UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
(Mark One) |
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(Mark One)☒ | | |
þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2020
Or
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| ☐ | | For the fiscal year ended December 31, 2018 |
Or |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
For the transition period from to
Commission File Number 001-33160
Spirit AeroSystems Holdings, Inc.
(Exact name of registrant as specified in its charter) |
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| Delaware | | 20-2436320 |
(State or other jurisdiction of Incorporation)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
Securities registered pursuant to Section 12(g) of the Act: None. Securities registered pursuant to Section 12(b) of the Act:
Identification Number)
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3801 South Oliver
Wichita, Kansas 67210
(AddressTitle of principal executive offices and zip code)
each class | Trading symbol | Name of each exchange on which registered |
Registrant’s telephone number, including area code:
(316) 526-9000
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Securities registered pursuant to Section 12(b) of the Act: |
Title of Each Class | | Name of Each Exchange on Which Registered |
Class A Common Stock,common stock, par value $0.01 par valueper share | SPR | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Stock Purchase Rights | SPR | New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ☒ No o☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o☐ No þ☒
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 þ☒ No o☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yesþ ☒ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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,”filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filerþ | | Accelerated filero | | Non-accelerated filero | | Smaller reporting companyo | | Emerging growth company o Growth Company |
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If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act. o☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No þx
The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price of the class A common stock on June 28, 2018,July 02, 2020, as reported on the New York Stock Exchange was approximately $9,797,077,735.$2,466,868,099.
As of February 1, 2019,11, 2021, the registrant had outstanding 105,458,685 shares105,420,191 shares of class A common stock, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 20192020 Annual Meeting of Stockholders to be filed not later than 120 day after the end of the fiscal year covered by this Annual Report on Form 10-K are incorporated herein by reference in Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
CAUTIONARY STATEMENTNOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual reportAnnual Report on Form 10-K (this “Annual Report”) includes “forward-looking statements.”- that involve many risks and uncertainties. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “aim,” “anticipate,” “believe,” “could,” “continue,” “estimate,” “expect,” “goal,” “forecast,” “intend,” “may,” “might,” “model,” “objective,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” and other similar words, or phrases, or the negative thereof, unless the context requires otherwise. These statements are based on circumstances as of the date on which the statements are made and they reflect management’s current views with respect to future events and are subject to risks and uncertainties, both known and unknown. Our actual results may vary materially from those anticipated in forward-looking statements. We caution investors not to place undue reliance on any forward-looking statements.
Important factors that could cause actual results to differ materially from those reflected in such forward-looking statements and that should be considered in evaluating our outlook include, but are not limited to, the following:1)
•the impact of the COVID-19 pandemic on our business and operations, including on the demand for our and our customers' products and services, on trade and transport restrictions, on the global aerospace supply chain, on our ability to continue to grow our businessretain the skilled work force necessary for production and execute our growth strategy, including the timing, execution,development, and profitability of new and maturing programs; 2)generally on our ability to performeffectively manage the impacts of the COVID-19 pandemic on our obligations underbusiness operations;
•demand for our newproducts and maturing commercial, business aircraft, and military development programs,services and the related recurring production, including our ability to meet contractually required production rate increases; 3) our ability to accurately estimate and manage performance, cost, and revenue under our contracts, including our ability to achieve certain cost reductions with respect to the B787 program and other programs; 4) margin pressures and the potential for additional forward losses on new and maturing programs; 5) our ability and our suppliers’ ability to accommodate, and the cost of accommodating, announced increases in the build rates of certain aircraft and expanding model mixes; 6) the effect on aircraft demand and build rates of changing customer preferences for business aircraft, including the effect of global economic conditions on the business aircraft market and expanding conflicts or political unrest; 7) customer cancellations or deferrals as a result of global economic uncertainty or otherwise; 8) thegeneral effect of economic or geopolitical conditions, or other events, such as pandemics, in the industries and markets in which we operate in the U.S. and globallyglobally;
•the timing and conditions surrounding the full worldwide return to service (including receiving the remaining regulatory approvals) of the B737 MAX, future demand for the aircraft, and any changes therein,residual impacts of the B737 MAX grounding on production rates for the aircraft;
•our reliance on Boeing and Airbus for a significant portion of our revenues;
•the business condition and liquidity of our customers and their ability to satisfy their contractual obligations to the Company;
•the certainty of our backlog, including fluctuations in foreign currency exchange rates; 9) the success and timely executionability of key milestones such as the receipt of necessary regulatory approvals, including customers to cancel or delay orders prior to shipment;
•our ability to obtain in a timely fashion any required regulatory or other third party approvalsaccurately estimate and manage performance, cost, margins, and revenue under our contracts, and the potential for the consummation of additional forward losses on new and maturing programs;
•our announced acquisition of Asco,accounting estimates for revenue and customer adherencecosts for our contracts and potential changes to their announced schedules; 10) those estimates;
•our ability to successfully negotiate, or re-negotiate, future pricing undercontinue to grow and diversity our supply agreements with Boeingbusiness, execute our growth strategy, and our other customers; 11)secure replacement programs, including our ability to enter into profitable supply arrangements with additional customers; 12)
•the abilityoutcome of all parties to satisfy their performance requirements, including our ability to timely deliver quality products, under existing supply contracts with our two major customers, Boeing and Airbus, and other customers, and the risk of nonpayment by such customers; 13) any adverse impact on Boeing’s and Airbus’ production of aircraft resulting from cancellations, deferrals,product warranty or reduced orders by their customers or from labor disputes, domestic or international hostilities, or acts of terrorism; 14) any adverse impact on the demand for air travel or our operations from the outbreak of diseases or epidemic or pandemic outbreaks; 15) our ability to avoid or recover from cyber-based or other security attacks, information technology failures, or other disruptions; 16) returns on pension plan assetsdefective product claims and the impact of future discount rate changes on pension obligations; 17) our ability to borrow additional funds or refinance debt, including our ability to obtain the debt to finance the purchase price for our announced acquisition of Asco on favorable terms or at all; 18) competition from or in-sourcing by commercial aerospace original equipment manufacturers and competition from other aerostructures suppliers; 19) the effect of governmental laws, such as U.S. export control laws and U.S. and foreign anti-bribery laws such as the Foreign Corrupt Practices Act and the United Kingdom Bribery Act, and environmental laws and agency regulations, both in the U.S. and abroad; 20) the effect of changes in tax law, such as the effect of The Tax Cuts and Jobs Act that was enacted on December 22, 2017, and changes to the interpretations of or guidance related thereto, and the Company’s ability to accurately calculate and estimate the effectsettlement of such changes; 21) any reduction inclaims may have on our credit ratings; 22) accounting assumptions;
•our dependence on our suppliers, as well as the cost and availability of raw materials and purchased components; 23)
•our ability and our suppliers' ability to meet stringent delivery (including quality and timeliness) standards and accommodate changes in the build rates of aircraft;
•our ability to maintain continuing, uninterrupted production at our manufacturing facilities and our suppliers’ facilities;
•competitive conditions in the markets in which we operate, including in-sourcing by commercial aerospace original equipment manufacturers;
•our ability to successfully negotiate, or re-negotiate, future pricing under our supply agreements with Boeing, Airbus and other customers;
•our ability to effectively integrate the acquisition of select assets of Bombardier along with other acquisitions that we pursue, and generate synergies and other cost savings therefrom, while avoiding unexpected costs, charges, expenses, and adverse changes to business relationships and business disruptions;
•the possibility that our cash flows may not be adequate for our additional capital needs;
•any reduction in our credit ratings;
•our ability to access the capital markets to fund our liquidity needs, and the costs and terms of any additional financing;
•our ability to avoid or recover from cyber or other security attacks and other operations disruptions;
•legislative or regulatory actions, both domestic and foreign, impacting our operations, including the effect of changes in tax laws and rates and our ability to accurately calculate and estimate the effect of such changes;
•our ability to recruit and retain a critical mass of highly-skilled employees and highly skilled employees;
•our relationships with the unions representing many of our employees, including our ability to avoid labor disputes and work stoppages with respect to our union employees; 24)
•spending by the U.S. and other governments on defense; 25) the possibility that our cash flows
•pension plan assumptions and our credit facility may not be adequate for our additional capital needs or for payment of interest on, and principal of, our indebtedness; 26) our exposure under our revolving credit facility to higher interest payments should interest rates increase substantially; 27) the effectiveness of any interest rate hedging programs; 28) future contributions;
•the effectiveness of our internal control over financial reporting; 29)
•the outcome or impact of ongoing or future litigation, arbitration, claims, and regulatory actions; 30)actions or investigations, including our exposure to potential product liability and warranty claims; 31) our ability to effectively assess, manage and integrate acquisitions that we pursue, including our ability to successfully integrate the Asco business and generate synergies and other cost savings; 32) the consummation
•adequacy of our announced acquisition of Asco while avoiding any unexpected costs, charges, expenses, adverse changes to business relationships and other business disruptions for ourselves and Asco as a result of the acquisition; 33) insurance coverage;
•our ability to continue selling certain receivables through our supplier financing program; 34) programs; and
•the risks of doing business internationally, including fluctuations in foreign currentcurrency exchange rates, impositions of tariffs or embargoes, trade restrictions, compliance with foreign laws, and domestic and foreign government policies; and 35) prolonged periods of inflation where we do not have adequate inflation protections in our customer contracts, among other things.policies.
These factors are not exhaustive and it is not possible for us to predict all factors that could cause actual results to differ materially from those reflected in our forward-looking statements. These factors speak only as of the date hereof, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. As with any projection or forecast, these statements are inherently susceptible to uncertainty and changes in circumstances. Except to the extent required by law, we undertake no obligation to, and expressly disclaim any obligation to, publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. You should review carefully the section captioned “Risk Factors” in this Annual Report for a more complete discussion of these and other factors that may affect our business.
PART I
Item 1. Business
Our Company
Unless the context otherwise indicates or requires, as used in this Annual Report, references to “we,” “us,” “our,” and the “Company” refer to Spirit AeroSystems Holdings, Inc. and its consolidated subsidiaries. References to “Spirit” refer only to our subsidiary, Spirit AeroSystems, Inc., and references to “Spirit Holdings” or “Holdings” refer only to Spirit AeroSystems Holdings, Inc.
The Company, incorporated in Delaware with its headquarters in Wichita, Kansas, is one of the largest independent non-Original Equipment Manufacturer (“OEM”) commercial aerostructures designers and manufacturers in the world. We design, engineer, and manufacture large, complex, and highly engineered commercial aerostructures such as fuselages, nacelles (including thrust reversers), struts/pylons, wing structures, and flight control surfaces. In addition to supplying commercial aircraft structures, we also design, engineer, and manufacture structural components for military aircraft and other applications. A portion of our defense business is classified by the U.S. Government and cannot be specifically described; however, it is included in our consolidated financial statements. We are a critical partner to our commercial and defense customers due to the broad range of products we currently supply to them and our leading design and manufacturing capabilities using both metallic and composite materials. For the twelve months ended December 31, 2018,2020, we generated net revenues of $7,222.0$3,404.8 million and had net incomeloss of $617.0$(870.3) million.
Operating Segments and Products
We operate in three principal segments: Fuselage Systems, Propulsion Systems, and Wing Systems. Our largest customer, The Boeing Company (“Boeing”), represents a substantial portion of our revenues in all segments. Further, our second largest customer, Airbus S.A.S., a division of Airbus Group SE (“Airbus”and its affiliates (collectively, "Airbus”), represents a substantial portion of revenues in the Wing Systems segment. We serve customers in addition to Boeing and Airbus across our three principal segments; however, these customers currently do not represent a significant portion of our revenues and are not expected to in the near future. All other activities fall within the All Other segment, principally made up of sundry sales of miscellaneous services, tooling contracts, and sales of natural gas through a tenancy-in-common with other companies that have operations in Wichita, Kansas.
Kansas that accounted for 3% of the net revenues for the twelve months ended December 31, 2020. |
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| Segment | | Percentage of Net Revenues for the Twelve Months Ended December 31, 20182020 | | Locations | | Commercial Programs | | Non-Classified Defense Programs |
| Fuselage Systems | | 55%51% | | McAlester, OK; Wichita, KS; Kinston, NC; San Antonio, TX; St.-Nazaire, France; Subang, MalaysiaMalaysia; Biddeford, ME; Casablanca, Morocco; Belfast, Northern Ireland | | B737, B747, B767, B777, B787, A220, A350 XWB, Learjet 75, Global 5000, Global 6000, Challenger 350, Challenger 650 | | Sikorsky CH-53K Trident D5, Standard Missile , Common Hypersonic Glide Body (C-HGB), NASA MSR, NASA Mars 2020, Bell Helicopter V280V-280 |
| Propulsion Systems | | 24%23% | | Wichita, KSKS; San Antonio, TX; Dallas, TX; Biddeford, ME; Belfast, Northern Ireland | | B737, B747, B767, B777, B787, Rolls-Royce BR725 Engine,and BR710 Engines, Mitsubishi Regional Jet, A220, (formerly Bombardier CSeries)Challenger 650, Irkut MC-21, IAE V2500 | | Trident D5, Standard Missile, Patriot Missile, THAAD |
| Wing Systems | | 21%23% | | Tulsa and McAlester, Oklahoma;OK; Prestwick, Scotland; San Antonio, TX; Subang, Malaysia; Kinston, North CarolinaNC; Casablanca, Morocco; Belfast, Northern Ireland | | B737, B747, B767, B777, B787, A320 family, A220, A330, A350 XWB, A380Global 5000, Global 6000, Global 7500, Learjet 75 | | Various |
Fuselage Systems. The Fuselage Systems segment includes development, production, and marketing of the following:
•The forward section of the aerostructure, which houses the flight deck, passenger cabin, and cargo area;
•The mid and rear fuselage sections;
•Other structure components of the fuselage, including floor beams; andbeams.
Related spares and maintenance, repair, and overhaul (“MRO”) services.
Net revenue in the Fuselage Systems Segmentsegment amounted to $1,725.9 million, $4,206.2 million, and $4,000.8 million $3,730.8 million,in 2020, 2019, and $3,498.8 million in 2018, 2017, and 2016, respectively.
Propulsion Systems. The Propulsion Systems Segmentsegment includes development, production, and marketing of the following:
•Nacelles (including thrust reversers) - aerodynamic structure surrounding engines;
•Struts/pylons - structure that connects the engine to the wing;
•Other structural engine components; and
•Related spares and MRO services.
Net revenue in the Propulsion Systems Segmentsegment amounted to $784.5 million, $2,057.8 million, and $1,702.5 million $1,666.2 million,in 2020, 2019, and $1,777.3 million in 2018, 2017, and 2016, respectively.
Wing Systems. The Wing Systems Segmentsegment includes development, production, and marketing of the following:parts, assemblies and a fully integrated wing including:
•Horizontal and vertical stabilizers;
•Flaps and slats - flight control surfaces;
•Wing structures - framework that consists mainly of spars, ribs, fixed leading edge, stringers, trailing edges, and flap track beams; fully functional and tested wing systems.
Related spares and MRO services.
Net revenue in the Wing Systems Segmentsegment amounted to $798.6 million, $1,588.3 million, and $1,513.0 million $1,578.8 million,in 2020, 2019, and $1,508.7 million in 2018, 2017, and 2016, respectively.
Our Manufacturing, Engineering, and Support Services
Manufacturing
Our expertise is in designing, engineering, and manufacturing large-scale, complex aerostructures. WeAs of December 31, 2020, we maintain seventen state-of-the-art manufacturing facilities in Wichita, Kansas; Tulsa, Oklahoma; McAlester, Oklahoma; Kinston, North Carolina; San Antonio, Texas; Prestwick, Scotland; Saint-Nazaire, France; Subang, Malaysia; Casablanca, Morocco; and Subang, Malaysia.Belfast, Northern Ireland.
Our core manufacturing competencies include:
•composites design and manufacturing processes;
•leading mechanized and automated assembly and fastening techniques;
•large-scale skin fabrication using both metallic and composite materials;
•chemical etching and metal bonding expertise;
•monolithic structures technology; and
•precision metal forming producing complex contoured shapes in sheet metal and extruded aluminum.
Our manufacturing expertise is supported by our state-of-the-art equipment. We have thousands of major pieces of equipment installed in our customized manufacturing facilities. For example, for the manufacture of the B787 composite forward fuselage, we installed two of the largest autoclaves in the world in our Wichita, KS facility. An autoclave is an enclosure device used in the manufacture of composite structures that generates controlled internal heat and pressure conditions used to cure and bond certain resins. We installed two autoclaves as well as other specialized machines in Kinston, North Carolina to support our work on the A350 XWB. We intend to continue to make the appropriate investments in our facilities to support and maintain our industry-leading manufacturing expertise.
Engineering
The Company is an industry leader in aerospace engineering with access to talent across the globe. The purpose of the engineering organization is to provide continuous support for new and ongoing designs, technology innovation, development for customer advancements, and production-related process improvements. We possess a broad base of engineering skills for design, analysis, test, certification, tooling, and support of major fuselage, wing, and propulsion assemblies using both metallic and composite materials. In addition, our regulatory certification expertise helps ensure associated designs and design changes are compliant with applicable regulations.
Our industry-leading engineering capabilities are key strategic factors differentiating us from our competitors.
Global Customer Support & Services (“GCS&S”Spirit AeroSystems Aftermarket Solutions ("SAAS”)
Through GCS&S,SAAS, we provide rotable assets, components, repair solutions, and engineering services. Our inventory of rotable assets is available for lease, exchange, and purchase. Additionally, our global repair stations are staffed with technicians specializing in advanced composite repair techniques. We provide MRO services for both metallic and composite components, either on site or at certified MRO stations. We are equipped with original production manufacturing tooling and specialize in service bulletin maintenance for Spiritthe Company's nacelle components.
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| Product | | Description | | Aircraft Program |
| MRO | | Certified repair stations that provide complete on-site repair and overhaul; maintains global partnerships to support MRO services | | B737, B747, B767, B777, B787 and Rolls-Royce BR725, ERJ, CRJ, E4B, A320 |
| Rotable Assets | | Maintain a pool of rotable assets for sale, exchange, and/or lease | | B737, B747, B767, B777, Rolls-Royce, BR725, ERJ, CRJ, E4B, A320 |
| Engineering Services | | Engineering, tooling, and measurement services. On-call field service representatives. | | Multiple programs |
Business Development
The Company’s core products include fuselages, struts/pylons, nacelles, and wing components, and we continue to focus on business growth through the application of key strengths, including design for manufacturability, materials utilization expertise, targeted automation, advanced tooling and testing concepts, and determinate assembly to enable cost-effective, highly efficient production. We invest in new technology to bring the most advanced techniques, manufacturing, and automation to our customers.
The Company applies extensive experience in advanced material systems, manufacturing technologies, and prototyping to continually invent and patent new technologies that improve quality, lower costs, and increase production capabilities. Our business growth is focused on application of these strengths to expand into new addressable commercial, defense and defensetransportation markets and customers.
Defense Business Growth
In addition to providing aerostructures for commercial aircraft, we also design, engineer and manufacture structural components for military aircraft. We have been awarded a significant amount of work for Boeing’s P-8, C40, and KC-46 Tanker. The Boeing P-8, C40, and KC-46 Tanker are commercial aircraft modified for military use. Other military programs for which we provide products includeare Unmanned Aerial Vehicle applications ("UAV"), Ministry of Defense U.K., BAE systems and includes the development of the Sikorsky CH-53K, Bell Helicopter V280 tilt-rotor, and B-21 Raider. With the acquisition of Fiber Materials Inc. (“FMI”) in early 2020, and partnership with the National Institute for Aviation Research ("NIAR") in Wichita, we have been able to expand our offering in Hypersonics and high temperature carbon composites. We are also under contract to complete the Future Vertical Lift Capability Set III Competitive Demonstration and Risk Reduction efforts. This phase is the competitive Pre-EMD efforts prior to a program of record contract award. Our statement of work is the fuselage structure for the Bell Helicopter V-280 Valor tilt-rotor offering. A portion of our defense business is classified by the U.S. Government, including the B-21 Raider program, and cannot be specifically described. The operating results of these classified contracts are included in our consolidated financial statements. The business risks associated with classified contracts historically have not differed materially from those of our other U.S. Government contracts. Our internal controls addressing the financial reporting of classified contracts are consistent with our internal controls for our non-classified contracts.
The following table summarizes by product and military program the major non-classified military programs thatwhat we currently have under contract.
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| Product | | Applicable Segment | | Description | | Military Program |
Low ObservablesFixed Wing Aircraft | | WingVarious Systems | | Radar absorbent and translucent materials | | Various |
Rotorcraft | | Fuselage Systems | | Forward cockpit and cabin, fuselage | | Sikorsky CH-53K, Bell Helicopter V280 Development Program |
Other Military | | Wing Systems | | Fabrication, bonding, assembly, testing, tooling, processing, engineering analysis, and training | | Various |
| Rotorcraft | | Fuselage Systems | | Forward cockpit and cabin, fuselage | | Sikorsky CH-53K, Bell V-280 |
| Missiles & Hypersonics | | Fuselage, Wing, and Propulsion Systems | | Solid rocket motor throats and nozzles, Re-entry vehicle thermal protection systems | | Trident D5, Standard Missile, Common Hypersonic Glide Body (C-HGB), NASA MSR, NASA Mars 2020, Patriot Missile, THAAD |
Fabrication Business Growth
The Company offers customers a wide range of solutions including machining, skin and sheet metal fabrication, and chemical processing. These capabilities are utilized for both internal and external sourcing and include the following:
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| Fabrication | | Description |
| Machine Fabrication | | 5-axis machining capabilities: high-speed aluminum fabrication up to 23 feet, seat track machining, and extensive hard metal capabilities 3- and 4-axis machining capabilities: range of hard metal capabilities, multi-spindle machines, and manufactured parts |
| Sheet Metal Fabrication | | Includes stretch and hydro forming, roll, hammer, profiling, gauge reduction of extrusions and aluminum heat treat, as well as subassemblies |
| Chemical Processing | | Includes a range of hard and soft metals with one of the largest automated lines in the industry |
| Skin Fabrication | | Include skin stretch forming up to 1,500 tons, laser scribe, trim and drill, and chemical milling
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Our Customers
Our revenues are substantially dependent on Boeing and Airbus. The loss of either of these customers would have a material adverse effect on the Company. For the twelve months ended both December 31, 20182020, approximately 60% and 23% of our net revenues were generated from sales to Boeing and Airbus, respectively. For the twelve months ended December 31, 2017,2019, approximately 79% and 16% of our net revenues were generated from sales to Boeing and Airbus, respectively. We are currently the sole-source supplier for nearly all of the products we sell to Boeing and Airbus.
Boeing
We are the largest independent supplier of aerostructures to Boeing and manufacture aerostructures for every Boeing commercial aircraft currently in production, including the majority of the airframe content for the Boeing B737, the most popular major commercial aircraft in history, and the Boeing B787, Boeing’s next generation twin aisle composite aircraft. We supply these products through long-term supply agreements that cover the life of these programs, including any commercial derivative models. These supply agreements are described in more detail under “Our Relationship with Boeing” below. We believe our relationship with Boeing will allow us to continue to be an integral partner with Boeing in the designing, engineering, and manufacturing of complex aerostructures.
Airbus
We originally became a supplier to Airbus in April 2006 through the acquisition of BAE Aerostructures (the “BAE Acquisition”) and subsequently won additional work packages with Airbus. We are one of the largest content suppliers of wing systems for the Airbus A320 family and are a significant supplier for the Airbus A380 and the Airbus A350 XWB. Under our supply agreement with Airbus for the A320 and A330, we supply products for the life of the aircraft program. For the A350 XWB and A380 programs,program, we have long-term requirementsrequirement contracts with Airbus. In addition, we build the fully integrated wing for the A220 aircraft. We believe we can leverage our relationship
with Airbus and our history of delivering high-quality products to further increase our sales to Airbus and continue to partner with Airbus on new programs going forward.
Other Customers
Other significant customers include Lockheed Martin, Northrop Grumman, Sikorsky,Bombardier, Rolls-Royce, and Mitsubishi Aircraft Corporation, and Bell Helicopter.Corporation.
U.S. and International Customer Mix
Although most of our revenues are obtained from sales inside the U.S., we generated $1,254.9$767.2 million, $1,260.1$1,296.8 million, and $1,142.8$1,254.9 million in sales to international customers for the twelve months ended December 31, 2020, 2019, and 2018, 2017, and 2016, respectively, primarily to Airbus. The international revenue is included primarily in the Wing Systems segment. All other segment revenues are primarily from U.S. sales. Approximately 4%19% of our long-lived assets based on book value are located in the United Kingdom ("U.K.") with approximately another 4% of our long-lived assets located in countries outside the U.S. and the U.K.
Our Relationship with Boeing
A significant portion of Spirit’s operations related to Boeing aerostructures was owned and controlled by Boeing until 2005. On February 7, 2005, Spirit Holdings became a standalone Delaware company, and commenced operations on June 17, 2005 through the acquisition of Boeing’s operations in Wichita, Kansas, Tulsa, Oklahoma, and McAlester, Oklahoma (the “Boeing Acquisition”) by an investor group led by Onex Partners LP and Onex Corporation (together with its affiliates, “Onex”). As of August 2014, Onex no longer held any investment in the Company. Boeing’s commercial aerostructures manufacturing operations in Wichita, Kansas and Tulsa and McAlester, Oklahoma, are referred to in this Annual Report as “Boeing Wichita.”
In connection with the Boeing Acquisition, we entered into long-term supply agreements under which we are Boeing’s exclusive supplier for substantially all of the products and services provided by Boeing Wichita to Boeing prior to the Boeing Acquisition.acquisition. These supply agreements include products for Boeing’s B737, B747, B767, and B777 commercial aircraft programs, as well as for certain products for Boeing’s B787 program. These supply agreements cover the life of these programs, including any commercial derivative models.
Supply Agreement with Boeing for B737, B747, B767, and B777 Programs ("Sustaining Programs")
Overview. Two documents effectively comprise the Sustaining Programs’ supply contract: (1) the Special Business Provisions (“Sustaining SBP”), which sets forth the specific terms of the Sustaining Programs’ supply arrangement, and (2) the General Terms Agreement (“Sustaining GTA,” and, together with the Sustaining SBP (and any related purchase order or contract), as amended, the “Sustaining Agreement”), which sets forth other general contractual provisions, including provisions relating to termination, events of default, assignment, ordering procedures, inspections, and quality controls.
The Sustaining Agreement is a requirements contract that covers certain products, including fuselages, struts/pylons, and nacelles (including thrust reversers), wings and wing components, as well as tooling, for the Sustaining Programs for the life of these programs, including any commercial derivative models. During the term of the Sustaining Agreement, and absent a default by Spirit, Boeing is obligated to purchase from Spirit all of its requirements for products covered by the Sustaining Agreement. Although Boeing is not required to maintain a minimum production rate, Boeing is subject to a maximum production rate above which it must negotiate with us regarding responsibility for recurring and non-recurring expenditures related to a capacity increase. Boeing owns substantially all of the tooling used in production or inspection of products covered by the Sustaining Agreement.
Pricing. On September 22, 2017, Boeing and Spirit entered into Amendment No. 30 to the Sustaining SBP (“Sustaining Amendment #30”). Sustaining Amendment #30that generally established pricing terms for the Sustaining Program models (excluding the B777x)B777X) through December 31, 2022 (with certain limited exceptions) and provided that Boeing and Spirit would negotiate follow-on pricing for periods beyond January 1, 2023 beginning 24 months prior to January 1, 2023. In addition, Sustaining Amendment #30the amendment provided that the parties would make certain investments for rate increases on the B737 program and implemented industry standardupdated payment terms.
On December 21, 2018, Boeing and Spirit executed a Collective Resolution 2.0 Memorandum of Agreement (the “2018 MOA”). The 2018 MOA established, among other items, pricing for certain programs through December 31, 2030, including the B737NG (including the P8), B737 MAX, B767 (but excluding 767-2C for which pricing is separately established), and the B777 freighters and 777-9 (pricing for the B777 300ER and 200LR was previously established and pricing for the B777-8 is subject to future negotiation). In addition, the 2018 MOA established B737 pricing based on production rates above and below current production levels, investments for tooling and capital for certain B737 rate increases, a joint cost reduction program for
the B777X (a joint cost reduction program for the B737 is separately established), and the release of liabilitycertain liabilities and claims asserted by both parties, including the B737 disruption activity claim. The parties further agreed to reconvene in 2028 to negotiate pricing beyond 2030. Consistent with the 2018 MOA, on January 30, 2019, Boeing and Spirit executed SBP Amendment #40 (“Sustaining Amendment #40”) to implement the December 2018 MOA terms and conditions applicable to the Sustaining Programs.
On February 6, 2020, Boeing and Spirit entered into a Memorandum of Agreement (the “2020 MOA”) extending B737 MAX pricing terms through 2033 (previously, the pricing was through December 31, 2030) and updated payment terms.
Advances on the B737 Program. On April 12, 2019, Boeing and the Company executed a Memorandum of Agreement (the “2019 MOA”). Under the 2019 MOA, the Company received an advance payment from Boeing in the amount of $123.0 million during the third quarter of 2019. The 2020 MOA provided that the $123.0 million advance would be repaid by offset against the purchase price for year 2022 shipset deliveries. In addition, the 2020 MOA provided that Boeing will pay $225 million to Spirit in the first quarter of 2020, consisting of (i) $70 million in support of Spirit’s inventory and production stabilization, of which $10 million will be repaid by Spirit in 2021, and (ii) $155 million as an incremental pre-payment for costs and shipset deliveries over the next two years. These payments were made to Spirit on February 6, 2020.
Termination of Airplane Program. If Boeing decides not to initiate or continue production of a Sustaining Program model or commercial derivative because it determines there is insufficient business basis for proceeding, Boeing may terminate such model or derivative, including any order therefore, by written notice to Spirit. In the event of such a termination, Boeing willwould be liable to Spirit for any orders issued prior to the date of the termination notice and may also be liable for certain termination costs.
Events of Default and Remedies. Events of default under the Sustaining Agreement include Spirit’s failure to deliver products when and as required, and failure to maintain a required system of quality assurance, among other things. Certain events of default may allow Boeing to cancel orders under or terminate the Sustaining Agreement.
Intellectual Property. All technical work product and works of authorship produced by or for Spirit with respect to any work performed by or for Spirit pursuant to the Sustaining Agreement are the exclusive property of Boeing. All inventions conceived by or for Spirit with respect to any work performed by or for Spirit pursuant to the Sustaining Agreement and any patents claiming such inventions are the exclusive property of Spirit, except that Boeing will own any such inventions that Boeing reasonably believes are applicable to the B787 Program, and Boeing may seek patent protection for such B787 inventions or hold them as trade secrets,secrets; provided that, if Boeing does not seek patent protection, Spirit may do so.
B787 Supply Agreement with Boeing (“B787 Program”)
Overview. Two documents effectively comprise the B787 Program supply contract: (1) the Special Business Provisions (“787 SBP”), which sets forth the specific terms of the B787 Program’s supply arrangement and (2) the General Terms Agreement (“787 GTA,” and, together with 787 SBP (and anyand (any related purchase order or contract), as amended, the “B787 Agreement”), which sets forth other general contractual provisions, including provisions relating to termination, events of default, assignment, ordering
procedures, inspections, and quality controls. The B787 Agreement is a requirements contract pursuant to which Spirit is Boeing’s exclusive supplier for the forward fuselage, fixed, and movable leading wing edges, engine pylons, and related tooling for the B787.
Pricing. On September 22, 2017, Boeing and Spirit entered into Amendment #25 to the B787 Agreement (the “787 Amendment #25”). 787 Amendment #25that established pricing terms for the B787-8, -9, and -10 models through line unit 1405 and provided that Boeing and Spirit would negotiate follow-on pricing for line units 1406 and beyond beginning 24 months prior to the scheduled delivery date for line unit 1405. 787 Amendment #25The amendment also implemented industry standardupdated payment terms and required the Company to repay Boeing $236.0 million less certain adjustments, as a retroactive adjustment for payments that were based on interim pricing. This amount was repaid in October 2017.
On December 21, 2018, Boeing and Spirit executed the 2018 MOA, which also established, among other things, pricing for the B787 for line unit 1004 through line unit 2205, and establishedagreed to establish a joint cost reduction program for the B787. Consistent with the 2018 MOA, on January 30, 2019, Boeing and Spirit executed Amendment #28 to the B787 Agreement (the “787 Amendment #28”) to implement the 2018 MOA terms and conditions applicable to the B787 Program.
Advance Payments. Boeing has made advance payments to Spirit under the B787 Agreement, which are required to be repaid to Boeing by way of offsetoffsets against the purchase price for future shipset deliveries. Advance repayments were scheduled to be spread evenly over the remainder of the first 1,000 B787 shipsets delivered to Boeing, except that pursuant to an amendment to the B787 Agreement entered into in April 2014, advance repayments were suspended from April 1, 2014 through March 31, 2015, and any repayments that otherwise would have become due during such 12-month period will be made by offset against the purchase price for shipset 1,001 through 1,120. Re-paymentsRepayments resumed in 2015. The 2018 MOA also provided
for the suspension of advance repayments with respect to the B787 beginning with line number 818; to resume at a lower rate of $450,319 per shipset at line number 1135 and continue through line number 1605.
In the event Boeing does not take delivery of a sufficient number of shipsets to repay the full amount of advances prior to the termination of the B787 Program or the B787 Agreement, any advances not then repaid will be applied against any outstanding payments then due by Boeing to us, and any remaining balance will be repaid in annual installments of $42.0 million due on December 15th of each year until the advance payments have been fully recovered by Boeing. Accordingly, portions of the advance repayment liability are included as current and long-term liabilities in our balance sheet. As of December 31, 2018,2020, the amount of advance payments received by us from Boeing not yet repaid was $233.9$212.1 million.
Termination of Airplane Program. If Boeing decides not to continue production of the B787 Program because it determines, after consultation with Spirit, that there is an insufficient business basis for proceeding, Boeing may terminate the B787 Program, including any orders, by written notice to Spirit. In the event of such a termination, Boeing will be liable to Spirit for costs incurred in connection with any orders issued prior to the date of the termination notice and may also be liable for certain termination costs and for compensation for any tools, raw materials or work-in-process requested by Boeing in connection with the termination.
Events of Default and Remedies. Events of default under the B787 Agreement include Spirit’s failure to deliver products when and as required, and failure to maintain a required system of quality assurance, among other things. Certain events of default may allow Boeing to cancel orders under or terminate the B787 Agreement.
Intellectual Property.The B787 Agreement established three classifications for patented invention and proprietary information: (1) intellectual property developed by Spirit during activity under the B787 Agreement (“Spirit IP”); (2) intellectual property developed jointly by Boeing and Spirit during that activity (“Joint IP”); and (3) all other intellectual property developed during activity under the B787 Agreement (“Boeing IP”).
Boeing may use Spirit IP for work on the B787 Program and Spirit maymust license it to third parties for work on such program. Each party is free to use Joint IP in connection with work on the B787 Program and other Boeing programs, but each must obtain the consent of the other to use it for other purposes. Spirit is entitled to use Boeing IP for the B787 Program, and may require Boeing to license it to subcontractors for the same purpose.
The foregoing descriptions of the various agreements between Spirit and Boeing do not purport to be complete and are qualified in their entirety by reference to the full text of each agreement as filed with the SEC, subject to certain omissions of confidential portions pursuant to requests for confidential treatment filed separately with the SEC.Please see Item 15 to this Annual Report.
Intellectual Property
We have several patents pertaining to our processes and products. While our patents, in the aggregate, are of material importance to our business, noNo individual patent or group of patents is of material importance. We also rely on trade secrets, confidentiality agreements, unpatented knowledge, creative products development, and continuing technological advancement to maintain our competitive position.
Competition
Although we are one of the largest independent non-OEM aerostructures suppliers based on annual revenues, with an estimated 20% share 23% share of the global non-OEM aerostructures market, this market remains highly competitive and fragmented. Our primary competition currently comes from either work performed internally by OEMs or other tier-one suppliers, and direct competition continues to grow. The Company continues to focus on design and manufacturing processes and tools, and cost reduction initiatives. The Company intends to compete by optimizing parts fabricated and assembled by the Company versus parts outsourced from the supply chain. Additionally, we compete by developing technologies and processes that leverage the Company's unique knowledge and capabilities to create value for our customers.
Our
In commercial aerostructures, our principal competitors among OEMs include Boeing, Airbus (including its wholly-owned subsidiaries Stelia Aerospace and Premium Aerotec GmbH), Bombardier, Embraer Brazilian Aviation Co., Leonardo, and United Technologies Corporation. Leonardo.
Our principal competitors among non-OEM tier-1 aerostructures suppliers include Aernnova, GKN Aerospace, Kawasaki Heavy Industries, Inc., Mitsubishi Heavy Industries, Safran Nacelles, Sonaca, Subaru Corporation, Triumph Group, Inc. (“Triumph”), and Latecoere S.A.
The Company continues to build a larger presence in the defense aerostructures market. The Company's competition in defense aerostructures includes Boeing, Lockheed Martin, Northrop Grumman, Raytheon United Technologies, Leonardo, GKN, Triumph, BAE Systems, Korea Aerospace Industries, and Turkish Aerospace Industries.
Expected Backlog
As of December 31, 2018,2020, our expected backlog associated with large commercial aircraft, business and regional jets, and military equipment deliveries, through 2023, calculated based on contractual and historical product prices and expected delivery volumes, was approximately $48.4 billion. This is an increase$34.2 billion a decrease of $900 million$8.3 billion from our corresponding estimate as of the endDecember 31, 2019. As of 2017.December 31, 2020, we adjusted our backlog to align with Boeing’s reporting position under ASC606 primarily due to 737 MAX and 777X, and aircraft order cancellations which contributed to a reduction of our backlog. The B737 MAX backlog is approximately 54% of our total backlog. Backlog is calculated based on the number of units Spiritthe Company is under contract to produce on our fixed quantity contracts, and Boeing’s and Airbus’ announced backlog on our supply agreements.agreements (which are based on orders from customers). The number of units may be subject to cancellation or delay by the customer prior to shipment, depending on contract terms. The level of unfilled orders at any given date during the year may be materially affected by the timing of our receipt of firm orders and additional airplane orders, and the speed with which those orders are filled. Accordingly, our expected backlog as of December 31, 20182020 may not necessarily represent the actual amount of deliveries or sales for any future period. Approximately 17% of ourFor additional information on backlog, as of December 31, 2018please see Item 1A. “Risk Factors – Risks Related to Our Business - Our backlog is expectedsubject to be converted into sales in 2019.change due to the COVID-19 pandemic and other factors.”
Suppliers and Materials
The principal raw materials used in our manufacturing operations are aluminum, titanium, steel, and carbon fiber. We also purchase metallic parts, non-metallic parts, and machined components. In addition, we procure subassemblies from various manufacturers that are used in the final aerostructure assembly. From time to time, we also review our make versus buymake-versus-buy strategy to determine whether it would be beneficial to us to outsource work that we currently produce in-house or vice versa.
We have long-standing relationships with hundreds of manufacturing suppliers. Our strategy is to enter into long-term contracts with suppliers to secure competitive pricing. Our exposure to rising costs of raw material is limited to some extent through leveraging relationships with our OEM customers’ high-volume contracts.
We continue to seek and develop sourcing opportunities in North America, Europe, and Asia to achieve a competitive global cost structure. Over 25 countries are represented in our international network of suppliers.
For additional information on our suppliers, please see Item 1A. “Risk Factors – Risks Related to Our Business.”
Research and Development
We believe that a world-class research and development focus helps maintain our position as an advanced partner to our OEM customers’ new product development teams. As a result, we spend capital and financial resources on our research and development includingspend was $38.8 million for the year ended December 31, 2020, $54.5 million for the year ended December 31, 2019, and $42.5 million for the year ended December 31, 2018, $31.2 million for the year ended December 31, 2017, and $23.8 million for the year ended December 31, 2016.2018. Through our research, we strive to develop unique intellectual property and technologies that will improve our products and our customers' products and, at the same time, position us to win work on new products. Our development effort primarily focuses on preparing for the initial production of new products and improving manufacturing processes on our current work. It also serves as an ongoing process that helps develop ways to reduce production costs and streamline manufacturing processes.
Our research and development is geared toward the architectural design of and manufacturing processes for our principal products: fuselage systems, propulsion systems, and wing systems. We are currently focused on research in areas such as advanced metallic joining, low-cost composites, acoustic attenuation, efficient structures, systems integration, advanced design and analysis methods, and new material systems. Other items that are expensed relate to research and development that is not funded by the customer. We collaborate with universities, research facilities, and technology partners in our research and development.
For additional information on research and development, please see Item 1A. “Risk Factors – Risks Related to Our Business - Our success depends in part on the success of our research and development initiatives.”
Regulatory Matters
Environmental. Our operations and facilities are subject to various environmental, health, and safety laws and regulations, including federal, state, local, and foreign government requirements governing, among other matters, the emission, discharge,
handling, and disposal of regulated materials, the investigation and remediation of contaminated sites, and permits required in
connection with our operations. We continually monitor our operations and facilities to ensure compliance with these laws and regulations; however, management cannot provide assurance that future changes in such laws or theirthe enforcement thereof, or the nature of our operations will not require us to make significant additional expenditures to ensure continued compliance. Further, we could incur substantial costs, including costs to reduce air emissions, clean-up costs, fines and sanctions, and third-party property damage, or personal injury claims as a result of violations of or liabilities under environmental laws, relevant common law or the environmental permits required for our operations. It is reasonably possible that costs incurred to ensure continued environmental compliance could have a material impact on our results of operations, capital expenditures, financial condition, competitive condition, or cash flows if additional work requirements or more stringent clean-up standards are imposed by regulators, new areas of soil, air, and groundwater contamination are discovered, and/or expansions of work scope are prompted by the results of investigations.
Government Contracts. Companies engaged in supplying defense-related equipment and services to U.S. Government agencies, either directly or by subcontract, are subject to business risks specific to the defense industry. These risks include the ability of the U.S. Government to unilaterally terminate existing contracts, suspend, or debar us from receiving new prime contracts or subcontracts, reduce the value of existing contracts, audit our contract-related costs and fees, including allocated indirect costs, and control and potentially prohibit the export of our products, among other things. If a contract was terminated for convenience, we could recover the costs we have incurred or committed, settlement expenses, and profit on the work completed prior to termination. However, if the termination is a result of our failure to perform, we may be liable for excess costs incurred by the prime contractor in procuring undelivered items from another source. In addition, failure to follow the requirements of the National Industrial Security Program Operating Manual (“NISPOM”) or any other applicable U.S. Government industrial security regulations could, among other things, result in termination of Spirit’sour facility clearance,securities clearances (each a "FCL"), which in turn would preclude us from being awarded classified contracts or, under certain circumstances, performing on our existing classified contracts.
Commercial Aircraft. The commercial aircraft component industry is highly regulated by the FAA,Federal Aviation Administration (the "FAA"), the European Aviation Safety Agency (“EASA”), and other agencies throughout the world. The military aircraft component industry is governed by military quality specifications. We, and the components we manufacture, are required to be certified by one or more of these entities or agencies, and, in some cases, by individual OEMs, to engineer and service parts and components used in specific aircraft models. In addition, the FAA requires that various maintenance routines be performed on aircraft components. We believe that we currently satisfy or exceed these maintenance standards in our repair and overhaul services.
Export Control. The technical data and components used in the design and production of our products, as well as many of the products and technical data we export, either as individual items or as components incorporated into aircraft, are subject to compliance with U.S. export control laws. Collaborative agreements that we may have with foreign persons, including manufacturers or suppliers, are also subject to U.S. export control laws.
Health and Safety. Our operations are also subject to a variety of worker and community safety laws. The Occupational Safety and Health Act (“OSHA”) mandates general requirements for safe workplaces for all employees. In addition, OSHA provides special procedures and measures for the handling of certain hazardous and toxic substances. Our management believes that our operations are in material compliance with OSHA’s health and safety requirements.
For additional information on regulatory matters, please see Item 1A. “Risk Factors – Risks Related to Our Business.”
Human Capital
Employees. Our people are our greatest asset. Leadership is committed to creating a culture of responsibility and achievement that supports our employees’ growth and development.We encourage our employees to be motivated, determined, embrace diversity, show their flexibility, and give back to the communities where we do business. By allowing employees to thrive, the Company creates a stronger and more dedicated team.
At December 31, 2018,2020, we had approximately 17,00014,500 employees: 15,0009,700 located in our fourfive U.S. facilities, 1,0002,900 located in our Belfast facilities, 900 located at our U.K.Prestwick facility, 900700 located in our Malaysia facility, 200 located at Morocco facility, and 100 in our France facility. During 2020, the Company continued workforce reductions to align with reduced production rates in light of reduced global aviation demand.
Values. The Company operates according to three key values that enable it to meet commitments to all stakeholders — employees, customers, suppliers, investors and communities. These values are:
•Transparency - Being open, honest and respectful with communication; sharing ideas and building trust by making intentions clear;
•Collaboration - Aligning actions with others; working together to achieve the best outcomes; and
•Inspiration - Encouraging the best from others; leading by example to ensure innovation is a component of success.
Adopting and incorporating the Company's values into day-to-day tasks and activities enables the Company to be a Trusted Partner. Practicing transparency, collaboration and inspiration—individually and collectively—allows the Company to be customer focused, provide on-time delivery, maintain and improve quality and ensure safety for all.
Code of Business Conduct. The Company is committed to the highest ethical standards and to complying with all laws and regulations applicable to the Company’s business. To support and articulate its commitment and responsibility in this regard, the Company has adopted the Code of Business Conduct (the “Code”). The Code addresses a number of topics, including the Foreign Corrupt Practices Act, conflicts of interest, safeguarding assets, insider trading, and general adherence to laws and regulations. All directors and employees, including executive officers, must comply with the Code. The Code is available on the Company’s website at http://investor.spiritaero.com/corporate-governance/OD/default.aspx.
Diversity and Inclusion. The Company is committed to creating a world class company — one that is actively working to build an inclusive culture, where all employees diverse skills and talents are valued. The company values the full range of differences, perspectives and abilities that our employees bring to the workplace. We strive to create an environment where all employees feel welcomed and a sense of belonging.
The Company is committed to promoting diversity not only because it is the right thing to do, but because greater diversity results in greater innovation and growth. People who come from different backgrounds have different ways of seeing the world. Combining those perspectives helps the Company find new ways to solve problems and innovate for the future. The Company maximizes the power of diversity in people, knowledge and technology by (among other things):
•Attracting, retaining and developing a diverse workforce;
•Recognizing and respecting the diversity of the marketplace; and
•Working and partnering with vendors from a diverse supplier base.
Talent Management. Retention and development of talent, and calibration of talent to meet the Company’s strategy, is critical to our success. We seek to provide our employees with opportunities for learning and development, mentoring and career planning. Our employees participate in performance development programs annually. We periodically conduct business climate surveys to measure engagement and alignment with our values. Our management and salaried talent retention rate was 94% (excluding retirements and reductions in force) in 2020.
Health and Safety. The Company takes steps to ensure that it complies in all material respects with applicable legal, regulatory and other requirements related to preventing pollution, injury and ill health, and employs industry-leading, technologically sound and economically feasible control mechanisms, procedures and processes. In addition, the Company provides training, education, safety monitoring and auditing, health-awareness programs, and ergonomic support in the Company's offices and factories. We are committed to the safety and health of our employees and work to eliminate all injuries and accidents. We evaluate safety performance through multiple indicators, including OSHA recordable injury rates and lost-time incidents,
Impact of COVID-19. In response to the COVID-19 pandemic, we have enacted our crisis management and response process as part of our enterprise risk management program to help us navigate the challenges we face due to the COVID-19 pandemic. Actions that we have taken include the following:
•Organized global teams to monitor the situation and recommend appropriate actions;
•Implemented travel restrictions for our employees;
•Enforced social-distancing standards throughout the workplace and mandated mask use;
•Initiated consistent and ongoing cleaning of high-touch work spaces;
•Established processes aligned with CDC guidelines to work with exposed individuals on necessary quarantine periods and the process to return to work; and
•Implemented working from home where practicable.
Other actions taken in response to the pandemic – including with respect to preserving liquidity – are referenced elsewhere in this Annual Report.
Labor Relations and Collective Bargaining Agreements
Our principal U.S. collective bargainingbargaining agreements were with the following unions as of December 31, 2018:2020:
|
| | | | | | | |
| Union | Percent of our U.S. Employees Represented | Status of the Agreements with Major Union |
| The International Association of Machinists and Aerospace Workers (IAM) | 61%52% | We have two major agreements - one expires in June 20202023 and one expires in December 2024. |
| The Society of Professional Engineering Employees in Aerospace (SPEEA) | 18%22% | We have two major agreements - one expires in January 2021December 2024 and one expires in December 2024.January 2026. |
| The International Union, Automobile, Aerospace and Agricultural Implement Workers of America (UAW) | 9%8% | We have one major agreement expiring in December 2025. |
| The International Brotherhood of Electrical Workers (IBEW) | 1% | We have one major agreement expiring in September 2020.2023. |
Approximately 69%Approximately 57% of our U.K.Prestwick employees are represented by one union, Unite (Amicus Section). In 2013, the Company negotiated two separate ten-year pay agreements with the Manual Staff bargaining and the Monthly Staff bargaining groups of the Unite union. These agreements fundamentally cover basic pay and variable at risk pay, while other employee terms and conditions generally remain the same from year to year until both parties agree to change them. The current pay agreements expire December 31, 2022.
In France, our employees are represented by CFTC (“Confédération Française des Travailleurs Chrétiens or French Confederation of Christian Workers”) and FO (“Force Ouvrière or Labor Force”). The Company negotiates yearly on compensation and once every four years on issues related to gender equality and work-life balance. The next election to determine union representation will occur in July 2023.
In the U.K. (Belfast), approximately 84% of the employees are part of the collective group represented by the Trade Unions in Belfast with approximately 73% being members of a Trade Union. Unite the Union is the largest representing approximately 93% of such employees, with General, Municipal, Boilermakers making up the balance. The last wage agreement covered the period from January 2016 to January 2019. No negotiations were held in 2020 due to the impact of COVID-19 and our pending acquisition of Shorts Brothers plc. It is anticipated that negotiations will occur in the first half of 2021.
In Morocco, approximately 43% of our employees are represented by Union Marocain du Travail ("UMT"). We negotiated a three year agreement with UMT that expires in December 2022.
None of our Malaysia employees are currently represented by a union.
We consider our relationships with our employees to be satisfactory.
Available Information
Our Internet address is http://www.spiritaero.com. The content on our website is available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Annual Report.
We make available through our Internet website, under the heading “Investors,” our Annual ReportReports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and amendments to those reports after we electronically file such materials with the SEC. Copies of our key corporate governance documents, including ourSpirit Holdings' Bylaws. The Corporate Governance Guidelines, the Code, of Business Conduct,the Transactions with Related Persons Policy, the Finance Code of Professional Conduct, and charters for our Audit Committee, Risk Committee, Compensation Committee, and Corporate Governance and Nominating Committee are also available on our website.
The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy information statement, and other information regarding issuers that file electronically with the SEC. Our filed Annual and Quarterly Reports, Current Reports, Proxy Statement and other reports previously filed with the SEC are available through the SEC's website.
Item 1A. Risk Factors
An investment in our securities involves risks and uncertainties. The risks and uncertainties set forth below are those that we currently believe may materially and adversely affect us, our future business or results of operations, our industry, or investments in our securities. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may also materially and adversely affect us, our future business or results of operations, or investments in our securities.
RISK FACTORS SUMMARY
The risks contained in the Risk Factors Summary are not exhaustive and it is not possible for us to predict all risks that could cause the Company's actual results to differ materially. The risks speak only as of the date hereof, and new risks may emerge or changes to the foregoing risks may occur that could impact our business.
We are subject to a variety of risks and uncertainties, including risks related to significant unusual events, our business, our industry, employment matters and certain general risks, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Risks that we deem material include, but are not limited to, the following:
•Risks Relating to Our Business
•Our business, financial results, and prospects are dependent on global aviation demand. The COVID-19 pandemic has had and is expected to continue to have a significant negative impact on aviation demand, our business and our industry.
•Our business depends largely on sales of components for a single aircraft program, the B737 MAX, which has had significant reductions in production rate, including suspensions, relating to the B737 MAX grounding and the COVID-19 pandemic. Additional suspensions or reductions in, or increases in, the B737 MAX production rate may create financial and disruption risks for the Company and its suppliers on the program, which, may in turn, affect the Company's ability to comply with contractual obligations.
•Because we depend on Boeing and Airbus, as our largest customers, our business will be negatively affected if either Boeing or Airbus reduces the number of products it purchases from us or if either experiences business difficulties or breaches its obligations to us.
•Our backlog is subject to change due to the COVID-19 pandemic, the B737 MAX grounding, and related cancellations.
•We use estimates in accounting for revenue and cost for our contracts. Changes in our estimates could adversely affect our future financial performance.
•Our business depends, in part, on securing work for replacement programs.
•Our business depends on our ability to maintain a lesserhealthy supply chain, meet production rate requirements, and timely delivery of products that meet or exceed stringent quality standards.
•Our operations depend on our ability to maintain continuing, uninterrupted production at our manufacturing facilities and our suppliers’ facilities.
•Interruptions in deliveries of or increased prices for components or raw materials used in our products could delay production and/or materially adversely affect our business.
•Our business could be materially adversely affected by product warranty obligations or defective product claims.
•The profitability of certain programs depends significantly on the assumptions surrounding satisfactory settlement of customer claims and assertions.
•Our acquisitions expose us to risks, including the risk that we may not be able to successfully integrate these businesses or achieve expected operating synergies.
•We face risks as we work to successfully execute on new or maturing programs.
•Prolonged periods of inflation where we do not have adequate inflation protections in our customer contracts could have a material adverse effect on our results of operations.
•The outcome of legal proceedings and government inquiries and investigations involving our business is unpredictable, and an adverse decision in any such matter could have a material effect on our business.
•We do not own most of the program-specific intellectual property and tooling used in our business.
•Our global footprint subjects us to the risks of doing business in foreign countries.
•Our results could be adversely affected by economic and geopolitical considerations.
•We may not be able to generate sufficient taxable income to fully realize our deferred tax assets.
•Our business is subject to regulation in the U.S. and internationally.
•The U.S. Government is a significant customer of certain of our customers and we and they are subject to specific U.S. Government contracting rules and regulations.
•Our operations could be negatively impacted by service interruptions, data corruption or misuse, cyber attacks, network security breaches or GDPR violations.
•We operate in a very competitive business environment.
•Our commercial business is cyclical and sensitive to commercial airlines’ profitability.
•Our success depends in part on the success of our research and development initiatives.
•Risks Related to Employment Matters
•In order to be successful, we must attract, retain, train, motivate, develop and transition key employees, and failure to do so could harm our business.
•We could be required to make future contributions to our defined benefit pension and post-retirement benefit plans and our costs may substantially increase in connection with such plans as a result of adverse changes in interest rates and the capital markets, changes in actuarial assumptions and legislative or other regulatory actions.
•Increases in labor costs, potential labor disputes, and work stoppages at our facilities or the facilities of our suppliers or customers could materially adversely affect our financial performance.
•Risks Related to Our Debt and Liquidity
•Declines in our financial condition or expected performance or reductions in our credit ratings could limit the Company’s ability to obtain future financing, increase its borrowing, adversely affect the market price of its securities, or otherwise impair its business, financial condition, and results of operations.
•Our debt could adversely affect our financial condition and our ability to operate our business due to significant restrictions in our Credit Agreement, which could also adversely affect our operating flexibility and put us at a competitive disadvantage.
•Risks Related to Our Common Stock
•We cannot make any guarantees with respect to dividends on our Common Stock.
•Spirit Holdings’ certificate of incorporation, rights plan, bylaws and our supply agreements with Boeing contain provisions that could discourage others from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.
Risks Related to Our Business
Our business, financial results, and prospects are dependent on global aviation demand. The COVID-19 pandemic has had and is expected to continue to have a significant negative impact on aviation demand, our business and our industry.
We largely support commercial aerostructures customers, and our financial results and prospects are almost entirely dependent on global aviation demand and the resulting production rates of our customers. In response to COVID-19 impacts, our customers, including Boeing and Airbus, have decreased production rates across many programs and may further adjust production rates or suspend production in the future. Suspensions in our production rates or prolonged reductions to rates have in the past resulted in, and could in the future result in, significant challenges and negative impacts on our business, operations and financial performance.
COVID-19’s impact on our 2020 financial performance resulted in a significant strain on our liquidity and debt balance. As of December 31, 2019, the Company had a debt balance of approximately $3,034.3 million, most of which was unsecured debt, and a cash balance of $2,350.5 million. As of December 31, 2020, the Company had a debt balance of approximately $3,873.6 million, more than 50% was secured debt, and a cash balance of $1,873.3 million.
The extent to which the pandemic will continue to negatively affect our business and results of operations will depend on many changing factors and developments, without limitation, the following:
•the severity, extent, and duration of the pandemic, its impact on the aircraft industry and aviation demand, and any additional production suspensions or reductions relating to the pandemic;
•the effectiveness and availability of vaccines and the public’s willingness to receive such vaccines or treatments;
•continued travel restrictions and bans, bans on public gatherings, and closures of non-essential businesses;
•economic stimulus efforts, including continued federal assistance for airlines;
•economic recessions resulting from the pandemic;
•any inability of significant portions of our workforce to work effectively, including because of illness, remote work, reduced salaries, quarantines, social distancing, government actions, or other restrictions in connection with the COVID-19 pandemic;
•the possibility that we may experience lawsuits or regulatory actions due to COVID-19 spread in the workplace;
•our ability to maintain our compliance practices and procedures, financial reporting processes and related controls, and manage the complex accounting issues presented by the COVID-19 pandemic;
•the impact on the Company’s vendors and outsourced business processes and their process and controls documentation;
•potential failure or reduced capacity of third parties on which the Company relies, including suppliers, lenders, and other business partners, to meet the Company’s obligations and needs;
•the impact on our contracts with our customers and suppliers, including force majeure provisions;
•the impact on, and subsequent volatility of, the financial markets;
•the availability and cost of credit to the Company; and
•the impact of government health and protection policies to future air traffic demand.
Several of these effects have already occurred and any or all of these items may occur or recur, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. While the Company has taken action to reduce costs, increase liquidity and strengthen its financial position in light of the COVID-19 pandemic, there can be no assurance that our actions will mitigate the impact of the pandemic on our business.
We expect that the COVID-19 pandemic will have a significant negative impact on our business for the duration of the pandemic and for an indeterminate time thereafter until demand grows closer to 2019 levels. We expect our business will not improve until our customers are willing to produce aircraft at sufficient levels, which depends upon the public’s willingness to use aircraft travel, the success of vaccination programs across the globe, sufficient OEM demand and orders (without suspension) from airlines, and the ability of airlines to weather the crisis and expand. This may not occur, if ever, until well after the broader global economy begins to improve. Further, we expect that the pandemic recovery time for wide-body aircraft may be longer than for narrow-body aircraft due to reduced traveler demand and lower volumes of international travel. If the pandemic worsens or there is significant uncertainty on the aviation industry’s recovery, we may find it difficult to obtain additional financing and/or fund our operations and meet our debt repayment obligations.
Our business depends largely on sales of components for a single aircraft program, the B737 MAX. The B737 MAX production rate was significantly reduced and, from time to time, suspended as a result of the B737 MAX grounding and COVID-19 pandemic. Additional suspensions or reductions in, or increases in, the B737 MAX production rate may create financial and disruption risks for the Company and its suppliers on the program, which, may in turn, affect the Company's ability to comply with contractual obligations.
For the twelve months ended December 31, 2018, 2019, and 2020, approximately 56%, 53%, and 19% of our net revenues were generated from sales of components to Boeing for the B737 aircraft, respectively. For the twelve months ended December 31, 2020, our revenues from the B737 aircraft were significantly impacted by grounding and COVID-19 pandemic. While we have entered into long-term supply agreements with Boeing to continue to provide components for the B737 for the life of the aircraft program, including commercial and military P-8 derivatives, Boeing does not have any obligation to purchase components from us for any replacement for the B737 that is not a commercial derivative model as defined by the Sustaining Agreement. The contract is a requirements contract, and Boeing can reduce the purchase volume at any time.
In March 2019, the B737 MAX fleet was grounded in the U.S. and internationally following the accidents involving two B737 MAX aircraft. At Boeing’s direction, Spirit suspended all B737 MAX production beginning on January 1, 2020. Subsequently, there were a number of changes to 2020 production rates as a result of the grounding and COVID-19 impacts. These production changes created significant disruption for the Company and its B737 MAX suppliers.
If production levels for the MAX program are reduced beyond current expectations due to depressed demand or otherwise, or if we have difficulties in managing our cost structure to take into account changes in production schedules or to accommodate a ramp-up in production, our liquidity position may worsen absent our ability to procure additional financing, we may trigger an event of default under our credit facilities, and our business, financial condition, results of operations and cash flows could be materially adversely impacted.
Boeing’s deliveries of the B737 MAX resumed in December 2020, but the rate at which deliveries will continue and continued impacts of the grounding remain uncertain. We have made significant assumptions with respect to the B737 program regarding the number of units to be delivered in 2021 (161 units), the period during which those units are likely to be produced, and the units’ expected sales prices, production costs, program tooling and other non-recurring costs, and routine warranty costs. In addition, we have made assumptions regarding estimated costs expected to be incurred until resuming a normal production rate consistent with 2019 production levels to determine which costs should be (i) included in program inventory and (ii) expensed when incurred as abnormal production costs. Any changes in these estimates and/or assumptions with respect to the B737 program could have a material adverse impact on our financial position, results of operations, and/or cash flows.
Because we depend on Boeing and Airbus, as our largest customers, our sales, cash flows from operations, and results of operations will be negatively affected if either Boeing or Airbus reduces the number of products it purchases from us or if either experiences business difficulties or breaches its obligations to us.
Currently,
Boeing is our largest customer, and Airbus is our second-largest customer. For the twelve months ended December 31, 20182020, approximately 60% and December 31, 2017, approximately 79% and 16%23% of our net revenues were generated from sales to Boeing and Airbus, respectively. Although part of our strategy is in part, to diversify our customer base, by entering into supply arrangements with additional customers, we cannot give any assuranceassure that we will be successful in doing so. Even if we are successful in obtaining and retaining new customers, we expect that Boeing and to a lesser extent, Airbus will continue to account for a substantial portion of our sales for the foreseeable future.
Although we are a party to various supplysales. Our contracts with Boeing and Airbus that obligate Boeing and Airbus to purchase all of theirare requirements for certain products from us, those agreements generallycontracts that do not require specific minimum purchase volumes. In addition, if we breach certain obligations under these supply agreements
volumes, and either Boeing or Airbus exercisescan reduce its right to terminate suchpurchase volume at any time. If either of these customers reduces the requirements under our agreements our business will be materially adversely affected. Further, if we are unable to perform our obligations under these supply agreements(as Boeing did in 2019 and 2020 due to the customer’s satisfaction, BoeingMAX grounding and the COVID-19 pandemic and other customers did in 2020 due to the COVID-19 pandemic), terminates the agreements or Airbus could seek damages from us, which could materially adversely affectportions of them (due to our business. Boeing and Airbus also have the contractual right to cancel their supply agreements with usbreach), a termination for convenience which could include(which is a provision included in most of the termination of onecontracts, or more aircraft models or programs for which we supply products. Although Boeing and Airbus would be required to reimburse us for certain expenses, there can be no assurance these payments would adequately cover our expenses or lost profits resulting from the termination. In addition, we have agreed to a limitation on recoverable damages if Boeing wrongfully terminates our main supply agreement with respect to any model or program. If this occurs, we may not be able to recover the full amount of our actual damages. Furthermore, if Boeing or Airbus (1) experiences a
decrease in requirements for the products that we supply to it; (2)otherwise), experiences a major disruption in its business such(such as a strike, work stoppage, or slowdown, a supply-chain problem, or a decreasesupply chain problem) or experiences a deterioration in orders from its customers; (3) files for bankruptcy protection;business, financial condition, access to credit, or (4) fails to perform its contractual obligations under its agreements with us;liquidity, our business, financial condition, and results of operations could be materially adversely affected.
Our business depends, in large part, on sales of components for a single aircraft program, the B737.
For the twelve months ended December 31, 2018, approximately 56% of our net revenues were generated Any monetary damages we receive from sales of components toAirbus or Boeing for the B737 aircraft. While we have entered into long-term supply agreements with Boeing to continue to provide components for the B737 for the life of the aircraft program, including commercial and the military P-8 derivatives, Boeing does not have any obligation to purchase components from us for any replacement for the B737 that is not a commercial derivative model as defined by the Sustaining Agreement. If we were unable to obtain significant aerostructures supply business for any B737 replacement program, our business, financial condition, and results of operations could be materially adversely affected.
The Company's ability to meet increased production rates depends on a number of factors. The failure of any one factor could affect the Company's ability to meet quality or delivery requirements and, as a result, could adversely affect the Company's business and financial results.
The Company is facing production rate increases on several of its programs, including the B737 program, which comprised 56% of the Company's net revenues for the twelve months ended December 31, 2018. In addition, increased production rates have been announced on other programs, including the A320 and B787 programs. The Company's ability to meet production rate increases is dependent upon several factors, including without limitation, expansion and alignment of its production facilities, tooling, and equipment; improved efficiencies in its production line; on-time delivery of component parts from the Company's suppliers; adequate supply of skilled labor; and implementation of customer customizations upon demand. If the Company fails to meet the quality or delivery expectations or requirements of its customers, disruptions in manufacturing lines could result, which could have a material adverse impact on the Company's ability to meet commitments to its customers and on its future financial results.
In some cases, in order to meet these increases in production rates, we will need to make significant capital expenditures to expand our capacity and improve our performance or find alternative solutions such as outsourcing some of our existing work to free up additional capacity. While some of these expenditures will be reimbursed by our customers, we could be required to bear a significant portion of the costs. In addition, the increases in production rates could cause disruptions in our manufacturing lines, which could materially adversely impact our ability to meet our commitments to our customers, and have a resulting adverse effect on our financial condition and results of operations.
Interruptions in deliveries of components or raw materials, or increased prices for components or raw materials used in our products could delay production and/or materially adversely affect our financial performance, profitability, margins, and revenues.
We are highly dependent on the availability of essential materials and purchased components from our suppliers, some of which are available only from a sole source or limited sources. Further, many of our suppliers are international. International supply sources possess additional risks, some of which are similar to those described below with respect to international revenue. Our dependency upon regular deliveries from particular suppliers of components and raw materials means that interruptions or stoppages in such deliveries could materially adversely affect our operations until arrangements with alternate suppliers, to the extent alternate suppliers exist, could be made. If any of our suppliers were unable or were to refuse to deliver materials to us for an extended period of time, or if we were unable to negotiate acceptable terms for the supply of materials with these or alternative suppliers, our business could suffer and be materially affected.
Moreover, we are dependent upon the ability of our suppliers to provide materials and components that meet specifications, quality standards, and delivery schedules. Our suppliers’ failure to provide expected raw materials or component parts that meet our technical specifications could materially adversely affect production schedules and contract profitability. We may not be able to find acceptable alternatives, and any such alternatives could result in increased costs for us and possible forward losses on certain contracts. Even if acceptable alternatives are found, the process of locating and securing such alternatives might be disruptive to our business and might lead to termination of our supply agreements with our customers.
Our continued supply of materials is subject to a number of risks including:
the destruction of or damage to our suppliers’ facilities or their distribution infrastructure;
embargoes, force majeure events, domestic or international acts of hostility, terrorism, or other events impacting our suppliers’ ability to perform;
a work stoppage or strike by our suppliers’ employees;
the failure of our suppliers to provide materials of the requisite quality or in compliance with specifications;
the failure of essential equipment at our suppliers’ plants;
the failure of our suppliers to satisfy U.S. and international import and export control laws for goods that we purchase from such suppliers;
the failure of our suppliers to meet regulatory standards;
the failure, shortage. or delay in the delivery of raw materials to our suppliers;
imposition of tariffs and similar import limitations on us or our suppliers;
contractual amendments and disputes with our suppliers; and
the inability of our suppliers to perform as a result of a contractual termination may not be sufficient to cover our actual damages.
Our backlog is subject to change due to the COVID-19 pandemic and other factors.
From time to time, we disclose our expected backlog associated with large commercial aircraft, business and regional jets, and military equipment deliveries, calculated based on contractual and historical product prices and expected delivery volumes. Our backlog declined throughout 2020 due to cancellations related to the B737 MAX grounding and the COVID-19 pandemic, and the pandemic may also extend or delay the time in which we expect to realize value from our backlog. Additional impacts from the pandemic or other global economic conditionsevents may cause our backlog to further deteriorate due to order cancellations or otherwise.delays. Additionally, we adjusted the calculation of our backlog to contemplate material impacts related to adjustments reported under ASC606.
In addition,
Backlog is calculated based on the number of units the Company is under contract to produce on our profitability isfixed quantity contracts, and Boeing’s and Airbus’ announced backlog on our supply agreements (which are based on orders from customers). Accordingly, we rely on latest available information from Boeing and Airbus to calculate our backlog, which may not reflect expected cancellations related to the COVID-19 pandemic. The number of units may be subject to cancellation or delay by the customer prior to shipment, depending on contract terms. The level of unfilled orders at any date during the year may be materially affected by the prices of the components and raw materials, such as titanium, aluminum, steel, and carbon fiber, used in the manufacturingtiming of our products. These prices may fluctuate based on a numberreceipt of factors beyondfirm orders and additional airplane orders, and the speed with which those orders are filled. Accordingly, our control, including world oil prices, changes in supply and demand, general economic conditions, labor costs, competition, import duties, tariffs, currency exchange rates and, in some cases, government regulation. Although our supply agreements with Boeing and Airbus allow us to pass on to our customers certain unusual increases in component and raw material costs in limited situations, we may not be fully compensated by the customers for the entirety of any such increased costs.
Our business depends, in part, on securing work for replacement programs.
While we have entered into long-term supply agreements with respect to the Sustaining Programs, Boeingexpected backlog does not have any obligation to purchase components from usnecessarily represent the actual amount of deliveries or sales for any subsequent variant of these aircraft that is not a commercial derivative as defined by the Sustaining Agreement. If we are unable to obtain significant aerostructures supply business for any aircraft program for which we provide significant content, our business, financial condition, and results of operations could be materially adversely affected.future period.
Our commercial business is cyclical and sensitive to commercial airlines’ profitability.
We compete in the aerostructures segment of the aerospace industry. Our customers’ business, and therefore our own, is directly affected by the financial condition of commercial airlines and other economic factors, including global economic conditions and geo-political considerations that affect the demand for air transportation. Specifically, our commercial business is dependent on the demand from passenger airlines and cargo carriers for the production of new aircraft. Accordingly, demand for our commercial products is tied to the worldwide airline industry’s ability to finance the purchase of new aircraft and the industry’s forecasted demand for seats, flights, routes, and cargo capacity. Availability of financing to non-U.S. customers depends in part on the continued operations of the U.S. Export-Import Bank. Additionally, the size and age of the worldwide commercial aircraft fleet affects the demand for new aircraft and, consequently, for our products. Such factors, in conjunction with evolving economic conditions, cause the market in which we operate to be cyclical to varying degrees, thereby affecting our business and operating results.
Significant consolidation in the aerospace industry could make it difficult for us to obtain new business.
Suppliers in the aerospace industry have consolidated and formed alliances to broaden their product and integrated system offerings and achieve critical mass. This supplier consolidation is, in part, attributable to aircraft manufacturers more frequently awarding long-term sole-source or preferred supplier contracts to the most capable suppliers, thus reducing the total number of suppliers. If this consolidation were to continue, it may become more difficult for us to be successful in obtaining new customers.
We operate in a very competitive business environment.
Competition in the aerostructures segment of the aerospace industry is intense. We face substantial competition from both OEMs and non-OEM aerostructures suppliers in trying to expand our customer base and the types of parts we make.
OEMs may choose not to outsource production of aerostructures due to, among other things, their own direct labor and other overhead considerations and capacity utilization at their own facilities. Consequently, traditional factors affecting competition, such as price and quality of service, may not be significant determinants when OEMs decide whether to produce a part in-house or to outsource.
Some of our competitors have greater resources than we do and, therefore, may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or devote greater resources to the promotion and sale of their products than we can. Providers of aerostructures have traditionally competed on the basis of cost, technology, quality, and service. We believe that developing and maintaining a competitive advantage will require continued investment in product development, engineering, supply-chain management, and sales and marketing, and we may not have enough resources to make such investments. For these reasons, we may not be able to compete successfully in this market or against our competitors, which could have a material adverse effect on our business, financial condition and results of operations.
High switching costs may substantially limit our ability to obtain business that is currently under contract with other suppliers.
Once a contract is awarded by an OEM to an aerostructures supplier, the OEM and the supplier are typically required to spend significant amounts of time and capital on design, manufacture, testing, and certification of tooling and other equipment. For an OEM to change suppliers during the life of an aircraft program, further testing and certification would be necessary, and the OEM would be required either to move the tooling and equipment used by the existing supplier for performance under the existing contract, which may be expensive and difficult (or impossible), or to manufacture new tooling and equipment. Additionally, in some cases, the existing incumbent supplier may have proprietary designs, know-how, processes, or technologies. Accordingly, any change of suppliers would likely result in production delays and additional costs to both the OEM and the new supplier. These high switching costs may make it more difficult for us to bid competitively against existing suppliers and less likely that an OEM will be willing to switch suppliers during the life of an aircraft program, which could materially adversely affect our ability to obtain new work on existing aircraft programs.
We face risks as we work to successfully execute on new or maturing programs.
New or maturing programs with new technologies typically carry risks associated with design responsibility, development of new production tools, hiring and training of qualified personnel, increased capital and funding commitments, ability to meet customer specifications, delivery schedules, and unique contractual requirements, supplier performance, ability of the customer to meet its contractual obligations to us, and our ability to accurately estimate costs associated with such programs. In addition, any new or maturing aircraft program may not generate sufficient demand or may experience technological problems or significant delays in the regulatory certification or manufacturing and delivery schedule. If we were unable to perform our obligations under new or maturing programs to the customer’s satisfaction or manufacture products at our estimated costs, if we were to experience unexpected fluctuations in raw material prices or supplier problems leading to cost overruns, if we were unable to successfully perform under revised design and manufacturing plans or successfully resolve claims and assertions, or if a new or maturing program in which we had made a significant investment was terminated or experienced weak demand, delays or technological problems could result and our business, financial condition, and results of operations could be materially adversely affected. Some of these risks have affected our maturing programs to the extent that we have recorded significant forward losses and maintain certain of our maturing programs at zero or low margins due to our inability to overcome the effects of these risks. We continue to face similar risks as well as the potential for default, quality problems, or inability to meet weight requirements and these could result in continued zero or low margins or additional forward losses, and the risk of having to write-off additional inventory if it were deemed to be unrecoverable over the life of the program. In addition, beginning new work on existing programs also carries risks associated with the transfer of technology, knowledge, and tooling.
In order to perform on new or maturing programs we may be required to construct or acquire new facilities requiring additional up-front investment costs. In the case of significant program delays and/or program cancellations, we could be required to bear certain unrecoverable construction and maintenance costs and incur potential impairment charges for the new facilities. Also, we may need to expend additional resources to determine an alternate revenue-generating use for the facilities. Likewise, significant delays in the construction or acquisition of a plant site could impact production schedules.
We use estimates in accounting for revenue and cost for our contracts. Changes in our estimates could adversely affect our future financial performance.
The Company recognizes revenue using the principles of Accounting Standards Codification ("ASC') Topic 606 , Revenue from contracts with customers (“ASC 606”), and estimates revenue and cost for contracts that span a period of multiple years. This method of accounting requires judgment on a number of underlying assumptions to develop our estimates such as favorable trends in volume, learning curve efficiencies, and future pricing from suppliers that reduce our production costs. However, several factors may cause the costs we incur in fulfilling these contracts to vary substantially from our original estimates such as technical problems, delivery reductions, materials shortages, supplier difficulties, and multiple other events. Other than certain increases in raw material costs that can generally be passed on to our customers, in most instances we must fully absorb cost overruns. Due to the significant length of time over which some revenue streams are generated, the variability of future period estimated revenue and cost may be adversely affected if circumstances or underlying assumptions change. If our estimated costs exceed our estimated revenues under a fixed-price contract, we will be required to recognize a forward loss on the affected program, which could have a material adverse effect on our results of operations. The risk particularly applies to products such as the B787 and A350, in that our performance at the contracted price depends on our being able to achieve production cost reductions as we gain production experience. ForDuring the fourth quarter of 2020, there were further disruptions and delays as a result of increased inspections and associated rework requests from Boeing on the B787 program. Further production rate changes or claims relating to inspection and rework requests may result in additional information on our accounting policies for recognizing revenue and profit, please see our discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in this Form 10-K.incremental forward loss charges.
Further, some of our long-term supply agreements, such as the Sustaining Agreement and the B787 Agreement, provide for the re-negotiation of established pricing terms at specified times in the future. If such negotiations result in costs that exceed our
revenue under a fixed-price contract, or operating margins that our lower than our current margins, we may need to recognize a forward loss on the affected program, which could have a material adverse effect on our results of operations.
Additionally, variability of future period estimated revenue and cost may result in recording additional valuation allowances against future deferred tax assets, which could adversely affect our future financial performance.
Our business depends, in part, on securing work for replacement programs.
While we have entered into long-term supply agreements with respect to the Sustaining Programs, Boeing does not have any obligation to purchase components from us for any subsequent variant of these aircrafts that is not a commercial derivative as defined by the Sustaining Agreement. If we are unable to obtain significant aerostructures supply business for any variant of these aircrafts for which we provide significant content, such as the B737 MAX, our business, financial condition, and results of operations could be materially adversely affected.
Our business depends on our ability to maintain a healthy supply chain, meet production rate requirements, and timely deliver products that meet or exceed stringent quality standards.
Our business depends on our ability to maintain a healthy supply chain, achieve planned production rate targets, and meet or exceed stringent performance and reliability standards. The supply chain for large commercial aerostructures is complex and involves hundreds of suppliers and their technical employees from all over the world.
Operational issues, including delays or defects in supplier components, could result in significant out-of-sequence work and increased production costs, as well as delayed deliveries to customers. Our suppliers’ failure to provide parts that meet our technical specifications could materially adversely affect production schedules and contract profitability. We may not be able to find acceptable alternatives, and any such alternatives could result in increased costs for us and possible forward losses on certain contracts. Even if acceptable alternatives are found, the process of locating and securing such alternatives might be disruptive to our business and might lead to termination of our supply agreements with our customers.
Our suppliers continue to encounter financial difficulty due to the pandemic and residual effects of the B737 MAX grounding. Absent financial support, suppliers may not be able to meet commitments under their agreements with us. If any suppliers fail to supply critical parts and we are not able to secure timely and adequate replacements, we may breach our obligations to our customers. As a result of a breach, customers generally may terminate their agreements or proceed against us for damages and our business, financial condition, results of operations and cash flows could be materially adversely impacted.
Additionally, the Company’s ability to meet production rate increases is dependent upon several factors, including expansion and alignment of its production facilities, tooling, and equipment; improved efficiencies in its production line; on-time delivery of component parts from the Company’s suppliers; adequate supply of skilled labor; and implementation of customer customizations upon demand. If the Company fails to meet the quality or delivery expectations or requirements of its customers, disruptions in manufacturing lines could result, which could have a material adverse impact on the Company’s ability to meet commitments to its customers and on its future financial results.
In some cases, in order to meet these increases in production rates, we will need to make significant capital expenditures to expand our capacity and improve our performance or find alternative solutions such as outsourcing some of our existing work to free up additional capacity. While some of these expenditures will be reimbursed by our customers, we could be required to bear a significant portion of the costs. In addition, the increases in production rates could cause disruptions in our manufacturing lines, which could materially adversely impact our ability to meet our commitments to our customers, and have a resulting adverse effect on our financial condition and results of operations.
Our operations depend on our ability to maintain continuing, uninterrupted production at our manufacturing facilities and our suppliers’ facilities.
Our manufacturing facilities or our suppliers’ manufacturing facilities could be damaged or disrupted by a natural disaster, war, terrorist activity, interruption of utilities, public health crises (such as the ongoing COVID-19 pandemic), or sustained mechanical failure. Although we have obtained property damage and business interruption insurance where we deem appropriate, a sustained mechanical failure of a key piece of equipment, major catastrophe (such as a fire, flood, tornado, hurricane, major snow storm, or other natural disaster), war, or terrorist activities in any of the areas where we or our suppliers conduct operations could result in a prolonged interruption of all or a substantial portion of our business. Any disruption resulting from these events could cause significant delays in shipments of products and the loss of sales and customers. We may not have insurance to adequately compensate us for any of these events. A large portion of our operations takes place at one facility in Wichita, Kansas, and any significant damage or disruption to this facility in particular would materially adversely affect our ability to service our customers. Additionally, while any insurance proceeds may cover certain business interruption expenses, certain deductibles and limitations will apply and no assurance can be made that all recovery costs will be covered.
Interruptions in deliveries of components or raw materials, or increased prices for components or raw materials used in our products could delay production and/or materially adversely affect our financial performance, profitability, margins, and revenues.
We are highly dependent on the availability of essential materials and purchased components from our suppliers, some of which are available only from a sole source or limited sources. Our dependency upon regular deliveries from particular suppliers of components and raw materials means that interruptions or stoppages in such deliveries could materially adversely affect our operations until arrangements with alternate suppliers, to the extent alternate suppliers exist, could be made. If any of our suppliers were unable or were to refuse to deliver materials to us for an extended period of time, or if we were unable to negotiate acceptable terms for the supply of materials with these or alternative suppliers, our business could suffer and be materially affected.
Our continued supply of materials is subject to a number of risks including:
•the destruction of or damage to our suppliers’ equipment, facilities or their distribution infrastructure;
•global economic conditions, embargoes, force majeure events, domestic or international acts of hostility, terrorism, pandemic, or other events impacting our suppliers’ ability to perform;
•a work stoppage or strike by our suppliers’ employees;
•the failure of our suppliers to provide materials of the requisite quality or in compliance with specifications;
•the failure of our suppliers to satisfy U.S. and international import and export control laws;
•the failure of our suppliers to meet regulatory standards;
•the failure, shortage, or delay in the delivery of raw materials to our suppliers;
•imposition of tariffs and similar import limitations on us or our suppliers; and
•contractual amendments and disputes with our suppliers.
In addition, our profitability is affected by the prices of the components and raw materials, such as titanium, aluminum, steel, and carbon fiber, used in the manufacturing of our products. These prices may fluctuate based on factors beyond our control, including world oil prices, changes in supply and demand, general economic conditions, labor costs, competition, import duties, tariffs, currency exchange rates, hostilities in jurisdictions that affect raw materials and, in some cases, government regulation. Although our supply agreements with Boeing and Airbus allow us to pass on to our customers certain unusual increases in component and raw material costs in limited situations, we may not be fully compensated by the customers for the entirety of any such increased costs.
Our business could be materially adversely affected by product warranty obligations or defective product claims.
We are exposed to liabilities that are unique to the products and services we provide. Our operations expose us to potential rework obligations, liabilities for warranty or other claims with respect to aircraft components that have been designed, manufactured, or serviced by us or our suppliers. We maintain insurance for certain risks, but the amount of our insurance coverage may not cover all claims or liabilities and we may be forced to bear substantial costs. Material obligations in excess of our insurance coverage (or other third-party indemnification) could have a material adverse effect on our business, financial condition, and results of operations.
In addition, if our products are found to be defective and lacking in quality, or if one of our products causes an accident, our reputation could be damaged and our ability to retain and attract customers could be materially adversely affected.
The profitability of certain programs depends significantly on the assumptions surrounding satisfactory settlement of customer claims and assertions.
For certain of our programs, we regularly commence work or incorporate customer requested changes prior to negotiating pricing terms for engineering work or the product that has been modified. We typically have the contractual right to negotiate pricing for customer directed changes. In those cases, we assert to our customers our contractual rights to obtain the additional revenue or cost reimbursement we expect to receive upon finalizing pricing terms. An expected recovery value of these assertions is incorporated into our contract profitability estimates. Our inability to recover these expected values, among other factors, could result in the recognition of a forward loss on these programs and could have a material adverse effect on our results of operations.
Our acquisitions expose us to risks, including the risk that we may not be able to successfully integrate these businesses or achieve expected operating synergies.
As part of our business strategy, we may merge with or acquire businesses and/or form joint ventures and strategic alliances. For example, the Company closed the Bombardier Acquisition (as defined below) on October 30, 2020. Combining our businesses may be more difficult, costly, or time consuming than expected. In addition, events outside of our control, including changes in regulation and laws as well as economic trends, could adversely affect our ability to realize the expected benefits from the acquisition. The success of this acquisition and other acquisitions will depend on, among other things, our ability to realize the anticipated benefits and cost savings from combining our and the acquired businesses in a manner that facilitates growth opportunities and realizes anticipated synergies and cost savings. These anticipated benefits and cost savings may not be realized fully or at all, or may take longer to realize than expected or could have other adverse effects that we do not currently foresee. Further, the integration of these companies involves a number of risks, including, but not limited to the diversion of management’s attention to the integration of operations, difficulties in the assimilation of different cultures and practices, reliance on sellers under transition services agreements, (including, without limitation, the transition services agreement with Bombardier), as well as in the assimilation of geographically dispersed operations and personnel, difficulties in the integration of departments, systems (including accounting, production, IT, and other critical systems), technologies, books and records and procedures, as well as in maintaining uniform standards, controls (including internal accounting controls), procedures, and policies and compliance with the Foreign Corrupt Practices Act, the U.K. Bribery Act and other applicable anti-bribery laws.
We face risks as we work to successfully execute on new or maturing programs.
New or maturing programs with new technologies typically carry risks associated with design responsibility, development of new production tools, hiring and training of qualified personnel, increased capital and funding commitments, ability to meet customer specifications, delivery schedules, and unique contractual requirements, supplier performance, ability of the customer to meet its contractual obligations to us, and our ability to accurately estimate costs associated with such programs. In addition, any new or maturing aircraft program may not generate sufficient demand or may experience technological problems or significant delays in the regulatory certification or manufacturing and delivery schedule. If we were unable to perform our obligations under new or maturing programs to the customer’s satisfaction or manufacture products at our estimated costs, if we were unable to successfully perform under revised design and manufacturing plans or successfully resolve claims and assertions, or if a new or maturing program in which we had made a significant investment was terminated or experienced weak demand, delays or technological problems could result and our business, financial condition, and results of operations could be materially adversely affected. Some of these risks have affected our maturing programs to the extent that we have recorded significant forward losses and maintain certain of our maturing programs at zero or low margins due to our inability to overcome the effects of these risks, which was greatly exacerbated by significantly reduced current and future production volumes related to the COVID-19 pandemic. We continue to face similar risks as well as the potential for default, quality problems, or inability to meet weight requirements and these could result in continued zero or low margins or additional forward losses, and the risk of having to write-off additional inventory if it were deemed to be unrecoverable over the life of the program. In addition, beginning new work on existing programs also carries risks associated with the transfer of technology, knowledge, and tooling.
In order to perform on new or maturing programs we may be required to construct or acquire new facilities requiring additional up-front investment costs. In the case of significant program delays and/or program cancellations, we could be required to bear certain unrecoverable construction and maintenance costs and incur potential impairment charges for the new facilities. Also, we may need to expend additional resources to determine an alternate revenue-generating use for the facilities. Likewise, significant delays in the construction or acquisition of a plant site could impact production schedules.
Prolonged periods of inflation where we do not have adequate inflation protections in our customer contracts could have a material adverse effect on our results of operations.
A majority of our sales are conducted pursuant to long-term contracts that set fixed unit prices. Certain, but not all, of these contracts provide for price adjustments for inflation or abnormal escalation. Although we have attempted to minimize the effect of inflation on our business through contractual protections, the presence of longer pricing periods within our contracts increases the likelihood that there will be sustained or higher than anticipated increases in costs of labor or material. Furthermore, if one of the raw materials on which we are dependent (e.g. aluminum, titanium, or composite material) were to experience an isolated price increase without inflationary impacts on the broader economy, we may not be entitled to inflation protection under certain of our contracts. If our contractual protections do not adequately protect us in the context of substantial cost increases, it could have a material adverse effect on our results of operations.
Our
The outcome of legal proceedings and government inquiries and investigations involving our business could be materially adversely affected by product warranty obligations or defective product claims.
We are exposed to liabilities that are unique to the productsis unpredictable, and services we provide. Our operations expose us to potential liabilities for warranty or other claims with respect to aircraft components that have been designed, manufactured, or serviced by us or our suppliers. We maintain insurance for certain risks. The amount of our insurance coverage may not cover all claims or liabilities and we may be forced to bear substantial costs. Material obligationsan adverse decision in excess of our insurance coverage (or other third party indemnification)any such matter could have a material adverse effect on our business, financial condition,position and results of operations.
In addition, if our products are found to be defective and lacking in quality, or if one of our products causes an accident, our reputation could be damaged and our ability to retain and attract customers could be materially adversely affected.
We may be required to repay Boeing advanced payments in the event Boeing does not take delivery of a sufficient number of shipsets prior to the termination of the aircraft program.
Boeing has made advance payments to Spirit under the B787 Supply Agreement, that are required to be repaid to Boeing by way of offset against the purchase price for future shipset deliveries. Advance repayments were originally scheduled to be spread evenly over the remainder of the first 1,000 B787 shipsets delivered to Boeing. On April 8, 2014, the Company signed a memorandum of agreement with Boeing that suspended advance repayments related to the B787 program for a period of twelve months beginning April 1, 2014. The 2018 MOA also provided for the suspension of advance repayments with respect to the B787 beginning with line number 818; to resume at a lower rate of $450,319 per shipset at line number 1135 and continue through line number 1605.
In the event Boeing does not take delivery of a sufficient number of shipsets to repay the full amount of advances prior to the termination of the B787 program or the B787 Supply Agreement, any advances not then repaid will be applied against any outstanding payments then due by Boeing to us, and any remaining balance will be repaid in annual installments of $42.0 million due on December 15th of each year until the advance payments have been fully recovered by Boeing.
Accordingly, portions of the advance repayment liability are included as current and long-term liabilities in our balance sheet. As of December 31, 2018, the amount of advance payments received by us from Boeing and not yet repaid was approximately $233.9 million.
In order to be successful, we must attract, retain, train, motivate, develop and transition key employees, and failure to do so could harm our business.
In order to be successful, we must attract, retain, train, motivate, develop, and transition qualified executives and other key employees, including those in managerial, manufacturing, and engineering positions. Competition for experienced employees in the aerospace industry, and in particular in Wichita, Kansas, where the majority of our manufacturing and executive offices are located, is intense. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash- and share-based compensation. A significant portion of our cash-based incentive compensation is conditioned on our achievement of certain designated financial performance targets, and a portion of our share-based incentive awards is conditioned on our achievement of certain designated financial performance targets and our stock price performance, which makes the size of a particular year’s awards uncertain. If employees do not receive share-based incentive awards with a value they anticipate, if our share-based compensation otherwise ceases to be viewed as a valuable benefit, if our total compensation package is not viewed as being competitive, our ability to attract, retain, and motivate executives and
key employees couldWe are involved in a number of legal proceedings including the proceedings disclosed in Note 22 to the Consolidated Financial Statements, Commitments, Contingencies and Guarantees. These claims may divert financial and management resources that would otherwise be weakened. The failureused to successfully hire executives and key employees or the loss of any executives and key employees could have a significant impact onbenefit our operations. Further, changes in our management team mayNo assurances can be disruptive to our business and any failure to successfully transition and assimilate key new hires or promoted employees could adversely affect our business andgiven that the results of operations.
Our human resource talent pool may notthese matters will be adequatefavorable to support our growth.
The Company’s operations and strategy require that we employ a critical massus. An adverse resolution of highly skilled employees. Specifically, we need employees with industry experience and engineering, technical, or mechanical skills. As the Company experiences an increase in retirements, the level of skill replacing our experienced workers is being impacted due to the availability of skilled labor in the market and low unemployment rates. Talent is being replaced with less experienced talent and the organization is having to grow our own to meet the talent gap. We continue to work with learning institutions to develop programs to attract and train new talent. Our inability to attract and retain skilled employees may adversely impact our ability to meet our customers’ expectations, the cost and schedule of development projects, and the cost and efficiency of existing operations.
The profitability of certain programs depends significantly on the assumptions surrounding satisfactory settlement of claims and assertions.
For certain of our programs, we regularly commence work or incorporate customer requested changes prior to negotiating pricing terms for engineering work or the product that has been modified. We typically have the contractual right to negotiate pricing for customer directed changes. In those cases, we assert to our customers our contractual rights to obtain the additional revenue or cost reimbursement we expect to receive upon finalizing pricing terms. An expected recovery value of these assertions is incorporated into our contract profitability estimates. Our inability to recover these expected values, among other factors, could result in the recognition of a forward loss on these programs and could have a material adverse effect on our results of operations.
Our operations depend on our ability to maintain continuing, uninterrupted production at our manufacturing facilities and our suppliers’ facilities. Our production facilities and our suppliers’ facilities are subject to physical and other risks that could disrupt production.
Our manufacturing facilities or our suppliers’ manufacturing facilities could be damaged or disrupted by a natural disaster, war, terrorist activity, interruption of utilities, or sustained mechanical failure. Although we have obtained property damage and business interruption insurance where appropriate, a sustained mechanical failure of a key piece of equipment, major catastrophe (such as a fire, flood, tornado, hurricane, major snow storm, or other natural disaster), war, or terrorist activities in any of the areas where we or our suppliers conduct operations could result in a prolonged interruption of all or a substantial portion of our business. Any disruption resulting from these events could cause significant delays in shipments of products and the loss of sales and customers and we may not have insurance to adequately compensate us for any of these events. A large portion of our operations takes place at one facility in Wichita, Kansas and any significant damage or disruption to this facility in particular would materially adversely affect our ability to service our customers.
The Company maintains broad insurance coverage for both property damage and business interruption where appropriate. While the Company expects the insurance proceeds would be sufficient to cover most of the business interruption expenses, certain deductibles and limitations will apply and no assurance can be made that all recovery costs will be covered.
Any future business combinations, acquisitions, mergers, or joint ventures will expose us to risks, including the risk that we may not be able to successfully integrate these businesses or achieve expected operating synergies.
We actively consider strategic transactions from time to time. We evaluate acquisitions, joint ventures, alliances, and co-production programs as opportunities arise, and we may be engaged in varying levels of negotiations with potential candidates at any time. We may not be able to effect transactions with strategic alliance, acquisition, or co-production program candidates on commercially reasonable terms or at all. If we enter into these transactions, we also may not realize the benefits we anticipate. In addition, we may not be able to obtain additional financing for these transactions. The integration of companies that have previously been operated separately involves a number of risks, including, but not limited to:
demands on management related to the increase in size after the transaction;
the diversion of management’s attention from the management of daily operations to the integration of operations;
difficulties in the assimilation and retention of employees;
difficulties in the assimilation of different cultures and practices, as well as in the assimilation of geographically dispersed operations and personnel, who may speak different languages;
difficulties combining operations that use different currencies or operate under different legal structures and laws;
difficulties in the integration of departments, systems (including accounting, production, ERP, and IT systems), technologies, books and records and procedures, as well as in maintaining uniform standards, controls (including internal accounting controls), procedures, and policies;
compliance with applicable competition laws;
compliance with the Foreign Corrupt Practices Act, the U.K. Bribery Act and other applicable anti-bribery laws; and
constraints (contractual or otherwise) limiting our ability to consolidate, rationalize and/or leverage supplier arrangements to achieve integration.
Consummating any acquisitions, joint ventures, alliances, or co-production programs could result in the incurrence of additional debt and related interest expense, as well as unforeseen contingent liabilities.
The Company's proposed acquisition of Asco is subject to significant risk and uncertainties.
As described elsewhere in this Annual Report on Form 10-K, on May 1, 2018, the Company and its wholly owned subsidiary Spirit AeroSystems Belgium Holdings BVBA (“Spirit Belgium”) entered into a definitive agreement (the “purchase agreement”) with certain sellers pursuant to which Spirit Belgium will purchase all of the issued and outstanding equity of S.R.I.F. N.V., the parent company of Asco Industries N.V. (“Asco”), for $650.0 million in cash, subject to certain customary closing adjustments. Our ability to complete the proposed acquisition on a timely basis or at all is subject to numerous risks and uncertainties, including, but not limited to, the following:
we may not obtain required regulatory approvals or receipt of regulatory approvals may take longer than expected or may impose conditions to the proposed acquisition that are not presently anticipated or cannot be met;
conditions to the proposed acquisition may not be fulfilled in a timely manner or at all; or
unforeseen events and those beyond our control.
One of the closing conditions is receipt of clearance from the European Commission (the “Commission”). During the scope of the Commission's Phase 1 review, the Commission identified issues that it required to be addressed regarding the transaction. Consequently, on October 26, 2018, we withdrew our notification of the transaction from the Commission in order to address those issues. The withdrawal interrupted the Commission's review of the transaction. After several months of addressing the issues, the Company refiled its application with the Commission on January 30, 2019, and the Commission is proceeding with a Phase 1 review of the transaction. There can be no assurances that we will receive the clearance of the Commission.
We have incurred and expect to incur transaction and acquisition-related costs associated with the proposed acquisition. In addition, while we have attempted to mitigate our exposure to currency exchange rate fluctuations, movements in the Euro exchange rate could cause the purchase price to fluctuate, affecting our cash flows. These, as well as other unanticipated costs and expenses,lawsuits could have a material impact on our financial conditionposition and operating results. Combining our businesses may be more difficult, costly, or time consuming than expected.results of operations. In addition, events outsidewe are sometimes subject to government inquiries and investigations of our control, including changes in regulation and laws as well as economic trends, could adversely affect our ability to realize the expected benefits from the acquisition.
The success of the proposed acquisition will depend on,business due, among other things, to the heavily regulated nature of our ability to realize the anticipated benefitsindustry and cost savings from combining our and Asco's businessesparticipation in a manner that facilitates growth opportunities and realizes anticipated synergies and cost savings. These anticipated benefits and cost savings may not be realized fullygovernment programs. Any such inquiry or at all, or may take longer to realize than expected orinvestigation could potentially result in an adverse ruling against us, which could have other adverse effects thata material impact on our financial position and operating. If we do not currently foresee.
We actively consider divestitures from timeare unsuccessful in any action related to time. Engagement in divestiture activity could disrupt our business and present risks not contemplated at the time of the divestiture.
Divestitures thatthis matter, we may pursue could involve numerous potential risks, including the following:
difficultiesbe required to pay a significant amount of monetary damages that may be in the separation of operations, services, products, and personnel;
diversion of resources and management’s attention from the operationexcess of our business;insurance coverage.
loss of key employees;
damage to our existing customer, supplier, and other business relationships;
negative effects on our reported results of operations from disposition-related charges, amortization expenses related to intangibles, and/or charges for impairment of long-term assets;
the need to agree to retain or assume certain current or future liabilities in order to complete the divestiture; and
the expenditure of substantial legal and other fees, which may be incurred whether or not a transaction is consummated.
As a result of the aforementioned risks, among others, the pursuit of any divestiture may not lead to increased stockholder value.
We do not own most of the program specific intellectual property and tooling used in our business.
Our business depends on using certain intellectual property and tooling that we have rights to use under license grants from Boeing. Theseour customers. If these licenses contain restrictions on our use of Boeing intellectual property and tooling and may beare terminated if we default under certain of these restrictions. If Boeing terminates our licensesdue to use Boeing intellectual property or tooling as a result of default or otherwise, or fails to honor its obligations under certain licenses, our business wouldmay be materially affected. See “Business-Our Relationship with Boeing-License of Intellectual Property.” In addition, to the licenses with Boeing, we license some of the intellectual property needed for performance under some of our supply contracts from our customers under those supply agreements. We must honor our contractual commitments to our customers related to intellectual property and comply with infringement laws governing our use of intellectual property. In the event we obtain new business from new or existing customers, we will need to pay particular attention to these contractual commitments and any other restrictions on our use of intellectual property to make sure that we will not be using intellectual property improperly in the performance of such new business. In the event we use any such intellectual property improperly, we could be subject to an infringement or misappropriation claim by the owner or licensee of such intellectual property.
In the future, our entry into new markets may requirebe facilitated by obtaining additional license grants from Boeing and/or from other third parties.our customers. If we are unable to negotiate additional license rights on acceptable terms (or at all) from Boeing and/or other third parties as the need arises,these customers, our ability to enter new markets may be materially restricted.
Our global footprint subjects us to the risks of doing business in foreign countries.
We have activities and operations globally (through wholly owned indirect or direct subsidiaries and joint ventures), including in the United Kingdom, France, Malaysia, Morocco and China. In addition, we derive a significant portion of our revenues from sales by Boeing and Airbus to customers outside the U.S and, for the twelve months ended December 31, 2020, direct sales to our non-U.S. customers accounted for approximately 23% of our net revenues. We expect that our and our customers’ international sales will continue to account for a significant portion of our net revenues for the foreseeable future. As a result, we are subject to risks of doing business internationally, including:
•changes in regulatory requirements applicable to our industry and business, including without limitation, changes in tariffs (imposed or threatened) on imports, including tariffs imposed in a retaliatory manner on U.S. exports, embargoes, export controls, and other trade restrictions or barriers;
•changes in the political, economic, legal, tax and social conditions in the countries we do business in;
•changes in policies and initiatives including with respect to foreign exchange, foreign investment, and government industrial cooperation requirements;
•the ability to secure clearances, approvals or licenses, including any requirements mandated by the U.S. Commerce Department, to maintain the ability to provide product or services to certain countries or customers;
•compliance with foreign labor laws, which generally provide for increased notice, severance and consultation requirements compared to U.S. laws; difficulties enforcing intellectual property and contractual rights in certain jurisdictions; the complexity and necessity of using foreign representatives and consultants;
•uncertainties and restrictions concerning the availability of funding credit or guarantees;
•potential or actual withdrawal or modification of international trade agreements;
•modifications to sanctions imposed on other countries; changes to immigration policies that may present risks to companies that rely on foreign employees or contractors;
•compliance with antitrust and competition regulations;
•differences in business practices;
•the difficulty of management and operation of an enterprise spread over various countries;
•compliance with a variety of foreign laws, as well as U.S. laws affecting the activities of U.S. companies abroad, including the Foreign Corrupt Practices Act, the U.K. Bribery Act and other applicable anti-bribery laws; and
•economic and geopolitical developments and conditions, including domestic or international hostilities, acts of terrorism and governmental reactions, inflation, trade relationships, and military and political alliances.
While these factors and the effect of these factors are difficult to predict, adverse developments in one or more of these areas could materially adversely affect our business, financial condition, and results of operations in the future.
Our results could be adversely affected by economic and geopolitical considerations.
The commercial airline industry is impacted by the strength of the global economy and the geopolitical events around the world. Possible exogenous shocks such as expanding conflicts or political unrest, renewed terrorist attacks against the industry, or pandemics have in the past caused, and could in the future cause, precipitous declines in air traffic. Any protracted economic slump, adverse credit market conditions, future terrorist attacks, war, or health concerns could cause airlines to cancel or delay the purchase of additional new aircraft, which could result in a deterioration of commercial airplane backlogs. If demand for new aircraft decreases, there would likely be a decrease in demand for our commercial aircraft products, and our business, financial condition, and results of operations could be materially adversely affected.
Changes in the U.K.’s economic and other relationships with the European Union (the “EU”) due to the U.K.’s departure from the EU on January 31, 2020 (referred to as “Brexit”) could adversely affect the Company. New provisional rules regarding the relationship between the U.K. and the EU took effect on January 1, 2021. Such rules govern trade, aviation, and various employee related matters, among other things. The effect of the new rules is still being determined. Because the Company currently operates and conducts business in the U.K. and in EU, potential adverse consequences of Brexit such as global market uncertainty, volatility in currency exchange rates, greater restrictions on imports and exports between the U.K. and other countries and increased regulatory complexities could have a negative impact on our business, financial condition, and results of operations.
We are pursuing growth opportunities in a number of newly developed and emerging markets. These investments may expose us to heightened risks of economic, geopolitical, or other events, including governmental takeover (nationalization) of our manufacturing facilities or intellectual property, restrictive exchange or import controls, disruption of operations as a result of systemic political or economic instability, outbreak of war or expansion of hostilities, and acts of terrorism, each of which could have a substantial adverse effect on our financial condition and results of operations. Further, the U.S. Government, other governments, and international organizations could impose additional sanctions that could restrict us from doing business directly or indirectly in or with certain countries or parties, which could include affiliates.
We may not be able to generate sufficient taxable income to fully realize our domestic deferred tax assets.
At December 31, 2020, we have recognized a valuation allowance against nearly all of our domestic net deferred tax assets. Changes that are adverse to the Company could result in the need to record additional a deferred tax asset valuation allowances resulting in a charge to results of operations and a decrease to total stockholders’ equity.
Our business is subject to regulation in the U.S. and internationally.
The manufacturing of our products is subject to numerous federal, state, and foreign governmental regulations including related to environmental, health and safety laws and regulations. The number of laws and regulations that are being enacted or proposed by various governmental bodies and authorities are increasing. Compliance with these regulations is difficult and expensive. If we fail to adhere, or are alleged to have failed to adhere, to any applicable federal, state, or foreign laws or regulations, or if such laws or regulations negatively affect sales of our products, our business, prospects, results of operations, financial condition, or cash flows may be adversely affected by penalties or sanctions or reputational degradation. In addition, our future results could be adversely affected by changes in applicable federal, state, and foreign laws and regulations, or the interpretation or enforcement thereof.
Our operations involve the use of large amounts of hazardous substances and regulated materials and generate many types of wastes, including emissions of hexavalent chromium and volatile organic compounds, and certain chlorinated and brominated hydrocarbon solvents, greenhouse gases such as carbon dioxide. Spills and releases of these materials may subject us to clean-up liability for remediation and claims of alleged personal injury, property damage, and damage to natural resources, and we may become obligated to reduce our emissions of hexavalent chromium, volatile organic compounds and/or greenhouse gases. We cannot give any assurance that the aggregate amount of future remediation costs and other environmental liabilities will not be material.
The Company's chemical milling and vapor degreasing processes use various regulated substances that are identified as TSCA (Toxic Substances Control Act) initial chemicals evaluated in risk assessments prescribed by the Lautenburg Chemical Safety Act in the U.S., and therefore may be subject to additional regulations in the near future. The Company is investigating
the use of alternative solvents and processes, including control technologies which may require material expenditures, however this business will remain dependent on the availability, use and cost of these materials for the immediate future. To the extent these alternative solutions are not viable, or any enacted regulation does not provide an exception, there could be material capital expenditures required to comply with elimination of the chemicals used in our current processes.
In connection with prior acquisitions, we may be indemnified or insured, subject to certain contractual limitations and conditions, for certain clean-up costs and other losses, liabilities, expenses, and claims related to existing environmental conditions on the acquired properties. If indemnification or insurance is not sufficient to cover any potential environmental liability, we may be required to make material expenditures.
In the future, contamination may be discovered at or emanating from our facilities or at off-site locations where we send waste. The remediation of such newly discovered contamination, related claims for personal injury or damages, or the enactment of new laws or a stricter interpretation of existing laws, may require us to make additional expenditures, some of which could be material. See Item 1. “Business - Regulatory Matters.”
In addition, increased concern over climate change has led to new and proposed legislative and regulatory initiatives. New or revised laws and regulations in this area could directly and indirectly affect the Company, its customers, or its suppliers by increasing production costs or otherwise impacting operations. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by the Company and could have an adverse effect on our business, financial condition, and results of operations.
As a manufacturer and exporter of defense and dual-use technical data and commodities, we are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to, the International Traffic in Arms Regulations, administered by the U.S. Department of State, and the Export Administration Regulations, administered by the U.S. Department of Commerce. Collaborative agreements that we may have with foreign persons, including manufacturers and suppliers, are also subject to U.S. export control laws. In addition, we are subject to trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the U.S. Department of the Treasury. A determination that we have failed to comply with one or more of these export controls or trade sanctions could result in civil or criminal penalties, including the imposition of fines upon us as well as the denial of export privileges and debarment from participation in U.S. government contracts. Additionally, restrictions may be placed on the export of technical data and goods in the future licenses grantedas a result of changing geopolitical conditions. Any one or more of such sanctions could have a material adverse effect on our business, financial condition, and results of operations.
The U.S. Government is a significant customer of certain of our customers and we and they are subject to specific U.S. Government contracting rules and regulations.
We provide aerostructures to defense aircraft manufacturers. Our defense customers’ businesses, and by extension, our business, is affected by the U.S. Government’s continued commitment to programs under contract with our customers. Contracts with the U.S. Government generally permit the government to terminate contracts partially or completely, with or without cause, at any time. An unexpected termination of a significant government contract, a reduction in expenditures by the U.S. Government for aircraft using our products, lower margins resulting from increasingly competitive procurement policies, a reduction in the volume of contracts awarded to us, or substantial cost overruns could materially reduce our cash flow and results of operations. We bear the potential risk that the U.S. Government may unilaterally suspend our defense customers or us from new contracts pending the resolution of alleged violations of procurement laws or regulations.
Decline in the U.S. defense budget or change of defense strategies or funding priorities (as a result of political environment, macroeconomic conditions and the ability of the U.S. Government to enact legislation or otherwise) may reduce demand for our defense customers’ aircraft or lead to competitive procurement conditions, which may reduce our defense business sales or margins. Further, changes in U.S. government procurement policies, regulations, initiatives and requirements may adversely impact our ability to grow our defense business.
The FAA prescribes standards and qualification requirements for aerostructures, including virtually all commercial airline and general aviation products, and licenses component repair stations within the U.S. Comparable agencies, such as the EASA in Europe, regulate these matters in other countries. If we fail to qualify for or obtain a required license for one of our products or services or lose a qualification or license previously granted, the sale of the subject product or service would be prohibited by law until such license is obtained or renewed and our business, financial condition, and results of operations could be materially restrictadversely affected. In addition, designing new products to meet existing regulatory requirements and retrofitting installed products to comply with new regulatory requirements can be expensive and time consuming.
A FCL is required for a company to be awarded and perform on classified contracts for the Department of Defense (“DOD”) and certain other agencies of the U.S. Government. If we were to violate the terms and requirements of the NISPOM or any other applicable U.S. Government industrial security regulations, we could lose our FCLs. We cannot give any assurance that we will be able to maintain our FCLs. If for some reason our FCLs are invalidated or terminated, we may not be able to continue to perform under our classified contracts in effect at that time, and we would not be able to enter into new classified contracts, which could adversely affect our revenues.
Under applicable federal regulations for defense contractors, we are required to comply with the Cybersecurity Maturity Model Certification (“CMMC”) program in the next several years and other similar cybersecurity requirements. Compliance with the CMMC is costly and complex. To the extent that we are unable to comply with the CMMC or other requirements, we may be unable to maintain or grow our business with the DOD or its prime customers.
Our operations could be negatively impacted by service interruptions, data corruption or misuse, cyber attacks, network security breaches or GDPR violations.
We rely on information technology networks and systems to manage and support a variety of business activities, including procurement and supply chain, engineering support, and manufacturing. These networks and systems, some of which are managed by third-parties (including, without limitation, under the transition services agreement with Bombardier with respect to the Bombardier Acquisition), are susceptible to damage, disruptions, or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers or insiders, telecommunication failures, user errors, or catastrophic events. If these networks and systems suffer severe damage, disruption, or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, our manufacturing process could be disrupted, resulting in late deliveries or even no deliveries if there is a total shutdown. This could have a material adverse effect on our reputation and we could face financial losses.
Further, we routinely experience cyber security threats and attempts to gain access to sensitive information, as do our customers, suppliers, and other third parties with which we work. We have established threat detection, monitoring, and mitigation processes and procedures and are continually exploring ways to improve these processes and procedures. However, the scope and impact of any future incident cannot be predicted and we cannot provide assurance that these processes and procedures will be sufficient to prevent cyber security threats from materializing. If threats do materialize, we could experience significant financial or information losses and/or reputational harm. If we are unable to protect sensitive or confidential information from these threats, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures and, as a result, our present and future business could be negatively impacted.
The EU’s General Data Protection Regulation (“GDPR”) imposes a range of compliance obligations applicable to the collection, use, retention, security, processing, and transfer of third party intellectual property.personally identifiable information of EU residents. Violations of the GDPR may result in significant fines and sanctions. Any failure, or perceived failure, by us to comply with the GDPR, or any other privacy, data protection, information security, or consumer protection-related privacy laws and regulations could result in financial losses and have an adverse effect on our reputation.
We operate in a very competitive business environment.
As the Company seeks to further diversify its program portfolio and product offerings and expand its customer base, we face substantial competition from both OEMs and non-OEM aerostructures suppliers. OEMs may choose not to outsource production of aerostructures due to, among other things, their own direct labor and other overhead considerations and capacity utilization at their own facilities. Consequently, traditional factors affecting competition, such as price and quality of service, may not be significant determinants when OEMs decide whether to produce a part in-house or to outsource.
Some of our non-OEM competitors have greater resources than we do and may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or devote greater resources to the promotion and sale of their products than we can. Consolidation of or partnerships among our competitors could also increase their financial resources, market penetration and purchasing power. Providers of aerostructures have traditionally competed on the basis of cost, technology, quality, and service. We believe that developing and maintaining a competitive advantage will require continued investment in product development, engineering, supply-chain management, and sales and marketing, and we may not have enough resources to make such investments.
It is very difficult for new aerostructures suppliers to compete against incumbent suppliers for work under an existing contract, because the OEM and the supplier typically spend significant amounts of time and capital on design, manufacture, testing, and certification of tooling and other equipment. A supplier change would require further testing and certification and the expensive movement of existing tooling or the development of new tooling, and would likely result in production delays and additional costs to both the OEM and the new supplier. These high switching costs may make it more difficult for us to bid competitively against existing suppliers and less likely that an OEM will be willing to switch suppliers during the life of an aircraft program, which could materially adversely affect our ability to obtain new work on existing aircraft programs.
Our commercial business is cyclical and sensitive to commercial airlines’ profitability.
Our customers’ business, and therefore our own, is directly affected by the financial condition of commercial airlines and other economic factors, including global economic conditions and geopolitical considerations that affect the demand for air transportation. Specifically, our commercial business is dependent on the demand from passenger airlines and cargo carriers for the production of new aircraft. Accordingly, demand for our commercial products is tied to the worldwide airline industry’s ability to finance the purchase of new aircraft and the industry’s forecasted demand for seats, flights, routes, and cargo capacity. Availability of financing to non-U.S. customers depends in part on the continued operations of the U.S. Export-Import Bank. Additionally, the size and age of the worldwide commercial aircraft fleet affects the demand for new aircraft and, consequently, for our products. Such factors, in conjunction with evolving economic conditions, cause the market in which we operate to be cyclical to varying degrees, thereby affecting our business and operating results.
Our success depends in part on the success of our research and development initiatives.
In order for us to remain competitive, we will need to expend significant capital to research and develop technologies, purchase new equipment and machines, or to train our employees in the new methods of production and service. We spent $42.5$38.8 million on research and development during the twelve months ended December 31, 2018.2020. Our expenditures on our research and development efforts may not create any new sales opportunities or increases in productivity that are commensurate with the level of resources invested.
We are in the process of developing specific technologies and capabilities in pursuit of new business and in anticipation of customers going forward with new programs. If any such programs do not go forward or are not successful, or if we are unable to generate sufficient new business, we may be unable to recover the costs incurred in anticipation of such programs or business and our profitability and revenues may be materially adversely affected.
We
While the Company intends to continue committing financial resources and effort to the development of innovative new technologies, any strain on the Company’s liquidity, such as the strain caused by the B737 MAX grounding and COVID-19 impacts, will needreduce the Company’s ability to expend significant capital to keep pace with technological developments in our industry. develop such technologies.
The aerospace industry is constantly undergoing development and change.
Risks Related to Employment Matters
In order to be successful, we must attract, retain, train, motivate, develop and transition key employees, and failure to do so could harm our business.
In order to be successful, we must attract, retain, train, motivate, develop, and transition qualified executives and other key employees, including those in managerial, manufacturing, and engineering positions. Competition for us to remain competitive, we will need to expend significant capital to research and develop technologies, purchase new equipment and machines, or to train ourexperienced employees in the new methodsaerospace industry, and particularly in Wichita, Kansas, where the majority of productionour manufacturing and service. We may not be successful in developing new productsexecutive offices are located, is intense. The failure to successfully hire executives and these capital expenditures maykey employees or to implement succession plans for executives and key employees, or the loss of any executives and key employees, could have a material adverse effectsignificant impact on us.our operations. Further, changes in our management team may be disruptive to our business and any failure to successfully transition and assimilate key new hires or promoted employees could adversely affect our business and results of operations.
In 2020, the Company announced significant workforce reductions to assist with alleviating costs due to the B737 MAX grounding and the COVID-19 pandemic. The Company’s ability to ramp up in production rates across multiple programs and on the B737 MAX program will depend, in part, on the Company’s ability to hire key employees to fill any gaps left by the workforce reductions. If the Company is unable to hire such key employees, production could be adversely impacted.
In addition, the Company’s operations and strategy require that we employ a critical mass of highly skilled employees with industry experience and engineering, technical, or mechanical skills. As the Company experiences an increase in retirements, the level of skill replacing our experienced workers is being impacted due to the availability of skilled labor in the market and
low unemployment rates.Our inability to attract and retain skilled employees may adversely impact our ability to meet our customers’ expectations, the cost and schedule of development projects, and the cost and efficiency of existing operations.
We could be required to make future contributions to our defined benefit pension and post-retirement benefit plans as a result of adverse changes in interest rates and the capital markets.Adverse changes in the securities markets or interest rates, changes in actuarial assumptions, and legislative or other regulatory actions could substantially increase the costs of these plans and could result in a requirement to contribute additional funds to the plans, including the Shorts Pension acquired in the Bombardier Acquisition.
Our estimates of liabilities and expenses for pensions and other post-retirement benefits incorporate significant assumptions including the rate used to discount the future estimated liability, the long-term rate of return on plan assets, and several assumptions relating to the employee workforce (salary increases, medical costs, retirement age, and mortality). A dramatic decrease in the fair value of our plan assets resulting from movements in the financial markets or a decrease in discount rates may cause the status of our plans to go from an over-funded status to an under-funded status and result in cash funding requirements to meet any minimum required funding levels. Our results of operations, liquidity, or shareholders’ equity in a particular period could be affected by a decline in the rate of return on plan assets, the rate used to discount the future estimated liability, or changes in employee workforce assumptions.
We derive
As part of the Bombardier Acquisition, the Company acquired Short Brothers plc ("Shorts"), which sponsors the Shorts Pension, a significant portion of our net revenues from direct and indirect sales outside the U.S. and are subjectdefined benefit pension plan that is closed to new participants. The Shorts Pension is not yet closed to the risksfuture accrual of doing business in foreign countries.
We derive a significant portion of our revenues from sales by Boeing and Airbusadditional benefits for current participants. Spirit acts as parent guarantor to customers outside the U.S. In addition,Shorts Pension for the twelve months ended December 31, 2018, direct saleslimited amount of £112 million.
Following future valuations of the Shorts Pension’s assets and liabilities or following future discussions with the Shorts Pension’s trustee, the annual funding obligation and/or the arrangements to our non-U.S. customers accounted for approximately 17% of our net revenues. We expect that our and our customers’ international sales will continue to account for a significant portion of our net revenuesensure adequate funding for the foreseeable future. AsShorts Pension may change. The future valuations under the Shorts Pension are affected by a result, we are subject to risksnumber of doing business internationally, including:
changes inassumptions and factors, including legislative or other regulatory requirements;
domesticchanges; assumptions regarding interest rates, currency rates, inflation, mortality, and foreign government policies, including requirements to expend a portionretirement rates; the investment strategy and performance of program funds locallythe Shorts Pension’s assets; and governmental industrial cooperation requirements;
fluctuations in foreign currency exchange rates;
the complexity and necessity of using foreign representatives and consultants;
uncertainties and restrictions concerning the availability of funding credit or guarantees;
tariffs (imposed or threatened) on imports, including tariffs imposed in a retaliatory manner on U.S. exports, embargoes, export controls, and other trade restrictions;
potential or actual withdrawal or modification of international trade agreements;
modifications to sanctions imposed on other countries;
changes to immigration policies that may present risks to companies that rely on foreign employees or contractors;
differences in business practices;
the difficulty of management and operation of an enterprise spread over various countries;
compliance with a variety of foreign laws, as well as U.S. laws affecting the activities of U.S. companies abroad, including the Foreign Corrupt Practices Act,actions by the U.K. BriberyPensions Regulator. Volatile economic conditions caused by COVID-19 or other events could increase the risk that the funding requirements increase following the next triennial valuation. The U.K. Pensions Regulator also has powers under the Pensions Act and2004 to impose a contribution notice or a financial support direction on Shorts (and other applicable anti-bribery laws; and
economic and geopolitical developments and conditions, including domesticpersons connected with the Company or international hostilities, actsShorts) if, in the case of terrorism and governmental reactions, inflation, trade relationships, and military and political alliances.
While these factorsa contribution notice, the U.K. Pensions Regulator reasonably believes such person has been party to an act, or deliberate failure to act, intended to avoid pension liabilities or that is materially detrimental to the pension plan, or, in the case of a financial support direction, if a plan employer is a service company or insufficiently resourced and the Pensions Regulator considers it is reasonable to act against such a person. A significant increase in the funding requirements for Shorts Pension could result in the imposition of additional financial contributions to the Shorts Pension and, if such required contributions are significant, could have a material adverse effect of these factors are difficult to predict, adverse developments in oneon Shorts or more of these areas could materially adversely affect our business, financial condition, and results of operations in the future.
The outcome of litigation and of government inquiries and investigations involving our business is unpredictable and an adverse decision in any such matter could have a material effect on our financial position and results of operations.
We are involved in a number of litigation matters. These claims may divert financial and management resources that would otherwise be used to benefit our operations. No assurances can be given that the results of these matters will be favorable to us. An adverse resolution of any of these lawsuits could have a material impact on our financial position and results of operations. In addition, we are sometimes subject to government inquiries and investigations of our business due, among other things, to the heavily regulated nature of our industry and our participation on government programs. Any such inquiry or investigation could potentially result in an adverse ruling against us, which could have a material impact on our financial position and operating results.
Increases in labor costs, potential labor disputes, and work stoppages at our facilities or the facilities of our suppliers or customers could materially adversely affect our financial performance.
Our financial performance is affected by the availability of qualified personnel and the cost of labor. A majority of our workforce is represented by unions. If our workers were to engage in a strike, work stoppage, or other slowdown, we could experience a significant disruption of our operations, which could cause us to be unable to deliver products to our customers on a timely basis and could result in a breach of our supply agreements. This could result in a loss of business and an increase in our operating expenses, which could have a material adverse effect on our business, financial condition, and results of operations. In addition, our non-unionized labor force may become subject to labor union organizing efforts, which could cause us to incur additional labor costs and increase the related risks that we now face.
Due to the receipt of occasional government incentives, we have certain commitments to keep our programs in their current locations. This may prevent us from being able to offer our products at prices that are competitive in the marketplace and could have a material adverse effect on our ability to generate new business.
In addition, many aircraft manufacturers, airlines, and aerospace suppliers have unionized work forces. Any strikes, work stoppages, or slowdowns experienced by aircraft manufacturers, airlines, or aerospace suppliers could reduce our customers’ demand for additional aircraft structures or prevent us from completing production of our aircraft structures.
The U.S. Government is a significant customer of certain of our customers and we and they are subject to specific U.S. Government contracting rules and regulations.
We provide aerostructures to defense aircraft manufacturers ("defense customers"). Our defense customers' businesses, and by extension, our business, is affected by the U.S. Government's continued commitment to programs under contract with our customers. Contracts with the U.S. Government generally permit the government to terminate contracts partially or completely, with or without cause, at any time. An unexpected termination of a significant government contract, a reduction in expenditures by the U.S. Government for aircraft using our products, lower margins resulting from increasingly competitive procurement policies, a reduction in the volume of contracts awarded to us, or substantial cost overruns could materially reduce our cash flow and results of operations. We bear the potential risk that the U.S. Government may unilaterally suspend our defense customers or us from new contracts pending the resolution of alleged violations of procurement laws or regulations.
A decline in the U.S. defense budget or change of funding priorities may reduce demand for our defense customers' aircraft and reduce our sales of defense products.
Risks Related to our Debt and Liquidity
The U.S. defense budget has fluctuated
Declines in recent years, at times resulting in reduced demand for new aircraft. Changes in military strategy and priorities,our financial condition or expected performance or reductions in defense spending, may affect current andour credit ratings could limit the Company’s ability to obtain future funding of these programs and could reduce the demand for our defense customers' products, and thereby reduce sales of our defense products, which couldfinancing, increase its borrowing, adversely affect our financial position, resultsthe market price of operations, and cash flows.
Our business may be materially adversely affected if we lose our government, regulatoryits securities, or industry approvals, if we lose our facility security clearance, if more stringent government regulations are enacted, or if industry oversight is increased.
The FAA prescribes standards and qualification requirements for aerostructures, including virtually all commercial airline and general aviation products, and licenses component repair stations within the U.S. comparable agencies, such as the EASA in Europe, regulate these matters in other countries. If we fail to qualify for or obtain a required license for one of our products or services or lose a qualification or license previously granted, the sale of the subject product or service would be prohibited by law until such license is obtained or renewed and ourotherwise impair its business, financial condition, and results of operationsoperations.
Our business requires significant capital. A decline in our financial condition or expected performance for any reason could be materially adversely affected. In addition, designing new productslimit our ability to meet existing regulatory requirementsaccess the credit and retrofitting installed products to comply with new regulatory requirementscapital markets, increase our borrowing costs, and/or affect the market price of our securities. There can be expensive and time consuming.
A facility security clearance is required for a company to be awarded and perform on classified contracts for the Department of Defense (“DOD”) and certain other agencies of the U.S. Government. We have obtained a facility clearance at the “Secret” level (“FCL”). If we were to violate the terms and requirements of the NISPOM or any other applicable U.S. Government industrial security regulations, we could lose our FCL. We cannot give anyno assurance that we will be able to maintain our FCL. If for some reason our FCL is invalidatedaccess the capital or terminated, we may not be able to continue to perform under our classified contracts in effect at that time, and we would not be able to enter into new classified contracts, which could adversely affect our revenues.
In addition, our growth objectives in the defense business may be materially adversely affected by the ability to obtain government security clearances for our existing employees and new hires.
From time to time, government agencies propose new regulations or changes to existing regulations. These changes or new regulations generally increase the costs of compliance. To the extent the agencies implement regulatory changes, we may incur significant additional costs to achieve compliance.
In addition, certain aircraft repair activities we intend to engage in may require the approval of the aircraft’s OEM. Our inability to obtain OEM approval could materially restrict our ability to perform such aircraft repair activities.
Our business is subject to regulation in the U.S. and internationally.
The manufacturing of our products is subject to numerous federal, state, and foreign governmental regulations. The number of laws and regulations that are being enacted or proposed by various governmental bodies and authorities are increasing. Compliance with these regulations is difficult and expensive. If we fail to adhere, or are alleged to have failed to adhere, to any applicable federal, state, or foreign laws or regulations,credit markets or, if we do have such laws or regulations negatively affect sales of our products, our business, prospects, results of operations, financial condition, or cash flows may be adversely affected. In addition, our future results could be adversely affected by changes in applicable federal, state, and foreign laws and regulations, or the interpretation or enforcement thereof, including those relating to manufacturing processes, product liability, government contracts, trade rules and customs regulations, intellectual property, consumer laws, privacy laws, as well as accounting standards and taxation requirements (including tax-rate changes, new tax laws, revised tax law interpretations, or other potential impacts outlined in proposals on the Tax Cuts and Jobs Act (the “TCJA”)).
We are subject to environmental, health, and safety regulations and our ongoing operations may expose us to related liabilities.
Our operations are subject to extensive regulation under environmental, health, and safety laws and regulations in the U.S. and other countries in which we operate. We may be subject to potentially significant fines or penalties, including criminal sanctions, if we fail to comply with these requirements. We have made, and will continue to make, significant capital and other expenditures to comply with these laws and regulations. We cannot predict with certainty what environmental legislationaccess, that it will be enacted in the future or how existing laws will be administered or interpreted. Our operations involve the use of large amounts of hazardous substances and regulated materials and generate many types of wastes, including emissions of hexavalent chromium and volatile organic compounds, and greenhouse gases such as carbon dioxide. Spills and releases of these materials may subject us to clean-up liability for remediation and claims of alleged personal injury, property damage, and damage to natural resources, and we may become obligated to reduce our emissions of hexavalent chromium, volatile organic compounds and/or greenhouse gases. We cannot give any assurance that the aggregate amount of future remediation costs and other environmental liabilities will not be material.on favorable terms.
Boeing, our predecessor at the Wichita facility, is under an administrative consent order issued by the Kansas Department of Health and Environment to contain and remediate contaminated groundwater, which underlies a majority of our Wichita facility. Pursuant to this order and its agreements with us, Boeing has a long-term remediation plan in place, and treatment, containment, and remediation efforts are underway. If Boeing does not comply with its obligations under the order and these agreements, we may be required to undertake such efforts and make material expenditures.
In connection with the BAE Acquisition, we became a supplier to Airbus and acquired a manufacturing facility in Prestwick, Scotland that is adjacent to contaminated property retained by BAE Systems. The contaminated property may be subject to a regulatory action requiring remediation of the land. It is also possible that the contamination may spread into the property we acquired. BAE Systems has agreed to indemnify us, subject to certain contractual limitations and conditions, for certain clean-up costs and other losses, liabilities, expenses, and claims related to existing pollution on the acquired property, existing pollution that migrates from the acquired property to a third party’s property and any pollution that migrates to our property from property retained by BAE Systems. If BAE Systems does not comply with its obligations under the BAE Acquisition agreement, we may be required to undertake such efforts and make material expenditures.
In the future, contamination may be discovered at or emanating from our facilities or at off-site locations where we send waste. The remediation of such newly discovered contamination, related claims for personal injury or damages, or the enactment of new laws or a stricter interpretation of existing laws, may require us to make additional expenditures, some of which could be material. See “Business - Regulatory Matters.”
We are subject to regulation of our technical data and goods under U.S. export control laws.
As a manufacturer and exporter of defense and dual-use technical data and commodities, we are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to, the International Traffic in Arms Regulations, administered by the U.S. Department of State, and the Export Administration Regulations, administered by the U.S. Department of Commerce. Collaborative agreements that we may have with foreign persons, including manufacturers and suppliers, are also subject to U.S. export control laws. In addition, we are subject to trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the U.S. Department of the Treasury.
A determination that we have failed to comply with one or more of these export controls or trade sanctions could result in civil or criminal penalties, including the imposition of fines upon us as well as the denial of export privileges and debarment from participation in U.S. government contracts. Additionally, restrictions may be placed on the export of technical data and goods in the future as a result of changing geopolitical conditions. Any one or more of such sanctions could have a material adverse effect on our business, financial condition, and results of operations.
We are required to comply with “conflict minerals” rules promulgated by the SEC, which impose costs on us, may make our supply chain more complex, and could adversely impact our business.
We are subject to annual due diligence, disclosure, and reporting requirements as a company that manufactures or contracts to manufacture products that contain certain minerals and metals known as “conflict minerals.” We have, and expect to continue to, incur additional costs and expenses, in order to comply with these rules, including for due diligence to determine whether conflict minerals are necessary to the functionality or production of any of our products and, if so, to verify the sources of such conflict minerals; and to implement any changes we deem necessary to our products, processes, or sources of supply as a result of such diligence and verification activities. Compliance with these rules could adversely affect the sourcing, supply, and pricing of materials used in certain of our products. As there may be only a limited number of suppliers offering conflict minerals from sources outside of the Democratic Republic of Congo or adjoining countries, or that have been independently verified as not funding armed conflict in those countries, we cannot assure that we will be able to obtain such verified minerals from such suppliers in sufficient quantities or at competitive prices. Since our supply chain is complex, we may not ultimately be able to sufficiently verify the origin of the conflict minerals used in our products through the due diligence procedures that we implement, which may adversely affect our reputation with our customers, stockholders, and other stakeholders. In such event, we may also face difficulties in satisfying customers who require that all of the components in our products be certified as “conflict free.” If we are not able to meet such requirements, customers may choose to disqualify us as a supplier, which may require us to write off inventory that cannot be sold. Any one or a combination of these factors could harm our business, reduce market demand for our products, and adversely affect our profit margins, net sales, and overall financial results. We may face similar risks in connection with any other regulations focusing on social responsibility or ethical sourcing that may be adopted in the future.
The Company's results could be adversely affected by economic and geopolitical considerations.
The commercial airline industry is impacted by the strength of the global economy and the geopolitical events around the world. Possible exogenous shocks such as expanding conflicts or political unrest in the Middle East or Asia, renewed terrorist attacks against the industry, or pandemic health crises have the potential to cause precipitous declines in air traffic. Any protracted economic slump, adverse credit market conditions, future terrorist attacks, war, or health concerns could cause airlines to cancel
or delay the purchase of additional new aircraft, which could result in a deterioration of commercial airplane backlogs. If demand for new aircraft decreases, there would likely be a decrease in demand for our commercial aircraft products, and our business, financial condition, and results of operations could be materially adversely affected.
There continues to be substantial uncertainty regarding the economic impact of the Referendum on the United Kingdom's Membership of the European Union ("EU") (referred to as "Brexit"). Potential adverse consequences of Brexit such as global market uncertainty, volatility in currency exchange rates, greater restrictions on imports and exports between the UK and other countries and increased regulatory complexities could have a negative impact on our business, financial condition, and results of operations. Adverse economic conditions may decrease our customers' demand for our products and services or impair the ability of our customers to pay for products and services they have purchased. As a result, our sales could decrease and reserves for our credit losses and write-offs of receivables may increase.
We are pursuing growth opportunities in a number of newly developed and emerging markets. These investments may expose us to heightened risks of economic, geopolitical, or other events, including governmental takeover (i.e., nationalization) of our manufacturing facilities or intellectual property, restrictive exchange or import controls, disruption of operations as a result of systemic political or economic instability, outbreak of war or expansion of hostilities, and acts of terrorism, each of which could have a substantial adverse effect on our financial condition and results of operations. Further, the U.S. government, other governments, and international organizations could impose additional sanctions that could restrict us from doing business directly or indirectly in or with certain countries or parties, which could include affiliates.
We could be materially adversely affected by high fuel prices
Due to the competitive nature of the airline industry, airlines are often unable to pass on increased fuel prices to customers by increasing fares. Fluctuations in the global supply of crude oil and the possibility of changes in government policy on jet fuel production, transportation, and marketing make it difficult to predict the future availability and price of jet fuel. In the event there is an outbreak or escalation of hostilities or other conflicts, or significant disruptions in oil production or delivery in oil-producing areas or elsewhere, there could be reductions in the production or importation of crude oil and significant increases in the cost of fuel. If there were major reductions in the availability of jet fuel or significant increases in its cost, the airline industry and, as a result, our business, could be materially adversely affected.
Our operations could be negatively impacted by service interruptions, data corruption or misuse, cyber-based attacks, or network security breaches.
We rely on information technology networks and systems to manage and support a variety of business activities, including procurement and supply chain, engineering support, and manufacturing. These networks and systems, some of which are managed by third-parties, are susceptible to damage, disruptions, or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers or insiders, telecommunication failures, user errors, or catastrophic events. If these networks and systems suffer severe damage, disruption, or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, our manufacturing process could be disrupted, resulting in late deliveries or even no deliveries if there is a total shutdown. This could have a material adverse effect on our reputation and we could face financial losses.
The General Data Protection Regulation (“GDPR”) went into effect in the EU on May 25, 2018. The GDPR creates a range of compliance obligations applicable to the collection, use, retention, security, processing, and transfer of personally identifiable information of EU residents. Violations of the GDPR may result in significant fines and sanctions. Any failure, or perceived failure, by us to comply with the GDPR, or any other privacy, data protection, information security, or consumer protection-related privacy laws and regulations could result in financial losses and have an adverse effect on our reputation.
Further, we routinely experience cyber security threats and attempts to gain access to sensitive information, as do our customers, suppliers, and other third parties with which we work. We have established threat detection, monitoring, and mitigation processes and procedures and are continually exploring ways to improve these processes and procedures. However, we cannot provide assurance that these processes and procedures will be sufficient to prevent cyber security threats from materializing. If threats do materialize, we could experience significant financial or information losses and/or reputational harm. If we are unable to protect sensitive or confidential information from these threats, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures and, as a result, our present and future business could be negatively impacted.
Our debt could adversely affect our financial condition and our ability to operate our business. The terms of the indentures governing our bonds and our credit facility impose significant operating and financial restrictions on us, which could also
adversely affect our operating flexibility and put us at a competitive disadvantage by preventing us from capitalizing on business opportunities.
As of December 31, 2018, we had total debt of $1,895.4 million, including $204.7 million of borrowings under our credit facility, $1,587.4 million of bonds, and $103.3 million of capital lease and other obligations. In addition to our debt, as of December 31, 2018, we had $27.3 million of letters of guarantee outstanding.
The 2018 Credit Agreement also contains the following financial covenants (as defined in the A&R Credit Agreement):
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Interest Coverage Ratio | | Shall not be less than 4.0:1.0 |
Total Leverage Ratio | | Shall not exceed 3.5:1.0 |
As of December 31, 2018, Spirit was and expects to remain in full compliance with all covenants contained within the 2018 Credit Agreement through December 31, 2019.
The terms of the indentures governing our bonds and our credit facility impose significant operating and financial restrictions on us, which limit our ability to incur liens, and enter into certain transactions, among other things. In addition, our debt instruments require us to maintain compliance with financial covenants.
We cannot assure you that we will be able to maintain compliance with the covenants in the agreements governing our indebtedness in the future or, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants. Failure to maintain compliance with these covenants could have a material adverse effect on our operations.
We may periodically need to obtain additional financing in order to meet our debt obligations as they come due, to support our operations and/or to make acquisitions. Our access to the debt capital markets and the cost of borrowings are affected by a number of factors including market conditions and the strength of our credit ratings. If we cannot obtain adequate sources of credit on favorable terms, or at all, our business, operating results, and financial condition could be adversely affected.
Any reduction in our credit ratings could materially and adversely affect our business or financial condition.
As of December 31, 2018,2020, our corporate credit ratings were BBB-B by Standard & Poor’s Financial Services LLCGlobal Ratings (“S&P”), and Baa3B2 by Moody’s Investors Service, Inc. (“Moody’s”).Throughout 2020, S&P and Moody’s downgraded our credit rating on a number of occasions. On January 13, 2020, Moody’s downgraded Spirit’s credit rating from Baa3 to Ba2. On January 31, 2020, S&P downgraded Spirit’s credit rating from BBB- to BB. On April 14, 2020, Moody’s further downgraded Spirit’s credit rating from Ba2 to Ba3, and on April 14, 2020, S&P downgraded Spirit’s credit rating from BB to BB-. On June 25, 2020, S&P downgraded Spirit’s credit rating to B+. On July 21, 2020, Moody’s downgraded Spirit’s credit rating to B2 with a negative outlook. On September 24, 2020, Moody’s affirmed its rating. On August 3, 2020, S&P downgraded Spirit’s credit rating to B with a stable outlook. On September 22, 2020, S&P affirmed its rating. As compared to the Company’s prior investment grade rating, these ratings and our current credit condition affects, among other things, our ability to access new capital. Further negative changes to these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt.
The ratings reflect the agencies’ assessment of our ability to pay interest and principal on our debt securities and credit agreements. A rating is not a recommendation to purchase, sell, or hold securities. Each rating is subject to revision or withdrawal at any time by the assigning rating organization. Each rating agency has its own methodology for assigning ratings and, accordingly, each rating should be considered independently of all other ratings. Lower ratings would typically result in higher interest costs of debt securities when they are sold, could make it more difficult to issue future debt securities, could require us to provide creditors with more restrictive covenants, which would limit our flexibility and ability to pay dividends and may require us to pledge additional collateral under our credit facility. Any downgrade in our credit ratings could thus have a material adverse effect on our business or financial condition.
Limitations on our ability to access the capital or credit markets, unfavorable terms or general reductions in liquidity may adversely and materially impact our business, financial condition, and results of operations.
Our debt could adversely affect our financial condition and our ability to operate our business. The terms of our Credit Agreement impose significant operating restrictions on our company and our subsidiaries, which could also adversely affect our operating flexibility and put us at a competitive disadvantage by preventing us from capitalizing on business opportunities.
As of December 31, 2020, we had total debt of $3,873.6 million. In addition to our debt, as of December 31, 2020, we had $19.6 million of letters of credit and letters of guarantee outstanding.
The terms of our Credit Agreement impose significant restrictions on us, and subject to certain exceptions, limit our ability, among other things, to:
•incur additional debt or issue preferred stock with certain terms;
•pay dividends or make distributions to our stockholders over certain amounts;
•repurchase or redeem our capital stock;
•make investments;
•incur liens;
•enter into transactions with our stockholders and affiliates;
•sell certain assets;
•acquire the assets of, or merge or consolidate with, other companies;
•incur restrictions on the ability of our subsidiaries to make distributions or transfer assets to us; and
•consider strategic transactions.
These restrictions could have consequences, including the following:
•making it more difficult for us to satisfy our obligations with respect to our debt;
•limiting our ability to obtain additional financing to fund future working capital, capital expenditures, strategic acquisitions or other general corporate requirements;
•requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes;
•increasing our vulnerability to general adverse economic and industry conditions;
•limiting our financial flexibility in planning for and reacting to changes in the industry in which we compete;
•having a material adverse effect on us if we fail to comply with the covenants in the Credit Agreement or in the indentures governing our long-term bonds or in the instruments governing our other debt; and
•increasing our cost of borrowing.
We cannot assure you that we will be able to maintain compliance with the covenants in the agreements governing our indebtedness in the future or, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants. Additionally, the terms of any future indebtedness we may incur could include more restrictive covenants. If we incur additional debt, the risks related to our high level of debt could intensify.
In addition, if we are unable to generate sufficient cash flow to service our debt and meet our other commitments, we may need to refinance all or a portion of our debt, sell morematerial assets or operations, or raise additional debt or equity capital. We cannot provide assurance that we could affect any of these actions on a timely basis, on commercially reasonable terms or at all, or that these actions would be sufficient to meet our capital requirements. In addition, the terms of our existing or future debt agreements may restrict us from effecting certain or any of these alternatives.
Risks Related to our Common Stock
We cannot make any guarantees with respect to dividends on our Common Stock.
On February 6, 2020, the Company announced that its Board of Directors, or Board, reduced its quarterly dividend to a penny per share to preserve liquidity until B737 MAX production reaches higher levels. The Board regularly evaluates the Company's capital allocation strategy and reduce your ownership in Spirit Holdings.
Our business plan may requiredividend policy. Any future determination to continue to pay dividends, or to pay higher dividends, will be at the investmentdiscretion of newour Board and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions, including the requirements of financing agreements to which we may raise by issuing additional equity (including equity interestsbe a party. No assurance can be given that may have a preference over shares of our class A common stock). However, this capital may notcash dividends will be availabledeclared and paid at all,historical levels or when needed, or upon terms and conditions favorable to us. The issuance of additional equity in Spirit Holdings may result in significant dilution of shares of our class A common stock. We may issue additional equity in connection with or to finance acquisitions. Further, our subsidiaries could issue securities in the future to persons or entities (including our affiliates) other than us or another subsidiary. This could materially adversely affect your investment in us because it would dilute your indirect ownership interest in our subsidiaries.at all.
Spirit Holdings’ certificate of incorporation, andrights plan, by-laws and our supply agreements with Boeing contain provisions that could discourage another companyothers from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.
Provisions of Spirit Holdings’ certificate of incorporation and by-laws may discourage, delay, or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our current board of directors.Board. These provisions include:
•advance notice requirements for nominations for election to the board of directorsBoard or for proposing matters that can be acted on by stockholders at stockholder meetings; and
•the authority of the board of directorsBoard to issue, without stockholder approval, up to 10 million shares of preferred stock with such terms as the boardBoard may determine.
In addition, Spirit Holdings adopted a limited duration stockholder rights agreement (the “rights plan”) on April 22, 2020 and declared a dividend of directors may determine.one right for each outstanding share of Common Stock as of May 1, 2020, the record date. The rights generally become exercisable if a person or group (including a group of persons who agree to act in concert with each other) acquires beneficial ownership of 10% or more of Spirit Holdings’ Common Stock in a transaction not approved by the Board. Passive investors in Spirit Holdings are permitted to hold up to 20% without triggering the exercise of the rights. In the event the rights become exercisable, each holder of a right (other than the acquiring person or group, whose rights will become void and will not be exercisable) will have the right to purchase, upon payment of the exercise price and in accordance with the terms of the rights plan, a number of shares of Common Stock having a market value of twice the exercise price. In addition, if Spirit Holdings is acquired in a merger or other business combination after an acquiring person acquires 50% or more of the
Common Stock, each holder of the right would thereafter have the right to purchase, upon payment of the exercise price and in accordance with the terms of the rights plan, a number of shares of Common Stock of the acquiring person having a market value of twice the exercise price. The acquiring person or group would not be entitled to exercise these rights. The rights plan expires, without any further action being required to be taken by Board, on April 22, 2021.
In addition, our supply agreements with Boeing include provisions giving Boeing the ability to terminate the agreements in the event any of certain disqualified persons acquire a majority of Spirit’s direct or indirect voting power or all or substantially all of Spirit’s assets. See Item 1. “Business - Our Relationship with Boeing.”
Item 1B. Unresolved Staff Comments
None.
Item 2. Significant Properties
The location, primary use, approximate square footage and ownership status of our principal properties as of December 31, 20182020 are set forth below:
| | | | | | | | | | | | | | | | | | | | |
| Location | | Primary Use | | Approximate
Square Footage | | Owned/Leased |
| United States | | | | | | |
Wichita, Kansas(1) | | Primary Manufacturing | | 12.9 million | | Owned/Leased |
| | Facility/Offices/Warehouse | | | | |
| Tulsa, Oklahoma | | Manufacturing Facility | | 1.77 million | | Leased |
| McAlester, Oklahoma | | Manufacturing Facility | | 139,000 | | Owned |
| Kinston, North Carolina | | Primary Manufacturing/Office/Warehouse | | 851,000 | | Leased |
| San Antonio, Texas | | Manufacturing/Warehouse | | 320,000 | | Leased |
| Dallas, Texas | | Manufacturing | | 50,000 | | Leased |
| Biddeford, Maine | | Manufacturing | | 180,000 | | Owned |
| | | | | | |
LocationUnited Kingdom | | Primary Use | | Approximate
Square Footage
| | Owned/Leased |
United StatesPrestwick, Scotland | | Manufacturing Facility | | 956,000 | | Owned |
Wichita, Kansas(1)
Belfast, Northern Ireland | | Primary Manufacturing Facility/Offices | | 12.03.0 million | | Owned/Leased |
| Malaysia | | Facility/Offices/Warehouse | | | | |
Tulsa, OklahomaSubang, Malaysia | | Manufacturing Facility | | 1.75 million386,000 | | Owned/Leased |
McAlester, OklahomaFrance | | Manufacturing Facility | | 142,000 | | Owned |
Kinston, North CarolinaSaint-Nazaire, France | | Primary Manufacturing/Office/WarehouseOffice | | 851,00058,800 | | Leased |
United KingdomAfrica | | | | | | |
Prestwick, ScotlandCasablanca, Morocco | | Primary Manufacturing Facility | | 974,000310,000 | | Owned |
Malaysia | | | | | | |
Subang, Malaysia | | Manufacturing | | 386,000 | | Owned/Leased |
France | | | | | | |
Saint-Nazaire, France | | Primary Manufacturing/Office | | 58,800 | | Leased |
| |
(1) | 90% of the Wichita facility is owned. |
(1)87% of the Wichita facility is owned.
Our physical assets consist of 16.220.7 million square feet of building space located on 1,3511,557 acres in seveneleven facilities. We produce our fuselage systems and propulsion systems from our primary manufacturing facility located in Wichita, Kansas with some fuselage work done in our McAlester, Oklahoma; Kinston, North Carolina; San Antonio TX; Saint Nazaire, France; Subang, Malaysia; Biddeford, Maine; and Subang, MalaysiaCasablanca, Morocco facilities. We produce wing systems in our manufacturing facilities in Tulsa and McAlester, Oklahoma; Kinston, North Carolina; Prestwick, Scotland; San Antonio, Texas; Casablanca, Morocco; Belfast, Northern Ireland and Subang, Malaysia. In addition to these sites, we have a facility located inThe McAlester, Oklahoma thatsite supplies machined parts and sub-assembliessub-
assemblies to the Wichita and Tulsa facilities, and is now offering services to third parties as part of our focus on leveraging our fabrication and assembly expertise. In July 2019, we entered into a lease for a facility in San Antonio, Texas specializes in sheet metal fabrication, machining, metal finishing and kitting. As previously announced, the McAlester, Oklahoma and San Antonio, Texas facilities are expected to be closed after transfer of work from these sites is completed, which we anticipate will take place during the first half of 2021. On October 30, 2020, the Company purchased assets including facilities from Bombardier Inc. and its affiliates (“Bombardier”) in Belfast, Northern Ireland; Casablanca, Morocco; and Dallas, Texas.
The Wichita facility, including Spirit'swhich includes the Company's corporate offices, is comprised of 633650 acres, 7.78.0 million square feet of manufacturing space, 1.61.9 million square feet of offices and laboratories for the engineering and design group and 2.73.0 million square feet for support functions and warehouses. A total of 355,000568,000 square feet are currently vacant, with 75,000280,000 square feet of that planned to support increases in rates across programs and the expansion of fabrication and assembly work. Two new facilities are currently under construction in Wichita. The first is the Global Digital Logistics Center, a 170,000 square foot automated warehouse that is scheduled for completion in June 2019. The second is the Northeast Manufacturing Facility, a 138,000 square foot manufacturing building that will house the B767 section 41 program and is scheduled for completion in October 2019. The Wichita site has access to transportation by rail, road, and air via the runways of McConnell Air Force Base. Additionally, a 6,000 square foot lease commenced in January 2019 on the Wichita State University (WSU) campus to establish an innovative relationship between Spirit and WSU through NIAR and the WSU Campus of Applied Sciences and Technology. The three areas of strategic focus are joint strategic research projects, applied learning opportunities for WSU students, and improved workforce training services to meet the growing demands of the aerospace industry.
The Tulsa facility consists of 1.751.77 million square feet of building space set on 160147 acres. The Tulsa plant is located five miles from an international shipping port (Port of Catoosa) and is located next to the Tulsa International Airport. Triumph currently
subleases 296,000 square feet of the Tulsa plant for manufacturing purposes. The sublease includes 261,000 square feet of manufacturing space and 35,000 square feet of office space. The McAlester site, which manufactures parts and sub-assemblies, consists of 142,000139,000 square feet of building space on 89 acres.
The Prestwick facility consists of 974,000 square feet of building space, comprised of 444,000 square feet of manufacturing space, 255,000 square feet of office space, and 275,000 square feet of warehouse/support space. This facility is set on 100 acres. The Aerospace Innovation Center, a new 70,000 square foot facility, is scheduled for completion in December 2019. The Prestwick plant is located within close proximity to the motorway network that provides access between England and continental Europe. It is also easily accessible by air (at Prestwick International Airport) or by sea. A portion of the Prestwick facility is leased to the Regional Aircraft division of BAE Systems and certain other tenants.
The Malaysian manufacturing plant is located at the Malaysia International Aerospace Center in Subang. The 386,000 square foot leased facility is set on 4590 acres and we expect the site will be closed after transfer of work is centrally located with easy access to Kuala Lumpur, as well as nearby ports and airports. The facility assembles composite panels for wing components. A new 57,000 square foot warehouse was constructed in June 2018 to accommodatecompleted, which we anticipate will take place during the need for more manufacturing space in the facility.first half of 2021.
The Wichita and Tulsa manufacturing facilities have significant scale to accommodate the very large structures that are manufactured there, including, in Wichita, entire fuselages. Three of the U.S. facilities are in close proximity, with approximately 175 miles between Wichita and Tulsa and 90 miles between Tulsa and McAlester.Tulsa. Currently, these U.S. facilities utilize approximately 97%95% of the available building space. The Prestwick manufacturing facility currently utilizes only 74% of the space; of the remaining space, 15% is leased to others and 11% is vacant.
The Kinston, North Carolina facility supports the manufacturing of composite panels and wing components. The primary manufacturing site and off-site leased spaces total 318 acres and 851,000 square feet. In addition to the primary manufacturing facility, this includes three additional buildings leased from the North Carolina Global Transpark Authority: a 27,800 square foot warehouse/office supporting receiving needs, a 26,400 square foot warehouse providing tooling storage, and a 121,000 square foot manufacturing facility supporting light manufacturing. A new 11,000
The San Antonio, Texas site is located within one mile of the San Antonio International Airport. The 320,000 square foot Trimsite specializes in sheet metal fabrication, machining, minor assembly, and chemical processing. Parts for several of Spirit's programs, including the B737 and the B787 are manufactured at the facility. Spirit acquired the facility to maintain the flow of parts and improve delivery performance. The site is expected to be closed in 2021, after the transfer of work is completed.
The Dallas, Texas operation is in a 50,000 square foot leased facility with proximity to the Dallas/Fort Worth logistical hub and is within seven miles of the Dallas Love Field Airport. This is a world class MRO/CRO facility that specializes in nacelle and flight control surfaces. They facility has FAA/EASA Part 145 & Drill expansionPart 21G certificates and service customers across the Americas.
The Biddeford, Maine site was purchased in 2020 and consists of 180,000 square feet at two locations on 21.65 acres. The primary function of these sites is carbon/carbon composite and thermal protection system manufacturing.
Prestwick facility consists of 956,000 square feet of building space, comprised of 464,000 square feet of manufacturing space, 268,000 square feet of office space, and 224,000 square feet of warehouse/support space. This facility is set on 93 acres.The Aerospace Innovation Center, a new 70,000 square foot facility, was completed and opened for business in November 2018 in supportFebruary 2021. The Prestwick plant is located within close proximity to the motorway network that provides access between England and continental Europe. It is also easily accessible by air (at Prestwick International Airport) or by sea. A portion of the A350 XWB program.Prestwick facility is leased to the Regional Aircraft division of BAE Systems and certain other tenants.
The Belfast, Northern Ireland facility consists of seven sites on 189 acres within 12 miles of the main factory at Queens Island totaling 3.0 million square feet. Five of the sites are owned totaling 1.0 million square feet, and two sites are leased totaling 2.0 million square feet. The operations conducted at these sites include machined parts, auto-riveting and major aerostructures final assembly; fabrication and wing assembly for the A220; composite fabrication for multi-programs; sheet
metal fabrication, metal bonding, chem-milling, composite parts manufacturing, and panel fabrication and assembly; nacelle production and MRO repair for multi-programs; and engineering services.
The Malaysian manufacturing plant is located at the Malaysia International Aerospace Center in Subang. The 386,000 square foot leased facility is set on 45 acres and is centrally located with easy access to Kuala Lumpur, as well as nearby ports and airports. The facility assembles composite panels for wing components and sub-structures for fuselage.
The Saint-Nazaire, France site was built on 6.25 acres and totals 58,800 square feet. This facility receives center fuselage frame sections for the Airbus A350 XWB from the facility in Kinston, North Carolina. Sections designed and manufactured in North Carolina are shipped across the Atlantic, received in Saint-Nazaire, and assembled before being transported to Airbus.
The Casablanca, Morocco site rests on 19 acres and totals 310,000 square feet with access to the Moroccan aeronautical hub, with the Mohammod V Airport being within two miles of the site. Operations in Casablanca include CRJ nacelle and flight commands, fuselage work on the Learjet 75, mid fuselage work on the A220, nacelle work on the A320neo, and mid fuselage work on the C350.
Item 3. Legal Proceedings
Information concerning the litigation and other legal proceedings in which the Company is involved may be found in Note 2122 to the Consolidated Financial Statements, Commitments, Contingencies and Guarantees, under the sub-heading “Litigation” in this Annual Report and that information is hereby incorporated by reference.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
Listed below are the names, ages, positions held, and biographies of all executive officers of Spirit Holdings. Executive officers hold office until their successors are appointed, or until their death, retirement, resignation, or removal.
Tom C. Gentile III, 54. 56.Mr. Gentile became President and Chief Executive Officer on August 1, 2016. From April 2016 to July 2016, Mr. Gentile served as Executive Vice President and Chief Operating Officer. From 2014 to April 2016, Mr. Gentile served as President and Chief Operating Officer of GE Capital where he oversaw GE Capital’s global operations, IT, and capital planning and served on its board of directors. Mr. Gentile had been employed by GE since 1998, and prior to his most recent position with GE, held the position of President and CEO of GE Healthcare’s Healthcare Systems division from 2011 until 2014 and the position of President and CEO of GE Aviation Services from 2008 until 2011. Mr. Gentile received his Bachelor of Arts degree in economics and Master of Business Administration degree from Harvard University, and also studied International Relations at the London School of Economics.
Jose Garcia, 46. Mark Suchinski, 54. Mr. Garcia joined the Company on January 9, 2019 asSuchinski became Senior Vice President and Chief Financial Officer after a 22 year career at General Electric Company (“GE”).on January 29, 2020. Mr. Suchinski has been with Spirit since 2006 and served as Spirit Holdings' and Spirit’s Vice President, Controller and Principal Accounting Officer from February 2014 to February 2018. Most recently, Mr. Suchinski served as Spirit’s Vice President, Quality, beginning in November 2015, Mr. Garcia servedAugust 2019 and as Spirit’s Vice President, Boeing 787 Program, from February 2018 to August 2019. Prior to February 2014, he held the following roles at Spirit: October 2013 to February 23, 2014 - Vice President, Treasurer and Financial Planning; August 2012 to October 2013 - Vice President, Finance and Treasurer; from July 2010 to August 2012, Vice President, Financial Planning & Analysis and Corporate Contracts; from January 2009 to July 2010, Controller – Fuselage Segment; and from September 2006 to January 2009, Controller – Aerostructures Segment. Prior to joining Spirit in 2006, he was at Home Products International, where he held the position of Corporate Controller from 2000 to 2004 and the position of Vice President and Chief FinancialAccounting Officer from 2004 to 2006. Prior to that, he held financial leadership positions of General Electric Renewable Energy, a divisioncontroller and senior finance manager at other companies. He also spent three years in public accounting. Mr. Suchinski received his Bachelor of GE headquarteredScience degree in Paris, France focusing on onshore and offshore wind, solar, and hydroelectric power generation. From July 2014 to November 2015, Mr. Garcia served as Vice President of Alstom Integration, Finance, and Synergies at GE. In this role, Mr. Garcia was responsible for finance
Accounting from DePaul University.
integration, synergies, and value creation in connection with the largest industrial acquisition in GE’s history. Prior to July 2014, Mr. Garcia served as Chief Financial Officer for a number of divisions at GE - from September 2011 to June 2014, Mr. Garcia served as Chief Financial Officer of GE in Latin America; from September 2009 to September 2011, Mr. Garcia served as Chief Financial Officer of GE Energy - Power Generation Services; and from April 2008 to September 2009, Mr. Garcia served as Chief Financial Officer of GE Energy - GE Hitachi Nuclear Energy Holdings. Prior to April 2008, Mr. Garcia served in a number of other capacities at GE including Finance Manager for commercial operations at GE Energy - Power Equipment, Chief Financial Officer of GE Energy Infrastructure in Greater China, and Executive Audit Manager at GE Corporate. Mr. Garcia received a Bachelor of Arts degree in business administration and management and a Master of Business Administration from ESADE Business School in Spain
William (Bill) Brown, 5658. Mr. Brown has served as Senior Vice President, Boeing Programs, since October1,October 1, 2018. Previously, from 2014 to 2018, Mr. Brown served as Senior Vice President and General Manager, Oklahoma Operations, Business and Regional Jets and Global Customer Support. Mr. Brown assumed responsibility of Oklahoma Operations in December 2014 and responsibility of Business and Regional Jets in September 2017. Mr. Brown joined Spirit and Spirit Holdings' in May 2014 as Senior Vice President, Global Customer Support and Services. Previously, Mr. Brown served as Executive Vice President for Global Operations and President for Global Customer Service and Support at Beechcraft from 2007 to May 2014. Prior to joining Beechcraft, Mr. Brown served as President and General Manager of AAR Aircraft Services in Oklahoma and held senior-level positions with Independence Air, Avborne Inc. and Midwest Airlines. Mr. Brown received his Bachelor of Science degree in Aviation Management from Oklahoma State University and his Master’sMasters of Business Administration degree from Colorado State University. He also holds an A&P license and is a commercial instrument pilot.
Stacy Cozad, 48. Ms. CozadTerry George, 59. Mr. George became Senior Vice President of Boeing 737 Program and Operations and Advanced Manufacturing Strategy on January 29, 2020. From July 2018 to January 29, 2020, Mr. George served as Vice President of New Product Development and Advanced Manufacturing Strategy. In this role, he was responsible for the Company’s factory automation strategy and implementation and new aircraft development. Additional roles include: Vice President and General Counsel, Chief Compliance Officer,Manager of Airbus Programs, Kinston, NC from July 2016 – 2018, several positions on the 787 program including Vice President of 787 Program Management, Senior Director and Corporate SecretaryDirector of 787 Operations, product line manager for the 787 Composites Fabrication and lastly, part of the Life Cycle Product team for the 787 program from June 2003 – April 2005. Mr. George began his career at Boeing in September 2017.Previously, Ms. Cozad served Spirit asJuly 1983 in Industrial Engineering and was named manager on the 737 program in 1991. In 1995, he was named product line manager of Automated Fastening for the 737 program. Mr. George earned his bachelor’s and master’s degrees in Business Administration, both from Wichita State University.
Duane Hawkins, 62. Mr. Hawkins is Senior Vice President General Counsel,of Spirit Holdings' and Corporate SecretaryPresident, Defense Division of Spirit AeroSystems, Inc., and has served in that role since January 4, 2016.July 2020. Prior to joining Spirit, she served as Southwest Airlines’ associate general counsel for litigation fromthat, beginning in October 2006 to December 2015, overseeing all litigation for the airline. Prior to joining Southwest, Ms. Cozad was an associate and partner in private law practices from September 1997 to September 2006, working on high-profile litigation cases. Ms. Cozad earned a Bachelor of Arts degree in behavioral science from Concordia University Texas and her Juris Doctor degree from Pepperdine University.
Duane Hawkins, 60.2018, Mr. Hawkins becamewas Senior Vice President of Defense and Fabrication in October 2018. In January 2019, Mr. Hawkins was also given the title of President, Defense and Fabrication Division.Fabrication. Previously, from July 2015 to October 2018, he served as Senior Vice President and General Manager of Boeing, Defense, Business and Regional Jet Programs and Global Customer Support. From July 2013 to June 2015, Mr. Hawkins served as Senior Vice President, - Operations. In that position, he had responsibility and oversight for Defense, Supply Chain Management, Fabrication, Global Quality, and Operations, including global footprint, Manufacturing Engineering, Industrial Engineering, and Tooling. Prior to joining Spirit, Mr. Hawkins washeld several positions at Raytheon Missile Systems between 2002-2013. Mr. Hawkins served as Vice President, Deputy Air Warfare Systems at Raytheon Missile Systems. From 2010 to 2012, Mr. Hawkins wasSystems; Vice President, Deputy Land Combat Systems at Raytheon Missile Systems. Prior positions at Raytheon Missile Systems also includeSystems; and Vice President, Deputy Supply Chain Management and Standard Missile Program Director. From 1994 to 2001, Mr. Hawkins was President of Defense Research Inc., and from 1993 to 1994 he was Vice President, Engineering at the company. He was factory manager for Hughes Missile Systems/ General Dynamics from 1991 to 1993, and Chief of Manufacturing Engineering for General Dynamics Missile Systems from 1988 to1991. Mr. Hawkins holds a Bachelor of Science degree in manufacturing/industrial engineering from Brigham Young University and a Master in Business Administration degree from Regis University.
Samantha Marnick, 48. 50. Ms. Marnick has served as Spirit and Spirit Holdings' Executive Vice President and Chief Operating Officer since July 28, 2020. Ms. Marnick holds the Company'sresponsibility for a wide range of functions including supply chain management, strategy, M&A activity, corporate administration, human resources, fabrication, research and technology, aftermarket, and regional and business jets. From October 1, 2018 to July 28, 2020, Ms. Marnick served as Spirit and Spirit Holdings' Executive Vice President, Chief Administration Officer and Strategy since October1, 2018. Her responsibilities also include mergers and acquisitions, global customer support and services, and business and regional jets.Strategy. From August 2016 to October 1, 2018, Ms. Marnick served as Executive Vice President, Chief Administration Officer. From October 2012 to July 2016, Ms. Marnick served as Senior Vice President, Chief Administration Officer. From January 2011 to September 2012, Ms. Marnick served as Senior Vice President of Corporate Administration and Human Resources. From March 2008 to December 2010, Ms. Marnick served as Vice President, Labor Relations and Workforce Strategy, responsible for labor relations, the global human resource project management office, compensation and benefits, and workforce planning. Ms. Marnick previously served as Director of Communications and Employee Engagement from March 2006 to March 2008. Prior to joining the Company, Ms. Marnick was a senior consultant and Principal for Mercer Human Resource Consulting, holding management positions in both the U.K. and in the U.S. Prior to that, Ms. Marnick worked for Watson Wyatt, the UK’sU.K.’s Department of Health and Social Security and The British Wool Marketing Board. Ms. Marnick holds a Master degree in Corporate Communication Strategy and Management from the University of Salford.
Kevin Matthies, 49. 51. Mr. Matthies became Senior Vice President, Chief Technology and Quality Officer on July 28, 2020. From January 29, 2020 to July 28, 2020, Mr. Matthies served as Senior Vice President of Quality. From September 2017 to January 29, 2020, Mr. Matthies served as Senior Vice President, Global Fabrication in September 2017.Fabrication. Mr. Matthies joined Spirit in 2013 and has held various leadership roles in both Airbus and Boeing program management, most recently serving as Vice President, General Manager of the B787 program until September 2017. Prior to joining Spirit, AeroSystems, Mr. Matthies spent 26 years at Raytheon Missile Systems, where he most recently served as President of the Javelin joint venture between
Raytheon and Lockheed Martin. Mr.
Matthies is a 3033 year veteran of the aerospace industry, having worked in executive positions for Raytheon Missile Systems, Hughes Aircraft Company, and General Dynamics. Mr. Matthies earned a Bachelor degree in Computer Science from California State University, San Bernadino, and a Master degree in Systems Engineering from the University of Arizona. He is a graduate of Raytheon's Leadership Excellence Program and was the recipient of the Raytheon 2010 Corporate Program Leadership Award.
John Pilla, 59.
Scott McLarty, 51. Mr. PillaMcLarty became Senior Vice President Chief Technology and Quality Officerof Airbus Programs in September 2017. Previously,November 2018. Before assuming the senior vice president position, Mr. Pilla served as the SeniorMcLarty was a Vice President of Engineering and Chief Technology Officer from June 2015 to September 2017. From May 2013 to June 2015, Mr. Pilla served as the Senior Vice President/General Manager - Airbus and A350 XWB Program Management. Mr. Pilla previously served as the Senior Vice President/General Manager, Propulsion Systems Segment from July 2009 through May 2013 as well as the Senior Vice President/General Manager of the Wing Systems Segment from September 2012 through May 2013. From July 2011 to May 2013, he was also responsiblewith responsibility for the Aftermarket Customer Support Organization. From April 2008 to July 2009, Mr. Pilla was Chief Technology Officer of Spirit HoldingsCompany's U.K. and he served as Vice President/General Manager-787 of Spirit Holdings and/or Spirit, a position he assumed at the date of the Boeing Acquisition in June 2005 and held until March 2008. He received his Bachelor degree in Aerospace Engineering from Kansas University, and a Master degree in Aerospace Structures Engineering and a Master of Business Administration degree from Wichita State University.
Ron Rabe, 53. Mr. Rabe became the Company's Senior Vice President of Operations and the Chief Procurement Officer in October 2018. From September 2017 to October 2018, Mr. Rabe served as the Company's Senior Vice President, Fabrication and Supply Chain Management and from June 2015 to September 2017, Mr. Rabe served as the Company's Senior Vice President of Operations. Prior to joining Spirit in June 2015, Mr. Rabe was Eaton Corporation’s vice president of global manufacturing and supply chain, vehicle group from June 2011 to June 2015. In that role he had responsibility for global operations of more than 40 sites, including with respect to supply chain, quality, materials, advanced manufacturing and lean manufacturing. From September 2009 to June 2011, Mr. Rabe worked at Eaton Aerospace Group, leading global operations on conveyance systems and operational support for the F-35, CH-53K, 787, and A350 new programs. Mr. Rabe also led operations for the global vehicle groupMalaysia business units and was responsible for opening new sitesdeveloping the strategy and driving profitable growth. Mr. McLarty joined the Company in China, India,April 2006 as part of the acquisition of the U.K. BAE Systems’ Aerostructures business unit which created Spirit AeroSystems (Europe) Ltd. Throughout his extensive career, Mr. McLarty has held a number of leadership roles in Operations, Project Management, Business Improvement, Supply Chain and Mexico from 2000 to 2009.HR. He started hishas worked on several aircraft programs including Boeing, Airbus, Hawker, Business Jets and Jetstream aircraft. Mr. McLarty has a breadth of experience in the aerospace industry gathered over 26 years and has key skills within project and program management, HR and industrial relations, commercial customer & government relations, business turnaround and driving strategic growth. Mr. McLarty holds external board-level positions and is influential within the industry and supporting bodies including government boards. He is a Chartered Fellow of the Institute of Personnel Development (FCIPD) and a Fellow of the Royal Aeronautical Society. He holds a Fellowship in Aerospace Manufacturing Management (FAMM) gained at Cranfield University.
Mindy McPheeters, 47. Ms. McPheeters is serving as Vice President of Legal, Interim General Counsel and Corporate Secretary effective January 2, 2021. Ms. McPheeters has been an attorney for the Company since 2015 and most recently held the title of Vice President of Legal and Compliance, Deputy General Counsel since August 7, 2020. During her legal career at the Boeing Company, Ms. McPheeters has provided legal advice on employment and labor matters since February 2015, she assumed primary responsibility for litigation in WichitaJuly 2017, legal oversight of supply chain and legal operations in 1986. Mr. Rabe holdsMarch of 2019, and ultimately customer contracts in August of 2020. Prior to joining the Company, Ms. McPheeters served as legal counsel for Delta Dental of Kansas and was a partner at Stinson LLP. Ms. McPheeters earned a Bachelor of ScienceBusiness Administration in Accounting from Wichita State University and her Juris Doctor degree from Newman University and a Masters of Business Administration degree from the Ross School of Business atThe University of Michigan in Ann Arbor.Kansas.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our classClass A common stock, par value $0.01 per share (“Common Stock”) has been quoted, trades on the NYSENew York Stock Exchange under the symbol “SPR” since November 21, 2006.“SPR,” As of February 1, 2019,11, 2021, there were approximately 8022,532 holders of record of Common Stock and, in addition, there were approximately 58,650 stockholders with shares in street name or nominee accounts.Stock. The closing price on February 1, 201911, 2021 was $87.81$38.96 per share as reported by the NYSE.
Securities Authorized for Issuance under Equity Compensation Plans
The following table represents restricted shares outstandingsecurities authorized for issuance under the Omnibus Incentive Planequity compensation plans as of December 31, 2018.2020.
Equity Compensation Plan Information
| | | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuances Under the Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | | Plan Category | Number of Securities
to be Issued
Upon Exercise of
Outstanding Options,
Warrants and Rights | | Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights | | Number of Securities
Remaining Available
for Future Issuances
Under the Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a)) | |
| | (a) | | (b) | | | | | (a)(5)(6) | | (b) | | (c) | |
| Restricted Stock Awards | | | | | | | Restricted Stock Awards | | | | | |
Equity compensation plans approved by security holders(1)(2) | 410,655 |
| | N/A |
| | 5,632,192 |
| | |
Equity compensation plans not approved by security holders(2) | — |
| | — |
| | — |
| | |
| Equity compensation plans approved by security holders | | Equity compensation plans approved by security holders | |
•Omnibus Incentive Plan of 2014(1) | | •Omnibus Incentive Plan of 2014(1) | 466,833 | | | N/A | | 3,956,736 | | |
•Employee Stock Purchase(2) | | •Employee Stock Purchase(2) | — | | | N/A | | 818,197 | | |
•Director Stock Plan(3) | | •Director Stock Plan(3) | 10,129 | | | N/A | | — | | |
•Supplemental Executive Retirement Plan(4) | | •Supplemental Executive Retirement Plan(4) | 28,950 | | | N/A | | — | | |
| Equity compensation plans not approved by security holders | | Equity compensation plans not approved by security holders | — | | | — | | | — | | |
| Total | 410,655 |
| | — |
| | 5,632,192 |
| | Total | 505,912 | | | — | | | 4,774,933 | | |
| |
(1) | On April 30, 2014, the Company’s Board of Directors approved the Omnibus Incentive Plan of 2014 (as amended, the “Omnibus Plan”). The Omnibus Plan was approved by the Company’s stockholders at the Company’s 2014 annual stockholder’s meeting. The Omnibus Plan provides for the issuance of incentive awards to officers, directors, employees, and consultants in the form of restricted stock, restricted stock units, stock appreciation rights, and other equity compensation, in lieu of cash compensation. |
| |
(2) | Represents time-based and performance-based long-term incentives that may be issued under the Omnibus Plan. For outstanding performance-based awards, the amount shown reflects the maximum payout. The amount of shares that could be paid out under the performance-based awards ranges from 0-200% based on actual performance. On the initial grant dates for these performance-based awards, the Company grants shares of restricted stock in the amount that would vest if the Company achieves the award target. |
(1)The Omnibus Incentive Plan of 2014, as amended (the “Omnibus Plan”) provides for the issuance of incentive awards to officers, directors, employees, and consultants in the form of restricted stock, restricted stock units, stock appreciation rights, and other equity compensation.
(2)The Company maintains the Spirit AeroSystems Holdings, Inc. Employee Stock Purchase Plan (as amended, the “ESPP”).
(3)Under the Spirit AeroSystems Holdings, Inc. Amended and Restated Director Stock Plan (as amended, the “DSP”), two non-employee directors are entitled to receive restricted stock units upon their separation from service. Since 2014, no additional shares have been or will be granted under the DSP.
(4)Under the Spirit AeroSystems Holdings, Inc. Supplement Executive Retirement Plan (as amended, the “SERP”), various phantom stock units are outstanding. Any payment on account of units may be made in cash or shares of Common Stock at the sole discretion of Holdings. The SERP was approved by stockholders before our initial public offering in 2006.
(5)Subject securities are not included in weighted average price consideration as they are issuable for no consideration.
(6)Represents performance-based long-term incentives that may be issued under the Omnibus Plan. For outstanding performance-based awards, the amount shown reflects the additional amount above target to maximum payout. The amount of shares that could be paid out under the performance-based awards ranges from 0-200% based on actual performance. On the initial grant dates for these performance-based awards, the Company grants shares of restricted stock in the amount that would vest if the Company achieves the award target.
Stock Performance
The following graph shows a comparison from December 31, 20142015 through December 31, 20182020 of cumulative total return of our Common Stock, Standard & Poor’s 500 Stock Index, and the Standard & Poor’s 500 Aerospace & Defense Index. Such returns are based on historical results and are not intended to suggest future performance. We made dividend payments on our Common Stock during the year ended December 31, 2018.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | INDEXED RETURNS
Years Ending |
| Company/Index | Base
Period
12/31/15 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 |
Spirit AeroSystems Holdings, Inc. | 100 | | | 116.74 | | | 175.59 | | | 145.89 | | | 148.32 | | | 79.69 | |
| S&P 500 Index | 100 | | | 111.96 | | | 136.40 | | | 130.42 | | | 171.49 | | | 203.04 | |
| S&P 500 Aerospace & Defense Index | 100 | | | 118.90 | | | 168.11 | | | 154.54 | | | 201.41 | | | 169.05 | |
Dividends
On February 6, 2020, the Company announced that its Board of Directors reduced its quarterly dividend to a penny per share to preserve liquidity until B737 MAX production reaches higher levels. The Board regularly evaluates the Company's capital allocation strategy and dividend policy. Any future determination to continue to pay dividends will be at the discretion of our Board of Directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions, including the requirements of financing agreements to which we may be a party. No assurance can be given that cash dividends will continue to be declared and paid at historical levels or at all.
|
| | | | | | | | | | | | | | | | | |
| | INDEXED RETURNS Years Ending |
| Company/Index | Base Period 12/31/13 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 |
Spirit AeroSystems Holdings, Inc. | 100 |
| | 126.29 |
| | 146.92 |
| | 171.51 |
| | 257.97 |
| | 214.33 |
|
| S&P 500 Index | 100 |
| | 113.69 |
| | 115.26 |
| | 129.05 |
| | 157.22 |
| | 150.33 |
|
| S&P 500 Aerospace & Defense Index | 100 |
| | 111.43 |
| | 117.49 |
| | 139.70 |
| | 197.50 |
| | 181.56 |
|
Issuer Purchases of Equity Securities
The following table provides information about our repurchases during the three months ended December 31, 20182020 of our Common Stock that is registered pursuant to Section 12 of the Exchange Act.
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | |
Period (1) | Total Number of Shares Purchased(2) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet be Repurchased Under the Plans or Programs (3) |
| ($ in millions other than per share amounts) |
| | | | | | | |
| October 2, 2020 - November 5, 2020 | 3,746 | | | $ | 20.03 | | | — | | | $925.0 | |
| November 6, 2020 - December 3, 2020 | 8,849 | | | $ | 29.43 | | | — | | | $925.0 | |
| December 4, 2020 - December 31, 2020 | 2,983 | | | $ | 37.76 | | | — | | | $925.0 | |
| Total | 15,578 | | | $ | 29.96 | | | — | | | $925.0 | |
(1)Our fiscal months often differ from the calendar months except for the month of December, as our fiscal year ends on December 31. For example, December 3, 2020 was the last day of our November 2020 fiscal month.
(2)15,578 shares were transferred to us from employees in satisfaction of tax withholding obligations associated with the vesting of restricted stock awards under the Omnibus Plan. No purchases were made under our Board-approved share repurchase program, described in footnote (3) below.
(3)On October 28, 2018, the Board of Directors increased the capacity of its share repurchase program to $1.0 billion. During the twelve month period ended December 31, 2020, the Company repurchased no shares of common stock. As a result, the total authorization amount remaining under the share repurchase program is $925.0 million. Share repurchases are currently on hold due to the impacts of the B737 MAX grounding and the COVID-19 pandemic. The Credit Agreement imposes additional restrictions on the Company’s ability to repurchase shares.
|
| | | | | | | | | | | | |
Period (1) | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet be Repurchased Under the Plans or Programs (2) |
| | ($ in millions other than per share amounts) |
| | | | | | | | |
| September 28, 2018 - November 1, 2018 | 510,160 |
| | N/A(3) |
| | 510,160 |
| |
| $1,000.0 |
|
| November 2, 2018 - November 29, 2018 | 584,242 |
| | N/A(3) |
| | 584,242 |
| |
| $1,000.0 |
|
| November 30, 2018 - December 31, 2018 | — |
| | — |
| | — |
| |
| $1,000.0 |
|
| Total | 1,094,402 |
| | — |
| | 1,094,402 |
| |
| $1,000.0 |
|
| |
(1) | Our fiscal months often differ from the calendar months except for the month of December, as our fiscal year ends on December 31. For example, November 1, 2018 was the last day of our October 2018 fiscal month. |
| |
(2) | In May 2018, the Company entered into two Accelerated Share Repurchase Agreements (the “ASRs”) to repurchase in total $725.0 million of Common Stock. After repurchases made under the ASRs, the Company had approximately $200.0 million remaining in its share repurchase program. On October 24, 2018, the Board of Directors approved an increase to its existing share repurchase program of approximately $800.0 million, resulting in total program authorization of $1.0 billion. |
| |
(3) | Shares received in October and November 2018, respectively, upon settlement of the ASRs, which were determined by the average daily volume weighted-average share price of Common Stock during the term of the ASRs. Final average price of all the shares delivered from the ASRs was $86.46. |
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth our selected consolidated financial data for each of the periods indicated. Financial data is derived from the audited consolidated financial statements of Spirit Holdings. The audited consolidated financial statements for the years ended December 31, 2018,2020, December 31, 2017,2019, and December 31, 20162018 are included in this Annual Report. You should read the information presented below in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined and consolidated financial statements and related notes contained elsewhere in the Annual Report.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Spirit Holdings |
| | Twelve Months Ended |
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | (Dollars in millions, except per share data) |
| Statement of Income Data: | | | | | | | | | |
| Net revenues | $ | 3,404.8 | | | $ | 7,863.1 | | | $ | 7,222.0 | | | $ | 6,983.0 | | | $ | 6,792.9 | |
Cost of sales(1) | 3,845.5 | | | 6,786.4 | | | 6,135.9 | | | 6,195.3 | | | 5,800.3 | |
Selling, general and administrative(2) | 237.4 | | | 261.4 | | | 210.4 | | | 204.7 | | | 230.9 | |
| Impact of severe weather event | — | | | — | | | (10.0) | | | 19.9 | | | 12.1 | |
| Restructuring cost | 73.0 | | | — | | | — | | | — | | | — | |
| Research and development | 38.8 | | | 54.5 | | | 42.5 | | | 31.2 | | | 23.8 | |
| Loss on disposal of assets | 22.9 | | | — | | | — | | | — | | | — | |
| Operating (loss) income | (812.8) | | | 760.8 | | | 843.2 | | | 531.9 | | | 725.8 | |
| Interest expense and financing fee amortization | (195.3) | | | (91.9) | | | (80.0) | | | (41.7) | | | (57.3) | |
Other (expense) income, net(3) | (77.8) | | | (5.8) | | | (7.0) | | | 44.4 | | | (8.0) | |
| (Loss) income before income taxes and equity in net (loss) income of affiliates | (1,085.9) | | | 663.1 | | | 756.2 | | | 534.6 | | | 660.5 | |
| Income tax benefit (provision) | 220.2 | | | (132.8) | | | (139.8) | | | (180.0) | | | (192.1) | |
| Equity in net income (loss) of affiliates | (4.6) | | | (0.2) | | | 0.6 | | | 0.3 | | | 1.3 | |
| Net (loss) income | $ | (870.3) | | | $ | 530.1 | | | $ | 617.0 | | | $ | 354.9 | | | $ | 469.7 | |
| (Loss) earnings per share, basic | $ | (8.38) | | | $ | 5.11 | | | $ | 5.71 | | | $ | 3.04 | | | $ | 3.72 | |
| Shares used in per share calculation, basic | 103.9 | | | 103.6 | | | 108.0 | | | 116.8 | | | 126.1 | |
| (Loss) earnings per share, diluted | $ | (8.38) | | | $ | 5.06 | | | $ | 5.65 | | | $ | 3.01 | | | $ | 3.70 | |
| Shares used in per share calculation, diluted | 103.9 | | | 104.7 | | | 109.1 | | | 117.9 | | | 127.0 | |
| Dividends declared per common share | $ | 0.04 | | | $ | 0.48 | | | $ | 0.46 | | | $ | 0.40 | | | $ | 0.10 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Spirit Holdings |
| | Twelve Months Ended |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 |
| | (Dollars in millions, except per share data) |
| Statement of Income Data: | | | | | | | | | |
| Net revenues | $ | 7,222.0 |
| | $ | 6,983.0 |
| | $ | 6,792.9 |
| | $ | 6,643.9 |
| | $ | 6,799.2 |
|
Cost of sales(1) | 6,135.9 |
| | 6,195.3 |
| | 5,800.3 |
| | 5,532.3 |
| | 5,711.0 |
|
Selling, general and administrative expenses(2) | 210.4 |
| | 204.7 |
| | 230.9 |
| | 220.8 |
| | 233.8 |
|
| Impact of severe weather events | (10.0 | ) | | 19.9 |
| | 12.1 |
| | — |
| | — |
|
| Research and development | 42.5 |
| | 31.2 |
| | 23.8 |
| | 27.8 |
| | 29.3 |
|
Loss on divestiture of programs(3) | — |
| | — |
| | — |
| | — |
| | 471.1 |
|
| Operating income | 843.2 |
| | 531.9 |
| | 725.8 |
| | 863.0 |
| | 354.0 |
|
| Interest expense and financing fee amortization | (80.0 | ) | | (41.7 | ) | | (57.3 | ) | | (52.7 | ) | | (88.1 | ) |
| Other (expense) income, net | (7.0 | ) | | 44.4 |
| | (8.0 | ) | | (2.2 | ) | | (3.5 | ) |
| Income before income taxes and equity in net income of affiliates | 756.2 |
| | 534.6 |
| | 660.5 |
| | 808.1 |
| | 262.4 |
|
| Income tax (provision) benefit | (139.8 | ) | | (180.0 | ) | | (192.1 | ) | | (20.6 | ) | | 95.9 |
|
| Equity in net income of affiliates | 0.6 |
| | 0.3 |
| | 1.3 |
| | 1.2 |
| | 0.5 |
|
| Net income | $ | 617.0 |
| | $ | 354.9 |
| | $ | 469.7 |
| | $ | 788.7 |
| | $ | 358.8 |
|
| Net income per share, basic | $ | 5.71 |
| | $ | 3.04 |
| | $ | 3.72 |
| | $ | 5.69 |
| | $ | 2.55 |
|
| Shares used in per share calculation, basic | 108.0 |
| | 116.8 |
| | 126.1 |
| | 138.4 |
| | 140.0 |
|
| Net income per share, diluted | $ | 5.65 |
| | $ | 3.01 |
| | $ | 3.70 |
| | $ | 5.66 |
| | $ | 2.53 |
|
| Shares used in per share calculation, diluted | 109.1 |
| | 117.9 |
| | 127.0 |
| | 139.4 |
| | 141.6 |
|
| Dividends declared per common share | $ | 0.46 |
| | $ | 0.40 |
| | $ | 0.10 |
| | $ | — |
| | $ | — |
|
| |
(1) | Included in 2018 costs of sales are net favorable changes in estimates on loss programs of $3.9 million. Included in 2017 costs of sales are net forward loss charges of $327.3 million. Included in 2016 costs of sales are net forward loss charges of $118.2 million. Included in 2015 costs of sales are net favorable changes in estimates on loss programs totaling $10.8 million. Included in 2014 cost of sales are net favorable changes in estimates on loss programs totaling $26.1 million. Includes cumulative catch-up adjustments of $(3.8) million, $31.2 million, $36.6 million, $41.6 million, and $60.4 million for periods prior to the twelve months ended December 31, 2018, 2017, 2016, 2015, and 2014, respectively. |
| |
(2) | Includes non-cash stock compensation expenses of $27.4 million, $22.1 million, $42.5 million, $26.0 million, and $16.4 million for the respective periods starting with the twelve months ended December 31, 2018, 2017, 2016, 2015, and 2014, respectively. |
| |
(3) | On December 8, 2014, Spirit entered into an Asset Purchase Agreement with Triumph Aerostructures - Tulsa, LLC, a wholly-owned subsidiary of Triumph Group Inc. (“Triumph Sub”), to sell Spirit’s G280 and G650 programs, consisting of the design, manufacture, and support of structural components for the Gulfstream G280 and G650 aircraft in Spirit’s facilities in Tulsa, Oklahoma to Triumph Sub. The transaction closed on December 30, 2014. In connection with the closing of the transaction, we recorded a loss on divestiture of programs of $471.1 million, representing the difference between the sale proceeds and the book value of the assets sold. |
(1)Included in 2020 costs of sales are net forward loss charges of ($370.3) million, excess capacity production costs of $278.9 million, and temporary workforce reduction costs of $33.7 million due to COVID-19, net of the U.S. employee retention credit and U.K. government subsidies. Included in 2019 costs of sales are net forward loss charges of ($63.5) million. Included in 2018 costs of sales are net favorable changes in estimates on loss programs of $3.9 million. Included in 2017 costs of sales are net forward loss charges of ($327.3) million. Included in 2016 costs of sales are net forward loss charges of ($118.2) million. Includes cumulative catch-up adjustments of ($30.4) million, ($2.0) million, ($3.8) million, $31.2 million, and $36.6 million for periods prior to the twelve months ended December 31, 2020, 2019, 2018, 2017, and 2016, respectively.
(2)Includes non-cash stock compensation expenses of $24.2 million, $36.1 million, $27.4 million, $22.1 million, and $42.5 million for the twelve months ended December 31, 2020, 2019, 2018, 2017, and 2016, respectively.
(3)Includes voluntary retirement program costs of $86.5 million offered by the Company for cost alignment and headcount reductions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Spirit Holdings |
| | Twelve Months Ended |
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | (Dollars in millions) |
| Other Financial Data: | | | | | | | | | |
| Net cash (used in) provided by operating activities | $ | (744.9) | | | $ | 922.7 | | | $ | 769.9 | | | $ | 573.7 | | | $ | 716.9 | |
| Net cash used in investing activities | $ | (502.0) | | | $ | (239.7) | | | $ | (267.8) | | | $ | (272.8) | | | $ | (253.4) | |
| Net cash provided by (used in) financing activities | $ | 769.5 | | | $ | 884.4 | | | $ | (153.5) | | | $ | (578.7) | | | $ | (718.7) | |
| Purchase of property, plant, & equipment | $ | (118.9) | | | $ | (232.2) | | | $ | (271.2) | | | $ | (273.1) | | | $ | (254.0) | |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 1,873.3 | | | $ | 2,350.5 | | | $ | 773.6 | | | $ | 423.3 | | | $ | 697.7 | |
| Accounts receivable, net | $ | 484.4 | | | $ | 546.4 | | | $ | 545.1 | | | $ | 722.2 | | | $ | 660.5 | |
| Inventories, net | $ | 1,422.3 | | | $ | 1,118.8 | | | $ | 1,012.6 | | | $ | 1,449.9 | | | $ | 1,515.3 | |
| Property, plant & equipment, net | $ | 2,503.8 | | | $ | 2,271.7 | | | $ | 2,167.6 | | | $ | 2,105.3 | | | $ | 1,991.6 | |
| Total assets | $ | 8,383.9 | | | $ | 7,606.0 | | | $ | 5,685.9 | | | $ | 5,267.8 | | | $ | 5,405.2 | |
| Total debt | $ | 3,873.6 | | | $ | 3,034.3 | | | $ | 1,895.4 | | | $ | 1,151.0 | | | $ | 1,086.7 | |
| Long-term debt | $ | 3,532.9 | | | $ | 2,984.1 | | | $ | 1,864.0 | | | $ | 1,119.9 | | | $ | 1,060.0 | |
| Total equity | $ | 857.0 | | | $ | 1,761.9 | | | $ | 1,238.1 | | | $ | 1,801.5 | | | $ | 1,928.8 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Spirit Holdings |
| | Twelve Months Ended |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 |
| | (Dollars in millions) |
| Other Financial Data: | |
| | | | | | | | |
| Cash flow provided by operating activities | $ | 769.9 |
| | $ | 573.7 |
| | $ | 716.9 |
| | $ | 1,289.7 |
| | $ | 361.6 |
|
| Cash flow used in investing activities | $ | (267.8 | ) | | $ | (272.8 | ) | | $ | (253.4 | ) | | $ | (357.4 | ) | | $ | (239.6 | ) |
| Cash flow used in financing activities | $ | (153.5 | ) | | $ | (578.7 | ) | | $ | (718.7 | ) | | $ | (351.1 | ) | | $ | (164.2 | ) |
| Capital expenditures | $ | (271.2 | ) | | $ | (273.1 | ) | | $ | (254.0 | ) | | $ | (360.1 | ) | | $ | (220.2 | ) |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 773.6 |
| | $ | 423.3 |
| | $ | 697.7 |
| | $ | 957.3 |
| | $ | 377.9 |
|
| Accounts receivable, net | $ | 545.1 |
| | $ | 722.2 |
| | $ | 660.5 |
| | $ | 537.0 |
| | $ | 605.6 |
|
| Inventories, net | $ | 1,012.6 |
| | $ | 1,449.9 |
| | $ | 1,515.3 |
| | $ | 1,774.4 |
| | $ | 1,753.0 |
|
| Property, plant & equipment, net | $ | 2,167.6 |
| | $ | 2,105.3 |
| | $ | 1,991.6 |
| | $ | 1,950.7 |
| | $ | 1,783.6 |
|
| Total assets | $ | 5,685.9 |
| | $ | 5,267.8 |
| | $ | 5,405.2 |
| | $ | 5,764.5 |
| | $ | 5,162.7 |
|
| Total debt | $ | 1,895.4 |
| | $ | 1,151.0 |
| | $ | 1,086.7 |
| | $ | 1,120.2 |
| | $ | 1,153.5 |
|
| Long-term debt | $ | 1,864.0 |
| | $ | 1,119.9 |
| | $ | 1,060.0 |
| | $ | 1,085.3 |
| | $ | 1,144.1 |
|
| Total equity | $ | 1,238.1 |
| | $ | 1,801.5 |
| | $ | 1,928.8 |
| | $ | 2,120.0 |
| | $ | 1,622.0 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information appearing in this Annual Report.Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and operations, includes forward-looking statements that involve risks and uncertainties.You should be readreview the sections of this Annual Report on Form 10-K captioned “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for a discussion of important factors that could cause our actual results to differ materially from the results described in conjunction withor implied by the Consolidated Financial Statementforward-looking statements contained in the following discussion and notes thereto.analysis.
Management’s Focus
In 2018, to help support our workFor the year ended December 31, 2020, management’s focus revolved around preserving and enhancing liquidity and reducing costs in light of the significant impacts of the B737 MAX grounding and COVID-19 pandemic. Additionally, management focused on production rate increases and market growth, we continued to focus on attracting, developing, and retaining a world-class team at our sites and being a trusted partner to our customers and suppliers. As part of our ongoing efforts to be a trusted partner, we executed the 2018 MOA and related definitive agreements with Boeing, which set pricing terms for several of our Boeing products into the future. We also made great efforts to recover to our customers' delivery schedules after facing various challenges in the early quarters of 2018. The improvements we made to our supply chain and factory in 2018 put us in a better position to execute on future rate increases.
Our 2019 focus continues to revolve around our operational execution, with a focus on safety and quality, while working to meet our customers' requirements, for production rate changes. We continue to pursueand pursuing and completing organic and inorganic optionsgrowth opportunities.
For the year ended December 31, 2021, management’s focus is expected to be on continued preservation and enhancement of our liquidity and cost reduction in light of the continuing impacts of the COVID-19 pandemic; revenue growth and diversification, integrating the Belfast, Morocco and Dallas sites; repaying and/or restructuring debt; and operational execution, with a continuing focus on safety and quality.
COVID-19
During the year ended December 31, 2020, the COVID-19 pandemic continued to have a significant negative impact on the aviation industry, our customers, and our business globally. In response to the pandemic, we and our customers implemented production suspensions and our customers adjusted production rates. Our customers may reduce or alter production rates again if circumstances require. A description of Airbus and Boeing's production rates on our significant programs is included below. We expect the pandemic and its effects to continue to have a significant negative impact on our business for growththe duration of the pandemic and during the subsequent economic recovery, which could be an extended period of time.
In response to the COVID-19 pandemic, we have enacted our crisis management and response process as part of our enterprise risk management program to help us navigate the challenges we face due to the COVID-19 pandemic. Actions that we have taken include the following:
•Organized global market continuesteams to evolve.monitor the situation and recommend appropriate actions;
Programs•Implemented travel restrictions for our employees;
•Enforced social-distancing standards throughout the workplace and mandated mask use;
•Initiated consistent and ongoing cleaning of high-touch work space;
•Established processes aligned with CDC guidelines to work with exposed individuals on necessary quarantine periods and the process to return to work; and
•Implemented working from home where practicable.
The Company has taken several actions to reduce costs, increase liquidity and strengthen our financial position in light of the economic impact of the COVID-19 pandemic, and the B737 MAX grounding (further described below), including the following:
•Reduced pay for all executives by 20 percent through January 4, 2021;
•Reduced 2020-2021 term non-employee director compensation by 15 percent;
•Reduced planned capital expenditures and operating expenses;
•Suspended share repurchase program;
•Reduced quarterly dividends to one penny per share;
•Initiated multiple production worker furloughs;
•Reduced pay for all U.S based, salaried employees and implemented a correlating four-day work week, which remains in place for its salaried workforce at its Wichita, Kansas facility through January 4, 2021;
•Reduced ~6,800employees globally including voluntary packages;
•Amended and eventually terminated our 2018 Credit Agreement and put into place current Credit Agreement for $400 million;
•Issued $1.2 billion in Second Lien 2025 Notes and $500 million in First Lien 2025 Notes; and
•Elected to defer the payment of $32.9 million of employer payroll taxes incurred through December 31, 2020, as provided by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), of which 50% is required to be deposited by December 2021 and the remaining 50% by December 2022 and accrued a pre-tax benefit related to the Employee Retention Credit related to paid employee furloughs of approximately $16.0 million. The Company will continue to evaluate its eligibility for this credit through June 2021. In addition, as of December 31, 2020 the Company recorded a deferral of $31.5 million of VAT payments until March 2022 under the United Kingdom deferral scheme and received Employee Retention Credit subsidies from U.K. government of approximately $5.4 million.
If OEM production rates decline in the future or the expected pandemic recovery timeline lengthens, the Company will evaluate further cost reduction actions, including additional workforce actions. For additional information, see Item 1A. “Risk Factors.”
B737 Program
ThroughoutThe B737 MAX program is a critical program to the Company. For the twelve months ended December 31, 2018, 2019, and 2020, approximately 56%, 53%, and 19% of our net revenues were generated from sales of components to Boeing for the B737 program steadily increased in rate dueaircraft, respectively. While we have entered into long-term supply agreements with Boeing to increased demand, and will continue to increase in rate in 2019. As we supported increased demand on the program, we experienced supplier disruptions, challenges related to model mix changes fromprovide components for the B737 NGfor the life of the aircraft program, including commercial and military P-8 derivatives, Boeing does not have any obligation to purchase components from us for any replacement for the B737 that is not a commercial derivative model as defined by the Sustaining Agreement. The contract is a requirements contract and Boeing can reduce the purchase volume at any time.
In March 2019, the B737 MAX fleet was grounded in the U.S. and internationally following the 2018 and 2019 accidents involving two B737 MAX aircraft. On November 18, 2020, the FAA issued an order rescinding the grounding of the B737 MAX and published an Airworthiness Directive specifying design changes that must be made before the aircraft returns to service. Since November 2020, regulators from Brazil, Canada, the EU and U.K. have taken similar actions to unground the B737 MAX and permit return to service after aircraft owners and operators incorporate the required changes to the aircraft. According to Boeing, other challengesglobal regulatory approvals/certifications are expected in 2021.
Due to impacts of the B737 MAX grounding and the COVID-19 pandemic on the aviation industry, the Company has experienced significant deterioration in its B737 MAX production rates that resultedhave significantly reduced the Company’s revenues. A summary of the production rate changes is below.
•On April 12, 2019, Boeing and the Company executed a Memorandum of Agreement (the “2019 MOA”) providing that the Company was to maintain its delivery rate of 52 shipsets per month with respect to the B737 MAX. Previously, the Company was expecting to increase production to a rate of 57 shipsets per month in additional2019;
•On December 19, 2019, Boeing directed the Company to stop all B737 MAX deliveries to Boeing effective January 1, 2020. Accordingly, Spirit suspended all B737 MAX production costs including overtime, expedited freight,beginning on January 1, 2020;
•On February 6, 2020, Boeing and surge resources. In responseSpirit entered into a Memorandum of Agreement (the “2020 MOA”) largely superseding the 2019 MOA and providing for Spirit to these disruptions, we implemented a comprehensive recoverydeliver to Boeing 216 B737 MAX shipsets in 2020;
•On May 4, 2020, Boeing and the Company agreed that Spirit would deliver 125 B737 MAX shipsets to Boeing in 2020; and
•On June 19, 2020, Boeing directed Spirit to reduce its 2020 B737 production plan from 125 to 72 shipsets (increasing to 31 shipsets per month in 2022).
Boeing's deliveries of the first half of 2018 to manage through the operational challenges and help mitigate future challenges. With this recovery plan in place, we made great efforts during the second and third quarters to recover to our planned production schedule and we fully recovered to our delivery scheduleB737 MAX resumed in the fourth quarter of 2018. Additional efforts2020 when the FAA rescinded the order that grounded B737 MAX aircraft in the U.S.. Several air carriers have resumed flights on the aircraft, and Boeing received its first orders for the B737 MAX since the grounding.
In the year ended December 31, 2021, we expect ongoing demand challenges from the 737 MAX grounding will continue to be ongoingexacerbated by the COVID-19 pandemic because other programs that mitigate the strain of the lower B737 MAX
production rate continue to address these challengesbe suspended or producing at lower rates. We expect air travel demand will improve from 2020 levels as the COVID-19 vaccinations are administered globally; however, any improvement in air travel demand will depend on, a go-forward basis. As a resultamong other things, the widespread distribution, use and effectiveness of our efforts to recover to our delivery schedule, we incurred additional expenses that are reflected in our full-year 2018vaccines and the speed with which COVID-19 may mutate. The overall pace of any recovery of air travel demand will depend on availability and speed of vaccinations, effectiveness of the vaccine on new strains of the COVID-19 virus, government travel restrictions, availability and speed of test results. We expect thesethat domestic air travel demand will recover sooner than international air travel demand and, as a result, we expect that the B737 MAX and other narrowbody production rates will recover to pre-pandemic levels before widebody production rates. For additional costs to be considerably reduced in 2019.information, see Item 1A. "Risk Factors."
B787 Program
As we continueIn the year ended December 31, 2020, Boeing announced B787 production rate changes from 10 aircraft per month to 5 aircraft per month. This resulted in an incremental forward loss charge of $192.5 million for the year ended December 31, 2020, During the year ended December 31, 2020 our focus was on the B787 program, our financial performance depends on our continued ability to achieveachieving cost reductions in our manufacturing and supply chain.
During 2018,the fourth quarter of 2020, as Boeing was reviewing its 787 Dreamliner production system, we recorded net favorablebegan analyzing our own 787 production system. That work is ongoing. With the data we have collected so far and based upon requests from Boeing, we have identified potential rework, which we will begin in order to help facilitate the resumption of deliveries by our customer. Further production rate changes or claims relating to inspection and rework costs could result in estimates of $3.4 million on theadditional incremental forward loss charges.
Due to B787 program due to favorable performance on several cost initiatives, partially offset by the adoption of ASU No. 2017-07, Compensation-Retirement Benefitsproduction issues, in the first quarter of 2018 which reclassified2021, B787 employees were temporarily furloughed for three weeks. We expect there will be future headcount reductions to align to reduced production rates.
Airbus Programs
The COVID-19 pandemic continues to impact both international and global travel and, as a result, all Airbus programs have experienced production rate reductions. Current production rates for Airbus commercial programs are captured below:
•A220 Wing average production volume of ~4.2 APM for 2021;
•A320 average production volume of 40 APM;
•A350 average production volume of 3.5 APM in 2020, increasing to 5 APM end of 2021; and
•A330 average production volume of 2 APM.
As a result of customer driven production rate changes, the recognitionA350 program recorded forward loss charges of pension income$147.9 million for the year ended December 31, 2020.The A220 wing and mid-fuselage sections acquired from gross profit into other income.Bombardier had forward loss liabilities of $258.6 million in the opening balance sheet as a result of the application of ASC 805 Business Combinations, see Note 29 to the Consolidated Financial Statements, Acquisitions.
Asco
Asco Acquisition
On May 1, 2018, the Company and its wholly-owned subsidiary Spirit AeroSystems Belgium Holdings BVBA (“Spirit Belgium”) entered into a definitive agreement (as amended, the “Asco Purchase AgreementAgreement”) with certain private sellers pursuant to whichproviding for the purchase by Spirit Belgium will purchaseof all of the issuesissued and outstanding equity of S.R.I.F. N.V., the parent company of Asco Industries N.V. (“Asco”). On September 25, 2020, the Company, Spirit Belgium and the Sellers entered into an amendment to the Asco Purchase Agreement (the “Termination Agreement”) pursuant to which the parties agreed to terminate the Asco Purchase Agreement, including all schedules and annexes thereto (other than certain confidentiality agreements) (collectively with the Asco Purchase Agreement, the “Transaction Documents”), effective as of September 25, 2020. Under the Termination Agreement, the parties also agreed to release each other from any and all claims, rights of action, howsoever arising, of every kind and nature, in connection with, arising out of, based upon or related to, directly or indirectly, the Transaction Documents, including any breach, non-performance, action or failure to act under the Transaction Documents.
Bombardier Acquisition
On October 30, 2020, Spirit and Spirit AeroSystems Global Holdings Limited (“Spirit UK”), wholly owned subsidiaries of the Company, completed their previously announced acquisition of the outstanding equity of Shorts and Bombardier Aerospace North Africa SAS ("BANA"), and substantially all the assets of the maintenance, repair and overhaul business in Dallas, Texas (collectively, the “Bombardier Acquired Business”), along with the assumption of certain liabilities of Shorts and BANA (the “Bombardier Acquisition”).For further information, see Note 29 Acquisitions.
The Company, acting through certain of its subsidiaries, assumed certain liabilities of the acquired entities, including the net pension liabilities under the Shorts Pension scheme and Short’s obligations under a repayable investment agreement with the Department for $650.0Business, Energy and Industrial Strategy of the U.K. Government. On the first anniversary of closing, Shorts will pay a special contribution of £100 million to the Shorts Pension scheme. The A220 wing and mid-fuselage sections acquired from Bombardier had forward loss liability of $258.6 million in cash, subject to certain customary closing adjustments, including foreign currency adjustments. The Company intends to close and integrate the acquisition in 2019.
Oneopening balance sheet as a result of the closing conditions is receiptapplication of clearance from the European Commission (the “Commission”). During the scope of the Commission’s Phase 1 review, the Commission identified issues that it required to be addressed regarding the transaction. Consequently, on October 26, 2018, we withdrew our notification of the transaction from the Commission in order to address those issues. The withdrawal interrupted the Commission’s review of the transaction. After several months of addressing the issues, the Company refiled its application with the Commission on January 30, 219, and the Commission is proceeding with a Phase 1 review of the transaction. There can be no assurances that we will receive the clearance of the Commission.ASC 805 Business Combinations.
Critical Accounting Policies
The preparation of the Company’s financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) requires management to use estimates and assumptions. The results of these estimates form the basis for making judgments that may affect the reported amounts of assets and liabilities, including the impacts of contingent assets and liabilities,
and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to inventory, revenue, income taxes, financing obligations, warranties, pensions and other post-retirement benefits, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management believes that the quality and reasonableness of our most critical accounting policies enable the fair presentation of our financial position and results of operations. However, the sensitivity of financial statements to these methods, assumptions, and estimates could create materially different results under different conditions or using different assumptions. We believe application of these policies requires difficult, subjective, and complex judgments to estimate the effect of inherent uncertainties. This section should be read in conjunction with Note 3 to the Consolidated Financial Statements, Summary of Significant Accounting Policies.
Revenues and Profit Recognition under Long-Term Contracts
Beginning January 1, 2018, the Company recognizedadopted recognition of revenue using the principles of Accounting Standards Codification TopicASC 606 (“ASC 606”), Revenue from contracts with customers. Revenue is recognized when, or as, control of promised products or services transfers to a customer, and the amount recognized reflects the consideration that the Company expected to receive in exchange for those products or services. See Note 3 to the Consolidated Financial Statements, Summary of Significant Accounting Policies,for a further description of revenue recognition under ASC 606, and a description of the legacy GAAP revenue and profit recognition presented for prior comparative periods.606. In determining our profits and losses in accordance with this method, we are required to make significant judgments regarding our future costs, variable elements of revenue, the standalone selling price, and other variables. We continually review and update our assumptions based on market trends and our most recent experience. If we make material changes to our assumptions, we may experiencehave positive or negative cumulative catch-up adjustments related to revenues previously recognized. Inrecognized, and in some cases, we may recognizeadjust forward loss amounts.reserves. When we experience abnormal production costs such as excess capacity costs the Company will expense the excess costs in the period incurred and report as segment costs of goods sold. These excess costs (actual and estimated future costs) are excluded from the estimates at completion of our accounting contracts with customers. For a broader description of the various types of risks we face related to new and maturing programs, see Item 1A. “Risk Factors”.
Business Combinations and Goodwill
We account for business combinations in accordance with ASC Topic 805, Business Combinations. Transaction costs related to business combinations are expensed as incurred. Assets acquired and liabilities assumed are measured and recognized based on their estimated fair values at the acquisition date, any excess of the purchase consideration when compared to the fair value of the net tangible and intangible assets acquired is recorded as goodwill. For discussionmaterial acquisitions, we have engaged independent advisory consultants to assist us with determining the fair value of assets acquired, including goodwill, and liabilities assumed based on established business valuation methodologies. Determining the fair value of assets acquired and liabilities assumed requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. In some cases, the Company used discounted cash flow analyses, which were based on our best estimate of future sales, earnings and cash flows after considering such factors as general market conditions, customer budgets, existing firm and future orders, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, the business combination is recorded and disclosed on a preliminary basis. Subsequent to the acquisition date, and not later than one year from the acquisition date, adjustments to the initial preliminary recognized amounts are recorded to the extent new information is obtained about the measurement of assets and liabilities that existed as of the date of the acquisition.
The Company assesses goodwill for impairment annually as of the first day of the fourth quarter or more frequently if events or circumstances indicate that the fair value of a reporting unit that includes goodwill may be lower than its carrying
value. We test goodwill for impairment by performing a qualitative assessment or quantitative test at the reporting unit level. In performing a qualitative assessment, we evaluate company-specific, market and industry, economic, and other relevant factors that may impact the fair value of our reporting units or the carrying value of the net assets of the respective reporting unit. If we determine that it is more likely than not that the carrying value of the net assets is more than the fair value of the respective reporting unit, then a quantitative test is performed. Where the quantitative test is used, we compare the carrying value of net assets to the estimated fair value of the respective reporting unit. If the fair value is determined to be less than carrying value, a goodwill impairment loss is recognized for the amount that the carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
In accordance with our annual assessment policy, we performed a qualitative assessment of goodwill for impairment as of the beginning of the fourth quarter based on the goodwill balances that existed as of October 1, 2020. The goodwill balance at October 1, 2020 was $78.4 million, of which $76.0 million represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the acquisition of FMI in the first quarter of year 2020. Management concluded through the assessment that it is not more likely than not that the fair value of any of our reporting units is less than the respective carrying value, and therefore, the Company's goodwill as of October 1, 2020 was not impaired. The variability of the factors used in our assessment depends on a number of conditions, including uncertainty associated with the COVID-19 pandemic, and whether the impacts of the adoptionpandemic could result in an impairment of ASC 606our goodwill. Our current estimates reflect potential production rate reduction scenarios for our primary customers that are not permanent in nature as we assume there will be an economic recovery from the impact of the COVID-19 pandemic and global passenger levels will ultimately return to COVID- 19 2019 levels.
After consideration of the Bombardier Acquisition on revenues and profit recognition, see Note 2October 30, 2020 the total amount of goodwill is $565.3 million. As of December 31, 2020, given the preliminary nature of the Bombardier Acquisition purchase price allocation, the Company has not yet allocated the Bombardier acquisition goodwill to the Consolidated Financial Statements, Adoptionrelevant reporting units and/or reportable segments.
Pension
Many of New our employees have earned benefits under the defined benefit pension plans. Effective June 17, 2005, pension assets and liabilities were spun-off from three Boeing qualified plans into four qualified Spirit plans for each Spirit employee who did not retire from Boeing by August 1, 2005. Effective December 31, 2005, all four qualified plans were merged together. In addition, Spirit has one nonqualified plan providing supplemental benefits to executives who transferred from a Boeing nonqualified plan to a Spirit plan and elected to keep their benefits in this plan. Both plans are frozen as of the date of the Boeing Acquisition (i.e., no future service benefits are being earned in these plans). The Company intends to fund its qualified pension plan through a trust. Pension assets are placed in trust solely for the benefit of the pension plans’ participants and are structured to maintain liquidity that is sufficient to pay benefit obligations.
On April 1, 2006, as part of the acquisition of BAE Aerostructures, the Company established a U.K. defined benefit pension plan for those employees based in Prestwick that had pension benefits remaining in BAE Systems’ pension plan. Effective December 31, 2013, this Prestwick pension plan was closed and benefits were frozen and thereafter subject only to statutory pension revaluation.
On October 30, 2020, as part of the Bombardier Acquisition, the Company acquired two further defined benefit plans (including the Shorts Pension) for current and former employees at the Belfast location. These plans are currently open to the future accrual of benefits but closed to new hires. In accordance with legislation, each of the U.K. plans and their assets are managed by independent trustee companies.
Accounting Standards.guidance require an annual measurement of our projected obligation and plan assets. These measurements are based upon several assumptions, including the discount rate and the expected long-term rate of asset return. Future changes in assumptions or differences between actual and expected outcomes can significantly affect our future annual expense, projected benefit obligation and shareholders’ equity.
The projected benefit obligation and net periodic pension cost are sensitive to discount rates. The projected benefit obligation would decrease by $182.0 million or increase by $193.4 million if the discount rate increased or decreased by 25 basis points. The 2020 net periodic pension cost would increase by $3.5 million or decrease by $3.9 million if the discount rate increased or decreased by 25 basis points at each applicable measurement date. Additionally, net periodic pension cost is also sensitive to changes in the expected long-term rate of asset return. A decrease or increase of 25 basis points in the expected long-term rate of asset return would have increased or decreased 2020 net periodic pension cost by $9.5 million.
For additional information, see Item 1A. “Risk Factors - We could be required to make future contributions to our defined benefit pension and post-retirement benefit plans as a result of adverse changes in interest rates and the capital markets. Adverse changes in the securities markets or interest rates, changes in actuarial assumptions, and legislative or other regulatory
actions could substantially increase the costs of these plans and could result in a requirement to contribute additional funds to the plans, including the Shorts Pension acquired in the Bombardier Acquisition.”
Income Taxes
Income taxes are accounted for in accordance with Financial Accounting Standards Board (“FASB”) authoritative guidance on accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts for existing assets and liabilities and their respective tax bases. Tax rate changes impacting these assets and liabilities are recognized in the period during which the rate change occurs.
Deferred tax assets are periodically evaluated to determine their recoverability and whether or not a valuation allowance is necessary. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, we assess all available positive and negative evidence. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified.
This assessment is completed on a taxing jurisdiction and entity filing basis. Based on these criteria and the relative weighting of both the positive and negative evidence available, and in particular the activity surrounding the Company’s prior earnings history including the forward losses previously recognized in the U.S. and U.K., Management determined that it was necessary to establish a valuation allowance against nearly all of its net U.S. and U.K. deferred tax assets at December 31, 2020. This determination was made as the Company anticipates it will enter into a U.S. cumulative loss position during the first half of 2021, as prior period positive earnings fall outside of the three-year measurement period. Additionally, segments of the UK operations are in cumulative loss positions after the inclusion of 2020 losses.
We record an income tax expenseprovision or benefit based on the netpre-tax income earned or net loss incurred in each tax jurisdiction and the tax rate applicable to that income or loss. In the ordinary course of business, there are transactions for which the ultimate tax outcome is uncertain. These uncertainties are accounted for in accordance with FASB authoritative guidance on accounting for the uncertainty in income taxes. The final tax outcome for these matters may be different than management's original estimates made in determining the income tax provision. A change to these estimates could impact the effective tax rate and net income or loss in subsequent periods. We use the flow-through accounting method for tax credits. Under this method, tax credits reduce income tax expense. See Note 20 to the Consolidated Financial Statements, Income Taxes, for further discussion.
Results of Operations
The following table sets forth, for the periods indicated, certain of our operating data:
|
| | | | | | | | | | | |
| | Twelve Months Ended |
| | December 31, 2018(1) | | December 31, 2017(1)(2) | | December 31, 2016(2) |
| | ($ in millions) |
| Net revenues | $ | 7,222.0 |
| | $ | 6,983.0 |
| | $ | 6,792.9 |
|
| Cost of sales | 6,135.9 |
| | 6,195.3 |
| | 5,800.3 |
|
| Gross profit | 1,086.1 |
| | 787.7 |
| | 992.6 |
|
| Selling, general and administrative expenses | 210.4 |
| | 204.7 |
| | 230.9 |
|
| Impact of severe weather event | (10.0 | ) | | 19.9 |
| | 12.1 |
|
| Research and development | 42.5 |
| | 31.2 |
| | 23.8 |
|
| Operating income | 843.2 |
|
| 531.9 |
|
| 725.8 |
|
| Interest expense and financing fee amortization | (80.0 | ) | | (41.7 | ) | | (57.3 | ) |
| Other (expense) income, net | (7.0 | ) | | 44.4 |
| | (8.0 | ) |
| Income before income taxes and equity in net income of affiliate | 756.2 |
|
| 534.6 |
|
| 660.5 |
|
| Income tax provision | (139.8 | ) | | (180.0 | ) | | (192.1 | ) |
| Income before equity in net income of affiliate | 616.4 |
|
| 354.6 |
|
| 468.4 |
|
| Equity in net income of affiliate | 0.6 |
| | 0.3 |
| | 1.3 |
|
| Net income | $ | 617.0 |
| | $ | 354.9 |
| | $ | 469.7 |
|
| | | | | | | | | | | | | | | | | |
| Twelve Months Ended |
| December 31, 2020(1) | | December 31, 2019(1)(2) | | December 31, 2018(2) |
| | ($ in millions) |
| Net revenues | $ | 3,404.8 | | | $ | 7,863.1 | | | $ | 7,222.0 | |
| Cost of sales | 3,845.5 | | | 6,786.4 | | | 6,135.9 | |
| Gross (loss) profit | (440.7) | | | 1,076.7 | | | 1,086.1 | |
| Selling, general and administrative | 237.4 | | | 261.4 | | | 210.4 | |
| Impact of severe weather event | — | | | — | | | (10.0) | |
| Restructuring cost | 73.0 | | | — | | | — | |
| Research and development | 38.8 | | | 54.5 | | | 42.5 | |
| Loss on disposal of assets | 22.9 | | | — | | | — | |
| Operating (loss) income | (812.8) | | | 760.8 | | | 843.2 | |
| Interest expense and financing fee amortization | (195.3) | | | (91.9) | | | (80.0) | |
| Other expense, net | (77.8) | | | (5.8) | | | (7.0) | |
| (Loss) income before income taxes and equity in net (loss) income of affiliates | (1,085.9) | | | 663.1 | | | 756.2 | |
| Income tax benefit (provision) | 220.2 | | | (132.8) | | | (139.8) | |
| Income before equity in net (loss) income of affiliates | (865.7) | | | 530.3 | | | 616.4 | |
| Equity in net (loss) income of affiliates | (4.6) | | | (0.2) | | | 0.6 | |
| Net (loss) income | $ | (870.3) | | | $ | 530.1 | | | $ | 617.0 | |
| |
(1) | See “Twelve Months Ended December 31, 2018 as Compared to Twelve Months Ended December 31, 2017” for detailed discussion of operating data. |
| |
(2) | See “Twelve Months Ended December 31, 2017 as Compared to Twelve Months Ended December 31, 2016” for detailed discussion of operating data. |
(1)See “Twelve Months Ended December 31, 2020 as Compared to Twelve Months Ended December 31, 2019” for detailed discussion of operating data.
(2)See “Twelve Months Ended December 31, 2019 as Compared to Twelve Months Ended December 31, 2018” for detailed discussion of operating data.
Comparative shipset deliveries by model are as follows:
| | | | Twelve Months Ended | | Twelve Months Ended |
| Model | December 31, 2018 | | December 31, 2017 | | December 31, 2016 | Model | December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| B737 | 605 |
| | 532 |
| | 500 |
| B737 | 71 | | | 606 | | | 605 | |
| B747 | 6 |
| | 6 |
| | 8 |
| B747 | 6 | | | 6 | | | 6 | |
| B767 | 30 |
| | 28 |
| | 25 |
| B767 | 28 | | | 33 | | | 30 | |
| B777 | 44 |
| | 70 |
| | 96 |
| B777 | 39 | | | 56 | | | 44 | |
| B787 | 143 |
| | 136 |
| | 127 |
| B787 | 112 | | | 166 | | | 143 | |
| Total Boeing | 828 |
| | 772 |
| | 756 |
| Total Boeing | 256 | | | 867 | | | 828 | |
A220 (1) | 12 |
| | — |
| | — |
| A220 (1) | 43 | | | 40 | | | 12 | |
| A320 Family | 657 |
| | 608 |
| | 574 |
| A320 Family | 466 | | | 682 | | | 657 | |
| A330 | 62 |
| | 80 |
| | 74 |
| A330 | 20 | | | 35 | | | 62 | |
| A350 | 98 |
| | 90 |
| | 69 |
| A350 | 62 | | | 111 | | | 98 | |
| A380 | 6 |
| | 13 |
| | 22 |
| A380 | — | | | 1 | | | 6 | |
| Total Airbus | 835 |
| | 791 |
| | 739 |
| Total Airbus | 591 | | | 869 | | | 835 | |
Business and Regional Jets (1) | 71 |
| | 88 |
| | 88 |
| |
Total Business/Regional Jets (1) (2) | | Total Business/Regional Jets (1) (2) | 73 | | | 55 | | | 71 | |
| Total | 1,734 |
| | 1,651 |
| | 1,583 |
| Total | 920 | | | 1,791 | | | 1,734 | |
| |
(1) | Airbus acquired majority ownership in the C-Series program (subsequently renamed as the A220 program) in July 2018; all C-Series deliveries prior to the third quarter of 2018 are included in Business and Regional Jets and all A220 deliveries subsequent to the acquisition are included in A220. |
(1)Airbus acquired majority ownership in the C-Series program (subsequently renamed as the A220 program) in July 2018; all C-Series deliveries prior to the third quarter of 2018 are included in business and regional jets and all A220 deliveries subsequent to the acquisition are included in A220. Also included in the business and regional jets are deliveries related to the Bombardier Acquisition.
(2)Beginning in the fourth quarter of 2020, total business/regional jet deliveries includes deliveries related to the Bombardier Acquisition.
For purposes of measuring production or shipset deliveries for Boeing aircraft in a given period, the term “shipset” refers to sets of structural fuselage components produced or delivered for one aircraft in such period. For purposes of measuring production or shipset deliveries for Airbus and Businessbusiness and Regional Jetregional jet aircraft in a given period, the term “shipset” refers to all structural aircraft components produced or delivered for one aircraft in such period. For the purposes of measuring wing shipset deliveries, the term “shipset” refers to all wing components produced or delivered for one aircraft in such period. Other components that are part of the same aircraft shipsets could be produced or shipped in earlier or later accounting periods than the components used to measure production or shipset deliveries, which may result in slight variations in production or delivery quantities of the various shipset components in any given period.
Net revenues by prime customer are as follows:
| | | | | | | | | | | | | | | | | |
| Twelve Months Ended |
| Prime Customer | December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| ($ in millions) |
| Boeing | $ | 2,043.8 | | | $ | 6,237.2 | | | $ | 5,677.7 | |
| Airbus | 773.3 | | | 1,250.6 | | | 1,180.8 | |
| Other | 587.7 | | | 375.3 | | | 363.5 | |
| Total net revenues | $ | 3,404.8 | | | $ | 7,863.1 | | | $ | 7,222.0 | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | Twelve Months Ended |
| Prime Customer | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | ($ in millions) |
| Boeing | $ | 5,677.7 |
| | $ | 5,527.5 |
| | $ | 5,502.6 |
|
| Airbus | 1,180.8 |
| | 1,123.5 |
| | 992.7 |
|
| Other | 363.5 |
| | 332.0 |
| | 297.6 |
|
| Total net revenues | $ | 7,222.0 |
| | $ | 6,983.0 |
| | $ | 6,792.9 |
|
Changes in Estimates
During the twelve months ended December 31, 2020, we recognized unfavorable change in estimates of $400.7 million primarily driven by Boeing announced production rate changes on the B787 program from 10 aircraft per month to 5 aircraft per month, Airbus production rate changes on the A350 program from 9 aircraft per month to 4 aircraft per month and rate reductions across all programs due to the COVID-19 pandemic. During the twelve months ended December 31, 2019, we recognized unfavorable changes in estimates of $65.5 million primarily driven by Boeing announced production rate change on the B787 program from 14 aircraft per month to 10 aircraft per month. During the twelve months ended December 31, 2018, we recognized total changesthere was a negligible amount of net change in estimates of $0.1 million that included favorable changes in estimates on forward loss programs of $3.9 million and unfavorable cumulative catch-up adjustments related to periods prior to 2018 of ($3.8) million. The net forward loss charges were primarily driven by favorable performance on cost initiatives, partially offset by the impact from the adoption of ASU 2017-02. Unfavorable cumulative catch-up adjustments for the periods prior to 2018 were primarily driven by unfavorable cost performance.
During the twelve months ended December 31, 2017, we recognized total changes in estimates of ($296.1) million that included net forward loss charges of ($327.3) million and favorable cumulative catch-up adjustments related to periods prior to 2017 of $31.2 million. Net forward loss charges were primarily driven by Boeing pricing negotiations, including the effect of executing the 2017 MOU (the precursor agreement to Sustaining Amendment #30 and 787 Amendment #25) with Boeing and extending the current B787 contract block in the second quarter. Favorable cumulative catch-up adjustments for the periods prior to 2017 were primarily driven by productivity and efficiency improvements and favorable cost performance.
During the twelve months ended December 31, 2016, we recognized total changes in estimates of ($81.6) million that included net forward loss charges of ($118.2) million and favorable cumulative catch-up adjustments related to periods prior to 2016 of $36.6 million. Net forward loss charges were primarily driven by various disruption and production inefficiencies related to achieving production rate increases on the A350 XWB fuselage program. Favorable cumulative catch-up adjustments for the periods prior to 2016 were primarily driven by productivity and efficiency improvements, favorable cost performance, mitigation of risks on maturing programs, and favorable pricing negotiations on a maturing program.
The Company is currently working on several programs, primarily the B787, A350 XWB, and BR725 programs, that carry risks associated with design responsibility, development of production tooling, production inefficiencies during the early phases of production, hiring and training of qualified personnel, increased capital and funding commitments, supplier performance, delivery schedules, and unique customer requirements. The Company has previously recorded forward loss charges on these programs. If the risks related to these programs are not mitigated, then the Company could record additional forward loss charges.estimates.
Twelve Months Ended December 31, 20182020 as Compared to Twelve Months Ended December 31, 20172019
Net Revenues. Net revenues for the twelve months ended December 31, 20182020 were $7,222.0$3,404.8 million, an increasea decrease of $239$4,458.3 million, or 3%57%, compared with net revenues of $6,983.0$7,863.1 million, for the prior year. The increasedecrease was primarily due to higherthe B737 MAX grounding and lower production activity on the B737, B787, B777, A350, and A320 and A350 XWB programs and increased defense related activity,due to COVID-19, partially offset by lower production onincreased defense activity. Approximately 83% of the B777, lower revenue recognized on the B787 program due to the adoption of ASC 606, and lower revenue recognized on the A350 XWB program in accordance with pricing terms. Approximately 95% of Spirit’sCompany's net revenues in 20182020 came from our two largest customers, Boeing and Airbus.
Deliveries to Boeing increaseddecreased to 828256 shipsets during 2018,2020, compared to 772 shipsets delivered in the prior year, driven by production increases on the B737 and B787 programs, partially offset by a decrease on the B777 program. Deliveries to Airbus increased to 835 shipsets during 2018, compared to 791867 shipsets delivered in the prior year, primarily driven by higherproduction decreases on the B737, B777 and B787 programs. Deliveries to Airbus decreased to 591 shipsets during 2020, compared to 869 shipsets delivered in the prior year, primarily driven by decreased production of the A320 and A350 XWB programs and the transfer of the A220 program to total Airbus deliveries in the third quarter of 2018, partially offset by decreased production on the A330 and A380 programs. Production deliveries of business/regional jet wing and wing components decreasedincreased to 7173 shipsets during 2018,2020, compared to 8855 shipsets delivered in the prior year, primarily driven by the transfer of the A220 program to total Airbus deliveries in the third quarter of 2018. In total, shipset deliveries increased 5% to 1,734 shipsets in 2018 compared to 1,651 shipsets in 2017.Bombardier Acquisition.
Gross (Loss) Profit.Gross (loss) profit was $1,086.1 million for the twelve months ended December 31, 2018,2020 was $(440.7) million, as compared to $787.7$1,076.7 million for the same period in the prior year, an increasea decrease of $298.4$1,517.4 million. The increasereduction in gross profit was primarily driven by the absence of the $352.8 million netB737 MAX grounding, forward loss charges recognized on the B787 program in the second quarter of 2017 and increased margins recognized on the A350 XWB programprograms due to reduced production rates, excess capacity production costs of $278.9 million, and temporary workforce reduction costs of $33.7 million due in response to the adoptionCOVID-19 pandemic, net of ASC 606, partially offset by decreased production on the B777 programU.S. employee retention credit and lower margins recognized on the B737 and B777 programs.U.K. government subsidies.
SG&A and Research and Development. SG&A expense was $5.7$24.0 million higherlower for the twelve months ended December 31, 2018,2020, as compared to the same period in the prior year, primarily due to costs incurred related to the anticipated purchase of Asco, partially offset by the recovery of legal fees related to a court decisionreduction in 2018.headcount. Research and development expense for the twelve months ended December 31, 20182020 was $11.3$15.7 million higher lower as compared to the same period in the prior year primarily due to more internal projects underway.actions to preserve liquidity in response to the COVID-19 pandemic and B737 MAX grounding.
ImpactRestructuring Costs and Disposal of Severe Weather Event. DuringAssets. Restructuring costs were $73.0 million higher for the twelve months ended December 31, 2018, the Company recorded a gain of $10.0 million from an insurance settlement related to costs incurred from the aftermath of Hurricane Matthew,2020, compared to expenses of $19.9 million for the same period in the prior year for Hurricane Matthew. The impactcost-alignment and headcount reductions as a result of Hurricane Matthew caused the Company’s Kinston, North Carolina site operations to temporarily shut down duringB737 MAX grounding and COVID-19 impacts. Losses on disposals of assets were $22.9 million higher for the fourth quarter of 2016 with carryover effects into 2017.twelve months ended December 31, 2020.
Operating (Loss) Income. Operating (loss) income for the twelve months ended December 31, 20182020 was $843.2$(812.8) million, which was $311.3$1,573.6 million higherlower than operating income of $531.9$760.8 million for the prior year. The increase in operating incomedecrease was primarily driven by decreased margins on the B737, B777 and A320 programs, $370.3 million of forward losses mainly driven by the B787 and A350 programs, excess capacity production costs of $278.9 million, and temporary workforce reduction costs of $33.7 million due to the absenceCOVID-19, net of the B787 net forwardU.S. employee retention credit and U.K. government subsidies. The Company also recognized restructuring costs of $73.0 million for cost-alignment and headcount reductions, and a $22.9 million loss charges recognized duringfrom the second quarterdisposal of 2017, partially offset by costs incurred related to the anticipated purchase of Asco.assets.
Interest Expense and Financing Fee Amortization. Interest expense and financing fee amortization for the twelve months ended December 31, 2018 includes $55.72020 included $160.3 million of interest and fees paid or accrued in connection with long-term debt and $18.3$17.5 million in amortization of deferred financing costs and original issue discount compared to $36.3$78.6 million of interest and fees paid or accrued in connection with long-term debt and $3.5$3.6 million in amortization of deferred financing costs and original issue discount for the prior year. The increase in interest expense iswas primarily as a result of additional debt taken on in 2018 in anticipationthe issuance of our ASRs and the planned purchase of Asco. During 2018, we extinguished our 2022 Notes (as defined below) through a tender offer and redemption and we replaced our prior credit agreement with the 2018 Credit Agreement. As a result, we recognized a loss on extinguishment of existing debt of $14.4 million included in $18.3$1,200 million of deferred financing costs above.Spirit’s 7.500% Senior Secured Second Lien Notes due 2025 and $500 million of Spirit’s 5.500% Senior Secured First Lien Notes due 2025.
Other (Expense) Income, net. Other expense for the twelve months ended December 31, 20182020 was $7.0($77.8) million, compared to other incomeexpense of $44.4($5.8) million for the same period in the prior year. Other expense during 20182020 was primarily driven by losses onexpenses related to a voluntary retirement program offered by the Company for cost alignment and headcount reductions and foreign currency forward contracts as the U.S. Dollar strengthened against the Euro, as well as net lossesexchange impact on the salefinancial payment obligation under the repayable investment agreement between Shorts and the United Kingdom's Department for Business, Energy and Industrial Strategy acquired as part of receivables, partially offset by pension income.the Bombardier Acquisition.
ProvisionBenefit (Provision) for Income Taxes. The income tax provision for the twelve months ended December 31, 2018,2020, was $139.8$220.2 million compared to $180.0$(132.8) million for the prior year. The 20182020 effective tax rate was 18.5%20.3% as compared to 33.7%20.0% for 2017. 2019.The difference in the effective tax rate recorded for 20182020 as comparedcompared to 20172019 is primarily related to a valuation allowance recorded on nearly all deferred tax assets, a benefit from the enactmentCARES Act that enabled the Company to benefit from certain US net operating losses at the former 35% corporate tax rate, the non-deductibility of the TCJA, including the reduction in the U.S. corporate federal income tax rate from 35% to 21%, the elimination of the domestic manufacturing deduction,wages and the inclusion of provisional tax impacts of our one-time transition tax liability and re-measurement of our net deferred tax asset balance in 2017. Unrelatedbenefits related to the TCJA,Employee Retention Credit, the difference in the effective tax rate is primarily related to higher state income and federal research tax credits generated in 2018 and the proportional tax rate effects of lower pre-tax income in 2017. The decrease from the U.S. statutory tax rate is attributable primarily to generation of state income tax credits in a loss year, and federal research tax credits, foreign rates less than the U.S. rate, and share based compensation excessrecognition of a previously unrecognized tax benefit offset by estimated state income tax. For additional information on the TCJA, please see Note 19due to the Consolidated Financial Statements, Income Taxes.a statute of limitation expiration.
Segments. The following table shows segment revenues and operating income for the twelve months ended December 31, 2018, 2017,2020, 2019, and 2016:
2018:
| | | | Twelve Months Ended | | Twelve Months Ended |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 | | December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| | ($ in millions) | | ($ in millions) |
| Segment Revenues | | | | | | Segment Revenues | | | | | |
| Fuselage Systems | $ | 4,000.8 |
| | $ | 3,730.8 |
| | $ | 3,498.8 |
| Fuselage Systems | $ | 1,725.9 | | | $ | 4,206.2 | | | $ | 4,000.8 | |
| Propulsion Systems | 1,702.5 |
| | 1,666.2 |
| | 1,777.3 |
| Propulsion Systems | 784.5 | | | 2,057.8 | | | 1,702.5 | |
| Wing Systems | 1,513.0 |
| | 1,578.8 |
| | 1,508.7 |
| Wing Systems | 798.6 | | | 1,588.3 | | | 1,513.0 | |
| All Other | 5.7 |
| | 7.2 |
| | 8.1 |
| All Other | 95.8 | | | 10.8 | | | 5.7 | |
| | $ | 7,222.0 |
| | $ | 6,983.0 |
| | $ | 6,792.9 |
| | $ | 3,404.8 | | | $ | 7,863.1 | | | $ | 7,222.0 | |
Segment Operating Income(1, 2) | | | | | | |
| Fuselage Systems | $ | 576.1 |
| | $ | 329.6 |
| | $ | 470.4 |
| |
| Propulsion Systems | 283.5 |
| | 267.7 |
| | 326.7 |
| |
| Wing Systems | 226.4 |
| | 205.1 |
| | 224.3 |
| |
Segment Operating (Loss) Income(1) | | Segment Operating (Loss) Income(1) | | | | |
Fuselage Systems(2) | | Fuselage Systems(2) | $ | (454.5) | | | $ | 440.8 | | | $ | 576.1 | |
Propulsion Systems(3) | | Propulsion Systems(3) | (36.8) | | | 404.6 | | | 283.5 | |
Wing Systems(4) | | Wing Systems(4) | (68.1) | | | 216.0 | | | 226.4 | |
| All Other | 0.3 |
| | 2.0 |
| | 1.6 |
| All Other | 34.7 | | | 3.4 | | | 0.3 | |
| | 1,086.3 |
| | 804.4 |
| | 1,023.0 |
| | (524.7) | | | 1,064.8 | | | 1,086.3 | |
Corporate SG&A(2) | (210.4 | ) | | (204.7 | ) | | (230.9 | ) | |
| Corporate SG&A | | Corporate SG&A | (237.4) | | | (261.4) | | | (210.4) | |
| Unallocated impact of severe weather event | 10.0 |
| | (19.9 | ) | | (12.1 | ) | Unallocated impact of severe weather event | — | | | — | | | 10.0 | |
| Research and development | (42.5 | ) | | (31.2 | ) | | (23.8 | ) | Research and development | (38.8) | | | (54.5) | | | (42.5) | |
Unallocated cost of sales(3) | (0.2 | ) | | (16.7 | ) | | (30.4 | ) | |
Unallocated cost of sales(5) | | Unallocated cost of sales(5) | (11.9) | | | 11.9 | | | (0.2) | |
| Total operating income | $ | 843.2 |
| | $ | 531.9 |
| | $ | 725.8 |
| Total operating income | $ | (812.8) | | | $ | 760.8 | | | $ | 843.2 | |
| |
(1) | Inclusive of forward losses, changes in estimates on loss programs, and cumulative catch-up adjustments. These changes in estimates for the periods ended December 31, 2018, 2017, and 2016 are further detailed in the segment discussions below and in Note 5 to the Consolidated Financial Statements, Changes in Estimates.
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(2) | Prior period information has been reclassified as a result of the Company's adoption of ASU 2017-07 on a retrospective basis in 2018. In accordance with the adoption of this guidance, prior year amounts related to the components of net periodic pension and postretirement benefit cost other than service costs have been reclassified from cost of sales and selling, general, and administrative expense to other income (expense) within the consolidated statement of operation for all periods presented. Accordingly, expenses of $18.1 million, $7.4 million, and $7.3 million attributable to the Fuselage Systems segment, Propulsion Systems segment, and Wing Systems segment, respectively, were reclassified into segment operating income for the twelve months ended December 31, 2017, and expenses of $1.8 million, $0.8 million, and $0.7 million attributable to the Fuselage Systems segment, Propulsion Systems segment, and Wing Systems segment, respectively, were reclassified out of segment operating income for the twelve months ended December 31, 2016. |
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(3) | For 2018, includes charges of $1.1 million related to warranty reserves. For 2017, includes charges of $1.8 million and $12.7 million related to warranty reserve and charges for excess purchases and purchase commitments, respectively. For 2016, includes charges of $13.8 million and $23.6 related to warranty reserve and early retirement incentives, respectively, offset by $7.9 million for the settlement of historical claims with suppliers. |
(1)Inclusive of forward losses, changes in estimate on loss programs and cumulative catch-up adjustments. These changes in estimates for the periods ended December 31, 2020, 2019, and 2018 respectively are further detailed in Note 5, Changes in Estimates.
(2)The year ended December 31, 2020 includes excess capacity production costs of $175.0 million related to the temporary B737 MAX production schedule changes, temporary workforce reduction costs of $19.0 million as a result of COVID-19 pandemic, net of U.S. employee retention credit, $41.3 million of restructuring costs and $22.5 million from loss on disposition of assets.
(3)The year ended December 31, 2020 includes excess capacity production costs of $61.1 million related to the temporary B737 MAX production schedule changes, temporary workforce adjustments costs of $7.2 million for as a result of COVID-19 pandemic net of U.S. employee retention credit and $15.2 million of restructuring costs.
(4)The year ended December 31, 2020 includes excess capacity production costs of $42.9 million related to the temporary B737 MAX and A320 production schedule changes, temporary workforce adjustments costs of $7.5 million as a result of COVID-19 pandemic, net of U.S. employee retention credit and U.K. government subsidies, $16.5 million of restructuring costs and $0.4 million from loss on the disposition of assets.
(5)Includes $(3.1)million, $13.9 million, and $(1.1) million related to warranty reserves for the periods ended December 31, 2020, 2019 and 2018, respectively. Included in unallocated cost of sales for December 31, 2020 is write off of excess material of ($8.1) million.
Fuselage Systems, Propulsion Systems, Wing Systems, and All Other segments represented approximately 55%51%, 24%23%, 21%23%, and less than 1%3%, respectively, of our net revenues for the twelve months ended December 31, 2020. Fuselage Systems, Propulsion Systems, Wing Systems, and All Other segments represented approximately 54%, 26%, 20%, and less than 1%, respectively, of our net revenues for the twelve months ended December 31, 2019.Fuselage Systems, Propulsion Systems, Wing Systems, and All Other segments represented approximately 55%, 24%, 21%, and less than 1%, respectively, of our net revenues for the twelve months ended December 31, 2018.
Fuselage Systems. Fuselage Systems segment net revenues for the twelve months ended December 31, 20182020 were $4,000.8$1,725.9 million, an increasea decrease of $270.0$2,480.3 million, or 7%59%, compared to the same period in the prior year. The increasedecrease in net revenuesrevenue was
primarily due to higherlower production volumes on the B737 MAX, B787, B777, and A350 XWB programs due to impacts from the COVID-19 pandemic and increased defense related work,B737 MAX grounding partially offset by lower production onincreased defense activity and revenues from the B777 program and lower revenue recognized onbusinesses acquired in the B787 program due to the adoption of ASC 606. Bombardier Acquisition.Fuselage Systems segment operating margins were 14%(26%) for the twelve months ended December 31, 2018,2020, compared to 9%11% for the same period in the prior year, with the increase primarily driven by the absence of the net forward loss charges recorded on the B787 fuselage program during the second quarter of 2017 and increased margins recognized on the A350 XWB program due to the adoption of ASC 606, partially offset by lower margins recognized on the B737 MAX program due to significantly less deliveries, forward losses of $265.4 million on the B787 and B777 programs.A350 programs, excess capacity production costs of $175.0 million, temporary workforce impact of $19.0 million due to the COVID-19 pandemic net of U.S. employee retention credit, and restructuring costs of $41.3 million for cost alignment and headcount reductions. In 2018,2020, the segment recorded unfavorable cumulative catch-up adjustments of ($5.3)$17.5 million as well as $3.4 million of favorable changes in estimates
on loss programs. In comparison, during 2017, the segment recorded favorable cumulative catch-up adjustments of $4.0 million as well as ($223.2)and $274.3 million of net forward loss charges. In comparison, during 2019, the segment recorded unfavorable cumulative catch-up adjustments of $1.3 million and $37.9 million of net forward loss charges primarily due to production rate changes on the B787 program.
Propulsion Systems. Propulsion Systems segment net revenues for the twelve months ended December 31, 20182020 were $1,702.5$784.5 million, an increasea decrease of $36.3$1,273.3 million, or 2%62%, compared to the same period in the prior year. The increasedecrease was primarily due to higherlower production volumes on the B737 program, partially offset by lower production on theMAX, B777, program, lower revenue recognized on certain non-recurring BoeingB787 and BR725 programs and lower net revenues recognized on the B787 program due to impacts from the adoption of ASC 606.COVID-19 pandemic and B737 MAX grounding. Propulsion Systems segment operating margins were 17%(5%) for the twelve months ended December 31, 2018,2020, compared to 16%20% for the same period in the prior year. This increasedecrease was primarily driven by lower margins due to significantly less deliveries on the absenceB737 MAX, and B777 programs, forward loss charges of $27 million on the B787 program, excess capacity production costs of $61.1 million, and temporary workforce impact of $7.2 million due to the COVID-19 pandemic net of U.S. employee retention credit, and restructuring costs of $15.2 million for cost alignment and headcount reductions. The segment recorded unfavorable cumulative catch-up adjustments of $7.8 million and net forward loss charges recorded onof $36.9 million for the B787 programtwelve months ended December 31, 2020. In comparison, during the second quarter of 2017, partially offset by lower margins recognized on the B777 program. In 2018,2019, the segment recorded unfavorable cumulative catch-up adjustments of ($0.2)$1.2 million and net forward loss charges of ($0.7)$15.1 million. In comparison, during 2017, the segment recorded favorable cumulative catch-up adjustments of $3.8 million and net forward loss charges of ($40.2) million.
Wing Systems. Wing Systems segment net revenues for the twelve months ended December 31, 20182020 were $1,513.0$798.6 million, a decrease of $65.8$789.7 million, or 4%50%, compared to the same period in the prior year.The decrease was primarily due to decreasedlower production volumes on the B737 MAX, B777, program, lower revenues recognized on the B787, programA320, and A350 programs due to the adoption of ASC 606,COVID-19 pandemic and lower revenue recognized on the A350 XWB program in accordance with pricing terms,B737 MAX grounding, partially offset by increased production onactivity from the B737 and A320 programs.Bombardier Acquisition. Wing Systems segment operating margins were 15%(8%) for the twelve months ended December 31, 2018,2020 compared to 13%14% for the same period in the prior year,year. This decrease was primarily driven by lower margins due to significantly lower deliveries on the absenceB737 and A320 programs, forward loss charges of $47.9 million on the B787 and A350 programs, excess capacity production costs of $42.9 million, temporary workforce impact of $7.5 million due to the COVID-19 pandemic net of U.S. employee retention credit, and U.K government subsidies and restructuring costs of $16.5 million for cost alignment and headcount reductions. In 2020, the segment recorded unfavorable cumulative catch-up adjustments of $5.1 million and $59.1 million of net forward loss charges recorded on the B787 program in the second quarter of 2017 and increased margin recognized on the A350 XWB program due to the adoption of ASC 606, partially offset by lower margins recognized on the B737 and B777 programs.charges. In 2018,comparison, during 2019, the segment recorded favorable cumulative catch-up adjustments of $1.7$0.5 million and favorable changes in estimates on loss programs$10.5 million of $1.2 million. In comparison, during 2017, the segment recorded favorable cumulative catch-up adjustments of $23.4 million and net forward loss charges of ($63.9) million.charges.
All Other. All Other segment net revenues consist of sundry sales of miscellaneous services, tooling contracts, and natural gas revenues from the Kansas Industrial Energy Supply Company (“KIESC”), a tenancy in common with other Wichita companies established to purchase natural gas where the Company is a major participant. In the twelve months ended December 31, 2018,2020. All Other segment net revenues were $5.7$95.8 million, a decreasean increase of $1.5$85.0 million compared to the same period$10.8 million in the prior year.twelve months ended December 31, 2019. The All Other segment recorded 5%36% operating margins for the twelve months ended December 31, 2018.2020, as compared to 31% operating margins for the twelve months ended December 31, 2019, with the increase primarily driven by ventilator production.
Twelve Months Ended December 31, 20172019 as Compared to Twelve Months Ended December 31, 20162018
Net Revenues. Net revenues for the twelve months ended December 31, 20172019 were $6,983.0$7,863.1 million, an increase of $190.1$641.1 million, or 3%9%, compared with net revenues of $6,792.9$7,222.0 million, for the prior year. The increase was primarily due to higher production deliveries on the B737,B777, B787, A320,A220, and A350 XWB programs, favorable model mix on B737 program, increased SAAS and defense related activity, and higher revenues recognized on certain non-recurring Boeing programs, partially offset by lower production deliveries on the B747 and B777, decreased GCS&S activity,A330 program, lower revenue recognized on the B787 ProgramA350 XWB program in accordance with pricing terms under the B787 Agreement, and the absence of a one-time customer claim settlement recorded in the first half of 2016.lower revenue recognized on certain Boeing nonrecurring programs. Approximately 95% of Spirit’sthe Company's net revenues in 20172019 came from our two largest customers, Boeing and Airbus.
Deliveries to Boeing increased to 772867 shipsets during 2017,2019, compared to 756828 shipsets delivered in the prior year, driven by production increases on the B737, B767, and B787 programs, partially offset by decreases on the B747 and B777 programs. Deliveries to Airbus increased to 791869 shipsets during 2017,2019, compared to 739835 shipsets delivered in the prior year, primarily driven by higher production of the A320, and A350 XWB, and A220 programs partially offset by decreased production on the A380A330 program. Production deliveries of business and business/regional jet wing and wing components remained flat at 88decreased to 55 shipsets during both 2017 and 2016.2019, compared to 71 shipsets delivered in the prior year, driven by the transfer of the A220 program to total Airbus deliveries in the third quarter of 2018. In total, shipset deliveries increased 4%3% to 1,6511,791 shipsets in 20172019 compared to 1,5831,734 shipsets in 2016.2018.
Gross Profit.Gross profit was $787.7 millionProfit for the twelve months ended December 31, 2017,2019 was $1,076.7 million, as compared to $992.6$1,086.1 million for the same period in the prior year.year, a decrease of $9.4 million. The decreasereduction in gross profit was primarily driven by net forward loss charges recognized for thecharge on B787 Programdue to Boeing announced production rate change from 14 aircraft per month to 12 aircraft per month in the secondthird quarter, of 2017,from 12 aircraft per month to 10 aircraft per month in the fourth quarter, and certain Boeing nonrecurring programs partially offset by the absence of forward loss chargesincreased profit recognized on the B737 due to model mix, B777, A220 and the A350 XWB fuselage program during 2016.program.
SG&A and Research and Development. SG&A expense was $26.2$51.0 million lowerhigher for the twelve months ended December 31, 2017,2019, as compared to the same period in the prior year, primarily due to expensescosts incurred related to executive retirementsthe Asco Acquisition and severance including stock compensation recognizedBombardier Acquisition, increased headcount and absence of a one-time recovery of legal fees related to a court decision in 2016.2018. Research and development expense for the twelve months ended December 31, 20172019 was $7.4$12.0 million higher as compared to the same period in the prior year, due to more internal projects underway.
Impact of Severe Weather Event. During the twelve months ended December 31, 2017, the Company recorded a $19.9 million charge related to the aftermath of Hurricane Matthew, compared to $12.1 million recorded in the prior year. The impact
of Hurricane Matthew caused the Company’s Kinston, North Carolina site operations to temporarily shut down during the fourth quarter of 2016 with carryover effects into 2017.
Operating Income. Operating income for the twelve months ended December 31, 20172019 was $531.9$760.8 million, which was $193.9$82.4 million lower than operating income of $725.8$843.2 million for the prior year. The decrease in operating income was primarily due to costs incurred related to the resultanticipated purchase of Asco and Bombardier, reduced profitability on the B787 netB737 program due to B737 MAX grounding and a forward loss charges recognized during the second quarter of 2017.charge on B787 due to announced production rate changes.
Interest Expense and Financing Fee Amortization. Interest expense and financing fee amortization for the twelve months ended December 31, 2017 includes $36.32019 included $78.6 million of interest and fees paid or accrued in connection with long-term debt and $3.5$3.6 million in amortization of deferred financing costs and original issue discount, compared to $38.0$55.7 million of interest and fees paid or accrued in connection with long-term debt and $19.3$18.3 million in amortization of deferred financing costs and original issue discount for the prior year. During 2016, we recognized $15.8 millionThe increase in interest expense foris primarily a result of additional debt taken on in 2018 in anticipation of our ASRs and the write-downplanned purchase of Asco. The decrease in deferred financing costs and fees in 2019 compared to 2018 is mainly due to the 2018 Credit Agreement (as defined below) which resulted in a loss on extinguishment of existing debt of $14.4 million included in the $18.3 million of deferred financing costs, original issue discount and third party fees, and a call premium resulting from the financing activities that occurred during the second quarter of 2016, which included the amendment and restatement of our existing credit facility and redemption of our 2020 Notes (as defined below) using proceeds from the issuance of the 2026 Notes (as defined below).costs.
Other (Expense) Income, net. Other incomeexpense for the twelve months ended December 31, 20172019 was $44.4$(5.8) million, compared to other expense of $8.0$(7.0) million for the same period in the prior year. Other expense during 20162019 was primarily driven by losses on foreign exchange rate lossescurrency forward contracts as the British Pound value weakenedU.S. Dollar strengthened against the U.S. Dollar.Euro, expenses related to a voluntary retirement program offered by the Company in the second quarter of 2019, as well as net losses on the sale of receivables, partially offset by gain on proceeds from a litigation settlement and pension income.
Provision for Income Taxes. The income tax provision for the twelve months ended December 31, 2017,2019, was $180.0$132.8 million compared to $192.1$139.8 million for the prior year. The 20172019 effective tax rate was 33.7%20.0% as compared to 29.1%18.5% for 2016.2018. The difference in the effective tax rate recorded for 20172019 as compared to 20162018 is primarily related to higher benefit from foreign rates less than the U.S. rate and incrementala reduction in federal research tax credits, in 2017, offset by the provisional tax impacts recorded in 2017 duean adjustment to the signing of the TCJA in December 2017. The provisional amounts include theour one-time transition tax for allliability, and an increase in income tax in the current year reflecting the finalization of our operating foreign subsidiariesthe 2018 amounts related to Global Intangible Low-Taxed Income ("GILTI") and the federal R&D tax credit reported in the tax return as agreed upon with the IRS in the course of the Company’s participation in the Internal Revenue Service’s Compliance Assurance Process (“CAP”) offset by a re-measurement of our net deferred tax asset balance. balance in 2019 and a decrease in the impact of GILTI.
The decrease from the U.S. statutory tax rate is attributable primarily to the inclusiongeneration of thestate income tax effects ofand federal research tax credits, foreign rates less than the U.S. rate, the re-measurement of our net U.S. deferredand share based compensation excess tax asset balance, the U.S. qualified domestic production activities deduction, and the generation of state income tax creditsbenefit, offset by the one-time transitionimpacts of finalizing the 2018 amounts related to GILTI and the federal R&D tax for all of our operating foreign subsidiaries.credit and estimated state income tax.
Fuselage Systems. Fuselage Systems segment net revenues for the twelve months ended December 31, 20172019 were $3,730.8$4,206.2 million, an increase of $232.0$205.4 million, or 7%5%, compared to the same period in the prior year. The increase in net revenues was primarily due to higher production deliveries on the B737B787, B777, and A350 XWB programs increased revenue on certain non-recurring Boeing programs, and increased SAAS and defense related work, partially offset by lower production deliveriesrevenue recognized on the B777 program and decreased GCS&S activity.certain non-recurring Boeing programs. Fuselage Systems segment operating margins were 9%11% for the twelve months ended December 31, 2017,2019, compared to 13%14% for the same period in the prior year, with the decrease primarily driven by B737 performance, the net forward loss charges recorded on the B787 fuselage program during the third and fourth quarter of 2019 due to announced production rate changes, and decreased margins recognized on the A350 XWB program. In 2017,2019, the segment recorded favorableunfavorable cumulative catch-up adjustments of $4.0($1.3) million, as well as ($223.2) million of net forward losses. In comparison, during 2016, the segment recorded favorable cumulative catch-up adjustments of $13.6 million driven by productivity and efficiency improvements, as well as ($133.4)37.9) million of net forward loss charges. In comparison, during 2018, the segment recorded unfavorable cumulative catch-up adjustments of ($5.3) million and $3.4 million of favorable changes in estimates on loss programs.
Propulsion Systems. Propulsion Systems segment net revenues for the twelve months ended December 31, 20172019 were $1,666.2$2,057.8 million, a decreasean increase of $111.1$355.3 million, or 6%21%, compared to the same period in the prior year. The decreaseincrease was primarily due to lowerfavorable model mix on B737, and increased production deliveries on theB787, B777 and B747A220 programs, decreased GCS&S activity, and lower net revenues recognized on the B787 program in accordance with pricing terms under the B787 Agreement, partially offset by higher deliverieslower revenue recognized on the B737 program and increased revenue on acertain non-recurring Boeing program.programs. Propulsion Systems segment operating margins were 16%
20% for the twelve months ended December 31, 2017,2019, compared to 18%17% for the same period in the prior year. This decreaseincrease was primarily driven by the B737, B777 and A220 programs, partially offset by net forward loss charges recorded on the B787 program.due to announced production rate changes. In 2017, the segment recorded favorable cumulative catch-up adjustments of $3.8 million and net forward loss charges of ($40.2) million. In comparison, during 2016,2019, the segment recorded unfavorable cumulative catch-up adjustments of ($0.4)1.2) million and favorable changes in estimates onnet forward loss programscharges of $10.1($15.1) million. In comparison, during 2018, the segment recorded unfavorable cumulative catch-up adjustments of ($0.2) million and net forward loss charges of ($0.7) million.
Wing Systems. Wing Systems segment net revenues for the twelve months ended December 31, 20172019 were $1,578.8$1,588.3 million, an increase of $70.1$75.3 million, or 5%, compared to the same period in the prior year.The increaseThis was primarily due to higherincreased production deliveries on the B737, B777, B787, A320, and A350 XWB programs and higher net revenues recognized on the B787 programs in accordance with pricing terms under the B787 Agreement, partially offset by lower production deliveries on the B777, B747, and A380 programs and the absence of a one-time claim settlement with a customer.programs. Wing Systems segment operating margins were 13%14% for the twelve months ended December 31, 2017,2019 compared to 15% for the same period in the prior year primarily driven by the netmainly due to forward loss charges on B787 due to announced production rate changes, B737 performance, offset by the B787 program.favorable performance on A350 XWB. In 2017,2019, the segment recorded favorable cumulative catch-up adjustments of $23.4$0.5 million and net forward loss charges of $(63.9)($10.5) million. In comparison, during 2016,2018, the segment recorded
favorable cumulative catch-up adjustments of $23.4$1.7 million driven by claim settlements with customers and productivity and efficiency improvements, as well as$1.2 million of favorable changes in estimates on loss programs of $5.1 million.programs.
All Other. All Other segment net revenues consist of sundry sales of miscellaneous services, tooling contracts, and natural gas revenues from KIESC.the Kansas Industrial Energy Supply Company (“KIESC”), a tenancy in common with other Wichita companies established to purchase natural gas where the Company is a major participant. In the twelve months ended December 31, 2017,2019, All Other segment net revenues were $7.2$10.8 million, a decreasean increase of $0.9$5.1 million compared to the same period in the prior year. The All Other segment recorded 28%31% operating margins for the twelve months ended December 31, 2017.2019.
Liquidity and Capital Resources
The primaryWe assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our principal source of liquidity is cash flows from continuing operations. Other than cash flow from continuing operations, sources of our liquidity include cash on hand cash flow from operations, which includes receivables from customers, and borrowings made available by our 2018 Credit Agreement (as defined below):and senior notes.
Our cash flows from continuing operations generally have been adversely impacted by the B737 MAX grounding and the COVID-19 pandemic (and resulting production rate changes associated with both events) and we expect the adverse impact to continue until aviation demand recovers. Based on the actions we took in 2020, we anticipate that we will have sufficient liquidity for the next 12 months. However, if the pace and scope of the COVID-19 pandemic recovery are worse than we currently forecast, we may need to obtain additional financing in order to fund our operations and obligations.
While the Company acted quickly to reduce costs in light of lower revenue expectations, the liquidity challenges resulted in the Company needing to issue significant amounts of additional debt. As of December 31, 2019 the Company had a debt balance of approximately $2,827.8 million, most of which was unsecured debt, and a cash balance of $2,350.5 million. As of December 31, 2020, the Company had a debt balance of approximately $3,658.9 million, more than 50% was secured debt and a cash balance of $1,873.3 million. The Company's financial condition will continue to be impacted by COVID-19 for the next several years or until demand recovers. If the pandemic worsens or there is significant uncertainty on the industry’s recovery, we may find it difficult to obtain additional financing and/or fund our operations and meet our debt repayment obligations.
For purposes of assessing our liquidity needs in this section, we have assumed that our customers generally would not further reduce their production rates. For risks that may affect that assumption, see Item 1A “Risk Factors.”
2018 Credit Agreement
On July 12, 2018, the Company entered into a $1,260.0$1,256.0 million senior unsecured Second Amended and Restated Credit Agreement among Spirit, the Company,as borrower, Holdings, as parent guarantor, the lenders party thereto, Bank of America, N.A., as administrative agent, and the other agents named therein (the “2018 Credit Agreement”), consisting of an $800.0 million revolving credit facility (the “2018 Revolver”), a $206.0 million term loan A facility (the “2018 Term Loan”) and a $250.0 million delayed draw term loan facility (the “Delayed Draw Term Loan”“2018 DDTL”).
Each of Under the 2018 Credit Agreement, the 2018 Revolver, the 2018 Term Loan and the Delayed Draw Term Loan matures2018 DDTL were to mature on July 12, 2023, and bears interest, at Spirit’s option, at either LIBOR plus 1.375% or a defined “base rate” plus 0.375%, subject2023.
Spirit amended the 2018 Credit Agreement several times in 2020, including modifications that added security to adjustment to between LIBOR plus 1.125% and LIBOR plus 1.875% (or between base rate plus 0.125% and base rate plus 0.875%, as applicable) basedthe 2018 Credit Agreement. Spirit repaid the outstanding balance of the 2018 Revolver on changes to Spirit’s senior unsecured debt rating provided by Standard & Poor’s Financial Services LLC and/or Moody’s Investors Service, Inc. The principal obligationsApril 30, 2020. On September 30, 2020, Spirit repaid the remaining balances under the 2018 Term Loan are to be repaid in equal quarterly installments of $2.6 million, commencing with the fiscal quarter ending March 31, 2019, and with the balance due at maturity of the 2018 Term Loan. The principal obligations under the Delayed Draw Term Loan are to be repaid in equal quarterly installments of 1.25% of the outstanding principal amount of the Delayed Draw Term Loan as of March 31, 2019, subject to adjustments for any extension of the availability period of the Delayed Draw Term Loan, with the balance due at maturity of the Delayed Draw Term Loan.
The Delayed Draw Term Loan was available for Spirit to draw until January 12, 2019. On January 7, 2019, Spirit extended the availability period under the Delayed Draw until April 12, 2019. It may be extended for one additional three-month period, in each instance subject to Spirit’s payment of a fee to the relevant lenders based on the undrawn Delayed Draw Term Loan commitment.
The 2018 Credit Agreement also contains an accordion feature that provides Spirit with the option to increase the 2018 Revolver commitments and/or institute one or more additional term loans by an amount not to exceed $750.0 in the aggregate, subject to the satisfaction of certain conditions and the participation of the lenders. The 2018 Credit Agreement contains customary affirmative and negative covenants, including certain financial covenants that are tested on a quarterly basis. Spirit’s obligations under the 2018 Credit Agreement may be accelerated upon an event of default, which includes non-payment of principal or interest, material breach of a representation or warranty, material breach of a covenant, cross-default to material indebtedness, material judgments, ERISA events, change in control, bankruptcy and invalidity of the guarantee of Spirit’s obligations under the 2018 Credit Agreement made by the Company.
DDTL. As of December 31, 2018,2020, the outstanding balance of the 2018 Term Loan and 2018 DDTL was $206.3$0.0. On October 5, 2020 Spirit terminated the 2018 Credit Agreement.
Credit Agreement
On October 5, 2020, Spirit entered into a term loan credit agreement (the “Credit Agreement”) providing for a $400.0 million senior secured term loan B credit facility with the lenders party thereto and Bank of America, N.A., as administrative
agent and collateral agent. On October 5, 2020 Spirit borrowed the full $400.0 million of initial term loans available under the Credit Agreement. The Credit Agreement also permits Spirit to request one or more incremental term facilities in an aggregate principal amount not to exceed (x) in the case of any incremental facility that is secured on a pari passu basis with the Credit Agreement, the greater of (a) $950.0 million and (b) such other amount, so long as on a pro forma basis after giving effect to the incurrence of such indebtedness and the use of proceeds thereof, the first lien secured net leverage ratio does not exceed 3.25 to 1.00; and (y) in the case of any incremental facility that is secured on a junior basis to the Credit Agreement, the greater of (a) $500.0 million and (b) such other amount, so long as on a pro forma basis after giving effect to the incurrence of such indebtedness and the use of proceeds thereof, the secured net leverage ratio does not exceed 5.00 to 1.00. Borrowings under the Credit Agreement will be used for general corporate purposes.
The Credit Agreement will mature on January 15, 2025 and amortizes in equal quarterly installments at a rate of 1.00% per annum of the original principal amount thereof, with the remaining balance due at final maturity. Interest on borrowings under the Credit Agreement will initially accrue at the Eurodollar rate plus an applicable margin equal to 5.25%.
The obligations under the Credit Agreement are guaranteed by Holdings and Spirit AeroSystems North Carolina, Inc., a wholly-owned subsidiary of the Company (“Spirit NC”), (collectively, the “Guarantors”) and each existing and future, direct and indirect, wholly-owned material domestic subsidiary of Spirit, subject to certain customary exceptions. The obligations are secured by a first-priority lien with respect to substantially all assets of Spirit and the Guarantors, subject to certain exceptions.
The Credit Agreement contains usual and customary affirmative and negative covenants for facilities and transactions of this type and that, among other things, restrict the Company and its restricted subsidiaries’ ability to incur additional indebtedness, create liens, consolidate or merge, make acquisitions and other investments, guarantee obligations of third parties, make loans or advances, declare or pay certain dividends or distributions on the Company’s stock, redeem or repurchase shares of the Company’s stock, engage in transactions with affiliates and enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends or dispose of assets. These covenants are subject to a number of qualifications and limitations.
The Credit Agreement provides for customary events of default, including, but not limited to, failure to pay principal and interest, failure to comply with covenants, agreements or conditions, and certain events of bankruptcy or insolvency involving the Company and its material subsidiaries.
As of December 31, 2020, the outstanding balance of the Credit Agreement was $400.0 million and the carrying value was $204.7$389.6 million.
First Lien 2025 Notes
On October 5, 2020, Spirit entered into an Indenture (the “First Lien 2025 Notes Indenture”), by and among Spirit, the Guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent, in connection with Spirit’s offering of $500.0 million aggregate principal amount of its 5.500% Senior Secured First Lien Notes due 2025 (the “First Lien 2025 Notes"). As of December 31, 2020, the outstanding balance of the First Lien 2025 Notes was $500.0 million and the carrying value was $493.9 million.
The First Lien 2025 Notes were issued and sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and in offshore transactions to non-U.S. persons pursuant to Regulation S under the Securities Act.
The First Lien 2025 Notes mature on January 15, 2025 and bear interest at a rate of 5.500% per year payable semiannually in cash in arrears on January 15 and July 15 of each year. The first interest payment date was January 15, 2021.
The First Lien 2025 Notes are guaranteed by the Guarantors and secured by certain real property and personal property, including certain equity interests, owned by Spirit and the Guarantors. The First Lien 2025 Notes and guarantees are Spirit’s and the Guarantors’ senior secured obligations and rank equally in right of payment with all of their existing and future senior indebtedness, effectively equal with their existing and future indebtedness secured on a pari passu basis by the collateral for the First Lien 2025 Notes to the extent of the value of the collateral (including the Credit Agreement and the 2026 Notes.Notes), effectively senior to all of their existing and future indebtedness that is not secured by a lien, or is secured by a junior-priority lien, on the collateral for the First Lien 2025 Notes to the extent of the value of the collateral, effectively junior to any of their other existing and future indebtedness that is secured by assets that do not constitute collateral for the First Lien 2025 Notes to the extent of the value of such assets, and senior in right of payment to any of their existing and future subordinated indebtedness.
The First Lien 2025 Notes Indenture contains covenants that limit Spirit’s, the Company’s and the Company’s subsidiaries’ ability, subject to certain exceptions and qualifications, to incur indebtedness secured by liens, enter into sale and leaseback transactions, make restricted payments and investments and enter into certain mergers or consolidations and transfer
substantially all of the Company and its subsidiaries’ assets. These covenants are subject to a number of qualifications and limitations. In addition, the First Lien 2025 Indenture provides for customary events of default.
2026 Notes
In June 2016, the Company issued $300.0 million in aggregate principal amount of 3.850% Senior Notes due June 15, 2026 (the “2026 Notes”) with interest payable, in cash in arrears, on June 15 and December 15 of each year, beginning December 15, 2016. As of December 31, 2018,2020, the outstanding balance of the 2026 Notes was $300.0 million and the carrying value was $297.5$298.1 million. The Company and Spirit NC guarantee Spirit's obligations under the 2026 Notes on a senior secured basis.
On February 24, 2020, Spirit entered into a Second Supplemental Indenture (the “Second Supplemental Indenture”) by and among Spirit, the Company, Spirit NC, and The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as trustee in connection with the 2026 Notes. Under the Second Supplemental Indenture, the 2026 Noteholders were granted security on an equal and ratable basis with the lenders under the 2018 Credit Agreement until the security in favor of the lenders under the 2018 Credit Agreement was released on October 5, 2020. The Supplemental Indenture also added Spirit NC as an additional guarantor under the indenture governing the 2026 Notes.
On April 17, 2020, Spirit entered into a Third Supplemental Indenture (the “Third Supplemental Indenture”), by and among Spirit, the Company, Spirit NC and The Bank of New York Mellon Trust Company, N.A., as trustee in connection with the 2026 Notes. Under the Third Supplemental Indenture, the noteholders were granted security on an equal and ratable basis with the holders of the Second Lien 2025 Notes.
On October 5, 2020, Spirit entered into a Fourth Supplemental Indenture (the “Fourth Supplemental Indenture”), by and among Spirit, the Company, Spirit NC and The Bank of New York Mellon Trust Company, N.A., as trustee in connection with 2026 Notes. Under the Fourth Supplemental Indenture, the holders of the 2026 Notes were granted security on an equal and ratable basis with the holders of the First Lien 2025 Notes and the secured parties under the Credit Agreement.
Second Lien 2025 Notes
On April 17, 2020, Spirit entered into an Indenture (the “Second Lien 2025 Notes Indenture”), by and among Spirit, the Guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent, in connection with Spirit’s offering of $1,200.0 million aggregate principal amount of its 7.500% Senior Secured Second Lien Notes due 2025 (the “Second Lien 2025 Notes”).
The Second Lien 2025 Notes were issued and sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and in offshore transactions to non-U.S. persons pursuant to Regulation S under the Securities Act.
The Second Lien 2025 Notes mature on April 15, 2025 and bear interest at a rate of 7.500% per year payable semiannually in cash in arrears on April 15 and October 15 of each year. The first interest payment date was October 15, 2020. As of December 31, 2020, the outstanding balance of the Second Lien 2025 Notes was $1,200.0 million and the carrying value was $1,184.2 million.
The Second Lien 2025 Notes are guaranteed by the Guarantors and secured by certain real property and personal property, including certain equity interests, owned by Spirit and the Guarantors. The Second Lien 2025 Notes and guarantees are Spirit’s and the Guarantors’ senior secured obligations and will rank equally in right of payment with all of their existing and future senior indebtedness, effectively junior to all of their existing and future first-priority lien indebtedness to the extent of the value of the collateral securing such indebtedness (including indebtedness under the Credit Agreement, the Second Lien 2025 Notes and the 2026 Notes), effectively junior to any of their other existing and future indebtedness that is secured by assets that do not constitute collateral for the 2026Second Lien 2025 Notes to the extent of the value of such assets, and senior in right of payment to any of their existing and future subordinated indebtedness.
The Second Lien 2025 Notes Indenture contains covenants that limit Spirit’s, the Company’s and certain of the Company’s subsidiaries’ ability, subject to certain exceptions and qualifications, to create liens, without granting equal and ratable liens to the holders of the 2026 Notes and enter into sale and leaseback transactions.transactions and guarantee other indebtedness without guaranteeing the Notes. These covenants are subject to a number of qualifications and limitations. In addition, the indentureSecond Lien 2025 Notes Indenture provides for customary events of default.
2022Floating Rate, 2023, and 2028 Notes. On May 22, 2018, the Company commenced an offer to purchase for cash (the “Tender Offer”) any and all of the $300.0 million outstanding principal amount of our 5 1/4% Senior Notes due 2022 (the “2022 Notes”). The Tender Offer was made pursuant to an Offer to Purchase dated May 22, 2018, and a related Letter of Transmittal and Notice of Guaranteed Delivery, which set forth the terms and conditions of the Tender Offer in full detail. Under the terms of the Tender Offer, holders of 2022 Notes who validly tendered their notes at or prior to May 29, 2018 received, in whole dollars, $1,028.50 per $1,000 principal
amount of Notes tendered. Tendering holders also received accrued and unpaid interest from the last applicable interest payment date to, but not including, the settlement date of the Tender Offer.
On May 30, 2018, Spirit repurchased $202.6 million aggregate principal amount of its 2022 Notes pursuant to the Tender Offer. In addition, on June 29, 2018, Spirit redeemed the remaining $97.4 million aggregate principal amount of the 2022 Notes outstanding. The redemption price of the 2022 Notes was 102.85% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the redemption date of June 29, 2018. Following the redemption on June 29, 2018, none of the 2022 Notes remain outstanding.
New Notes. On May 30, 2018, Spirit entered into an Indenture (the “Indenture”“2018 Indenture”) by and among Spirit, the Company and The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as trustee in connection with Spirit’s offering of $300.0 million aggregate principal amount of its Senior Floating Rate Notes due 2021 (the “Floating Rate Notes”), $300.0 million aggregate principal amount of its 3.950% Senior Notes due 2023 (the “2023 Notes”) and $700.0 million aggregate principal amount of its 4.600% Senior Notes due
2028 (the “2028 Notes” and, together with the Floating Rate Notes and the 2023 Notes, the “New“2018 Notes”). The CompanyHoldings guaranteed Spirit’s obligations under the 2018 Notes on a senior unsecured basis (the “Guarantees”).basis.
The Floating Rate Notes bear interest at a rate per annum equal to three-month LIBOR, as determined in the case of the initial interest period, on May 25, 2018, and thereafter at the beginning of each quarterly period as described herein, plus 80 basis points and mature on June 15, 2021. Interest on the Floating Rate Notes is payable on March 15, June 15, September 15 and December 15 of each year, beginning on September 15, 2018. The 2023 Notes bear interest at a rate of 3.950% per annum and mature on June 15, 2023. The 2028 Notes bear interest at a rate of 4.600% per annum and mature on June 15, 2028. Interest on the 2023 Notes and 2028 Notes is payable on June 15 and December 15 of each year, beginning on December 15, 2018. The outstanding balance of the Floating Rate Notes, 2023 Notes, and 2028 Notes was $300.0 million, $300.0 million, and $700.0 million as of December 31, 2018,2020, respectively. The carrying value of the Floating Rate Notes, 2023 Notes, and 2028 Notes was $298.5299.7 million, $297.9$298.8 million, and $693.5$694.6 million as of December 31, 2018,2020, respectively.
The Notes and the Guarantees have been registered under the Securities Act of 1933, as amended (the “Act”), pursuant to a Registration Statement on Form S-3 (No. 333-211423) previously filed with the SEC under the Act.
The2018 Indenture contains covenants that limit Spirit’s, the Company’s and certain of the Company’s subsidiaries’ ability, subject to certain exceptions and qualifications, to create liens without granting equal and ratable liens to the holders of the New2018 Notes and enter into sale and leaseback transactions. These covenants are subject to a number of qualifications and limitations. In addition, the 2018 Indenture provides for customary events of default.
ProceedsOn February 12, 2021, Spirit sent a notice of redemption to holders to redeem the outstanding $300 million principal amount of the NewFloating Rate Notes were used to repurchase the 2022 Notes, partially repay $250 million on our then-existing term loan facility, fund the ASRs, and pay for financing and acquisition related costs.February 24, 2021.
For additional information on our outstanding debt, please see Note 1516 to the Consolidated Financial Statements, Debt.
OtherReceivables Financing
Additionally, we may receive proceeds from asset sales and may seek to access the credit markets, if needed. In October 2017, theThe Company entered into an agreement (the “Receivable Sales Agreement”)has two agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing and Airbus to a third party financial institution.institutions. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with the Company and continue to allow Spirit to monetize receivables prior to the payment date subject to payment of a discount. No guarantees are delivered under the agreements. Our ability to continue using such agreements is primarily dependent upon the strength of Boeing’s and Airbus’s financial condition. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognized from the Company's balance sheet. For additional information on the sale of receivables, please see Note 6 to the Consolidated Financial Statements, Accounts Receivable, net.
Our liquidity requirements are driven by our long-cycle business model. Our business model is comprised of four to six year non-recurring investment periods, which include design and development efforts, followed by recurring production, in most cases, through the life of the contract, which could extend beyond twenty years. The non-recurring investment periods require significant outflows of cash as we design the product, build tooling, purchase equipment, and build initial production inventories. These activities could be funded partially through customer advances and milestone payments, which are offset against revenue as production units are delivered in the case of customer advances, or recognized as revenue as milestones are achieved in the case of milestone payments. The remaining funds needed to support non-recurring programs come from predictable cash inflows from our mature programs that are in the recurring phase of the production cycle. The non-recurring investment period typically ends concurrently with initial deliveries of completed aircraft by our customers, which indicates that a program has entered into the recurring production phase. When a program reaches steady recurring production, it typically results in long-term generation of cash from operations. As part of our business model, we have continuously added new non-recurring programs, which are supported by mature programs that are in the steady recurring phase of the production cycle to promote growth.
Credit Ratings
As of December 31, 2018, we had $773.6 million2020, our corporate credit ratings were B by Standard & Poor’s Global Ratings (“S&P”), and B2 by Moody’s Investors Service, Inc. (“Moody’s”). Throughout 2020, S&P and Moody’s downgraded our credit rating on a number of cashoccasions. On January 13, 2020, Moody’s downgraded Spirit’s credit rating from Baa3 to Ba2. On January 31, 2020, S&P downgraded Spirit’s credit rating from BBB- to BB. On April 14, 2020, Moody’s further downgraded Spirit’s credit rating from Ba2 to Ba3, and cash equivalents on April 14, 2020, S&P downgraded Spirit’s credit rating from BB to BB-. On June 25, 2020, S&P downgraded Spirit’s credit rating to B+. On July 21, 2020, Moody’s downgraded Spirit’s credit rating to B2 with a negative outlook. On August 3, 2020, S&P downgraded Spirit’s credit rating to B with a stable outlook. On September 22, 2020, S&P affirmed its rating. On September 24, 2020, Moody’s affirmed its rating.
The ratings reflect the balance sheet. Basedagencies’ assessment of our ability to pay interest and principal on our planned levelsdebt securities and credit agreements. A rating is not a recommendation to purchase, sell or hold securities. Each rating is subject to revision or withdrawal at any time by the assigning rating organization. Each rating agency has its own methodology for assigning ratings and, accordingly, each rating should be considered independently of operationsall other ratings.
As compared to the Company’s prior investment grade rating, the Company’s current rating and our strong liquidity position, we currently expect thatcredit condition affects, among other things, our cash on hand, cash flow from operations,ability to access new capital. Further negative changes to these ratings may result in more stringent covenants and borrowings availablehigher interest rates under our 2018 Credit Agreement will be sufficient to fund our operations, dividend payments, sharethe terms of any new debt.
repurchases, inventory growth, planned capital investments, research and development expenditures, and scheduled debt service payments for at least the next twelve months.
Cash Flows
The following table provides a summary of our cash flows for the twelve months ended December 31, 2018, 2017,2020 2019, and 2016:2018:
| | | | | | | | | | | | | | | | | |
| | For the Twelve Months Ended |
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| | ($ in millions) |
| Net (loss) income | $ | (870.3) | | | $ | 530.1 | | | $ | 617.0 | |
| Adjustments to reconcile net income | 735.6 | | | 401.0 | | | 2.6 | |
| Changes in working capital | (610.2) | | | (8.4) | | | 150.3 | |
| Net cash (used in) provided by operating activities | (744.9) | | | 922.7 | | | 769.9 | |
| Net cash used in investing activities | (502.0) | | | (239.9) | | | (267.8) | |
| Net cash provided by (used in) financing activities | 769.5 | | | 884.4 | | | (153.5) | |
| Effect of exchange rate change on cash and cash equivalents | 3.3 | | | 5.9 | | | — | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash for the period | (474.1) | | | 1,573.1 | | | 348.6 | |
| Cash, cash equivalents, and restricted cash, beginning of period | 2,367.2 | | | 794.1 | | | 445.5 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 1,893.1 | | | $ | 2,367.2 | | | $ | 794.1 | |
|
| | | | | | | | | | | |
| | For the Twelve Months Ended |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | ($ in millions) |
| Net income | $ | 617.0 |
| | $ | 354.9 |
| | $ | 469.7 |
|
| Adjustments to reconcile net income | 2.6 |
| | 241.3 |
| | 283.7 |
|
| Changes in working capital | 150.3 |
| | (22.5 | ) | | (36.5 | ) |
| Net cash provided by operating activities | 769.9 |
| | 573.7 |
| | 716.9 |
|
| Net cash used in investing activities | (267.8 | ) | | (272.8 | ) | | (253.4 | ) |
| Net cash used in financing activities | (153.5 | ) | | (578.7 | ) | | (718.7 | ) |
| Effect of exchange rate change on cash and cash equivalents | — |
| | 5.6 |
| | (4.4 | ) |
| Net increase (decrease) in cash, cash equivalents, and restricted cash for the period | 348.6 |
| | (272.2 | ) | | (259.6 | ) |
| Cash, cash equivalents, and restricted cash, beginning of period | 445.5 |
| | 717.7 |
| | 977.3 |
|
| Cash, cash equivalents, and restricted cash, end of period | $ | 794.1 |
| | $ | 445.5 |
| | $ | 717.7 |
|
Twelve Months Ended December 31, 20182020 as Compared to Twelve Months Ended December 31, 20172019
Operating Activities.
For the twelve months ended December 31, 2018,2020, we had a net cash outflow of $744.9 million from operating activities, a decrease of $1,667.6 million, compared to a net cash inflow of $922.7 million for the prior year.The increase in net cash used in operating activities was primarily due to the B737 MAX grounding and COVID-19 pandemic that significantly impacted our deliveries across all programs and negative impacts of working capital requirements. Net tax receipts for 2020 were $62.5 million compared to net tax payments of $105.0 million during the prior year, primarily due to recognition of underlying taxable temporary differences.
Investing Activities
For the twelve months ended December 31, 2020, we had a net cash outflow of $502.0 million from investing activities, compared to a net cash outflow of $239.9 million for the prior year primarily driven by the FMI acquisition and the Bombardier Acquisition offset by reduced capital spend.
Financing Activities
For the twelve months ended December 31, 2020, we had a net cash inflow of $769.9 million for financing activities, a decrease in inflow of $114.5 million as compared to a net cash inflow of $884.4 million for the same period in the prior year. During 2020, the Company issued $400.0 under the Credit Agreement, $1,200.0 in Second Lien 2025 Notes, and $500.0 million in First Lien 2025 Notes, offset by the $800.0 million payment on the 2018 Revolver and $400.0 million payment of the 2018 Term Loan A and payment of debt issuance costs. During 2019, the Company drew $250.0 million on the 2018 DDTL and net draws of $800.0 million on the 2018 Revolver in December 2019. During 2020, the Company paid cash dividends totaling $15.4 million to its stockholders of record, compared to $50.4 million in 2019.
Twelve Months Ended December 31, 2019 as Compared to Twelve Months Ended December 31, 2018
Operating Activities
For the twelve months ended December 31, 2019, we had a net cash inflow of $922.7 million from operating activities, an increase of $196.2$152.8 million, compared to a net cash inflow of $573.7$769.9 million for the prior year.The increase in net cash provided by operating activities was primarily due to the absenceB737 advanced payment of a repayment of $236.0$123.0 million in accordance withreceived during the B787 Amendment #25 in 2017,third quarter, partially offset by higher net tax paymentsrepayment of B787 advances of $98.0 million in 2018. Net tax payments made during 20182019 were $202.3$105.0 million compared to net tax payments of $101.9$202.3 million during the prior year, primarily due to recognition of underlying taxable temporary differences and the absence of a material forward loss.differences.
Investing Activities.Activities
For the twelve months ended December 31, 2018,2019, we had a net cash outflow of $267.8$239.9 million from investing activities, compared to a net cash outflow of $272.8$267.8 million for the prior year.year due to reduced spend on capital projects.
Financing Activities.Activities
For the twelve months ended December 31, 2018,2019, we had a net cash outflowinflow of $153.5$884.4 million for financing activities, a decreasean increase in outflowinflow of $425.2$1,037.9 million as compared to a net cash outflow of $578.7$153.5 million for the same period in the prior year. The decrease in net cash outflow is primarily due to the issuance of the New Notes during the second quarter of 2018, which resulted in $1,300.0 million proceeds from the issuance of debt, partially offset by $586.2 million repayments on debt and debt issuance and financing costs. During 2018,2019, the Company repurchased 9.3has drawn $250.0 million shareson the 2018 DDTL and net draws of its Common Stock for $800.0 million compared toon the repurchase of 7.5 million shares of Common Stock for $496.3 millionRevolver in 2017.December 2019. During 2018,2019, the Company paid cash dividends totaling $48.0$50.4 million to its stockholders of record, compared to $47.1$48.0 million in 2017.
Twelve Months Ended December 31, 2017 as Compared to Twelve Months Ended December 31, 2016
Operating Activities. For the twelve months ended December 31, 2017, we had a net cash inflow of $573.7 million from operating activities, a decrease of $143.2 million, compared to a net cash inflow of $716.9 million for the prior year. The decrease in net cash provided by operating activities was primarily due to the repayment under B787 Amendment #25 of $236.0 million less certain adjustments to Boeing as a retroactive adjustment for payments that were based on interim pricing, partially offset by lower net tax payments in 2017. Net tax payments made during 2017 were $101.9 million, resulting in an increase in net cash of $89.5 million, compared to net tax payments of $191.4 million during the prior year.
Investing Activities. For the twelve months ended December 31, 2017, we had a net cash outflow of $272.8 million from investing activities, an increase in outflow of $19.4 million, compared to a net cash outflow of $253.4 million for the prior year. The increase in cash outflow was driven by higher investment in capital during 2017 to support increasing production rates.
Financing Activities. For the twelve months ended December 31, 2017, we had a net cash outflow of $578.7 million for financing activities, a decrease in outflow of $140.0 million as compared to a net cash outflow of $718.7 million for the same
period in the prior year. During 2017, the Company repurchased 7.5 million shares of its Common Stock for $496.3 million, compared to the repurchase of 14.2 million shares of Common Stock for $649.6 million in 2016. During 2017, the Company paid cash dividends totaling $47.1 million to its stockholders of record. Additionally, during 2016, we entered into a prior credit agreement and issued the 2026 Notes using the proceeds along with cash on hand to repurchase $300.0 million of our senior notes due in 2020 pursuant to a tender offer and redemption.2018.
Future Cash Needs and Capital Spending
Impacts from the COVID-19 pandemic and the B737 MAX grounding have significantly impacted our liquidity requirements and operations. Our primary future cash needs will consist of working capital, research and development, capital expenditures, debt service, dividend payments, integration activity, and potential merger and acquisition.acquisition activity. We expend significant capital as we undertake new programs, which begin in the non-recurring investment phase of our business model. In addition, we expend significant capital to meet increased production rates, on certain maturewhich we expect will happen as air travel demand normalizes to 2019 levels (which may take several years); however, we cannot give any assurances that normalization will happen soon enough for us to fund our operations and maturing programs, including the B737, B787, A320, and A350 XWB programs. In response to announced customer production rate increases, we are evaluating various plans to relieve capacity constraints.meet our debt repayment obligations. We also require capital to develop new technologies for the next generation of aircraft, which may not be funded by our customers. Capital expendituresHistorically, share repurchases and dividend payments have also been factors affecting our liquidity. As described below, our share repurchase program is paused and we have reduced our quarterly dividend to one penny per share.
While we cannot give any assurances that air travel demand will recover soon enough for us to fund our operations and meet our debt repayment obligations, we believe our cash on hand and cash flows from continuing operations coupled with our ability to vary our cost structure quickly, will provide sufficient liquidity to address the challenges and opportunities of the current market and our global cash needs for the twelve monthsforeseeable future, however we could experience significant fluctuations in our cash flows from period to period during the COVID-19 pandemic. As of December 31, 2020, we were in compliance with all applicable covenants under our Credit Agreement.
The COVID-19 pandemic has created significant uncertainty in our industry. Air travel demand has deteriorated due to the pandemic and responsive government preventative measures. Our customers have reduced their production rates, which negatively impacts results of operations and cash flows. We are unable to predict the duration, impact or outcome of the pandemic and the resulting impact on the aviation industry and, accordingly, cannot predict the outcome on our operations. We have taken a number of actions to assist with managing the impacts of the COVID-19 pandemic, including those described earlier in this section.
Apart from the COVID-19 pandemic, the B737 MAX grounding and its residual demand impacts created and continues to create significant liquidity challenges for the Company. Spirit delivered 71 B737 MAX shipsets in year ended December 31, 2018 totaled $271.2 million, as2020 compared to $273.1 million606 B737 MAX shipsets in the year ended December 31, 2019. While we expect the production rate to increase in 2021 and future years, that expectation is subject to a number of risks that are described further in Item 1A “Risk Factors” of this Annual Report.
If production levels are further reduced by our customers for any reason (including the COVID-19 pandemic or demand challenges for the same periodB737 MAX program, or otherwise) beyond current expectations or if we have difficulties in 2017.managing our cost structure to take into account changes in production schedules,our liquidity position may worsen if we are unable to procure additional financing, and our business, financial condition, results of operations and cash flows could be materially adversely impacted.
There is $925 million remaining in the Company’s Board-approved share repurchase program. Share repurchases are currently on hold due to the impacts of the B737 MAX grounding and the COVID-19 pandemic.
On November 1, 2016,February 6, 2020, the Company announced that its Board of Directors reduced its quarterly dividend to a penny per share to preserve liquidity. The Board regularly evaluates the Company's capital allocation strategy and dividend policy. Any future determination to continue to pay dividends will be at the discretion of our Board of Directors authorizedand will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions, including the requirements of financing agreements to which we may be a new share repurchase programparty. No assurance can be given that cash dividends will continue to be declared and paid at historical levels or at all.
The Company has two agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing and Airbus to third party financial institutions. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with the Company and continue to allow the Company to monetize prior to the payment date for the purchasereceivables, subject to payment of upa discount. No guarantees are delivered under the agreements. Our ability to $600.0 millioncontinue using such agreements is primarily dependent upon the strength of Boeing’s and Airbus’s financial condition. If any of these financial institutions involved with these arrangements experiences financial difficulties, becomes unwilling to support Boeing or Airbus due to a deterioration in their financial condition or otherwise, or is otherwise unable to honor the terms of the factoring arrangements, we may experience significant disruption and potential liquidity issues due to the failure of such arrangements, which could have an adverse impact upon our Common Stock. On July 25, 2017, the Company increased the existing share repurchase program by up to an additional $400.0 millionoperating results, financial condition and cash flows. Transfers under this agreement are accounted for as sales of our Common Stock,receivables resulting in a total program authorization of $1.0 billion. On January 24, 2018, the Board of Directors approved an increase toreceivables being de-recognized from the program of approximately $500 million. After repurchases made under the ASRs, the Company had approximately $200 million remaining in its share repurchase program. On October 24, 2018, the Board of Directors approved an increase to its existing share repurchase authorization of approximately $800 million, resulting in a total authorization of $1.0 billion. As a result, the total amount remaining in the authorization is approximately $1.0 billion.
The Company continues to pay quarterly cash dividends in the amount of $0.12 per share. The most recent dividend was declared by the Board on January 23, 2019, to be paid on April 8, 2019, to stockholders of record as of March 18, 2019.
Asco. We expect to fund the Asco acquisition through cash on hand and borrowings available under our 2018 Credit Agreement.Company's balance sheet. For additional information on our pending purchasethe sale of Asco,receivables, please see Note 276 to the Consolidated Financial Statements, Asco Acquisition.
Furthermore, in connection with the Asco acquisition and to reduce the Company's exposure to currency exchange rate fluctuations due to a significant portion of purchase price being payable in Euros, the Company entered into foreign currency forward contracts. To reduce the Company's exposure to currency exchange rate fluctuations, the Company entered into foreign currency forward contracts. The objective of these contracts is to minimize the impact of currency exchange rate movements on the Company's cash flows, however the Company has not designated these forward contracts as a hedge and has not applied hedge accounting to them. During the second quarter of 2018, to reduce the Euro exchange rate exposure of the purchase of Asco, the Company entered into a foreign currency forward contract in the amount of $580.0; this foreign currency forward contract wasAccounts Receivable, net settled in the third quarter of 2018 and a new contract was entered during the fourth quarter in the amount of $568.3; this contract was net settled and a third contract was entered into with a settlement date in the first quarter of 2019 in the amount of $547.7. The fair value of the foreign currency forward contract, using Level 2 inputs, was an asset of $5.8 as of December 31, 2018. The Company recorded a net loss related to foreign currency forward contract activity of $35.3 for the twelve months ended December 31, 2018 to Other (expense) income, net in the Consolidated Statement of Operations..
Contractual Obligations:
Obligations
The following table summarizes our contractual cash obligations as of December 31, 2018:2020:
| | Contractual Obligations(1)(2) | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 and After | | Total | Contractual Obligations(1)(2) | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 and
After | | Total |
| | ($ in millions) | |
| Principal payments on term loan | $ | 22.8 |
| | $ | 22.8 |
| | $ | 22.8 |
| | $ | 22.8 |
| | $ | 365.0 |
| | $ | — |
| | $ | — |
| | $ | 456.2 |
| |
Interest on debt(3) | 21.3 |
| | 23.3 |
| | 22.1 |
| | 20.7 |
| | 12.1 |
| | 4.0 |
| | 33.5 |
| | 137.0 |
| |
| ($ in millions) | | ($ in millions) | |
| Principal payments under the Credit Agreement | | Principal payments under the Credit Agreement | $ | 4.0 | | | $ | 4.0 | | | $ | 4.0 | | | $ | 4.0 | | | $ | 384.0 | | | $ | — | | | $ | 400.0 | |
| Interest on debt | | Interest on debt | 24.2 | | | 24.0 | | | 23.7 | | | 23.7 | | | 1.0 | | | — | | | $ | 96.6 | |
| Long-term bonds | — |
| | — |
| | 300.0 |
| | — |
| | 300.0 |
| | — |
| | 1,000.0 |
| | 1,600.0 |
| Long-term bonds | 300.0 | | | — | | | 300.0 | | | — | | | 1,700.0 | | | 1,000.0 | | | $ | 3,300.0 | |
| Interest on long-term bonds | 66.3 |
| | 66.3 |
| | 61.0 |
| | 55.6 |
| | 49.7 |
| | 43.8 |
| | 173.8 |
| | 516.5 |
| Interest on long-term bonds | 174.6 | | | 173.1 | | | 167.2 | | | 161.3 | | | 102.5 | | | 86.3 | | | $ | 865.0 | |
| Non-cancelable capital lease payments | 8.1 |
| | 8.5 |
| | 8.8 |
| | 9.0 |
| | 8.4 |
| | 4.8 |
| | 51.7 |
| | 99.3 |
| |
| Non-cancelable financing lease payments | | Non-cancelable financing lease payments | 41.1 | | | 37.2 | | | 32.2 | | | 25.4 | | | 15.5 | | | 25.1 | | | $ | 176.5 | |
| Non-cancelable operating lease payments | 8.9 |
| | 8.0 |
| | 7.4 |
| | 7.0 |
| | 5.9 |
| | 5.4 |
| | 31.3 |
| | 73.9 |
| Non-cancelable operating lease payments | 8.9 | | | 8.6 | | | 7.7 | | | 7.2 | | | 6.6 | | | 167.8 | | | $ | 206.8 | |
| Other | 2.2 |
| | 2.1 |
| | 2.1 |
| | 1.6 |
| | 0.8 |
| | — |
| | 3.7 |
| | 12.5 |
| |
Other(3) | | Other(3) | 6.9 | | | 6.3 | | | 6.5 | | | 6.5 | | | 6.1 | | | 79.1 | | | $ | 111.4 | |
Purchase obligations(4) | 107.2 |
| | 6.8 |
| | 0.8 |
| | 0.1 |
| | — |
| | — |
| | — |
| | 114.9 |
| Purchase obligations(4) | 102.6 | | | 1.2 | | | — | | | — | | | — | | | — | | | $ | 103.8 | |
| Total | $ | 236.8 |
| | $ | 137.8 |
| | $ | 425.0 |
| | $ | 116.8 |
| | $ | 741.9 |
| | $ | 58.0 |
| | $ | 1,294.0 |
| | $ | 3,010.3 |
| Total | $ | 662.3 | | | $ | 254.4 | | | $ | 541.3 | | | $ | 228.1 | | | $ | 2,215.7 | | | $ | 1,358.3 | | | $ | 5,260.1 | |
| |
(1) | Does not include repayment of $233.9 million of B787 advances or deferred revenue credits to Boeing. See Note 12 to the Consolidated Financial Statements, Advance Payments.(1)Does not include repayment of $212.1 million of B787 advances or deferred revenue credits to Boeing. See Note 13 to the Consolidated Financial Statements, Advance Payments. (2)The $16.5 million of unrecognized tax benefit liability for uncertain tax positions has been excluded from this table due to uncertainty involving the ultimate settlement period. See Note 20 to the Consolidated Financial Statements, Income Taxes. (3)Includes build to suit asset obligation total of $107.3 million as of December 31, 2020. (4)Purchase obligations represent computing, tooling, and property, plant and equipment commitments as of December 31, 2020. |
| |
(2) | The $7.2 million of unrecognized tax benefit liability for uncertain tax positions has been excluded from this table due to uncertainty involving the ultimate settlement period. See Note 19 to the Consolidated Financial Statements, Income Taxes.
|
| |
(3) | Interest on our Term Loan was calculated for all years using the three-month LIBOR yield curve as of December 31, 2018 plus applicable margin. |
| |
(4) | Purchase obligations represent computing, tooling, and property, plant and equipment commitments as of December 31, 2018. |
Off-Balance Sheet Arrangements
Other than operating leases disclosed in the notes to our financial statements included in this Annual Report, weWe have not entered into any off-balance sheet arrangements as of December 31, 2018.2020.
Foreign Operations
We engage in business in various non-U.S. markets. As of December 31, 2018,2020, we have facilities in the U.K., France, Malaysia and Malaysia, a worldwide supplier base, and a repair center forMorocco. We are also members of two joint ventures in the European and Middle-Eastern regions. We purchase certain components, assemblies, and materials that we use in our products from foreign suppliers and a portionPeople’s Republic of our products will be sold directly to foreign customers, including Airbus, or resold to foreign end-users (e.g., foreign airlines and militaries). In addition, we operate an assembly facility in Saint-Nazaire, France to receive and assemble center fuselage frame sections for the A350 XWB commercial aircraft from the facility in Kinston, North Carolina before they are shipped to Airbus.China.
Currency fluctuations, tariffs and similar import limitations, price controls, tax reform, and labor regulations can affect our foreign operations. Other potential limitations on our foreign operations include expropriation, nationalization, restrictions on foreign investments or their transfers, and additional political and economic risks. In addition, the transfer of funds from foreign operations could be impaired by any restrictive regulations that foreign governments could enact.
Sales to foreign customers are subject to numerous additional risks, including the impact of foreign government regulations, political uncertainties, and differences in business practices. There can be no assurance that foreign governments will not adopt regulations or take other actions that would have a direct or indirect adverse impact on our business or market opportunities with such governments’ countries. Furthermore, the political, cultural, and economic climate outside the U.S. may be unfavorable to our operations and growth strategy.
For the twelve months ended December 31, 2020, our net revenues from direct sales to non-U.S. customers were approximately $767.2 million, or 23% of total net revenues for the same period. For the twelve months ended December 31, 2019, our net revenues from direct sales to non-U.S. customers were approximately $1,296.8 million, or 16% of total net revenues for the same period. For the twelve months ended December 31, 2018, our net revenues from direct sales to non-U.S. customers were approximately $1,254.9 million, or 17% of total net revenues for the same period. For the twelve months ended December 31, 2017, our net revenues from direct sales
Our foreign operations subject us to non-U.S. customers were approximately $1,260.1 million, or 18%risks that are described further in Item 1A “Risk Factors” of total net revenues for the same
period. For the twelve months ended December 31, 2016, our net revenues from direct sales to non-U.S. customers were approximately $1,142.8 million, or 17% of total net revenues for the same period.this Annual Report.
Inflation
A majority of our sales are conducted pursuant to long-term contracts that set fixed unit prices. Certain, but not all, of these contracts provide for price adjustments for inflation or abnormal escalation. Although we have attempted to minimize the effect of inflation on our business through contractual protections, the presence of longer pricing periods within our contracts increases the likelihood that there will be sustained or higher than anticipated increases in costs of labor or materials. Furthermore, if one of the raw materials on which we are dependent (e.g. aluminum, titanium, steel, or raw composite material) were to experience an isolated price increase without inflationary impacts on the broader economy, we may not be entitled to inflation protection under certain of our contracts. If our contractual protections do not adequately protect us in the context of substantial cost increases, it could have a material adverse effect on our results of operations.
Spirit’sThe Company's contracts with suppliers currently provide for fixed pricing in U.S. dollars, while contracts with respect to our U.K. operations are denominated in U.S. dollars, British pounds sterling or Euros. In some cases, our supplier arrangements contain inflationary adjustment provisions based on accepted industry indices, and we typically include an inflation component in estimating our supply costs. In addition, Spiritthe Company has long-term supply agreements for raw materials with most of its suppliers and for certain raw materials, Spiritthe Company is party to collective raw material sourcing contracts arranged through Boeing and Airbus (see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Commodity Price and Availability Risks” below). With these strategies, Spiritthe Company expects pricing for raw materials to be stable in the near term. We will continue to focus our strategic cost reduction plans on mitigating the effects of potential cost increases on our operations.
See further discussion of risks in Item 1A “Risk Factors” of this Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a result of our operating and financing activities, we are exposed to various market risks that may affect our consolidated results of operations and financial position. These market risks include credit risks, commodity price, and availability risks, interest rate risks, and foreign exchange risks.
Credit Risks
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash investments, the funds in which our pension assets are invested, and trade accounts receivable.receivable, and unbilled receivables included in contract assets.
Accounts receivable includeincludes amounts billed and currently due from customers. Contract assets include amounts due from customers for performance obligations that have been satisfied but for which amounts have not been billed. These amounts include particular estimated contract changes, claims in negotiation that are probable of recovery, and amounts retained by the customer pending dispute resolution. For the twelve months ended December 31, 2018,2020, approximately 79%60% of our net revenues were from sales to Boeing. We continuously monitor collections and payments from customers and maintain a provision for estimated credit losses as deemed appropriate based upon historical experience and any specific customer collection issues that have been identified. For the twelve months ended December 31, 2020, we recorded estimated credit losses of $4.7 million. See Note 6, to our Consolidated Financial Statements, Accounts Receivable, net, for more information on the provision for estimated credit losses. While we cannot guarantee that we will continue to experience the same credit loss rates in the future, such credit losses have historically not been material. For this reason, we believe that our exposure to this credit risk is not material.
We maintain cash and cash equivalents with various financial institutions and perform periodic evaluations of the relative credit standing of those financial institutions and, from time to time, we invest excess cash in liquid short-term money market funds.institutions. We have not experienced any losses in such accounts and believe that we are not exposed to any significant credit risk on cash and cash equivalents. Additionally, we monitor our defined benefit pension plan asset investments on a quarterly basis and we believe that we are not exposed to any significant credit risk in these investments. Therefore, exposure to credit risk for these items is not believed to be material.
Commodity Price and Availability Risks
In our business we use various raw materials, including aluminum, titanium, steel, and composites, all of which can experience price fluctuations depending on market conditions. Substantial price increases could reduce our profitability. Although our supply agreements with our customers allow us to pass on certain abnormal increases in component and raw material costs in limited situations, we may not be fully compensated for such increased costs. To mitigate these risks, we use our strategic sourcing initiatives, and are parties to collective raw material sourcing contracts arranged through certain customers that allow us to obtain raw materials at pre-negotiated rates and help insulate us from market volatility across the industry for certain specialized metallic and composite raw materials used in the aerospace industry. In addition, we also have long-term supply agreements with a number of our major parts suppliers. We generally do not employ forward contracts or other financial instruments to hedge commodity price risk, although we continue to review a full range of business options focused on strategic risk management for all raw material commodities. We do not expect our exposure to commodity price and availability risks to be material.
If one or more of our suppliers or subcontractors experiences delivery delays or other performance problems, we may be unable to meet commitments to our customers or incur additional costs. Any failure by our suppliers to provide acceptable raw materials, components, kits, or subassemblies could adversely affect our production schedules and contract profitability. We do not anticipate material risk in this area, as we assess qualification of suppliers and continually monitor them to control risk associated with such supply base reliance.
To a lesser extent, we also are exposed to fluctuations in the prices of certain utilities and services, such as electricity, natural gas, chemicals and freight. We do not believe there is a material exposure, as we utilize a range of long-term agreements to minimize procurement expense and supply risk in these areas.
Interest Rate Risks
As of December 31, 2018,2020, under our 2018 Credit Agreement, we had $204.7$400 million of variable rate term loan debt outstanding as compared to $460.7 millionconsisting of variable rate debt outstandingthe term loan bearing interest that varies with the Eurodollar rate. Additionally, as of December 31, 2017 under the Company's prior credit agreement. Borrowings under our 2018 Credit Agreement bear interest that varies with LIBOR. As of December 31, 2018,2020, we had $298.5$300 million outstanding of Floating Rate Notes bearing interest at a rate per annum equal tothat varies with the three-month LIBOR, as determined in the case of the initial interest period, on May 25, 2018, and thereafter at the beginning of each quarterly period as described herein, plus 80 basis points andLIBOR. The Floating Rate Notes mature on June 15, 2021. Interest on2021- (on February 12, 2021, Spirit sent a notice of redemption to holders to redeem the outstanding $300 million principal amount of the Floating Rate Notes is payable on March 15, June 15, September 15 and December 15 of each year, beginning on September 15, 2018.February 24, 2021). Interest rate changes will generally do not affect the market value of such debt, but do impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant.
As of December 31, 2020, the Company had one interest rate swap agreement with a notional value of $150 million. This derivative has been designated as a cash flow hedge by the Company. The fair value of the hedge was a liability of $1.2 million as of December 31, 2020. Changes in the fair value of cash flow hedges are recorded in Accumulated Other Comprehensive Income (“AOCI”) and recorded in earnings in the period in which the hedged transaction occurs. For the twelve months ended December 31, 2020, the Company recorded a net loss in AOCI of $14.3 million. For the twelve months ended December 31, 2020, a loss of $3.6 million was reclassified from AOCI to earnings, and included in the interest expense line item on the Condensed Consolidated Statements of Operations, and in operating activities on the Condensed Consolidated Statements of Cash Flows. For the twelve months ended December 31, 2020 a loss of $10.4 million was reclassified from AOCI to earnings
resulting from the termination of a swap agreement, and included in the other income line item on the Condensed Consolidated Statements of Operations, and in operating activities on the Condensed Consolidated Statement of Cash Flows. Within the next 12 months, the Company expects to recognize a loss of $1.2 million in earnings related to the hedged contract. Assuming other variables remain constant, including levels of indebtedness, a 1% increase in interest rates on our variable debt would have an estimated impact on pre-tax earnings and cash flows for the next twelve months of approximately $5.1$2.4 million.
On March 15, 2017,
Foreign Exchange Risks
We are subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. The functional currency for our Prestwick, Scotland and Subang, Malaysia operations is the Company entered into an interest rate swap agreement, with an effective date of March 31, 2017.British pound sterling. The swaps have a notional value of $250.0 millionfunctional currency for our operations located in Belfast, Northern Ireland, Casablanca, Morocco, and fix the variable portion of the Company’s floating rate debt at 1.815%. The fair value of the interest rate swaps, using Level 2 inputs, was an asset of $2.2 million as of December 31, 2018. ForDallas, Texas, which were acquired in the twelve months ended December 31, 2018,2020, is the Company recorded a gain related to swap activity of $1.4 million. Exposure to interest rate risk is not believed to be material on the interest rate swap agreements.
Foreign Exchange Risks
We have certainU.S. Dollar. While sales expenses, assets, and liabilities thatprocurement costs from these sites are largely denominated in British pounds sterling. Ourtheir respective functional currency for our U.K. operations is the British pound sterling. However,currencies, there are also sales made to Boeing and some procurement costs are denominated in currencies outside of the respective functional currencies, mostly U.S. dollars, British sterling pound, Euros, Malaysian Ringgit, and Euros.Moroccan Dirham. As a consequence, movements in exchange rates could cause our net sales and expenses to fluctuate, affecting our profitability and cash flows. We do not believe that this risk to profitability and cash flows is material, as the impact of fluctuations within sales and expenses are generally expected to be largely offsetting.
Even when revenues and expenses are matched, we must translate British pound sterling denominated results of operations, assets, and liabilities for our foreign subsidiaries to U.S. dollars in our consolidated financial statements. Consequently, increases and decreases in the value of the U.S. dollar as compared to the British pound sterling will affect our reported results of operations and the value of our assets and liabilities on our balance sheet, even if our results of operations or the value of those assets and liabilities has not changed in its original currency. These transactions could affect the comparability of our results between financial periods and/or result in significant changes to the carrying value of our assets, liabilities and shareholders’ equity. We do not believe this exposure to foreign currency exchange risk is material.
In accordance with FASB authoritative guidance, the intercompany revolving credit facility with our U.K. subsidiary is exposed to fluctuations in foreign exchange rates. The intercompany revolving credit facility did not have an outstanding balance as of December 31, 2020. There is similarly an intercompany revolving credit facility, denominated in US dollars, between our U.K. subsidiary, whose functional currency is the British pound sterling, and our subsidiary in Belfast. The fluctuation in rates for 20182020 resulted in a loss of $1.9$0 million reflected in other income/expense. We do not believe that the exposure to foreign currency risk is material for the intercompany revolving credit facility.facilities.
In advance association to the Company’s acquisition of select assets of Bombardier aerostructures and aftermarket services businesses in Belfast, Northern Ireland (known as Shorts Brothers); Casablanca, Morocco; and Dallas, United States on October 30, 2020, the planned purchaseCompany acquired certain liabilities as previously disclosed including the Shorts Pension and financial payment obligations under a repayable investment agreement between Shorts and the U.K.'s Department for Business, Energy and Industrial Strategy. On the first anniversary of Asco,closing, a special contribution of £100 million to the Shorts Pension. Both the pension special contribution and repayable investment agreement liabilities are payable in British pound sterling. After December 31, 2020, but prior to filing date, we entered into a foreign currency forward contract duringto hedge the second and third quarterprice risk associated with the special contribution of 2018. The objective£100 million to the Shorts Pension, noted above. Consistent with the use of these contracts isthis contract to minimizeneutralize the impacteffect of currency exchange rate movements on the Company's cash flows, however the Company has not designated these forward contracts as a hedge and has not applied hedge accounting to them. During the second quarter of 2018, the Company entered into a foreign currency forward contractfluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the amount of $580.0 million; this foreign currency forward contract was net settled in the third quarter of 2018 and a new contract was entered during the fourth quarter in the amount of $568.3; this contract was net settled and a third contract was entered into with a settlement date in the first quarter of 2019 in the amount of $547.7. The fair valueremeasurement of the foreign currency forward contract was an assetliability for the special contribution of $5.8£100 million asto the Shorts pension scheme being hedged.As of December 31, 2018. The Company recorded2020, a net loss related to this activity of $35.3 million for the twelve months ended December 31, 2018. Assuming all other variables remained constant at December 31, 2018, a 1% change5% increase or decrease in the exchange rate applicable to financial payment obligation under the repayable investment agreement between the U.S. dollarShorts and the EuroU.K.'s Department for Business, Energy and Industrial Strategy would have increased or decreased or increased the lossour pre-tax earnings by $5.5$16 million.
Item 8. Financial Statements and Supplementary Data
SPIRIT AEROSYSTEMS HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Consolidated Financial Statements of Spirit AeroSystems Holdings, Inc. for the periods ended December 31, 2018,2020, December 2017,2019, and December 31, 20162018 | |
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Spirit AeroSystems Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Spirit AeroSystems Holdings, Inc. (the Company) as of December 31, 20182020 and 2017,2019, the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018,2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)and our report dated February 8, 201925, 2021 expressed an unqualified opinion thereon.
Adoption of New Accounting StandardStandards
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenuelease recognition in 20182019 due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers.2016-02, Leases.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates.
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Revenue and profit recognition for over time and loss contracts
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| Description of the Matter | As more fully described in Note 3 of the consolidated financial statements, significant estimates and assumptions are made to account for the revenue and profit earned through the satisfaction of performance obligations from long-term supply agreements. For performance obligations that are satisfied over time, the Company generally recognizes revenue using an input method with revenue amounts being recognized proportionately as costs are incurred relative to the total expected costs to satisfy the performance obligation. During 2020, revenue from over time contracts accounted for approximately $2,188.4 million of the Company’s $3,404.8 million revenues. For loss contracts, the Company establishes forward loss reserves for total estimated costs that are in excess of total estimated consideration.
Auditing the Company’s estimate-at-completion process used in their revenue and profit recognition process is complex due to the judgment involved in evaluating the assumptions made by management to forecast the estimated cost to complete individual accounting contracts. For example, total cost estimates to satisfy the performance obligations reflect management’s assumptions about future labor and overhead efficiencies, program progress on various initiatives and program performance. Changes in those assumptions can have a material effect on the previously recognized revenue and profit. These adjustments are recorded as changes in estimates as more fully described in Note 5.
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process including controls over management’s review of the estimated cost to complete accounting contracts.
We also performed audit procedures that included, among others, testing the significant assumptions discussed above and testing the completeness and accuracy of the underlying data used in management's estimate-at-completion analysis. Specifically, for cost estimates, we (1) inspected contracts and related modifications with the Company’s customers and significant suppliers, (2) inspected the results of the Company's retrospective review analysis of actual costs compared to costs estimated at completion, (3) inquired of contract management, program management and supplier management to evaluate the basis of assumptions used in the estimate at completion and to assess whether all contracts were provided for accounting analysis, and (4) inspected source documentation for customer and supplier claims. Finally, we involved EY specialists to perform an independent estimate-at-completion for certain programs and performed sensitivity analyses to determine the effect of changes in assumptions.
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Bombardier Acquisition
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| Description of the Matter | During 2020, the Company completed its Bombardier Acquisition for net consideration of $275 million, as disclosed in Note 29 to the consolidated financial statements. The transaction was accounted for as a business combination.
Auditing the Company's accounting for the purchase price allocation related to its acquisition of the Bombardier Acquired Businesses was complex due to the significant estimation required by management to determine the fair value of forward loss provisions of $281.6 million and customer relationship intangible assets of $124.1 million. The significant estimation was primarily due to the complexity of the valuation models used by management to measure the fair value of the forward loss provisions and customer relationship intangible assets and the sensitivity of the respective fair values to the significant underlying assumptions. The Company used a discounted cash flow model to measure the forward loss provisions. The significant assumptions used in the model included discount rates and certain assumptions that form the basis of the forecasted results (e.g., forecasted unit delivery timing and forecasted unit costs). The Company used a discounted cash flow model to measure the customer relationship intangible assets. The significant assumptions used to estimate the value of the intangible assets included discount rates, contributory asset charges, a tax amortization benefit and certain assumptions that form the basis of the forecasted results (e.g., forecasted unit delivery timing and forecasted unit revenues and expenses). These significant assumptions are forward looking and could be affected by future economic and market conditions.
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| How We Addressed the Matter in Our Audit | We tested the Company's controls over its accounting for acquisitions. For example, we tested controls over the recognition and measurement of forward loss provisions and customer relationships intangible assets, including the valuation models and underlying assumptions used to develop such estimates.
To test the fair value of the forward loss provisions, we performed audit procedures that included, among others, testing the significant assumptions discussed above and testing the completeness and accuracy of the underlying data used in management's analysis. For example, we inspected contracts and related modifications with the Company’s customers and inquired of program management to evaluate the basis of assumptions used in the estimate at completion. Additionally, we involved our contract specialists to perform an independent estimate of forecasted unit cost for certain programs and performed sensitivity analyses to determine the effect of changes in assumptions. To test the estimated fair value of the customer relationship intangible assets, we performed audit procedures that included, among others, evaluating the Company's use of the income approach (the excess earnings method) and testing the significant assumptions used in the model, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market and economic trends, to the assumptions used to value similar assets in other acquisitions, to the historical results of the acquired business and to other guidelines used by companies within the same industry. We involved our valuation specialists to assist in our evaluation of the significant assumptions used in the discounted cash flow model.
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2014.
Wichita, Kansas
February 8, 201925, 2021
Spirit AeroSystems Holdings, Inc.
Consolidated Statements of Operations
| | | | | | | | | | For the Twelve Months Ended |
| | For the Twelve Months Ended | | December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| | December 31,
2018 | | December 31,
2017 | | December 31,
2016 | | ($ in millions, except per share data) |
| | ($ in millions, except per share data) | |
| Net Revenues | $ | 7,222.0 |
| | $ | 6,983.0 |
| | $ | 6,792.9 |
| |
| Net revenues | | Net revenues | $ | 3,404.8 | | | $ | 7,863.1 | | | $ | 7,222.0 | |
| Operating costs and expenses | | | | | | Operating costs and expenses | | |
| Cost of sales | 6,135.9 |
| | 6,195.3 |
| | 5,800.3 |
| Cost of sales | 3,845.5 | | | 6,786.4 | | | 6,135.9 | |
| Selling, general and administrative | 210.4 |
| | 204.7 |
| | 230.9 |
| Selling, general and administrative | 237.4 | | | 261.4 | | | 210.4 | |
| Impact of severe weather event | (10.0 | ) | | 19.9 |
| | 12.1 |
| Impact of severe weather event | 0 | | | 0 | | | (10.0) | |
| Restructuring costs | | Restructuring costs | 73.0 | | | 0 | | | 0 | |
| Research and development | 42.5 |
| | 31.2 |
| | 23.8 |
| Research and development | 38.8 | | | 54.5 | | | 42.5 | |
| Loss on disposal of assets | | Loss on disposal of assets | 22.9 | | | 0 | | | 0 | |
| Total operating costs and expenses | 6,378.8 |
| | 6,451.1 |
| | 6,067.1 |
| Total operating costs and expenses | 4,217.6 | | | 7,102.3 | | | 6,378.8 | |
| Operating income | 843.2 |
| | 531.9 |
| | 725.8 |
| |
| Operating (loss) income | | Operating (loss) income | (812.8) | | | 760.8 | | | 843.2 | |
| Interest expense and financing fee amortization | (80.0 | ) | | (41.7 | ) | | (57.3 | ) | Interest expense and financing fee amortization | (195.3) | | | (91.9) | | | (80.0) | |
| Other income (expense), net | (7.0 | ) | | 44.4 |
| | (8.0 | ) | |
| Income before income taxes and equity in net income of affiliates | 756.2 |
| | 534.6 |
| | 660.5 |
| |
| Income tax provision | (139.8 | ) | | (180.0 | ) | | (192.1 | ) | |
| Income before equity in net income of affiliates | 616.4 |
| | 354.6 |
| | 468.4 |
| |
| Equity in net income of affiliates | 0.6 |
| | 0.3 |
| | 1.3 |
| |
| Net income | $ | 617.0 |
| | $ | 354.9 |
| | $ | 469.7 |
| |
| Earnings per share | | | | | | |
| Other expense, net | | Other expense, net | (77.8) | | | (5.8) | | | (7.0) | |
| (Loss) income before income taxes and equity in net (loss) income of affiliates | | (Loss) income before income taxes and equity in net (loss) income of affiliates | (1,085.9) | | | 663.1 | | | 756.2 | |
| Income tax benefit (provision) | | Income tax benefit (provision) | 220.2 | | | (132.8) | | | (139.8) | |
| (Loss) income before equity in net (loss) income of affiliates | | (Loss) income before equity in net (loss) income of affiliates | (865.7) | | | 530.3 | | | 616.4 | |
| Equity in net (loss) income of affiliates | | Equity in net (loss) income of affiliates | (4.6) | | | (0.2) | | | 0.6 | |
| Net (loss) income | | Net (loss) income | $ | (870.3) | | | $ | 530.1 | | | $ | 617.0 | |
| (Loss) earnings per share | | (Loss) earnings per share | | | | | |
| Basic | $ | 5.71 |
| | $ | 3.04 |
| | $ | 3.72 |
| Basic | $ | (8.38) | | | $ | 5.11 | | | $ | 5.71 | |
| Diluted | $ | 5.65 |
| | $ | 3.01 |
| | $ | 3.70 |
| Diluted | $ | (8.38) | | | $ | 5.06 | | | $ | 5.65 | |
| Dividends declared per common share | $ | 0.46 |
| | $ | 0.40 |
| | $ | 0.10 |
| Dividends declared per common share | $ | 0.04 | | | $ | 0.48 | | | $ | 0.46 | |
See notes to consolidated financial statements
Spirit AeroSystems Holdings, Inc.
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | |
| | For the Twelve Months Ended |
| | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| | ($ in millions) |
| Net income | $ | 617.0 |
| | $ | 354.9 |
| | $ | 469.7 |
|
| Other comprehensive (loss) income, net of tax: | | | | | |
| Pension, SERP, and Retiree medical adjustments, net of tax effect of $12.7, ($6.0), and ($20.8), respectively | (41.0 | ) | | 19.8 |
| | 36.9 |
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| Unrealized foreign exchange income (loss) on intercompany loan, net of tax effect of $0.8, ($1.2), and $2.5, respectively | (3.2 | ) | | 4.9 |
| | (9.9 | ) |
| Foreign currency translation adjustments | (23.9 | ) | | 33.7 |
| | (53.4 | ) |
| Total other comprehensive income (loss) | (68.1 | ) | | 58.4 |
| | (26.4 | ) |
| Total comprehensive income | $ | 548.9 |
| | $ | 413.3 |
| | $ | 443.3 |
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| | | | | | | | | | | | | | | | | |
| | For the Twelve Months Ended |
| | December 31,
2020 | | December 31,
2019 | | December 31,
2018 |
| | ($ in millions) |
| Net (loss) income | $ | (870.3) | | | $ | 530.1 | | | $ | 617.0 | |
| Other comprehensive (loss) income, net of tax: | | | | | |
| Pension, SERP, and Retiree medical adjustments, net of tax effect of ($8.6), ($21.9), and $12.7, respectively | (61.5) | | | 71.7 | | | (41.0) | |
| Unrealized foreign exchange income (loss) on intercompany loan, net of tax effect of ($0.4), $2.1, and $0.8, respectively | 1.3 | | | 4.3 | | | (3.2) | |
| Unrealized loss on interest rate swaps, net of tax effect of $3.4, $0.2, and $0, respectively | (10.9) | | | (0.6) | | | — | |
| Reclassification of loss on interest rate swaps to earnings, net of tax effect of ($3.3), $0, and $0, respectively | 10.7 | | | 0 | | | — | |
| Foreign currency translation adjustments | 15.5 | | | 20.3 | | | (23.9) | |
| Total other comprehensive (loss) income, net of tax | (44.9) | | | 95.7 | | | (68.1) | |
| Total comprehensive (loss) income | $ | (915.2) | | | $ | 625.8 | | | $ | 548.9 | |
See notes to consolidated financial statements
Spirit AeroSystems Holdings, Inc.
Consolidated Balance Sheets
| | | | December 31, 2018 | | December 31, 2017 | | December 31, 2020 | | December 31, 2019 |
| | ($ in millions) | | ($ in millions) |
| Assets | | | | Assets | | | |
| Cash and cash equivalents | $ | 773.6 |
| | $ | 423.3 |
| Cash and cash equivalents | $ | 1,873.3 | | | $ | 2,350.5 | |
| Restricted cash | 0.3 |
| | 2.2 |
| Restricted cash | 0.3 | | | 0.3 | |
| Accounts receivable, net | 545.1 |
| | 722.2 |
| Accounts receivable, net | 484.4 | | | 546.4 | |
| Contract assets, short-term | 469.4 |
| | — |
| Contract assets, short-term | 368.4 | | | 528.3 | |
| Inventory, net | 1,012.6 |
| | 1,449.9 |
| Inventory, net | 1,422.3 | | | 1,118.8 | |
| Other current assets | 48.3 |
| | 53.5 |
| Other current assets | 336.3 | | | 98.7 | |
| Total current assets | 2,849.3 |
| | 2,651.1 |
| Total current assets | 4,485.0 | | | 4,643.0 | |
| Property, plant and equipment, net | 2,167.6 |
| | 2,105.3 |
| Property, plant and equipment, net | 2,503.8 | | | 2,271.7 | |
| Right of use assets | | Right of use assets | 70.6 | | | 48.9 | |
| Contract assets, long-term | 54.1 |
| | — |
| Contract assets, long-term | 4.4 | | | 6.4 | |
| Pension assets | 326.7 |
| | 347.1 |
| Pension assets | 455.9 | | | 449.1 | |
| Deferred income taxes | | Deferred income taxes | 0.1 | | | 106.5 | |
| Goodwill | | Goodwill | 565.3 | | | 2.4 | |
| Intangible assets, net | | Intangible assets, net | 215.2 | | | 1.2 | |
| Other assets | 288.2 |
| | 164.3 |
| Other assets | 83.6 | | | 76.8 | |
| Total assets | $ | 5,685.9 |
| | $ | 5,267.8 |
| Total assets | $ | 8,383.9 | | | $ | 7,606.0 | |
| Liabilities | | | | Liabilities | | | |
| Accounts payable | $ | 902.6 |
| | $ | 693.1 |
| Accounts payable | $ | 558.9 | | | $ | 1,058.3 | |
| Accrued expenses | 313.1 |
| | 269.3 |
| Accrued expenses | 365.6 | | | 240.2 | |
| Profit sharing | 68.3 |
| | 109.5 |
| Profit sharing | 57.0 | | | 84.5 | |
| Current portion of long-term debt | 31.4 |
| | 31.1 |
| Current portion of long-term debt | 340.7 | | | 50.2 | |
| Operating lease liabilities, short-term | | Operating lease liabilities, short-term | 5.5 | | | 6.0 | |
| Advance payments, short-term | 2.2 |
| | 100.0 |
| Advance payments, short-term | 18.9 | | | 21.6 | |
| Contract liabilities, short-term | 157.9 |
| | — |
| Contract liabilities, short-term | 97.6 | | | 158.3 | |
| Forward loss provision, short-term | 12.4 |
| | — |
| Forward loss provision, short-term | 184.6 | | | 83.9 | |
| Deferred revenue and other deferred credits, short-term | 20.0 |
| | 64.6 |
| Deferred revenue and other deferred credits, short-term | 22.2 | | | 14.8 | |
| Deferred grant income liability — current | 16.0 |
| | 21.6 |
| Deferred grant income liability — current | 0 | | | 3.6 | |
| Other current liabilities | 58.2 |
| | 331.8 |
| Other current liabilities | 58.4 | | | 39.3 | |
| Total current liabilities | 1,582.1 |
| | 1,621.0 |
| Total current liabilities | 1,709.4 | | | 1,760.7 | |
| Long-term debt | 1,864.0 |
| | 1,119.9 |
| Long-term debt | 3,532.9 | | | 2,984.1 | |
| Operating lease liabilities, long-term | | Operating lease liabilities, long-term | 66.6 | | | 43.0 | |
| Advance payments, long-term | 231.9 |
| | 231.7 |
| Advance payments, long-term | 327.4 | | | 333.3 | |
| Pension/OPEB obligation | 34.6 |
| | 40.8 |
| Pension/OPEB obligation | 440.2 | | | 35.7 | |
| Contract Liabilities, long-term | 369.8 |
| | — |
| Contract Liabilities, long-term | 372.0 | | | 356.3 | |
| Forward loss provision, long-term | 170.6 |
| | — |
| Forward loss provision, long-term | 561.4 | | | 163.5 | |
| Deferred revenue and other deferred credits | 31.2 |
| | 161.0 |
| |
| Deferred revenue and other deferred credits, long-term | | Deferred revenue and other deferred credits, long-term | 38.9 | | | 34.4 | |
| Deferred grant income liability — non-current | 28.0 |
| | 39.3 |
| Deferred grant income liability — non-current | 28.1 | | | 29.0 | |
| Other liabilities | 135.6 |
| | 252.6 |
| |
| Deferred income taxes | | Deferred income taxes | 13.0 | | | 8.3 | |
| Other non-current liabilities | | Other non-current liabilities | 437.0 | | | 95.8 | |
| Stockholders’ Equity | | | | Stockholders’ Equity | |
| Preferred stock, par value $0.01, 10,000,000 shares authorized, no shares issued | — |
| | — |
| Preferred stock, par value $0.01, 10,000,000 shares authorized, no shares issued | 0 | | | 0 | |
| Common Stock, par value $0.01, 200,000,000 shares authorized, 105,461,817 and 114,447,605 shares issued and outstanding, respectively | 1.1 |
| | 1.1 |
| |
| Common Stock, Class A par value $0.01, 200,000,000 shares authorized, 105,542,162 and 104,882,379 shares issued and outstanding, respectively | | Common Stock, Class A par value $0.01, 200,000,000 shares authorized, 105,542,162 and 104,882,379 shares issued and outstanding, respectively | 1.1 | | | 1.1 | |
| Additional paid-in capital | 1,100.9 |
| | 1,086.9 |
| Additional paid-in capital | 1,139.8 | | | 1,125.0 | |
| Accumulated other comprehensive loss | (196.6 | ) | | (128.5 | ) | Accumulated other comprehensive loss | (154.1) | | | (109.2) | |
| Retained earnings | 2,713.2 |
| | 2,422.4 |
| Retained earnings | 2,326.4 | | | 3,201.3 | |
| Treasury stock, at cost (40,719,438 and 31,467,709 shares, respectively) | (2,381.0 | ) | | (1,580.9 | ) | |
| Treasury stock, at cost (41,523,470 shares each period, respectively) | | Treasury stock, at cost (41,523,470 shares each period, respectively) | (2,456.7) | | | (2,456.8) | |
| Total stockholders' equity | 1,237.6 |
| | 1,801.0 |
| Total stockholders' equity | 856.5 | | | 1,761.4 | |
| Noncontrolling interest | 0.5 |
| | 0.5 |
| Noncontrolling interest | 0.5 | | | 0.5 | |
| Total equity | 1,238.1 |
| | 1,801.5 |
| Total equity | 857.0 | | | 1,761.9 | |
| Total liabilities and equity | $ | 5,685.9 |
| | $ | 5,267.8 |
| Total liabilities and equity | $ | 8,383.9 | | | $ | 7,606.0 | |
See notes to consolidated financial statements
Spirit AeroSystems Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
| | | | | | | | | | | | | | | | | Common Stock | | Additional
Paid-in
Capital | | Treasury Stock | | Accumulated
Other
Comprehensive
Loss | | Retained
Earnings | | |
| | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | | | | |
| | | | | Shares | | Amount | | Total |
| | Shares | | Amount | | Total | | ($ in millions, except share data) |
| | ($ in millions, except share data) | |
| Balance — December 31, 2015 | 135,617,710 |
| | $ | 1.4 |
| | $ | 1,051.6 |
| | $ | (429.2 | ) | | $ | (160.5 | ) | | $ | 1,656.2 |
| | $ | 2,119.5 |
| |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 469.7 |
| | 469.7 |
| |
| Dividends Declared | — |
| | — |
| | — |
| | — |
| | — |
| | (12.0 | ) | | (12.0 | ) | |
| Employee equity awards | 856,232 |
| | — |
| | 42.5 |
| | — |
| | — |
| | — |
| | 42.5 |
| |
| Stock forfeitures | (280,349 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Net shares settled | (335,436 | ) | | — |
| | (15.2 | ) | | — |
| | — |
| | — |
| | (15.2 | ) | |
| Excess tax benefits from share-based payment arrangements | — |
| | — |
| | (0.2 | ) | | — |
| | — |
| | — |
| | (0.2 | ) | |
| SERP shares issued | 28,626 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Treasury shares | (14,244,227 | ) | | (0.2 | ) | | 0.2 |
| | (649.6 | ) | | — |
| | — |
| | (649.6 | ) | |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (26.4 | ) | | — |
| | (26.4 | ) | |
| Balance — December 31, 2016 | 121,642,556 |
| | $ | 1.2 |
| | $ | 1,078.9 |
| | $ | (1,078.8 | ) | | $ | (186.9 | ) | | $ | 2,113.9 |
| | $ | 1,928.3 |
| |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 354.9 |
| | 354.9 |
| |
| Dividends Declared | — |
| | — |
| | — |
| | — |
| | — |
| | (46.4 | ) | | (46.4 | ) | |
| Employee equity awards | 667,845 |
| | — |
| | 22.1 |
| | — |
| | — |
| | — |
| | 22.1 |
| |
| Stock forfeitures | (92,482 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Net shares settled | (250,066 | ) | | — |
| | (14.2 | ) | | — |
| | — |
| | — |
| | (14.2 | ) | |
| SERP shares issued | 11,369 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Treasury shares | (7,531,617 | ) | | (0.1 | ) | | 0.1 |
| | (502.1 | ) | | — |
| | — |
| | (502.1 | ) | |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | 58.4 |
| | — |
| | 58.4 |
| |
| Balance — December 31, 2017 | 114,447,605 |
| | $ | 1.1 |
| | $ | 1,086.9 |
| | $ | (1,580.9 | ) | | $ | (128.5 | ) | | $ | 2,422.4 |
| | $ | 1,801.0 |
| Balance — December 31, 2017 | 114,447,605 | | | $ | 1.1 | | | $ | 1,086.9 | | | $ | (1,580.9) | | | $ | (128.5) | | | $ | 2,422.4 | | | $ | 1,801.0 | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 617.0 |
| | 617.0 |
| Net income | — | | | — | | | — | | | — | | | — | | | 617.0 | | | 617.0 | |
| Adoption of ASC 606 | — |
| | — |
| | — |
| | — |
| | — |
| | (277.0 | ) | | (277.0 | ) | Adoption of ASC 606 | — | | | — | | | — | | | — | | | — | | | (277.0) | | | (277.0) | |
| Dividends Declared | — |
| | — |
| | — |
| | — |
| | — |
| | (49.2 | ) | | (49.2 | ) | |
| Dividends declared | | Dividends declared | — | | | — | | | — | | | — | | | — | | | (49.2) | | | (49.2) | |
| Employee equity awards | 466,719 |
| | — |
| | 27.4 |
| | — |
| | — |
| | — |
| | 27.4 |
| Employee equity awards | 466,719 | | | — | | | 27.4 | | | — | | | — | | | — | | | 27.4 | |
| Stock forfeitures | (47,962 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Stock forfeitures | (47,962) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net shares settled | (177,812 | ) | | — |
| | (15.6 | ) | | — |
| | — |
| | — |
| | (15.6 | ) | Net shares settled | (177,812) | | | — | | | (15.6) | | | — | | | — | | | — | | | (15.6) | |
| ESPP shares issued | 24,996 |
| | — |
| | 2.1 |
| | — |
| | — |
| | — |
| | 2.1 |
| ESPP shares issued | 24,996 | | | — | | | 2.1 | | | — | | | — | | | — | | | 2.1 | |
| Treasury shares | (9,251,729 | ) | | — |
| | 0.1 |
| | (800.1 | ) | | — |
| | — |
| | (800.0 | ) | Treasury shares | (9,251,729) | | | — | | | 0.1 | | | (800.1) | | | — | | | — | | | (800.0) | |
| Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | (68.1) | | | — | | | (68.1) | |
| Balance — December 31, 2018 | | Balance — December 31, 2018 | 105,461,817 | | | $ | 1.1 | | | $ | 1,100.9 | | | $ | (2,381.0) | | | $ | (196.6) | | | $ | 2,713.2 | | | $ | 1,237.6 | |
| Net income | | Net income | — | | | — | | | — | | | — | | | — | | | 530.1 | | | 530.1 | |
| Adoption of ASC 2018-02 | | Adoption of ASC 2018-02 | — | | | — | | | — | | | — | | | (8.3) | | | 8.3 | | | 0 | |
| Dividends declared | | Dividends declared | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (50.3) | | | (50.3) | |
| Employee equity awards | | Employee equity awards | 448,594 | | | $ | — | | | $ | 34.4 | | | $ | — | | | $ | — | | | $ | — | | | 34.4 | |
| Stock forfeitures | | Stock forfeitures | (125,055) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | — | |
| Net shares settled | | Net shares settled | (137,500) | | | $ | — | | | $ | (12.9) | | | $ | — | | | $ | — | | | $ | — | | | (12.9) | |
| ESPP shares issued | | ESPP shares issued | 32,341 | | | $ | — | | | $ | 2.6 | | | $ | — | | | $ | — | | | $ | — | | | 2.6 | |
| SERP shares issued | | SERP shares issued | 6,214 | | | $ | — | | | $ | 0 | | | $ | — | | | $ | — | | | $ | — | | | 0 | |
| Treasury shares | | Treasury shares | (804,032) | | | $ | — | | | $ | 0 | | | $ | (75.8) | | | $ | — | | | $ | — | | | (75.8) | |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | (68.1 | ) | | — |
| | (68.1 | ) | Other comprehensive income | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 95.7 | | | $ | — | | | 95.7 | |
| Balance — December 31, 2018 | 105,461,817 |
| | $ | 1.1 |
| | $ | 1,100.9 |
| | $ | (2,381.0 | ) | | $ | (196.6 | ) | | $ | 2,713.2 |
| | $ | 1,237.6 |
| |
| Balance — December 31, 2019 | | Balance — December 31, 2019 | 104,882,379 | | | $ | 1.1 | | | $ | 1,125.0 | | | $ | (2,456.8) | | | $ | (109.2) | | | $ | 3,201.3 | | | $ | 1,761.4 | |
| Net income (loss) | | Net income (loss) | — | | | — | | | — | | | — | | | — | | | (870.3) | | | (870.3) | |
| Dividends declared | | Dividends declared | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (4.4) | | | (4.4) | |
| | Employee equity awards | | Employee equity awards | 952,392 | | | $ | — | | | $ | 26.7 | | | $ | — | | | $ | — | | | $ | — | | | 26.7 | |
| Stock forfeitures | | Stock forfeitures | (192,111) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | — | |
| Net shares settled | | Net shares settled | (224,964) | | | $ | — | | | $ | (14.5) | | | $ | — | | | $ | — | | | $ | — | | | (14.5) | |
| ESPP shares issued | | ESPP shares issued | 124,466 | | | $ | — | | | $ | 2.6 | | | $ | — | | | $ | — | | | $ | — | | | 2.6 | |
| Treasury shares | | Treasury shares | 0 | | | $ | — | | | $ | 0 | | | $ | 0.1 | | | $ | — | | | $ | — | | | 0.1 | |
| Other | | Other | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (0.2) | | | (0.2) | |
| Other comprehensive income (loss) | | Other comprehensive income (loss) | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (44.9) | | | (44.9) | |
| Balance — December 31, 2020 | | Balance — December 31, 2020 | 105,542,162 | | | $ | 1.1 | | | $ | 1,139.8 | | | $ | (2,456.7) | | | $ | (154.1) | | | $ | 2,326.4 | | | $ | 856.5 | |
See notes to consolidated financial statements
Spirit AeroSystems Holdings, Inc.
Consolidated Statements of Cash Flows
| | | | For the Twelve Months Ended | | For the Twelve Months Ended |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| | ($ in millions) | | ($ in millions) |
| Operating activities | | | | | | Operating activities | | | | | |
| Net income | $ | 617.0 |
| | $ | 354.9 |
| | $ | 469.7 |
| |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | |
| Depreciation expense | 230.6 |
| | 214.1 |
| | 208.6 |
| |
| Amortization expense | 0.4 |
| | 0.2 |
| | 0.2 |
| |
| Net (loss) income | | Net (loss) income | $ | (870.3) | | | $ | 530.1 | | | $ | 617.0 | |
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities | | Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities | |
| Depreciation and amortization expense | | Depreciation and amortization expense | 277.6 | | | 251.7 | | | 231.0 | |
| Amortization of deferred financing fees | 17.9 |
| | 3.4 |
| | 19.3 |
| Amortization of deferred financing fees | 20.4 | | | 3.5 | | | 17.9 | |
| Accretion of customer supply agreement | 4.1 |
| | 2.6 |
| | 4.9 |
| Accretion of customer supply agreement | 2.0 | | | 4.3 | | | 4.1 | |
| Employee stock compensation expense | 27.4 |
| | 22.1 |
| | 42.5 |
| Employee stock compensation expense | 24.2 | | | 36.1 | | | 27.4 | |
| Excess tax benefit of share-based payment arrangements | — |
| | — |
| | 0.1 |
| |
| (Gain) from derivative instruments | (7.2 | ) | | (0.9 | ) | | — |
| |
| (Gain) loss from foreign currency transactions | (0.3 | ) | | (8.1 | ) | | 17.4 |
| |
| Loss on impairment and disposition of assets | 1.8 |
| | 9.5 |
| | 0.4 |
| |
| Loss (gain) from derivative instruments | | Loss (gain) from derivative instruments | 0 | | | 8.1 | | | (7.2) | |
| Loss (gain) from foreign currency transactions | | Loss (gain) from foreign currency transactions | 25.0 | | | 1.6 | | | (0.3) | |
| Loss on disposition of assets | | Loss on disposition of assets | 26.4 | | | 4.9 | | | 1.8 | |
| Deferred taxes | (38.0 | ) | | 52.4 |
| | 0.9 |
| Deferred taxes | 94.0 | | | 86.1 | | | (38.0) | |
| Pension and other post retirement benefits, net | (33.4 | ) | | (34.7 | ) | | 3.5 |
| |
| Long term income tax payable | | Long term income tax payable | 1.5 | | | — | | | — | |
| Pension and other post-retirement benefits, net | | Pension and other post-retirement benefits, net | 44.5 | | | (20.0) | | | (33.4) | |
| Grant liability amortization | (21.6 | ) | | (19.0 | ) | | (11.9 | ) | Grant liability amortization | (3.5) | | | (16.2) | | | (21.6) | |
| Equity in net income of affiliates | (0.6 | ) | | (0.3 | ) | | (1.3 | ) | |
| Equity in net loss (income) of affiliates | | Equity in net loss (income) of affiliates | 4.6 | | | 0.2 | | | (0.6) | |
| Forward loss provision | (170.9 | ) | | — |
| | — |
| Forward loss provision | 216.5 | | | 40.7 | | | (170.9) | |
| Changes in assets and liabilities | | | | | | Changes in assets and liabilities | |
| Accounts receivable, net | (47.9 | ) | | (48.5 | ) | | (139.1 | ) | Accounts receivable, net | 168.3 | | | 12.8 | | | (47.9) | |
| Inventory, net | (61.3 | ) | | 319.6 |
| | 207.8 |
| Inventory, net | (39.5) | | | (95.4) | | | (61.3) | |
| Contract asset | (8.5 | ) | | — |
| | — |
| |
| Contract liability | 208.3 |
| | — |
| | — |
| |
| Contract assets | | Contract assets | 168.2 | | | (5.2) | | | (8.5) | |
| Accounts payable and accrued liabilities | 244.5 |
| | 160.3 |
| | (34.3 | ) | Accounts payable and accrued liabilities | (592.7) | | | 34.6 | | | 244.5 | |
| Profit sharing/deferred compensation | (40.9 | ) | | 7.6 |
| | 40.5 |
| Profit sharing/deferred compensation | (28.2) | | | 16.0 | | | (40.9) | |
| Advance payments | (98.3 | ) | | (209.6 | ) | | (144.4 | ) | Advance payments | (21.0) | | | 120.8 | | | (98.3) | |
| Income taxes receivable/payable | (28.4 | ) | | 25.7 |
| | (3.3 | ) | Income taxes receivable/payable | (246.3) | | | (59.6) | | | (28.4) | |
| Contract liabilities | | Contract liabilities | (49.5) | | | (13.0) | | | 208.3 | |
| Deferred revenue and other deferred credits | 16.9 |
| | (231.2 | ) | | 12.4 |
| Deferred revenue and other deferred credits | 9.2 | | | 6.2 | | | 16.9 | |
| Other | (41.7 | ) | | (46.4 | ) | | 23.0 |
| Other | 23.7 | | | (25.6) | | | (41.7) | |
| Net cash provided by operating activities | 769.9 |
| | 573.7 |
| | 716.9 |
| |
| Net cash provided (used in) by operating activities | | Net cash provided (used in) by operating activities | (744.9) | | | 922.7 | | | 769.9 | |
| Investing activities | | | | | | Investing activities | | | | | |
| Purchase of property, plant and equipment | (271.2 | ) | | (273.1 | ) | | (254.0 | ) | Purchase of property, plant and equipment | (118.9) | | | (232.2) | | | (271.2) | |
| Proceeds from sale of assets | 3.4 |
| | 0.4 |
| | 0.6 |
| |
| Acquisition, net of cash acquired | | Acquisition, net of cash acquired | (388.5) | | | — | | | — | |
| Equity in net assets of affiliates | | Equity in net assets of affiliates | 0 | | | (7.9) | | | — | |
| Other | — |
| | (0.1 | ) | | — |
| Other | 5.4 | | | 0.2 | | | 3.4 | |
| Net cash used in investing activities | (267.8 | ) | | (272.8 | ) | | (253.4 | ) | Net cash used in investing activities | (502.0) | | | (239.9) | | | (267.8) | |
| Financing activities | | | | | | Financing activities | | | | | |
| Proceeds from issuance of bonds | 1,300.0 |
| | — |
| | 299.8 |
| |
| Proceeds from issuance of debt | | Proceeds from issuance of debt | 400.0 | | | 250.0 | | | 1,300.0 | |
| Proceeds from revolving credit facility | | Proceeds from revolving credit facility | 0 | | | 900.0 | | | 0 | |
| Proceeds from issuance of long term bonds | | Proceeds from issuance of long term bonds | 1,700.0 | | | — | | | — | |
| Customer Financing | | Customer Financing | 10.0 | | | — | | | — | |
| Principal payments of debt | (6.7 | ) | | (2.8 | ) | | (36.4 | ) | Principal payments of debt | (31.6) | | | (13.4) | | | (6.7) | |
| Payments on term loan | (256.3 | ) | | (25.0 | ) | | — |
| Payments on term loan | (439.7) | | | (16.6) | | | (256.3) | |
| Payments on revolving credit facility | | Payments on revolving credit facility | (800.0) | | | (100.0) | | | 0 | |
| Payments on bonds | (300.0 | ) | | — |
| | (300.0 | ) | Payments on bonds | 0 | | | 0 | | | (300.0) | |
| Taxes paid related to net share settlement awards | (15.6 | ) | | (14.2 | ) | | (15.2 | ) | Taxes paid related to net share settlement awards | (14.5) | | | (12.9) | | | (15.6) | |
| Proceeds from issuance of ESPP stock | 2.1 |
| | — |
| | — |
| Proceeds from issuance of ESPP stock | 2.6 | | | 2.6 | | | 2.1 | |
| Excess tax benefit of share-based payment arrangements | — |
| | — |
| | (0.1 | ) | |
| Debt issuance and financing costs | (23.2 | ) | | (0.9 | ) | | (17.2 | ) | Debt issuance and financing costs | (41.9) | | | 0 | | | (23.2) | |
| Proceeds from financing under the New Markets Tax Credit Program | — |
| | 7.6 |
| | — |
| |
| Purchase of treasury stock | (805.8 | ) | | (496.3 | ) | | (649.6 | ) | Purchase of treasury stock | 0.1 | | | (75.8) | | | (805.8) | |
| Dividends paid | (48.0 | ) | | (47.1 | ) | | — |
| Dividends paid | (15.4) | | | (50.4) | | | (48.0) | |
| Net cash used in financing activities | (153.5 | ) | | (578.7 | ) | | (718.7 | ) | |
| Other | | Other | (0.1) | | | 0.9 | | | — | |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 769.5 | | | 884.4 | | | (153.5) | |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | 5.6 |
| | (4.4 | ) | Effect of exchange rate changes on cash and cash equivalents | 3.3 | | | 5.9 | | | 0 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash for the period | 348.6 |
| | (272.2 | ) | | (259.6 | ) | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash for the period | | Net (decrease) increase in cash, cash equivalents, and restricted cash for the period | (474.1) | | | 1,573.1 | | | 348.6 | |
| Cash, cash equivalents, and restricted cash, beginning of period | 445.5 |
| | 717.7 |
| | 977.3 |
| Cash, cash equivalents, and restricted cash, beginning of period | 2,367.2 | | | 794.1 | | | 445.5 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 794.1 |
| | $ | 445.5 |
| | $ | 717.7 |
| Cash, cash equivalents, and restricted cash, end of period | $ | 1,893.1 | | | $ | 2,367.2 | | | $ | 794.1 | |
| Supplemental information | | | | | | Supplemental information | | | | | |
| Interest paid | $ | 70.4 |
| | $ | 43.6 |
| | $ | 45.2 |
| Interest paid | $ | 146.6 | | | $ | 93.2 | | | $ | 70.4 | |
| Income taxes paid | $ | 202.3 |
| | $ | 101.9 |
| | $ | 191.4 |
| |
| Property acquired through capital leases | $ | 26.8 |
| | $ | 29.3 |
| | $ | 1.8 |
| |
| | | | | | | | | | | | | | | | | |
| Income taxes (received) paid | $ | (62.5) | | | $ | 105.0 | | | $ | 202.3 | |
| Property acquired through finance leases | $ | 26.3 | | | $ | 120.3 | | | $ | 26.8 | |
| | | | | | | | | | | | | | | | | |
| Reconciliation of Cash, Cash Equivalents, and Restricted Cash: | For the Twelve Months Ended |
| December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| ($ in millions) |
| Cash and cash equivalents, beginning of the period | $ | 2,350.5 | | | $ | 773.6 | | | $ | 423.3 | |
| Restricted cash, short-term, beginning of the period | 0.3 | | | 0.3 | | | 2.2 | |
| Restricted cash, long-term, beginning of the period | 16.4 | | | 20.2 | | | 20.0 | |
| Cash, cash equivalents, and restricted cash, beginning of the period | $ | 2,367.2 | | | $ | 794.1 | | | $ | 445.5 | |
| | | | | |
| Cash and cash equivalents, end of the period | $ | 1,873.3 | | | $ | 2,350.5 | | | $ | 773.6 | |
| Restricted cash, short-term, end of the period | 0.3 | | | 0.3 | | | 0.3 | |
| Restricted cash, long-term, end of the period | 19.5 | | | 16.4 | | | 20.2 | |
| Cash, cash equivalents, and restricted cash, end of the period | $ | 1,893.1 | | | $ | 2,367.2 | | | $ | 794.1 | |
See notes to consolidated financial statements
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements
($, €, £, and RM in millions other than per share amounts)
1. Nature of Business
Spirit AeroSystems Holdings, Inc. (“Holdings” or theand its consolidated subsidiaries (the “Company”) provides manufacturing and design expertise in a wide range of fuselage, propulsion, and wing products and services for aircraft original equipment manufacturers (“OEM”) and operators through its subsidiaries, including Spirit AeroSystems, Inc. (“Spirit”). As used herein, “Company” refer to Spirit AeroSystems Holdings, Inc. and its consolidated subsidiaries. References to “Spirit” refer only to our subsidiary, Spirit AeroSystems, Inc., and references to “Spirit Holdings” or “Holdings” refer only to Spirit AeroSystems Holdings, Inc.
The Company's headquarters are in Wichita, Kansas, with manufacturing and assembly facilities in Tulsa and McAlester, Oklahoma; Prestwick, Scotland; Wichita, Kansas; Kinston, North Carolina; Subang, Malaysia; Saint-Nazaire, France; San Antonio, Texas; Biddeford, Maine; Belfast, Northern Ireland; Morroco, Casablanca; and Saint-Nazaire, France.Dallas, Texas. The Company has previously announced site consolidation activities, including the McAlester, Oklahoma and San Antonio, Texas sites. The work transfer and closure activities for these sites are planned to primarily take place over the first half of 2021.
The Company largely supports commercial aerostructures customers, and the Company's financial results and prospects are almost entirely dependent on global aviation demand and the resulting production rates of the Company's customers. In response to COVID-19 impacts, the Company's customers, including Boeing and Airbus, have decreased production rates across many programs and may further adjust production rates or suspend production in the future.
COVID-19’s impact on the Company's 2020 financial performance reduced the Company's liquidity and, as a result, the Company took steps to reduce costs and raise additional debt. As of December 31, 2019, the Company had a debt balance of approximately $3,034.3, most of which was unsecured debt, and a cash balance of $2,350.3. As of December 31, 2020, the Company had a debt balance of approximately $3,873.6, more than 50% was secured debt, and a cash balance of $1,873.3. Based on the actions the Company took in 2020, the Company anticipates that it will have sufficient liquidity to meet operating and financing needs for at least the next 12 months.
2. Adoption of New Accounting Standards
Adoption of New Revenue Standard
ASU 2016-02
In May 2014,February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)ASU No. 2014-09, Revenue from Contracts with Customers2016-02, Leases (Topic 842) (“ASU 2014-09”2016-02”) that supersedes ASC 605-35, Revenue Recognition - Construction-Type. This update requires recognition of lease assets and Production-Type Contracts (“legacy GAAP”). Subsequently,lease liabilities on the FASB issued several updates tobalance sheet of lessees. ASU 2014-09, which are pending content or otherwise codified in Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”). ASC 606 also includes new guidance on costs related to a contract, which2016-02 is codified in ASC Subtopic 340-40 (“ASC 340-40”).effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018. The Company adopted ASC 606ASU 2016-02 and related updates as of January 1, 2019 using the modified retrospective method (“method”) effective as of January 1, 2018 (“date of initial application”). Under this method,transition approach, with the cumulative effect of the adoption of ASC 606 isinitial application recognized as an adjustment to retained earnings onat the date of initial application (“Transition Adjustment”),adoption. Under this effective date method, financial results reported prior to the first quarter of 2019 are unchanged. The Company also chose to adopt the package of practical expedients.
The Company has reviewed all of its current active leases and has implemented the comparative financial statements for prior periods are not adjustednecessary processes and continuesystems to be reported under legacy GAAP. The Transition Adjustment was an after tax decrease to retained earningscomply with the requirements of approximately $277.0. Financial information for 2018 and 2017 is presented under ASC 606 and under legacy GAAP, respectively. The tables below reflect adjusted 2018 financial statement amounts as ifASU 2016-02. Upon adoption of ASU 2016-02, the Company had been reporting under legacy GAAPrecognized a Right of Use (“ROU”) asset on its books for itemsthe net present value of all of its active leases with terms greater than 12 months, with an offsetting lease liability. The ROU asset and corresponding lease liability will be amortized over the course of the lease term, which includes all options that are materially different.the Company expects it will exercise.
The adoption of ASC 606 does not impact the Company's cash flows or the underlying economics of the Company's contracts with customers. However, the pattern and timing of revenue and profit recognition, as well as financial statement presentation and disclosures, has changed.
The significant changes and the qualitative and quantitativeConsolidated Balance Sheet impact of the adoption of ASC 606 are noted below:ASU 2016-02 was an increase to both assets and liabilities of $52.7. The adoption of ASU 2016-02 did not have any material impact to net income or cash flows.
a.RevenueAdoption of ASU 2018-02
In February 2018, the FASB issued ASU No. 2018-02 (“ASU 2018-02”), Income Statement - Reporting Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Cuts and Jobs Act of 2017, as amended ("TCJA"), from Contractsaccumulated other comprehensive income into retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with Customers
The Company no longer uses the units-of-delivery method, and the historical use of contract blocks to define contracts for accounting purposes has been replaced by accounting contracts as identified under ASC 606. The Company's accounting contracts under ASC 606 are for the specific number of units for which orders have been received, which is typically for fewer units than what was used to define contract blocks under legacy GAAP. In mostearly adoption permitted. As a result of the Company's contracts,adoption of ASU 2018-02 in the customer has options or requirements to purchase additional products and services.
b.Deferred Production Costs
Under legacy GAAP, certain production costs were deferred overfirst quarter of 2019, the life of the contract block, which is not permitted under ASC 606. Accordingly, deferred production costs of $640.3 (pretax), net of previously recognized forward loss reserves of $364.0 (pretax), were eliminated, resulting in a decrease toCompany reclassified $8.3 from accumulated other comprehensive income into retained earnings inon the Transition Adjustment.
c.Contract Assets and Contract Liabilities
Contract assets primarily represent revenues recognized for performance obligations that have been satisfied but for which amounts have not been billed. Contract assets in the amount of $342.0 were established in the Transition Adjustment.
Contract liabilities primarily represent cash received that is in excess of revenues recognized and is contingent upon the satisfaction of performance obligations. For certain contracts, the allocation of consideration to the performance obligations results in a deferral of revenue that was previously recognized under legacy GAAP. Contract liabilities in the amount of $113.0 were established in the Transition Adjustment, which reflects consideration received prior to the date of initial application that is in
condensed consolidated balance sheet.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
excess of the standalone selling price. This liability includes an allocation of consideration to future units, including those under options that the Company believes are likely to be exercised, with prices that are lower than standalone selling price. This liability will be recognized earlier if the options are not fully exercised, or immediately if the contract is terminated prior to the options being fully exercised.
d.Contract Costs
The Company’s accounting for preproduction, tooling, and certain other costs has not changed since these costs generally do not fall within the scope of ASC 340-40. Incurred production costs for anticipated contracts (satisfaction of performance obligations, which have commenced because the Company expects the customer to exercise options) continue to be classified as inventory.
e. Practical expedients
The Company has adopted ASC 606 only for contracts that were not substantially completed under legacy GAAP on the date of initial application. For these contracts, the Company has reflected the aggregate effect of all modifications executed prior to the date of initial application when identifying satisfied and unsatisfied performance obligations, for determining the transaction price and for allocating the transaction price.
The following tables summarize the impacts of adopting ASC Topic 606 on the Company’s consolidated financial statements for the twelve months ended December 31, 2018.
|
| | | | | | | | | | | |
| | For the Twelve
Months Ended |
| | As Reported | | Impact of Adoption of | | As Adjusted |
| | December 31,
2018 | | ASC Topic 606 | | December 31,
2018 |
| Revenue | $ | 7,222.0 |
| | 133.8 |
| | $ | 7,355.8 |
|
| Cost of sales | 6,135.9 |
| | 277.5 |
| | 6,413.4 |
|
| Income tax provision | (139.8 | ) | | 32.3 |
| | (107.5 | ) |
| Net income | 617.0 |
| | (111.5 | ) | | 505.5 |
|
| | | | | | |
| Earnings per share | |
| | |
| | |
|
| Basic | $ | 5.71 |
| | $ | (1.03 | ) | | $ | 4.68 |
|
| Diluted | $ | 5.65 |
| | $ | (1.02 | ) | | $ | 4.63 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
|
| | | | | | | | | | | |
| | As Reported | | Impact of Adoption of | | As Adjusted |
| | December 31,
2018 | | ASC Topic 606 | | December 31,
2018 |
| Assets | |
| | | | |
|
| Accounts receivable, net | $ | 545.1 |
| | $ | 102.8 |
| | $ | 647.9 |
|
| Contract assets, short-term | 469.4 |
| | (469.4 | ) | | — |
|
| Inventory, net | 1,012.6 |
| | 378.9 |
| | 1,391.5 |
|
| Other current assets | 48.3 |
| | 41.7 |
| | 90.0 |
|
| Contract assets, long-term | 54.1 |
| | (54.1 | ) | | — |
|
| Other assets | 288.2 |
| | (70.5 | ) | | 217.7 |
|
| Total assets | 5,685.9 |
| | (70.6 | ) | | 5,615.3 |
|
| Liabilities | |
| | | | |
|
| Accrued expenses | 313.1 |
| | (5.8 | ) | | 307.3 |
|
| Contract liabilities, short-term | 157.9 |
| | (157.9 | ) | | — |
|
| Forward loss provision, short-term | 12.4 |
| | (12.4 | ) | | — |
|
| Deferred revenue and other deferred credits, short-term | 20.0 |
| | 130.3 |
| | 150.3 |
|
| Other current liabilities | 58.2 |
| | 259.8 |
| | 318.0 |
|
| Contract liabilities, long-term | 369.8 |
| | (369.8 | ) | | — |
|
| Forward loss provision, long-term | 170.6 |
| | (170.6 | ) | | — |
|
| Deferred revenue and other deferred credits | 31.2 |
| | 93.6 |
| | 124.8 |
|
| Stockholders' Equity | |
| | | | |
|
| Accumulated other comprehensive loss | (196.6 | ) | | (3.4 | ) | | (200.0 | ) |
| Retained earnings | 2,713.2 |
| | 165.5 |
| | 2,878.7 |
|
| Total liabilities and equity | 5,685.9 |
| | (70.6 | ) | | 5,615.3 |
|
Adoption of ASU 2017-072016-13
In March 2017,June 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost2016-13, (“ASU 2017-07”2016-13”). ASU 2017-07 requires entities to report the service cost component of net periodic pension and net periodic postretirement benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Further, ASU 2017-07, which requires the other componentsimmediate recognition of net periodic pensionmanagement's estimates of current expected credit losses. ASU 2016-13 is effective for fiscal years and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if oneinterim reporting periods within those years beginning after December 15, 2019. Early adoption is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. The Company adopted the requirements of ASU 2017-07 on January 1, 2018, using the retrospective transition method.
Prior period information has been reclassified as a result of the Company's adoption of ASU 2017-07 on a retrospective basis inpermitted after fiscal years beginning December 15, 2018. In accordance with the adoption of this guidance, prior year amounts related to the components of net periodic pension and postretirement benefit cost other than service costs have been reclassified from cost of sales and selling, general and administrative expense to other income (expense) within the consolidated statement of operations for all periods presented. The reclassifications are as follows:
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Twelve Months Ended | | For the Twelve Months Ended |
| | As Reported | | Impact of Adoption of | | As Adjusted | | As Reported | | Impact of Adoption of | | As Adjusted |
| | December 31,
2017 | | ASU 2017-07 | | December 31,
2017 | | December 31,
2016 | | ASU 2017-07 | | December 31,
2016 |
| Cost of sales | $ | 6,162.5 |
| | $ | 32.8 |
| | $ | 6,195.3 |
| | $ | 5,803.6 |
| | $ | (3.3 | ) | | $ | 5,800.3 |
|
| Selling, general and administrative | 200.3 |
| | 4.4 |
| | 204.7 |
| | 228.3 |
| | 2.6 |
| | 230.9 |
|
| Other income, net | 7.2 |
| | 37.2 |
| | 44.4 |
| | (7.3 | ) | | (0.7 | ) | | (8.0 | ) |
Adoption of ASU 2016-18
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (“ASU 2016-18”), which addresses classification and presentation of changes in restricted cash on the statement of cash flows. The standard requires a reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents. The ASU does not define restricted cash or restricted cash equivalents, but an entity will need to disclose the nature of the restrictions. The Company adopted ASU 2016-18 on2016-13 as of January 1, 2018. Below2020 by means of the modified retrospective method and required cumulative-effect adjustment to the opening retained earnings as of that date. The cumulative-effect adjustment to the opening retained earnings as of January 1, 2020 was not material. All credit losses in accordance with ASU 2016-13 were on receivables and/or contract assets arising from the Company’s contracts with customers including the cumulative-effect adjustment to the opening retained earnings. There is a reconciliationno significant impact to our operating results due to the adoption of cash, cash equivalents, and restricted cash. Long-term restricted cash is included in Other AssetsASU 2016-13. See Note 6 Accounts Receivable, net for more information on the Company's condensed consolidated balance sheet.ASC 326 allowance for credit losses.
|
| | | | | | | |
| Reconciliation of Cash, Cash Equivalents, and Restricted Cash: | | | |
| | For the Twelve Months Ended |
| | December 31,
2018 | | December 31,
2017 |
| Cash and cash equivalents, beginning of the period | $ | 423.3 |
| | $ | 697.7 |
|
| Restricted cash, short-term, beginning of the period | 2.2 |
| | — |
|
| Restricted cash, long-term, beginning of the period | 20.0 |
| | 20.0 |
|
| Cash, cash equivalents, and restricted cash, beginning of the period | $ | 445.5 |
| | $ | 717.7 |
|
| | | | |
| Cash and cash equivalents, end of the period | $ | 773.6 |
| | $ | 423.3 |
|
| Restricted cash, short-term, end of the period | 0.3 |
| | 2.2 |
|
| Restricted cash, long-term, end of the period | 20.2 |
| | 20.0 |
|
| Cash, cash equivalents, and restricted cash, end of the period | $ | 794.1 |
| | $ | 445.5 |
|
3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the Company’s financial statements and the financial statements of its majority owned or controlled subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and Regulation S-X. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year financial statements and notes to conform to the 2018 presentation, as discussed in Note 2, Adoption of New Accounting Standards.
The CompanySpirit 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. 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 in Prestwick uses local currency, the British pound, as its functional currency;currency, and the Malaysian subsidiary uses the British pound and the Singapore subsidiary uses the Singapore dollar.pound. All other foreign subsidiaries and branches use the U.S. dollar as their functional currency. As part of
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
the monthly consolidation process, the functional currencies of the Company’s international subsidiaries are translated to U.S. dollars using the end-of-month translation rate for balance sheet accountsassets and liabilities and average period currency translation rates for revenue and income accounts.
Use of Estimates
The preparation of the Company's financial statements in conformity with GAAP requires management to use estimates and assumptions. The results of these estimates form the basis for making judgments that may affect the reported amounts of assets and liabilities, including the impacts of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period.
Management may make significant judgments when assessing estimated amounts of variable consideration and related constraints, the number of options likely to be exercised, and the standalone selling prices of the Company’s products and services. The Company also estimates the cost of satisfying the performance obligations in its contracts and options that may extend over many years. Cost estimates reflect currently available information and the impact of any changes to cost estimates, based upon the facts and circumstances, are recorded in the period in which they become known.
The transaction price for a contract reflects the consideration the Company expects to receive for fully satisfying the performance obligations in the contract. The Company’s contracts with customers are typically for products and services to be provided at fixed stated prices but may also include variable consideration. Variable consideration may include, but is not limited to, unpriced contract modifications, cost sharing provisions, incentives and awards, non-warranty claims and assertions, provisions for non-conformance and rights to return, or other payments to, or receipts from, customers and suppliers.customers. The Company estimates the variable consideration using the expected value or the most likely amount based upon the facts and circumstances, available data and trends and the history of resolving variability with specific customers and suppliers.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
The Company regularly commences work and incorporates customer-directed changes prior to negotiating pricing terms for engineering work, product modifications, and other statements of work. The Company's contractual terms typically provide for price negotiations after certain customer-directed changes have been accepted by the Company. Prices are estimated until they are contractually agreed upon with the customer. When a contract is modified, the Company evaluates whether additional distinct products and services have been promised and whether allocation of consideration is necessary. If not,at standalone selling prices, in which case the modification is treated as a change toseparate contract. If not, depending on whether the remaining performance obligations withinare distinct from the goods or services transferred on or before the modification, the modification is either treated prospectively as if it were a termination of the existing contract and the creation of a new contract, treated as if it were a part of the existing contract, or otherwise accounted fortreated as a new contract prospectively.some combination.
The Company allocates the consideration for a contract to the performance obligations on the basis of their relative standalone selling price. The Company estimates the likelihood of the amount of options that the customer is going to exercise when assessing the existence of performance obligations with respect to this allocation or for assessing the impact of loss contracts.
The Company typically provides warranties on all the Company's products and services. Generally, warranties are not priced separately because customers cannot purchase them independently of the products or services under contract so they do not create performance obligations. SpiritThe Company's warranties generally provide assurance to the Company's customers that the products or services meet the specifications in the contract. In the event that there is a warranty claim because of a covered design, material or workmanship issue, the Company may be required to redesign or modify the product, offer concessions, and/or pay the customer for repairs or perform the repair. Provisions for estimated expenses related to design, service, and product warranties and certain extraordinary rework are made at the time products are sold. These costs are accrued at the time of the sale and are recorded as unallocated cost of sales. These estimates are established using historical information on the nature, frequency, and the cost experience of warranty claims, including the experience of industry peers. In the case of new development products or new customers, Spiritthe Company also considers factors including the warranty experience of other entities in the same business, management judgment, and the type and nature of the new product or new customer, among others.
Actual results could differ from those estimates and assumptions.
Revenues and Profit Recognition
Substantially all of the Company’s revenues are from long-term supply agreements with Boeing, Airbus, and other aerospace manufacturers. The Company participates in its customers’ programs by providing design, development, manufacturing, fabrication, and support services for major aerostructures in the fuselage, propulsion, and wing segments. During the early stages of a program, this frequently involves nonrecurring design and development services, including tooling. As the program matures, the Company
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
provides recurring manufacturing of products in accordance with customer design and schedule requirements. Many contracts include clauses that provide sole supplier status to the Company for the duration of the program’s life (including derivatives). The Company's long-term supply agreements typically include fixed price volume-based terms and require the satisfaction of performance obligations for the duration of the program’s life.
The identification of an accounting contract with a customer and the related promises require an assessment of each party’s rights and obligations regarding the products or services to be transferred, including an evaluation of termination clauses and presently enforceable rights and obligations. In general, these long-term supply agreements are legally governed by master supply agreements (or general terms agreements) together with special business provisions (or work package agreements), which define specific program requirements. Purchase orders (or authorizations to proceed) are issued under these agreements to reflect presently enforceable rights and obligations for the units of products and services being purchased. The units for accounting purposes (“accounting contract”) are typically determined by the purchase orders. Revenue is recognized when the Company has a contract with presently enforceable rights and obligations, including an enforceable right to payment for work performed. These agreements may lead to continuing sales for more than twenty years. Customers generally contract with the Company for requirements in a segment relating to a specific program, and the Company’s performance obligations consist of a wide range of engineering design services and manufactured structural components, as well as spare parts and repairs for OEMs. A single program may result in multiple contracts for accounting purposes, and within the respective contracts, non-recurring work elements and recurring work elements may result in multiple performance obligations. The Company generally contracts directly with its customers and is the principal in all current contracts.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
Management considers a number of factors when determining the existence of an accounting contract and the related performance obligations that include, but are not limited to, the nature and substance of the business exchange, the contractual terms and conditions, the promised products and services, the termination provisions in the contract, including the presently enforceable rights and obligations of the parties to the contract, the nature and execution of the customer’s ordering process and how the Company is authorized to perform work, whether the promised products and services are distinct or capable of being distinct within the context of the contract, as well as how and when products and services are transferred to the customer.
Revenue is recognized when, or as, control of promised products or services transfers to a customer and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those products or services. Revenue is recognized over time as work progresses when the Company is entitled to the reimbursement of costs plus a reasonable profit for work performed for which the Company has no alternate use. For these performance obligations that are satisfied over time, the Company generally recognizes revenue using an input method with revenue amounts being recognized proportionately as costs are incurred relative to the total expected costs to satisfy the performance obligation. The Company believes that costs incurred as a portion of total estimated costs is an appropriate measure of progress towards satisfaction of the performance obligation since this measure reasonably depicts the progress of the work effort. When the Company experiences abnormal production costs such as excess capacity costs the Company will expense the costs in the period incurred separately from the costs incurred for satisfaction of the performance obligations under the Company's contracts with customers.
Revenue for performance obligations that are not recognized over time are recognized at the point in time when control transfers to the customer (which is generally upon delivery). For performance obligations that are satisfied at a point in time, the Company evaluates the point in time when the customer can direct the use of, and obtain the benefits from, the products and services. Shipping and handling costs are not considered performance obligations and are included in cost of sales as incurred.
The transaction price for a contract reflects the consideration the Company expects to receive for fully satisfying the performance obligations in the contract. The Company’s current contracts do not include any significant financing components because the timing of the transfer of the underlying products and services under contract are at the customers’ discretion. Additionally, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. The Company's contracts with customers generally require payment under normal commercial terms after delivery. Payment terms are typically within 30 to 120 days of delivery. The total transaction price is allocated to each of the identified performance obligations using the relative standalone selling price to reflect the amount the Company expects to be entitled for transferring the promised products and services to the customer. A majority of the Company’s agreements with customers include options for future purchases. For the purposes of allocating transaction price, the Company assesses, based upon the facts and circumstances of the business arrangement, the amount and likelihood of options to be exercised that may result in deferral of revenue to future contracts and options. Deferred revenues are recognized as, or when, the underlying future performance obligations are satisfied.
Standalone selling price is the price at which the Company would sell a promised good or service separately to a customer. Standalone selling prices are established at contract inception and subsequent changes in transaction price are allocated on the same basis as at contract inception. Standalone selling prices for the Company’s products and services are generally not observable
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
and the Company uses the “Expected Cost plus a Margin” approach to determine standalone selling price. Expected costs are typically derived from the available periodic forecast information. If a contract modification changes the overall transaction price of an existing contract, the Company allocates the new transaction price on the basis of the relative standalone selling prices of the performance obligations and cumulative adjustments, if any, are recorded in the current period.
The Company also identifies and estimates variable consideration for contractual provisions such as unpriced contract modifications, cost sharing provisions, incentives and awards, non-warranty claims and assertions, provisions for non-conformance and rights to return, or other payments to, or receipts from, customers and suppliers. The timing of satisfaction of performance obligations and actual receipt of payment from a customer may differ and affects the balances of the contract assets and liabilities.
For contracts that are deemed to be loss contracts, the Company establishes forward loss reserves for total estimated costs that are in excess of total estimated consideration in the period in which they become known. These reserves are based on estimates for accounting contracts, plus options that the Company believes are likely to be exercised. The Company records forward loss reserves for all performance obligations in the aggregate for the accounting contract.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
Research and Development
Research and development includes costs incurred for experimentation, design, and testing that are expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents represent all highly liquid investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. Unbilled receivables are recorded on the balance sheet as contract assets, as per ASC 606 guidance. Beginning January 1, 2020, management assesses and records an allowance for credit losses on financial assets within the scope of ASU 2016-13 using the CECL model. Prior periods allowance for credit losses were based on a review of outstanding receivables that are charged off against the allowance after the potential for recovery is considered remote in accordance with legacy GAAP. The amount necessary to adjust the allowance for credit losses to management’s current estimate, as of the reporting date, on these assets is recorded in net income as credit loss expense. All credit losses reported in accordance with ASU 2016-13 were on trade receivables and/or contract assets arising from the Company’s contracts with customers. See Note 6, Accounts Receivable, net, for more information.
The Company adopted ASC 606 usinghas two agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing and Airbus to a third party financial institution. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with the modified retrospective method effective as of January 1, 2018. Accordingly, for comparative periodsCompany and continue to allow the Company to monetize prior to 2018, revenue was recognizedthe payment date for the receivables, subject to payment of a discount. No guarantees are delivered under the contract method of accounting and sales and profits were recorded on each contract blockagreements. The Company's ability to continue using the percentage-of-completion method of accounting,such agreements is primarily using unit-of-delivery. Under the units-of-delivery method, revenue is recognized baseddependent upon the numberstrength of units delivered during a periodBoeing’s and Airbus’s financial condition. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognized from the Company's balance sheet. For additional information on the sale of receivables see Note 6, Accounts Receivable, net.
Inventory
Raw materials are stated at lower of cost (principally on an actual or average cost basis) or net realizable value. Production costs for contracts, including costs expected to be recovered on specific anticipated contracts (work that has commenced because the Company expects the customer to exercise options), are classified as work-in-process and include direct material, labor, overhead, and purchases. Typically, anticipated contracts materialize and the contract pricerelated performance obligations are satisfied within 6-12 months. These costs are evaluated for impairment periodically and expenditurescapitalized costs for which anticipated contracts do not materialize are written off in the period in which it becomes known. Revenue and related cost of sales are recognized as the performance obligations are satisfied. When the Company experiences abnormal production costs such as excess capacity costs the Company will expense the costs in the period incurred excluded from inventoriable costs. Valuation reserves for excess, obsolete, and slow-moving inventory are estimated by evaluating inventory of individual raw materials and parts against both historical usage rates and forecasted production requirements. See Note 9, Inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost allocableless accumulated depreciation. Depreciation is applied using a straight-line method over the useful lives of the respective assets as described in the following table:
| | | | | |
| Estimated Useful Life |
| Land improvements | 20 years |
| Buildings | 45 years |
| Machinery and equipment | 3-20 years |
| Tooling — Airplane program — B787, Rolls-Royce | 5-20 years |
| Tooling — Airplane program — all others | 2-10 years |
| Capitalized software | 3-7 years |
The Company capitalizes certain costs, such as software coding, installation, and testing, that are incurred to purchase or to create and implement internal-use computer software. The Company’s capitalization policy includes specifications that the software must have a service life greater than one year, is legally and substantially owned by the Company, and has an acquisition cost of greater than $0.1.
Spirit AeroSystems Holdings, Inc.
Notes to the delivered units.Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
Where the Company is involved in build-to-suit leasing arrangements, the Company is deemed the owner of the asset for accounting purposes during the construction period of the asset. The Company records the related assets and liabilities for construction costs incurred under these build-to-suit leasing arrangements during the construction period. Upon completion of the asset, the Company considers whether the assets and liabilities qualify for derecognition under the sale-leaseback accounting guidance. See Note 10, Property, Plant and Equipment Net.
Impairment or Disposal of Long-Lived Assets
The Company reviews capital and amortizing intangible assets (long-lived assets) for impairment whenever events or changes in circumstances indicate that the recorded amount may not be recoverable. Assets are classified as either held-for-use or available-for-sale. For held-for-use assets, if indicators are present, we perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset group in question to its carrying amount.If the undiscounted cash flows used in the recoverability test are less than the long-lived asset group’s carrying amount, we determine the fair value of the long-lived asset group and recognize an impairment loss if the carrying amount of the long-lived asset group exceeds its fair value.For assets available-for-sale, a loss is recognized when the recorded amount exceeds the fair value less cost to sell.
Business Combinations and Goodwill
The Company accounts for business combinations in accordance with ASC Topic 805, Business Combinations. Transaction costs related to business combinations are expensed as incurred. Assets acquired and liabilities assumed are measured and recognized based on their estimated fair values at the acquisition date, any excess of the purchase consideration when compared to the fair value of the net tangible and intangible assets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. In some cases, the Company uses discounted cash flow analyses, which are based on estimates of future sales, earnings and cash flows after considering such factors as general market conditions, customer budgets, existing firm and future orders, changes in working capital, long term business plans and recent operating performance. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, the business combination is recorded and disclosed on a preliminary basis. Subsequent to the acquisition date, and not later than one year from the acquisition date, adjustments to the initial preliminary recognized amounts are recorded to the extent new information is obtained about the measurement of assets and liabilities that existed as of the date of the acquisition.
The Company assesses goodwill for impairment annually as of the first day of the fourth quarter or more descriptionfrequently if events or circumstances indicate that the fair value of a reporting unit that includes goodwill may be lower than its carrying value. The Company tests goodwill for impairment by performing a qualitative assessment or quantitative test at the reporting unit level. In performing a qualitative assessment, the Company evaluates company-specific, market and industry, economic, and other relevant factors that may impact the fair value of reporting units or the carrying value of the net assets of the respective reporting unit. If it is determined that it is more likely than not that the carrying value of the net assets is more than the fair value of the respective reporting unit, then a quantitative test is performed. Where the quantitative test is used, the Company compares the carrying value of net assets to the estimated fair value of the respective reporting unit. If the fair value is determined to be less than carrying value, a goodwill impairment loss is recognized for the amount that the carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
Deferred Financing Costs
Costs relating to long-term debt are deferred and included in other long-term assets. These costs are amortized over the term of the related debt or debt facilities and are included as a component of interest expense.
Derivative Instruments and Hedging Activity
The Company uses derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates and interest rates. Derivative financial instruments are recognized on the balance sheet as either assets or liabilities and are measured at fair value. Changes in fair value of derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is effective as part of a hedge transaction, and if it is, the type of
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
hedge transaction. Gains and losses on derivative instruments reported in other comprehensive income are subsequently included in earnings in the periods in which earnings are affected by the hedged item or when the hedge is no longer effective. Cash flows associated with the Company’s derivatives are presented as a component of the operating section of the statement of cash flows. The use of derivatives has generally been limited to interest rate swaps and foreign currency forward contracts. The Company enters into foreign currency forward 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. See Note 15, Derivative and Hedging Activities.
Fair Value of Financial Instruments
Financial instruments are measured in accordance with FASB authoritative guidance related to fair value measurements. This guidance clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about fair value measurements. See Note 14, Fair Value Measurements.
Income Taxes
Income taxes are accounted for in accordance with FASB authoritative guidance on accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts for existing assets and liabilities and their respective tax bases. Tax rate changes impacting these assets and liabilities are recognized in the period during which the rate change occurs.
Deferred tax assets are periodically evaluated to determine their recoverability and whether or not a valuation allowance is necessary. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, the Company assesses all available positive and negative evidence. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified.
This assessment is completed on a taxing jurisdiction and entity filing basis. Based on these criteria and the relative weighting of both the positive and negative evidence available, and in particular the activity surrounding the Company’s prior earnings history including the forward losses previously recognized in the U.S. and UK, management determined that it was necessary to establish a valuation allowance against nearly all of its net U.S. and UK deferred tax assets at December 31, 2020. This determination was made as the Company anticipates it will enter into a U.S. cumulative loss position during the first half of 2021, as prior period positive earnings fall outside of the three-year measurement period. Additionally, segments of the UK operations are in cumulative loss positions after the inclusion of 2020 losses. Once a company anticipates a cumulative three year loss position, there is a presumption that a company should no longer rely solely on projected future income in determining whether the deferred tax asset is more likely than not to be realized.
The Company records income tax provision or benefit based on the net income earned or net loss incurred in each tax jurisdiction and the tax rate applicable to that income or loss. In the ordinary course of business, there are transactions for which the ultimate tax outcome is uncertain. These uncertainties are accounted for in accordance with FASB authoritative guidance on accounting for the uncertainty in income taxes. The final tax outcome for these matters may be different than management's original estimates made in determining the income tax provision.A change to these estimates could impact the effective tax rate and net income or loss in subsequent periods. The Company uses the flow-through accounting method for tax credits. Under this method, tax credits reduce income tax expense.See Note 20 to the Consolidated Financial Statements, Income Taxes, for further discussion.
Stock-Based Compensation and Other Share-Based Payments
Many of the Company’s employees are participants in the Omnibus Incentive Plan of 2014 (as amended, the “Omnibus Plan”). The expense attributable to the Company’s employees is recognized over the period the amounts are earned and vested, as described in Note 19, Stock Compensation. The expense includes an estimate of expected forfeitures, based on historical forfeiture trends.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
4. New Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12”) which modifies FASB Accounting Standards Codification 740 to simplify the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company has not elected early adoption and implementation of this guidance for its December 31, 2020 consolidated financial statements.The guidance will be adopted and implemented for its fiscal year beginning January 1, 2021. The adoption is not expected to have a material impact to our financial position or results of operations.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022, and an entity may elect to apply ASU 2020-04 for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. An entity may elect to apply ASU 2020-04 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements but has not elected to adopt as of December 31, 2020.
5. Changes in Estimates
The Company has a periodic forecasting process in which management assesses the progress and performance of the Company’s programs. This process requires management to review each program’s progress by evaluating the program schedule, changes to identified risks and opportunities, changes to estimated revenues and costs for the accounting contracts (and options if applicable), and any outstanding contract matters. Risks and opportunities include but are not limited to management’s judgment about the cost associated with the Company’s ability to achieve the schedule, technical requirements (e.g., a newly-developed product versus a mature product), and any other program requirements. Due to the span of years it may take to completely satisfy the performance obligations for the accounting contracts (and options, if any) and the scope and nature of the work required to be performed on those contracts, the estimation of total revenue and costs is subject to many variables and, accordingly, is subject to change based upon judgment. When adjustments in estimated total consideration or estimated total cost are required, any changes from prior estimates for fully satisfied performance obligations are recognized in the current period as a cumulative catch-up adjustment for the inception-to-date effect of such changes. Cumulative catch-up adjustments are driven by several factors including production efficiencies, assumed rate of production, the rate of overhead absorption, changes to scope of work, and contract modifications. Cumulative catch-up adjustments are primarily related to changes in the estimated margin of contracts with performance obligations that are satisfied over time.
Changes in estimates are summarized below:
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
| | | | | | | | | | | |
| Changes in Estimates | December 31, 2020 | December 31, 2019 | December 31, 2018 |
| (Unfavorable) Favorable Cumulative Catch-up Adjustments by Segment | | | |
| Fuselage | (17.5) | | (1.3) | | (5.3) | |
| Propulsion | (7.8) | | (1.2) | | (0.2) | |
| Wing | (5.1) | | 0.5 | | 1.7 | |
| Total (Unfavorable) Favorable Cumulative Catch-up Adjustment | (30.4) | | (2.0) | | (3.8) | |
| | | |
| (Forward Loss) and Changes in Estimates on Loss Programs by Segment | | | |
| Fuselage | (274.3) | | (37.9) | | 3.4 | |
| Propulsion | (36.9) | | (15.1) | | (0.7) | |
| Wing | (59.1) | | (10.5) | | 1.2 | |
| Total (Forward Loss) and Change in Estimate on Loss Program | (370.3) | | (63.5) | | 3.9 | |
| | | |
| Total Change in Estimate | (400.7) | | (65.5) | | 0.1 | |
| EPS Impact (diluted per share based on statutory tax rate) | (3.07) | | $ | (0.50) | | 0 | |
2020 Changes in Estimates
During the twelve months ended December 31, 2020, the Company recognized net forward loss charges of $370.3 primarily driven by production rate changes on B787 and A350 from 10 aircraft per month to 5 aircraft per month and 9 aircraft per month to 4 aircraft per month, respectively. Unfavorable cumulative catch up adjustments of $30.4 were primarily driven by rate reduction across all overtime programs due to the COVID-19 pandemic.
2019 Changes in Estimates
During the twelve months ended December 31, 2019, the Company recognized net forward loss charges of $65.5 primarily driven by the production rate change on B787 from 14 aircraft per month to 10 aircraft per month.
2018 Changes in Estimates
Favorable changes in estimates on loss programs were primarily driven by favorable performance on cost initiatives and mitigation of risks, partially offset by forward loss charges due to the adoption of ASC 606ASU 2017-07 on the B787 program. Total unfavorable cumulative catch-up adjustments were driven by increased production costs incurred due to factory disruption challenges on the B737 program.
6. Accounts Receivable, net
Accounts receivable represent the Company’s unconditional rights to consideration, subject to the payment terms of the contract, for which only the passage of time is required before payment. Unbilled receivables are reflected under contract assets on the balance sheet. Beginning January 1, 2020, management assesses and records an allowance for credit losses using a current expected credit loss ("CECL") model. See Allowance for Credit Losses, below. Prior periods allowance for credit losses were based on legacy GAAP.
Accounts receivable, net consists of the following:
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
| | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 |
| Trade receivables | $ | 458.9 | | | $ | 515.2 | |
| Other | 31.1 | | | 32.6 | |
| Less: allowance for credit losses | (5.6) | | | (1.4) | |
| Accounts receivable, net | $ | 484.4 | | | $ | 546.4 | |
The Company has two agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing and Airbus to third party financial institutions. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with the Company and they continue to allow the Company to monetize the receivables prior to their payment date, subject to payment of a discount. No guarantees are delivered under the agreements. The Company's ability to continue using such agreements is primarily dependent upon the strength of Boeing’s and Airbus’s financial condition. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being derecognized from the Company's balance sheet. For the twelve months ended December 31, 2020, $2,011.7 of accounts receivable have been sold via this arrangement. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on sale of receivables is $8.9 for the year ended December 31, 2020 and is included in Other (expense) income. See Note 23, Other Income (Expense), net.
Allowance for Credit Losses
Beginning January 1, 2020, management assesses and records an allowance for credit losses on financial assets within the scope of ASU 2016-13 using the CECL model. Prior periods allowance for credit losses were based on a review of outstanding receivables that are charged off against the allowance after the potential for recovery is considered remote in accordance with legacy GAAP. The amount necessary to adjust the allowance for credit losses to management’s current estimate, as of the reporting date, on these assets is recorded in net income as credit loss expense. All credit losses reported in accordance with ASU 2016-13 were on trade receivables and/or contract assets arising from the Company’s contracts with customers.
In determining the appropriate methodology to use within the CECL model for receivables and contract assets arising from the Company’s contracts with customers, the Company considered the risk characteristics of the applicable assets. The Company segregated the trade receivables and contract assets into “pools” of assets at the major customer level. The Company's assessment was based on similarity of risk characteristics shared by these pool of assets. Management observed that risks for collectability, with regard to the trade receivables and contract assets resulting from contracts with customers include: macro level economic conditions that impact all of the Company's customers, macro level market conditions that could impact the Company's customers in certain aircraft categories, certain customer specific market conditions, certain customer specific economic conditions, and certain customer specific administrative conditions.
The Company selected a loss-rate method for the CECL model, based on the relationship between historical write-offs of receivables and the impactsunderlying sales by major customer. Utilizing this model, a historical loss-rate is applied against the amortized cost of adoptionapplicable assets, at the time the asset is established. The loss rate reflects the Company’s current estimate of the risk of loss (even when that risk is remote) over the expected remaining contractual life of the assets. The Company's policy is to deduct write-offs from the allowance for credit losses account in the period in which the financial assets are deemed uncollectible.
The changes to the allowance for credit losses and related credit loss expense reported for the twelve months ended December 31, 2020 were solely based on the financial statementsresults of the CECL model. During the period, worsening economic conditions related to the COVID-19 pandemic influenced management’s current estimate of expected credit losses. In particular, trade accounts receivables from certain suppliers and third party Spirit Aerosystems Aftermarket Solutions ("SAAS”) customers are now included in the historical loss rate method CECL model at a higher loss-rate than originally estimated. This change did not have a material impact on reported results for the twelve months ended December 31, 2020. Other than this change, there have been no significant changes in the factors that influence management’s current estimate of expected credit losses, nor changes to the Company’s accounting policies or CECL methodology. The beginning balances, current period activity, and ending balances of the allocation for credit losses on accounts receivable and contract assets were not material.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
7. Contract Assets and Contract Liabilities
Contract assets primarily represent revenues recognized for performance obligations that have been satisfied but for which amounts have not been billed. Contract assets, current are those for which performance obligations have been fully satisfied and billing is expected within 12 months of contract origination and contract assets, long-term are fully satisfied obligations that are expected to be billed in more than 12 months. No impairments to contract assets were recorded for the period ended December 31, 2018, please see2020 and 2019. See also Note 2, Adoption6, Accounts Receivable, net.
Contract liabilities are established for cash received that is in excess of New Accounting Standards.revenues recognized and are contingent upon the satisfaction of performance obligations. Contract liabilities primarily consist of cash received on contracts for which revenue has been deferred since the receipts are in excess of transaction price resulting from the allocation of consideration based on relative standalone selling price to future units (including those under option that the Company believes are likely to be exercised) with prices that are lower than standalone selling price. These contract liabilities will be recognized earlier if the options are not fully exercised, or immediately, if the contract is terminated prior to the options being fully exercised.
| | | | | | | | | | | |
| December 31, 2020 | December 31, 2019 | Change |
| Contract assets | $ | 372.8 | | $ | 534.7 | | $ | (161.9) | |
| Contract liabilities | (469.6) | | (514.6) | | 45.0 | |
| Net contract assets (liabilities) | $ | (96.8) | | $ | 20.1 | | $ | (116.9) | |
For the period ended December 31, 2020, the decrease in contract assets reflects the net impact of decreases in revenue recognized in excess of billed revenues during the period.The decrease in contract liabilities reflects the net decrease of deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $118.2 of revenue that was included in the contract liability balance at the beginning of the period.
| | | | | | | | | | | |
| December 31, 2019 | December 31, 2018 | Change |
| Contract assets | $ | 534.7 | | $ | 523.5 | | $ | 11.2 | |
| Contract liabilities | (514.6) | | (527.7) | | 13.1 | |
| Net contract assets (liabilities) | $ | 20.1 | | $ | (4.2) | | $ | 24.3 | |
For the period ended December 31, 2019, the increase in contract assets reflects the net impact of additional revenue recognized in excess of billed revenues during the period.The decrease in contract liabilities reflects the net impact of additional deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $139.0 of revenue that was included in the contract liability balance at the beginning of the period.
8. Revenue Disaggregation and Outstanding Performance Obligations
DisaggregationDeferred Financing Costs
Costs relating to long-term debt are deferred and included in other long-term assets. These costs are amortized over the term of Revenuethe related debt or debt facilities and are included as a component of interest expense.
Derivative Instruments and Hedging Activity
The Company disaggregates revenue baseduses derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates and interest rates. Derivative financial instruments are recognized on the methodbalance sheet as either assets or liabilities and are measured at fair value. Changes in fair value of measuring satisfactionderivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is effective as part of a hedge transaction, and if it is, the performance obligation either over time or at a point in time. Additionally, the Company disaggregates revenue based upon the location where products and services are transferred to the customer, and based upon major customer. The Company’s principal operating segments and related revenue are noted in Note 22, Segment Information.
The following table disaggregates revenues by the methodtype of performance obligation satisfaction:
|
| | | |
| | For the Twelve Months Ended |
| Revenue | December 31,
2018 |
| Contracts with performance obligations satisfied over time | $ | 5,628.5 |
|
| Contracts with performance obligations satisfied at a point in time | 1,593.5 |
|
| Total Revenue | $ | 7,222.0 |
|
The following table disaggregates revenue by major customer:
|
| | | |
| | For the Twelve Months Ended |
| Customer | December 31, 2018 |
| Boeing | $ | 5,677.7 |
|
| Airbus | 1,180.8 |
|
| Other | 363.5 |
|
| Total net revenues | $ | 7,222.0 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
hedge transaction. Gains and losses on derivative instruments reported in other comprehensive income are subsequently included in earnings in the periods in which earnings are affected by the hedged item or when the hedge is no longer effective. Cash flows associated with the Company’s derivatives are presented as a component of the operating section of the statement of cash flows. The use of derivatives has generally been limited to interest rate swaps and foreign currency forward contracts. The Company enters into foreign currency forward 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. See Note 15, Derivative and Hedging Activities.
Fair Value of Financial Instruments
Financial instruments are measured in accordance with FASB authoritative guidance related to fair value measurements. This guidance clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about fair value measurements. See Note 14, Fair Value Measurements.
Income Taxes
Income taxes are accounted for in accordance with FASB authoritative guidance on accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts for existing assets and liabilities and their respective tax bases. Tax rate changes impacting these assets and liabilities are recognized in the period during which the rate change occurs.
Deferred tax assets are periodically evaluated to determine their recoverability and whether or not a valuation allowance is necessary. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, the Company assesses all available positive and negative evidence. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified.
This assessment is completed on a taxing jurisdiction and entity filing basis. Based on these criteria and the relative weighting of both the positive and negative evidence available, and in particular the activity surrounding the Company’s prior earnings history including the forward losses previously recognized in the U.S. and UK, management determined that it was necessary to establish a valuation allowance against nearly all of its net U.S. and UK deferred tax assets at December 31, 2020. This determination was made as the Company anticipates it will enter into a U.S. cumulative loss position during the first half of 2021, as prior period positive earnings fall outside of the three-year measurement period. Additionally, segments of the UK operations are in cumulative loss positions after the inclusion of 2020 losses. Once a company anticipates a cumulative three year loss position, there is a presumption that a company should no longer rely solely on projected future income in determining whether the deferred tax asset is more likely than not to be realized.
The Company records income tax provision or benefit based on the net income earned or net loss incurred in each tax jurisdiction and the tax rate applicable to that income or loss. In the ordinary course of business, there are transactions for which the ultimate tax outcome is uncertain. These uncertainties are accounted for in accordance with FASB authoritative guidance on accounting for the uncertainty in income taxes. The final tax outcome for these matters may be different than management's original estimates made in determining the income tax provision.A change to these estimates could impact the effective tax rate and net income or loss in subsequent periods. The Company uses the flow-through accounting method for tax credits. Under this method, tax credits reduce income tax expense.See Note 20 to the Consolidated Financial Statements, Income Taxes, for further discussion.
Stock-Based Compensation and Other Share-Based Payments
Many of the Company’s employees are participants in the Omnibus Incentive Plan of 2014 (as amended, the “Omnibus Plan”). The expense attributable to the Company’s employees is recognized over the period the amounts are earned and vested, as described in Note 19, Stock Compensation. The expense includes an estimate of expected forfeitures, based on historical forfeiture trends.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
4. New Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12”) which modifies FASB Accounting Standards Codification 740 to simplify the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company has not elected early adoption and implementation of this guidance for its December 31, 2020 consolidated financial statements.The guidance will be adopted and implemented for its fiscal year beginning January 1, 2021. The adoption is not expected to have a material impact to our financial position or results of operations.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022, and an entity may elect to apply ASU 2020-04 for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. An entity may elect to apply ASU 2020-04 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements but has not elected to adopt as of December 31, 2020.
5. Changes in Estimates
The following table disaggregatesCompany has a periodic forecasting process in which management assesses the progress and performance of the Company’s programs. This process requires management to review each program’s progress by evaluating the program schedule, changes to identified risks and opportunities, changes to estimated revenues and costs for the accounting contracts (and options if applicable), and any outstanding contract matters. Risks and opportunities include but are not limited to management’s judgment about the cost associated with the Company’s ability to achieve the schedule, technical requirements (e.g., a newly-developed product versus a mature product), and any other program requirements. Due to the span of years it may take to completely satisfy the performance obligations for the accounting contracts (and options, if any) and the scope and nature of the work required to be performed on those contracts, the estimation of total revenue and costs is subject to many variables and, accordingly, is subject to change based upon judgment. When adjustments in estimated total consideration or estimated total cost are required, any changes from prior estimates for fully satisfied performance obligations are recognized in the location where controlcurrent period as a cumulative catch-up adjustment for the inception-to-date effect of productssuch changes. Cumulative catch-up adjustments are transferreddriven by several factors including production efficiencies, assumed rate of production, the rate of overhead absorption, changes to scope of work, and contract modifications. Cumulative catch-up adjustments are primarily related to changes in the estimated margin of contracts with performance obligations that are satisfied over time.
Changes in estimates are summarized below:
Spirit AeroSystems Holdings, Inc.
Notes to the customer:Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
|
| | | |
| | For the Twelve Months Ended |
| Location | December 31,
2018 |
| United States | $ | 5,967.1 |
|
| International | |
| United Kingdom | 763.3 |
|
| Other | 491.6 |
|
| Total International | 1,254.9 |
|
| Total Revenue | $ | 7,222.0 |
|
| | | | | | | | | | | |
| Changes in Estimates | December 31, 2020 | December 31, 2019 | December 31, 2018 |
| (Unfavorable) Favorable Cumulative Catch-up Adjustments by Segment | | | |
| Fuselage | (17.5) | | (1.3) | | (5.3) | |
| Propulsion | (7.8) | | (1.2) | | (0.2) | |
| Wing | (5.1) | | 0.5 | | 1.7 | |
| Total (Unfavorable) Favorable Cumulative Catch-up Adjustment | (30.4) | | (2.0) | | (3.8) | |
| | | |
| (Forward Loss) and Changes in Estimates on Loss Programs by Segment | | | |
| Fuselage | (274.3) | | (37.9) | | 3.4 | |
| Propulsion | (36.9) | | (15.1) | | (0.7) | |
| Wing | (59.1) | | (10.5) | | 1.2 | |
| Total (Forward Loss) and Change in Estimate on Loss Program | (370.3) | | (63.5) | | 3.9 | |
| | | |
| Total Change in Estimate | (400.7) | | (65.5) | | 0.1 | |
| EPS Impact (diluted per share based on statutory tax rate) | (3.07) | | $ | (0.50) | | 0 | |
Research
2020 Changes in Estimates
During the twelve months ended December 31, 2020, the Company recognized net forward loss charges of $370.3 primarily driven by production rate changes on B787 and DevelopmentA350 from 10 aircraft per month to 5 aircraft per month and 9 aircraft per month to 4 aircraft per month, respectively. Unfavorable cumulative catch up adjustments of $30.4 were primarily driven by rate reduction across all overtime programs due to the COVID-19 pandemic.
Research2019 Changes in Estimates
During the twelve months ended December 31, 2019, the Company recognized net forward loss charges of $65.5 primarily driven by the production rate change on B787 from 14 aircraft per month to 10 aircraft per month.
2018 Changes in Estimates
Favorable changes in estimates on loss programs were primarily driven by favorable performance on cost initiatives and development includesmitigation of risks, partially offset by forward loss charges due to the adoption of ASU 2017-07 on the B787 program. Total unfavorable cumulative catch-up adjustments were driven by increased production costs incurred for experimentation, design, and testing that are expensed as incurred.due to factory disruption challenges on the B737 program.
Cash and Cash Equivalents
Cash and cash equivalents represent all highly liquid investments with original maturities of three months or less.
6. Accounts Receivable, net
Accounts receivable represent the Company’s unconditional rights to consideration, subject to the payment terms of the contract, for which only the passage of time is required before payment. Unbilled receivables are reflected under contract assets on the balance sheet. Beginning January 1, 2020, management assesses and records an allowance for credit losses using a current expected credit loss ("CECL") model. See Allowance for Credit Losses, below. Prior periods allowance for credit losses were based on legacy GAAP.
Accounts receivable, are recorded atnet consists of the invoiced amountfollowing:
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and do not bear interest. For 2018, unbilled receivables were recorded on the balance sheet as contract assets, asRM in millions other than per ASC 606 guidance. For 2017 and prior periods, consistent with industry practice, the Company classified unbilled receivables related to contracts accounted for under the long-term contract method of accounting as current. share amounts)
| | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 |
| Trade receivables | $ | 458.9 | | | $ | 515.2 | |
| Other | 31.1 | | | 32.6 | |
| Less: allowance for credit losses | (5.6) | | | (1.4) | |
| Accounts receivable, net | $ | 484.4 | | | $ | 546.4 | |
The Company determines an allowance for doubtful accounts based on a review of outstanding receivables. Account balances are charged off against the allowance after the potential for recovery is considered remote. The Company’s allowance for doubtful accounts was approximately $0.7 and $1.3 at December 31, 2018 and December 31, 2017, respectively.
In October 2017, the Company entered into an agreement (the “Receivable Sales Agreement”),has two agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing and Airbus to a third party financial institution.institutions. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with the Company and they continue to allow the Company to monetize the receivables prior to their payment date, subject to payment of a discount. No guarantees are delivered under the agreements. The Company's ability to continue using such agreements is primarily dependent upon the strength of Boeing’s and Airbus’s financial condition. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognizedderecognized from the Company's balance sheet. For the twelve months ended December 31, 2020, $2,011.7 of accounts receivable have been sold via this arrangement. The Receivable Sales Agreement providesproceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on sale of receivables is $8.9 for the continuing saleyear ended December 31, 2020 and is included in Other (expense) income. See Note 23, Other Income (Expense), net.
Allowance for Credit Losses
Beginning January 1, 2020, management assesses and records an allowance for credit losses on financial assets within the scope of certain receivablesASU 2016-13 using the CECL model. Prior periods allowance for credit losses were based on a revolving basis until terminatedreview of outstanding receivables that are charged off against the allowance after the potential for recovery is considered remote in accordance with legacy GAAP. The amount necessary to adjust the allowance for credit losses to management’s current estimate, as of the reporting date, on these assets is recorded in net income as credit loss expense. All credit losses reported in accordance with ASU 2016-13 were on trade receivables and/or contract assets arising from the Company’s contracts with customers.
In determining the appropriate methodology to use within the CECL model for receivables and contract assets arising from the Company’s contracts with customers, the Company considered the risk characteristics of the applicable assets. The Company segregated the trade receivables and contract assets into “pools” of assets at the major customer level. The Company's assessment was based on similarity of risk characteristics shared by either party. The receivables under the Receivable Sales Agreement are sold without recoursethese pool of assets. Management observed that risks for collectability, with regard to the third party financial institution. See Note 6, Accounts Receivable, net,trade receivables and contract assets resulting from contracts with customers include: macro level economic conditions that impact all of the Company's customers, macro level market conditions that could impact the Company's customers in certain aircraft categories, certain customer specific market conditions, certain customer specific economic conditions, and certain customer specific administrative conditions.
The Company selected a loss-rate method for further discussion.
Inventory
Raw materials are stated at lowerthe CECL model, based on the relationship between historical write-offs of cost (principally on an actual or average cost basis) or market. Production costs for contracts, including costs expected to be recovered on specific anticipated contracts (work that has commenced because the Company expects the customer to exercise options), are classified as work-in-process and include direct material, labor, overhead, and purchases. Typically, anticipated contracts materializereceivables and the related performance obligations are satisfied within 6-12 months. Revenue and relatedunderlying sales by major customer. Utilizing this model, a historical loss-rate is applied against the amortized cost of sales are recognized asapplicable assets, at the performance obligations are satisfied. These costs are evaluatedtime the asset is established. The loss rate reflects the Company’s current estimate of the risk of loss (even when that risk is remote) over the expected remaining contractual life of the assets. The Company's policy is to deduct write-offs from the allowance for impairment periodically and capitalized costs for which anticipated contracts do not materialize are written offcredit losses account in the period in which it becomes known. Valuation reservesthe financial assets are deemed uncollectible.
The changes to the allowance for excess, obsolete,credit losses and slow-moving inventory are estimated by evaluating inventory of individual raw materials and parts against both historical usage rates and forecasted production requirements. Work-in-process includes $151.6 in costs incurred in anticipation of specific future contracts and no impairments were chargedrelated credit loss expense reported for the period endingtwelve months ended December 31, 2018. See Note 9, Inventory.
2020 were solely based on the results of the CECL model. During the period, worsening economic conditions related to the COVID-19 pandemic influenced management’s current estimate of expected credit losses. In particular, trade accounts receivables from certain suppliers and third party Spirit Aerosystems Aftermarket Solutions ("SAAS”) customers are now included in the historical loss rate method CECL model at a higher loss-rate than originally estimated. This change did not have a material impact on reported results for the twelve months ended December 31, 2020. Other than this change, there have been no significant changes in the factors that influence management’s current estimate of expected credit losses, nor changes to the Company’s accounting policies or CECL methodology. The beginning balances, current period activity, and ending balances of the allocation for credit losses on accounts receivable and contract assets were not material.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
Property, Plant7. Contract Assets and EquipmentContract Liabilities
Property, plant
Contract assets primarily represent revenues recognized for performance obligations that have been satisfied but for which amounts have not been billed. Contract assets, current are those for which performance obligations have been fully satisfied and equipmentbilling is expected within 12 months of contract origination and contract assets, long-term are statedfully satisfied obligations that are expected to be billed in more than 12 months. No impairments to contract assets were recorded for the period ended December 31, 2020 and 2019. See also Note 6, Accounts Receivable, net.
Contract liabilities are established for cash received that is in excess of revenues recognized and are contingent upon the satisfaction of performance obligations. Contract liabilities primarily consist of cash received on contracts for which revenue has been deferred since the receipts are in excess of transaction price resulting from the allocation of consideration based on relative standalone selling price to future units (including those under option that the Company believes are likely to be exercised) with prices that are lower than standalone selling price. These contract liabilities will be recognized earlier if the options are not fully exercised, or immediately, if the contract is terminated prior to the options being fully exercised.
| | | | | | | | | | | |
| December 31, 2020 | December 31, 2019 | Change |
| Contract assets | $ | 372.8 | | $ | 534.7 | | $ | (161.9) | |
| Contract liabilities | (469.6) | | (514.6) | | 45.0 | |
| Net contract assets (liabilities) | $ | (96.8) | | $ | 20.1 | | $ | (116.9) | |
For the period ended December 31, 2020, the decrease in contract assets reflects the net impact of decreases in revenue recognized in excess of billed revenues during the period.The decrease in contract liabilities reflects the net decrease of deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $118.2 of revenue that was included in the contract liability balance at cost less accumulated depreciation. Depreciation is applied using a straight-line method over the useful livesbeginning of the respectiveperiod.
| | | | | | | | | | | |
| December 31, 2019 | December 31, 2018 | Change |
| Contract assets | $ | 534.7 | | $ | 523.5 | | $ | 11.2 | |
| Contract liabilities | (514.6) | | (527.7) | | 13.1 | |
| Net contract assets (liabilities) | $ | 20.1 | | $ | (4.2) | | $ | 24.3 | |
For the period ended December 31, 2019, the increase in contract assets as describedreflects the net impact of additional revenue recognized in excess of billed revenues during the period.The decrease in contract liabilities reflects the net impact of additional deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $139.0 of revenue that was included in the following table:
|
| |
| Estimated Useful Life |
Land improvements | 20 years |
Buildings | 45 years |
Machinery and equipment | 3-20 years |
Tooling — Airplane program — B787, Rolls-Royce | 5-20 years |
Tooling — Airplane program — all others | 2-10 years |
Capitalized software | 3-7 years |
The Company capitalizes certain costs, such as software coding, installation, and testing, that are incurred to purchase or to create and implement internal-use computer software. The Company’s capitalization policy includes specifications thatcontract liability balance at the software must have a service life greater than one year, is legally and substantially owned by Spirit, and has an acquisition cost of greater than $0.1.
Where the Company is involved in build-to-suit leasing arrangements, the Company is deemed the ownerbeginning of the asset for accounting purposes during the construction period of the asset. The Company records the related assetsperiod.
8. Revenue Disaggregation and liabilities for construction costs incurred under these build-to-suit leasing arrangements during the construction period. Upon completion of the asset, the Company considers whether the assets and liabilities qualify for derecognition under the sale-leaseback accounting guidance.Outstanding Performance Obligations
Impairment or Disposal of Long-Lived Assets and Goodwill
Spirit reviews capital and amortization of intangible assets (long-lived assets) for impairment on an annual basis or whenever events or changes in circumstances indicate that the recorded amount may not be recoverable. Under the standard, assets must be classified as either held-for-use or available-for-sale. An impairment loss is recognized when the recorded amount of an asset that is held for use exceeds the projected undiscounted future net cash flows expected from its use and disposal, and is measured as the amount by which the recorded amount of the asset exceeds its fair value, which is measured by discounted cash flows when quoted market prices are not available. For assets available-for-sale, an impairment loss is recognized when the recorded amount exceeds the fair value less cost to sell. The Company performs an annual impairment test for goodwill in the fourth quarter of each year, or more frequently, if an event occurs or circumstances change that would more likely than not reduce fair value below current value.
Deferred Financing Costs
Costs relating to long-term debt are deferred and included in other long-term assets. These costs are amortized over the term of the related debt or debt facilities and are included as a component of interest expense.
Derivative Instruments and Hedging Activity
The Company uses derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates and interest rates. Derivative financial instruments are recognized on the balance sheet as either assets or liabilities and are measured at fair value. Changes in fair value of derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is effective as part of a hedge transaction, and if it is, the type of
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
hedge transaction. Gains and losses on derivative instruments reported in other comprehensive income are subsequently included in earnings in the periods in which earnings are affected by the hedged item or when the hedge is no longer effective. Cash flows associated with the Company’s derivatives are presented as a component of the operating section of the statement of cash flows. The use of derivatives has generally been limited to interest rate swaps and foreign currency forward contracts. The Company enters into foreign currency forward 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.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, See Note 15, Derivative and RM in millions other than per share amounts)
Hedging Activities.
Fair Value of Financial Instruments
Financial instruments are measured in accordance with FASB authoritative guidance related to fair value measurements. This guidance clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about fair value measurements. See Note 13, 14, Fair Value Measurements.
Income Taxes
Income taxes are accounted for in accordance with FASB authoritative guidance on accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts for existing assets and liabilities and their respective tax bases. Tax rate changes impacting these assets and liabilities are recognized in the period during which the rate change occurs.
Deferred tax assets are periodically evaluated to determine their recoverability and whether or not a valuation allowance is necessary. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, we assessthe Company assesses all available positive and negative evidence. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified.
We record anThis assessment is completed on a taxing jurisdiction and entity filing basis. Based on these criteria and the relative weighting of both the positive and negative evidence available, and in particular the activity surrounding the Company’s prior earnings history including the forward losses previously recognized in the U.S. and UK, management determined that it was necessary to establish a valuation allowance against nearly all of its net U.S. and UK deferred tax assets at December 31, 2020. This determination was made as the Company anticipates it will enter into a U.S. cumulative loss position during the first half of 2021, as prior period positive earnings fall outside of the three-year measurement period. Additionally, segments of the UK operations are in cumulative loss positions after the inclusion of 2020 losses. Once a company anticipates a cumulative three year loss position, there is a presumption that a company should no longer rely solely on projected future income in determining whether the deferred tax asset is more likely than not to be realized.
The Company records income tax expenseprovision or benefit based on the net income earned or net loss incurred in each tax jurisdiction and the tax rate applicable to that income or loss. In the ordinary course of business, there are transactions for which the ultimate tax outcome is uncertain. These uncertainties are accounted for in accordance with FASB authoritative guidance on accounting for the uncertainty in income taxes. The final tax outcome for these matters may be different than management's original estimates made in determining the income tax provision.A change to these estimates could impact the effective tax rate and net income or loss in subsequent periods. We useThe Company uses the flow-through accounting method for tax credits. Under this method, tax credits reduce income tax expense.See Note 19, 20 to the Consolidated Financial Statements, Income Taxes, for further discussion.
Stock-Based Compensation and Other Share-Based Payments
Many of the Company’s employees are participants in various stock compensation plans.the Omnibus Incentive Plan of 2014 (as amended, the “Omnibus Plan”). The expense attributable to the Company’s employees is recognized over the period the amounts are earned and vested, as described in Note 18, 19, Stock Compensation. The expense includes an estimate of expected forfeitures, based on historical forfeiture trends.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
4. New Accounting Pronouncements
In August 2018,December 2019, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General(Topic 715-20): Disclosure Framework—Changes to2019-12, Simplifying the Disclosure RequirementsAccounting for Defined Benefit Plans (“Income Taxes ("ASU 2018-14”2019-12”), which modifies FASB Accounting Standards Codification 740 to simplify the disclosure requirementsaccounting for defined benefit pension plans and other postretirement plans.income taxes. ASU 2018-142019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impacthas not elected early adoption and implementation of adopting this guidance on ourfor its December 31, 2020 consolidated financial statements.The guidance will be adopted and implemented for its fiscal year beginning January 1, 2021. The adoption is not expected to have a material impact to our financial position or results of operations.
In August 2018,March 2020, the FASB issued ASU No. 2018-13, Fair Value Measurement2020-04, Reference Rate Reform (Topic 820): Disclosure Framework — Changes to848) Facilitation of the Disclosure Requirements for Fair Value MeasurementEffects of Reference Rate Reform on Financial Reporting (“ASU 2018-13”2020-04”), which modifiesprovides temporary optional guidance for a limited period of time to ease the disclosure requirementspotential burden in accounting for (or recognizing the effects of) reference rate reform on fair value measurementsfinancial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by removing, modifying, or addingreference rate reform if certain disclosures. Certain disclosures incriteria are met. ASU 2018-13 are required to be applied on a retrospective basis and others on a prospective basis. ASU 2018-132020-04 is effective for fiscal yearsall entities as of March 12, 2020 through December 31, 2022, and an entity may elect to apply ASU 2020-04 for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. An entity may elect to apply ASU 2020-04 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after December 15, 2019, with early adoption permitted.the beginning of the interim period that includes March 12, 2020. The Company is currently evaluating the potential impact of adopting this guidance on ourits consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) (“ASU 2018-02”). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the TCJA from accumulated other comprehensive income into retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. ASU 2018-02 may be applied retrospectively to each period in which the effect of the TCJA is recognized or in the period of adoption. The guidance will require a new disclosure regarding a company’s accounting policy for releasing the tax effects in AOCI. The Company is currently evaluating how to apply the new guidance andstatements but has not determined whether it will electelected to reclassify stranded amounts. The adoption of ASU 2018-02 is not expected to have a material effect on our consolidated financial statements.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which expands component and fair value hedging, specifies the presentation of the effects of hedging instruments, and eliminates the separate measurement and presentation of hedge ineffectiveness. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted ASU 2017-12adopt as of January 1, 2018. The adoption of ASU 2017-12 did not have a material impact to the Company’s consolidated financial statements.December 31, 2020.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit losses (Topic 326) (“ASU 2016-13”), which requires the immediate recognition of management's estimates of current expected credit losses. ASU 2016-13 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2019. Early adoption is permitted after fiscal years beginning December 15, 2018. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). This update requires recognition of all lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018. Early adoption is permitted. ASU 2016-02 allows for the modified retrospective transition approach and provides certain optional transition relief. The Company adopted the requirements of ASU 2016-02 on January 1, 2019 using the modified retrospective transition approach, with the cumulative effect of the initial application recognized at the date of adoption.
The Company has reviewed all of its current active leases and has implemented the necessary processes and systems to comply with the requirements of ASU 2016-02. Upon adoption of ASU 2016-02, the Company recognized a Right Of Use ("ROU") asset on its books for the net present value of all of its active leases with terms greater than 12 months, with an offsetting lease liability. The ROU asset and corresponding lease liability will be amortized over the course of the lease term, which includes all options that Company expects it will exercise.
Based on currently available information, the Company estimates the Transition Adjustment will have an impact of $50.0 - $60.0 increase to the assets and liabilities on the Consolidated Balance Sheet. The Company does not expect the adoption of ASU 2016-02 to have any material impact to Net Income or Cash Flows.
5. Changes in Estimates
The Company has a periodic forecasting process in which management assesses the progress and performance of the Company’s programs. This process requires management to review each program’s progress by evaluating the program schedule, changes to identified risks and opportunities, changes to estimated revenues and costs for the accounting contracts (and options if applicable), and any outstanding contract matters. Risks and opportunities include but are not limited to management’s judgment about the cost associated with the Company’s ability to achieve the schedule, technical requirements (e.g., a newly-developed product versus a mature product), and any other program requirements. Due to the span of years it may take to completely satisfy the performance obligations for the accounting contracts (and options, if any) and the scope and nature of the work required to be performed on those contracts, the estimation of total revenue and costs is subject to many variables and, accordingly, is subject to change based upon judgment. When adjustments in estimated total consideration or estimated total cost are required, any changes from prior estimates for fully satisfied performance obligations are recognized in the current period as a cumulative catch-up adjustment for the inception-to-date effect of such changes. Cumulative catch-up adjustments are driven by several factors including production efficiencies, assumed rate of production, the rate of overhead absorption, changes to scope of work, and contract modifications. For 2017, the changes in estimates apply to contract blocks under legacy GAAP under the units-of-delivery method. For 2018, cumulativeCumulative catch-up adjustments are primarily related to changes in measurethe estimated margin of progress for contracts with performance obligations that are satisfied over time.
Changes in estimates are summarized below:
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
| | | | | | | | | | | |
| Changes in Estimates | December 31, 2020 | December 31, 2019 | December 31, 2018 |
| (Unfavorable) Favorable Cumulative Catch-up Adjustments by Segment | | | |
| Fuselage | (17.5) | | (1.3) | | (5.3) | |
| Propulsion | (7.8) | | (1.2) | | (0.2) | |
| Wing | (5.1) | | 0.5 | | 1.7 | |
| Total (Unfavorable) Favorable Cumulative Catch-up Adjustment | (30.4) | | (2.0) | | (3.8) | |
| | | |
| (Forward Loss) and Changes in Estimates on Loss Programs by Segment | | | |
| Fuselage | (274.3) | | (37.9) | | 3.4 | |
| Propulsion | (36.9) | | (15.1) | | (0.7) | |
| Wing | (59.1) | | (10.5) | | 1.2 | |
| Total (Forward Loss) and Change in Estimate on Loss Program | (370.3) | | (63.5) | | 3.9 | |
| | | |
| Total Change in Estimate | (400.7) | | (65.5) | | 0.1 | |
| EPS Impact (diluted per share based on statutory tax rate) | (3.07) | | $ | (0.50) | | 0 | |
|
| | | | | | |
| Changes in Estimates | December 31, 2018 | December 31, 2017 | December 31, 2016 |
| (Unfavorable) Favorable Cumulative Catch-up Adjustments by Segment | | | |
| Fuselage | (5.3 | ) | 4.0 |
| 13.6 |
|
| Propulsion | (0.2 | ) | 3.8 |
| (0.4 | ) |
| Wing | 1.7 |
| 23.4 |
| 23.4 |
|
| Total (Unfavorable) Favorable Cumulative Catch-up Adjustment | (3.8 | ) | 31.2 |
| 36.6 |
|
| | | | |
| (Forward Loss) and Changes in Estimates on Loss Programs by Segment | | | |
| Fuselage | 3.4 |
| (223.2 | ) | (133.4 | ) |
| Propulsion | (0.7 | ) | (40.2 | ) | 10.1 |
|
| Wing | 1.2 |
| (63.9 | ) | 5.1 |
|
| Total (Forward Loss) and Change in Estimate on Loss Program | 3.9 |
| (327.3 | ) | (118.2 | ) |
| | | | |
| Total Change in Estimate | 0.1 |
| (296.1 | ) | (81.6 | ) |
| EPS Impact (diluted per share based on statutory rates) | 0.00 |
| (1.58 | ) | (0.40 | ) |
2020 Changes in Estimates
During the twelve months ended December 31, 2020, the Company recognized net forward loss charges of $370.3 primarily driven by production rate changes on B787 and A350 from 10 aircraft per month to 5 aircraft per month and 9 aircraft per month to 4 aircraft per month, respectively. Unfavorable cumulative catch up adjustments of $30.4 were primarily driven by rate reduction across all overtime programs due to the COVID-19 pandemic.
2019 Changes in Estimates
During the twelve months ended December 31, 2019, the Company recognized net forward loss charges of $65.5 primarily driven by the production rate change on B787 from 14 aircraft per month to 10 aircraft per month.
2018 Changes in Estimates
Favorable changes in estimates on loss programs were primarily driven by favorable performance on cost initiatives and mitigation of risks, partially offset by forward loss charges due to the adoption of ASU 2017-07 on the B787 program. Total unfavorable cumulative catch-up adjustments were driven by increased production costs incurred due to factory disruption challenges on the B737 program.
2017 Changes in Estimates
On August 1, 2017, Boeing and6. Accounts Receivable, net
Accounts receivable represent the Company through its subsidiary, Spirit, entered into a Collective Resolution Memorandum of Understanding (the “2017 MOU”), which required Boeing and SpiritCompany’s unconditional rights to negotiate and execute definitive documentation implementing the agreements set forth in the 2017 MOU by September 29, 2017.
On September 22, 2017, Boeing and Spirit completed their negotiation of such definitive documentation and entered into Amendment No. 30consideration, subject to the long-term supply agreement covering productspayment terms of the contract, for Boeing’s B737, B747, B767, and B777 commercial aircraft programs (“Sustaining Amendment #30”) and Amendment No. 25 towhich only the long-term supply agreement covering products for Boeing's B787 commercial aircraft program (the “787 Amendment #25” and, together with the Sustaining Amendment #30, the “Definitive Documentation”) generally established pricing terms for the B737, B747, B767, and B777 models (excluding the B777x) through December 31, 2022 (with certain limited exceptions), and for the B787-8, -9, and -10 models through line unit 1405.
In the second quarterpassage of 2017, in connection with the 2017 MOU, the Company formally extended the currenttime is required before payment. Unbilled receivables are reflected under contract block ending at line unit 1003 to line unit 1300 and established a planning block from line units 1301 to 1405. Based on cost updates, contract block extension, and planning block addition, the Company updated its estimated contract costs and revenue for the B787 program. As a result, the Company recorded a second quarter 2017 reach-forward loss of $352.8 on its B787 program. In the fourth quarter of 2017, favorable cost initiatives and benefits from absorption of fixed costs due to announced rate increases, resulted in a favorable change in estimateassets on the B787 programbalance sheet. Beginning January 1, 2020, management assesses and records an allowance for credit losses using a current expected credit loss ("CECL") model. See Allowance for Credit Losses, below. Prior periods allowance for credit losses were based on legacy GAAP.
Accounts receivable, net consists of $41.1.
During 2017, the Company recorded a forward loss on the A350XWB program of $19.4, primarily related to unfavorable exchange rate impacts on labor and non-labor costs and supplier claims.
The Company could record additional forward loss charges if there are further changes to revenue and cost estimates and/or if risks are not mitigated.
2016 Changes in Estimates
following:
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
| | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 |
| Trade receivables | $ | 458.9 | | | $ | 515.2 | |
| Other | 31.1 | | | 32.6 | |
| Less: allowance for credit losses | (5.6) | | | (1.4) | |
| Accounts receivable, net | $ | 484.4 | | | $ | 546.4 | |
Favorable cumulative catch-up adjustments for the periods priorThe Company has two agreements to 2016sell, on a revolving basis, certain trade accounts receivable balances with Boeing and Airbus to third party financial institutions. These programs were primarily driven by productivity and efficiency improvements, favorable cost performance, mitigation of risk on maturing programs and favorable pricing negotiations on a maturing program.
During the second quarter of 2016, Spirit signed a memorandum of agreement with Airbus (the “Airbus 2016 MOA”) that, in part, materially reset the pricing for 800 units on the A350 XWB Fuselage and Wing requirements contracts. The Airbus 2016 MOA was negotiated to economically compensate Spirit for significant engineering changes to aircraft design. The new pricing provided the Company with a higher degree of certainty of revenue that will be realized over the 800 unit contracts. Further, the Company analyzed A350 XWB market demand using third party publicationsentered into as well as Airbus firm orders, which indicated that the sustained demand for the A350 XWB program was in excess of 800 units. The Company determined that due to the higher degree of precision of the A350 XWB revenue along with the strong, sustained market demand, it was appropriate to extend the accounting block quantity to 800 units in the second quarter of 2016. The contract block quantity change was made in accordance with applicable accounting guidance as well as the Company’s accounting policies and past practices. As a result of theBoeing and Airbus 2016 MOA,seeking payment term extensions with the Company updated its estimated revenues that will be realized over the 800 unit A350 XWB Fuselage and Wing contract accounting blocks.
Whilethey continue to allow the Company continued to make progress onmonetize the A350 XWB Fuselage program,receivables prior to their payment date, subject to payment of a discount. No guarantees are delivered under the Company experienced various disruptionagreements. The Company's ability to continue using such agreements is primarily dependent upon the strength of Boeing’s and production inefficiencies that exceeded estimates made in previous quarters primarily related to achieving production rate increases. As a result of these disruptions and inefficiencies, cost estimates were updated in the second quarter of 2016 to account for increased labor costs in fabrication and assembly and expedited shipping costs to meet current and future customer production rate increases. The Company also updated its estimates in the second quarter of 2016 due to uncertainty of supply chain cost reductions and achievement of cost affordability projects. The changes in revenue and cost estimates during the second quarter of 2016 resulted in a net forward loss charge of ($135.7) on the A350 XWB program. Increased scrap and rework as well as increased production labor costs resulted in an additional net forward loss charge of ($6.1) recorded on the A350 XWB program during the fourth quarter of 2016.
For the twelve months ended December 31, 2016, the changes in revenue and cost estimates during the second and fourth quarters of 2016 (as described above) resulted in a net forward loss charge of ($141.8) on the A350 XWB program.
6. Accounts Receivable, net
Accounts receivable, net consists of the following:
|
| | | | | | | |
| | December 31,
2018 | | December 31,
2017 |
| Trade receivables | $ | 527.9 |
| | $ | 710.5 |
|
| Other | 17.9 |
| | 13.0 |
|
| Less: allowance for doubtful accounts | (0.7 | ) | | (1.3 | ) |
| Accounts receivable, net | $ | 545.1 |
| | $ | 722.2 |
|
For 2017, 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 for which the recovery will occur over the term of the contract, which could exceed one year. For 2018, unbilled receivables are reflected under contract assets on the consolidated balance sheet.
As discussed previously, in October 2017, the Company entered into the Receivable Sales Agreement.Airbus’s financial condition. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognizedderecognized from the Company's balance sheet. The Receivable Sales Agreement provides forFor the continuing sale of certain receivables on a revolving basis until terminated by either party. The receivables under the Receivable Sales Agreement are sold without recourse to the third party financial institution. During 2018, $5,590.2twelve months ended December 31, 2020, $2,011.7 of accounts receivable have been sold via this arrangement. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on sale of receivables is $8.9 for the year ended December 31, 2020 and is included in Other (expense) income. See Note 23, Other Income (Expense), net.
Allowance for Credit Losses
Beginning January 1, 2020, management assesses and records an allowance for credit losses on financial assets within the scope of ASU 2016-13 using the CECL model. Prior periods allowance for credit losses were based on a review of outstanding receivables that are charged off against the allowance after the potential for recovery is considered remote in accordance with legacy GAAP. The amount necessary to adjust the allowance for credit losses to management’s current estimate, as of the reporting date, on these assets is recorded in net income as credit loss expense. All credit losses reported in accordance with ASU 2016-13 were on trade receivables and/or contract assets arising from the Company’s contracts with customers.
In determining the appropriate methodology to use within the CECL model for receivables and contract assets arising from the Company’s contracts with customers, the Company considered the risk characteristics of the applicable assets. The Company segregated the trade receivables and contract assets into “pools” of assets at the major customer level. The Company's assessment was based on similarity of risk characteristics shared by these pool of assets. Management observed that risks for collectability, with regard to the trade receivables and contract assets resulting from contracts with customers include: macro level economic conditions that impact all of the Company's customers, macro level market conditions that could impact the Company's customers in certain aircraft categories, certain customer specific market conditions, certain customer specific economic conditions, and certain customer specific administrative conditions.
The Company selected a loss-rate method for the CECL model, based on the relationship between historical write-offs of receivables and the underlying sales by major customer. Utilizing this model, a historical loss-rate is applied against the amortized cost of applicable assets, at the time the asset is established. The loss rate reflects the Company’s current estimate of the risk of loss (even when that risk is remote) over the expected remaining contractual life of the assets. The Company's policy is to deduct write-offs from the allowance for credit losses account in the period in which the financial assets are deemed uncollectible.
The changes to the allowance for credit losses and related credit loss expense reported for the twelve months ended December 31, 2020 were solely based on the results of the CECL model. During the period, worsening economic conditions related to the COVID-19 pandemic influenced management’s current estimate of expected credit losses. In particular, trade accounts receivables from certain suppliers and third party Spirit Aerosystems Aftermarket Solutions ("SAAS”) customers are now included in the historical loss rate method CECL model at a higher loss-rate than originally estimated. This change did not have a material impact on reported results for the twelve months ended December 31, 2020. Other than this change, there have been no significant changes in the factors that influence management’s current estimate of expected credit losses, nor changes to the Company’s accounting policies or CECL methodology. The beginning balances, current period activity, and ending balances of the allocation for credit losses on accounts receivable and contract assets were not material.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
receivables is $16.5 for the year ended December 31, 2018 and is included in Other income and expense. See Note 22, Other Income (Expense), net.
7. Contract Assets and Contract Liabilities
Contract assets primarily represent revenues recognized for performance obligations that have been satisfied but for which amounts have not been billed. Contract assets, current are those for which performance obligations have been fully satisfied and billing is expected within 12 months of contract origination and contract assets, long-term are fully satisfied obligations that are expected to be billed in more than 12 months. No impairments to contract assets were recorded for the period ended December 31, 2018.2020 and 2019. See also Note 6, Accounts Receivable, net.
Contract liabilities are established for cash received that is in excess of revenues recognized and are contingent upon the satisfaction of performance obligations. Contract liabilities primarily consist of cash received on contracts for which revenue has been deferred since the receipts are in excess of transaction price resulting from the allocation of consideration based on relative standalone selling price to future units (including those under option that the Company believes are likely to be exercised) with prices that are lower than standalone selling price. These contract liabilities will be recognized earlier if the options are not fully exercised, or immediately, if the contract is terminated prior to the options being fully exercised.
| | | | | | | | | | | |
| December 31, 2020 | December 31, 2019 | Change |
| Contract assets | $ | 372.8 | | $ | 534.7 | | $ | (161.9) | |
| Contract liabilities | (469.6) | | (514.6) | | 45.0 | |
| Net contract assets (liabilities) | $ | (96.8) | | $ | 20.1 | | $ | (116.9) | |
|
| | | | | | | | | |
| | January 1, 2018 |
| December 31, 2018 |
| Change |
|
| Contract assets | $ | 517.8 |
| $ | 523.5 |
| $ | 5.7 |
|
| Contract liabilities | (319.4 | ) | (527.7 | ) | (208.3 | ) |
| Net contract assets (liabilities) | $ | 198.4 |
| $ | (4.2 | ) | $ | (202.6 | ) |
For the period ended December 31, 2020, the decrease in contract assets reflects the net impact of decreases in revenue recognized in excess of billed revenues during the period.The decrease in contract liabilities reflects the net decrease of deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $118.2 of revenue that was included in the contract liability balance at the beginning of the period.
The
| | | | | | | | | | | |
| December 31, 2019 | December 31, 2018 | Change |
| Contract assets | $ | 534.7 | | $ | 523.5 | | $ | 11.2 | |
| Contract liabilities | (514.6) | | (527.7) | | 13.1 | |
| Net contract assets (liabilities) | $ | 20.1 | | $ | (4.2) | | $ | 24.3 | |
For the period ended December 31, 2019, the increase in contract assets reflects the net impact of additional revenue recognized in excess of billed revenues during the period.The increasedecrease in contract liabilities reflects the net impact of additional deferred revenues recorded in excess of revenue recognized during the period. For the period ended December 31, 2018, theThe Company recognized $53.2$139.0 of revenue that was included in the contract liability balance at the beginning of the period.
8. Revenue Disaggregation and Outstanding Performance Obligations
Disaggregation of Revenue
The Company disaggregates revenue based on the method of measuring satisfaction of the performance obligation either over time or at a point in time. Additionally, the Company disaggregates revenue based upon the location where products and services are transferred to the customer, and based upon major customer. The Company’s principal operating segments and related revenue are noted in Note 26, Segment and Geographical Information.
The following table disaggregates revenues by the method of performance obligation satisfaction:
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
| | | | | | | | |
| | For the Twelve Months Ended |
| Revenue | December 31,
2020 | December 31,
2019 |
| Contracts with performance obligations satisfied over time | $ | 2,188.4 | | $ | 5,963.5 | |
| Contracts with performance obligations satisfied at a point in time | 1,216.4 | | 1,899.6 | |
| Total Revenue | $ | 3,404.8 | | $ | 7,863.1 | |
The following table disaggregates revenue by major customer:
| | | | | | | | |
| For the Twelve Months Ended |
| Customer | December 31,
2020 | December 31,
2019 |
| Boeing | $ | 2,043.8 | | $ | 6,237.2 | |
| Airbus | 773.3 | | 1,250.6 | |
| Other | 587.7 | | 375.3 | |
| Total net revenues | $ | 3,404.8 | | $ | 7,863.1 | |
The following table disaggregates revenue based upon the location where control of products are transferred to the customer:
| | | | | | | | |
| For the Twelve Months Ended |
| Location | December 31,
2020 | December 31,
2019 |
| United States | $ | 2,637.6 | | $ | 6,566.3 | |
| International | | |
| United Kingdom | 433.5 | | 771.9 | |
| Other | 333.7 | | 524.9 | |
| Total International | 767.2 | | 1,296.8 | |
| Total Revenue | $ | 3,404.8 | | $ | 7,863.1 | |
Remaining Performance Obligations
Unsatisfied, or partially unsatisfied, performance obligations currently under contract that are expected to be recognized to revenue in the future are noted in the table below. The Company expects options to be exercised in addition to the amounts presented below.
| | | | | | | | | | | | | | |
| 2021 | 2022 | 2023 | 2024 and After |
| Unsatisfied performance obligations | $2,726.2 | $3,661.8 | $4,406.4 | $3,206.8 |
|
| | | | |
| | 2019 | 2020 | 2021 | 2022 and After |
| Unsatisfied performance obligations | $6,640.1 | $6,398.3 | $1,319.1 | $596.3 |
9. Inventory
Inventory consists of raw materials used in the production process, work-in-process, which is direct material, direct labor, overhead and purchases, and capitalized preproduction costs. Raw materials are stated at lower of cost (principally on an actual or average cost basis) or market.net realizable value. Capitalized pre-production costs include certain contract costs, including applicable overhead, incurred before a product is manufactured on a recurring basis. These costs are typically amortized over a
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
period that is consistent with the satisfaction of the underlying performance obligations to which these relate. See Note 3, Summary of Significant Accounting Policies - Inventory.
For 2017, deferred production includes costs for the excess of production costs over the estimated average cost per shipset, and credit balances for favorable variances on contracts between actual costs incurred and the estimated average cost per shipset for units delivered under the current production blocks. Recovery of excess-over-average deferred production costs is dependent on the number of shipsets ultimately sold and the ultimate selling prices and lower production costs associated with future production under these contract blocks. Forward loss reserves on contract blocks are recorded in the period in which they become evident
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
and are included as a reduction to inventory with remaining amounts, if any, reflected in accrued deferred revenue. Inventories are summarized as follows:
| | | | December 31, 2018 | | December 31, 2017 | | December 31, 2020 | | December 31, 2019 |
| Raw materials | $ | 240.4 |
| | $ | 321.0 |
| Raw materials | $ | 337.3 | | | $ | 253.1 | |
Work-in-process(1) | 727.8 |
| | 854.4 |
| Work-in-process(1) | 1,000.6 | | | 822.8 | |
| Finished goods | 7.1 |
| | 35.8 |
| Finished goods | 58.1 | | | 14.5 | |
| Product inventory | 975.3 |
| | 1,211.2 |
| Product inventory | 1,396.0 | | | 1,090.4 | |
Capitalized pre-production(2) | 37.3 |
| | 78.9 |
| |
Deferred production(3) | — |
| | 640.3 |
| |
Forward loss provision(4) | — |
| | (480.5 | ) | |
| Capitalized pre-production | | Capitalized pre-production | 26.3 | | | 28.4 | |
| Total inventory, net | $ | 1,012.6 |
| | $ | 1,449.9 |
| Total inventory, net | $ | 1,422.3 | | | $ | 1,118.8 | |
Product inventory, summarized in the table above, is shown net of valuation reserves of $55.2$56.8 and $51.6$39.0 as of December 31, 20182020 and December 31, 2017,2019, respectively. For contract blocks The valuation reserve increase is primarily due to the Bombardier Acquisition. (as defined below)
(1)Work-in-process inventory includes direct labor, direct material, overhead, and purchases on contracts for which revenue is recognized at a point in time, as well as sub-assembly parts that have not closed,been issued to production on contracts for which revenue is recognized using the following non-productinput method. For the period ended December 31, 2020, and December 31, 2019, work-in-process inventory amountsincludes $351.2 and $157.2, respectively, of costs incurred in anticipation of specific contracts and no impairments were includedrecorded in the summarizedperiod.
Excess capacity and abnormal production costs are excluded from inventory table above:
| |
(1) | For the period ended December 31, 2018, work-in-process inventory includes direct labor, direct material, overhead, and purchases on contracts for which revenue is recognized at a point in time, as well as sub-assembly parts that have not been issued to production on contracts for which revenue is recognized using the input method. For the period ended December 31, 2017, work-in-process included direct labor, direct material, overhead, and purchases on all contracts that were accounted for using the units-of-delivery method. For the period ended December 31, 2018, work-in-process inventory includes $151.6 of costs incurred in anticipation of specific contracts and no impairments were recorded in the period. |
| |
(2) | As part of the Transition Adjustment, $43.0 (pretax) of pre-production costs on the A350 XWB were eliminated. |
| |
(3) | As part of the Transition Adjustment, $640.3 (pretax) of deferred production was eliminated. For the period ended December 31, 2017, the balance contained $632.8 and $129.3 on the A350 XWB and Rolls-Royce BR725 programs, respectively. |
| |
(4) | For the period ended December 31, 2018, forward loss reserves of $183.0 have been classified as a liability on the consolidated balance sheet. For the period ended December 31, 2017, the forward loss reserve for the B787 program exceeded the program's inventory balance. This excess was classified as a liability and reported in other current liabilities on the balance sheet in the amount of $254.5 as of December 31, 2017. |
and recognized as expense in the period incurred. Cost of sales for the twelve months ended December 31, 2020 includes $278.9 of excess capacity production costs related to temporary B737 MAX, A220, and A320 production schedule changes. Cost of sales also includes costs of $33.7 related to temporary workforce adjustments as a result of COVID-19 production pause, net of the U.S. employee retention credit and U.K. government subsidies of approximately $21.4 for the twelve months ended December 31, 2020.
10. Property, Plant and Equipment, net
Property, plant and equipment, net consists of the following:
|
| | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| Land | $ | 15.0 |
| | $ | 15.9 |
|
| Buildings (including improvements) | 822.7 |
| | 764.1 |
|
| Machinery and equipment | 1,697.0 |
| | 1,529.9 |
|
| Tooling | 1,032.3 |
| | 1,013.9 |
|
| Capitalized software | 269.2 |
| | 263.3 |
|
| Construction-in-progress | 227.8 |
| | 213.4 |
|
| Total | 4,064.0 |
| | 3,800.5 |
|
| Less: accumulated depreciation | (1,896.4 | ) | | (1,695.2 | ) |
| Property, plant and equipment, net | $ | 2,167.6 |
| | $ | 2,105.3 |
|
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Land | $ | 30.8 | | | $ | 15.9 | |
| Buildings (including improvements) | 1,166.7 | | | 924.0 | |
| Machinery and equipment | 2,120.5 | | | 1,941.5 | |
| Tooling | 1,036.1 | | | 1,047.4 | |
| Capitalized software | 282.5 | | | 277.8 | |
| Construction-in-progress | 220.0 | | | 192.8 | |
| Total | 4,856.6 | | | 4,399.4 | |
| Less: accumulated depreciation | (2,352.8) | | | (2,127.7) | |
| Property, plant and equipment, net | $ | 2,503.8 | | | $ | 2,271.7 | |
Spirit AeroSystems Holdings, Inc.
Notes toCapitalized interest was $5.0, $6.5, and $6.7 for the Consolidated Financial Statements — (Continued)
($, €,twelve months ended December 31, 2020, 2019, and RM in millions other than per share amounts)
2018, respectively. Repair and maintenance costs are expensed as incurred. The Company recognized repair and maintenance costs of $136.2, $130.0,$119.7, $142.2, and $123.1$136.2 for the twelve months ended December 31, 2018, 20172020, 2019 and 2016,2018, respectively.
The Company capitalizes certain costs, such as software coding, installation and testing, that are incurred to purchase or to create and implement internal use computer software. Depreciation expense related to capitalized software was $16.7, $19.2,$16.1, $17.7, and $18.6$16.7 for the twelve months ended December 31, 2020, 2019, and 2018, 2017respectively.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £,and 2016, respectively.RM in millions other than per share amounts)
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. 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. The Company evaluated its long-lived assets at its locations and determined that an impairment of $1.9 primarily related to unused machinery and $8.2 primarily related to abandoned construction-in-progress, was necessary forFor the twelve months ended December 31, 20182020, there was no impairment. During the twelve months ended December 31, 2020, the Company disposed of long-lived assets with a net book value of $19.2 and 2017,$3.7 related to production decreases, process-related changes and quality improvement initiatives on the B787 and A350 programs, respectively. By segment, the disposal charge consisted of $22.5 and $0.4 related to the Fuselage Systems segment and Wing Systems segment, respectively, and is included as a separate line item of the operating loss in the Condensed Consolidated Statements of Operations for the period.
11. Leases
The Company records impairmentsdetermines if an arrangement is a lease at the inception of a signed agreement. Operating leases are included in ROU assets (long-term), short-term operating lease liabilities, and long-term operating lease liabilities on the Company’s consolidated balance sheet. Finance leases are included in Property, Plant and Equipment, current portion of long-term debt, and long-term debt.
ROU assets represent the right of the Company to use an underlying asset for the length of the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
To determine the present value of lease payments, the Company uses its estimated incremental borrowing rate or the implicit rate, if readily determinable. The estimated incremental borrowing rate is based on information available at the lease commencement date, including any recent debt issuances and publicly available data for instruments with similar characteristics. The ROU asset also includes any lease payments made and excludes lease incentives.
The Company's lease terms may include options to extend or terminate the lease and, when it is reasonably certain that an option will be exercised, those options are included in the net present value calculation. Leases with a term of 12 months or less, which are primarily related to property, plantautomobiles and manufacturing equipment, to costs of salesare not recorded on the statementbalance sheet. The aggregate amount of operations.lease cost for leases with a term of 12 months or less is not material.
The Company has lease agreements that include lease and non-lease components, which are generally accounted for separately. For certain leases (primarily related to IT equipment), the Company does account for the lease and non-lease components as a single lease component. A portfolio approach is applied to effectively account for the ROU assets and liabilities for those specific leases referenced above. The Company does not have any material leases containing variable lease payments or residual value guarantees. The Company also does not have any material subleases.
The Company currently has operating and finance leases for items such as manufacturing facilities, corporate offices, manufacturing equipment, transportation equipment, and vehicles. Majority of the Company's active leases have remaining lease terms that range between less than one year to 18 years, some of which include options to extend the leases for up to 30 years, and some of which include options to terminate the leases within one year. 11.Comparable information presented in the financial statements for periods prior to January 1, 2019 represent legacy GAAP treatment of leases. For more information on the effective date and transition approach for implementation, see Note 2, Adoption of New Accounting Standards.
For the twelve months ended December 31, 2020, total net lease cost was $36.8. This was comprised of $9.0 of operating lease costs, $21.5 amortization of assets related to finance leases, and $6.3 interest on finance lease liabilities. For the twelve months ended December 31, 2019, total net lease cost was $25.1. This was comprised of $9.0 of operating lease costs, $13.1 amortization of assets related to finance leases, and $3.0 interest on finance lease liabilities.
Supplemental cash flow information related to leases was as follows:
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
| | | | | | | | | | | |
| For the Twelve Months Ended | | For the Twelve Months Ended |
| December 31, 2020 | | December 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 8.7 | | | $ | 8.9 | |
| Operating cash flows from finance leases | $ | 6.3 | | | $ | 3.0 | |
| Financing cash flows from finance leases | $ | 30.1 | | | $ | 12.1 | |
| | | |
| ROU assets obtained in exchange for lease obligations: | | | |
| Operating leases | $ | 28.5 | | | $ | 2.3 | |
| | | |
| | | |
| | | |
Supplemental balance sheet information related to leases:
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Finance leases: | | | |
| Property and equipment, gross | $ | 214.2 | | | $ | 165.5 | |
| Accumulated amortization | (45.1) | | | (23.5) | |
| Property and equipment, net | $ | 169.1 | | | $ | 142.0 | |
The weighted average remaining lease term as of December 31, 2020 for operating and finance leases was 42.3 years and 5.5 years, respectively. The weighted average discount rate as of December 31, 2020 for operating and finance leases was 5.5% and 4.3%, respectively. See Note 16, Debt,for current and non-current finance lease obligations. The weighted average remaining lease term as of December 31, 2019 for operating and finance leases was 10.2 years and 6.5 years, respectively. The increase in the operating weighted average remaining lease term is primarily due to the Bombardier Acquisition (as defined below) with three leases that extend to 2114. The weighted average discount rate as of December 31, 2019 for operating and finance leases was 5.6% and 4.3%, respectively.
As of December 31, 2020, remaining maturities of lease liabilities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 and thereafter | Total Lease Payments | Less: Imputed Interest | Total Lease Obligations |
| Operating Leases | $ | 8.9 | | $ | 8.6 | | $ | 7.7 | | $ | 7.2 | | $ | 6.6 | | $ | 167.8 | | $ | 206.8 | | $ | (134.7) | | $ | 72.1 | |
| Financing Leases | $ | 41.1 | | $ | 37.2 | | $ | 32.2 | | $ | 25.4 | | $ | 15.5 | | $ | 25.1 | | $ | 176.5 | | $ | (19.7) | | $ | 156.8 | |
As of December 31, 2020, the Company had additional financing lease commitments that have not yet commenced of approximately $75.9 for manufacturing equipment and facilities which are in various phases of construction or customization for the Company's ultimate use, with lease terms between 3 and 7 years. The Company's involvement in the construction and design process for these assets is generally limited to project management.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
12. Other Assets, Goodwill, and Intangible Assets
Other current assets are summarized as follows:
| | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 |
| Prepaid expenses | 16.3 | | | 19.3 | |
Income tax receivable(1) | 315.3 | | | 74.2 | |
| Other assets- short term | 4.7 | | | 5.2 | |
| Total other current assets | $ | 336.3 | | | $ | 98.7 | |
Other assets are summarized as follows:
|
| | | | | | | |
| | December 31,
2018 | | December 31,
2017 |
| Intangible assets | | | |
| Patents | $ | 2.0 |
| | $ | 1.9 |
|
| Favorable leasehold interests | 6.2 |
| | 6.3 |
|
| Total intangible assets | 8.2 |
| | 8.2 |
|
| Less: Accumulated amortization-patents | (1.9 | ) | | (1.8 | ) |
| Accumulated amortization-favorable leasehold interest | (4.9 | ) | | (4.6 | ) |
| Intangible assets, net | 1.4 |
| | 1.8 |
|
| Deferred financing | | | |
| Deferred financing costs | 41.7 |
| | 39.5 |
|
| Less: Accumulated amortization-deferred financing costs | (35.6 | ) | | (33.7 | ) |
| Deferred financing costs, net | 6.1 |
| | 5.8 |
|
| Other | | | |
| Goodwill — Europe | 2.4 |
| | 2.5 |
|
| Equity in net assets of affiliates | — |
| | 4.7 |
|
Supply agreement(1) | 14.6 |
| | 19.9 |
|
| Restricted Cash | 20.2 |
| | 20.0 |
|
| Deferred Tax Asset - non-current | 205.0 |
| | 72.5 |
|
| Other | 38.5 |
| | 37.1 |
|
| Total | $ | 288.2 |
| | $ | 164.3 |
|
| | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 |
| Deferred financing | | | |
| Deferred financing costs | 0.9 | | | 41.7 | |
| Less: Accumulated amortization-deferred financing costs | (0.5) | | | (36.9) | |
| Deferred financing costs, net | 0.4 | | | 4.8 | |
| Other | | | |
| | | |
Supply agreements (2) | 11.4 | | | 11.5 | |
| Equity in net assets of affiliates | 3.1 | | | 7.7 | |
| Restricted cash - collateral requirements | 19.5 | | | 16.4 | |
| Other | 49.2 | | | 36.4 | |
| Total | $ | 83.6 | | | $ | 76.8 | |
| |
(1) | Under two agreements, certain payments accounted for as consideration paid by the Company to a customer and a supplier are being amortized as reductions to net revenues. |
(1) Increase in income tax receivable expected to be received within 12 months and is an increase over the prior year as a result of the carryback provisions included in the CARES Act. 12.
(2) Certain payments accounted for as consideration paid by the Company to a customer are being amortized as reductions to net revenues.
Goodwill is summarized as follows:
| | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 |
Goodwill(1) (2) | 565.3 | | | 2.4 | |
(1) The acquisition of Fiber Materials Inc. ("FMI") on January 10, 2020 resulted in the establishment of $76.0 goodwill.
(2)The Bombardier Acquisition (as defined below) on October 30, 2020 resulted in the establishment of 486.8 of goodwill. See also Note 29, Acquisitions, as of December 31, 2020, given the preliminary nature of the Bombardier Acquisition purchase price allocation, the Company has not yet allocated goodwill to the relevant reportable segments.
The balance of goodwill by reportable segment as of December 31, 2020, excluding that noted above as resulting from the Bombardier Acquisition, is $42.9 for the Fuselage Systems segment, $33.1 for the Propulsion Systems segment, and $2.5 for the Wing Systems segment. The goodwill balance as of December 31, 2019 of $2.4 is allocated to the Wing Systems segment.
The change in value from December 31, 2019 to December 31, 2020 for the Wing Systems segment goodwill item, noted above, reflects net exchange differences arising during the period.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
The total goodwill value includes no accumulated impairment loss in any of the periods presented. The Company assesses goodwill for impairment annually as of the first day of the fourth quarter or more frequently if events or circumstances indicate that the fair value of a reporting unit that includes goodwill may be lower than its carrying value. We test goodwill for impairment by performing a qualitative assessment or quantitative test at the reporting unit level. In performing a qualitative assessment, we evaluate company-specific, market and industry, economic, and other relevant factors that may impact the fair value of our reporting units or the carrying value of the net assets of the respective reporting unit. If we determine that it is more likely than not that the carrying value of the net assets is more than the fair value of the respective reporting unit, then a quantitative test is performed. Where the quantitative test is used, we compare the carrying value of net assets to the estimated fair value of the respective reporting unit. If the fair value is determined to be less than carrying value, a goodwill impairment loss is recognized for the amount that the carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
Intangible assets are summarized as follows:
| | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 |
| Intangible assets | | | |
| Patents | $ | 2.0 | | | $ | 2.0 | |
| Favorable leasehold interests | 2.8 | | | 2.8 | |
Developed technology asset(1) (2) | 94.0 | | | 0 | |
Customer relationships intangible assets(2) | 124.1 | | | 0 | |
| Total intangible assets | 222.9 | | | 4.8 | |
| Less: Accumulated amortization - patents | (2.0) | | | (1.9) | |
| Accumulated amortization - favorable leasehold interest | (1.8) | | | (1.7) | |
| Accumulated amortization - developed technology asset | (2.6) | | | 0 | |
| Accumulated amortization - customer contracts asset | (1.3) | | | 0 | |
| Intangible assets, net | 215.2 | | | 1.2 | |
(1) The acquisition of FMI on January 10, 2020 resulted in the establishment of a $30.0 intangible asset for developed technology.
(2) The Bombardier acquisition on October 30, 2020 resulted in the establishment of a $64.0 intangible asset for developed technology and a $124.1 intangible asset for customer relationships.
The amortization for each of the five succeeding years relating to intangible assets currently recorded in the Condensed Consolidated Balance sheet and the weighted average amortization is estimated to be the following as of December 31, 2020:
| | | | | | | | | | | | | | | |
| Year | | Favorable leasehold interest | Developed Technology | Customer Contracts | Total |
| 2021 | | 0.1 | | 6.3 | | 6.9 | | 13.3 | |
| 2022 | | 0.1 | | 6.3 | | 6.9 | | 13.3 | |
| 2023 | | 0.1 | | 6.3 | | 6.9 | | 13.3 | |
| 2024 | | 0.1 | | 6.3 | | 6.9 | | 13.3 | |
| 2025 | | 0.1 | | 6.3 | | 6.9 | | 13.3 | |
| | | | | |
| Weighted average amortization period | | 8.5 | 14.6 | 17.8 | 16.4 |
13. Advance Payments
Advances on the B787 Program. Boeing has made advance payments to Spirit under the B787 Special Business Provisions and General Terms Agreement (collectively, the "B787 Supply Agreement,Agreement"), that are required to be repaid to Boeing by way of offset against the purchase price for future shipset deliveries. Advance repayments were originally scheduled to be spread
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
evenly over the remainder of the first 1,000 B787 shipsets delivered to Boeing. On April 8, 2014, the Company signed a memorandum of agreement with Boeing that suspended advance repayments related to the B787 program for a period of twelve months beginning April 1, 2014. Repayment recommenced on April 1, 2015, and any repayments that
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
otherwise would have become due during such twelve-month period were to offset the purchase price for shipsets 1001 through 1120. On December 21, 2018, the Company signed the 2018 MOA with Boeing that again suspended the advance repayments beginning with line unit 818. The advance repayments will resume at a lower rate of $450,319$0.45 per shipset at line number 1135 and continue through line number 1605. As a result of this deferral of repayments, the Company reclassified $108.3 of customer advances from short term to long term as of December 31, 2018. For additional information on the 2018 MOA, see Note 28, Boeing Collective Resolution.
In the event Boeing does not take delivery of a sufficient number of shipsets to repay the full amount of advances prior to the termination of the B787 program or the B787 Supply Agreement, any advances not then repaid will be applied against any outstanding payments then due by Boeing to us, and any remaining balance will be repaid in annual installments of $42.0$27.0 due on December 15th of each year until the advance payments have been fully recovered by Boeing. As of December 31, 2018,2020, the amount of advance payments received by us from Boeing and not yet repaid was approximately $233.9.$212.1.
Advances on the B737 Program. In an effort to minimize the disruption to Spirit's operations and its supply chain, the 2019 MOA entered into on April 12, 2019 included the terms and conditions for an advance payment to be made from Boeing to Spirit in the amount of $123, which was received during the third quarter of 2019. The 2020 MOA entered into on February 6, 2020, extended the repayment date of the $123.0, advance received by Spirit under the 2019 MOA to 2022. The 2020 MOA also required Boeing to pay $225 to Spirit in the first quarter of 2020, consisting of (i) $70 in support of Spirit’s inventory and production stabilization, of which $10 will be repaid by Spirit in 2021, and (ii) $155 as an incremental pre-payment for costs and shipset deliveries over the next two years.
13.Advances on the Irkut Program. Irkut made an advance payment of $150 at the inception of the program in 2012 for the design and development of the Nacelle for the MC-21 aircraft.The remainder of $1.2 will be released in 2021.
14. Fair Value Measurements
The 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 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 2Observable 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 the interest rate swaps and foreign currency hedge contracts.
Level 3Unobservable inputs that are supported by little or no market activity and 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.
The Company’s long-term debt includes a senior unsecuredsecured term loan and senior unsecured notes. The estimated fair value of the Company’s 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:
|
| | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | | December 31, 2017 | |
| | Carrying
Amount | | Fair
Value | | | Carrying
Amount | | Fair
Value | |
| Senior secured term loan A (including current portion) | $ | 204.7 |
| | $ | 197.8 |
| (2) | | $ | 460.7 |
| | $ | 461.9 |
| (2) |
| Senior unsecured notes due 2021 | 298.5 |
| | 292.9 |
| (1) | | — |
| | — |
| |
| Senior unsecured notes due 2022 | — |
| | — |
| | | 294.8 |
| | 304.6 |
| (1) |
| Senior unsecured notes due 2023 | 297.9 |
| | 297.5 |
| (1) | | — |
| | — |
| |
| Senior unsecured notes due 2026 | 297.5 |
| | 274.5 |
| (1) | | 297.2 |
| | 301.0 |
| (1) |
| Senior unsecured notes due 2028 | 693.5 |
| | 663.0 |
| (1) | | — |
| | — |
| |
| Total | $ | 1,792.1 |
| | $ | 1,725.7 |
| | | $ | 1,052.7 |
| | $ | 1,067.5 |
| |
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | | December 31, 2019 | |
| | Carrying
Amount | | Fair
Value | | | Carrying
Amount | | Fair
Value | |
| Senior unsecured term loan A (including current portion) | $ | 0 | | | $ | 0 | | | | $ | 438.5 | | | $ | 440.1 | | (2) |
| Revolver | 0 | | | 0 | | | | 800.0 | | | 800.0 | | (2) |
| Senior secured term loan B (including current portion) | 389.6 | | | 395.0 | | (2) | | 0 | | | 0 | | |
| Floating rate notes | 299.7 | | | 297.5 | | (1) | | 299.1 | | | 298.4 | | (1) |
| Senior notes due 2023 | 298.8 | | | 293.8 | | (1) | | 298.3 | | | 307.2 | | (1) |
| Senior secured first lien notes due 2025 | 493.9 | | | 521.2 | | (1) | | 0 | | | 0 | | |
| Senior secured second lien notes due 2025 | 1,184.2 | | | 1,279.1 | | (1) | | 0 | | | 0 | | |
| Senior notes due 2026 | 298.1 | | | 313.9 | | (1) | | 297.8 | | | 305.6 | | (1) |
| Senior notes due 2028 | 694.6 | | | 689.2 | | (1) | | 694.1 | | | 734.4 | | (1) |
| Total | $ | 3,658.9 | | | $ | 3,789.7 | | | | $ | 2,827.8 | | | $ | 2,885.7 | | |
| |
(1) | Level 1 Fair Value hierarchy |
| |
(2) | Level 2 Fair Value hierarchy |
(1)Level 1 Fair Value hierarchy 14.(2)Level 2 Fair Value hierarchy
15. Derivative and Hedging Activities
The Company has historically entered into interest rate swap agreements to reduce its exposure to the variable rate portion of its long-term debt. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values.
The Company has historically entered into derivative instruments covered by master netting arrangements whereby, in the event of a default as defined by the 2018 Credit Agreement (as defined below) 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. See Note 15, 16, Debt, for more information.
Derivatives Not Accounted for as Hedges
Interest Rate Swaps
On March 15, 2017, the Company entered into an interest rate swap agreement, with an effective date of March 31, 2017. The swaps haveswap has a notional value of $250.0 and fixfixed the variable portion of the Company’s floating rate debt at 1.815%. The swap expired in March 2020.
Derivatives Accounted for as Hedges
Cash Flow Hedges
During the third quarter of 2019, the Company entered into two interest rate swap agreements with a combined notional value of $450.0. As of December 31, 2020, the Company has one swap agreement with a notional value of $150.0. These derivatives have been designated as cash flow hedges by the Company. The fair value of the interest rate swaps, using Level 2 inputs,these hedges was an asseta liability of $2.2$1.2 and $0.1 as of December 31, 2018.2020 and December 31, 2019, respectively, which is recorded in the other current liabilities line item on the Condensed Consolidated Balance Sheet.
Changes in the fair value of cash flow hedges are recorded in Accumulated Other Comprehensive Income (“AOCI”) and recorded in earnings in the period in which the hedged transaction occurs. For the twelve months ended December 31, 2018, the Company recorded a gain related2020 and
Spirit AeroSystems Holdings, Inc.
Notes to swap activity of $1.4 to Other (expense) income, net in the Consolidated Statement of Operations.Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
Foreign Currency Forward Contract
As described further in Note 27, Asco Acquisition, the Company and its wholly-owned subsidiary Spirit AeroSystems Belgium Holdings BVBA (“Spirit Belgium”) entered into a definitive agreement (the “Purchase Agreement”) with certain private sellers pursuant to which Spirit Belgium will purchase all of the issued and outstanding equity of S.R.I.F. N.V., the parent company of Asco Industries N.V. (“Asco”) for $650.0 in cash, subject to certain customary closing adjustments, including foreign currency adjustments. As such, movements in the Euro exchange rates could cause the purchase price to fluctuate, affecting our cash flows.
To reduce the Company's exposure to currency exchange rate fluctuations, the Company entered into foreign currency forward contracts. The objective of these contracts is to minimize the impact of currency exchange rate movements on the Company's cash flows, however the Company has not designated these forward contracts as a hedge and has not applied hedge accounting to them. During the second quarter of 2018, to reduce the Euro exchange rate exposure of the purchase of Asco, the Company entered into a foreign currency forward contract in the amount of $580.0; this foreign currency forward contract was net settled in the third quarter of 2018 and a new contract was entered during the fourth quarter in the amount of $568.3; this contract was net settled and a third contract was entered into with a settlement date in the first quarter of 2019 in the amount of $547.7. The fair value of the foreign currency forward contract, using Level 2 inputs, was an asset of $5.8 as of December 31, 2018. The2019, the Company recorded a net loss related to foreign currency forward contract activityin AOCI of $35.3 for$14.3 and $0.8, respectively. For the twelve months ended December 31, 20182020 and December 31, 2019, a loss of $3.6 and $0.1, respectively, was reclassified from AOCI to Other (expense)earnings, and included in the interest expense line item on the Condensed Consolidated Statements of Operations, and in operating activities on the Condensed Consolidated Statements of Cash Flows. For the twelve months ended December 31, 2020, a loss of $10.4 was reclassified from AOCI to earnings resulting from the termination of a swap agreement, and included in the other income netline item on the Condensed Consolidated Statements of Operations, and in operating activities on the Condensed Consolidated Statement of Operations.Cash Flows. Within the next 12 months, the Company expects to recognize a loss of $1.2 in earnings related to this hedged contract. As of December 31, 2020, the maximum term of hedged forecasted transactions was 6 months.
15.
16. Debt
Total debt shown on the balance sheet is comprised of the following:
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
| | | | December 31, 2020 | | December 31, 2019 |
| | | Current | Noncurrent | | Current | Noncurrent |
| Senior unsecured term loan A | | Senior unsecured term loan A | $ | 0 | | $ | 0 | | | $ | 22.8 | | $ | 415.7 | |
| Revolver | | Revolver | 0 | | 0 | | | 0 | | 800.0 | |
| Senior secured term loan B | | Senior secured term loan B | 3.9 | | 385.7 | | | 0 | | 0 | |
| Floating Rate Notes | | Floating Rate Notes | 299.7 | | 0 | | | 0 | | 299.1 | |
| Senior notes due 2023 | | Senior notes due 2023 | 0 | | 298.8 | | | 0 | | 298.3 | |
| Senior secured first lien notes due 2025 | | Senior secured first lien notes due 2025 | 0 | | 493.9 | | | 0 | | 0 | |
| Senior secured second lien notes due 2025 | | Senior secured second lien notes due 2025 | 0 | | 1,184.2 | | | 0 | | 0 | |
| Senior notes due 2026 | | Senior notes due 2026 | 0 | | 298.1 | | | 0 | | 297.8 | |
| Senior notes due 2028 | | Senior notes due 2028 | 0 | | 694.6 | | | 0 | | 694.1 | |
| Present value of finance lease obligations | | Present value of finance lease obligations | 35.3 | | 121.5 | | | 25.8 | | 121.3 | |
| Other | | Other | 1.8 | | 56.1 | | | 1.6 | | 57.8 | |
| Total | | Total | $ | 340.7 | | $ | 3,532.9 | | | $ | 50.2 | | $ | 2,984.1 | |
| | | | December 31, 2018 | | December 31, 2017 | |
| | Current | Noncurrent | | Current | Noncurrent | |
| Senior unsecured term loan A | $ | 22.7 |
| $ | 182.0 |
| | $ | 24.9 |
| $ | 435.8 |
| |
| Senior notes due 2021 | — |
| 298.5 |
| | — |
| — |
| |
| Senior notes due 2022 | — |
| — |
| | — |
| 294.8 |
| |
| Senior notes due 2023 | — |
| 297.9 |
| | — |
| — |
| |
| Senior notes due 2026 | — |
| 297.5 |
| | — |
| 297.2 |
| |
| Senior notes due 2028 | — |
| 693.5 |
| | — |
| — |
| |
| Present value of capital lease obligations | 7.1 |
| 35.3 |
| | 5.2 |
| 33.6 |
| |
| Other | 1.6 |
| 59.3 |
| | 1.0 |
| 58.5 |
| |
| Total | $ | 31.4 |
| $ | 1,864.0 |
| | $ | 31.1 |
| $ | 1,119.9 |
| |
|
2018 Credit Agreement
On July 12, 2018, the CompanySpirit entered into a $1,260.0$1,256.0 senior unsecured Second Amended and Restated Credit Agreement among Spirit, as borrower, the Company,Holdings, as parent guarantor, the lenders party thereto, Bank of America, N.A., as administrative agent, and the other agents named therein (the “2018 Credit Agreement”), consisting of aan $800.0 revolving credit facility (the “2018 Revolver”), a $206.0 term loan A facility (the “2018 Term Loan”) and a $250.0 delayed draw term loan facility (the “Delayed Draw Term Loan”“2018 DDTL”).
Each of Under the 2018 Credit Agreement, the 2018 Revolver, the 2018 Term Loan and the Delayed Draw Term Loan matures2018 DDTL were to mature on July 12, 2023, and bears interest, at Spirit’s option, at either LIBOR plus 1.375% or a defined “base rate” plus 0.375%, subject2023.
Spirit amended the 2018 Credit Agreement several times in 2020, including modifications that added security to adjustment to between LIBOR plus 1.125% and LIBOR plus 1.875% (or between base rate plus 0.125% and base rate plus 0.875%, as applicable) based on changes to Spirit’s senior unsecured debt rating provided by Standard & Poor’s Financial Services LLC and/or Moody’s Investors Service, Inc. The principal obligationsthe 2018 Credit Agreement. On September 30, 2020, Spirit repaid the remaining balances under the 2018 Term Loan are to be repaid in equal quarterly installmentsand the 2018 DDTL. As of $2.6, commencing withDecember 31, 2020, the fiscal quarter ending March 31, 2019, and with theoutstanding balance due at maturity of the 2018 Term Loan. The principal obligationsLoan and 2018 DDTL was $0.0. Spirit repaid the outstanding balance of the 2018 Revolver on April 30, 2020. On October 5, 2020 Spirit terminated the 2018 Credit Agreement
Credit Agreement
On October 5, 2020, Spirit entered into a term loan credit agreement (the “Credit Agreement”) providing for a $400.0 senior secured term loan B credit facility with the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent. On October 5, 2020 Spirit borrowed the full $400.0 of initial term loans available under the Delayed Draw Term Loan are to be repaid in equal quarterly installments of 1.25% of the outstanding principal amount of the Delayed Draw Term Loan as of March 31, 2019, subject to adjustments for any extension of the availability period of the Delayed Draw Term Loan, with the balance due at maturity of the Delayed Draw Term Loan.
Credit Agreement. The Delayed Draw Term Loan was available for Spirit to draw until January 12, 2019. On January 7, 2019, Spirit extended the availability period under the Delayed Draw until April 12, 2019. It may be extended for one additional three-month period, in each instance subject to Spirit’s payment of a fee to the relevant lenders based on the undrawn Delayed Draw Term Loan commitment.
The 2018 Credit Agreement also contains an accordion feature that providespermits Spirit with the option to increase the 2018 Revolver commitments and/or instituterequest one or more additionalincremental term loans byfacilities in an aggregate principal amount not to exceed $750.0(x) in the aggregate, subjectcase of any incremental facility that is secured on a pari passu basis with the Credit Agreement, the greater of (a) $950.0 and (b) such other amount, so long as on a pro forma basis after giving effect to the satisfactionincurrence of certain conditionssuch indebtedness and the participationuse of proceeds thereof, the lenders. The 2018 Credit Agreement contains customary affirmativefirst lien secured net leverage ratio does not exceed 3.25 to 1.00; and negative covenants, including certain financial covenants that are tested on a quarterly basis. Spirit’s obligations under the 2018 Credit Agreement may be accelerated upon an event of default, which includes non-payment of principal or interest, material breach of a representation or warranty, material breach of a covenant, cross-default to material indebtedness, material judgments, ERISA events, change in control, bankruptcy and invalidity of the guarantee of Spirit’s obligations under the 2018 Credit Agreement made by the Company.
In addition to paying interest on outstanding principal under the 2018 Credit Agreement, Spirit is required to pay an unused line fee at a rate per annum equal to the applicable percentage for the applicable pricing tier set forth(y) in the table below under the heading “Commitment Fee” on the unused portion of the commitments under the revolving credit facility. Spirit is required to pay letter of credit fees at a rate per annum equal to the applicable percentage for the applicable pricing tier set forth in the table below under the heading “Letter of Credit Fee” on the amounts available to be drawn under each standby letter of credit. Spirit is also required to pay fronting fees in respect of letters of credit to the issuing banks and customary administrative fees to the administrative agent. At December 31, 2018, Spirit had no letters of credit outstanding. The Company was subject to pricing tier 3 at December 31, 2018.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
case of any incremental facility that is secured on a junior basis to the Credit Agreement, the greater of (a) $500.0 and (b) such other amount, so long as on a pro forma basis after giving effect to the incurrence of such indebtedness and the use of proceeds thereof, the secured net leverage ratio does not exceed 5.00 to 1.00. Borrowings under the Credit Agreement will be used for general corporate purposes.
As
The Credit Agreement will mature on January 15, 2025 and amortizes in equal quarterly installments at a resultrate of 1.00% per annum of the modificationoriginal principal amount thereof, with the remaining balance due at final maturity. Interest on borrowings under the Credit Agreement will initially accrue at the Eurodollar rate plus an applicable margin equal to 5.25%.
The obligations under the Credit Agreement are guaranteed by Holdings and extinguishmentSpirit AeroSystems North Carolina, Inc., a wholly-owned subsidiary of the Company's prior credit agreement,Company (“Spirit NC”), (collectively, the “Guarantors”) and each existing and future, direct and indirect, wholly-owned material domestic subsidiary of Spirit, subject to certain customary exceptions. The obligations are secured by a first-priority lien with respect to substantially all assets of Spirit and the Guarantors, subject to certain exceptions.
The Credit Agreement contains usual and customary affirmative and negative covenants for facilities and transactions of this type and that, among other things, restrict the Company recognized a loss on extinguishmentand its restricted subsidiaries’ ability to incur additional indebtedness, create liens, consolidate or merge, make acquisitions and other investments, guarantee obligations of $1.1, all of which is reflected within amortization of deferred financing feesthird parties, make loans or advances, declare or pay certain dividends or distributions on the Condensed Consolidated StatementCompany’s stock, redeem or repurchase shares of Cash Flowsthe Company’s stock, engage in transactions with affiliates and enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends or dispose of assets. These covenants are subject to a number of qualifications and limitations.
The Credit Agreement provides for customary events of default, including, but not limited to, failure to pay principal and interest, failure to comply with covenants, agreements or conditions, and certain events of bankruptcy or insolvency involving the twelve months ended December 31, 2018. Company and its material subsidiaries.
As of December 31, 2018,2020, the outstanding balance of the 2018 Term LoanCredit Agreement was $206.3$400.0 and the carrying value was $204.7.$389.6.
|
| | | | | | | | | |
| Pricing Tier | Credit Rating (S&P/Moody's) | | Commitment Fee | | Letter of Credit Fee | | Eurodollar Rate Loans | | Base Rate Loans |
| 1 | ≥BBB+/Baa1 | | 0.125% | | 1.125% | | 1.125% | | 0.125% |
| 2 | BBB/Baa2 | | 0.150% | | 1.250% | | 1.250% | | 0.250% |
| 3 | BBB-/Baa3 | | 0.200% | | 1.375% | | 1.375% | | 0.375% |
| 4 | BB+/Ba1 | | 0.250% | | 1.625% | | 1.625% | | 0.625% |
| 5 | ≤BB/Ba2 | | 0.300% | | 1.875% | | 1.875% | | 0.875% |
On October 5, 2020, Spirit entered into an Indenture (the “First Lien 2025 Notes Indenture”), by and among Spirit, the Guarantors, and The 2018 Credit Agreement contains customary affirmativeBank of New York Mellon Trust Company, N.A., as trustee and negative covenants, including restrictions on indebtedness, liens, typecollateral agent, in connection with Spirit’s offering of business, acquisitions, investments, sales or transfers$500.0 aggregate principal amount of assets, payments of dividends, transactions with affiliates, change in control and other matters customarily restricted in such agreements.
The 2018 Credit Agreement also contains the following financial covenants (as defined in the A&R Credit Agreement):
|
| | |
Interest Coverage Ratio | | Shall not be less than 4.0:1.0 |
Total Leverage Ratio | | Shall not exceed 3.5:1.0 |
its 5.500% Senior Secured First Lien Notes due 2025 (the “First Lien 2025 Notes"). As of December 31, 2018,2020, the outstanding balance of the First Lien 2025 Notes was $500.0 and the carrying value was $493.9.
The First Lien 2025 Notes were issued and sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and in offshore transactions to non-U.S. persons pursuant to Regulation S under the Securities Act.
The First Lien 2025 Notes mature on January 15, 2025 and bear interest at a rate of 5.500% per year payable semiannually in cash in arrears on January 15 and July 15 of each year. The first interest payment date is January 15, 2021.
The First Lien 2025 Notes are guaranteed by the Guarantors and secured by certain real property and personal property, including certain equity interests, owned by Spirit was and expects to remainthe Guarantors. The First Lien 2025 Notes and guarantees are Spirit’s and the Guarantors’ senior secured obligations and rank equally in full complianceright of payment with all covenants contained withinof their existing and future senior indebtedness, effectively equal with their existing and future indebtedness secured on a pari passu basis by the 2018collateral for the First Lien 2025 Notes to the extent of the value of the collateral (including the Credit Agreement through December 31, 2019.and the 2026 Notes), effectively senior to all of their existing and future indebtedness that is not secured by a lien, or is secured by a junior-priority lien, on the collateral for the First Lien 2025 Notes to the extent of the value of the collateral, effectively junior to any of their other existing and future indebtedness that is secured by assets that do not constitute collateral for the First Lien 2025 Notes to the extent of the value of such assets, and senior in right of payment to any of their existing and future subordinated indebtedness.
Senior
The First Lien 2025 Notes Indenture contains covenants that limit Spirit’s, the Company’s and the Company’s subsidiaries’ ability, subject to certain exceptions and qualifications, to incur indebtedness secured by liens, enter into sale and leaseback transactions, make restricted payments and investments and enter into certain mergers or consolidations and transfer
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
substantially all of the Company and its subsidiaries’ assets. These covenants are subject to a number of qualifications and limitations. In addition, the First Lien 2025 Indenture provides for customary events of default.
2026 Notes
2026 Notes.
In June 2016, the Company issued $300.0 million in aggregate principal amount of 3.850% Senior Notes due June 15, 2026 (the “2026 Notes”) with interest payable, in cash in arrears, on June 15 and December 15 of each year, beginning December 15, 2016. As of December 31, 2018,2020, the outstanding balance of the 2026 Notes was $300.0 million and the carrying value was $297.5 million.$298.1. The Company and Spirit NC guarantee Spirit's obligations under the 2026 Notes on a senior secured basis.
On February 24, 2020, Spirit entered into a Second Supplemental Indenture (the “Second Supplemental Indenture”) by and among Spirit, the Company, Spirit NC, and The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as trustee in connection with the 2026 Notes. Under the Second Supplemental Indenture, the 2026 Noteholders were granted security on an equal and ratable basis with the lenders under the 2018 Credit Agreement until the security in favor of the lenders under the 2018 Credit Agreement was released on October 5, 2020. The Supplemental Indenture also added Spirit NC as an additional guarantor under the indenture governing the 2026 Notes.
On April 17, 2020, Spirit entered into a Third Supplemental Indenture (the “Third Supplemental Indenture”), by and among Spirit, the Company, Spirit NC and The Bank of New York Mellon Trust Company, N.A., as trustee in connection with the 2026 Notes. Under the Third Supplemental Indenture, the noteholders were granted security on an equal and ratable basis with the holders of the Second Lien 2025 Notes.
On October 5, 2020, Spirit entered into a Fourth Supplemental Indenture (the “Fourth Supplemental Indenture”), by and among Spirit, the Company, Spirit NC and The Bank of New York Mellon Trust Company, N.A., as trustee in connection with 2026 Notes. Under the Fourth Supplemental Indenture, the holders of the 2026 Notes were granted security on an equal and ratable basis with the holders of the First Lien 2025 Notes and the secured parties under the Credit Agreement.
Second Lien 2025 Notes
On April 17, 2020, Spirit entered into an Indenture (the “Second Lien 2025 Notes Indenture”), by and among Spirit, the Guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent, in connection with Spirit’s offering of $1,200.0 aggregate principal amount of its 7.500% Senior Secured Second Lien Notes due 2025 (the “Second Lien 2025 Notes”).
The Second Lien 2025 Notes were issued and sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and in offshore transactions to non-U.S. persons pursuant to Regulation S under the Securities Act.
The Second Lien 2025 Notes mature on April 15, 2025 and bear interest at a rate of 7.500% per year payable semiannually in cash in arrears on April 15 and October 15 of each year. The first interest payment date was October 15, 2020. As of December 31, 2020, the outstanding balance of the Second Lien 2025 Notes was $1,200.0 and the carrying value was $1,184.2.
The Second Lien 2025 Notes are guaranteed by the Guarantors and secured by certain real property and personal property, including certain equity interests, owned by Spirit and the Guarantors. The Second Lien 2025 Notes and guarantees are Spirit’s and the Guarantors’ senior secured obligations and will rank equally in right of payment with all of their existing and future senior indebtedness, effectively junior to all of their existing and future first-priority lien indebtedness to the extent of the value of the collateral securing such indebtedness (including indebtedness under the Credit Agreement, the Second Lien 2025 Notes and the 2026 Notes), effectively junior to any of their other existing and future indebtedness that is secured by assets that do not constitute collateral for the 2026Second Lien 2025 Notes to the extent of the value of such assets, and senior in right of payment to any of their existing and future subordinated indebtedness.
The Second Lien 2025 Notes Indenture contains covenants that limit Spirit’s, the Company’s and certain of the Company’s subsidiaries’ ability, subject to certain exceptions and qualifications, to create liens, without granting equal and ratable liens to the holders of the 2026 Notes and enter into sale and leaseback transactions.transactions and guarantee other indebtedness without guaranteeing the Notes. These covenants are subject to a number of qualifications and limitations. In addition, the indentureSecond Lien 2025 Notes Indenture provides for customary events of default.
2022 Notes. On May 22, 2018, the Company commenced an offer to purchase for cash (the “Tender Offer”) any
Floating Rate, 2023, and all2028 Notes
Table of the $300.0 outstanding principal amount of our 5 1/4% Senior Notes due 2022 (the “2022 Notes”). The Tender Offer was made pursuant to an Offer to Purchase dated May 22, 2018, and a related Letter of Transmittal and Notice of Guaranteed Delivery, which set forth the terms and conditions of the Tender Offer in full detail. Under the terms of the Tender Offer, holders of 2022 Notes who validly tendered their notes at or prior to May 29, 2018 received, in whole dollars, $1,028.50 per $1,000 principal amount of Notes tendered. Tendering holders received accrued and unpaid interest from the last applicable interest payment date to, but not including, the settlement date of the Tender Offer.Contents On May 30, 2018, Spirit repurchased $202.6 aggregate principal amount of its 2022 AeroSystems Holdings, Inc.
Notes pursuant to the Tender Offer. In addition, on June 29, 2018, Spirit redeemed the remaining $97.4 aggregate principal amount of the 2022 Notes outstanding. The redemption price of the 2022 Notes was 102.85% of the principal amount thereof, plus accruedConsolidated Financial Statements — (Continued)
($, €, £, and unpaid interest to, but not including, the redemption date of June 29, 2018. Following the redemption on June 29, 2018, none of the 2022 Notes remain outstanding.RM in millions other than per share amounts)
As a result of the extinguishment of the 2022 Notes, the Company recognized a loss on extinguishment of $13.2, all of which is reflected within amortization of deferred financing fees on the Condensed Consolidated Statement of Cash Flows for the twelve months ended December 31, 2018.
New Notes. On May 30, 2018, Spirit entered into an Indenture (the “Indenture”“2018 Indenture”) by and among Spirit, the Company and The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as trustee in connection with Spirit’s offering of $300.0 aggregate principal amount of its Senior Floating Rate Notes due 2021 (the “Floating Rate Notes”), $300.0 aggregate principal amount of
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
its 3.950% Senior Notes due 2023 (the “2023 Notes”) and $700.0 aggregate principal amount of its 4.600% Senior Notes due 2028 (the “2028 Notes” and, together with the Floating Rate Notes and the 2023 Notes, the “New“2018 Notes”). The CompanyHoldings guaranteed Spirit’s obligations under the 2018 Notes on a senior unsecured basis (the “Guarantees”).basis.
The Floating Rate Notes bear interest at a rate per annum equal to three-month LIBOR, as determined in the case of the initial interest period, on May 25, 2018, and thereafter at the beginning of each quarterly period as described herein, plus 800.80 basis points and mature on June 15, 2021. Interest on the Floating Rate Notes is payable on March 15, June 15, September 15 and December 15 of each year, beginning on September 15, 2018. The 2023 Notes bear interest at a rate of 3.950% per annum and mature on June 15, 2023. The 2028 Notes bear interest at a rate of 4.600% per annum and mature on June 15, 2028. Interest on the 2023 Notes and 2028 Notes is payable on June 15 and December 15 of each year, beginning on December 15, 2018. The outstanding balance of the Floating Rate Notes, 2023 Notes, and 2028 Notes was $300.0, $300.0, and $700.0 as of December 31, 2018,2020, respectively. The carrying value of the Floating Rate Notes, 2023 Notes, and 2028 Notes was $298.5, $297.9,299.7, $298.8, and $693.5$694.6 as of December 31, 2018,2020, respectively.
The Notes and the Guarantees have been registered under the Securities Act of 1933, as amended (the “Act”), pursuant to a Registration Statement on Form S-3 (No. 333-211423) previously filed with the SEC under the Act.
The 2018 Indenture contains covenants that limit Spirit’s, the Company’s and certain of the Company’s subsidiaries’ ability, subject to certain exceptions and qualifications, to create liens without granting equal and ratable liens to the holders of the New2018 Notes and enter into sale and leaseback transactions. These covenants are subject to a number of qualifications and limitations. In addition, the 2018 Indenture provides for customary events of default.
On February 12, 2021, Spirit sent a notice of redemption to holders to redeem the outstanding $300 million principal amount of the Floating Rate Notes on February 24, 2021.
As of December 31, 2018, we were and expect to remain2020, the Company is in full compliance with all covenants contained in the indentures governing the 2021First Lien 2025 Notes, Second Lien 2025 Notes, Floating Rate Notes, 2023 Notes, 2026 Notes, and the 2028 Notes through December 31, 2019.2021.
The following table shows required payments during the next five years on the term loan and notes outstanding at December 31, 2020. See Note 11, Leases for maturities of finance lease obligations. 16. | | | | | | | | | | | | | | | | | |
| 2021 | 2022 | 2023 | 2024 | 2025 |
| Required payments | $ | 304.0 | | $ | 4.0 | | $ | 304.0 | | $ | 4.0 | | $ | 2,084.0 | |
17. Pension and Other Post-Retirement Benefits
Multi-employer Pension Plan
In connection with the collective bargaining agreement signed with the International Association of Machinists and Aerospace Workers (“IAM”), the Company contributes to a multi-employer defined benefit pension plan (“IAM National Pension Fund”). TheAs of July 1, 2015, the level of contribution, as specified in the bargaining agreement was, in whole dollars, $1.75 per hour of employee service as of July 1, 2015.service. The IAM bargaining agreement providesprovided for a $0.05 per hour increase, in whole dollars, effective July 1 of each year through 2019. Effective July 1, 2019 the level of employer contribution increased to $1.95 per hour and will remain at $1.95 per hour through contract expiration. The IAM contract expires June 24, 2023.
The collective bargaining agreement with the International Union,United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) requires the Company to contribute a specified amount per hour of service to the IAM National Pension Fund. The specified amount was $1.65$1.70 per hour in 2018.2019. Per the negotiated UAW collective bargaining agreement, the pension contributions, in whole dollars, was $1.70 per hour effective January 1, 2019 and will be as follows:
Effective 1/1/2018 — $1.65
Effective 1/1/2019 — $1.70
Effective 1/1/$1.75 per hour effective January 1, 2020 - 2025 — $1.75through year 2025.
The risk of this multi-employer plan is different from single-employer plans in the following aspects:
| |
1. | 1.Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. |
| |
2. | If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. |
| |
3. | If the Company chooses to stop participating in the multi-employer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability. |
The following table summarizes the multi-employer plan by one employer may be used to which the Company contributes:
provide benefits to employees of other participating employers.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
2.If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
3.If the Company chooses to stop participating in the multi-employer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Pension Protection Act Zone Status | | | | | | | | | | | | Expiration Date of Collective- Bargaining Agreement |
| | | | | FIP/RP Status Pending/ Implemented | | Contributions of the Company | | | |
| | EIN/Pension Plan Number | | | Surcharge Imposed | |
| Pension Fund | 2017 | | 2018 | | 2016 | | 2017 | | 2018 | |
| IAM National Pension Fund | 51-60321295 | | Green | | Green | | No | | $ | 26.9 |
| | $ | 30.3 |
| | $ | 35.0 |
| | No | | IAM June 27, 2020 UAW December 7, 2025 |
| Pension Fund | Year Company Contributions to Plan Exceeded More Than 5 Percent of Total Contributions (as of December 31 of the Plan’s Year-End) |
| IAM National Pension Fund | 2016, 2017, 2018 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Pension Protection Act Zone Status | | | | | | | | | | | | Expiration
Date of
Collective-
Bargaining
Agreement |
| | | | | FIP/RP
Status
Pending/
Implemented | | Contributions of the Company | | | |
| | EIN/Pension
Plan Number | | | Surcharge
Imposed | |
| Pension Fund | 2019 | | 2020 | | 2018 | | 2019 | | 2020 | |
| IAM National Pension Fund | 51-60321295 | | Red | | Red | | Yes | | $ | 35.0 | | | $ | 40.7 | | | $ | 30.1 | | | Yes | | IAM June 24, 2023
UAW December 7, 2025 |
| Pension Fund | Year Company Contributions to Plan Exceeded More Than 5 Percent of Total Contributions (as of December 31 of the Plan’s Year-End) |
| IAM National Pension Fund | 2018, 2019, 2020 |
Defined Contribution Plans
The Company contributes to a defined contribution plan available to all U.S. employees, excluding IAM and UAW represented employees. Under the plan, the Company makes a matching contribution of 75% of the employee contribution to a maximum 8% of eligible individual employee compensation. In addition, non-matching contributions based on an employee’s age and years of service are paid at the end of each calendar year for certain employee groups.
The Company recorded $35.1, $33.6,$32.5, $35.9, and $33.8$35.1 in contributions to these plans for the twelve months ended December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively.
On April 1, 2006, as part of the acquisition of BAE Aerostructures, the Company established a defined contribution pension plan for those employees who are hired after the date of acquisition. Under the plan, the Company contributes 8% of base salary while participating employees are required to contribute 4% of base salary. The Company recorded $6.8$4.1 in contributions to this plan for the periodtwelve months ended December 31, 2018, $5.42020, $4.1 in contributions for the periodtwelve months ended December 31, 20172019 and $3.8$6.8 in contributions for the periodtwelve months ended December 31, 2016.2018.
On October 30, 2020, as part of the Bombardier Acquisition, the Company acquired a further defined contribution plan for certain employees at the Belfast location. Under the plan, the company contributes up to 8% of base salary, matching employee contributions up to this level. The company recorded $0.03 in contributions to this plan for the two months from October 30, 2020 to December 31, 2020.
Defined Benefit Pension Plans
Effective June 17, 2005, pension assets and liabilities were spun-off from three Boeing qualified plans into four qualified Spirit plans for each Spirit employee who did not retire from Boeing by August 1, 2005. Effective December 31, 2005, all four qualified plans were merged together. In addition, Spirit has one nonqualified plan providing supplemental benefits to executives who transferred from a Boeing nonqualified plan to a Spirit plan and elected to keep their benefits in this plan. Both plans are frozen as of the date of the Boeing Acquisition (i.e., no future service benefits are being earned in these plans). The Company intends to fund its qualified pension plan through a trust. Pension assets are placed in trust solely for the benefit of the pension plans’ participants and are structured to maintain liquidity that is sufficient to pay benefit obligations.
On April 1, 2006, as part of the acquisition of BAE Aerostructures, the Company established a U.K. defined benefit pension plan for those employees based in Prestwick that had pension benefits remaining in BAE Systems’ pension plan. Effective December 31, 2013, this Prestwick pension plan was closed and benefits were frozen and thereafter subject only to statutory pension revaluation.
On October 30, 2020, as part of the Bombardier Acquisition, the Company acquired two further defined benefit plans for current and former employees at the Belfast location. These plans are currently open to the future accrual of benefits but closed to new hires.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
In accordance with legislation, each of the U.K. legislation, the planplans and itstheir assets are managed by an independent trustee company.companies. The investment strategystrategies adopted by this trustee isthe trustees are documented in a Statement of Investment Principles in line with U.K. legislation. The principles for the investment strategystrategies are to maximize the long-term rate of return on plan assets within an acceptable level of risk while maintaining adequate funding levels. The trustee hastrustees have invested the plan assets in pooled arrangements with authorized investment companies that were selected to be consistent with the plan's overall investment principles and strategy. Effective December 31, 2013, the U.K. pension plan was closed and benefits were frozen and thereafter subject only to statutory pension revaluation.
Other Post-Retirement Benefit Plans
The Company also has post-retirement health care coverage for eligible U.S. retirees and qualifying dependents prior to age 65. Eligibility for employer-provided benefits is limited to those employees who were employed at the date of the Boeing Acquisition and retire on or after attainment of age 62 and 10 years of service. Employees who do not satisfy these eligibility requirements can retire with post-retirement medical benefits at age 55 and 10 years of service, but they must pay the full cost of medical benefits provided.
On October 30, 2020, as part of the Bombardier Acquisition, the Company acquired a post-retirement medical plan for the employees at the Belfast location.
Obligations and Funded Status
The following tables reconcile the funded status of both pension and post-retirement medical benefits to the balance on the balance sheets for the fiscal years 20182020 and 2017.2019. Benefit obligation balances presented in the tables reflect the projected benefit obligation and accumulated benefit obligation for the Company’s pension plans, and accumulated post-retirement benefit
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
obligations for the Company’s post-retirement medical plan. The Company uses an end of fiscal year measurement date of December 31 for the Company's U.S. pension and post-retirement medical plans.Special termination benefits for the periods ending December 31, 2020 and December 31, 2019 are related to a voluntary retirement programs offered by the Company in 2020 and 2019, respectively. The projected benefit obligation of the US based defined benefit plans as of December 31, 2020 remained largely flat compared to that as of December 31, 2019, reflecting offsetting underlying impacts. Voluntary retirement programs offered by the Company drove a net decrease to the projected benefit obligation through changes to plan settlements, special termination benefits, and curtailment loss. This was offset by an increase in liabilities that was driven by a decrease in the effective discount rate utilized in the actuarial valuation of the plans. Voluntary retirement programs offered by the Company drove a net increase to the projected benefit obligation of the US based Other Post-Retirement benefit plans through changes to special termination benefits and curtailment loss. The projected benefit obligation of the U.K. Prestwick Plan increased, driven by a decrease in the effective discount rate utilized in the actuarial valuation of the plan. The projected benefit obligation of the U.K. Belfast plans was acquired on October 30, 2020, as part of the Bombardier Acquisition.
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | Periods Ended December 31, | | Periods Ended December 31, |
| U.S. Plans | 2018 | | 2017 | | 2018 | | 2017 |
| Change in projected benefit obligation: | | | | | | | |
| Beginning balance | $ | 1,084.4 |
| | $ | 1,036.0 |
| | $ | 47.2 |
| | $ | 51.5 |
|
| Service cost | — |
| | — |
| | 1.1 |
| | 1.2 |
|
| Employee contributions | — |
| | — |
| | 1.0 |
| | 1.1 |
|
| Interest cost | 34.7 |
| | 35.6 |
| | 1.0 |
| | 1.2 |
|
| Actuarial losses (gains) | (91.7 | ) | | 80.0 |
| | (2.4 | ) | | 1.0 |
|
| Special Termination Benefits | — |
| | — |
| | — |
| | — |
|
| Plan Amendments | — |
| | — |
| | — |
| | — |
|
| Benefits paid | (30.4 | ) | | (67.2 | ) | | (7.6 | ) | | (8.8 | ) |
| Projected benefit obligation at the end of the period | $ | 997.0 |
| | $ | 1,084.4 |
| | $ | 40.3 |
| | $ | 47.2 |
|
| Assumptions used to determine benefit obligation: | | | | | | | |
| Discount rate | 4.21 | % | | 3.59 | % | | 3.74 | % | | 3.03 | % |
| Rate of compensation increase | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| Medical assumptions: | | | | | | | |
| Trend assumed for the year | N/A |
| | N/A |
| | 6.24 | % | | 6.59 | % |
| Ultimate trend rate | N/A |
| | N/A |
| | 4.50 | % | | 4.50 | % |
| Year that ultimate trend rate is reached | N/A |
| | N/A |
| | 2038 |
| | 2038 |
|
| Change in fair value of plan assets: | | | | | | | |
| Beginning balance | $ | 1,410.3 |
| | $ | 1,302.9 |
| | $ | — |
| | $ | — |
|
| Actual (loss) return on assets | (77.1 | ) | | 174.5 |
| | — |
| | — |
|
| Employer contributions to plan | 0.1 |
| | 0.1 |
| | 6.6 |
| | 7.7 |
|
| Employee contributions to plan | — |
| | — |
| | 1.0 |
| | 1.1 |
|
| Benefits paid | (30.5 | ) | | (67.2 | ) | | (7.6 | ) | | (8.8 | ) |
| Expenses paid | — |
| | — |
| | — |
| | — |
|
| Ending balance | $ | 1,302.8 |
| | $ | 1,410.3 |
| | $ | — |
| | $ | — |
|
| Reconciliation of funded status to net amounts recognized: | | | | | | | |
| Funded status (deficit) | $ | 305.8 |
| | $ | 325.9 |
| | $ | (40.3 | ) | | $ | (47.2 | ) |
| Net amounts recognized | $ | 305.8 |
| | $ | 325.9 |
| | $ | (40.3 | ) | | $ | (47.2 | ) |
| Amounts recognized in the balance sheet: | | | | | | | |
| Noncurrent assets | $ | 307.0 |
| | $ | 327.2 |
| | $ | — |
| | $ | — |
|
| Current liabilities | — |
| | — |
| | (6.9 | ) | | (7.7 | ) |
| Noncurrent liabilities | (1.2 | ) | | (1.3 | ) | | (33.4 | ) | | (39.5 | ) |
| Net amounts recognized | $ | 305.8 |
| | $ | 325.9 |
| | $ | (40.3 | ) | | $ | (47.2 | ) |
| Amounts not yet reflected in net periodic benefit cost and included in AOCI: | | | | | | | |
| Accumulated other comprehensive (loss) income | $ | (141.9 | ) | | $ | (89.6 | ) | | $ | 27.5 |
| | $ | 28.3 |
|
| Cumulative employer contributions in excess of net periodic benefit cost | 447.7 |
| | 415.5 |
| | (67.8 | ) | | (75.5 | ) |
| Net amount recognized in the balance sheet | $ | 305.8 |
| | $ | 325.9 |
| | $ | (40.3 | ) | | $ | (47.2 | ) |
| Information for pension plans with benefit obligations in excess of plan assets: | | | | | | | |
| Projected benefit obligation | $ | 1.2 |
| | $ | 1.3 |
| | $ | 40.3 |
| | $ | 47.2 |
|
| Accumulated benefit obligation | 1.2 |
| | 1.3 |
| | — |
| | — |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-Retirement
Benefits |
| | Periods Ended December 31, | | Periods Ended December 31, |
| U.S. Plans | 2020 | | 2019 | | 2020 | | 2019 |
| Change in projected benefit obligation: | | | | | | | |
| Beginning balance | $ | 1,096.6 | | | $ | 997.0 | | | $ | 41.8 | | | $ | 40.3 | |
| Service cost | 0 | | | 0 | | | 0.8 | | | 0.9 | |
| Employee contributions | 0 | | | 0 | | | 1.2 | | | 0.9 | |
| Interest cost | 24.4 | | | 36.5 | | | 1.0 | | | 1.2 | |
| Actuarial losses (gains) | 124.8 | | | 141.1 | | | (1.8) | | | 1.8 | |
| Special termination benefits | 31.0 | | | 5.2 | | | 12.0 | | | 3.9 | |
| Plan Curtailment | 33.9 | | | 0 | | | 2.3 | | | 0 |
| Plan Settlements | (175.5) | | | (49.9) | | | 0 | | | 0 | |
| Benefits paid | (36.1) | | | (33.3) | | | (7.8) | | | (7.2) | |
| Projected benefit obligation at the end of the period | $ | 1,099.1 | | | $ | 1,096.6 | | | $ | 49.5 | | | $ | 41.8 | |
| Assumptions used to determine benefit obligation: | | | | | | | |
| Discount rate | 2.31 | % | | 3.19 | % | | 1.26 | % | | 2.55 | % |
| Rate of compensation increase | N/A | | N/A | | N/A | | N/A |
| Medical assumptions: | | | | | | | |
| Trend assumed for the year | N/A | | N/A | | 5.56 | % | | 5.90 | % |
| Ultimate trend rate | N/A | | N/A | | 4.50 | % | | 4.50 | % |
| Year that ultimate trend rate is reached | N/A | | N/A | | 2038 | | 2038 |
| Change in fair value of plan assets: | | | | | | | |
| Beginning balance | $ | 1,519.5 | | | $ | 1,302.8 | | | $ | 0 | | | $ | 0 | |
| Actual return (loss) on assets | 218.4 | | | 299.7 | | | 0 | | | 0 | |
| Employer contributions to plan | 0.1 | | | 0.1 | | | 6.6 | | | 6.3 | |
| Employee contributions to plan | 0 | | | 0 | | | 1.2 | | | 0.9 | |
| Plan Settlements | (175.5) | | | (49.9) | | | 0 | | | 0 | |
| Benefits paid | (36.2) | | | (33.2) | | | (7.8) | | | (7.2) | |
| Expenses paid | 0 | | | 0 | | | 0 | | | 0 | |
| Ending balance | $ | 1,526.3 | | | $ | 1,519.5 | | | $ | 0 | | | $ | 0 | |
| Reconciliation of funded status to net amounts recognized: | | | | | | | |
| Funded status (deficit) | $ | 427.3 | | | $ | 422.9 | | | $ | (49.5) | | | $ | (41.8) | |
| | | | | | | |
| Net amounts recognized | $ | 427.3 | | | $ | 422.9 | | | $ | (49.5) | | | $ | (41.8) | |
| Amounts recognized in the balance sheet: | | | | | | | |
| Noncurrent assets | $ | 428.7 | | | $ | 424.2 | | | 0 | | | 0 | |
| Current liabilities | (0.1) | | | (0.1) | | | (10.3) | | | (7.3) | |
| Noncurrent liabilities | (1.3) | | | (1.2) | | | (39.2) | | | (34.5) | |
| Net amounts recognized | $ | 427.3 | | | $ | 422.9 | | | $ | (49.5) | | | $ | (41.8) | |
| Amounts not yet reflected in net periodic benefit cost and included in AOCI: | | | | | | | |
| Accumulated other comprehensive (loss) income | $ | (6.5) | | | $ | (46.0) | | | $ | 19.3 | | | $ | 22.6 | |
| Cumulative employer contributions in excess of net periodic benefit cost | 433.8 | | | 468.9 | | | (68.8) | | | (64.4) | |
| Net amount recognized in the balance sheet | $ | 427.3 | | | $ | 422.9 | | | $ | (49.5) | | | $ | (41.8) | |
| Information for pension plans with benefit obligations in excess of plan assets: | | | | | | | |
| Projected benefit obligation | $ | 1.4 | | | $ | 1.3 | | | $ | 49.5 | | | $ | 41.8 | |
| Accumulated benefit obligation | 1.4 | | | 1.3 | | | 0 | | | 0 | |
|
| | | | | | | |
| | Pension Benefits |
| | Periods Ended December 31, |
| U.K. Plans | 2018 | | 2017 |
| Change in projected benefit obligation: | | | |
| Beginning balance | $ | 76.9 |
| | $ | 82.1 |
|
| Service cost | 1.3 |
| | 1.3 |
|
| Interest cost | 1.7 |
| | 2.0 |
|
| Actuarial (gains) losses | (6.9 | ) | | (1.1 | ) |
| Benefits paid | (0.6 | ) | | (0.8 | ) |
| Expense paid | (1.3 | ) | | (1.3 | ) |
| Plan settlements | (7.5 | ) | | (12.5 | ) |
| Exchange rate changes | (3.7 | ) | | 7.2 |
|
| Projected benefit obligation at the end of the period | $ | 59.9 |
| | $ | 76.9 |
|
| Assumptions used to determine benefit obligation: | | | |
| Discount rate | 3.00 | % | | 2.60 | % |
| Rate of compensation increase | 3.40 | % | | 3.35 | % |
| Change in fair value of plan assets: | | | |
| Beginning balance | $ | 96.8 |
| | $ | 96.2 |
|
| Actual (loss) return on assets | (3.0 | ) | | 8.7 |
|
| Company contributions | 1.7 |
| | — |
|
| Plan settlements | (9.1 | ) | | (14.7 | ) |
| Expenses paid | (1.3 | ) | | (1.3 | ) |
| Benefits paid | (0.6 | ) | | (0.8 | ) |
| Exchange rate changes | (4.9 | ) | | 8.7 |
|
| Ending balance | $ | 79.6 |
| | $ | 96.8 |
|
| Reconciliation of funded status to net amounts recognized: | | | |
| Funded status | 19.7 |
| | 19.9 |
|
| Net amounts recognized | $ | 19.7 |
| | $ | 19.9 |
|
| Amounts recognized in the balance sheet: | | | |
| Noncurrent assets | $ | 19.7 |
| | $ | 19.9 |
|
| Noncurrent liabilities | — |
| | — |
|
| Net amounts recognized | $ | 19.7 |
| | $ | 19.9 |
|
| Amounts not yet reflected in net periodic benefit cost and included in AOCI: | | | |
| Accumulated other comprehensive income (loss) | 3.1 |
| | 4.3 |
|
| Prepaid pension cost | 16.6 |
| | 15.6 |
|
| Net amount recognized in the balance sheet | $ | 19.7 |
| | $ | 19.9 |
|
| Information for pension plans with benefit obligations in excess of plan assets: | | | |
| Projected benefit obligation | $ | — |
| | $ | — |
|
| Accumulated benefit obligation | — |
| | — |
|
| Fair value of assets | $ | — |
| | $ | — |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
The US based defined benefit plans utilize a cash balance based formula for a subset of the plan participants. The weighted-average interest crediting rates used to determine the benefit obligation and net periodic benefit cost for all future years is 5.25%.
| | | | | | | | | | | |
| | Pension Benefits |
| | Periods Ended December 31, |
| U.K. Prestwick Plan | 2020 | | 2019 |
| Change in projected benefit obligation: | | | |
| Beginning balance | $ | 66.7 | | | $ | 59.9 | |
| Service cost | 0.9 | | | 0.9 | |
| Interest cost | 1.2 | | | 1.6 | |
| Actuarial loss (gain) | 12.2 | | | 5.5 | |
| Benefits paid | (0.8) | | | (0.8) | |
| Expense paid | (0.9) | | | (0.9) | |
| Plan settlements | (5.9) | | | (2.1) | |
| Exchange rate changes | 2.5 | | | 2.6 | |
| Projected benefit obligation at the end of the period | $ | 75.9 | | | $ | 66.7 | |
| Assumptions used to determine benefit obligation: | | | |
| Discount rate | 1.45 | % | | 2.10 | % |
| Rate of compensation increase | 3.10 | % | | 3.15 | % |
| Change in fair value of plan assets: | | | |
| Beginning balance | $ | 91.6 | | | $ | 79.6 | |
| Actual return (loss) on assets | 15.1 | | | 11.1 | |
| Company contributions | 1.7 | | | 1.7 | |
| Plan settlements | (6.9) | | | (2.6) | |
| Expenses paid | (0.9) | | | (0.9) | |
| Benefits paid | (0.8) | | | (0.8) | |
| Exchange rate changes | 3.3 | | | 3.5 | |
| Ending balance | $ | 103.1 | | | $ | 91.6 | |
| Reconciliation of funded status to net amounts recognized: | | | |
| Funded status | 27.2 | | | 24.9 | |
| Net amounts recognized | $ | 27.2 | | | $ | 24.9 | |
| Amounts recognized in the balance sheet: | | | |
| Noncurrent assets | $ | 27.2 | | | $ | 24.9 | |
| Noncurrent liabilities | — | | | — | |
| Net amounts recognized | $ | 27.2 | | | $ | 24.9 | |
| Amounts not yet reflected in net periodic benefit cost and included in AOCI: | | | |
| Accumulated other comprehensive income (loss) | 5.8 | | | 5.9 | |
| Prepaid pension cost | 21.4 | | | 19.0 | |
| Net amount recognized in the balance sheet | $ | 27.2 | | | $ | 24.9 | |
| Information for pension plans with benefit obligations in excess of plan assets: | | | |
| Projected benefit obligation | $ | — | | | $ | — | |
| Accumulated benefit obligation | — | | | — | |
| Fair value of assets | $ | — | | | $ | — | |
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other
Post-Retirement
Benefits |
| Periods Ended December 31, | | Periods Ended December 31, |
| U.K Belfast Plans | 2020 | | 2019 | | 2020 | | 2019 |
| Change in projected benefit obligation: | | | | | | | |
| Beginning balance | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Net transfer in/(out) (including the effect of any business combination divestitures) | 2,311.8 | | | 0 | | | 0.7 | | | 0 | |
| Service cost | 6.3 | | | 0 | | | 0 | | | 0 | |
| Employee contributions | 0 | | | 0 | | | 0 | | | 0 | |
| Interest cost | 6.0 | | | 0 | | | 0 | | | 0 | |
| Actuarial losses (gains) | 183.9 | | | 0 | | | 0 | | | 0 | |
| Special termination benefits | 0 | | | 0 | | | 0 | | | 0 | |
| Exchange rate changes | 161.6 | | | 0 | | | 0.1 | | | 0 | |
| Benefits paid | (8.2) | | | 0 | | | 0 | | | 0 | |
| Projected benefit obligation at the end of the period | $ | 2,661.4 | | | $ | 0 | | | $ | 0.8 | | | $ | 0 | |
| Assumptions used to determine benefit obligation: | | | | | | | |
| Discount rate | 1.45 | % | | 0 | % | | 1.45 | % | | 0 | % |
| Rate of compensation increase | 2.90 | % | | — | % | | N/A | | — | % |
| Medical assumptions: | | | | | | | |
| Trend assumed for the year | N/A | | N/A | | 5.50 | % | | 0 | % |
| Ultimate trend rate | N/A | | N/A | | 5.50 | % | | 0 | % |
| Year that ultimate trend rate is reached | N/A | | N/A | | NA | | NA |
| Change in fair value of plan assets: | | | | | | | |
| Beginning balance | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Net transfer in/(out) (including the effect of any business combination divestitures) | 2,003.7 | | | 0 | | | 0 | | | 0 | |
| Actual (loss) return on assets | 125.9 | | | 0 | | | 0 | | | 0 | |
| Employer contributions to plan | 3.8 | | | 0 | | | 0 | | | 0 | |
| Employee contributions to plan | 0.1 | | | 0 | | | 0 | | | 0 | |
| Benefits paid | (8.2) | | | 0 | | | 0 | | | 0 | |
| Expenses paid | 137.4 | | | 0 | | | 0 | | | 0 | |
| Ending balance | $ | 2,262.7 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Reconciliation of funded status to net amounts recognized: | | | | | | | |
| Funded status (deficit) | $ | (398.8) | | | $ | 0 | | | $ | (0.8) | | | $ | 0 | |
| | | | | | | |
| Net amounts recognized | $ | (398.8) | | | $ | 0 | | | $ | (0.8) | | | $ | 0 | |
| Amounts recognized in the balance sheet: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Noncurrent liabilities | (398.8) | | | 0 | | | (0.8) | | | 0 | |
| Net amounts recognized | $ | (398.8) | | | $ | 0 | | | $ | (0.8) | | | $ | 0 | |
| Amounts not yet reflected in net periodic benefit cost and included in AOCI: | | | | | | | |
| Accumulated other comprehensive (loss) income | $ | (404.7) | | | $ | 0 | | | $ | (0.8) | | | $ | 0 | |
| Cumulative employer contributions in excess of net periodic benefit cost | 5.9 | | | 0 | | | 0 | | | 0 | |
| Net amount recognized in the balance sheet | $ | (398.8) | | | $ | 0 | | | $ | (0.8) | | | $ | 0 | |
| Information for pension plans with benefit obligations in excess of plan assets: | | | | | | | |
| Projected benefit obligation | $ | 2,661.5 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Accumulated benefit obligation | 2,594.5 | | | 0 | | | 0 | | | 0 | |
| Fair value of assets | 2,262.7 | | | — | | | — | | | — | |
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
Annual Expense
The components of pension and other post-retirement benefit plans expense for the U.S. plans and the assumptions used to determine benefit obligations for each of the periods ended December 31, 2018, 2017,2020, 2019, and 20162018 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other
Post-Retirement
Benefits |
| | Periods Ended
December 31, | | Periods Ended
December 31, |
| U.S. Plans | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Components of net periodic benefit cost (income): | | | | | | | | | | | |
| Service cost | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0.8 | | | $ | 0.9 | | | $ | 1.1 | |
| Interest cost | 24.4 | | | 36.5 | | | 34.7 | | | 1.0 | | | 1.2 | | | 1.1 | |
| Expected return on plan assets | (64.2) | | | (66.7) | | | (66.9) | | | 0 | | | 0 | | | 0 | |
| Amortization of net (gain) loss | 0.2 | | | 0.5 | | | 0 | | | (1.7) | | | (2.2) | | | (2.3) | |
| Amortization of prior service costs | 0 | | | 0 | | | 0 | | | (0.9) | | | (0.9) | | | (0.9) | |
Settlement (gain) loss recognized(1) | 9.8 | | | 3.4 | | | 0 | | | 0 | | | 0 | | | 0 | |
Curtailment loss/(gain) (2) | 33.9 | | 0 | 0 | | 0 | 0 | | 0 | (0.2) | | 0 | 0 | | 0 | 0 | |
Special termination benefits(2) | 31.0 | | | 5.2 | | | 0 | | | 12.0 | | | 3.9 | | | 0 | |
| Net periodic benefit (income) cost | 35.1 | | | (21.1) | | | (32.2) | | | 11.0 | | | 2.9 | | | (1.0) | |
| Other changes recognized in OCI: | | | | | | | | | | | |
| Total recognized in other OCI (income) loss | $ | (39.4) | | | $ | (95.9) | | | $ | 52.3 | | | $ | 1.0 | | | $ | 4.9 | | | $ | 0.8 | |
| Total recognized in other net periodic benefit and OCI (income) loss | $ | (4.3) | | | $ | (117.0) | | | $ | 20.1 | | | $ | 12.0 | | | $ | 7.8 | | | $ | (0.2) | |
| Assumptions used to determine net periodic benefit costs: | | | | | | | | | | | |
| Discount rate | 3.19 | % | | 4.21 | % | | 3.59 | % | | 2.55 | % | | 3.74 | % | | 3.03 | % |
| Expected return on plan assets | 4.50 | % | | 5.00 | % | | 4.80 | % | | N/A | | N/A | | N/A |
| Salary increases | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
| Medical Assumptions: | | | | | | | | | | | |
| Trend assumed for the year | N/A | | N/A | | N/A | | 5.90 | % | | 6.24 | % | | 6.59 | % |
| Ultimate trend rate | N/A | | N/A | | N/A | | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year that ultimate trend rate is reached | N/A | | N/A | | N/A | | 2038 | | 2038 | | 2038 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | Periods Ended December 31, | | Periods Ended December 31, |
| U.S. Plans | 2018 | | 2017 | | 2016 | | 2018 |
| 2017 |
| 2016 |
| Components of net periodic benefit cost (income): | | | | | | | | | | | |
| Service cost | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1.1 |
| | $ | 1.2 |
| | $ | 1.8 |
|
| Interest cost | 34.7 |
| | 35.7 |
| | 42.7 |
| | 1.1 |
| | 1.2 |
| | 2.1 |
|
| Expected return on plan assets | (66.9 | ) | | (69.8 | ) | | (74.9 | ) | | — |
| | — |
| | — |
|
| Amortization of net loss | — |
| | — |
| | 5.7 |
| | (2.3 | ) | | (2.2 | ) | | — |
|
| Amortization of prior service costs | — |
| | — |
| | — |
| | (0.9 | ) | | (0.9 | ) | | (0.9 | ) |
| Special Termination Benefits | — |
| | — |
| | 23.6 |
| | — |
| | — |
| | 3.1 |
|
| Net periodic benefit (income) cost | (32.2 | ) | | (34.1 | ) | | (2.9 | ) | | (1.0 | ) | | (0.7 | ) | | 6.1 |
|
| Other changes recognized in OCI: | | | | | | | | | | | |
| Total recognized in OCI (income) loss | $ | 52.3 |
| | $ | (24.8 | ) | | $ | (31.8 | ) | | $ | 0.8 |
| | $ | 4.2 |
| | $ | (23.0 | ) |
| Total recognized in net periodic benefit cost and OCI | $ | 20.1 |
| | $ | (58.9 | ) | | $ | (34.7 | ) | | $ | (0.2 | ) | | $ | 3.5 |
| | $ | (16.9 | ) |
| Assumptions used to determine net periodic benefit costs: | | | | | | | | | | | |
| Discount rate | 3.59 | % | | 4.15 | % | | 4.38 | % | | 3.03 | % | | 3.21 | % | | 3.43 | % |
| Expected return on plan assets | 4.80 | % | | 5.50 | % | | 6.00 | % | | N/A |
| | N/A |
| | N/A |
|
| Salary increases | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| Medical Assumptions: | | | | | | | | | | | |
| Trend assumed for the year | N/A |
| | N/A |
| | N/A |
| | 6.59 | % | | 6.93 | % | | 7.27 | % |
| Ultimate trend rate | N/A |
| | N/A |
| | N/A |
| | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year that ultimate trend rate is reached | N/A |
| | N/A |
| | N/A |
| | 2038 |
| | 2038 |
| | 2038 |
|
The estimated net gain(1) Due to settlement accounting, the Company remeasured the pension assets and obligations which resulted in a $39.4 and $95.9, respectively,impact to OCI that will be amortized from other comprehensive income into net periodic benefit cost overis included in the next fiscal year is $1.7 for Pension BenefitsCompany's Consolidated Statements of Comprehensive Income and a charge of $9.8 and $3.4, forrespectively, that was recorded to Other Post-Retirement Benefits plans.income (expense).
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
The components of the pension benefit plan expense for the U.K. plans and the assumptions used to determine benefit obligations for each of the periods ended December 31, 2018, 2017,2020 and 2016 are as follows:December 31, 2019 is a combination of pension value plan, post-retirement medical plan,offset by a reduction in the Company's net benefit obligation. The increase is due to 2020 voluntary retirement plan.
|
| | | | | | | | | | | |
| | Pension Benefits |
| | Periods Ended December 31, |
| U.K. Plans | 2018 | | 2017 | | 2016 |
| Components of net periodic benefit cost (income): | | | | | |
| Service cost | $ | 1.3 |
| | $ | 1.3 |
| | $ | 1.0 |
|
| Interest cost | 1.7 |
| | 2.0 |
| | 2.9 |
|
| Expected return on plan assets | (2.8 | ) | | (2.9 | ) | | (3.6 | ) |
| Settlement gain | (0.4 | ) | | (0.3 | ) | | — |
|
| Net periodic benefit cost (income) | $ | (0.2 | ) | | $ | 0.1 |
| | $ | 0.3 |
|
| Other changes recognized in OCI: | | | | | |
| Total (income) recognized in OCI | $ | (0.5 | ) | | $ | (6.7 | ) | | $ | (4.6 | ) |
| Total recognized in net periodic benefit cost and OCI | $ | (0.7 | ) | | $ | (6.6 | ) | | $ | (4.3 | ) |
| Assumptions used to determine net periodic benefit costs: | | | | | |
| Discount rate | 2.60 | % | | 2.70 | % | | 4.00 | % |
| Expected return on plan assets | 3.10 | % | | 3.20 | % | | 4.30 | % |
| Salary increases | 3.35 | % | | 3.20 | % | | 3.10 | % |
The estimated net (gain) loss that will be amortized from other comprehensive income into net periodic benefit cost over the next fiscal year for the U.K. plan is zero.
As described in Note 3, Summary of Significant Accounting Policies, the adoption of ASU 2017-07 in 2018 requires the Company to record only the service component of net periodic benefit cost in operating profit and the non-service components of net periodic benefit cost (i.e., interest cost, expected return on plan assets, amortization of prior service cost, special termination benefits, and net actuarial gains or losses) as part of non-operating income. Results
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
The components of the pension benefit plan expense for the U.K. plans and the assumptions used to determine benefit obligations for each of the periods ended December 31, 20172020, 2019, and 2018 are as follows:
| | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | Periods Ended
December 31, |
| U.K. Prestwick Plan | 2020 | | 2019 | | 2018 |
| Components of net periodic benefit cost (income): | | | | | |
| Service cost | $ | 0.9 | | | $ | 0.9 | | | $ | 1.3 | |
| Interest cost | 1.2 | | | 1.7 | | | 1.7 | |
| Expected return on plan assets | (1.7) | | | (2.4) | | | (2.8) | |
| Settlement gain | (0.4) | | | (0.2) | | | (0.4) | |
| Net periodic benefit cost (income) | $ | 0 | | | $ | 0 | | | $ | (0.2) | |
| Other changes recognized in OCI: | | | | | |
| Total (income) recognized in OCI | $ | (0.9) | | | $ | (3.2) | | | $ | (0.5) | |
| Total recognized in net periodic benefit cost and OCI | $ | (0.9) | | | $ | (3.2) | | | $ | (0.7) | |
| Assumptions used to determine net periodic benefit costs: | | | | | |
| Discount rate | 2.10 | % | | 3.00 | % | | 2.60 | % |
| Expected return on plan assets | 2.00 | % | | 3.10 | % | | 3.10 | % |
| Salary increases | 3.15 | % | | 3.40 | % | | 3.35 | % |
The estimated net (gain) loss that will be amortized from other comprehensive income into net periodic benefit cost over the next fiscal year for the U.K. plan is 0.
The components of the pension benefit plan expense for the Belfast plans and the assumptions used to determine benefit obligations for each of the periods ended December 31, 2016 have been adjusted2020, 2019, and 2018 are as follows:
| | | | | | | | | | | | | | | | | |
| Pension Benefits |
| Periods Ended
December 31, |
| U.K. Belfast Plans | 2020 | | 2019 | | 2018 |
| Components of net periodic benefit cost (income): | | | | | |
| Service cost | $ | 6.3 | | | $ | 0 | | | $ | 0 | |
| Interest cost | 5.9 | | | 0 | | | 0 | |
| Expected return on plan assets | (14.0) | | | 0 | | | 0 | |
| | | | | |
| Net periodic benefit cost (income) | $ | (1.8) | | | $ | 0 | | | $ | 0 | |
| Other changes recognized in OCI: | | | | | |
| Total (income) recognized in OCI | $ | 96.6 | | | $ | 0 | | | $ | 0 | |
| Total recognized in net periodic benefit cost and OCI | $ | 94.8 | | | $ | 0 | | | $ | 0 | |
| Assumptions used to determine net periodic benefit costs: | | | | | |
| Discount rate | 1.75 | % | | — | % | | — | % |
| Expected return on plan assets | 4.20 | % | | — | % | | — | % |
| Salary increases | 2.75 | % | | — | % | | — | % |
Spirit AeroSystems Holdings, Inc.
Notes to reflect this accounting change.the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
Assumptions
The Company sets the discount rate assumption annually for each of its retirement-related benefit plans as of the measurement date, based on a review of projected cash flow and a long-term high-quality corporate bond yield curve. The discount rate determined on each measurement date is used to calculate the benefit obligation as of that date, and is also used to calculate the net periodic benefit (income)/cost for the upcoming plan year. During 2015, the mortality assumption for the U.S. plans was updated to Mercer’s MRP-2007 generational mortality tables for non-annuitants and Mercer’s MILES-2010 generational tables for the Auto, Industrial Goods and Transportation group for annuitants both reflecting Mercer’s MMP-2007 improvement scale. In 2018, the Company incorporated the MMP-2018 improvement scale. MMP-2018 is a Mercer-developed scale that uses the same basic model as the Society of Actuaries MP-2018 scale, but with different parameters and adjustments for actual experience since 2006. In 2019, the Company incorporated the MMP-2019 improvement scale which was utilized in 2020. MMP-2019 is a Mercer-developed scale that uses the same basic model as the Society of Actuaries MP-2019 scale, but with different parameters and adjustments for actual experience since 2006. A blue collar adjustment is reflected for the hourly union participants and a white collar adjustment is reflected for all other participants. Actuarial gains and losses are amortized using the corridor method over the average working lifetimes of active participants/membership.
The pension expected return on assets assumption is derived from the long-term expected returns based on the investment allocation by class specified in the Company's investment policy. The expected return on plan assets determined on each measurement date is used to calculate the net periodic benefit (income)/cost of the upcoming plan year.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. To determine the health care cost trend rates the Company considers national health trends and adjusts for its specific plan design and locations. The trend and aging assumptions were updated during 2016 to reflect more current trends. These assumptions were reviewed in 2018,2020, and it was determined they were still reasonable and therefore were unchanged.
A one-percentage point increase in the initial through ultimate assumed health care trend rates would have increased the accumulated post-retirement benefit obligation by $1.8 at December 31, 2018 and the aggregate service and interest cost components
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
of non-pension post-retirement benefit expense for 2018 by $0.1. A one-percentage point decrease would have decreased the obligation by $1.7 and the aggregate service and interest cost components of non-pension post-retirement benefit expense for 2018 by $0.1.
U.S. Plans
The Company’s investment objective is to achieve long-term growth of capital, with exposure to risk set at an appropriate level. This objective shall be accomplished through the utilization of a diversified asset mix consisting of equities (domestic and international) and taxable fixed income securities. The allowable asset allocation range is:
|
| | | | |
| Equities | 20 - 50% |
| Fixed income | 50 - 80% |
| Real estate | 0 - 7% |
Investment guidelines include that no security, except issues of the U.S. Government, shall comprise more than 5% of total Plan assets and further, no individual portfolio shall hold more than 7% of its assets in the securities of any single entity, except issues of the U.S. Government. The following derivative transactions are prohibited — leverage, unrelated speculation and “exotic” collateralized mortgage obligations or CMOs. Investments in hedge funds, private placements, oil and gas and venture capital must be specifically approved by the Company in advance of their purchase.
The Company’s plans have asset allocations for the U.S., as of December 31, 20182020 and December 31, 2017,2019, as follows:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Asset Category — U.S. | | | |
| Equity securities — U.S. | 26 | % | | 25 | % |
| Equity securities — International | 3 | % | | 4 | % |
| Debt securities | 69 | % | | 69 | % |
| Real estate | 2 | % | | 2 | % |
| Total | 100 | % | | 100 | % |
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
|
| | | | | |
| | 2018 | | 2017 |
| Asset Category — U.S. | | | |
| Equity securities — U.S. | 24 | % | | 24 | % |
| Equity securities — International | 3 | % | | 4 | % |
| Debt securities | 71 | % | | 70 | % |
| Real estate | 2 | % | | 2 | % |
| Total | 100 | % | | 100 | % |
U.K. PlansPrestwick Plan
The Trustee’s investment objective is to ensure that they can meet their obligation to the beneficiaries of the Plan. An additional objective is to achieve a return on the total Plan, which is compatible with the level of risk considered appropriate. The overall benchmark allocation of the Plan’s assets is:
|
| | | | |
| Equity securities | 35 | %19 - 20% |
| Debt securities | 60 | %80% |
| Property | 5 | %1% |
The Company’s plans havePlan has asset allocations for the U.K., as of December 31, 20182020 and December 31, 2017,2019, as follows:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Asset Category — U.K. Prestwick | | | |
| Equity securities | 15 | % | | 15 | % |
| Debt securities | 80 | % | | 80 | % |
| Other | 5 | % | | 5 | % |
| Total | 100 | % | | 100 | % |
|
| | | | | |
| | 2018 | | 2017 |
| Asset Category — U.K. | | | |
| Equity securities | 36 | % | | 36 | % |
| Debt securities | 60 | % | | 58 | % |
| Other | 4 | % | | 6 | % |
| Total | 100 | % | | 100 | % |
U.K. Belfast Plans
The Trustees' investment objective is to ensure that they can meet their obligation to the beneficiaries of the Plans. An additional objective is to achieve a return on the total Plan, which is compatible with the level of risk considered appropriate. The overall benchmark allocation of the Plan’s assets is:
| | | | | |
| Equity securities | 32% |
| Fixed Income | 36% |
| Indexed-Linked Gilts | 15% |
| Real Return Assets | 15% |
| Money Market | 2% |
The Plans have asset allocations as of December 31, 2020 and December 31, 2019, as follows:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Asset Category — U.K. Belfast | | | |
| Equity securities | 32% | | — | % |
| Fixed Income | 36% | | — | % |
| Indexed-Linked Gilts | 15% | | — | % |
| Real Return Assets | 13% | | — | % |
| Money Market | 4% | | — | % |
| Total | 100 | % | | — | % |
Projected contributions and benefit payments
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
Required U.S. pension contributions under Employee Retirement Income Security Act (ERISA) regulations are expected to be zero in 20192021 and discretionary contributions are not expected in 2019.2021. SERP and post-retirement medical plan contributions
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in 2019millions other than per share amounts)
in 2021 are not expected to exceed $6.9.be $10.3. Expected contributions to the U.K. Prestwick plan for 20192021 are $1.7.$1.8. Expected contributions to the U.K. (Belfast) plans for 2021 are $180.2, including a one-time contribution of £100 agreed as part of the acquisition of the Short Brothers plc.
The Company monitors its defined benefit pension plan asset investments on a quarterly basis and believes that the Company is not exposed to any significant credit risk in these investments.
The total benefits expected to be paid over the next ten years from the plans' assets or the assets of the Company, by country, are as follows:
| | | | | | | | | | | |
| U.S. | Pension Plans | | Other
Post-Retirement
Benefit Plans |
| 2021 | $ | 41.3 | | | $ | 10.3 | |
| 2022 | $ | 43.6 | | | $ | 9.5 | |
| 2023 | $ | 45.4 | | | $ | 8.0 | |
| 2024 | $ | 47.6 | | | $ | 5.7 | |
| 2025 | $ | 49.5 | | | $ | 3.9 | |
| 2026-2030 | $ | 269.5 | | | $ | 11.8 | |
|
| | | | | | | |
| U.S. | Pension Plans | | Other Post-Retirement Benefit Plans |
| 2019 | $ | 36.7 |
| | $ | 6.9 |
|
| 2020 | $ | 40.4 |
| | $ | 5.9 |
|
| 2021 | $ | 44.2 |
| | $ | 5.0 |
|
| 2022 | $ | 48.1 |
| | $ | 4.6 |
|
| 2023 | $ | 51.4 |
| | $ | 4.6 |
|
| 2024-2028 | $ | 297.3 |
| | $ | 17.5 |
|
| | | | | |
| U.K. Prestwick | Pension Plans |
| 2021 | $ | 0.9 | |
| 2022 | $ | 0.9 | |
| 2023 | $ | 0.9 | |
| 2024 | $ | 0.9 | |
| 2025 | $ | 1.0 | |
| 2026-2030 | $ | 5.1 | |
| | | | | | | | | | | |
| U.K. Belfast | Pension Plans | | Other
Post-Retirement
Benefit Plans |
| 2021 | $ | 61.1 | | | $ | 0.1 | |
| 2022 | $ | 62.2 | | | $ | 0.1 | |
| 2023 | $ | 63.2 | | | $ | 0.1 | |
| 2024 | $ | 64.3 | | | $ | 0.1 | |
| 2025 | $ | 65.4 | | | $ | 0.1 | |
| 2026-2030 | $ | 344.2 | | | $ | 5.0 | |
|
| | | |
| U.K. | Pension Plans |
| 2019 | $ | 0.6 |
|
| 2020 | $ | 0.6 |
|
| 2021 | $ | 0.6 |
|
| 2022 | $ | 0.7 |
|
| 2023 | $ | 0.7 |
|
| 2024-2028 | $ | 3.6 |
|
Fair Value Measurements
The pension plan assets are valued at fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for the investments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Temporary Cash Investments — These investments consist of U.S. dollars and foreign currencies held in master trust accounts. Foreign currencies held are reported in terms of U.S. dollars based on currency exchange rates readily available in active markets. These temporary cash investments are classified as level 1 investments.
Collective Investment Trusts — These investments are public investment vehicles valued using market prices and performance of the fund. The trust allocates notional units to the policy holder based on the underlying notional unit buy (offer) price using the middle market price plus transaction costs. These investments are classified within level 2 of the valuation
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
hierarchy. In addition, the collective investment trust includes a real estate fund, which is classified within level 3 of the valuation hierarchy.
Commingled Equity and Bond Funds — These investments are valued at the closing price reported by the Plan Trustee. These investments are not being traded in an active market, but are backed by various investment securities managed by the Bank of New York. Fair value is being calculated using inputs that rely on the Bank of New York’s own assumptions, which are based on underlying investments that are traded on an active market and classified within level 2 of the valuation hierarchy.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
As of December 31, 20182020 and December 31, 2017,2019, the pension plan assets measured at fair value on a recurring basis were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | At December 31, 2020 Using |
| Description | December 31, 2020 Total | | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Temporary Cash Investments | $ | 6.4 | | | $ | 6.4 | | | $ | 0 | | | $ | 0 | |
| Collective Investment Trusts | 102.4 | | | 0 | | | 99.0 | | | 3.4 | |
| Commingled Equity and Bond Funds | 3,735 | | | 0 | | | 3,735.0 | | | 0 | |
| $ | 3,843.8 | | | $ | 6.4 | | | $ | 3,834.0 | | | $ | 3.4 | |
| | | | | | At December 31, 2018 Using | | | | At December 31, 2019 Using |
| Description | December 31, 2018 Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Description | December 31, 2019 Total | | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Temporary Cash Investments | $ | 0.2 |
| | $ | 0.2 |
| | $ | — |
| | $ | — |
| Temporary Cash Investments | $ | 0.7 | | | $ | 0.7 | | | $ | 0 | | | $ | 0 | |
| Collective Investment Trusts | 79.4 |
| | — |
| | 76.2 |
| | 3.2 |
| Collective Investment Trusts | 91.6 | | | 0 | | | 87.6 | | | 3.4 | |
| Commingled Equity and Bond Funds | 1,302.8 |
| | — |
| | 1,302.8 |
| | — |
| Commingled Equity and Bond Funds | 1,519.5 | | | 0 | | | 1,519.5 | | | 0 | |
| | $ | 1,382.4 |
| | $ | 0.2 |
| | $ | 1,379.0 |
| | $ | 3.2 |
| | $ | 1,611.8 | | | $ | 0.7 | | | $ | 1,607.1 | | | $ | 3.4 | |
|
| | | | | | | | | | | | | | | |
| | | | At December 31, 2017 Using |
| Description | December 31, 2017 Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Temporary Cash Investments | $ | 0.3 |
| | $ | 0.3 |
| | $ | — |
| | $ | — |
|
| Collective Investment Trusts | 96.5 |
| | — |
| | 90.6 |
| | 5.9 |
|
| Commingled Equity and Bond Funds | 1,410.3 |
| | — |
| | 1,410.3 |
| | — |
|
| | $ | 1,507.1 |
| | $ | 0.3 |
| | $ | 1,500.9 |
| | $ | 5.9 |
|
The table below sets forth a summary of changes in the fair value of the Plan’s level 3 investment assets and liabilities for the years ended December 31, 20182020 and December 31, 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| Description | Beginning
Fair Value | | Purchases | | Gain (Loss) | | Sales,
Maturities,
Settlements, Net | | Exchange
rate | | Ending Fair
Value |
| Collective Investment Trusts | $ | 3.4 | | | $ | 0 | | | $ | (0.1) | | | $ | — | | | $ | 0.1 | | | $ | 3.4 | |
| | | | | | | | | | | |
| $ | 3.4 | | | $ | 0 | | | $ | (0.1) | | | $ | — | | | $ | 0.1 | | | $ | 3.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| Description | Beginning
Fair Value | | Purchases | | Gain (Loss) | | Sales,
Maturities,
Settlements, Net | | Exchange
rate | | Ending Fair
Value |
| Collective Investment Trusts | $ | 3.2 | | | $ | 0 | | | $ | 0.1 | | | $ | 0 | | | $ | 0.1 | | | $ | 3.4 | |
| | | | | | | | | | | |
| $ | 3.2 | | | $ | 0 | | | $ | 0.1 | | | $ | 0 | | | $ | 0.1 | | | $ | 3.4 | |
18. Capital Stock
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| Description | Beginning Fair Value | | Purchases | | Gain (Loss) | | Sales, Maturities, Settlements, Net | | Exchange rate | | Ending Fair Value |
| Collective Investment Trusts | $ | 5.9 |
| | $ | — |
| | $ | 0.3 |
| | $ | (2.8 | ) | | $ | (0.2 | ) | | $ | 3.2 |
|
| | $ | 5.9 |
| | $ | — |
| | $ | 0.3 |
| | $ | (2.8 | ) | | $ | (0.2 | ) | | $ | 3.2 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| Description | Beginning Fair Value | | Purchases | | Gain (Loss) | | Sales, Maturities, Settlements, Net | | Exchange rate | | Ending Fair Value |
| Collective Investment Trusts | $ | 4.8 |
| | $ | — |
| | $ | 0.6 |
| | $ | — |
| | $ | 0.5 |
| | $ | 5.9 |
|
| | $ | 4.8 |
| | $ | — |
| | $ | 0.6 |
| | $ | — |
| | $ | 0.5 |
| | $ | 5.9 |
|
17. Capital Stock
Holdings has authorized 210,000,000 shares of stock. Of that, 200,000,000 shares are Common Stock, par value $0.01 per share, one vote per share and 10,000,000 shares are preferred stock, par value $0.01 per share.
In association with the Boeing Acquisition, Spirit executives with balances in Boeing’s Supplemental Executive Retirement Plan (“SERP”) were authorized to purchase a fixed number of units of Holdings “phantom stock” at $3.33 per unit based on the present value of their SERP balances. Under this arrangement, 860,244 phantom units were purchased. Any payment on account of units may be made in cash or shares of Common Stock at the sole discretion of Holdings. The balance of SERP units was 47,48728,950, 38,754 and 47,487 as of December 31, 2020, 2019, and 2018, andrespectively.
Repurchases of Common Stock
There is $925.0 remaining under the Board-authorized share repurchase program. During the twelve months ended December 31, 2017, respectively.2020, no shares were repurchased under the Board-authorized share repurchase program. Share repurchases are currently on hold due to the impacts of the B737 MAX grounding and the COVID-19 pandemic. The Credit Agreement imposes additional restrictions on the Company’s ability to repurchase shares.
During the three months ended December 31, 2020, 15,578 shares were transferred to us from employees in satisfaction of tax withholding obligations associated with the vesting of restricted stock awards under the Omnibus Plan.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
Repurchases of Common Stock
During the period ended December 31, 2017, the Company repurchased 7.5 million shares of its Common Stock for $502.1.
During the period ended December 31, 2018, the Company repurchased 9.3 million shares of its Common Stock for $800.0.
18.19. Stock Compensation
Holdings has established the stockholder-approved 2014 Omnibus Incentive Plan, as amended (the “Omnibus Plan”) to grant cash and equity awards to certain individuals. Compensation values are based on the value of Holdings’ Common Stock on the grant date, which is added to equity and charged to period expense. The Company’s Omnibus Plan was amended in October 2019 to allow for participants to make tax elections with respect to their equity awards.
Holdings has recognized a net total of $27.4, $22.1,$24.2, $36.1, and $42.5$27.4 of stock compensation expense for the periodstwelve months ended December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively. Stock compensation expense is charged in its entirety directly to selling, general and administrative expense.
Short-Term Incentive Plan
The Short-Term Incentive Program under the Omnibus Plan enables eligible employees to receive incentive benefits in the form of cash as determined by the Compensation Committee.
Board of Directors Stock Awards
The Company’s Omnibus Plan provides non-employee directors the opportunity to receive grants of restricted shares of Common Stock, or Restricted Stock Units (“RSUs”) or a combination of both Common Stock and RSUs. The Common Stock grants and RSU grants vest one year from the grant date subject to the directors compliance with the one-year service condition; however, the RSU grants are not payable until the director’s separation from service. The Board of Directors is authorized to make discretionary grants of shares or RSUs from time to time. Compensation values are based on the value of Holdings’ Common Stock on the grant date, which is added to equity and charged to period expense or included in inventory and cost of sales.
The Company expensed a net amount of $1.3, $1.0,$1.4, $1.4, and $1.2$1.3 for the restricted shares of Common Stock and RSUs for the periodstwelve months ended December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively. The Company’s unamortized stock compensation related to these restricted shares of Common Stock and RSUs is $0.6,$0.4, which will be recognized over a weighted average remaining period of 54 months. The intrinsic value of the unvested restricted shares of Common Stock and RSUs, based on the value of the Company's stock at December 31, 2018,2020, was $1.2,$2.5, based on the value of the Company’s Common Stock and the number of unvested shares of restricted Common Stock and RSUs.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
The following table summarizes grants of restricted Common Stock and RSUs to members of the Company’s Board of Directors for the periodstwelve months ended December 31, 2018, 2017,2020, 2019, and 2016:2018:
| | | | Shares | Value(1) | | Shares | Value(1) |
| | Class A | | Class A | | | Class A | | Class A | |
| | (Thousands) | | | | (Thousands) | | |
| Board of Directors Stock Grants | | | | | Board of Directors Stock Grants | | | | |
| Nonvested at December 31, 2015 | 21 |
| | $ | 1.1 |
| | |
| Granted during period | 26 |
| | 1.2 |
| | |
| Vested during period | (21 | ) | | (1.1 | ) | | |
| Forfeited during period | — |
| | — |
| | |
| Nonvested at December 31, 2016 | 26 |
| | 1.2 |
| | |
| Granted during period | 24 |
| | 1.2 |
| | |
| Vested during period | (26 | ) | | (1.2 | ) | | |
| Forfeited during period | — |
| | — |
| | |
| Nonvested at December 31, 2017 | 24 |
| | 1.2 |
| | Nonvested at December 31, 2017 | 24 | | | $ | 1.2 | | |
| Granted during period | 17 |
| | 1.4 |
| | Granted during period | 17 | | | 1.4 | | |
| Vested during period | (19 | ) | | (1.0 | ) | | Vested during period | (19) | | | (1.0) | | |
| Forfeited during period | — |
| | — |
| | Forfeited during period | 0 | | | 0 | | |
| Nonvested at December 31, 2018 | 22 |
| | $ | 1.6 |
| | Nonvested at December 31, 2018 | 22 | | | 1.6 | | |
| Granted during period | | Granted during period | 17 | | | 1.5 | | |
| Vested during period | | Vested during period | (22) | | | (1.7) | | |
| Forfeited during period | | Forfeited during period | 0 | | | 0 | | |
| Nonvested at December 31, 2019 | | Nonvested at December 31, 2019 | 17 | | | 1.4 | | |
| Granted during period | | Granted during period | 65 | | | 1.3 | | |
| Vested during period | | Vested during period | (17) | | | (1.5) | | |
| Forfeited during period | | Forfeited during period | 0 | | | 0 | | |
| Nonvested at December 31, 2020 | | Nonvested at December 31, 2020 | 65 | | | $ | 1.2 | | |
106
| |
(1) | Value represents grant date fair value. |
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
(1)Value represents grant date fair value.
Long-Term Incentive Awards
Holdings has established the Long-Term Incentive Plan (the “LTIP”) under the Omnibus Plan to grant equity awards to certain employees. Generally, specified employees are entitled to receive a long-term incentive award that, for the 20182020 year, consisted of the following:
•60% of the award consisted of time-based, service-condition restricted Common Stock that vests in equal installments over a three-year period (the “RS Award”). Values for these awards are based on the value of Common Stock on the grant date.
•20% of the award consisted of performance-based, market-condition restricted Common Stock that vests on the three-year anniversary of the grant date contingent upon TSR compared to the Company’s peers (the “TSR Award”). Values for these awards are initially measured on the grant date using estimated payout levels derived from a Monte Carlo valuation model.
•20% of the award consisted of performance-based, (performance-condition) restricted Common Stock that vests on the three-year anniversary of the grant date contingent upon the Company’s cumulative three-year free cash flow as a percentage of the Company’s cumulative three-year revenues meeting certain pre-established goals (the “FCF Percentage Award”). Values for these awards are based on the dividend adjusted value of Common Stock on the grant date.
For the twelve months ended December 31, 2020, 515,788 shares of Common Stock with an aggregate grant date fair value of $21.0 were granted as RS Awards under the Company's LTIP. In addition, 385,887 shares of Common Stock with an aggregate grant date fair value of $16.1 were granted as TSR Awards and FCF Percentage Awards under the Company’s LTIP.
For the twelve months ended December 31, 2019, 303,638 shares of Common Stock with an aggregate grant date fair value of $27.3 were granted as RS Awards under the Company's LTIP. In addition, 127,802 shares of Common Stock with an aggregate grant date fair value of $13.4 were granted as TSR Awards under the Company’s LTIP.
For the twelve months ended December 31, 2018, 295,482 shares of Common Stock with an aggregate grant date fair value of $25.6 were granted as RS Awards under the Company'sCompany’s LTIP. In addition, 156,279 shares of Common Stock with an aggregate grant date fair value of $14.1 were granted as TSR Awards and FCF Percentage Awards under the Company’s LTIP.
For the twelve months ended December 31, 2017, 352,043 shares of Common Stock with an aggregate grant date fair value of $20.4 were granted as RS Awards under the Company's LTIP. In addition, 292,160 shares of Common Stock with an aggregate grant date fair value of $15.0 were granted as TSR Awards under the Company’s LTIP. Additionally, 422,422 shares of Common Stock with an aggregate grant date fair value of $14.9 awarded under the Company’s LTIP vested during the twelve months ended 2017.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
For the twelve months ended December 31, 2016, 623,620 shares of Common Stock with an aggregate grant date fair value of $27.4 were granted as RS Awards under the Company’s LTIP. In addition, 206,132 shares of Common Stock with an aggregate grant date fair value of $10.9 were granted as TSR Awards under the Company’s LTIP. Additionally, 503,543 shares of Common Stock with an aggregate grant date fair value of $14.9 awarded under the Company’s LTIP vested during the twelve months ended 2016.
The Company expensed a net total of $26.1, $21.1,$22.8, $32.2, and $41.3$26.1 for share of Common Stock issued under the LTIP for the twelve month periods ended December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively.
The Company’s unamortized stock compensation related to these unvested shares of Common Stock is $32.1,$22.9, which will be recognized over a weighted average remaining period of 1.81.6 years. The intrinsic value of the unvested shares of Common Stock issued under the LTIP at December 31, 20182020 was $80.0,$34.5, based on the value of the Company’s Common Stock and the number of unvested shares.
The following table summarizes the activity of the restricted shares under the LTIP for the twelve month periods ended December 31, 2018, 2017,2020, 2019, and 2016:2018:
|
| | | | | | | |
| | Shares | | Value(1) | |
| | Common Stock | | Common Stock | |
| | (Thousands) | | | |
| Long-Term Incentive Plan/Long-Term Incentive Award under Omnibus Plan | | | | |
| Nonvested at December 31, 2015 | 1,837 |
| | $ | 64.4 |
| |
| Granted during period | 830 |
| | 38.3 |
| |
| Vested during period | (830 | ) | | (24.5 | ) | |
| Forfeited during period | (280 | ) | | (10.9 | ) | |
| Nonvested at December 31, 2016 | 1,557 |
| | 67.3 |
| |
| Granted during period | 644 |
| | 35.5 |
| |
| Vested during period | (655 | ) | | (25.0 | ) | |
| Forfeited during period | (93 | ) | | (4.4 | ) | |
| Nonvested at December 31, 2017 | 1,453 |
| | 73.4 |
| |
| Granted during period | 451 |
| | 39.7 |
| |
| Vested during period | (465 | ) | | (24.1 | ) | |
| Forfeited during period | (48 | ) | | (3.0 | ) | |
| Nonvested at December 31, 2018 | 1,391 |
| | $ | 86.0 |
| |
| |
(1) | Value represents grant date fair value. |
19. Income Taxes
The following summarizes pretax income:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| U.S. | $ | 655.0 |
| | $ | 426.6 |
| | $ | 593.3 |
|
| International | 101.2 |
| | 108.0 |
| | 67.2 |
|
| Total (before equity earnings) | $ | 756.2 |
| | $ | 534.6 |
| | $ | 660.5 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
| | | | | | | | | | | | | | |
| | Shares | | Value(1) | |
| | Common Stock | | Common Stock | |
| | (Thousands) | | | |
| Long-Term Incentive Plan/Long-Term Incentive Award under Omnibus Plan | | | | |
| Nonvested at December 31, 2017 | 1,453 | | | $ | 73.4 | | |
| Granted during period | 451 | | | 39.7 | | |
| Vested during period | (465) | | | (24.1) | | |
| Forfeited during period | (48) | | | (3.0) | | |
| Nonvested at December 31, 2018 | 1,391 | | | 86.0 | | |
| Granted during period | 431 | | | 40.6 | | |
| Vested during period | (393) | | | (24.2) | | |
| Forfeited during period | (125) | | | (8.4) | | |
| Nonvested at December 31, 2019 | 1,304 | | | 94.0 | | |
| Granted during period | 940 | | | 39.6 | | |
| Vested during period | (573) | | | (39.1) | | |
| Forfeited during period | (192) | | | (14.0) | | |
| Nonvested at December 31, 2020 | 1,479 | | | $ | 80.5 | | |
(1)Value represents grant date fair value.
20. Income Taxes
Income Before Income Taxes: The sources of income before income taxes are:
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| U.S. | $ | (1,046.7) | | | $ | 552.4 | | | $ | 655.0 | |
| International | (39.2) | | | 110.7 | | | 101.2 | |
| Total (before equity earnings) | $ | (1,085.9) | | | $ | 663.1 | | | $ | 756.2 | |
Income taxes are accounted for in accordance with FASB authoritative guidance on accounting for income taxes. Deferred income tax provisionassets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts for existing assets and liabilities and their respective tax bases. Tax rate changes impacting these assets and liabilities are recognized in the period during which the rate change occurs.
We record an income tax expense or benefit based on the income earned or loss incurred in each tax jurisdiction and the tax rate applicable to that income or loss. In the ordinary course of business, there are transactions for which the ultimate tax outcome is uncertain. These uncertainties are accounted for in accordance with FASB authoritative guidance on accounting for the uncertainty in income taxes. The final tax outcome for these matters may be different than management's original estimates made in determining the income tax provision. A change to these estimates could impact the effective tax rate and net income or loss in subsequent periods. We use the flow-through accounting method for tax credits. Under this method, tax credits reduce income tax expense.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
Provision for Income Tax Taxes: The income Tax expense (benefit) contains the following components:
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Current | | | | | |
| Federal | $ | (301.0) | | | $ | 57.8 | | | $ | 159.4 | |
| State | (5.5) | | | 0.7 | | | 4.1 | |
| Foreign | (8.1) | | | (12.8) | | | 11.4 | |
| Total current | $ | (314.6) | | | $ | 45.7 | | | $ | 174.9 | |
| Deferred | | | | | |
| Federal | $ | (16.2) | | | $ | 71.8 | | | $ | (27.8) | |
| State | 106.9 | | | (11.4) | | | (12.8) | |
| Foreign | 3.7 | | | 26.7 | | | 5.5 | |
| Total deferred | 94.4 | | | 87.1 | | | (35.1) | |
| Total income tax provision | $ | (220.2) | | | $ | 132.8 | | | $ | 139.8 | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Current | | | | | |
| Federal | $ | 159.4 |
| | $ | 107.3 |
| | $ | 158.0 |
|
| State | 4.1 |
| | 0.7 |
| | 3.6 |
|
| Foreign | 11.4 |
| | 20.0 |
| | 29.2 |
|
| Total current | $ | 174.9 |
| | $ | 128.0 |
| | $ | 190.8 |
|
| Deferred | | | | | |
| Federal | $ | (27.8 | ) | | $ | 53.6 |
| | $ | 20.0 |
|
| State | (12.8 | ) | | (0.2 | ) | | (1.0 | ) |
| Foreign | 5.5 |
| | (1.4 | ) | | (17.7 | ) |
| Total deferred | (35.1 | ) | | 52.0 |
| | 1.3 |
|
| Total tax provision | $ | 139.8 |
| | $ | 180.0 |
| | $ | 192.1 |
|
Reconciliation of Effective Income Tax Rate: The income tax provision from operations differs from the tax provision computed at the U.S. federal statutory income tax rate due to the following:
| | | | 2018 | | | | 2017 | | | | 2016 | | | | 2020 | | 2019 | | 2018 | |
| Tax at U.S. Federal statutory rate | $ | 158.8 |
| | 21.0 | % | | $ | 187.1 |
| | 35.0 | % | | $ | 231.2 |
| | 35.0 | % | Tax at U.S. Federal statutory rate | $ | (228.1) | | | 21.0 | % | | $ | 139.3 | | | 21.0 | % | | $ | 158.8 | | | 21.0 | % |
| State income taxes, net of Federal benefit | 18.1 |
| | 2.4 |
| | 8.8 |
| | 1.6 |
| | 11.6 |
| | 1.8 |
| State income taxes, net of Federal benefit | (28.1) | | | 2.6 | | | 14.9 | | | 2.3 | | | 18.1 | | | 2.4 | |
| State income tax credits, net of Federal benefit | (22.7 | ) | | (3.0 | ) | | (9.7 | ) | | (1.8 | ) | | (9.4 | ) | | (1.4 | ) | State income tax credits, net of Federal benefit | (17.4) | | | 1.6 | | | (22.6) | | | (3.4) | | | (22.7) | | | (3.0) | |
| Foreign rate differences | (6.2 | ) | | (0.8 | ) | | (20.6 | ) | | (3.8 | ) | | (13.5 | ) | | (2.0 | ) | Foreign rate differences | (3.3) | | | 0.3 | | | (7.1) | | | (1.1) | | | (6.2) | | | (0.8) | |
| Research and Experimentation | (5.4 | ) | | (0.7 | ) | | (2.6 | ) | | (0.5 | ) | | (3.6 | ) | | (0.6 | ) | |
| Domestic Production Activities Deduction | — |
| | — |
| | (7.1 | ) | | (1.3 | ) | | (16.4 | ) | | (2.5 | ) | |
| Interest on assessments | — |
| | — |
| | (0.1 | ) | | — |
| | 0.6 |
| | 0.1 |
| |
| Research and experimentation | | Research and experimentation | (0.1) | | | 0 | | | 0.7 | | | 0.1 | | | (5.4) | | | (0.7) | |
| Excess tax benefits | (4.0 | ) | | (0.5 | ) | | (4.8 | ) | | (0.9 | ) | | (4.6 | ) | | (0.7 | ) | Excess tax benefits | 0.1 | | | 0 | | | (2.5) | | | (0.4) | | | (4.0) | | | (0.5) | |
| Non-deductible expenses | 4.6 |
| | 0.6 |
| | 2.4 |
| | 0.5 |
| | 1.0 |
| | 0.1 |
| Non-deductible expenses | 10.5 | | | (1.0) | | | 4.0 | | | 0.6 | | | 4.6 | | | 0.6 | |
| Transition Tax | (5.4 | ) | | (0.7 | ) | | 44.9 |
| | 8.4 |
| | — |
| | — |
| |
| Transition tax | | Transition tax | 0 | | | 0 | | | 1.6 | | | 0.2 | | | (5.4) | | | (0.7) | |
| Re-measurement of Deferred Taxes | — |
| | — |
| | (16.2 | ) | | (3.0 | ) | | — |
| | — |
| Re-measurement of Deferred Taxes | 1.7 | | | (0.2) | | | (2.0) | | | (0.3) | | | 0 | | | 0 | |
| Global Intangible Low-Taxed Income (GILTI) Tax | | Global Intangible Low-Taxed Income (GILTI) Tax | 3.9 | | | (0.4) | | | 7.1 | | | 1.1 | | | 1.8 | | | 0.2 | |
| Valuation Allowance | | Valuation Allowance | 150.2 | | | (13.8) | | | — | | | — | | | — | | | — | |
| NOL Utilized at 35% vs 21% | | NOL Utilized at 35% vs 21% | (104.8) | | | 9.7 | | | — | | | — | | | — | | | — | |
| Other | 2.0 |
| | 0.2 |
| | (2.1 | ) | | (0.5 | ) | | (4.8 | ) | | (0.7 | ) | Other | (4.8) | | | 0.5 | | | (0.6) | | | (0.1) | | | 0.2 | | | 0 | |
| Total provision for income taxes | $ | 139.8 |
| | 18.5 | % | | $ | 180.0 |
| | 33.7 | % | | $ | 192.1 |
| | 29.1 | % | |
| Total income tax provision | | Total income tax provision | $ | (220.2) | | | 20.3 | % | | $ | 132.8 | | | 20.0 | % | | $ | 139.8 | | | 18.5 | % |
On December 22, 2017, President Trump signed into law legislation referred to as the Tax Cuts and Jobs Act (the “TCJA”), significantly changing U.S.The income tax law. Substantially allprovision for the twelve months ended December 31, 2020, was ($220.2) compared to $132.8 for the prior year. The 2020 effective tax rate was 20.3% as compared to 20.0% for 2019.
In 2019, an amended tax return was filed in a foreign jurisdiction for one of the provisionsCompany’s foreign subsidiaries impacting the amount of the TCJA are effective for taxable years beginning after December 31, 2017. The staff of the SEC recognized the complexity of reflecting the impacts of the TCJA and on December 22, 2017 issued Staff Accounting Bulletin 118 (“SAB 118”), which clarified accounting for income taxes under ASC 740 for information that was not yet available or complete and provided for up to a one year period in which to complete the required analyses and accounting (the “measurement period”).
In 2017 and the first nine months of 2018, the Company recorded provisional amounts for certain enactment-date effects of the TCJA by applying the guidance in SAB 118 because the enactment-date accounting for these effects had not yet been completed. In 2018 and 2017, the Company recorded tax expense related to the enactment-date effects of the TCJA that included recording the one-time transition tax liability related to undistributed earnings of certain foreign subsidiaries that were not previously taxed and adjusting deferred tax assets and liabilities for the changesincluded in the federal tax rate.
Foreign tax effects. The one-time transition tax is based on total post-1986 earnings and profits (E&P) that were previously deferred from US income taxes. The Company recorded a provisional amount for the one-time transition tax liability for all of our
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
operating foreign subsidiaries, resulting in income tax expense of $44.9, including the anticipated state income tax effect, as of December 31, 2017. Upon further analysis of the TCJA and Notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service (the “IRS”) and discussions with the IRS during the audit of our 2017 tax return, the Company finalized its calculations of the transition tax liability during 2018.enacted by TCJA. The increase to the transition tax liability, as filed on the 2017 federal income tax return and agreed to by the IRS, was $39.5. The Company decreased its December 31, 2017 provisional amount by $5.4 during 2018,in 2019 is $1.6 which ishas been included as a component of income tax expense from continuing operations. Although Congressional intent and the statutory language were clear that the transition tax could be paid over a period of eight years and the Company properly elected to pay the transition tax liability over a period of eight years on our timely filed 2017 federal income tax return, IRS guidance published in April of 2018 indicated that taxpayers in a net overpayment position would have all overpayments applied to successive installments of the transition tax liability. Legislative proposals were passed in the U.S. House of Representatives in late December 2018 to correct the application of this IRS guidance, however there has been no action in the U.S. Senate to pass legislation addressing this issue. As a result of the overpayment from 2017, our net remaining liability related to the transition tax is $3.7, which will be paid within the period provided in the TCJA.
Deferred tax assets and liabilities. As of December 31, 2017, the Company re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future (which was generally 21%), by recording a provisional tax benefit of $16.2. Upon further analysis during the measurement period, no material adjustments were required to the provisional tax benefit recorded in 2017.
The TCJA introduces a tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries for years ending after December 31, 2017. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income,, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. At December 31, 2018, theThe Company has elected to account for GILTI in the year the tax is incurredincurred. As of December 31, 2020, there was $3.9 of GILTI tax expense due a U.K. NOL carryback to 2019 that will result in an increase to US GILTI tax. As of December 31, 2019 there was $7.1 of GILTI tax expense resulting from $0.6 of income tax expense related to activity in 2019 and have recorded$6.5 of income tax expense related to the finalization of the 2018 amounts related to GILTI reported in the tax return as agreed upon
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
with the IRS in the course of the Company’s participation in the Internal Revenue Service’s Compliance Assurance Process (“CAP”) program. As of December 31, 2018 there was $1.8 of GILTI tax expense, whichexpense.
The 2020 U.S. Net Operating Loss will be carried back to 2015 and 2016. The tax rate in the carryback years is 35% compared to the current tax rate of 21%. The impact of this rate difference is included in the current year tax provision.
The CARES Act allows net operating losses to be carried back to the previous five years, when the federal tax rate was 35%. As of December 31, 2020 the Company will report a net operating loss when it files its fiscal year 2020 tax return. Management will continue to monitor potential legislation as a componentwell as market conditions which may materially alter the anticipated value of this net operating loss. The Company had $315.3 and $74.2 of income tax expense from continuing operations.receivable as of December 31, 2020 and December 31, 2019, respectively, which is reflected within other current assets on the balance sheet as well as $0.0 and $6.3 of income tax payable as of December 31, 2020 and December 31, 2019, respectively, which is reflected within other current liabilities on the balance sheet. The Company had $1.5 and $5.3 of non-current income tax payable as of December 31, 2020 and December 31, 2019, respectively, which is reflected within other liabilities on the balance sheet.
Additionally, as allowed by the CARES Act, the Company has deferred $32.9 of employer payroll taxes, of which 50% is required to be deposited by December 2021 and the remaining 50% by December 2022. The Company has estimated it will be eligible for a pre-tax employee retention credit of approximately $16. The Company will continue to evaluate its eligibility for this credit through June 2021. In addition, as of December 31, 2020, the Company has recorded a deferral of $31.5 of VAT payments with the option to pay in smaller payments through the end of March 31, 2022 interest free under the United Kingdom deferral scheme.
Oklahoma follows the CARES Act and also allows net operating losses to be carried back to the previous five years. The estimated state income tax refund is recorded as an income tax receivable along with the estimated federal income tax receivable as mentioned above.
Deferred Income Taxes: Significant tax effected temporary differences comprising the net deferred tax asset are as follows:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Depreciation and amortization | $ | (174.3) | | | $ | (117.8) | |
| Long-term contracts | 165.7 | | | 107.5 | |
| State income tax credits | 122.8 | | | 108.3 | |
| Net operating loss carryforward | 98.6 | | | 0.4 | |
| Accruals and reserves | 50.3 | | | 40.3 | |
| Employee compensation accruals | 36.2 | | | 39.2 | |
| Pension and other employee benefit plans | (15.3) | | | (88.5) | |
| Interest expense limitation | 22.7 | | | 0 | |
| Post retirement benefits other than pensions | 11.8 | | | 9.8 | |
| Other | 8.0 | | | 8.6 | |
| Inventory | 1.2 | | | 0.4 | |
| Interest swap contracts | 0.3 | | | 0.2 | |
| Net deferred tax asset before valuation allowance | 328.0 | | | 108.4 | |
| Valuation allowance | (340.9) | | | (10.2) | |
| Net deferred tax (liability) | (12.9) | | | 98.2 | |
|
| | | | | | | |
| | 2018 | | 2017 |
| Long-term contracts | $ | 210.2 |
| | $ | 69.0 |
|
| Post-retirement benefits other than pensions | 9.5 |
| | 11.2 |
|
| Pension and other employee benefit plans | (60.4 | ) | | (65.1 | ) |
| Employee compensation accruals | 36.1 |
| | 33.8 |
|
| Depreciation and amortization | (115.1 | ) | | (104.4 | ) |
| Inventory | 0.5 |
| | 1.9 |
|
| State income tax credits | 94.1 |
| | 89.8 |
|
| Accruals and reserves | 46.2 |
| | 58.3 |
|
| Deferred production | (1.8 | ) | | (1.7 | ) |
| Net operating loss carryforward | 0.4 |
| | 0.3 |
|
| Other | (2.3 | ) | | (5.9 | ) |
| Net deferred tax asset | 217.4 |
| | 87.2 |
|
| Valuation allowance | (13.2 | ) | | (15.0 | ) |
| Net deferred tax asset | $ | 204.2 |
| | $ | 72.2 |
|
Deferred tax detail above is included in the balance sheet and supplemental information as follows:
|
| | | | | | | |
| | 2018 | | 2017 |
| Non-current deferred tax assets | 205.0 |
| | 72.5 |
|
| Non-current deferred tax liabilities | (0.8 | ) | | (0.3 | ) |
| Net non-current deferred tax assets | $ | 204.2 |
| | $ | 72.2 |
|
| Total deferred tax asset | $ | 204.2 |
| | $ | 72.2 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
| | | | | | | | | | | |
| 2020 | | 2019 |
| | | |
| | | |
| | | |
| Non-current deferred tax assets | 0.1 | | | 106.5 | |
| Non-current deferred tax liabilities | (13.0) | | | (8.3) | |
| Net non-current deferred tax asset (liability) | $ | (12.9) | | | $ | 98.2 | |
| Total deferred tax asset (liability) | $ | (12.9) | | | $ | 98.2 | |
The following is a roll forward of the deferred tax valuation allowance at December 31, 2018, 20172020, 2019, and 2016:2018:
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Balance at January 1 | $ | 10.2 | | | $ | 13.2 | | | $ | 15.0 | |
| Bombardier Acquisition opening balance sheet | 163.6 | | | 0 | | | 0 | |
| State income tax credits | 110.1 | | | (3.2) | | | (2.2) | |
| Net operating losses | 20.7 | | | 0 | | | 0 | |
| Depreciation and amortization | 0 | | | 0.2 | | | 0.1 | |
| Other | 19.4 | | | 0 | | | 0.3 | |
| Other comprehensive income adjustment | 16.9 | | | 0 | | | 0 | |
| Balance at December 31 | $ | 340.9 | | | $ | 10.2 | | | $ | 13.2 | |
|
| | | | | | | | | | | |
| Deferred Tax Asset Valuation Allowance | 2018 | | 2017 | | 2016 |
| Balance, January 1 | $ | 15.0 |
| | $ | 13.5 |
| | $ | 15.1 |
|
| U.S. deferred tax asset | — |
| | — |
| | — |
|
| Income tax credits | (2.2 | ) | | 1.6 |
| | (0.9 | ) |
| Depreciation and amortization | 0.1 |
| | 0.1 |
| | (0.1 | ) |
| Long-term contracts | — |
| | — |
| | — |
|
| Other | 0.3 |
| | (0.2 | ) | | (0.6 | ) |
| Balance, December 31 | $ | 13.2 |
| | $ | 15.0 |
| | $ | 13.5 |
|
Deferred tax assets are periodically evaluated to determine their recoverability and whether or not a valuation allowance is necessary. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, we assessthe Company assesses all available positive and negative evidence. The weight given to the positive and negative evidence is commensurate with the extent the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses.
Based on these criteria and the relative weighting of both the positive and negative evidence available, and in particular the activity surrounding the Company’s prior earnings history including the forward losses previously recognized in the U.S., Management determined that it was necessary to establish a valuation allowance against nearly all of its net U.S. deferred tax assets at December 31, 2020. This determination was made as the Company will enter into a U.S. cumulative loss position once anticipated 2021 results are included in the threshold. Once a company anticipates a cumulative three year loss position, there is a presumption that a company should no longer rely solely on projected future income in determining whether the deferred tax asset is more likely than not to be realized. As of December 31, 2020, the total net U.S. deferred tax asset was $149.5. The net U.S. deferred tax liability after recording valuation allowances is $0.6. Valuation allowances recorded against the consolidated net U.S. deferred tax asset in the current year were $140.7 for a total valuation allowance of $150.1 for the US.
The Company continueshas determined a valuation allowance on certain U.K. deferred tax assets is needed based upon cumulative losses generated in the U.K. Additionally, with the recording of the Bombardier Acquisition, a $163.6 valuation allowance was recorded against U.K. deferred tax assets as part of the opening balance sheet. The Company recorded a portion of the increase in the valuation allowance to maintain $13.2income tax expense in continuing operations $9.5 and a portion to OCI $16.9. Valuation allowances recorded against UK deferred tax assets in the current year were $26.4 for a total valuation allowances primarily against separate company North Carolinaallowance of $190.8 for the U.K.
Included in the deferred tax assets at December 31, 2020 are $105.7 in Kansas High Performance Incentive Program ("HPIP") Credit, $11.4 in Kansas Research & Development ("R&D") Credit and $0.4 in Kansas Qualified Vendor (“QV”) Credit, totaling $117.5 in gross Kansas state income tax credit deferredcarryforwards, net of federal benefit. The HPIP Credit provides a 10% investment tax assets. Itcredit for qualified business facilities located in Kansas. This credit can be carried forward 16 years. The Kansas R&D Credit provides a credit for qualified research and development expenditures conducted within Kansas. This credit can be carried forward indefinitely. The QV Credit is equal to 15% of the Company's opinion that noneamount for approved expenditures of these North Carolina state incomegoods and services purchased from a qualified vendor, not to exceed $0.5 per qualified vendor per tax credits willyear. The QV Credit can be utilized before they expire and a $12.0 valuation allowance is recorded against the deferred tax asset.carried forward 4 years.
Certain provisions within the TCJA effectively transition the U.S. to a territorial system and eliminates deferral on U.S. taxation for certain amounts of income which is not taxed at a minimum level. At this time, we continuethe Company continues to maintain
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
that earnings of all foreign operating subsidiaries are indefinitely invested outside the U.S. on the basis of estimates that future domestic cash generation, inclusive of management actions and plans associated with the 737MAX production halt and slowdown, will be sufficient to meet future domestic cash needs and ourthe Company's specific plans for reinvestment of those subsidiary earnings to fund working capital requirements, service existing obligations, execute M&A transactions, and invest in efforts to secure future business. As a result, no additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities.
To the extent cash in excess of the needs identified above are generated from a key international operating subsidiary and a dividend is declared, we havethe Company has completed analysis regarding potential dividend withholding taxes and anticipate that any associated withholding taxes would be immaterial based upon current law. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable at this time.
Unrecognized Tax Benefits:The beginning and ending unrecognized tax benefits reconciliation is as follows:
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Beginning balance at January 1 | $ | 5.4 | | | $ | 7.2 | | | $ | 6.7 | |
| Bombardier Acquisition opening balance sheet | 14.0 | | | — | | | — | |
| Gross increases related to current period tax positions | 0.4 | | | 0.4 | | | 0 | |
| Gross increases related to prior period tax positions | 0 | | | 0 | | | 0.5 | |
| Gross decreases related to prior period tax positions | 0 | | | (2.2) | | | 0 | |
| Statute of limitations' expiration | (3.3) | | | 0 | | | 0 | |
| Settlements | 0 | | | 0 | | | 0 | |
| Ending balance at December 31 | $ | 16.5 | | | $ | 5.4 | | | $ | 7.2 | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 6.7 |
| | $ | 6.3 |
| | $ | 6.2 |
|
| Gross increases related to current period tax positions | — |
| | — |
| | — |
|
| Gross increases related to prior period tax positions | 0.5 |
| | 0.4 |
| | 0.1 |
|
| Gross decreases related to prior period tax positions | — |
| | — |
| | — |
|
| Statute of limitations' expiration | — |
| | — |
| | — |
|
| Settlements | — |
| | — |
| | — |
|
| Ending balance | $ | 7.2 |
| | $ | 6.7 |
| | $ | 6.3 |
|
Included in the December 31 2018, 2020 balance was $5.7$16.5 in unrecognized tax benefits of which if ultimately recognized, will$15.3 would reduce the Company's effective tax rate. The Internal Revenue Service's examination of the Company's 2017 U.S. Federal income tax return is substantially complete. The Company will continue to participate in the Compliance Assurance Process ("CAP") program for its 2018 and 2019 tax years. The CAP program's objective is to resolve issues in a timely, contemporaneous manner and eliminate the need for a lengthy post-filing examination. The Directorate General of Public Finance completed its examination of our 2015 France income tax return and the statute of limitations has lapsed on our 2016 U.K. tax return. While a change couldrate if ultimately recognized.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
result from the ongoing examinations, the Company expects no material change in its recorded unrecognized tax liability in the next 12 months.
The Company reports interest and penalties, if any, related to unrecognized tax benefits in the income tax provision.As of December 31, 2018,2020, 2019, and December 31, 2017,2018, there was no accrued interest on the unrecognized tax benefit liability included in the balance sheets and there was no impact of interest on the Company’s unrecognized tax benefit liability during 20182020, 2019 and 2017.2018.
The Company continuesfiles income tax returns in all jurisdictions in which it operates.
The Company’s federal audit is complete under the CAP program for the 2018 and 2019 tax years. The Company will continue to operate underparticipate in the CAP program for the 2020 and 2021 tax years. The CAP program’s objective is to resolve issues in a timely, contemporaneous manner and eliminate the need for a lengthy post-filing examination. The Company has an open tax holidayaudit in Malaysia effective through September 2024. In 2014, the Company received formal approvalKingdom of Morocco for tax years ending prior to the Company’s ownership of the tax holiday from the Malaysian tax authorities, with conditional renewals once every five years beginning in September 2014. The Company expects to meet the requirements for the conditional renewals. The Company’s 2018 income tax expense reflects $5.0 of Malaysia tax holiday benefit for the year ended December 31, 2018.Moroccan legal entity.
At December 31, 2018, the Company had total North Carolina state net operating loss carryforwards of $16.0 which begin to expire in 2026.
Included in the deferred tax assets at December 31, 2018 are $68.8 in Kansas High Performance Incentive Program ("HPIP") Credit, $10.0 in Kansas Research & Development ("R&D") Credit, and $3.3 in Kansas Business and Jobs Development Credit, totaling $82.1 in gross Kansas state income tax credit carryforwards, net of federal benefit. The HPIP Credit provides a 10% investment tax credit for qualified business facilities located in Kansas for which $8.0 expires in 2029, $10.8 expires in 2030, $6.4 expires in 2031, $10.8 expires in 2032, $11.3 expires in 2033, and $21.5 expires in 2034. The R&D Credit provides a credit for qualified research and development expenditures conducted within Kansas. This credit can be carried forward indefinitely. The Business and Jobs Development Credit provides a tax credit for increased employment in Kansas. This credit can be carried forward indefinitely.
The Company had $13.3 and $27.1 of income tax receivable as of December 31, 2018 and December 31, 2017, respectively, which is reflected within other current assets on the balance sheet. The Company had $3.7 of non-current income tax payable as of December 31, 2018, which is reflected within other liabilities on the balance sheet.
20.21. Equity
Employee Stock Purchase Plan
In April 2017, the stockholders approvedThe Company maintains the Spirit AeroSystems Holdings, Inc. Employee Stock Purchase Plan (the “ESPP”) with the associated registration statement on Form S-8 filed on September 6, 2017. The ESPP, which became effective on October 1, 2017.2017 and was amended and restated on January 21, 2020. The ESPP is implemented over consecutive six-month offering periods, beginning on April 1 and October 1 of each year and ending on the last day of September and March, respectively. Shares are issued on the last trading day of each six-month offering period. Generally, any person who is employed by the Company, Spirit or by a subsidiary or affiliate of the Company that has been designated by the Compensation Committee may participate in the ESPP. As of December 31, 2020, the number of remaining ESPP shares available for future issuances was 818,197.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
The maximum number of shares of the Company's Common Stock that may be purchased under the ESPP will be 1,000,000 shares, subject to adjustment for stock dividends, stock splits or combinations of shares of the Company's stock. The per-share purchase price for the Company's Common Stock purchased under the ESPP is 95% of the fair market value of a share of such stock on the last day of the offering period.
Dividends
TheOn February 6, 2020, the Company paid a quarterly cash dividendsdividend to shareholders of record on December 16, 2019 of $0.12 per share of Common Stock in the second, third, and fourth quarters in 2018. The Company paid a cash dividend of $0.10 per share of Common Stock in the first quarter of 2018. The total amount of dividends paid during 2018 was $48.0.share. On January 23, 2018,February 6, 2020, the Company announced that its Board of Directors declaredreduced its quarterly dividend to a $0.12penny per share quarterly cash dividend onto preserve liquidity. For the outstanding Common Stock ofremaining three quarter in 2020, the Company payable on April 9, 2019paid a quarterly dividend to stockholdersshareholders of record at$0.01 per share. The total amount of dividends paid during 2020 was $15.4. The Board regularly evaluates the close of business on March 19, 2019.Company's capital allocation strategy and dividend policy. Any future determination to continue to pay dividends will be at the discretion of ourthe Company's Board of Directors and will depend upon, among other factors, ourthe Company's results of operations, financial condition, capital requirements and contractual restrictions, including the requirements of financing agreements to which wethe Company may be a party. No assurance can be given that cash dividends will continue to be declared and paid at historical levels or at all.
Earnings per Share Calculation
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
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.
The following table sets forth the computation of basic and diluted earnings per share:
| | | | For the Twelve Months Ended | | For the Twelve Months Ended |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| | Income | | Shares | | Per Share Amount | | Income | | Shares | | Per Share Amount | | Loss | | Shares | | Per Share Amount | | Income | | Shares | | Per
Share
Amount | | Income | | Shares | | Per
Share
Amount | | Loss | | Shares | | Per
Share
Amount |
| Basic EPS | | | | | | | | | | | | | | | | | | Basic EPS | | | | | | | | | | | | | | | | | |
| Income available to common shareholders | $ | 616.5 |
| | 108.0 |
| | $ | 5.71 |
| | $ | 354.7 |
| | 116.8 |
| | $ | 3.04 |
| | $ | 469.4 |
| | 126.1 |
| | $ | 3.72 |
| |
| (Loss) income available to common shareholders | | (Loss) income available to common shareholders | $ | (870.3) | | | 103.9 | | | $ | (8.38) | | | $ | 529.7 | | | 103.6 | | | $ | 5.11 | | | $ | 616.5 | | | 108.0 | | | $ | 5.71 | |
| Income allocated to participating securities | 0.5 |
| | 0.1 |
| | |
| | 0.2 |
| | 0.1 |
| | |
| | 0.3 |
| | 0.1 |
| | |
| Income allocated to participating securities | 0 | | | 0 | | | 0.4 | | | 0.1 | | | | | 0.5 | | | 0.1 | | | |
| Net income | $ | 617.0 |
| | |
| | |
| | $ | 354.9 |
| | |
| | |
| | $ | 469.7 |
| | |
| | |
| |
| Net (loss) income | | Net (loss) income | $ | (870.3) | | | | | | | $ | 530.1 | | | | | | | $ | 617.0 | | | | | |
| Diluted potential common shares | |
| | 1.0 |
| | |
| | |
| | 1.0 |
| | |
| | |
| | 0.8 |
| | |
| Diluted potential common shares | | | 0 | | | | 1.0 | | | | | | | 1.0 | | | |
| Diluted EPS | | | | | | | | | | | | | | | | | | Diluted EPS | | | | | | | | | | | | | | | | | |
| Net income | $ | 617.0 |
| | 109.1 |
| | $ | 5.65 |
| | $ | 354.9 |
| | 117.9 |
| | $ | 3.01 |
| | $ | 469.7 |
| | 127.0 |
| | $ | 3.70 |
| |
| Net (loss) income | | Net (loss) income | $ | (870.3) | | | 103.9 | | | $ | (8.38) | | | $ | 530.1 | | | 104.7 | | | $ | 5.06 | | | $ | 617.0 | | | 109.1 | | | $ | 5.65 | |
Included in the outstanding common shares were 1.5 million, 1.4 million 1.5 million and 1.61.4 million of issued but unvested shares at December 31, 2018, 20172020, 2019 and 2016,2018, respectively, which are excluded from the basic EPS calculation.
Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Loss, net of tax, is summarized by component as follows:
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Interest swaps | $ | (0.9) | | | $ | (0.6) | |
Pension(1) | (112.0) | | | (53.1) | |
| SERP/ Retiree medical | 14.5 | | | 17.1 | |
| Foreign currency impact on long term intercompany loan | (11.8) | | | (13.1) | |
| Currency translation adjustment | (43.9) | | | (59.5) | |
| Total accumulated other comprehensive loss | $ | (154.1) | | | $ | (109.2) | |
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
|
| | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| Pension | $ | (116.7 | ) | | $ | (75.9 | ) |
| SERP/ Retiree medical | 17.2 |
| | 17.7 |
|
| Foreign currency impact on long term intercompany loan | (17.4 | ) | | (14.2 | ) |
| Currency translation adjustment | (79.7 | ) | | (56.1 | ) |
| Total accumulated other comprehensive loss | $ | (196.6 | ) | | $ | (128.5 | ) |
(1) The pension impact to Accumulated Other Comprehensive Income is primarily due to the Bombardier Acquisition.
Amortization or settlement cost recognition of the pension plans’ net lossgain/(loss) reclassified from accumulated other comprehensive loss and realized into costs of sales and selling, general and administrative on the consolidated statements of operations was $0.3, $0.3($9.5), ($3.7) and 5.7$0.3 for the twelve months ended December 31, 2018, 20172020, 2019 and 2016,2018, respectively.
NoncontrollingNon-controlling Interest
NoncontrollingNon-controlling interest at December 31, 20182020 remained unchanged from the prior year at $0.5.
Repurchases of Common Stock
The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. As of December 31, 2018,2020, no treasury shares have been reissued or retired.
On January 27, 2016, the Company announced that its Board of Directors authorized an additional new share repurchase program for the purchase of up to $600.0 of Common Stock (the “2016 Share Repurchase Program”). During the periodtwelve month ended December 31, 2016,2019, the Company repurchased 14.20.8 million shares of its Common Stock for $649.6, which consisted$75.8. During the twelve month ended December 31, 2020 the Company purchased zero shares of its Common Stock under this share repurchase program. As a result, the total authorization amount remaining $50.0 fromunder the priorcurrent share repurchase program andis approximately all$925.0. Share repurchases are currently on hold due to the impacts of the $600.0B737 MAX grounding and the COVID-19 pandemic. The Credit Agreement imposes additional restrictions on the Company’s ability to repurchase shares.
During the 3 months ended December 31, 2020, 15,578 shares were transferred to us from employees in satisfaction of tax withholding obligations associated with the vesting of restricted stock awards under the Omnibus Plan.
Rights Plan
On April 22, 2020, the Company’s Board of Directors declared a dividend of one right (a “Right”) for each outstanding share of Common Stock held of record at the close of business on May 1, 2020 (the “Record Time”), and adopted a stockholder rights plan, as set forth in the Stockholder Protection Rights Agreement, dated as of April 22, 2020 (the “Rights Agreement”), between the Company and Computershare Inc., as Rights Agent. Generally, the Rights may cause substantial dilution to a person or group that acquires 10% (or 20% in the case of a passive institutional investor) or more of the authorized amountCommon Stock unless the Rights are first redeemed or the Rights Agreement is terminated by the Board. While the Rights will not prevent a takeover of the 2016 Share Repurchase Program.Company, they may discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. Nevertheless, the Rights will not interfere with a Board-approved transaction that is in the best interests of the Company and its stockholders because the Rights can be redeemed, or the Rights Agreement terminated, on or prior to the consummation of such a transaction. Prior to exercise, the Rights do not confer voting or dividend rights. The Rights Agreement will expire on April 22, 2021 per its terms.
22. Commitments, Contingencies and Guarantees
On February 10, 2020, February 24, 2020, and March 24, 2020, three separate private securities class action lawsuits were filed against the Company in the U.S. District Court for the Northern District of Oklahoma, its Chief Executive Officer, Tom Gentile III, former chief financial officer, Jose Garcia, and former controller (principal accounting officer), John Gilson. On April 20, 2020, the Class Actions were consolidated by the court (the “Consolidated Class Action”), and on July 20, 2020, the plaintiffs filed a Consolidated Class Action Complaint which added Shawn Campbell, the Company’s former Vice President for the 737NG and 737 Max program, as a defendant. Allegations in the Consolidated Class Action include (i) violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against the Company and Messrs. Gentile, Garcia and Gilson, (ii) violations of Section 20(a) of the Exchange Act against the individual defendants, and (iii) violations of Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c) promulgated thereunder against all defendants.
On June 11, 2020, a shareholder derivative lawsuit (the “Derivative Action 1”) was filed against the Company (as nominal defendant), all members of the Company’s Board of Directors, and Messrs. Garcia and Gilson in the U.S. District Court for the
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
Northern District of Oklahoma. Allegations in the Derivative Action 1 include (i) breach of fiduciary duty, (ii) abuse of control, and (iii) gross mismanagement. On NovemberOctober 5, 2020, a shareholder derivative lawsuit (the “Derivative Action 2” and, together with Derivative Action 1, 2016, the Company's“Derivative Actions”) was filed against the Company (as nominal defendant), all members of the Company’s Board of Directors, authorized a share repurchase programand Messrs. Garcia and Gilson in the Eighteenth Judicial District, District Court of Sedgwick County, Kansas. Allegations in the Derivative Action 2 include (i) breach of fiduciary duty, (ii) waste of corporate assets, and (iii) unjust enrichment.
The facts underlying the Consolidated Class Action and Derivative Actions relate to the accounting process compliance independent review (the “Accounting Review”) discussed in the Company’s January 30, 2020 press release and described under Management's Discussion and Analysis of Financial Condition and Results of Operations - Accounting Review of the Annual Report on Form 10-K for the purchase of up to $600.0 of Common Stock (the “2017 Share Repurchase Program”). On July 25, 2017, the Company's Board of Directors authorized an increase to the 2017 Share Repurchase Program authorization up to an additional $400.0 of Common Stock. On January 24, 2018, the Board of Directors approved an increase to the 2017 Share Repurchase Program authorization up to an additional $500.0. As a result, the total amount remaining in the authorization is approximately $1,000.0.
During the periodyear ended December 31, 2018,2019, and its resulting conclusions. The Company voluntarily reported to the SEC the determination that, with respect to the third quarter of 2019, the Company repurchased 9.3 million sharesdid not comply with its established accounting processes related to potential third quarter contingent liabilities received after the quarter-end. On March 24, 2020, the Staff of the SEC Enforcement Division informed the Company that it had determined to close its Common Stockinquiry without recommending any enforcement action against the Company. In addition, the facts underlying the Consolidated Class Action and Derivative Actions relate to the Company’s disclosures regarding the B737 MAX grounding and Spirit’s production rate (and related matters) after the grounding. On September 18, 2020, the Company and individual defendants filed a motion to dismiss the Consolidated Class Action. That motion is pending. The Derivative Actions have been stayed pending a decision on the Consolidated Class Action. The Company and the individual defendants deny the allegations in the Consolidated Class Action and the Derivative Action.
The Company is also involved in a lawsuit filed by a former executive officer for $800.0.
21. Commitments, Contingenciesbenefits withheld in connection with a disputed violation of restrictive covenants within his retirement agreement. While the Company believes it is not probable that the former executive will succeed in the lawsuit, based upon the executive’s selection of cash as the sole remedy in the third quarter of 2020, the lawsuit could result in a loss up to $40 including pre-trial interest and Guarantees
Litigation
Fromany other relief, including an estimated offset by retaining previously vested shares. Factors underlying this estimated range of loss may change from time to time, the Company is subject to, and is 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.actual results may vary significantly from this estimate.
From time to time, in the ordinary course of business and similar to others in the industry, the Company receives 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. The Company reviews such requests and notices and takes appropriate action. Additionally, the Company is 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, the Company is required to participate in certain government investigations regarding environmental remediation actions.
Pension Indemnification.On December 5, 2014, Boeing filed a complaintIn addition to the items addressed above, from time to time, the Company is subject to, and is presently involved in, Delaware Superior Court, Complex Commercial Litigation Division, entitled The Boeing Co. v. Spirit AeroSystems, Inc., No. N14C-12-055 (EMD) (the “Complaint”) seeking indemnification of approximately $139.0 from Spirit for (a) damages assessed against Boeing in International Union, United Automobile, Aerospace and Agricultural Workers of America v. Boeing Co., AAA Case No. 54 300 00795 07 (“UAW Arbitration”), which was brought on behalf of certain former Boeing employees in Tulsa and McAlester, Oklahoma, (b)litigation, legal proceedings, or other claims that Boeing settled in Society of Professional Engineering Employees in Aerospace v. Boeing Co., Nos. 05-1251-MLB, 07-1043-MLB (D. Kan.) (“Harkness Class Action”), and (c) attorneys’ fees Boeing alleged it expended to defend the UAW Arbitration and Harkness Class Action, as well as reasonable fees, costs and expenses Boeing expended litigating the case against Spirit. Boeing’s Complaint asserted that the damages assessed against Boeingarising in the UAW Arbitration andordinary course of business. While the claims settled by Boeing infinal outcome of these matters cannot be predicted with certainty, considering, among other things, the Harkness Class Action were liabilitiesmeritorious legal defenses available, the Company believes that, Spirit assumed under an Asset Purchase Agreement between Boeing and Spirit, dated February 22, 2005 (the “APA”). Boeing asserted claims for breachon a basis of contract and declaratory judgment regarding its indemnification rights under the APA.
Spirit assertedinformation presently available, none of these items, when finally resolved, will have a Counterclaim against Boeing,material adverse effect on the ground that the liabilities at issue were Boeing’s responsibility under the APA. Spirit’s Counterclaim alleged breach of contract and sought a declaratory judgment regarding Spirit’s right to indemnification from Boeing under the APA. Spirit’s Counterclaim sought to recover the amounts that Spirit spent litigating the Harkness Class Action, responding to Boeing’s indemnification demands concerning the Harkness Class Action and UAW Arbitration, and also litigating the current lawsuit against Boeing.Company’s long-term financial position or liquidity.
On December 20, 2016, Boeing and Spirit moved for summary judgment. On June 27, 2017, the Delaware Superior Court (the “Superior Court”) issued an order denying Boeing’s Motion for Summary Judgment and granting Spirit’s Motion for Summary Judgment, finding that the liabilities at issue were excluded liabilities under the APA and holding that Spirit is entitled to recover reasonable attorneys' fees, costs, and other expenses from Boeing. The Court granted Spirit’s motion as to fees, costs, and expenses incurred as a result of the litigation and underlying matters and denied the motion as to pre- and post-trial interest.
Boeing appealed the Superior Court’s decision to the Supreme Court of the State of Delaware (the “Supreme Court”). On July 12, 2018, a unanimous three judge panel of the Supreme Court ruled in favor of Spirit and on July 26, 2018, the Supreme Court denied Boeing’s Motion for Reargument and returned the case to the Superior Court. Spirit sought recovery of additional attorneys’ fees, costs, and other expenses incurred during the appellate process. On August 22, 2018, the Superior Court granted Spirit’s motion. Spirit recouped all amounts to which it was entitled by court order. This matter is now closed.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
Contractual Terms Clarification. On July 6, 2018, Spirit filed a complaint in Washington Superior Court captioned Spirit AeroSystems, Inc. v. The Boeing Company (No. 18-2-16649-7 SEA). Spirit sought payment of money that Boeing owed Spirit for product ordered by Boeing and delivered by Spirit. As of the date the complaint was filed, Boeing had underpaid Spirit by approximately $64.0. Spirit asked the court to clarify the parties’ contractual obligations, including that Boeing has no right under the parties’ contracts to withhold money based on disputed warranty claims on past orders. On September 5, 2018, Boeing moved to dismiss three of Spirit’s claims without prejudice and one claim with prejudice. The motion was fully briefed and the Court denied Boeing's motion following oral argument held on November 16, 2018. On December 3, 2018, Boeing filed its answer and counterclaims contending that it was entitled to withhold money due to customer warranty claims and seeking damages and clarification of certain contractual obligations. On December 24, 2018, the parties filed a stipulation and order of dismissal providing that all claims and counterclaims in the litigation should be dismissed without prejudice, which was then entered by the Court. Most warranty claims at issue in the lawsuit were settled and resolved, although a few remain open pending future resolution. For further information, see Note 28, Boeing Collective Resolution.
Customer and Vendor Claims
From time to time the Company receives, or is subject to, customer and vendor claims arising in the ordinary course of business, including, but not limited to, those related to product quality and late delivery. The Company accrues for matters when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we takethe Company takes into consideration multiple factors including without limitation ourthe Company's historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of an unfavorable outcome, and the severity of any potential loss. Any accruals deemed necessary are reevaluated at least quarterly and updated as matters progress over time.
While the final outcome of these types of matters cannot be predicted with certainty, considering, among other things, the factual and legal defenses available, it is the opinion of the Company that, when finally resolved, no current claims will have a material adverse effect on the Company’s long-term financial position or liquidity. However, it is possible that the Company’s results of operations in a period could be materially affected by one or more of these other matters.
On October 1, 2018, the Company received notice of a claim related to factory disruptions. Claims are inherently uncertain as they typically include many unsubstantiated items and factual disputes. On December 21, 2018, the Company and the customer amicably resolved this claim through the date of the settlement.
Commitments
The Company leases equipment and facilities under various non-cancelable capital and operating leases. The capital leasing arrangements extend through 2024. Minimum future lease payments under these leases at December 31, 2018 are as follows:
|
| | | | | | | | | | | | | | | |
| | | | Capital | | |
| | Operating | | Present Value | | Interest | | Total |
| 2019 | $ | 8.9 |
| | $ | 8.1 |
| | $ | 5.0 |
| | $ | 22.0 |
|
| 2020 | $ | 8.0 |
| | $ | 8.5 |
| | $ | 4.8 |
| | $ | 21.3 |
|
| 2021 | $ | 7.4 |
| | $ | 8.8 |
| | $ | 4.6 |
| | $ | 20.8 |
|
| 2022 | $ | 7.0 |
| | $ | 9.0 |
| | $ | 4.4 |
| | $ | 20.4 |
|
| 2023 | $ | 5.9 |
| | $ | 8.4 |
| | $ | 4.2 |
| | $ | 18.5 |
|
| 2024 and thereafter | $ | 36.7 |
| | $ | 56.5 |
| | $ | 37.6 |
| | $ | 130.8 |
|
Operating lease payments were as follows:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Minimum rentals | $ | 14.3 |
| | $ | 14.1 |
| | $ | 15.4 |
|
| Total | $ | 14.3 |
| | $ | 14.1 |
| | $ | 15.4 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
Spirit'sCommitments
The Company's future aggregate capital commitments totaled $114.9$103.8 and $243.0$119.9 at December 31, 20182020 and December 31, 2017,2019, respectively.
Guarantees
Contingent liabilities in the form of letters of guarantee have been provided by the Company. Outstanding guarantees were $27.3$19.6 and $23.2$21.5 at December 31, 20182020 and December 31, 2017,2019, respectively.
Restricted Cash - Collateral Requirements
The Company was required to maintain $20.2$19.5 and $20.0$16.4 of restricted cash as of December 31, 20182020 and December 31, 2017,2018, respectively, related to certain collateral requirements for obligations under its workers’ compensation programs. Restricted cash is included in other assets on"Other assets" in the balance sheet.Company's Consolidated Balance Sheet.
Indemnification
The Company has entered into customary indemnification agreements with each of its non-employee directors, and some of its bylaws and certain executive employment agreements include indemnification and advancement provisions. Pursuant to the terms of the bylaws and, with respect to Jose Garcia, his employment agreement, the Company is providing Messrs. Garcia and Gilson and all other individual defendants with defense costs and provisional indemnity with respect to the Consolidated Class Action and Derivative Actions, as appropriate. Under thosethe bylaws and any applicable 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.
The Company has agreed to indemnify parties for specified liabilities incurred, or that may be incurred, in connection with transactions they have entered into with the Company. The Company is unable to assess the potential number of future claims that may be asserted under these indemnities, nor the amounts thereof (if any). As a result, the Company cannot estimate the maximum potential amount of future payments under these indemnities and therefore, no liability has been recorded.
Service and Product Warranties and Extraordinary Rework
Provisions for estimated expenses related to service and product warranties and certain extraordinary rework are evaluated on a quarterly basis. These costs are accrued and are recorded to unallocated cost of goods sold. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims, including the experience of industry peers. In the case of new development products or new customers, Spiritthe Company considers other factors including the experience of other entities in the same business and management judgment, among others. Service warranty and extraordinary work is reported in current liabilities and other liabilities on the balance sheet.
The warranty balance presented in the table below includes unresolved warranty claims that are in dispute in regards to their value as well as their contractual liability. The Company estimated the total costs related to some of these claims, however there is significant uncertainty surrounding the disposition of these disputed claims and as such, the ultimate determination of the provision’s adequacy requires significant management judgment. The amount of the specific provisions recorded against disputed warranty claims was $41.0 and $101.0$8.1 as of December 31, 20182020 and December 31, 2017,2019, respectively. These specific provisions represent the Company’s best estimate of reasonably possibleprobable warranty costs.claims. Should the Company incur higher than expected warranty costs and/or discover new or additional information related to these warranty provisions, the Company may incur additional charges that exceed these recorded amounts.provisions. The Company utilized available information to make appropriate assessments, however the Company recognizes that data on actual claims experience is of limited duration and therefore, claims projections are subject to significant judgment. The amount of the reasonably possible disputed warranty claims in excess of the specific warranty provision was $34.0 and $223.0,$12.1 as of December 31, 20182020 and December 31, 2017,2019, respectively.
The following is a roll forward of the service warranty and extraordinary rework balance at December 31, 2018, 20172020, 2019 and 2016:2018:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Balance, January 1 | $ | 166.4 |
| | $ | 163.7 |
| | $ | 158.7 |
|
| Charges to costs and expenses | 3.2 |
| | 5.8 |
| | 16.7 |
|
| Payouts | (1.2 | ) | | (4.0 | ) | | (9.5 | ) |
Impact of 2018 MOA(1) | (63.8 | ) | | — |
| | — |
|
| Exchange rate | 0.2 |
| | 0.9 |
| | (2.2 | ) |
| Balance, December 31 | $ | 104.8 |
| | $ | 166.4 |
| | $ | 163.7 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Balance, January 1 | $ | 64.7 | | | $ | 104.8 | | | $ | 166.4 | |
| Charges to costs and expenses | 3.3 | | | (13.9) | | | 3.2 | |
| Payouts | (1.9) | | | (1.7) | | | (1.2) | |
Impact of 2018 MOA(1) | — | | | — | | | (63.8) | |
Impact of TGI Settlement(2) | — | | | (25.0) | | | — | |
Bombardier Acquisition(3) | 10.3 | | | — | | | — | |
| Exchange rate | 0.5 | | | 0.5 | | | 0.2 | |
| Balance, December 31 | $ | 76.9 | | | $ | 64.7 | | | $ | 104.8 | |
(1)As part of the 2018 MOA, $63.8 of warranty provision was released, settled against previously held Accounts Receivable, net with no impact to earnings.
| |
(1) | As part of the 2018 MOA, $63.8 of warranty provision was released, settled against previously held Accounts Receivable, net with no impact to earnings. For further information, see Note 28, Boeing Collective Resolution.(2)Due to a settlement on outstanding warranty issues in the first quarter of 2019, $25.0 of warranty provision was reclassified to accounts payable and was paid in the second quarter of 2019. (3)Warranty liabilities acquired in the Bombardier acquisition. |
Bonds
Since the Company'sits incorporation, Spirit and its predecessor havehas periodically utilized City of Wichita issued Industrial Revenue Bonds (“IRBs”) to finance self-constructed and purchased real property at its Wichita site. Tax benefits associated with IRBs include provisions for a ten-year complete property tax abatement and a Kansas Department of Revenue sales tax exemption on all IRB funded purchases. Spirit and its predecessor purchased these IRBs so they are bondholders and debtor / lessee for the property purchased with the IRB proceeds.
Spirit recorded the property net of a capitalfinance lease obligation to repay the IRB proceeds on its balance sheet. Gross assets and liabilities associated with these IRBs were $343.5$380.2 and $288.5$376.2 as of December 31, 20182020 and December 31, 2017,2019, respectively.
22.23. Other (Expense) Income, (Expense), Net
Other (expense) income, (expense), net is summarized as follows:
|
| | | | | | | | | | | |
| | For the Twelve Months Ended |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| Kansas Development Finance Authority bond | $ | 3.8 |
| | $ | 3.2 |
| | $ | 3.4 |
|
| Rental and miscellaneous income | 0.2 |
| | 1.2 |
| | 0.3 |
|
| Pension Income (Expense) | 34.3 |
| | 37.2 |
| | (0.7 | ) |
| Interest Income | 8.0 |
| | 6.4 |
| | 3.6 |
|
| Other | 0.4 |
| | — |
| | — |
|
| Loss on foreign currency forward contract, net of settlement | (35.3 | ) | | — |
| | — |
|
Loss on sale of accounts receivable (see Note 6, Accounts Receivable, net) | (16.5 | ) | | (3.3 | ) | | — |
|
| Foreign currency losses | (1.9 | ) | | (0.3 | ) | | (14.6 | ) |
| Total Other Income (Expense), net | $ | (7.0 | ) | | $ | 44.4 |
| | $ | (8.0 | ) |
| | | | | | | | | | | | | | | | | |
| | For the Twelve Months Ended |
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| Kansas Development Finance Authority bond | $ | 3.0 | | | $ | 3.7 | | | $ | 3.8 | |
| Rental and miscellaneous income | 0.2 | | | 0.2 | | | 0.2 | |
| Pension (loss) income | (36.8) | | | 19.5 | | | 34.3 | |
| Interest income | 10.0 | | | 12.9 | | | 8.0 | |
| Loss on foreign currency forward contract and interest rate swaps | (10.5) | | | (19.0) | | | (35.3) | |
| Loss on sale of accounts receivable | (8.9) | | | (24.7) | | | (16.5) | |
| ASC 326 credit loss reserve | (4.7) | | | — | | | — | |
| Foreign currency losses | (27.0) | | | (12.3) | | | (1.9) | |
| Litigation settlement | 0 | | | 13.5 | | | — | |
| Other | (3.1) | | | 0.4 | | | 0.4 | |
| Total Other (Expense) Income, net | $ | (77.8) | | | $ | (5.8) | | | $ | (7.0) | |
Foreign currency losses are due to the impact of movement in foreign currency exchange rates on an intercompany revolver and long-term contractual rights/obligations, as well as trade and intercompany receivables/payables that are denominated in a currency other than the entity’s functional currency.
Spirit AeroSystems Holdings, Inc. 23.Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
Pension expense for the twelve months ended December 31, 2020 and December 31, 2019 included $86.5 and $12.5 of expenses related to the voluntary retirement program, respectively.
24. Significant Concentrations of Risk
Economic Dependence
The Company’s largest customer (Boeing) accounted for approximately 79%60%, 79%, and 81% and79% of the revenues for the periods ended December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively. Approximately 36%16%, 44%40%, and 56%36% of the Company's accounts receivable balance at December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively, was attributable to Boeing.
The Company’s second largest customer (Airbus) accounted for approximately 16%23%, 16%, and 15%16% of the revenues for the periods ended December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively. Approximately 48%37%, 38%41%, and 28%48% of the Company's accounts receivable balance at December 31, 2018, 2017,2020, 2019, and 2016,2018, respectively, was attributable to Airbus.
Employees
As of December 31, 2018,2020, the Company had approximately 17, 00014,500 employees: 15,0009,700 located in the Company's fourfive U.S. facilities, 1,0003,800 located at the U.K. facility, 900facilities, 700 located in the Malaysia facility, 200 in Morocco, and 100 located in the France facility.
Approximately 89%83% of the Company’s U.S. employees are represented by five unionsunions. Approximately 1% of the Company's US employees are represented by an International Brotherhood of Electrical Workers (IBEW) collective bargaining agreement that will expire in September 2023 and approximately 69%,52% of US employees are represented by the International Association of Machinists and Aerospace Workers (IAM) collective bargaining agreement. On January 18, 2020 the Wichita IAM collective bargaining agreement was extended to June 2023.
Approximately 57% of the Company’s U.K.Company's Prestwick employees are represented by one union, Unite (Amicus Section). In 2013, the Company negotiated two separate ten-year pay agreements with the Manual Staff bargaining and the Monthly Staff bargaining groups of the Unite union. FrenchThese agreements fundamentally cover basic pay and variable at risk pay, while other employee terms and conditions generally remain the same from year to year until both parties agree to change them. The current pay agreements expire December 31, 2022.
In France, the Company's employees are represented by CFTC (“Confédération Française
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
des Travailleurs Chrétiens or French Confederation of Christian Workers”) and FO (“Force Ouvrière or Labor Force”).The Company negotiates yearly on compensation and once every four years on issues related to gender equality and work-life balance. The next election to determine union representation will occur in July 2023.
In U.K. (Belfast), approximately 84% of the employees are part of the collective group represented by the Trade Unions in Belfast with approximately 73% being members of a Trade Union. Unite the Union is the largest representing approximately 93% of the group, with GMB making up the balance. The last wage agreement covered the period from January 2016 to January 2019. No negotiations were held in 2020 due to the impact of COVID-19 and the Company's pending acquisition of Shorts Brothers plc. It is anticipated that negotiations will occur in the first half of 2021.
In Morocco, approximately 43% of the Company's employees are represented by UMT (“Union Marocain du Travail”). The Company negotiated a three year agreement which will expire in December 2022.
None of the Company's Malaysia employees are currently represented by a union.
24.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
25. Supplemental Balance Sheet Information
Accrued expenses and other liabilities consist of the following:
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Accrued expenses | | | |
| Accrued wages and bonuses | $ | 41.1 | | | $ | 35.2 | |
| Accrued fringe benefits | 103.0 | | | 125.5 | |
| Accrued interest | 29.1 | | | 3.5 | |
| Workers' compensation | 7.7 | | | 8.7 | |
| Property and sales tax | 47.2 | | | 24.1 | |
| Warranty/extraordinary rework reserve — current | 2.1 | | | 0.5 | |
Other(1) | 135.4 | | | 42.7 | |
| Total | $ | 365.6 | | | $ | 240.2 | |
| Other liabilities | | | |
Repayable investment agreement(2) | $ | 307.2 | | | $ | — | |
| Warranty/extraordinary rework reserve - non-current | 74.8 | | | 64.3 | |
Other(3) | 55.0 | | | 31.5 | |
| Total | $ | 437.0 | | | $ | 95.8 | |
(1) Includes $53.9 of general and production material accruals, $23.7 of accrued payroll taxes, $31.7 of 777 and 787 program liabilities, and $12.5 of accrued severance and deferred compensation.
(2) As a result of the acquisition of the acquired Bombardier Business, Spirit assumed financial obligations related to a repayable investment agreement with the Department for Business, Energy and Industrial Strategy of the Government of the United Kingdom. The balance above is the long term portion. Current portion of $17.3 as of December 31, 2020 is within Other Liabilities – Short Term on the Balance Sheet. See note 29, Acquisitions
(3) Includes $8.2 of deferred grant in Morocco, $9.6 NC R&D Tax Credit Offset, $9.1 of estimated workers compensation liability, $5.9 of deferred compensation, $16.3 of accrued employer payroll taxes due in 2022 (CARES act).
|
| | | | | | | |
| | December 31, 2018 | | December 31,
2017 |
| Accrued expenses | | | |
| Accrued wages and bonuses | $ | 48.3 |
| | $ | 40.8 |
|
| Accrued fringe benefits | 125.0 |
| | 116.3 |
|
| Accrued interest | 3.5 |
| | 5.8 |
|
| Workers' compensation | 8.3 |
| | 8.1 |
|
| Property and sales tax | 25.2 |
| | 24.7 |
|
| Warranty/extraordinary rework reserve — current | 1.3 |
| | 2.2 |
|
| Other | 101.5 |
| | 71.4 |
|
| Total | $ | 313.1 |
| | $ | 269.3 |
|
| Other liabilities | | | |
| Deferred tax liability — non-current | $ | 0.8 |
| | $ | 0.3 |
|
| Warranty/extraordinary rework reserve — non-current | 103.6 |
| | 164.2 |
|
| Customer cost recovery | 2.4 |
| | 22.9 |
|
| Other | 28.8 |
| | 65.2 |
|
| Total | $ | 135.6 |
| | $ | 252.6 |
|
25.26. Segment and Geographical Information
The Company operates in three principal segments: Fuselage Systems, Propulsion Systems and Wing Systems. Revenue from Boeing represents a substantial portion of ourthe Company's revenues in all segments. Wing Systems also includes significant revenues from Airbus. Approximately 95%83% of the Company's net revenues for the twelve months ended December 31, 20182020 came from the Company's two2 largest customers, Boeing and Airbus. All other activities fall within the All Other segment, principally made up of sundry sales offrom ventilator production, miscellaneous other services, tooling contracts and sales of natural gas through a tenancy-in-common with other companies that have operations in Wichita, Kansas. The Company's primary profitability measure to review a segment’s operating performance is segment operating income before corporate selling, general and administrative expenses, research and development and unallocated cost of sales.
Corporate selling, general and administrative expenses include centralized functions such as accounting, treasury and human resources that are not specifically related to the Company's operating segments and are not allocated in measuring the operating segments’ profitability and performance and net profit margins. Research and development includes research and development efforts that benefit the Company as a whole and are not unique to a specific segment. Unallocated cost of sales includes general costs not directly attributable to segment operations, such as warranty, early retirement and other incentives. All of these items are not specifically related to the Company’s operating segments and are not utilized in measuring the operating segments’ profitability and performance.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
The Company’s Fuselage Systems segment includes development, production and marketing of forward, mid and rear fuselage sections and systems, primarily to aircraft OEMs (OEM refers to aircraft original equipment manufacturer), as well as related spares and maintenance, repairs and overhaul (“MRO”) services.. The Fuselage Systems segment manufactures products at the Company's facilities in Wichita, Kansas; Tulsa and McAlester, Oklahoma; San Antonio, Texas; Kinston, North Carolina; Biddeford, Maine; Casablanca, Morocco; and Subang, Malaysia. The Fuselage Systems segment also includes an assembly plant for the A350 XWB aircraft in Saint-Nazaire, France.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
The Company’s Propulsion Systems segment includes development, production and marketing of struts/pylons, nacelles (including thrust reversers) and related engine structural components primarily to aircraft or engine OEMs, as well as related spares and MRO services. The Propulsion Systems segment manufactures products at the Company's facility in Wichita, Kansas.Kansas; Dallas, Texas; Biddeford, Maine; Belfast, Northern Ireland; and San Antonio, Texas.
The Company’s Wing Systems segment includes development, production and marketing of wings and wing components (including flight control surfaces) as well as other miscellaneous structural parts primarily to aircraft OEMs, as well as related spares and MRO services.OEMs. These activities take place at the Company’s facilities in Tulsa and McAlester, Oklahoma; San Antonio, Texas; Kinston, North Carolina; Prestwick, Scotland; Belfast, Northern Ireland; Casablanca, Morocco; and Subang, Malaysia.
The Company’s segments are consistent with the organization and responsibilities of management reporting to the chief operating decision-maker for the purpose of assessing performance. The Company’s definition of segment operating income differs from net profit marginOperating income as presented in its primary financial statements and a reconciliation of the segment and consolidated results is provided in the table set forth below.
While some working capital accounts are maintained on a segment basis, much of the Company’s assets are not managed or maintained on a segment basis. Property, plant and equipment, including tooling, is used in the design and production of products for each of the segments and, therefore, is not allocated to any individual segment. In addition, cash, prepaid expenses, other assets, and deferred taxes are managed and maintained on a consolidated basis and generally do not pertain to any particular segment. Raw materials and certain component parts are used in aerostructure production across all segments. Work-in-process inventory is identifiable by segment, but is managed and evaluated at the program level. As there is no segmentation of the Company’s productive assets, depreciation expense (included in fixed manufacturing costs and selling, general and administrative expenses) and capital expenditures, no allocation of these amounts has been made solely for purposes of segment disclosure requirements.
The following table shows segment revenues and operating income for the twelve months ended December 31, 2018, 20172020, 2019 and 2016:2018:
| | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 31, 2019 | | Twelve Months Ended December 31, 2018 |
| Segment Revenues | | | | | |
| Fuselage Systems | $ | 1,725.9 | | | $ | 4,206.2 | | | $ | 4,000.8 | |
| Propulsion Systems | 784.5 | | | 2,057.8 | | | 1,702.5 | |
| Wing Systems | 798.6 | | | 1,588.3 | | | 1,513.0 | |
| All Other | 95.8 | | | 10.8 | | | 5.7 | |
| $ | 3,404.8 | | | $ | 7,863.1 | | | $ | 7,222.0 | |
Segment Operating (loss) income (1) | | | | | |
Fuselage Systems(2) | $ | (454.5) | | | $ | 440.8 | | | $ | 576.1 | |
Propulsion Systems(3) | (36.8) | | | 404.6 | | | 283.5 | |
Wing Systems(4) | (68.1) | | | 216.0 | | | 226.4 | |
| All Other | 34.7 | | | 3.4 | | | 0.3 | |
| (524.7) | | | 1,064.8 | | | 1,086.3 | |
| Corporate SG&A | (237.4) | | | (261.4) | | | (210.4) | |
| Unallocated impact of severe weather event | 0 | | | 0 | | | 10.0 | |
| Research and development | (38.8) | | | (54.5) | | | (42.5) | |
Unallocated cost of sales(5) | (11.9) | | | 11.9 | | | (0.2) | |
| Total operating (loss) income | $ | (812.8) | | | $ | 760.8 | | | $ | 843.2 | |
|
| | | | | | | | | | | |
| | Twelve Months Ended December 31, 2018 | | Twelve Months Ended December 31, 2017 | | Twelve Months Ended December 31, 2016 |
| Segment Revenues | | | | | |
| Fuselage Systems | $ | 4,000.8 |
| | $ | 3,730.8 |
| | $ | 3,498.8 |
|
| Propulsion Systems | 1,702.5 |
| | 1,666.2 |
| | 1,777.3 |
|
| Wing Systems | 1,513.0 |
| | 1,578.8 |
| | 1,508.7 |
|
| All Other | 5.7 |
| | 7.2 |
| | 8.1 |
|
| | $ | 7,222.0 |
| | $ | 6,983.0 |
| | $ | 6,792.9 |
|
Segment Operating Income (1, 2) | | | | | |
| Fuselage Systems | $ | 576.1 |
| | $ | 329.6 |
| | $ | 470.4 |
|
| Propulsion Systems | 283.5 |
| | 267.7 |
| | 326.7 |
|
| Wing Systems | 226.4 |
| | 205.1 |
| | 224.3 |
|
| All Other | 0.3 |
| | 2.0 |
| | 1.6 |
|
| | 1,086.3 |
| | 804.4 |
| | 1,023.0 |
|
Corporate SG&A (2) | (210.4 | ) | | (204.7 | ) | | (230.9 | ) |
| Unallocated impact of severe weather event | 10.0 |
| | (19.9 | ) | | (12.1 | ) |
| Research and development | (42.5 | ) | | (31.2 | ) | | (23.8 | ) |
Unallocated cost of sales(3) | (0.2 | ) | | (16.7 | ) | | (30.4 | ) |
| Total operating income | $ | 843.2 |
| | $ | 531.9 |
| | $ | 725.8 |
|
| |
(1) | Inclusive of forward losses, changes in estimate on loss programs and cumulative catch-up adjustments. These changes in estimates for the periods ended December 31, 2018, 2017, and 2016 are further detailed in Note 5, Changes in Estimates.
|
| |
(2) | Prior period information has been reclassified as a result of the Company's adoption of ASU 2017-07 on a retrospective basis in 2018. In accordance with the adoption of this guidance, prior year amounts related to the components of net periodic pension and postretirement benefit cost other than service costs have been reclassified from cost of sales and selling, general, and |
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
administrative expense to other income (expense) within the consolidated statement(1)Inclusive of operation for all periods presented. Accordingly, expenses of $18.1, $7.4,forward losses, changes in estimate on loss programs and $7.3 attributable to the Fuselage Systems segment, Propulsion Systems segment, and Wing Systems segment, respectively, were reclassified into segment operating incomecumulative catch-up adjustments. These changes in estimates for the twelve monthsperiods ended December 31, 20172020, 2019, and expenses of $1.8, $0.8, and $0.7 attributable to the Fuselage Systems segment, Propulsion Systems segment, and Wing Systems segment, respectively, were reclassified out of segment operating income for the twelve months2018 are further detailed in Note 5, Changes in Estimates.
(2)The year ended December 31, 2016.2020 includes excess capacity production costs of $175.0 related to the temporary B737 MAX production schedule changes, temporary workforce costs of $19.0 as a result of COVID-19 production pause net of U.S. employee retention credit,$41.3 of restructuring costs and $22.5 from loss on the disposition of assets.
| |
(3) | For 2018, includes charges of $1.1 related to warranty reserves. For 2017, includes charges of $1.8 and $12.7, related to warranty reserves and charges for excess purchases and purchase commitments, respectively. For 2016, includes charges of $13.8 and $23.6 related to warranty reserves and early retirement incentives, respectively, offset by $7.9 for the settlement of historical claims with suppliers. |
(3)The year ended December 31, 2020 includes excess capacity production costs of $61.1 related to the temporary B737 MAX production schedule changes, temporary workforce costs of $7.2 as a result of COVID-19 production pause net of U.S employee retention credit and $15.2 of restructuring costs.
(4)The year ended December 31, 2020 includes excess capacity production costs of $42.9 related to the temporary B737 MAX and A320 production schedule changes, temporary workforce costs of $7.5 as a result of COVID-19, net of U.S employee retention credit and U.K government subsidies, $16.5 of restructuring costs and $0.4 from loss on the disposition of assets.
(5)Includes $(3.3), $13.9 and $(1.1) related to warranty reserves for the periods ended December 31, 2020, 2019 and 2018, respectively. Included in unallocated for December 31, 2020 is write off of excess material of ($8.1).
Most of the Company’s revenue is obtained from sales inside the U.S. However, the Company does generate international sales, primarily from sales to Airbus. The following chart illustrates the split between domestic and foreign revenues:
| | | | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | Year Ended December 31, 2018 |
Revenue Source(1) | Net Revenues | | Percent of Total Net Revenues | | Net Revenues | | Percent of Total Net Revenues | | Net Revenues | | Percent of Total Net Revenues | Revenue Source(1) | Net Revenues | | Percent of
Total
Net Revenues | | Net Revenues | | Percent of
Total
Net Revenues | | Net Revenues | | Percent of
Total
Net Revenues |
| United States | $ | 5,967.1 |
| | 83 | % | | $ | 5,722.9 |
| | 82 | % | | $ | 5,650.1 |
| | 83 | % | United States | $ | 2,637.6 | | | 77 | % | | $ | 6,566.3 | | | 84 | % | | $ | 5,967.1 | | | 83 | % |
| International | | | | | | | | | | | | International | | | |
| United Kingdom | 763.3 |
| | 10 | % | | 740.9 |
| | 11 | % | | 690.7 |
| | 10 | % | United Kingdom | 433.5 | | | 13 | % | | 771.9 | | | 10 | % | | 763.3 | | | 10 | % |
| Other | 491.6 |
| | 7 | % | | 519.2 |
| | 7 | % | | 452.1 |
| | 7 | % | Other | 333.7 | | | 10 | % | | 524.9 | | | 6 | % | | 491.6 | | | 7 | % |
| Total International | 1,254.9 |
| | 17 | % | | 1,260.1 |
| | 18 | % | | 1,142.8 |
| | 17 | % | Total International | 767.2 | | | 23 | % | | 1,296.8 | | | 16 | % | | 1,254.9 | | | 17 | % |
| Total Revenues | $ | 7,222.0 |
| | 100 | % | | $ | 6,983.0 |
| | 100 | % | | $ | 6,792.9 |
| | 100 | % | Total Revenues | $ | 3,404.8 | | | 100 | % | | $ | 7,863.1 | | | 100 | % | | $ | 7,222.0 | | | 100 | % |
| |
(1) | Net Revenues are attributable to countries based on destination where goods are delivered. |
(1)Net Revenues are attributable to countries based on destination where goods are delivered.
Most of the Company’s long-lived assetsproperty, plant and equipment are located within the U.S. Approximately 4%19% of the Company's long-lived assetsproperty, plant and equipment based on book value are located in the U.K. with approximately another 4% of the Company's total long-lived assetsproperty, plant and equipment located in countries outside the U.S. and the U.K. The following chart illustrates the split between domestic and foreign assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | Year Ended December 31, 2018 |
| Asset Location | Total
PPE | | Percent of
PPE | | Total
PPE | | Percent of
Total
PPE | | Total
PPE | | Percent of
Total
PPE |
| United States | $ | 1,931.0 | | | 77 | % | | $ | 2,079.4 | | | 92 | % | | $ | 2,003.9 | | | 92 | % |
| International | | | | | | | | | | | |
| United Kingdom | 466.2 | | | 19 | % | | 112.4 | | | 5 | % | | 82.1 | | | 4 | % |
| Other | 106.6 | | | 4 | % | | 79.9 | | | 3 | % | | 81.6 | | | 4 | % |
| Total International | 572.8 | | | 23 | % | | 192.3 | | | 8 | % | | 163.7 | | | 8 | % |
| Total Property, Plant & Equipment | $ | 2,503.8 | | | 100 | % | | $ | 2,271.7 | | | 100 | % | | $ | 2,167.6 | | | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
| Asset Location | Total Long-Lived Assets | | Percent of Total Long-Lived Assets | | Total Long-Lived Assets | | Percent of Total Long-Lived Assets | | Total Long-Lived Assets | | Percent of Total Long-Lived Assets |
| United States | $ | 2,003.9 |
| | 92 | % | | $ | 1,939.0 |
| | 92 | % | | $ | 1,828.2 |
| | 92 | % |
| International | | | | | | | | | | | |
| United Kingdom | 82.1 |
| | 4 | % | | 82.5 |
| | 4 | % | | 80.0 |
| | 4 | % |
| Other | 81.6 |
| | 4 | % | | 83.8 |
| | 4 | % | | 83.4 |
| | 4 | % |
| Total International | 163.7 |
| | 8 | % | | 166.3 |
| | 8 | % | | 163.4 |
| | 8 | % |
| Total Long-Lived Assets | $ | 2,167.6 |
| | 100 | % | | $ | 2,105.3 |
| | 100 | % | | $ | 1,991.6 |
| | 100 | % |
26. Quarterly Financial Data (Unaudited)
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
27. Restructuring Costs
In twelve months ended December 31, 2020, the Company's customers, including Boeing and Airbus, have significantly reduced their overall production rates as a result of the COVID-19 pandemic and, in the case of Boeing, the B737 MAX grounding. As a result, the Company took actions to align costs to the updated production levels (restructuring activity). The Company’s planned restructuring activities are documented in a restructuring plan that is approved and controlled by management. The planned activities to align costs to expected production levels have materially affected the scope of operations and manner in which business is conducted by the Company.
Restructuring costs under the plan, which are presented separately as a component of operating loss on the consolidated statement of operations, are related to involuntary workforce reductions and the VRP. The total restructuring costs of $73.0 for the twelve months ended December 31, 2020 includes $51.4 related to involuntary workforce reductions and $21.6 related to the VRP.
The total restructuring costs related to involuntary workforce reductions of $51.4 for the twelve months ended December 31, 2020 includes $31.5 from the first quarter of 2020 for approximately 3,200 employees, $4.9 from the second quarter of 2020 for approximately 1,450 additional employees in response to COVID-19 impacts, $11.1 from the third quarter of 2020 for approximately 1,950 additional employees, and $3.9 in the fourth quarter for 950 additional employees. The $51.4 total represents the full cost of the involuntary workforce restructuring activities included in the plan through December 31, 2020. Of the $51.4 total for the twelve months ended December 31, 2020, $46.4 was paid during the twelve months ended December 31, 2020 and the remaining $5.0 is recorded in the accrued expenses line item on the balance sheet as of December 31, 2020.
The total restructuring costs related to the VRP of $21.6 for the twelve months ended December 31, 2020 represents the total costs expected to be incurred for the voluntary retirement packages that includes $11.1 for the first quarter 2020 for 207 employees, $1.4 for the second quarter 2020 for 27 employees, $8.4 for the third quarter 2020 for 165 employees, and $0.7 in the fourth quarter for an additional 30 employees. The cost related to packages under the VRP are generally accrued and charged to earnings when the employee accepts the offer. Of the $21.6 total for the twelve months ended December 31, 2020, $21.4 was paid during the period and the remaining $0.2 is recorded in the accrued expenses line item on the consolidated balance sheet as of December 31, 2020.
The costs of the restructuring plan are included in segment operating margins. The total amount for the twelve months ended December 31, 2020 for each segment was $41.3 for the Fuselage Systems segment, $15.2 for the Propulsion Systems segment, and $16.5 for the Wing Systems segment.
28. Quarterly Financial Data (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
| December 31, 2020(1) | | October 1, 2020(2) | | July 2, 2020(3) | | April 2, 2020(4) |
| Net revenues | $ | 876.6 | | | $ | 806.3 | | | $ | 644.6 | | | $ | 1,077.3 | |
| Gross (loss) profit | $ | (27.9) | | | $ | (97.1) | | | $ | (280.5) | | | $ | (35.2) | |
| Operating (loss) income | $ | (101.4) | | | $ | (176.9) | | | $ | (367.0) | | | $ | (167.5) | |
| Net (loss) income | $ | (295.9) | | | $ | (155.5) | | | $ | (255.9) | | | $ | (163.0) | |
| (Loss) earnings per share, basic | $ | (2.85) | | | $ | (1.50) | | | $ | (2.46) | | | $ | (1.57) | |
| (Loss) earnings per share, diluted | $ | (2.85) | | | $ | (1.50) | | | $ | (2.46) | | | $ | (1.57) | |
| Dividends declared per common share | $ | 0.01 | | | $ | 0.01 | | | $ | 0.01 | | | $ | 0.01 | |
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | December 31, 2018(1) | | September 27, 2018(2) | | June 28, 2018(3) | | March 29, 2018(4) |
| Revenues | $ | 1,835.3 |
| | $ | 1,813.7 |
| | $ | 1,836.9 |
| | $ | 1,736.1 |
|
| Gross profit | $ | 300.7 |
| | $ | 270.6 |
| | $ | 289.7 |
| | $ | 225.1 |
|
| Operating income | $ | 243.6 |
| | $ | 222.5 |
| | $ | 217.6 |
| | $ | 159.5 |
|
| Net income | $ | 177.6 |
| | $ | 168.8 |
| | $ | 145.2 |
| | $ | 125.4 |
|
| Earnings per share, basic | $ | 1.70 |
| | $ | 1.61 |
| | $ | 1.32 |
| | $ | 1.11 |
|
| Earnings per share, diluted | $ | 1.68 |
| | $ | 1.59 |
| | $ | 1.31 |
| | $ | 1.10 |
|
| Dividends declared per common share | $ | 0.12 |
| | $ | 0.12 |
| | $ | 0.12 |
| | $ | 0.10 |
|
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | December 31, 2017(5) | | September 28, 2017(6) | | June 29, 2017(7) | | March 30, 2017(8) |
| Revenues | $ | 1,714.6 |
| | $ | 1,748.2 |
| | $ | 1,826.1 |
| | $ | 1,694.1 |
|
| Gross profit (loss) | $ | 282.1 |
| | $ | 261.6 |
| | $ | (29.1 | ) | | $ | 273.1 |
|
| Operating income (loss) | $ | 217.3 |
| | $ | 202.3 |
| | $ | (92.1 | ) | | $ | 204.4 |
|
| Net income (loss) | $ | 122.8 |
| | $ | 147.2 |
| | $ | (56.8 | ) | | $ | 141.7 |
|
| Earnings (loss) per share, basic | $ | 1.08 |
| | $ | 1.27 |
| | $ | (0.48 | ) | | $ | 1.19 |
|
| Earnings (loss) per share, diluted | $ | 1.07 |
| | $ | 1.26 |
| | $ | (0.48 | ) | | $ | 1.17 |
|
| Dividends declared per common share | $ | 0.10 |
| | $ | 0.10 |
| | $ | 0.10 |
| | $ | 0.10 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
| December 31, 2019(5) | | September 26, 2019(6) | | June 27, 2019(7) | | March 28, 2019(8) |
| Net revenues | $ | 1,959.3 | | | $ | 1,919.9 | | | $ | 2,016.1 | | | $ | 1,967.8 | |
| Gross profit | $ | 202.0 | | | $ | 272.3 | | | $ | 292.9 | | | $ | 309.5 | |
| Operating income | $ | 95.7 | | | $ | 206.1 | | | $ | 226.0 | | | $ | 233.0 | |
| Net income | $ | 67.7 | | | $ | 131.3 | | | $ | 168.0 | | | $ | 163.1 | |
| Earnings per share, basic | $ | 0.65 | | | $ | 1.27 | | | $ | 1.62 | | | $ | 1.57 | |
| Earnings per share, diluted | $ | 0.65 | | | $ | 1.26 | | | $ | 1.61 | | | $ | 1.55 | |
| Dividends declared per common share | $ | 0.12 | | | $ | 0.12 | | | $ | 0.12 | | | $ | 0.12 | |
| |
(1) | Fourth quarter 2018 earnings include the impact of net favorable changes in estimate of $3.5. |
| |
(2) | Third quarter 2018 earnings include the impact of net unfavorable changes in estimate of $13.5. |
| |
(3) | Second quarter 2018 earnings include the impact of net favorable changes in estimate of $24.9. |
| |
(4) | First quarter 2018 earnings include the impact of net unfavorable changes in estimate of $22.6. |
| |
(5) | Fourth quarter 2017 earnings include the impact of net favorable changes in estimate of $12.9 |
| |
(6) | Third quarter 2017 earnings include the impact of net unfavorable changes in estimate of $4.8. |
| |
(7) | Second quarter 2017 earnings include the impact of net unfavorable changes in estimate of $329.2. |
| |
(8) | First quarter 2017 earnings include the impact of net favorable changes in estimate of $5.2 |
(1) Fourth quarter 2020 earnings include the impact of net unfavorable changes in estimate of $400.7, restructuring costs of $4.6, deferred tax allowance of $150.2, and excess capacity costs and temporary workforce costs net of government subsidies of $50.1 and ($0.1), respectively. 27. (2) Third quarter 2020 earnings include the impact of net unfavorable changes in estimate of $123.8, restructuring costs of $19.5, and excess capacity costs and temporary workforce costs net of government subsidies of $72.6 and $(10.9), respectively.
(3) Second quarter 2020 earnings include the impact of net unfavorable changes in estimate of $231.8, restructuring costs of $6.3, loss on disposal of assets of $22.9, and excess capacity costs and temporary workforce costs net of government subsidies of $82.8 and $19.3, respectively.
(4) First quarter 2020 earnings include the impact of net unfavorable changes in estimate of $27.9, restructuring costs of $42.6, and excess capacity costs and temporary workforce costs net of government subsidies of $73.4 and $25.4, respectively.
(5) Fourth quarter 2019 earnings include the impact of net unfavorable changes in estimate of $55.2.
(6) Third quarter 2019 earnings include the impact of net unfavorable changes in estimate of $41.8.
(7) Second quarter 2019 earnings include the impact of net unfavorable changes in estimate of $10.9.
(8) First quarter 2019 earnings include the impact of net favorable changes in estimate of $0.5.
29. Acquisitions
Asco Acquisition
On May 1, 2018, the Company and its wholly-owned subsidiary Spirit AeroSystems Belgium Holdings BVBA (“Spirit Belgium”) entered into a definitive agreement (as amended, the “Asco Purchase Agreement pursuant to whichAgreement”) with certain private sellers providing for the purchase by Spirit Belgium will purchaseof all of the issued and outstanding equity of S.R.I.F. N.V., the parent company of Asco a leading supplier of high lift wing structures, mechanical assemblies and major functional components to major OEMs and Tier I suppliers in the global commercial aerospace and military markets, for the translated amount of $650.0 in cash,Industries N.V. (“Asco”), subject to certain customary closing adjustments, including foreign currency adjustments. The definitive agreement is subject to customary closing conditions, including regulatory approvals and customer consents.
One of the closing conditions is receipt of clearance from the European Commissionadjustments (the “Commission”“Asco Acquisition”). During the scope of the Commission’s Phase 1 review, the Commission identified issues that it requires to be addressed regarding the transaction. Consequently, on October 26, 2018,On September 25, 2020, the Company, withdrew its notification ofSpirit Belgium and the transaction fromSellers entered into an amendment to the Commission in orderAsco Purchase Agreement (the “Termination Agreement”) pursuant to address those issues. After several months of addressingwhich the issues,parties agreed to terminate the Company refiled its applicationAsco Purchase Agreement, including all schedules and annexes thereto (other than certain confidentiality agreements) (collectively with the CommissionAsco Purchase Agreement, the “Transaction Documents”), effective as of September 25, 2020. Under the Termination Agreement, the parties also agreed to release each other from any and all claims, rights of action, howsoever arising, of every kind and nature, in connection with, arising out of, based upon or related to, directly or indirectly, the Commission is proceeding with a Phase 1 review ofTransaction Documents, including any breach, non-performance, action or failure to act under the transaction. There can be no assurances that the Company will receive the clearance of the Commission.Transaction Documents.
Acquisition-related expenses were $16.4$20.0 for the twelve months ended December 31, 20182020 and $12.7 for the twelve months ended December 31, 2019, and are included in selling, general and administrative costs on the condensed and consolidated statementsstatement of operations.
FMI
On January 10, 2020, Spirit completed the acquisition of 100% of the outstanding equity of FMI using cash on hand. The acquisition-date fair value of consideration transferred was $121.4, which included cash payment to the seller, payment of closing indebtedness, and payment of selling expenses.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
Acquiring FMI aligns with the Company's strategic growth objectives to diversify its customer base and expand the current defense business. FMI is an industry-leader in the design and manufacture of complex composite solutions that are primarily used in aerospace applications. FMI's main operations focus on multidirectional reinforced composites that enable high-temperature applications such as thermal protection systems, re-entry vehicle nose tips, and rocket motor throats and nozzles.
28. Boeing Collective Resolution
On December 21, 2018, Boeing and Spirit executedAcquisition-related expenses were $0.5 for the 2018 MOA. The 2018 MOA established, among other items, pricing for certain programs throughtwelve months ended December 31, 2030, including2020, and are included in selling, general and administrative costs on the B737NG (includingcondensed and consolidated statement of operations.
The purchase price has been allocated among assets acquired and liabilities assumed at fair value, with the P8), B737 MAX, B767 (but excluding 767-2Cexcess purchase price recorded as goodwill. The Company has recorded purchase accounting entries, which the Company concluded were final as of the quarter ended October 1, 2020:
| | | | | |
| At January 10, 2020 | |
| Cash and cash equivalents | $ | 3.5 | |
| Accounts receivable | 5.3 | |
| Inventory | 1.9 | |
| Contract Assets, short-term | 5.6 | |
| Prepaid and other current assets | 0.5 | |
| Equipment and leasehold improvements | 12.3 | |
| Intangible assets | 30.0 | |
| Goodwill | 76.0 | |
| Other noncurrent assets | 0.2 | |
| Total assets acquired | $ | 135.3 | |
| |
| Accounts payable and accrued liabilities | 1.8 | |
| Income Tax Payable | 1.4 | |
| Contract liabilities, short-term | 2.2 | |
| Accrued payroll and employee benefits | 0.6 | |
| Other current liabilities | 0.2 | |
| Deferred income taxes, non-current | 7.5 | |
| Other noncurrent liabilities | 0.2 | |
| Total liabilities assumed | 13.9 | |
| Net assets acquired | $ | 121.4 | |
The intangible assets included above consist of the following:
| | | | | | | | |
| | Amount | Amortization Period |
| | | (in years) |
| Developed technology asset | $ | 30.0 | | 15 |
| Total intangible assets | $ | 30.0 | | 15 |
FMI has developed proprietary know-how over the past 50 years related to its densification and weaving processes. FMI's densification and weaving processes are used to develop specialized composites which can withstand high temperatures and meet the structural requirements set forth by FMI's customers. FMI has developed proprietary designs for 3D and 4D weaving of uncrimped carbon fibers. The densification process utilizes proprietary formulas of heat, pressure, materials, and time to create high density composite solutions at scale. FMI's developed technology results in high strength to weight composites with unmatched density, stability, and heat resistance, which pricing is separately established), and the B777 freighters and 777-9 (pricingare essential for the B777 300ERmission critical markets it serves. This developed technology is the primary driver of FMI's longstanding, competitive advantage in the markets.
FMI is typically engaged with government agencies through purchase orders and 200LR was previously establisheddoes not have any life of program commitments from customers. As a result of FMI’s existing developed technology and pricing for the B777-8 is subject to future negotiation). The 2018 MOA also established pricing for the B787 for line number 1004 through line number 2205. In addition, the 2018 MOA established (i) B737 pricing basedincumbent position on production rates above and below current production levels; (ii) investments for tooling and capital for certain B737 rate increases; (iii) joint cost reduction programs for the B777X and B787 (a joint cost reduction program for the B737 is separately established); (iv) suspensionprevious
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements Commitments, Contingencies— (Continued)
($, €, £, and GuaranteesRM in millions other than per share amounts)
purchase orders, FMI is positioned to capture future government programs. As such, the developed technology and contract assets were subsumed into one consolidated intangible asset (collectively referred to as the developed technology asset).
The developed technology intangible asset is deemed to be the primary revenue-generating identifiable intangible asset acquired in the Transaction. The multi-period excess earnings method was used as the approach for estimating the fair value of the developed technology intangible asset which utilizes significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. The principle behind this method is that the value of the intangible asset is equal to the present value of the after-tax cash flows attributable to the intangible asset only. The analysis included assumptions for projections of revenues and expenses, contributory asset charges, discount rates, and a tax impacts.
The goodwill amount of $76.0 recognized is attributable primarily to expected revenue synergies generated by the integration of the Company's products and technologies with those of FMI and intangible assets that do not qualify for separate recognition, such as the assembled workforce of FMI. None of the goodwill is expected to be deductible for income tax purposes. The goodwill is allocated $42.9 to the Fuselage Systems segment and $33.1 to the Propulsion Systems segment. This allocation was based upon the fair value of the projected earnings as of the acquisition date. The recognized goodwill was adjusted from $76.2 to $76.0 resulting from settlement of net working capital in second quarter of 2020. See Note 12, Other Assets, Goodwill, and Intangible Assets for more information on goodwill.
The Company’s consolidated income statement from the acquisition date to the period ending December 31, 2020 includes revenue and earnings of FMI of $58.8 and $7.7, respectively. The following summary, prepared on a pro forma basis, presents the unaudited consolidated results of operations for the twelve months ended December 31, 2020 and December 31, 2019 as if the acquisition of FMI had been completed as of the beginning of fiscal 2019, after including any post-acquisition adjustments directly attributable to the acquisition, and after including the impact of adjustments such as amortization of intangible assets, and interest expense on related borrowings and, in each case, the related income tax effects. These amounts have been calculated after substantively applying the Company’s accounting policies. This pro forma presentation does not include any impact of transaction synergies. The pro forma results are not necessarily indicative of the Company's results of operations had the Company owned FMI for the entire periods presented, nor does it purport to represent results for any future periods.
| | | | | | | | | | | | | | |
| For the Twelve Months Ended |
| December 31,
2020 | | December 31,
2019 | |
| Revenue - as reported | $ | 3,404.8 | | | $ | 7,863.1 | | |
| Revenue - pro forma | 3,405.6 | | | 7,913.8 | | |
| Net (loss) income - as reported | $ | (870.3) | | | $ | 530.1 | | |
| Net (loss) income - pro forma | (870.2) | | | 534.9 | |
| Earnings Per Share - Diluted - as reported | $ | (8.38) | | | $ | 5.06 | | |
| Earnings Per Share - Diluted - pro forma | (8.38) | | | 5.11 | |
Bombardier Acquisition
On October 30, 2020, Spirit and Spirit AeroSystems Global Holdings Limited (“Spirit UK”), above,wholly owned subsidiaries of the Company, completed their previously announced acquisition of the outstanding equity of Short Brothers plc (“Shorts”) and Bombardier Aerospace North Africa SAS ("BANA"), and substantially all the assets of the maintenance, repair and overhaul business in Dallas, Texas (collectively, the “Bombardier Acquired Business”), along with the assumption of certain liabilities of Shorts and BANA (the “Bombardier Acquisition”).
The Bombardier Acquired Businesses are global leaders in aerostructures and fabrication, delivering composite and metallic wing components, nacelles, fuselages and tail assemblies, along with high-value mechanical assemblies made out of aluminum, titanium and steel. The backlog of work includes long-term contracts on the Airbus aircraft family, along with Bombardier business and regional jets. The acquisition is in line with the Company’s growth strategy of increasing Airbus content, developing low-cost country footprint, and growing the Company’s aftermarket business. The Bombardier Acquired Businesses are included within the Fuselage Systems, Propulsion Systems, and Wing Systems reporting segments. Refer to Note 26 Segment and Geographical Information for additional information about the Company’s segments.
The Company, acting through certain of its subsidiaries, also assumed net pension liabilities of approximately $316. As a result of the acquisition of the acquired Bombardier Business, Spirit assumed financial obligations related to a repayable
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
investment agreement with the Department for Business, Energy and Industrial Strategy of the Government of the United Kingdom. As a result of its obligation to make future payments under this agreement, the Company recorded the assumed obligation from this transaction as a liability on its Consolidated Balance Sheet that will be accounted for using the interest method over the estimated life of the agreement. As a result, the Company imputes interest on the transaction and recorded imputed interest expense at the estimated interest rate. The Company's estimate of the interest rate under the sub-heading "Litigation"agreement is based on the amount of payments expected to be made over the remaining life of the agreement. The Company utilizes future sales projections and growth rates to further develop this estimate. The projected amount of payments expected to be made involves the use of significant estimates and assumptions with respect to the number of units expected to be sold. The Company periodically assesses the expected payments to be made using a combination of historical results and forecasts from market data sources. To the extent such payments are greater or less than its initial estimates or the timing of such payments is materially different than its original estimates, the Company will adjust the amortization of the liability prospectively. The Company determined the fair value of the liability at the acquisition date to be $304 which is included within the liabilities assumed, with a current effective annual imputed interest rate of 6.78%. ConsistentCash payments made related to the principal component of the liability will be classified as a financing outflow on the consolidated statement of cash flows, while payments made related to the interest component will be presented within operating cash flows.
The $275 cash consideration, along with these assumed liabilities, results in a total enterprise value of $895. The Company agreed to procure payment of a special contribution of £100 to the Shorts pension scheme on October 30, 2021. In addition, included within the liabilities assumed is approximately $281.6 in forward loss contracts. Refer to Note 5 Changes in Estimates for additional information on the Company’s forward loss provisions.
Acquisition-related expenses were $11.0 and $19.6 for the twelve months ended December 31, 2020 and December 31, 2019, respectively, and are included in selling, general and administrative costs on the condensed and consolidated statement of operations..
The acquisition was accounted for as a business combination in accordance with ASC Topic 805, Business Combinations. The purchase price has been allocated among assets acquired and liabilities assumed at fair value based on information currently available, with the 2018 MOA,excess purchase price recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. In some cases, the Company used discounted cash flow analyses, which were based on the Company's best estimate of future sales, earnings and cash flows after considering such factors as general market conditions, customer budgets, existing firm and future orders, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.
The Company also identified contractual obligations with customers on certain contracts with economic returns that are lower than could be realized in market transactions as of the acquisition date. The Company measured these liabilities under the measurement provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” which is based on the price to transfer the obligation to a market participant at the measurement date, assuming that the liability will remain outstanding in the marketplace. Significant assumptions were used to determine the fair value of the loss contract reserves using the discounted cash flow model including discount rates, forecasted quantities of products to be sold under the long-term contracts and market prices for respective products. These were forward looking assumptions that could be affected by future economic and market conditions. Based on the estimated net cash outflows of the programs plus a reasonable contracting profit margin required to transfer the contracts to market participants, the Company recorded assumed liabilities of approximately $281.6 in connection with the Bombardier Acquisition. These liabilities are shown within the Forward loss provision on the Consolidated Balance Sheet for the period ended December 31, 2020. These liabilities will be liquidated in accordance with the underlying pattern of obligations, as reflected by the expenses incurred on the contracts, as a reduction to cost of sales. Total consumption of the contractual obligation in 2020 was $7.2. Total consumption of the contractual obligation for the next five year, based upon the assumptions referenced above is expected to be as follows: $12.0 in 2021, $43.1 in 2022, $70.1 in 2023, $83.7 in 2024, and $65.5 in 2025.
The company expects to substantially finalize its purchase price allocation by October 30, 2021 after the Company further analyzed and assessed a number of the factors used in establishing the fair values of assets acquired and liabilities assumed as of the Bombardier Acquisition date including, but not limited to, contractual and operational factors underlying the customer-related intangible assets and property, plant and equipment; details surrounding tax matters; and assumptions underlying certain existing or potential reserves, such as those for product warranties and environmental matters. The final fair value determination could result in material adjustments to the values presented in the preliminary purchase price allocation table below.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
The preliminary purchase price allocation of the assets acquired and the liabilities assumed at the acquisition date is as follows:
| | | | | |
| At October 30, 2020 | |
| Cash and cash equivalents | $ | 4.4 | |
| Accounts receivable, net | 94.1 | |
| Inventory | 252.0 | |
| Other current assets | 11.1 | |
| Intangible assets, net | 188.1 | |
| Other non-current assets | 11.7 | |
| Property and equipment, net | 373.6 | |
| Right of use asset | 27.7 | |
| Goodwill | 486.8 | |
| Total assets acquired | $ | 1,449.5 | |
| |
| Accounts payable | 90.4 | |
| Accrued payroll and employee benefits | 113.8 | |
| Forward loss provision, short-term | 19.2 | |
| Other current liabilities | 31.5 | |
| Forward loss provision, long-term | 262.4 | |
| Other non-current liabilities | 313.4 | |
| Operating lease liabilities, long-term | 27.5 | |
| Retirement benefits | 316.3 | |
| Total liabilities assumed | 1,174.5 | |
| Net assets acquired | $ | 275.0 | |
The preliminary amounts allocated to the intangible assets identified are as consist of the follows:
| | | | | | | | |
| | Amount | Amortization Period |
| | | (in years) |
| Developed Technology | $ | 64.0 | | 15.0 |
| Customer Relationships | $ | 124.1 | | 18.0 |
| Total intangible assets | $ | 188.1 | | |
The customer relationships intangible asset consists of estimated future revenues. The customer relationships intangible asset was valued using the excess earnings method (income approach) in which the value is derived from an estimation of the after-tax cash flows specifically attributable to the customer relationships. The analysis included assumptions for projections of revenues and expenses, contributory asset charges, discount rates, and a tax amortization benefit. The developed technology intangible asset was valued using the relief from royalty method (income approach) in which the value is derived by estimation of the after-tax royalty savings attributable to owning the assets. Assumptions in this analysis included projections of revenues, royalty rates representing costs avoided due to ownership of the assets, discount rates, and a tax amortization benefit.
The goodwill recognized is attributable primarily to expected synergies and intangible assets that do not qualify for separate recognition, such as the acquired assembled workforce. We expect $24.4 of the goodwill to be deductible for income tax purposes. As of December 31, 2020, given the preliminary nature of the Bombardier Acquisition purchase price allocation, and time constraints the Company has not yet allocated goodwill to the relevant reporting units and or reportable segments.
The results of operations of the Bombardier Acquired Businesses have been included in the Company’s consolidated statements of operations as of the acquisition date. The following table provides the results of operations for the Bombardier Acquired Businesses included in the Company’s consolidated statements of operations for the year ended December 31, 2020.
| | | | | |
| Net revenue | 93.4 | |
| Net income attributable to the Bombardier Acquired Businesses | (26.5) | |
The following summary, prepared on a pro forma basis, presents the unaudited consolidated results of operations for the twelve months ended December 31, 2020, and December 31, 2019 as if the Bombardier Acquisition had been completed as of January 30, 2019, Boeing1, 2019. The pro forma results include the impact of any post-acquisition adjustments directly attributable to the
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and Spirit executed Sustaining Amendment #40RM in millions other than per share amounts)
acquisition and 787 Amendment #28the impact of adjustments such as the recognition of additional depreciation and amortization expense, and the related income tax effects. This pro forma presentation does not include any impact of transaction synergies. The pro forma results are not necessarily indicative of what the results of operations would have been had the Bombardier Acquisition occurred during the periods presented, nor does it purport to implement the December 2018 MOA terms and conditions.represent results for any future periods.
| | | | | | | | | | | | | | |
| For the Twelve Months Ended |
| December 31,
2020 | | December 31,
2019 | |
| Revenue - as reported | $ | 3,404.8 | | | $ | 7,863.1 | | |
| Revenue - pro forma | 3,983.6 | | | 8,804.2 | | |
| Net (loss) income - as reported | $ | (870.3) | | | $ | 530.1 | | |
| Net (loss) income - pro forma | (883.2) | | | 596.3 | | |
| Earnings Per Share - Diluted - as reported | $ | (8.38) | | | $ | 5.06 | | |
| Earnings Per Share - Diluted - pro forma | (8.50) | | | 5.70 | | |
29.
30. Condensed Consolidating Financial Information
The Floating Rate Notes, 2023 Notes, 2026 Notes, and 2028 Notes (collectively, the "Notes""Unsecured Notes") are fully and unconditionally guaranteed on a senior unsecured basis by Holdings. No subsidiariesThe 2026 Notes and First Lien 2025 Notes are guarantorsfully and unconditionally guaranteed on a senior secured first lien basis by Holdings and Spirit NC. The Second Lien 2025 Notes are fully and unconditionally guaranteed on a senior secured second lien basis by Holdings and Spirit NC. Together, the Floating Rate Notes, 2023 Notes, Second Lien 2025 Notes, First Lien 2025 Notes, 2026 Notes, and 2028 Notes shall be referred to any ofas the “Existing Notes.”
The following condensed consolidating financial information, which has been prepared in accordance with the requirements for presentation of Rule 3-10(d) of Regulation S-X promulgated under the Securities Act, presents the condensed consolidating financial information separately for:
| |
(i) | Holdings, as the parent company and parent guarantor of the Notes as further detailed in Note 15, Debt;
|
| |
(ii) | Spirit, as the subsidiary issuer of the Notes; |
| |
(iii) | The Company’s subsidiaries, (the “Non-Guarantor Subsidiaries”), on a combined basis; |
| |
(iv) | Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Holdings and the Non-Guarantor Subsidiaries, (b) eliminate the investments in the Company’s subsidiaries, and (c) record consolidating entries; and |
| |
(v) | Holdings and its subsidiaries on a consolidated basis. |
(i)Holdings, as the parent guarantor of the Existing Notes, as further detailed in Note 15, Debt;
(ii)Spirit, as issuer of the Existing Notes;
(iii)Spirit NC, as a guarantor of the 2026 Notes and First Lien 2025 Notes on a senior secured first lien basis and the Second Lien 2025 Notes on a senior secured second lien basis;
(iv)The Company’s other subsidiaries (the “Non-Guarantor Subsidiaries”), on a combined basis;
(v)Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Holdings, Spirit NC, and the Non-Guarantor Subsidiaries, (b) eliminate the investments in the Company’s subsidiaries, and (c) record consolidating entries; and
(vi)Holdings and its subsidiaries on a consolidated basis.
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
Condensed Consolidating Statements of Operations and Comprehensive Income
For the Twelve Months Ended December 31, 20182020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Holdings | | Spirit | | Spirit NC | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Total |
| Net revenues | $ | 0 | | | $ | 2,859.7 | | | $ | 281.7 | | | $ | 689.0 | | | $ | (425.6) | | | $ | 3,404.8 | |
| Operating costs and expenses | | | | | | | | | | | |
| Cost of sales | 0 | | | 3,339.4 | | | 267.9 | | | 663.8 | | | (425.6) | | | 3,845.5 | |
| Selling, general and administrative | 13.9 | | | 200.9 | | | 2.7 | | | 19.9 | | | 0 | | | 237.4 | |
| Restructuring costs | 0 | | | 61.2 | | | 1.3 | | | 10.5 | | | 0 | | | 73.0 | |
| Research and development | 0 | | | 32.0 | | | 0.3 | | | 6.5 | | | 0 | | | 38.8 | |
| Loss on disposal of assets | 0 | | | 19.2 | | | 3.7 | | | 0 | | | 0 | | | 22.9 | |
| Total operating costs and expenses | 13.9 | | | 3,652.7 | | | 275.9 | | | 700.7 | | | (425.6) | | | 4,217.6 | |
| Operating (loss) income | (13.9) | | | (793.0) | | | 5.8 | | | (11.7) | | | 0 | | | (812.8) | |
| Interest expense and financing fee amortization | 0 | | | (191.5) | | | (0.1) | | | (5.8) | | | 2.1 | | | (195.3) | |
| Other (expense) income, net | 0 | | | (55.5) | | | (0.2) | | | (20.0) | | | (2.1) | | | (77.8) | |
| Income (loss) before income taxes and equity in net income of affiliates and subsidiaries | (13.9) | | | (1,040.0) | | | 5.5 | | | (37.5) | | | 0 | | | (1,085.9) | |
| Income tax benefit (provision) | 2.9 | | | 214.2 | | | (1.4) | | | 4.5 | | | 0 | | | 220.2 | |
| Income (loss) before equity in net income of affiliates and subsidiaries | (11.0) | | | (825.8) | | | 4.1 | | | (33.0) | | | 0 | | | (865.7) | |
| Equity in net (loss) income of affiliates | 0 | | | 0 | | | 0 | | | (4.6) | | | 0 | | | (4.6) | |
| Equity in net (loss) income of subsidiaries | (859.3) | | | (33.5) | | | 0 | | | 0 | | | 892.8 | | | 0 | |
| Net (loss) income | (870.3) | | | (859.3) | | | 4.1 | | | (37.6) | | | 892.8 | | | (870.3) | |
| Other comprehensive (loss) income | (44.9) | | | (44.9) | | | 0 | | | (72.2) | | | 117.1 | | | (44.9) | |
| Comprehensive (loss) income | $ | (915.2) | | | $ | (904.2) | | | $ | 4.1 | | | $ | (109.8) | | | $ | 1,009.9 | | | $ | (915.2) | |
|
| | | | | | | | | | | | | | | | | | | |
| | Holdings | | Spirit | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
| Net Revenues | $ | — |
| | $ | 6,487.3 |
| | $ | 1,361.2 |
| | $ | (626.5 | ) | | $ | 7,222.0 |
|
| Operating costs and expenses | | | | | | | | | |
| Cost of sales | — |
| | 5,541.4 |
| | 1,221.0 |
| | (626.5 | ) | | 6,135.9 |
|
| Selling, general and administrative | 10.4 |
| | 182.6 |
| | 17.4 |
| | — |
| | 210.4 |
|
| Impact of severe weather event | — |
| | (10.0 | ) | | — |
| | — |
| | (10.0 | ) |
| Research and development | — |
| | 37.5 |
| | 5.0 |
| | — |
| | 42.5 |
|
| Total operating costs and expenses | 10.4 |
| | 5,751.5 |
| | 1,243.4 |
| | (626.5 | ) | | 6,378.8 |
|
| Operating (loss) income | (10.4 | ) | | 735.8 |
| | 117.8 |
| | — |
| | 843.2 |
|
| Interest expense and financing fee amortization | — |
| | (79.7 | ) | | (5.2 | ) | | 4.9 |
| | (80.0 | ) |
| Other income (expense), net | — |
| | — |
| | (2.1 | ) | | (4.9 | ) | | (7.0 | ) |
| (Loss) income before income taxes and equity in net income of affiliates and subsidiaries | (10.4 | ) | | 656.1 |
| | 110.5 |
| | — |
| | 756.2 |
|
| Income tax benefit (provision) | 1.9 |
| | (122.3 | ) | | (19.4 | ) | | — |
| | (139.8 | ) |
| (Loss) income before equity in net income of affiliates and subsidiaries | (8.5 | ) | | 533.8 |
| | 91.1 |
| | — |
| | 616.4 |
|
| Equity in net income of affiliates | 0.6 |
| | — |
| | 0.6 |
| | (0.6 | ) | | 0.6 |
|
| Equity in net income of subsidiaries | 624.9 |
| | 91.0 |
| | — |
| | (715.9 | ) | | — |
|
| Net income | 617.0 |
| | 624.8 |
| | 91.7 |
| | (716.5 | ) | | 617.0 |
|
| Other comprehensive loss | (68.1 | ) | | (68.1 | ) | | (26.3 | ) | | 94.4 |
| | (68.1 | ) |
| Comprehensive income | $ | 548.9 |
| | $ | 556.7 |
| | $ | 65.4 |
| | $ | (622.1 | ) | | $ | 548.9 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
Condensed Consolidating Statements of Operations and Comprehensive Income
For the Twelve Months Ended December 31, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Holdings | | Spirit | | Spirit NC | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Total |
| Net revenues | $ | 0 | | | $ | 7,116.7 | | | $ | 455.0 | | | $ | 965.5 | | | $ | (674.1) | | | $ | 7,863.1 | |
| Operating costs and expenses | | | | | | | | | | | |
| Cost of sales | 0 | | | 6,197.0 | | | 439.8 | | | 823.7 | | | (674.1) | | | 6,786.4 | |
| Selling, general and administrative | 18.1 | | | 223.3 | | | 3.2 | | | 16.8 | | | 0 | | | 261.4 | |
| Research and development | 0 | | | 47.0 | | | 1.1 | | | 6.4 | | | 0 | | | 54.5 | |
| Total operating costs and expenses | 18.1 | | | 6,467.3 | | | 444.1 | | | 846.9 | | | (674.1) | | | 7,102.3 | |
| Operating income (loss) | (18.1) | | | 649.4 | | | 10.9 | | | 118.6 | | | 0 | | | 760.8 | |
| Interest expense and financing fee amortization | 0 | | | (91.6) | | | 0 | | | (3.9) | | | 3.6 | | | (91.9) | |
| Other (expense) income, net | 0 | | | 0.5 | | | 0 | | | (2.7) | | | (3.6) | | | (5.8) | |
| Income (loss) before income taxes and equity in net income (loss) of affiliates and subsidiaries | (18.1) | | | 558.3 | | | 10.9 | | | 112.0 | | | 0 | | | 663.1 | |
| Income tax benefit (provision) | 3.9 | | | (120.2) | | | (2.6) | | | (13.9) | | | 0 | | | (132.8) | |
| Income (loss) before equity in net income of affiliates and subsidiaries | (14.2) | | | 438.1 | | | 8.3 | | | 98.1 | | | 0 | | | 530.3 | |
| Equity in net income of affiliates | (0.2) | | | 0 | | | 0 | | | (0.2) | | | 0.2 | | | (0.2) | |
| Equity in net income of subsidiaries | 544.5 | | | 106.4 | | | 0 | | | 0 | | | (650.9) | | | 0 | |
| Net income (loss) | 530.1 | | | 544.5 | | | 8.3 | | | 97.9 | | | (650.7) | | | 530.1 | |
| Other comprehensive income (loss) | 95.7 | | | 95.7 | | | 0 | | | 24.5 | | | (120.2) | | | 95.7 | |
| Comprehensive income (loss) | $ | 625.8 | | | $ | 640.2 | | | $ | 8.3 | | | $ | 122.4 | | | $ | (770.9) | | | $ | 625.8 | |
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
Condensed Consolidating Statements of Operations and Comprehensive Loss
For the Twelve Months Ended December 31, 20172018
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Holdings | | Spirit | | Spirit NC | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Total |
| Net revenues | $ | 0 | | | $ | 6,487.3 | | | $ | 441.9 | | | $ | 919.3 | | | $ | (626.5) | | | $ | 7,222.0 | |
| Operating costs and expenses | | | | | | | | | | | |
| Cost of sales | 0 | | | 5,541.4 | | | 428.3 | | | 792.7 | | | (626.5) | | | 6,135.9 | |
| Selling, general and administrative | 10.4 | | | 182.6 | | | 2.1 | | | 15.3 | | | 0 | | | 210.4 | |
| Impact of severe weather event | 0 | | (10.0) | | | 0 | | 0 | | 0 | | (10.0) | |
| Research and development | 0 | | | 37.5 | | | 0.8 | | | 4.2 | | | 0 | | | 42.5 | |
| Total operating costs and expenses | 10.4 | | | 5,751.5 | | | 431.2 | | | 812.2 | | | (626.5) | | | 6,378.8 | |
| Operating income (loss) | (10.4) | | | 735.8 | | | 10.7 | | | 107.1 | | | 0 | | | 843.2 | |
| Interest expense and financing fee amortization | 0 | | | (79.7) | | | 0 | | | (5.2) | | | 4.9 | | | (80.0) | |
| Other (expense) income, net | 0 | | | 0 | | | 0 | | | (2.1) | | | (4.9) | | | (7.0) | |
| Income (loss) before income taxes and equity in net income (loss) of affiliates and subsidiaries | (10.4) | | | 656.1 | | | 10.7 | | | 99.8 | | | 0 | | | 756.2 | |
| Income tax benefit (provision) | 1.9 | | | (122.3) | | | (2.5) | | | (16.9) | | | 0 | | | (139.8) | |
| Income (loss) before equity in net income of affiliates and subsidiaries | (8.5) | | | 533.8 | | | 8.2 | | | 82.9 | | | 0 | | | 616.4 | |
| Equity in net income of affiliates | 0.6 | | | 0 | | | 0 | | | 0.6 | | | (0.6) | | | 0.6 | |
| Equity in net income of subsidiaries | 624.9 | | | 91.0 | | | 0 | | | 0 | | | (715.9) | | | 0 | |
| Net income (loss) | 617.0 | | | 624.8 | | | 8.2 | | | 83.5 | | | (716.5) | | | 617.0 | |
| Other comprehensive (loss) income | (68.1) | | | (68.1) | | | 0 | | | (26.3) | | | 94.4 | | | (68.1) | |
| Comprehensive income (loss) | $ | 548.9 | | | $ | 556.7 | | | $ | 8.2 | | | $ | 57.2 | | | $ | (622.1) | | | $ | 548.9 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Holdings | | Spirit | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
| Net Revenues | $ | — |
| | $ | 6,236.4 |
| | $ | 1,362.3 |
| | $ | (615.7 | ) | | $ | 6,983.0 |
|
| Operating costs and expenses | | | | | | | | | |
| Cost of sales | — |
| | 5,592.2 |
| | 1,218.8 |
| | (615.7 | ) | | 6,195.3 |
|
| Selling, general and administrative | 12.4 |
| | 177.5 |
| | 14.8 |
| | — |
| | 204.7 |
|
| Impact of severe weather event | — |
| | 19.9 |
| | — |
| | — |
| | 19.9 |
|
| Research and development | — |
| | 27.8 |
| | 3.4 |
| | — |
| | 31.2 |
|
| Total operating costs and expenses | 12.4 |
| | 5,817.4 |
| | 1,237.0 |
| | (615.7 | ) | | 6,451.1 |
|
| Operating (loss) income | (12.4 | ) | | 419.0 |
| | 125.3 |
| | — |
| | 531.9 |
|
| Interest expense and financing fee amortization | — |
| | (41.6 | ) | | (5.7 | ) | | 5.6 |
| | (41.7 | ) |
| Other income (expense), net | — |
| | 49.6 |
| | 0.4 |
| | (5.6 | ) | | 44.4 |
|
| (Loss) income before income taxes and equity in net income of affiliates and subsidiaries | (12.4 | ) | | 427.0 |
| | 120.0 |
| | — |
| | 534.6 |
|
| Income tax benefit (provision) | 4.7 |
| | (161.7 | ) | | (23.0 | ) | |
|
| | (180.0 | ) |
| (Loss) income before equity in net income of affiliates and subsidiaries | (7.7 | ) | | 265.3 |
| | 97.0 |
| | — |
| | 354.6 |
|
| Equity in net income of affiliates | 0.3 |
| | — |
| | 0.3 |
| | (0.3 | ) | | 0.3 |
|
| Equity in net income of subsidiaries | 362.3 |
| | 97.0 |
| | — |
| | (459.3 | ) | | — |
|
| Net income | 354.9 |
| | 362.3 |
| | 97.3 |
| | (459.6 | ) | | 354.9 |
|
| Other comprehensive loss | 58.4 |
| | 58.4 |
| | 42.2 |
| | (100.6 | ) | | 58.4 |
|
| Comprehensive income | $ | 413.3 |
| | $ | 420.7 |
| | $ | 139.5 |
| | $ | (560.2 | ) | | $ | 413.3 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
Condensed Consolidating Statements of Operations and Comprehensive IncomeBalance Sheet
For the Twelve Months Ended December 31, 20162020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Holdings | | Spirit | | Spirit NC | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Total |
| Assets | | | | | | | | | | | |
| Cash and cash equivalents | $ | 0 | | | $ | 1,664.5 | | | $ | 0 | | | $ | 208.8 | | | $ | 0 | | | $ | 1,873.3 | |
| Restricted cash | 0 | | | 0.3 | | | 0 | | | 0 | | | 0 | | | 0.3 | |
| Accounts receivable, net | 0 | | | 486.4 | | | 82.7 | | | 329.1 | | | (413.8) | | | 484.4 | |
| Contract assets, short-term | 0 | | | 319.8 | | | 0 | | | 48.6 | | | 0 | | | 368.4 | |
| Inventory, net | 0 | | | 828.4 | | | 156.8 | | | 437.1 | | | 0 | | | 1,422.3 | |
| Other current assets | 0 | | | 318.5 | | | 0 | | | 17.8 | | | 0 | | | 336.3 | |
| Total current assets | 0 | | | 3,617.9 | | | 239.5 | | | 1,041.4 | | | (413.8) | | | 4,485.0 | |
| Property, plant and equipment, net | 0 | | | 1,666.7 | | | 264.3 | | | 572.8 | | | 0 | | | 2,503.8 | |
| Right of use assets | 0 | | | 36.7 | | | 6.9 | | | 27.0 | | | 0 | | | 70.6 | |
| Contract assets, long-term | 0 | | | 4.4 | | | 0 | | | 0 | | | 0 | | | 4.4 | |
| Pension assets, net | 0 | | | 428.7 | | | 0 | | | 27.2 | | | 0 | | | 455.9 | |
| Deferred income taxes | 0 | | | 0 | | | 0 | | | 0.1 | | | 0 | | | 0.1 | |
| Goodwill | 0 | | | 100.4 | | | 0 | | | 464.9 | | | 0 | | | 565.3 | |
| Intangible assets, net | 0 | | | 29.0 | | | 0 | | | 186.2 | | | 0 | | | 215.2 | |
| Investment in subsidiary | 856.9 | | | 1,040.8 | | | 0 | | | 0 | | | (1,897.7) | | | 0 | |
| Other assets | 0 | | | 140.7 | | | 0 | | | 128.7 | | | (185.8) | | | 83.6 | |
| Total assets | $ | 856.9 | | | $ | 7,065.3 | | | $ | 510.7 | | | $ | 2,448.3 | | | $ | (2,497.3) | | | $ | 8,383.9 | |
| Liabilities | | | | | | | | | | | |
| Accounts payable | $ | 0 | | | $ | 514.6 | | | $ | 235.1 | | | $ | 222.7 | | | $ | (413.5) | | | $ | 558.9 | |
| Accrued expenses | 0 | | | 233.7 | | | 0.4 | | | 131.8 | | | (0.3) | | | 365.6 | |
| Profit sharing | 0 | | | 50.8 | | | 0 | | | 6.2 | | | 0 | | | 57.0 | |
| Current portion of long-term debt | 0 | | | 337.7 | | | 0.2 | | | 2.8 | | | 0 | | | 340.7 | |
| Operating lease liabilities, short-term | 0 | | | 4.8 | | | 0.6 | | | 0.1 | | | 0 | | | 5.5 | |
| Advance payments, short-term | 0 | | | 17.6 | | | 0 | | | 1.3 | | | 0 | | | 18.9 | |
| Contract liabilities, short-term | 0 | | | 96.8 | | | 0 | | | 0.8 | | | 0 | | | 97.6 | |
| Forward loss provision, long-term | 0 | | | 162.1 | | | 0 | | | 22.5 | | | 0 | | | 184.6 | |
| Deferred revenue and other deferred credits, short-term | 0 | | | 12.7 | | | 0 | | | 9.5 | | | 0 | | | 22.2 | |
| Other current liabilities | 0 | | | 24.0 | | | 0 | | | 34.4 | | | 0 | | | 58.4 | |
| Total current liabilities | 0 | | | 1,454.8 | | | 236.3 | | | 432.1 | | | (413.8) | | | 1,709.4 | |
| Long-term debt | 0 | | | 3,522.7 | | | 0.6 | | | 94.8 | | | (85.2) | | | 3,532.9 | |
| Operating lease liabilities, long-term | 0 | | | 32.1 | | | 6.3 | | | 28.2 | | | 0 | | | 66.6 | |
| Advance payments, long-term | 0 | | | 327.4 | | | 0 | | | 0 | | | 0 | | | 327.4 | |
| Pension/OPEB obligation | 0 | | | 40.6 | | | 0 | | | 399.6 | | | 0 | | | 440.2 | |
| Contract liabilities, long-term | 0 | | | 371.0 | | | 0 | | | 1.0 | | | 0 | | | 372.0 | |
| Forward loss provision, long-term | 0 | | | 299.0 | | | 0 | | | 262.4 | | | 0 | | | 561.4 | |
| Deferred grant income liability - non-current | 0 | | | 8.7 | | | 0 | | | 19.4 | | | 0 | | | 28.1 | |
| Deferred revenue and other deferred credits | 0 | | | 31.5 | | | 0 | | | 7.4 | | | 0 | | | 38.9 | |
| Deferred income taxes | 0 | | | 0.7 | | | 0 | | | 12.3 | | | 0 | | | 13.0 | |
| Other liabilities | 0 | | | 199.8 | | | 0 | | | 337.8 | | | (100.6) | | | 437.0 | |
| Total equity | 856.9 | | | 777.0 | | | 267.5 | | | 853.3 | | | (1,897.7) | | | 857.0 | |
| Total liabilities and stockholders’ equity | $ | 856.9 | | | $ | 7,065.3 | | | $ | 510.7 | | | $ | 2,448.3 | | | $ | (2,497.3) | | | $ | 8,383.9 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Holdings | | Spirit | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
| Net Revenues | $ | — |
| | $ | 6,124.6 |
| | $ | 1,284.2 |
| | $ | (615.9 | ) | | $ | 6,792.9 |
|
| Operating costs and expenses | | | | | | | | | |
| Cost of sales | — |
| | 5,251.7 |
| | 1,164.5 |
| | (615.9 | ) | | 5,800.3 |
|
| Selling, general and administrative | 8.7 |
| | 206.2 |
| | 16.0 |
| | — |
| | 230.9 |
|
| Impact of severe weather event | — |
| | 12.1 |
| | — |
| | — |
| | 12.1 |
|
| Research and development | — |
| | 20.8 |
| | 3.0 |
| | — |
| | 23.8 |
|
| Total operating costs and expenses | 8.7 |
| | 5,490.8 |
| | 1,183.5 |
| | (615.9 | ) | | 6,067.1 |
|
| Operating (loss) income | (8.7 | ) | | 633.8 |
| | 100.7 |
| | — |
| | 725.8 |
|
| Interest expense and financing fee amortization | — |
| | (57.0 | ) | | (7.8 | ) | | 7.5 |
| | (57.3 | ) |
| Other income (expense), net | — |
| | 14.2 |
| | (14.7 | ) | | (7.5 | ) | | (8.0 | ) |
| (Loss) income before income taxes and equity in net income of affiliates and subsidiaries | (8.7 | ) | | 591.0 |
| | 78.2 |
| | — |
| | 660.5 |
|
| Income tax benefit (provision) | 2.6 |
| | (179.2 | ) | | (15.5 | ) | |
|
| | (192.1 | ) |
| (Loss) income before equity in net income of affiliates and subsidiaries | (6.1 | ) | | 411.8 |
| | 62.7 |
| | — |
| | 468.4 |
|
| Equity in net income of affiliates | 1.3 |
| | — |
| | 1.3 |
| | (1.3 | ) | | 1.3 |
|
| Equity in net income of subsidiaries | 474.5 |
| | 62.6 |
| | — |
| | (537.1 | ) | | — |
|
| Net income | 469.7 |
| | 474.4 |
| | 64.0 |
| | (538.4 | ) | | 469.7 |
|
| Other comprehensive loss | (26.4 | ) | | (26.4 | ) | | (61.3 | ) | | 87.7 |
| | (26.4 | ) |
| Comprehensive income | $ | 443.3 |
| | $ | 448.0 |
| | $ | 2.7 |
| | $ | (450.7 | ) | | $ | 443.3 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
Condensed Consolidating Balance Sheet
December 31, 20182019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Holdings | | Spirit | | Spirit NC | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Total |
| Assets | | | | | | | | | | | |
| Cash and cash equivalents | $ | 0 | | | $ | 2,193.3 | | | $ | 0 | | | $ | 157.2 | | | $ | 0 | | | $ | 2,350.5 | |
| Restricted cash | 0 | | | 0.3 | | | 0 | | | 0 | | | 0 | | | 0.3 | |
| Accounts receivable, net | 0 | | | 565.4 | | | 50.5 | | | 250.7 | | | (320.2) | | | 546.4 | |
| Inventory, net | 0 | | | 786.8 | | | 136.8 | | | 195.2 | | | 0 | | | 1,118.8 | |
| Contract assets, short-term | 0 | | | 458.8 | | | 0 | | | 69.5 | | | 0 | | | 528.3 | |
| Other current assets | 0 | | | 93.5 | | | 0 | | | 5.2 | | | 0 | | | 98.7 | |
| Total current assets | 0 | | | 4,098.1 | | | 187.3 | | | 677.8 | | | (320.2) | | | 4,643.0 | |
| Property, plant and equipment, net | 0 | | | 1,773.0 | | | 306.3 | | | 192.4 | | | 0 | | | 2,271.7 | |
| Right of use assets | 0 | | | 41.2 | | | 7.5 | | | 0.2 | | | 0 | | | 48.9 | |
| Contract assets, long-term | 0 | | | 6.4 | | | 0 | | | 0 | | | 0 | | | 6.4 | |
| Pension assets, net | 0 | | | 424.2 | | | 0 | | | 24.9 | | | 0 | | | 449.1 | |
| Deferred income taxes | 0 | | | 106.3 | | | 0 | | | 0.2 | | | 0 | | | 106.5 | |
| Goodwill | 0 | | | 0 | | | 0 | | | 2.4 | | | 0 | | | 2.4 | |
| Intangible assets, net | 0 | | | 1.2 | | | 0 | | | 0 | | | 0 | | | 1.2 | |
| Investment in subsidiary | 1,761.9 | | | 838.4 | | | 0 | | | 0 | | | (2,600.3) | | | 0 | |
| Other assets | 0 | | | 147.6 | | | 0 | | | 116.0 | | | (186.8) | | | 76.8 | |
| Total assets | $ | 1,761.9 | | | $ | 7,436.4 | | | $ | 501.1 | | | $ | 1,013.9 | | | $ | (3,107.3) | | | $ | 7,606.0 | |
| Liabilities | | | | | | | | | | | |
| Accounts payable | $ | 0 | | | $ | 977.1 | | | $ | 226.3 | | | $ | 175.1 | | | $ | (320.2) | | | $ | 1,058.3 | |
| Accrued expenses | 0 | | | 210.0 | | | 0.8 | | | 29.4 | | | 0 | | | 240.2 | |
| Profit sharing | 0 | | | 76.9 | | | 0 | | | 7.6 | | | 0 | | | 84.5 | |
| Current portion of long-term debt | 0 | | | 48.4 | | | 0.2 | | | 1.6 | | | 0 | | | 50.2 | |
| Operating lease liabilities, short-term | 0 | | | 5.3 | | | 0.6 | | | 0.1 | | | 0 | | | 6.0 | |
| Advance payments, short-term | 0 | | | 21.6 | | | 0 | | | 0 | | | 0 | | | 21.6 | |
| Contract liabilities, short-term | 0 | | | 158.3 | | | 0 | | | 0 | | | 0 | | | 158.3 | |
| Forward loss provision, long-term | 0 | | | 83.9 | | | 0 | | | 0 | | | 0 | | | 83.9 | |
| Deferred revenue and other deferred credits, short-term | 0 | | | 14.5 | | | 0 | | | 0.3 | | | 0 | | | 14.8 | |
| Deferred grant income liability — current | 0 | | | 0.5 | | | 2.1 | | | 1.0 | | | 0 | | | 3.6 | |
| Other current liabilities | 0 | | | 28.8 | | | 0 | | | 10.5 | | | 0 | | | 39.3 | |
| Total current liabilities | 0 | | | 1,625.3 | | | 230.0 | | | 225.6 | | | (320.2) | | | 1,760.7 | |
| Long-term debt | 0 | | | 2,974.7 | | | 0.9 | | | 94.7 | | | (86.2) | | | 2,984.1 | |
| Operating lease liabilities, long-term | 0 | | | 36.0 | | | 6.9 | | | 0.1 | | | 0 | | | 43.0 | |
| Advance payments, long-term | 0 | | | 333.3 | | | 0 | | | 0 | | | 0 | | | 333.3 | |
| Pension/OPEB obligation | 0 | | | 35.7 | | | 0 | | | 0 | | | 0 | | | 35.7 | |
| Contract liabilities, long-term | 0 | | | 356.3 | | | 0 | | | 0 | | | 0 | | | 356.3 | |
| Forward loss provision, long-term | 0 | | | 163.5 | | | 0 | | | 0 | | | 0 | | | 163.5 | |
| Deferred grant income liability - non-current | 0 | | | 9.2 | | | 0 | | | 19.8 | | | 0 | | | 29.0 | |
| Deferred revenue and other deferred credits | 0 | | | 30.4 | | | 0 | | | 4.0 | | | 0 | | | 34.4 | |
| Deferred income taxes | 0 | | | 0 | | | 0 | | | 8.3 | | | 0 | | | 8.3 | |
| Other liabilities | 0 | | | 190.1 | | | 0 | | | 6.3 | | | (100.6) | | | 95.8 | |
| Total equity | 1,761.9 | | | 1,681.9 | | | 263.3 | | | 655.1 | | | (2,600.3) | | | 1,761.9 | |
| Total liabilities and stockholders’ equity | $ | 1,761.9 | | | $ | 7,436.4 | | | $ | 501.1 | | | $ | 1,013.9 | | | $ | (3,107.3) | | | $ | 7,606.0 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Holdings | | Spirit | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
| Assets | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 705.0 |
| | $ | 68.6 |
| | $ | — |
| | $ | 773.6 |
|
| Restricted cash | — |
| | 0.3 |
| | — |
| | — |
| | 0.3 |
|
| Accounts receivable, net | — |
| | 593.0 |
| | 310.2 |
| | (358.1 | ) | | 545.1 |
|
| Inventory, net | — |
| | 696.0 |
| | 316.6 |
| | — |
| | 1,012.6 |
|
| Contract assets, short-term | — |
| | 420.8 |
| | 48.6 |
| | — |
| | 469.4 |
|
| Other current assets | — |
| | 45.3 |
| | 3.0 |
| | — |
| | 48.3 |
|
| Total current assets | — |
| | 2,460.4 |
| | 747.0 |
| | (358.1 | ) | | 2,849.3 |
|
| Property, plant and equipment, net | — |
| | 1,670.8 |
| | 496.8 |
| | — |
| | 2,167.6 |
|
| Contract assets, long-term | — |
| | 54.1 |
| | — |
| | — |
| | 54.1 |
|
| Pension assets | — |
| | 307.0 |
| | 19.7 |
| | — |
| | 326.7 |
|
| Investment in subsidiary | 1,238.0 |
| | 699.0 |
| | — |
| | (1,937.0 | ) | | — |
|
| Other assets | — |
| | 357.1 |
| | 127.5 |
| | (196.4 | ) | | 288.2 |
|
| Total assets | $ | 1,238.0 |
| | $ | 5,548.4 |
| | $ | 1,391.0 |
| | $ | (2,491.5 | ) | | $ | 5,685.9 |
|
| Liabilities | | | | | | | | | |
| Accounts payable | $ | — |
| | $ | 855.2 |
| | $ | 405.6 |
| | $ | (358.2 | ) | | $ | 902.6 |
|
| Accrued expenses | — |
| | 276.7 |
| | 36.3 |
| | 0.1 |
| | 313.1 |
|
| Profit sharing | — |
| | 62.6 |
| | 5.7 |
| | — |
| | 68.3 |
|
| Current portion of long-term debt | — |
| | 30.5 |
| | 0.9 |
| | — |
| | 31.4 |
|
| Advance payments, short-term | — |
| | 2.2 |
| | — |
| | — |
| | 2.2 |
|
| Contract liabilities, short-term | — |
| | 157.3 |
| | 0.6 |
| | — |
| | 157.9 |
|
| Forward loss provision, short-term | — |
| | 12.4 |
| | — |
| | — |
| | 12.4 |
|
| Deferred revenue, short-term | — |
| | 19.5 |
| | 0.5 |
| | — |
| | 20.0 |
|
| Deferred grant income liability — current | — |
| | — |
| | 16.0 |
| | — |
| | 16.0 |
|
| Other current liabilities | — |
| | 52.4 |
| | 5.8 |
| | — |
| | 58.2 |
|
| Total current liabilities | — |
| | 1,468.8 |
| | 471.4 |
| | (358.1 | ) | | 1,582.1 |
|
| Long-term debt | — |
| | 1,856.6 |
| | 103.2 |
| | (95.8 | ) | | 1,864.0 |
|
| Advance payments, long-term | — |
| | 231.9 |
| | — |
| | — |
| | 231.9 |
|
| Pension/OPEB obligation | — |
| | 34.6 |
| | — |
| | — |
| | 34.6 |
|
| Contract liabilities, long-term | — |
| | 369.8 |
| | — |
| | — |
| | 369.8 |
|
| Forward loss provision, long-term | — |
| | 170.6 |
| | — |
| | — |
| | 170.6 |
|
| Deferred grant income liability — non-current | — |
| | 5.9 |
| | 22.1 |
| | — |
| | 28.0 |
|
| Deferred revenue and other deferred credits | — |
| | 28.8 |
| | 2.4 |
| | — |
| | 31.2 |
|
| Other liabilities | — |
| | 223.3 |
| | 12.9 |
| | (100.6 | ) | | 135.6 |
|
| Total equity | 1,238.0 |
| | 1,158.1 |
| | 779.0 |
| | (1,937.0 | ) | | 1,238.1 |
|
| Total liabilities and shareholders’ equity | $ | 1,238.0 |
| | $ | 5,548.4 |
| | $ | 1,391.0 |
| | $ | (2,491.5 | ) | | $ | 5,685.9 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
Condensed Consolidating Balance SheetStatements of Cash Flows
For the Twelve Months Ended December 31, 20172020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Holdings | | Spirit | | Spirit NC | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Total |
| Operating activities | | | | | | | | | | | |
| Net cash used in operating activities | $ | 0 | | | $ | (720.1) | | | $ | (8.6) | | | $ | (16.2) | | | 0 | | $ | (744.9) | |
| Investing activities | | | | | | | | | | | |
| Purchase of property, plant and equipment | 0 | | | (92.3) | | | (2.2) | | | (24.4) | | | 0 | | | (118.9) | |
| Acquisition, net of cash acquired | 0 | | | (160.9) | | | 0 | | | (227.6) | | | 0 | | | (388.5) | |
| Other | 0 | | | 0.5 | | | 0 | | | 4.9 | | | 0 | | | 5.4 | |
| Net cash used in investing activities | $ | 0 | | | $ | (252.7) | | | $ | (2.2) | | | $ | (247.1) | | | $ | 0 | | | $ | (502.0) | |
| Financing activities | | | | | | | | | | | |
| Proceeds from issuance of long term bonds | 0 | | | 1,700.0 | | | 0 | | | 0 | | | 0 | | | 1,700.0 | |
| Proceeds from issuance of debt | 0 | | | 400.0 | | | 0 | | | 0 | | | 0 | | | 400.0 | |
| Customer financing | 0 | | | 10.0 | | | 0 | | | 0 | | | 0 | | | 10.0 | |
| Principal payments of debt | 0 | | | (29.4) | | | (0.2) | | | (2.0) | | | 0 | | | (31.6) | |
| Payments on term loan | 0 | | | (439.7) | | | 0 | | | 0 | | | 0 | | | (439.7) | |
| Payments on revolving credit facility | 0 | | | (800.0) | | | 0 | | | — | | | 0 | | | (800.0) | |
| Proceeds (payments) from intercompany debt | 0 | | | (325.0) | | | 11.0 | | | 314.0 | | | 0 | | | 0 | |
| Taxes paid related to net share settlement of awards | 0 | | | (14.5) | | | 0 | | | 0 | | | 0 | | (14.5) | |
| Proceeds (payments) from subsidiary for purchase of treasury stock | (0.1) | | | 0.1 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Purchase of treasury stock | 0.1 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0.1 | |
| Proceeds (payments) from subsidiary for dividends paid | 15.4 | | | (15.4) | | | 0 | | | 0 | | | 0 | | | 0 | |
| Dividends paid | (15.4) | | | 0 | | | 0 | | | 0 | | | 0 | | | (15.4) | |
| Proceeds from issuance of ESPP stock | 0 | | | 2.6 | | | 0 | | | 0 | | | 0 | | | 2.6 | |
| Debt issuance costs | 0 | | | (41.9) | | | 0 | | | 0 | | | 0 | | | (41.9) | |
| Other | 0 | | (0.1) | | | 0 | | | 0 | | | 0 | | | (0.1) | |
| Net cash provided by financing activities | $ | 0 | | | $ | 446.7 | | | $ | 10.8 | | | $ | 312.0 | | | $ | 0 | | | $ | 769.5 | |
| Effect of exchange rate changes on cash and cash equivalents | 0 | | | 0.5 | | | 0 | | | 2.8 | | | 0 | | | 3.3 | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash for the period | 0 | | | (525.6) | | | 0 | | | 51.5 | | | 0 | | | (474.1) | |
| Cash, cash equivalents, and restricted cash, beginning of period | 0 | | | 2,210.0 | | | 0 | | | 157.2 | | | 0 | | | 2,367.2 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 0 | | | $ | 1,684.4 | | | $ | 0 | | | $ | 208.7 | | | $ | 0 | | | $ | 1,893.1 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Holdings | | Spirit | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
| Assets | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 365.1 |
| | $ | 58.2 |
| | $ | — |
| | $ | 423.3 |
|
| Restricted cash | — |
| | 2.2 |
| | — |
| | — |
| | $ | 2.2 |
|
| Accounts receivable, net | — |
| | 752.6 |
| | 330.9 |
| | (361.3 | ) | | 722.2 |
|
| Inventory, net | — |
| | 1,010.0 |
| | 439.9 |
| | — |
| | 1,449.9 |
|
| Other current assets | — |
| | 50.3 |
| | 3.2 |
| | — |
| | 53.5 |
|
| Total current assets | — |
| | 2,180.2 |
| | 832.2 |
| | (361.3 | ) | | 2,651.1 |
|
| Property, plant and equipment, net | — |
| | 1,585.8 |
| | 519.5 |
| | — |
| | 2,105.3 |
|
| Pension assets | — |
| | 327.2 |
| | 19.9 |
| | — |
| | 347.1 |
|
| Investment in subsidiary | 1,801.5 |
| | 704.4 |
| | — |
| | (2,505.9 | ) | | — |
|
| Other assets | — |
| | 298.2 |
| | 124.5 |
| | (258.4 | ) | | 164.3 |
|
| Total assets | $ | 1,801.5 |
| | $ | 5,095.8 |
| | $ | 1,496.1 |
| | $ | (3,125.6 | ) | | $ | 5,267.8 |
|
| Liabilities | | | | | | | | | |
| Accounts payable | $ | — |
| | $ | 629.0 |
| | $ | 425.4 |
| | $ | (361.3 | ) | | $ | 693.1 |
|
| Accrued expenses | — |
| | 239.5 |
| | 29.8 |
| | — |
| | 269.3 |
|
| Profit sharing | — |
| | 103.4 |
| | 6.1 |
| | — |
| | 109.5 |
|
| Current portion of long-term debt | — |
| | 30.2 |
| | 0.9 |
| | — |
| | 31.1 |
|
| Advance payments, short-term | — |
| | 100.0 |
| | — |
| | — |
| | 100.0 |
|
| Deferred revenue, short-term | — |
| | 63.6 |
| | 1.0 |
| | — |
| | 64.6 |
|
| Deferred grant income liability — current | — |
| | — |
| | 21.6 |
| | — |
| | 21.6 |
|
| Other current liabilities | — |
| | 324.3 |
| | 7.5 |
| | — |
| | 331.8 |
|
| Total current liabilities | — |
| | 1,490.0 |
| | 492.3 |
| | (361.3 | ) | | 1,621.0 |
|
| Long-term debt | — |
| | 1,110.6 |
| | 167.1 |
| | (157.8 | ) | | 1,119.9 |
|
| Advance payments, long-term | — |
| | 231.7 |
| | — |
| | — |
| | 231.7 |
|
| Pension/OPEB obligation | — |
| | 40.8 |
| | — |
| | — |
| | 40.8 |
|
| Deferred grant income liability — non-current | — |
| | — |
| | 39.3 |
| | — |
| | 39.3 |
|
| Deferred revenue and other deferred credits | — |
| | 158.2 |
| | 2.8 |
| | — |
| | 161.0 |
|
| Other liabilities | — |
| | 343.1 |
| | 10.1 |
| | (100.6 | ) | | 252.6 |
|
| Total equity | 1,801.5 |
| | 1,721.4 |
| | 784.5 |
| | (2,505.9 | ) | | 1,801.5 |
|
| Total liabilities and shareholders’ equity | $ | 1,801.5 |
| | $ | 5,095.8 |
| | $ | 1,496.1 |
| | $ | (3,125.6 | ) | | $ | 5,267.8 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €,£, and RM in millions other than per share amounts)
Condensed Consolidating Statements of Cash Flows
For the Twelve Months Ended December 31, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Holdings | | Spirit | | Spirit NC | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Total |
| Operating activities | | | | | | | | | | | |
| Net cash provided by operating activities | $ | 0 | | | $ | 733.3 | | | $ | 11.4 | | | $ | 178.0 | | | $ | 0 | | | $ | 922.7 | |
| Investing activities | | | | | | | | | | | |
| Purchase of property, plant and equipment | 0 | | | (184.0) | | | (11.2) | | | (37.0) | | | 0 | | | (232.2) | |
| Other | 0 | | | 0.2 | | | 0 | | | (7.9) | | | 0 | | | (7.7) | |
| Net cash used in investing activities | 0 | | | (183.8) | | | (11.2) | | | (44.9) | | | 0 | | | (239.9) | |
| Financing activities | | | | | | | | | | | |
| Proceeds from issuance of debt | 0 | | | 250.0 | | | 0 | | | 0 | | | 0 | | | 250.0 | |
| Proceeds from revolving credit facility | 0 | | | 900.0 | | | 0 | | | 0 | | | 0 | | | 900.0 | |
| Principal payments of debt | 0 | | | (12.5) | | | (0.2) | | | (0.7) | | | 0 | | | (13.4) | |
| Payments on term loans | 0 | | | (16.6) | | | 0 | | | 0 | | | 0 | | | (16.6) | |
| Payments on revolving credit facility | 0 | | | (100.0) | | | 0 | | | 0 | | | 0 | | | (100.0) | |
| Proceeds (payments) from intercompany debt | 0 | | | 49.4 | | | 0 | | | (49.4) | | | 0 | | | 0 | |
| Taxes paid related to net share settlement of awards | 0 | | | (12.9) | | | 0 | | | 0 | | | 0 | | | (12.9) | |
| Proceeds (payments) from subsidiary for purchase of treasury stock | 75.8 | | | (75.8) | | | 0 | | | 0 | | | 0 | | | 0 | |
| Purchase of treasury stock | (75.8) | | | 0 | | | 0 | | | 0 | | | 0 | | | (75.8) | |
| Proceeds (payments) from subsidiary for dividends paid | 50.4 | | | (50.1) | | | 0 | | | (0.3) | | | 0 | | | 0 | |
| Dividends paid | (50.4) | | | 0 | | | 0 | | | 0 | | | 0 | | | (50.4) | |
| Proceeds from issuance of ESPP stock | 0 | | | 2.6 | | | 0 | | | 0 | | | 0 | | | 2.6 | |
| Other | 0 | | 0.9 | | | 0 | | | 0 | | | 0 | | | 0.9 | |
| Net cash provided by (used in) financing activities | 0 | | | 935.0 | | | (0.2) | | | (50.4) | | | 0 | | | 884.4 | |
| Effect of exchange rate changes on cash and cash equivalents | 0 | | | 0 | | | 0 | | | 5.9 | | | 0 | | | 5.9 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash for the period | 0 | | | 1,484.5 | | | 0 | | | 88.6 | | | 0 | | | 1,573.1 | |
| Cash, cash equivalents, and restricted cash, beginning of period | 0 | | | 725.5 | | | 0 | | | 68.6 | | | 0 | | | 794.1 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 0 | | | $ | 2,210.0 | | | $ | 0 | | | $ | 157.2 | | | $ | 0 | | | $ | 2,367.2 | |
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, £, and RM in millions other than per share amounts)
Condensed Consolidating Statements of Cash Flows
For the Twelve Months Ended December 31, 2018
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Holdings | | Spirit | | Spirit NC | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Total |
| Operating activities | | | | | | | | | | | |
| Net cash provided by operating activities | $ | 0 | | | $ | 643.1 | | | $ | 18.3 | | | $ | 108.5 | | | $ | 0 | | | $ | 769.9 | |
| Investing activities | | | | | | | | | | | |
| Purchase of property, plant and equipment | 0 | | | (230.5) | | | (18.6) | | | (22.1) | | | 0 | | | (271.2) | |
| Other | 0 | | | 2.3 | | | 0.5 | | | 0.6 | | | 0 | | | 3.4 | |
| Net cash used in investing activities | 0 | | | (228.2) | | | (18.1) | | | (21.5) | | | 0 | | | (267.8) | |
| Financing activities | | | | | | | | | | | |
| Proceeds from issuance of debt | 0 | | | 1,300.0 | | | 0 | | | 0 | | | 0 | | | 1,300.0 | |
| Principal payments of debt | 0 | | | (5.8) | | | (0.2) | | | (0.7) | | | 0 | | | (6.7) | |
| Proceeds (payments) from intercompany debt | 0 | | | 75.9 | | | 0 | | | (75.9) | | | 0 | | | 0 | |
| Payments on term loan | 0 | | | (256.3) | | | 0 | | | 0 | | | 0 | | | (256.3) | |
| Payments on bonds | 0 | | | (300.0) | | | 0 | | | 0 | | | 0 | | | (300.0) | |
| Debt issuance costs | 0 | | | (23.2) | | | 0 | | | 0 | | | 0 | | | (23.2) | |
| Taxes paid related to net share settlement of awards | 0 | | | (15.6) | | | 0 | | | 0 | | | 0 | | | (15.6) | |
| Proceeds from issuance of ESPP stock | 0 | | | 2.1 | | | 0 | | | 0 | | | 0 | | | 2.1 | |
| Proceeds (payments) from subsidiary for purchase of treasury stock | 805.8 | | | (805.8) | | | 0 | | | 0 | | | 0 | | | 0 | |
| Purchase of treasury stock | (805.8) | | | 0 | | | 0 | | | 0 | | | 0 | | | (805.8) | |
| Proceeds (payments) from subsidiary for dividends paid | 48.0 | | | (48.0) | | | 0 | | | 0 | | | 0 | | | 0 | |
| Dividends paid | (48.0) | | | 0 | | | 0 | | | 0 | | | 0 | | | (48.0) | |
| Net cash used in financing activities | 0 | | | (76.7) | | | (0.2) | | | (76.6) | | | 0 | | | (153.5) | |
| Effect of exchange rate changes on cash and cash equivalents | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash for the period | 0 | | | 338.2 | | | 0 | | | 10.4 | | | 0 | | | 348.6 | |
| Cash, cash equivalents, and restricted cash, beginning of period | 0 | | | 387.3 | | | 0 | | | 58.2 | | | 0 | | | 445.5 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 0 | | | $ | 725.5 | | | $ | 0 | | | $ | 68.6 | | | $ | 0 | | | $ | 794.1 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Holdings | | Spirit | | Non-Guarantor Subsidiaries | | Consolidating Adjustments | | Total |
| Operating activities | | | | | | | | | |
| Net cash provided by operating activities | $ | — |
| | $ | 643.1 |
| | $ | 126.8 |
| | $ | — |
| | $ | 769.9 |
|
| Investing activities | | | | | | | | | |
| Purchase of property, plant and equipment | — |
| | (230.5 | ) | | (40.7 | ) | |
|
| | (271.2 | ) |
| Proceeds from sale of assets | — |
| | 2.8 |
| | 0.6 |
| | — |
| | 3.4 |
|
| Other | — |
| | (0.5 | ) | | 0.5 |
| | — |
| | — |
|
| Net cash used in investing activities | — |
| | (228.2 | ) | | (39.6 | ) | | — |
| | (267.8 | ) |
| Financing activities | | | | | | | | | |
| Proceeds from issuance of debt | — |
| | 1,300.0 |
| | — |
| | — |
| | 1,300.0 |
|
| Principal payments of debt | — |
| | (5.8 | ) | | (0.9 | ) | | — |
| | (6.7 | ) |
| Collection on (repayment of) intercompany debt | — |
| | 75.9 |
| | (75.9 | ) | | — |
| | — |
|
| Payments on term loan | — |
| | (256.3 | ) | | — |
| | — |
| | (256.3 | ) |
| Payments on debt | — |
| | (300.0 | ) | | — |
| | — |
| | (300.0 | ) |
| Debt issuance and financing costs | — |
| | (23.2 | ) | | — |
| | — |
| | (23.2 | ) |
| Taxes paid related to net share settlement awards | — |
| | (15.6 | ) | | — |
| | — |
| | (15.6 | ) |
| Proceeds from issuance of ESPP stock | — |
| | 2.1 |
| | — |
| | — |
| | 2.1 |
|
| Proceeds (payments) from subsidiary for purchase of treasury stock | 805.8 |
| | (805.8 | ) | | — |
| | — |
| | — |
|
| Purchase of treasury stock | (805.8 | ) | | — |
| | — |
| | — |
| | (805.8 | ) |
| Proceeds (payments) from subsidiary for dividends paid | 48.0 |
| | (48.0 | ) | | — |
| | — |
| | — |
|
| Dividends paid | (48.0 | ) | | — |
| | — |
| | — |
| | (48.0 | ) |
| Net cash used in financing activities | — |
| | (76.7 | ) | | (76.8 | ) | | — |
| | (153.5 | ) |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | — |
| |
|
| | — |
|
| Net (decrease) increase in cash, cash equivalents, and restricted cash for the period | — |
| | 338.2 |
| | 10.4 |
| | — |
| | 348.6 |
|
| Cash, cash equivalents, and restricted cash, beginning of period | — |
| | 387.3 |
| | 58.2 |
| | — |
| | 445.5 |
|
| Cash, cash equivalents, and restricted cash, end of period | $ | — |
| | $ | 725.5 |
| | $ | 68.6 |
| | $ | — |
| | $ | 794.1 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
Condensed Consolidating Statements of Cash Flows
For the Twelve Months Ended December 31, 2017
|
| | | | | | | | | | | | | | | | | | | |
| | Holdings | | Spirit | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Total |
| Operating activities | | | | | | | | | |
| Net cash provided by operating activities | $ | — |
| | $ | 450.5 |
| | $ | 123.2 |
| | $ | — |
| | $ | 573.7 |
|
| Investing activities | | | | | | | | | |
| Purchase of property, plant and equipment | — |
| | (241.4 | ) | | (31.7 | ) | |
|
| | (273.1 | ) |
| Proceeds from sale of assets | — |
| | 0.4 |
| | — |
| | — |
| | 0.4 |
|
| Other | — |
| | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
| Net cash used in investing activities | — |
| | (241.1 | ) | | (31.7 | ) | | — |
| | (272.8 | ) |
| Financing activities | | | | | | | | | |
| Principal payments of debt | — |
| | (1.2 | ) | | (1.6 | ) | | — |
| | (2.8 | ) |
| Collection on (repayment of) intercompany debt | — |
| | 54.9 |
| | (54.9 | ) | | — |
| | — |
|
| Payments on term loan | — |
| | (25.0 | ) | | — |
| | — |
| | (25.0 | ) |
| Debt issuance and financing costs | — |
| | (0.9 | ) | | — |
| | — |
| | (0.9 | ) |
| Taxes paid related to net share settlement awards | — |
| | (14.2 | ) | | — |
| | — |
| | (14.2 | ) |
| Proceeds for financing under New Markets Tax Credit Program | — |
| | 7.6 |
| | — |
| | — |
| | 7.6 |
|
| Proceeds (payments) from subsidiary for purchase of treasury stock | 496.3 |
| | (496.3 | ) | | — |
| | — |
| | — |
|
| Purchase of treasury stock | (496.3 | ) | | — |
| | — |
| | — |
| | (496.3 | ) |
| Proceeds (payments) from subsidiary for dividends paid | 47.1 |
| | (47.1 | ) | | — |
| | — |
| | — |
|
| Dividends paid | (47.1 | ) | | — |
| | — |
| | — |
| | (47.1 | ) |
| Net cash used in financing activities | — |
| | (522.2 | ) | | (56.5 | ) | | — |
| | (578.7 | ) |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 5.6 |
| | — |
| | 5.6 |
|
| Net decrease in cash and cash equivalents for the period | — |
| | (312.8 | ) | | 40.6 |
| | — |
| | (272.2 | ) |
| Cash, cash equivalents, and restricted cash, beginning of period | — |
| | 700.1 |
| | 17.6 |
| | — |
| | 717.7 |
|
| Cash, cash equivalents, and restricted cash, end of period | $ | — |
| | $ | 387.3 |
| | $ | 58.2 |
| | $ | — |
| | $ | 445.5 |
|
Spirit AeroSystems Holdings, Inc.
Notes to the Consolidated Financial Statements — (Continued)
($, €, and RM in millions other than per share amounts)
Condensed Consolidating Statements of Cash Flows
For the Twelve Months Ended December 31, 2016
|
| | | | | | | | | | | | | | | | | | | |
| | Holdings | | Spirit | | Non-Guarantor
Subsidiaries | | Consolidating
Adjustments | | Total |
| Operating activities | | | | | | | | | |
| Net cash provided by operating activities | $ | — |
| | $ | 645.9 |
| | $ | 71.0 |
| | $ | — |
| | $ | 716.9 |
|
| Investing activities | | | | | | | | | |
| Purchase of property, plant and equipment | — |
| | (206.4 | ) | | (47.6 | ) | |
|
| | (254.0 | ) |
| Proceeds from sale of assets | — |
| | 0.6 |
| | — |
| | — |
| | 0.6 |
|
| Other | — |
| | 0.4 |
| | (0.4 | ) | | — |
| | — |
|
| Net cash used in investing activities | — |
| | (205.4 | ) | | (48.0 | ) | | — |
| | (253.4 | ) |
| Financing activities | | | | | | | | | |
| Proceeds from issuance of bonds | — |
| | 299.8 |
| | — |
| | — |
| | 299.8 |
|
| Principal payments of debt | — |
| | (33.9 | ) | | (2.5 | ) | | — |
| | (36.4 | ) |
| Collection on (repayment of) intercompany debt | — |
| | 61.6 |
| | (61.6 | ) | | — |
| | — |
|
| Payments on term loan | — |
| | (300.0 | ) | | — |
| | — |
| | (300.0 | ) |
| Debt issuance and financing costs | — |
| | (17.2 | ) | | — |
| | — |
| | (17.2 | ) |
| Taxes paid related to net share settlement awards | — |
| | (15.2 | ) | | — |
| | — |
| | (15.2 | ) |
| Excess tax benefits from share-based payment arrangements | — |
| | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
| Proceeds (payments) from subsidiary for purchase of treasury stock | 649.6 |
| | (649.6 | ) | | — |
| | — |
| | — |
|
| Purchase of treasury stock | (649.6 | ) | | — |
| | — |
| | — |
| | (649.6 | ) |
| Net cash used in financing activities | — |
| | (654.6 | ) | | (64.1 | ) | | — |
| | (718.7 | ) |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | (4.4 | ) | | — |
| | (4.4 | ) |
| Net decrease in cash and cash equivalents for the period | — |
| | (214.1 | ) | | (45.5 | ) | | — |
| | (259.6 | ) |
| Cash, cash equivalents, and restricted cash, beginning of period | — |
| | 914.2 |
| | 63.1 |
| | — |
| | 977.3 |
|
| Cash, cash equivalents, and restricted cash, end of period | $ | — |
| | $ | 700.1 |
| | $ | 17.6 |
| | $ | — |
| | $ | 717.7 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management with the participation of our President and Chief Executive Officer (principal executive officer) and Senior Vice President and Chief Financial Officer (principal financial officer) havehas evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2018,2020 and havehas concluded that these disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are1934, as amended, or the “Exchange Act”) were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act, of 1934, as amended, is recorded, processed, summarized, and reported within the time period specified inby the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports
we file or submit under the Exchange Act is accumulated and communicated to management of the Company, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management has concluded that the material weakness previously identified and disclosed in the Company’s Annual Report on Form 10-K for the twelve months ended December 31, 2019 (“2019 Form 10-K”) related to claims and assertions and other subjective elements and key judgments of our estimate at completion process was fully remediated in accordance with the plan outlined in the 2019 Form 10-K.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as(as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934.Act). Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by the Company’s board of directors,Board, management and other personnel to provide reasonable assurance of the reliability of our financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
1.(1)Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company's assets;
2.(2)Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors; and
3.(3)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluationOur assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this evaluation, we used2020 did not include an assessment of the effectiveness of internal control over financial reporting of the Bombardier Acquisition, which was acquired on October 30, 2020. The operating results of the Bombardier Acquisition are included in our consolidated financial statements from the period subsequent to the acquisition date and constituted $1,489.1 million and $182.5 million of total assets and net assets, respectively, as of December 31, 2020 and $93.4 million and $26.6 million of net sales and operating loss, respectively, for the year then ended.
Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework(2013 Framework)framework). Based on this evaluation,assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2018.2020. The effectiveness of the Company’s internal control over financial reporting as of December 31, 20182020 has been audited by the Company'sCompany’s independent auditors,registered public accounting firm, Ernst & Young LLP, as stated in their report appearing herein.
Changes
Change in Internal Controls overControl Over Financial Reporting
There were
Except for the matters discussed in this Item 9A, there was no changeschange in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the fourth quarter of 2018period covered by this Annual Report that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Spirit AeroSystems Holdings, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Spirit AeroSystems Holdings, Inc. internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Spirit AeroSystems Holdings, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the Bombardier Acquired Businesses, which is included in the 2020 consolidated financial statements of the Company and constituted $1,489.1 million and $182.5 million of total assets and net assets, respectively, as of December 31, 2020 and $93.4 million and $26.6 million of net sales and operating loss, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the Bombardier Acquisition.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Spirit AeroSystems Holdings, Inc. as of December 31, 20182020 and 2017,2019, the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018,2020, and the related notes,and our report dated February 8, 201925, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Wichita, Kansas
February 8, 2019
25, 2021
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information concerning the executive officers of Spiritthe Company is included in Part I of this Annual Report on Form 10-K and is incorporated by reference herein. The information otherwise required by Items 401, 405, 406, and 407(c)(3), (d)(4), and (d)(5) of Regulation S-K will be provided in Spirit Holdings’ proxy statement for its 20192021 annual meeting of stockholders, which will be filed with the SEC no later than 120 days after the end of the fiscal year (the “2019“2021 Proxy Statement”) and is incorporated by reference herein.
The Company has adopted a Code of Conduct (the “Code”) and a Finance Code of Professional Conduct that applies to the Company’s Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer, and persons performing similar functions. Copies of the Code and Finance Code of Professional Conduct are available on the Company’s website at http://investor.spiritaero.com/govdocs,corporate-governance/OD/default.aspx, and any waiver from the Code or Finance Code of Professional Conduct will be timely disclosed on the Company’s website or a Current Report on Form 8-K, as will any amendments to the Code or Finance Code of Professional Conduct.
Item 11. Executive Compensation
The information required by Item 402 and Item 407(e)(4) and (e)(5) of Regulation S-K will be provided in the 20192021 Proxy Statement and is incorporated by reference herein.
Pursuant to the rules and regulations of the SEC under the Exchange Act, the information under Item 407(e)(5) incorporated by reference from the 20192021 Proxy Statement shall not be deemed to be “soliciting material,” or to be “filed” with the Commission,SEC, or subject to Regulation 14A or 14C or the liabilities of Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning the securities authorized for issuance under equity compensation plans included in Part II, Item 5 of this Annual Report on Form 10-K is incorporated by reference herein. The information required by Item 403 of Regulation S-K will be provided in the 20192021 Proxy Statement and is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Items 404 and 407(a) of Regulation S-K will be provided in the 20192021 Proxy Statement and is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services
The information required by Item 9(e) of Schedule 14A will be provided in the 20192021 Proxy Statement and is incorporated by reference herein.
Part IV
*Item 15. Exhibits and Financial Statement Schedules
|
| | | | | | | | | | | | | | | | | | | |
Article I. Exhibit
Number
| | Section 1.01 Exhibit | | Incorporated by
Reference to the
Following Documents
| | |
| 2.1 | | Asset Purchase Agreement, dated as of February 22, 2005, between Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft Systems, Inc.) and The Boeing Company | | | | |
| 2.2 | | First Amendment to Asset Purchase Agreement, dated June 15, 2005, between Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft Systems, Inc.) and The Boeing Company | | | | |
| 2.3 | | Asset Purchase Agreement, between Spirit AeroSystems Inc., Triumph Aerostructures - Tulsa LLC and Triumph Group, Inc., dated as of December 8, 2014 | | | | |
| 2.4 | | Amendment No. 1 to Asset Purchase Agreement, between Spirit AeroSystems, Inc., Triumph Aerostructures - Tulsa, LLC and Triumph Group, Inc., dated as of December 30, 2014 | | | | |
| 3.1 | | Third Amended and Restated Certificate of Incorporation of Spirit AeroSystems Holdings, Inc. | |
| | |
| 3.2 | | Seventh Amended and Restated By Laws of Spirit AeroSystems Holdings, Inc. | | | | |
| 4.1 | | Form of Class A Common Stock Certificate | | | | |
4.74.2 | | Indenture dated as of June 1, 2016, governing the 3.850% Senior Notes due 2026, by and among Spirit, the guarantors identified therein and The Bank of New York Mellon Trust Company, N.A. | | | | |
4.84.3 | | Form of 3.850% Senior Note due 2026 | | | | |
4.94.4 | | Supplemental Indenture, dated December 5, 2016, governing the 3.850% Senior Notes due 2026
| | | | |
4.104.5 | | Second Supplemental Indenture, dated as of February 24, 2020, among Spirit AeroSystems, Inc., Spirit AeroSystems Holdings, Inc., Spirit AeroSystems North Carolina, Inc., and The Bank of New York Mellon Trust Company, N.A., as Trustee. | | | | |
| 4.6 | | Third Supplemental Indenture, dated as of April 17, 2020, among Spirit AeroSystems, Inc., Spirit AeroSystems Holdings, Inc., Spirit AeroSystems North Carolina, Inc., and The Bank of New York Mellon Trust Company, N.A., as Trustee. | | | | |
| 4.7 | | Fourth Supplemental Indenture, dated as of October 5, 2020, among Spirit AeroSystems, Inc., Spirit AeroSystems Holdings, Inc., Spirit AeroSystems North Carolina, Inc., and The Bank of New York Mellon Trust Company, N.A., as Trustee. | | | | |
| 4.8 | | Indenture, dated as of May 30, 2018, among Spirit AeroSystems, Inc., Spirit AeroSystems Holdings, Inc. and the Bank of New York Mellon Trust Company,. | | | | |
4.114.9 | | Form of Senior Floating Rate Note due 2021 | | | | |
| | | | | | | | | | | | | | | | | | | | |
4.124.10 | | Form of 3.950% Senior Note due 2023 | | | | |
4.134.11 | | Form of 4.600% Senior Note due 2028 | | | | |
| 4.12 | | Indenture, dated as of April 17, 2020, among Spirit AeroSystems, Inc., Spirit AeroSystems Holdings, Inc., Spirit AeroSystems North Carolina, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent. | | | | |
| 4.13 | | Form of 7.500% Senior Secured Second Lien Note due 2025. | | | | |
| 4.14 | | Indenture, dated as of October 5, 2020, among Spirit AeroSystems, Inc., Spirit AeroSystems Holdings, Inc., Spirit AeroSystems North Carolina, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent. | | | | |
| 4.15 | | Form of 5.500% Senior Secured First Lien Notes due 2025 | | | | |
| 4.16 | | Stockholder Protection Rights Agreement, dated April 22, 2020, between Spirit AeroSystems Holdings, Inc. and Computershare Inc. | | | | |
| | Description of Spirit AeroSystems Holdings, Inc. Securities Registered under Section 12 of the Exchange Act. | | * | | |
|
| | | | | | | | | | | | | |
Article I. Exhibit
Number
| | Section 1.01 Exhibit | | Incorporated by
Reference to the
Following Documents
|
| 10.1 | | Form of Indemnification Agreement | | |
| 10.2† | | Spirit AeroSystems Holdings, Inc. Amended and Restated Deferred Compensation Plan, As Amended | | |
| 10.3† | | Employment Agreement between Spirit AeroSystems Holdings, Inc. Second Amended and Sanjay Kapoor, effective as of August 23, 2013Restated Director Stock Plan | | |
| 10.4† | | Form of Executive Compensation Letter | | |
10.5† | | Spirit AeroSystems Holdings, Inc. 2014 Omnibus Incentive Plan | |
|
10.6†10.5† | | First Amendment to the Spirit AeroSystems Holdings, Inc. 2014 Omnibus Incentive Plan, dated January 25, 2017
| | |
10.7†10.6† | | Second Amendment to the Spirit AeroSystems Holdings, Inc. 2014 Omnibus Incentive Plan, dated October 23, 2019 | | |
| 10.7† | | Employment Agreement between Spirit AeroSystems, Inc. and Samantha Marnick, effective as of February 22, 2006 and annual Executive Compensation Letter, dated May 3, 2013 | |
|
| | | | | | | | | | | | | | |
| 10.8† | | Employment Agreement between Spirit AeroSystems, Inc. and Duane Hawkins, effective as of June 17, 2013 | | |
| 10.9† | | Amendment to Employment Agreement between Spirit Aerosystems, Inc. and Duane Hawkins, effective as of June 17, 2013 | | |
| 10.10† | | Employment Agreement between Spirit AeroSystems, Inc. and Michelle Lohmeier, effective as of June 10, 2015 | | |
10.11† | | Employment Agreement, dated as of February 13, 2016, between Spirit AeroSystems, Inc. and Thomas C. Gentile III | | |
10.12† | | Executive Compensation Letter between Spirit AeroSystems, Inc. and Samantha Marnick, dated June 1, 2016 | |
|
10.13† | | Employment Agreement between Spirit AeroSystems, Inc. and Ron Rabe, effective as of June 9, 2015 | | |
10.14† | | Annual Executive Compensation Letter between Spirit AeroSystems, Inc. and John Pilla, dated February 7, 2014 | | |
Article I. Exhibit
Number
| | Section 1.01 Exhibit | | Incorporated by
Reference to the
Following Documents
|
|
| 10.11† | | | | |
10.15† | | Employment Agreement between Spirit AeroSystems, Inc., and Stacy Cozad, effective as of January 4, 2016 | | |
10.16 | | Employment Agreement between Spirit AeroSystems, Inc. and Bill Brown, effective as of May 5, 2014 | | |
10.17†10.12† | | Long-Term Incentive Program under theEmployment Agreement, dated January 29, 2020, between Spirit AeroSystems, Holdings, Inc. 2014 Omnibus Incentive Plan, effective April 30, 2014and Mark Suchinski. | | |
10.18†10.13† | | Long-Term Incentive Program under the Spirit AeroSystems Holdings, Inc. 2014 Omnibus Incentive Plan, as amended and restated effective January 25, 2017 | | |
10.19†10.14† | | Long-Term Incentive Program under the Spirit AeroSystems Holdings, Inc. 2014 Omnibus Plan, as amended and restated effective January 23, 2019 | | |
| 10.15† | | Short-Term Incentive Program under the Spirit AeroSystems Holdings, Inc. 2014 Omnibus Incentive Plan, as amended and restated effective January 25, 2017 | | |
| 10.16† | | Director Stock Program under the Spirit AeroSystems Holdings, Inc. 2014 Omnibus Incentive Plan, effective April 25, 2018 | | * |
10.21†10.17† | | Spirit AeroSystems Holdings, Inc. Supplemental Executive Retirement Plan, as amended and restated effective January 25, 2017 (filed as Exhibit 10.5 to the Annual Report on Form 10-K (File No. 001-33160), filed with the Securities and Exchange Commission on February 10, 2017) | |
|
10.2210.18† | | Employee Stock Purchase Plan | | |
10.23†10.19† | | Amended and Restated Employee Stock Purchase Plan, effective January 21, 2020 | | Time-Based Restricted Stock Award Agreement
| | |
10.24† | | Performance-Based Restricted Stock Award Agreement
| | |
10.25†10.20† | | Form of Time-Based Restricted Stock Award Agreement
| | |
| 10.21† | | Form of Performance-Based Restricted Stock Award Agreement
| | |
| 10.22† | | Retirement and Consulting Agreement and General Release, dated June 7, 2016, between Spirit AeroSystems, Inc. and Larry A. Lawson | | |
| 10.23† | | Retirement and Consulting Agreement and General Release, dated November 20, 2018,January 31, 2020, between Spirit AeroSystems Holdings, Inc., Spirit AeroSystems, Inc. and Sanjay KapoorJose Garcia. | | * |
| | Employment Agreement between Spirit AeroSystems, Inc., and Jose Garcia, effective as of January 9, 2019 | | * |
Article I. Exhibit
Number
| | Section 1.01 Exhibit | | Incorporated by
Reference to the
|
|
| | | | | | | | | | | | | |
10.2810.24† | | Resignation and General Release, dated April 3, 2020, among Spirit AeroSystems, Inc., Spirit AeroSystems Holdings, Inc. , and John Gilson. | | |
| 10.25† | | Retirement Agreement and General Release with John Pilla, dated July 29, 2020. | | |
| 10.26† | | Second Amended and Restated Credit Agreement, dated as of July 12, 2018, among Spirit AeroSystems Inc., as borrower, Spirit AeroSystems Holdings, Inc., as parent guarantor, the lenders party thereto, Bank of America, N.A., as administrative agent, and the other agents named therein | | |
10.2910.27 | | InducementFirst Amendment to the Second Amended and Restated Credit Agreement, betweendated as of February 24, 2020, among Spirit AeroSystems, Inc., as borrower, Spirit AeroSystems Holdings, Inc., as parent guarantor, the lenders party thereto, Bank of America, N.A., as administrative agent and Thecollateral agent. | | |
| 10.28 | | Delayed Draw Term Loan Credit Agreement, dated as of February 24, 2020, among Spirit AeroSystems, Inc., as borrower, Spirit AeroSystems Holdings, Inc., as parent guarantor, Spirit AeroSystems North Carolina, Global TransPark Authority,Inc., as subsidiary guarantor, and the lenders party thereto, Bank of America, N.A., as administrative agent. | | |
| 10.29 | | Second Amendment, dated May 14, 2008as of March 30, 2020, to the Second Amended and Restated Credit Agreement among Spirit AeroSystems, Inc., as borrower, Spirit AeroSystems Holdings, Inc., as parent guarantor, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral agent. | | |
| 10.30 | | LeaseThird Amendment, dated as of April 10, 2020, to the Second Amended and Restated Credit Agreement betweenamong Spirit AeroSystems, Inc., as borrower, Spirit AeroSystems Holdings, Inc., as parent guarantor, the lenders party thereto, and The North Carolina Global TransPark Authority, dated May 14, 2008Bank of America, N.A., as administrative agent and collateral agent. | | |
| 10.31 | | Construction AgencyFourth Amendment, dated as of April 13, 2020, to the Second Amended and Restated Credit Agreement betweenamong Spirit AeroSystems, Inc., as borrower, Spirit AeroSystems Holdings, Inc., as parent guarantor, the lenders party thereto, and The North Carolina Global TransPark Authority,Bank of America, N.A., as administrative agent and collateral agent. | | |
| 10.32 | | Fifth Amendment, dated May 14, 2008as of April 20, 2020, to the Second Amended and Restated Credit Agreement among Spirit AeroSystems, Inc., as borrower, Spirit AeroSystems Holdings, Inc., as parent guarantor, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral agent. | | |
10.32††10.33 | | Sixth Amendment, dated as of July 31, 2020, to the Second Amended and Restated Credit Agreement among Spirit AeroSystems, Inc., as borrower, Spirit AeroSystems Holdings, Inc., as parent guarantor, Spirit AeroSystems North Carolina, Inc., as a guarantor, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral agent. | | |
| | | | | | | | | | | | | | |
| 10.34 | | Term Loan Credit Agreement, dated as of October 5, 2020, by and among Spirit AeroSystems, Inc., the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent and collateral agent. | | |
| 10.35†† | | General Terms Agreement (Sustaining and others), dated as of June 16, 2005, between The Boeing Company and Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft Systems, Inc.) | | |
10.33†10.36†† | | Hardware Material Services General Terms Agreement, dated as of June 16, 2005, between The Boeing Company and Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft Systems, Inc.) | | |
10.34†10.37†† | | Ancillary Know-How Supplemental License Agreement, dated as of June 16, 2005, between The Boeing Company and Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft Systems, Inc.) | | |
10.3510.38†† | | Sublease Agreement, dated as of June 16, 2005, among The Boeing Company, Boeing IRB Asset Trust and Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft Systems, Inc.) | | |
10.36†10.39†† | | Special Business Provisions (Sustaining), as amended through February 6, 2013, between The Boeing Company and Spirit AeroSystems, Inc. | | |
10.37†10.40†† | | Amendment No. 9 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems Inc., dated as of September 4, 2014 | | |
10.38†10.41†† | | Amendment No. 10 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems Inc., dated as of September 26, 2014 | | |
10.3910.42†† | | Amendment No. 2, dated March 4, 2011, to General Terms Agreement (Sustaining and Others) between The Boeing Company and Spirit AeroSystems, Inc. | | |
|
| 10.43†† | | | | |
10.40†† | | Memorandum of Agreement, between The Boeing Company and Spirit AeroSystems, Inc., made as of March 9, 2012, amending Special Business Provisions (Sustaining) | | |
| 10.44†† | | | | |
Article I. Exhibit
Number
| | Section 1.01 Exhibit | | Incorporated by
Reference to the
Following Documents
|
10.41†† | | Memorandum of Agreement (737 MAX Non-Recurring Agreement), between The Boeing Company and Spirit AeroSystems, Inc., made as of April 7, 2014, amending Spirit’s long-term supply agreement with Boeing | |
|
10.42†10.45†† | | Memorandum of Agreement (Pricing Agreement), between The Boeing Company and Spirit AeroSystems, Inc., made as of April 8, 2014, amending Spirit’s long-term supply agreement with Boeing | |
|
10.43†10.46†† | | Amendment No. 11 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems, Inc., dated as of March 10, 2015 | | |
10.4410.47†† | | Amendment No. 12 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems, Inc., dated as of April 9, 2015 | | |
10.4510.48†† | | Amendment No. 13 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems, Inc., dated as of January 4, 2016 | | |
| | | | | | | | | | | | | | |
10.4610.49†† | | Amendment No. 14 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems, Inc., dated as of April 21, 2015 | | |
10.47†10.50†† | | Amendment No. 17 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems, Inc., dated as of December 23, 2015 | | |
10.48†10.51†† | | Amendment No. 20 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems, Inc., dated as of November 1, 2015 | | |
10.49†10.52†† | | Amendment No. 21 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems, Inc., dated as of May 9, 2016 | |
|
10.50†10.53†† | | Amendment No. 22 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems, Inc., dated as of November 2, 2016 | | |
10.51†10.54†† | | Amendment No. 23 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems, Inc., dated as of December 16, 2016 | | |
10.52†10.55†† | | Amendment No. 24 to Special Business Provisions, between The Boeing Company and Spirit AeroSystems, Inc., dated as of December 20, 2016 | | |
10.53†10.56†† | | Amendment 25 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of March 16, 2017 | | |
|
| 10.57†† | | | | |
10.54†† | | Amendment 26 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of March 23, 2017 | | |
10.55†10.58†† | | Amendment 27 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of March 31, 2017 | | |
Article I. Exhibit
Number
10.59†† | | Section 1.01 Exhibit | | Incorporated by
Reference to the
Following Documents
|
10.56†† | | Amendment 28 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of June 22, 2017 | | |
10.57†10.60†† | | Amendment 29 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of July 20, 2017 | | |
10.58†10.61†† | | Amendment No. 30 to Special Business Provisions (SBP) MS-65530-0016, dated September 22, 2017, between The Boeing Company and Spirit AeroSystems, Inc. | | |
10.59†10.62†† | | Amendment No. 31 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of October 18, 2017 | | |
10.60†10.63†† | | Amendment No. 32 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of November 15, 2017 | | |
10.61†10.64†† | | Amendment No. 33 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of November 30, 2017 | | |
| | | | | | | | | | | | | | |
10.62†10.65†† | | Amendment 34 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of February 23, 2018 | | |
10.63†10.66†† | | Amendment 35 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of April 18, 2018 | | |
10.64†10.67†† | | Amendment 36 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of June 20, 2018 | | |
10.65†10.68†† | | Amendment 37 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of August 17, 2018 | | |
10.66†10.69†† | | Collective Resolution Memorandum of Understanding between the Boeing Company and Spirit AeroSystems, Inc., dated as of August 1, 2017 | | |
|
| 10.70†† | | | | |
| | Amendment 38 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of November 1, 2018 | | * |
| | Amendment 39 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of November 2, 2018 | | * |
|
| 10.72†† | | | | |
| | Collective Resolution 2.0 Memorandum of Agreement between the Boeing Company and Spirit AeroSystems, Inc., dated as of December 21, 2018 | | * |
| 10.73†† | | Amendment 40 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of January 30, 2019 | | |
| 10.74†† | | Amendment 41 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of March 29, 2019 | | |
| 10.75†† | | Memorandum of Agreement between the Boeing Company and Spirit AeroSystems, Inc., 737 Production Rate Adjustments, dated as of April 12, 2019. | | |
| 10.76†† | | Amendment 43 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of May 22, 2019. | | |
| 10.77†† | | Amendment 44 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of July 19, 2019. | | |
| 10.78†† | | Amendment 45 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of October 3, 2019. | | |
10.79††
| | Amendment 46 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of October 3, 2019. | | |
| 10.80†† | | Memorandum of Agreement, dated February 6, 2020, between The Boeing Company and Spirit AeroSystems, Inc. | | |
| 10.81†† | | Amendment 47 to Special Business Provisions MS-65530-0016, between the Boeing Company and Spirit AeroSystems, Inc., dated as of May 5, 2020. | | |
| | | | | | | | | | | | | | |
| 10.82†† | | 737 Production Rate Adjustment and Other Settlements Memorandum of Agreement, dated May 5, 2020, between The Boeing Company and Spirit AeroSystems, Inc. | | |
| 10.83†† | | B787 General Terms Agreement BCA-65520-0032between The Boeing Company and Spirit AeroSystems, Inc., conformed to incorporate the General Terms Agreement, dated June 16, 2005, Amendment No. 1 thereto, dated June 19, 2009, and Amendment No. 2 thereto, dated May 12, 2011 | | |
| | | | | | | | | | | | | | |
10.71††Article I. Exhibit
Number | | Section 1.01 Exhibit | | Incorporated by
Reference to the
Following Documents |
| 10.84†† | | B787 Special Business Provisions BCA-MS-65530-0019, dated August 20, 2012, between The Boeing Company and Spirit AeroSystems, Inc., conformed to incorporate the Special Business Provisions, dated June 16, 2005, and Amendments 1 through 19 thereto | | |
10.72†10.85†† | | Amendment No. 20 to B787 Special Business Provisions BCA-MS-65530-0019, dated June 5, 2013, between The Boeing Company and Spirit AeroSystems, Inc. | | |
10.73†10.86†† | | Amendment No. 21 to B787 Special Business Provisions BCA-MS-65530-0019, dated July 1, 2014, between The Boeing Company and Spirit AeroSystems, Inc. | | |
10.74†10.87†† | | Amendment No. 22 Revision 1 to B787 Special Business Provisions BCA-MS-65530-0019, dated December 4, 2014, between The Boeing Company and Spirit AeroSystems, Inc. | | |
10.75†10.88†† | | Amendment No. 23 to B787 Special Business Provisions BCA-MS-65530-0019, dated August 3, 2015, between The Boeing Company and Spirit AeroSystems, Inc. | | |
| 10.89†† | | | | |
Article I. Exhibit
Number
| | Section 1.01 Exhibit | | Incorporated by
Reference to the
Following Documents
|
10.76†† | | Amendment No. 24 to B787 Special Business Provisions BCA-MS-65530-0019, dated December 16, 2015, between The Boeing Company and Spirit AeroSystems, Inc. | | |
10.77†10.90†† | | Amendment No. 25 to B787 Special Business Provisions (SBP) BCA-MS-65530-0019, dated September 22, 2017, between The Boeing Company and Spirit AeroSystems, Inc. | | |
10.78†10.91†† | | Amendment No. 26 to B787 Special Business Provisions (SBP) BCA-MS-65530-0019, dated December 14, 2017, between The Boeing Company and Spirit AeroSystems, Inc. | | |
|
| 10.92†† | | | | |
10.79†† | | Amendment 27 to B787 Special Business Provisions BCA-MS-65530-0019, between The Boeing Company and Spirit AeroSystems, Inc., dated as of August 17, 2018 | | |
10.8010.93†† | | Amendment 28 to B787 Special Business Provisions (SBP) BCA-MS-65530-0019, between The Boeing Company and Spirit AeroSystems, Inc., dated as of January 30, 2019 | | |
| 10.94†† | | Amendment 29 to B787 Special Business Provisions (CBP) BCA-MS-65530-0019, between the Boeing Company and Spirit AeroSystems, Inc., dated as of May 14, 2019. | | |
| | | | | | | | | | | | | | |
| 10.95†† | | Amendment 30 to B787 Special Business Provisions (CBP) BCA-MS-65530-0019, between the Boeing Company and Spirit AeroSystems, Inc., dated as of August 12, 2019. | | |
| 10.96†† | | Amendment 31 to B787 Special Business Provisions (CBP) BCA-MS-65530-0019, between the Boeing Company and Spirit AeroSystems, Inc., dated as of October 3, 2019. | | |
| 10.97†† | | Amendment 32 to B787 Special Business Provisions (CBP) BCA-MS-65530-0019, between the Boeing Company and Spirit AeroSystems, Inc., dated as of April 15, 2020. | | |
| 10.98 | | Agreement for the Sale and Purchase of Shares of S.R.I.F. N.V., dated May 1, 2018, by and between Christian Boas, Emile Boas, DREDA, Sylvie Boas, Spirit AeroSystems Belgium Holdings BVBA and Spirit AeroSystems Holdings, Inc. | | |
10.8110.99 | | Confirmation - Accelerated Share RepurchaseLetter Agreement, dated March 19, 2019, RE; Agreement for the Sale and Purchase of Shares of S.R.I.F. N.V., dated May 1, 2018, by and between Christian Boas, Emile Boas, DREDA, Sylvie Boas, Spirit | | |
| 10.100 | | Letter Agreement, dated March 27, 2019, RE; Agreement for the Sale and Purchase of Shares of S.R.I.F. N.V., dated May 1, 2018, by and between Christian Boas, Emile Boas, DREDA, Sylvie Boas, Spirit | | |
| 10.101 | | Letter Agreement, dated May 30,3, 2019, RE; Agreement for the Sale and Purchase of Shares of S.R.I.F. N.V., dated May 1, 2018 (as amended), by and between Christian Boas, Emilie Boas, DREDA, Sylvie Boas, Spirit AeroSystems Belgium Holdings BVBA, and Spirit AeroSystems Holdings, Inc. | | |
| 10.102 | | Amended and Goldman Sachs & Co. LLC.Restated Agreement for the Sale and Purchase of Shares of S.R.I.F. N.V., dated May 14, 2019 (as amended), by and between Christian Boas, Emilie Boas, DREDA, Sylvie Boas, Spirit AeroSystems Belgium Holdings BVBA, and Spirit AeroSystems Holdings, Inc. | | |
| 10.103 | | Letter Agreement, dated June 3, 2019, RE; Agreement for the Sale and Purchase of Shares of S.R.I.F. N.V. (as amended), by and between Christian Boas, Emilie Boas, DREDA, Sylvie Boas, Spirit AeroSystems Belgium Holdings BVBA, and Spirit AeroSystems Holdings, Inc. | | |
| 10.104 | | Letter Agreement, dated July 14, 2019, RE; Agreement for the Sale and Purchase of Shares of S.R.I.F. N.V.(as amended), by and between Christian Boas, Emilie Boas, DREDA, Sylvie Boas, Spirit AeroSystems Belgium Holdings BVBA, and Spirit AeroSystems Holdings, Inc. | | |
| 10.105 | | Amended and Restated Agreement for the Sale and Purchase of Shares of S.R.I.F. N.V., dated October 28, 2019 (as amended), by and between Christian Boas, Emilie Boas, DREDA, Sylvie Boas, Spirit AeroSystems Belgium Holdings BVBA, and Spirit AeroSystems Holdings, Inc. | | |
| | | | | | | | | | | | | | |
| 10.106 | | Letter Agreement, dated January 29, 2020, RE; Agreement for the Sale and Purchase of Shares of S.R.I.F. N.V.(as amended), by and between Christian Boas, Emilie Boas, DREDA, Sylvie Boas, Spirit AeroSystems Belgium Holdings BVBA, and Spirit AeroSystems Holdings, Inc.
| | |
| 10.107 | | Termination Agreement dated September 25, 2020 by and among Spirit AeroSystems Holdings, Inc., Spirit AeroSystems Belgium Holdings BVBA and certain private sellers. | | |
10.8210.108†† | | Confirmation - AcceleratedAgreement for the Sale and Purchase of (1) the Entire Issued Share Repurchase Agreement,Capital of Short Brothers plc and Bombardier Aerospace North Africa SAS and (2) Certain Other Assets, dated May 30, 2018,October 31, 2019, by and between Bombardier Inc., Bombardier Aerospace UK Limited, Bombardier Finance Inc., Bombardier Services Corporation, Spirit AeroSystems Global Holdings Limited, and Spirit AeroSystems, Inc. | | |
| 10.109 | | Deed of Amendment, dated as of October 16, 2020, by and among Spirit AeroSystems, Inc, and Spirit AeroSystems Global Holdings Limited, and Bombardier Inc., Bombardier Aerospace UK Limited, Bombardier Finance Inc. and Morgan Stanley & Co. LLC.Bombardier Services Corporation. | | |
| 10.110 | | Amendment, dated as of October 26, 2020, by and among Spirit AeroSystems, Inc, and Spirit AeroSystems Global Holdings Limited, and Bombardier Inc., Bombardier Aerospace UK Limited, Bombardier Finance Inc. and Bombardier Services Corporation. | | |
| | Subsidiaries of Spirit AeroSystems Holdings, Inc. | | * |
| | Consent of Ernst & Young LLP | | * |
| | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | | * |
| | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | | * |
Article I. Exhibit
Number | | Section 1.01 Exhibit | | Incorporated by
Reference to the
Following Documents |
| | Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 | | ** |
| | Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 | | ** |
| 101.INS@ | | XBRL Instance Document | | * |
| 101.SCH@ | | XBRL Taxonomy Extension Schema Document | | * |
| 101.CAL@ | | XBRL Taxonomy Extension Calculation Linkbase Document | | * |
| 101.DEF@ | | XBRL Taxonomy Extension Definition Linkbase Document | | * |
| 101.LAB@ | | XBRL Taxonomy Extension Label Linkbase Document | | * |
| 101.PRE@ | | XBRL Taxonomy Extension Presentation Linkbase Document | | * |
| |
† | Indicates management contract or compensation plan or arrangement |
| |
†† | Indicates that portions of the exhibit have been omitted and separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment |
†Indicates management contract or compensation plan or arrangement
†† Indicates that confidential portions of the exhibit have been omitted in accordance with the rules of the Securities and Exchange Commission
* Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this reportAnnual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wichita, State of Kansas on February 8, 2019.
| | | | | | | | | | | | | | |
| | SPIRIT AEROSYSTEMS HOLDINGS, INC. |
| | | | |
| | SPIRIT AEROSYSTEMS HOLDINGS, INC.By: | | /s/ Mark J. Suchinski |
| | | | |
| | By: | | /s/ Jose Garcia |
| | | | Jose Garcia ExecutiveMark J. Suchinski
Senior Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Act of 1934, this reportAnnual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ Thomas C. Gentile III | | Director, President and Chief Executive | | February 25, 2021 |
| Thomas C. Gentile III | | Officer (Principal Executive Officer) | | |
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ Thomas C. Gentile IIIMark J. Suchinski | | Director, President and Chief Executive | | February 8, 2019 |
Thomas C. Gentile III | | Officer (Principal Executive Officer) | | |
| | | | |
/s/ Jose Garcia | | ExecutiveSenior Vice President and Chief Financial | | February 8, 201925, 2021 |
Jose Garcia Mark J. Suchinski | | Officer (Principal Financial Officer) | | |
| | | | |
| /s/ Damon Ward | | Vice President, Corporate Controller | | February 25, 2021 |
| Damon Ward | | | | |
/s/ John Gilson | | Vice President and Corporate Controller | | February 8, 2019 |
John Gilson | | (Principal Accounting Officer) | | |
| | | | |
| /s/ Robert Johnson | | Director, Chairman of the Board | | February 8, 201925, 2021 |
| Robert Johnson | | | | |
| | | | |
| /s/ Stephen Cambone | | Director | | February 25, 2021 |
| Stephen Cambone | | | | |
| | | | |
| /s/ Charles Chadwell | | Director | | February 8, 201925, 2021 |
| Charles Chadwell | | | | |
| | | | |
| /s/ Irene M. Esteves | | Director | | February 8, 201925, 2021 |
| Irene M. Esteves | | | | |
| | | | |
| /s/ Paul Fulchino | | Director | | February 8, 201925, 2021 |
| Paul Fulchino | | | | |
| | | | |
| /s/ Richard Gephardt | | Director | | February 8, 201925, 2021 |
| Richard Gephardt | | | | |
| | | | |
| /s/ Ronald Kadish | | Director | | February 8, 201925, 2021 |
| Ronald Kadish | | | | |
| | | | |
| /s/ John L. Plueger | | Director | | February 8, 201925, 2021 |
| John L. Plueger | | | | |
| | | | |
| /s/ Laura Wright | | Director | | February 8, 201925, 2021 |
| Laura Wright | | | | |
