[Kaye Scholer Letterhead]
August 29, 2006
BY EDGAR AND BY HAND
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attention: Ms. Sara D. Kalin
Assistant Director
Re: SPIRIT AEROSYSTEMS HOLDINGS, INC.
Registration Statement on Form S-1
Filed on June 30, 2006 (File No. 333-135486)
Dear Ms. Kalin:
Our client, Spirit AeroSystems Holdings, Inc. ("SPIRIT HOLDINGS" or
the "COMPANY"), has filed today with the Commission Pre-Effective Amendment No.
1 to Spirit Holdings' Registration Statement on Form S-1.
The following responds to the Staff's comments contained in your
letter dated July 28, 2006 concerning the above-referenced document. The text of
the Staff's comments is set forth in italics below, followed by the response of
Spirit Holdings. All references to page numbers in the text of this letter refer
to pages in the Registration Statement contained in Amendment No. 1. The
information in these responses was provided to us by Spirit Holdings.
Enclosed with the copy of this letter are four copies of Amendment No.
1, marked to show changes from the Registration Statement on Form S-1 filed on
June 30, 2006.
General
1. Prior to printing and distribution of the preliminary prospectus, please
supplementally provide us mock-ups of any pages that include any additional
pictures or graphics to be presented. Accompanying captions, if any, should
also be provided. We may have comments after reviewing the materials.
RESPONSE:
Prior to printing and distribution of the preliminary prospectus, the
prospectus artwork and related captions that Spirit Holdings intends to use
in the prospectus will be provided to the Staff supplementally under
separate cover.
2. Please provide any exhibits that have not already been filed, including
your opinion of counsel, as soon as possible. As these exhibits may trigger
a number of disclosure
August 29, 2006
Page 2
matters, we will need a reasonable period of time to review these exhibits
as well as all disclosure in the registration statement that you modify or
add as a result of this new information. We may have additional comments
after reviewing this additional information. Similarly, your filing omits
information that is not dependant upon the offering price, such as the
amounts of your current debt that you plan to repay with proceeds from the
offering and the current beneficial ownership of the principal and selling
stockholders. Please provide this information as soon as possible.
RESPONSE:
Certain additional exhibits have been filed with Amendment No. 1 or will be
included in a subsequent amendment.
The disclosure has been revised to include the amount of current debt that
Spirit Holdings plans to repay with proceeds from the offering under the
section captioned "Use of Proceeds" on page 31, as well as on pages 7 and
67.
At this time, Spirit Holdings anticipates that a stock split of its common
stock will occur immediately prior to the consummation of the offering, but
has not yet determined the rate of the stock split. Spirit Holdings will
not be able to compute the final share ownership numbers for the table
until the rate of the stock split has been determined. Once the rate of the
stock split is known, Spirit Holdings will include this information in the
table and will apply such split retroactively to all share and per share
data included in the Registration Statement. In addition, Spirit Holdings
does not know at this time which of its stockholders will be participating
in the offering. The disclosure has been revised to include the percentages
of the beneficial owners currently listed in the table. Spirit Holdings
will complete the remainder of the table in a future amendment.
We understand that the Registration Statement will not be declared
effective until the Staff has completed its review of the final documents.
Registration Statement Cover Page
3. Please revise your fee table to separately list the shares offered by the
selling shareholders.
RESPONSE:
The fee table has been revised to separately list the shares offered by the
selling stockholders and will be completed in a future amendment when
Spirit Holdings has the requisite information.
Table of Contents, page i
4. Please relocate the dealer prospectus delivery obligation to the outside
back cover page of the prospectus. See Item 502(b) of Regulation S-K.
August 29, 2006
Page 3
RESPONSE:
We would like to retain the current position of the dealer prospectus
delivery obligation on the inside front cover page below the table of
contents because, due to the requirements of the electronic delivery
format, Credit Suisse Securities (USA) LLC ("CREDIT SUISSE") has moved all
the information previously found on the back cover page to the inside front
cover page. Since the dealer prospectus delivery obligation is important
disclosure that applies to the entire document, we are concerned that it
may be overlooked if it is embedded further in the document. Moreover,
Credit Suisse has advised us that it received specific approval from
Shelley Parrett of the Staff to position the dealer prospectus delivery
obligation in this location for its offerings. Therefore, we respectfully
submit that it should be retained in its current position.
Industry and Market Data, page iv
5. We note your disclosure here and throughout the filing that you have
included market and industry data based on independent industry
publications, government publications, reports by market research firms or
other published independent sources. Please revise your disclosure
throughout the prospectus to indicate the date of each of the reports you
reference. Additionally, please be advised that you must provide consents
with respect to any statistics or other data that are not based on public
information available for free or at a nominal cost. See Rule 436 of
Regulation C. Alternatively, you may remove the reference to the third
party or parties and attribute the applicable information to the company,
based on its own research.
RESPONSE:
The disclosure throughout the filing has been revised to attribute certain
information to Spirit Holdings, based on its own research. The only
remaining reference to a market research firm (the Teal Group) refers to
data published in The Wichita Eagle and we have added a statement that such
information is according to published reports. Since the newspaper article
does not provide the date of the published reports that it quotes, we are
unable to indicate the date of the report being referenced in the
Registration Statement. Please see pages 2, 78, 79 and 82.
Summary, page 1
General
6. Please revise to balance the disclosure regarding your competitive
strengths and the benefits of your business strategy with a brief
discussion of the principal challenges or risks associated with your
business. For example, while your disclosure in this section discusses the
fact that you have been awarded significant work on Boeing's new B787
aircraft, you should also disclose that the success of your business will
depend, in large part, on the success of the B787 program. Additionally,
you disclose in this section that your long-term contracts provide you with
a stable base business, but should also highlight for investors the risks
associated with how your long-term fixed price contracts could affect your
business strategy.
August 29, 2006
Page 4
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see page 6.
Overview, page 1
7. We note that your summary, in large part, repeats the information contained
in the "Business" section. The summary should not merely repeat the text of
the prospectus but should provide a brief overview of the key aspects of
the offering. Carefully consider and identify those aspects of the offering
that are the most significant. Please refer to Instruction to 503(a) of
Regulation S-K.
RESPONSE:
The Summary has been revised to reduce the disclosure and delete repetitive
information in response to the Staff's comment. Please see pages 1 through
6.
8. We note your statement that you are the "largest independent non-OEM
designer and manufacturer of aerostructures in the world," here and
elsewhere in the prospectus. We also note your statements in the second
paragraph. Please supplementally provide us with support for these
statements.
RESPONSE:
Concurrently with the filing of Amendment No. 1, we are supplementally
providing to the Staff the materials that support the statements regarding
our leading position and other requested statements in the prospectus.
9. Please revise throughout your filing to remove references to your 75 years
of operating history, as you have just recently begun to operate as a
stand-alone entity.
RESPONSE:
The disclosure has been revised to make clear that Spirit Holdings'
predecessor, Boeing Wichita, has 75 years of operating history. Please see
pages 1, 77 and 80.
10. Please refer to the last sentence of the first paragraph. Please balance
your disclosure by disclosing the amount of losses or net income generated
during the same time period.
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see page 1.
11. We note in the third paragraph that you derive your revenues primarily from
Boeing and Airbus. Please revise to indicate here the percentage of
revenues derived from each customer. We note your disclosure on pages 13
and 89.
August 29, 2006
Page 5
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see page 1.
Pursue Strategic Acquisitions on an Opportunistic Basis, page 5
12. We note that in this section and in other places throughout the filing you
mention your plan to capture additional market share and diversify your
current business through opportunistic strategic acquisitions. Please tell
us whether you have any current plans, proposals or arrangements with
respect to specific acquisition candidates.
RESPONSE:
Spirit Holdings currently has no plans, proposals or arrangements to enter
into any strategic acquisitions.
Risk Factors
13. We note your disclosure on page 94, which indicates that you compete with
Boeing and Airbus. If there is a material risk to the company related to
competing with your customers, please revise to provide a separate risk
factor addressing this risk.
RESPONSE:
In most cases, Spirit Holdings does not compete with its customers in the
classic sense, i.e., for third party business. Spirit Holdings does,
however, compete with Boeing and Airbus in the sense that if they decide to
produce their own aerostructures internally, there would be fewer business
opportunities for Spirit Holdings. Spirit Holdings does not believe there
is a material risk of harm to the customer relationship as a result of this
type of competition.
Furthermore, Spirit Holdings' contracts with each of Boeing and Airbus are
exclusive, and prohibit each of the companies from manufacturing internally
the supplies and equipment that Spirit Holdings provides. As a result,
Spirit Holdings does not believe there is a material risk related to
competing with its customers during the period covered by its contracts
with them.
Spirit Holdings does compete directly with Boeing in the spares and
maintenance repair and overhaul aftermarket sectors. However, as part of
Spirit Holdings' initial acquisition of Boeing Wichita, Boeing empowered
Spirit Holdings to compete with it in those sectors, and licensed to Spirit
Holdings certain intellectual property necessary to enable Spirit Holdings
to so compete. Accordingly, Spirit Holdings does not believe there is a
material risk of harm to its relationship with Boeing as a result of its
competing with Boeing in the spares and maintenance, repair and overhaul
sectors.
August 29, 2006
Page 6
Our business will suffer if certain key officers or employees discontinue
employment with us, page 18
14. Please revise to discuss any specific risks associated with losing Jeffrey
Turner as your President and CEO.
RESPONSE:
The disclosure has been revised to specifically identify Jeffrey Turner's
importance to Spirit Holdings as its President and CEO. Please see page 17.
We are subject to the requirement of the National Industrial Security Program
Operating Manual, page 18
15. Please revise to clarify how much of your business relates to classified
contracts so investors can understand the significance of this risk factor.
RESPONSE:
The disclosure has been revised to clarify that classified contracts
comprise a minimal portion of Spirit Holdings' business. Please see page
17.
Use of Proceeds, page 31
16. We could not locate disclosure regarding the determination of offering
price as outlined in Item 505 of Regulations S-K. Please revise or advise.
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see page 136.
Unaudited Pro Forma Consolidated Financial Data, page 39
17. Please revise the header to correct the company name.
RESPONSE:
The header has been revised in response to the Staff's comment. Please see
page 39.
Selected Consolidated Financial Information and Other Data, page 45
18. Please include the selected consolidated financial data of the predecessor
for the three months ended March 30, 2005. Refer to Item 301(b)(4) of
Regulation S-K for guidance.
August 29, 2006
Page 7
RESPONSE:
The financial data has been updated for the second quarter ended June 29,
2006 and includes selected consolidated financial data of the predecessor
for the five and one-half months ended June 16, 2005. Please see page 45.
19. Please include the per share basic and diluted data for Spirit Holdings.
Refer to Item 301(b)(2) of Regulation S-K for guidance.
RESPONSE:
The per share basic and diluted data for Spirit Holdings has been provided
in response to the Staff's comment. Please see pages 9, 37, 39, 40 and 45.
As we stated above, Spirit Holdings anticipates that a stock split of its
common stock will occur immediately prior to the consummation of the
offering, but has not yet determined the rate of the stock split. Once the
rate of the stock split is known, Spirit Holdings will apply such split
retroactively to all per share data included in the Registration Statement.
MD&A
Market Trends, page 48
20. Please enhance your disclosure regarding the possibility of Boeing
terminating its B747 and B767 programs to include a discussion of your
evaluation of likelihood and the potential impact to your future results of
operations. We note from page 52 that these models represent 6% of the
production units by program as of March 30, 2006.
RESPONSE:
The disclosure regarding the possibility of Boeing terminating its B747
program has been deleted because Spirit Holdings believes, based on recent
developments, that there is no longer a significant likelihood that Boeing
will terminate this program in the near future. The disclosure regarding
the B767 process has been revised in response to the Staff's comment.
Please see page 48.
Boeing Strike, page 50
21. Please tell us (1) the amount of revenue recognized on ship-in-place units,
(2) when final delivery was made to the customer site and (3) why revenue
recognition was appropriate during the ship-in-place period. In your
response cite each of the criteria that must be met in order to recognize
revenue when delivery has not occurred, as outlined in the guidance in SAB
Topic 13(3)(a).
August 29, 2006
Page 8
RESPONSE:
During the strike from September 2, 2005 through September 29, 2005 of the
International Association of Machinists and Aerospace Workers ("IAM") in
the Puget Sound area, Boeing suspended commercial airplane production.
Boeing then required Spirit Holdings' wholly-owned subsidiary, Spirit
AeroSystems, Inc. ("SPIRIT") to hold all completed units at a Spirit owned
facility until Boeing's affected commercial airplane operations were
resumed. This arrangement was initiated by Boeing due to the lack of
available space to store all of the large aerostructures that would
accumulate while its production line was down and was formalized in a
written memorandum from Boeing to Spirit. This ship-in-place ("S-I-P")
program required that the completed production units be moved by Spirit to
on-site bonded storage areas which were subject to the terms of a Bonded
Stores Agreement ("BSA"). Products moved to these storage areas were
considered by Boeing to be "delivered" in accordance with the supply
contract and payment was made consistent with the terms of the applicable
supply contract. During the period when the S-I-P program was in place,
Spirit complied with the terms of this program and recognized revenue on
completed units consistent with the terms of the contracts covered by the
S-I-P program. Although the IAM's strike ended September 29, 2005, Boeing
needed additional time to resume full commercial airplane production after
the shut-down and to consume completed units under the S-I-P agreement. As
a result, the S-I-P agreement continued through early January 2006 for
certain aerostructures.
The total sales value of the completed production units that were shipped
in place was approximately $506 million during the period from September 2,
2005 through January 2006. Approximately $480 million and $26 million were
recognized as revenue by Spirit in 2005 and 2006, respectively. The
physical delivery of the units to Boeing began after the end of the strike
on September 29, 2005, and continued through January 2006 with
approximately $431 million, or 85% of the total shipped in place units,
being physically delivered to Boeing prior to December 31, 2005. The
balance of these units was physically delivered by February 27, 2006.
Ship-In-Place Program Summary ($ in millions)
<Table>
<Caption>
Quarter Revenue Recognized Value of Total Company Percentage of S-I-P Revenue
on S-I-P Items Physical Shipments Revenue (approx) to Total Company Revenue
3rd Quarter 2005 $ 97.1 $ 6.1 $ 639.0 15.2%
4th Quarter 2005 $383.1 $424.5 $ 547.2 70.0%
1st Quarter 2006 $ 25.8 $ 75.4 $ 663.5 3.9%
Total $506.0 $506.0 $1,849.7 27.4%
</Table>
The production units that were subject to the S-I-P program that was
implemented by Boeing are covered under the long-term fixed-price contracts
that were entered into with Boeing when Spirit became a stand alone company
in 2005. As described in the Revenue Recognition section of footnote 2,
Summary of Significant Accounting Policies, to Spirit Holdings'
consolidated financial statements, Spirit Holdings accounts for these
contracts using SOP 81-1, Accounting for Performance of Construction-Type
and Certain Production-Type Contracts ("SOP 81-1").
August 29, 2006
Page 9
SOP 81-1 includes a comment that states "transactions within the scope of SOP
81-1 are not subject to the views expressed in Staff Accounting Bulletin (SAB)
101, Revenue Recognition in Financial Statements, issued by the Securities and
Exchange Commission." In addition, SAB Topic 13, referenced in the Staff's
comment, states that "if a transaction is within the scope of specific
authoritative literature that provides revenue recognition guidance, that
literature should be applied." Nevertheless, the Company did evaluate the
revenue recognition criteria in SAB Topic 13 (3)(a) as follows:
1. THE RISKS OF OWNERSHIP MUST HAVE PASSED TO THE BUYER. - Title to the S-I-P
units and the risk of ownership were transferred to Boeing. Boeing had
physical access to the S-I-P units at its request and could withdraw the
units at its discretion. In the event one of Boeing's customers cancelled
an order, Boeing was still required to pay for the S-I-P unit and was not
entitled to a refund or credit. Boeing was also responsible for any
decline in market value while the S-I-P units were warehoused at Spirit.
Spirit was responsible for any damage to the completed units while in its
custody.
2. THE CUSTOMER MUST HAVE MADE A FIXED COMMITMENT TO PURCHASE THE GOODS,
PREFERABLY IN WRITTEN DOCUMENTATION. - As discussed above, Boeing
initiated the S-I-P program, and it was documented in a written memorandum
to Spirit.
3. THE BUYER, NOT THE SELLER, MUST REQUEST THAT THE TRANSACTION BE ON A BILL
AND HOLD BASIS. THE BUYER MUST HAVE A SUBSTANTIAL BUSINESS PURPOSE. - As
discussed above, Boeing did request the S-I-P program and had a valid
business purpose in doing so. In addition to the IAM strike, Boeing did
not have the physical storage capacity to accommodate the large
aerostructures supplied by Spirit as these components are generally
delivered to Boeing as required by their production schedule.
4. THERE MUST BE A FIXED SCHEDULE FOR DELIVERY OF THE GOODS. THE DATE FOR
DELIVERY MUST BE REASONABLE AND MUST BE CONSISTENT WITH THE BUYER'S
BUSINESS PURPOSE. - Specific dates for delivery were contingent upon
Boeing's resolution of the IAM strike. Spirit and Boeing assumed the IAM
strike would be resolved relatively quickly (within 90 days) and in
actuality it was resolved within 30 days. Spirit resumed shipments
immediately following the resolution of the IAM strike on September 29,
2005.
5. THE SELLER MUST NOT HAVE RETAINED ANY SPECIFIC PERFORMANCE OBLIGATIONS
SUCH THAT THE EARNING PROCESS IS NOT COMPLETE. - Spirit had no specific
performance obligations associated with the S-I-P units.
6. THE ORDERED GOODS MUST HAVE BEEN SEGREGATED FROM THE SELLER'S INVENTORY
AND NOT BE SUBJECT TO BEING USED TO FILL OTHER ORDERS. - The S-I-P units
were fully segregated from other Spirit inventory and were not subject to
use on other orders.
7. THE PRODUCT MUST BE COMPLETE AND READY FOR SHIPMENT. - The S-I-P units
were complete and ready for shipment.
August 29, 2006
Page 10
The Company also evaluated Spirit's pricing and payment terms associated
with the S-I-P units, which did not deviate from Spirit's contractually
determined terms with Boeing. Spirit viewed the S-I-P program as a unique
arrangement that was initiated by its primary customer, Boeing. For the
reasons noted above, Boeing demonstrated appropriate business purpose in
requesting the S-I-P program and Spirit concluded that its revenue
recognition was appropriate.
Inventory, page 53
22. Please provide to us a description of the nature of your pre-production
cost included in inventory. In addition, fully explain to us how the
accounting complies with EITF 99-5. With respect to the guidance in EITF
99-5, it appears that pre-production costs for products to be sold should
be expensed as incurred.
RESPONSE:
Based upon the legislative history of EITF 99-5, the Company believes that
contracts subject to the guidance of SOP 81-1 have been excluded from the
scope of EITF 99-5. In EITF 99-5, Issue Summary 1, Supplement 1, the FASB
staff recommended that EITF 99-5 not apply to arrangements within the scope
of SOP 81-1. Such views notwithstanding, the Company understands that a
reasonable analogy may be made to the guidance in EITF 99-5 relative to its
pre-production costs. The Company confirms that all pre-production design
and development costs related to activities that constitute research and
development pursuant to Statement of Financial Accounting Standards
("SFAS") No. 2 have been expensed as incurred. The Company has capitalized
pre-production costs once research and development has ceased. Such costs
include finalizing bills of material and manufacturing plans to allow for
efficient commercial production and entering of final designs into the
Company's engineering software databases, all of which are required
components of the Company's contractual agreement with Boeing. Lastly, the
capitalized costs include tool design which is not subject to research or
development. In all instances, the Company believes that the capitalized
pre-production costs do not represent research and development, are
contractually specified with Boeing, and are highly probable of
recovery through existing orders received by Boeing.
August 29, 2006
Page 11
Specifically, in determining which of these costs are deferred as
contract costs, the Company considered the guidance within paragraphs 12
through 13 of SOP 81-1, which state:
"Contracts covered by this statement of position are binding agreements
between buyers and sellers in which the seller agrees, for compensation, to
perform a service to the buyer's specifications. Contracts consist of
legally enforceable agreements in any form and include amendments,
revisions and extensions of such agreements. Performance will often extend
over long periods, and the seller's right to receive payment depends on his
performance in accordance with the agreement. The service may consist of
designing, engineering, fabricating, constructing or manufacturing related
to the construction or production of tangible assets....Contracts covered
by this statement include, but are not limited to, the following:
...contracts to design, develop, manufacture or modify complex aerospace or
electronic equipment to a buyer's specification or to provide services
related to the performance of such contracts."
Although SOP 81-1 indicates contracts for the design, development and
manufacturing of complex aerospace are within its scope, it does not
provide explicit guidance on how to account for these pre-production design
and engineering costs. Paragraph 70 of SOP 81-1, which describes allowable
contract costs, indicates, "authoritative accounting pronouncements require
costs to be considered period costs if they cannot be clearly related to
production." Paragraph 74 of SOP 81-1, which discusses pre-contract and
certain learning or start-up costs, includes a footnote reference to SFAS
No. 2. Therefore, it is the Company's understanding that SFAS No. 2 should
be considered in evaluating whether certain pre-production costs should be
expensed or deferred in long-term contracts not containing guaranteed
reimbursement for such costs.
SFAS No. 2, paragraph 8 defines research and development costs as follows:
"Research is planned search or critical investigation aimed at discovery of
new knowledge with the hope that such knowledge will be useful in
developing a new product or service (hereinafter "product") or a new
process or technique (hereinafter "process") or in bringing about a
significant improvement to an existing product or process.
Development is the translation of research findings or other knowledge
into a plan or design for a new product or process or for a significant
improvement to an existing product or process whether intended for sale or
use. It includes the conceptual formulation, design and testing of product
alternatives, construction of prototypes and operation of pilot plants. It
does not include routine or periodic alterations to existing products,
production lines, manufacturing processes and other on-going operations
even though those alterations may represent improvements and it does not
include market research or market testing activities."
August 29, 2006
Page 12
SFAS No. 2, paragraph 9 provides the following guidance:
"The following are examples of activities that typically would be included
in research and development in accordance with paragraph 8 (unless
conducted for others under a contractual arrangement):
a. Laboratory research aimed at discovery of new knowledge.
b. Searching for applications of new research findings or other
knowledge.
c. Conceptual formulation and design of possible product or process
alternatives.
d. Testing in search for or evaluation of product or process
alternatives.
e. Modification of the formulation or design of a product or process.
f. Design, construction and testing of pre-production prototypes and
models.
g. Design of tools, jigs, molds and dies involving new technology.
h. Design, construction and operation of a pilot plant that is not of a
scale economically feasible to the enterprise for commercial
production.
i. Engineering activity required to advance the design of a product to
the point that it meets specific functional and economic requirements
and is ready for manufacture."
The following is a summary of Spirit Holdings' assessment (in bold) of the
aforementioned criteria contained in SFAS No. 2, paragraph 9:
a. Laboratory research aimed at discovery of new knowledge. - THE
COMPANY IS NO LONGER PERFORMING RESEARCH AIMED AT THE DISCOVERY OF
NEW KNOWLEDGE. THE INITIAL LABORATORY RESEARCH FOR THE B787 WAS
PERFORMED EARLY IN THE PROJECT. BOEING AND THE COMPANY HAVE INVESTED
SIGNIFICANTLY IN THE INITIAL RESEARCH WHICH INCLUDED ADDITIONAL
RESEARCH ON THE COMPOSITE MATERIALS UTILIZED IN THE B787. THESE COSTS
WERE EXPENSED BY BOEING AND THE COMPANY AS INCURRED.
August 29, 2006
Page 13
b. Searching for applications of new research findings or other
knowledge. - THE COMPANY IS NO LONGER SEARCHING FOR THE APPLICATION
OF NEW RESEARCH FINDINGS OR OTHER KNOWLEDGE. BOEING HAS ISSUED ITS
FIRM DESIGN CONFIGURATION DECLARATION FOR THE B787 AND IS ACTIVELY
MARKETING THE AIRCRAFT TO AIRLINES, LEASING COMPANIES AND FREIGHT
COMPANIES AS EVIDENCED BY BOEING'S APRIL 2006 ORDER LOG OF 393 B787
AIRCRAFT.
c. Conceptual formulation and design of possible product or process
alternatives. - BOEING AND THE COMPANY COMPLETED THE CONCEPTUAL
FORMULATION AND DESIGN OF POSSIBLE PRODUCT ALTERNATIVES EARLIER IN
THE PROJECT INCLUDING CONSIDERATION OF A METAL, COMPOSITE AND HYBRID
AIRCRAFT. THE COSTS ASSOCIATED WITH THOSE ACTIVITIES WERE EXPENSED AS
INCURRED.
d. Testing in search for or evaluation of product or process
alternatives. - BOEING AND THE COMPANY COMPLETED THESE EFFORTS
RELATED TO THE B787 EARLIER IN THE PROJECT. NO SUCH ACTIVITIES ARE
BEING COMPLETED OTHER THAN STRESS TESTING. COSTS ASSOCIATED WITH THE
COMPANY'S STRESS TESTING ACTIVITIES HAVE BEEN AND WILL CONTINUE TO BE
EXPENSED AS INCURRED.
e. Modification of the formulation or design of a product or process. -
THE COMPANY IS NOT MODIFYING THE DESIGN OF THE B787 AIRCRAFT AS
BOEING HAS ISSUED FIRM DESIGN CONFIGURATION DECLARATION OF THE PLANE
AND HAS PROVIDED SUCH DECLARATION TO ITS SUPPLIERS.
f. Design, construction and testing of pre-production prototypes and
models. - THE COMPANY HAS COMPLETED THE DESIGN, CONSTRUCTION AND
INITIAL TESTING OF TWO PROTOTYPES. THE COSTS ASSOCIATED WITH THESE
ACTIVITIES WERE EXPENSED AS INCURRED.
g. Design of tools, jigs, molds and dies involving new technology. - THE
COMPANY IS NOT UTILIZING NEW TECHNOLOGIES IN DESIGNING THE TOOLING
NECESSARY FOR THE B787 PROGRAM. ALTHOUGH THE B787 WILL BE CONSTRUCTED
UTILIZING SIGNIFICANT COMPOSITE MATERIALS, THE COMPANY HAS A LONG
HISTORY OF DESIGNING AND MANUFACTURING COMPOSITE-BASED STRUCTURES.
h. Design, construction and operation of a pilot plant that is not of a
scale economically feasible to the enterprise for commercial
production. - THE COMPANY IS NOT DESIGNING, CONSTRUCTING AND
OPERATING A PILOT PLANT IN CONNECTION WITH THE B787 PROGRAM. FULL
COMMERCIAL PRODUCTION WILL COMMENCE IN EXISTING FACILITIES IN
WICHITA, KANSAS AND TULSA, OKLAHOMA. CERTAIN FACILITY CUSTOMIZATION
(INCLUDING THE INSTALLATION OF THE AUTOCLAVE (OVEN) NECESSARY TO
PRODUCE THE COMPOSITE FRAME OF THE B787 FUSELAGE) IS COMPLETE.
ADDITIONAL SPECIALIZED EQUIPMENT CONTINUES TO BE INSTALLED AT THESE
FACILITIES.
August 29, 2006
Page 14
i. Engineering activity required to advance the design of a product to
the point that it meets specific functional and economic requirements
and is ready for manufacture. - ONCE THE COMPANY MEETS ITS FINAL DATA
PACKAGE CREATION ("FDPC") MILESTONE, WHICH IS A DETAILED DESIGN
SPECIFICATION BY PART INCLUDING FULL 3-D GEOMETRY, FUNCTIONAL
TOLERANCES AND EXPLANATORY ENGINEERING ANNOTATIONS, IT IS READY TO
MANUFACTURE WITHIN THE CONTEXT OF SFAS NO. 2. ONCE THE FDPC MILESTONE
IS ACHIEVED, THE COMPANY IS NOT ADVANCING NEW TECHNOLOGIES OR THE
DESIGN OF ITS COMPONENT PARTS. ENGINEERING COSTS INCURRED PRIOR TO
THAT MILESTONE BEING MET ARE EXPENSED AS INCURRED. QUALIFYING
ENGINEERING COSTS, INCLUDING THOSE NOTED BELOW, WILL BE DEFERRED AS
A CONTRACT COST ONCE THE FDPC MILESTONE IS MET:
- Manufacturing/process engineering - finalize bills of material
and manufacturing and assembly plans to allow full and efficient
commercial production including references to specific tools and
equipment. The manufacturing and assembly plans are required
components of the contractual agreement with Boeing and will be
utilized by production and assembly personnel throughout the
lifecycle of the B787 contract. Additionally, manufacturing
engineers will assist with the programming of automated equipment
and tools (e.g. lathes, milling machines, etc.) to produce
specific components.
- Design engineering - release of FDPC to final designs within
the Company's Enovia (engineering software) databases. Freezing
final designs within Enovia are also a required component of the
Company's contractual agreement with Boeing. Included therein
will be final systems drawings and schematics that will be
utilized by production employees to ensure electrical,
hydraulics, lighting and other systems within the structural
components are properly assembled. These designs will be utilized
by production and assembly personnel throughout the lifecycle of
the B787 contract.
- Tool design engineers - complete final tool design to
correspond with FDPC/frozen design plans of specific component
parts. The tooling resulting from these activities is expected to
be utilized throughout the lifecycle of the B787 contract.
August 29, 2006
Page 15
Credit Facilities, page 65
23. Please expand your disclosure to disclose the amount of borrowings
outstanding under your senior secured credit facility.
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see page 67.
Cash Flow, page 67
24. Please disclose the material factors that impacted operating cash flows in
terms of cash. As you use the indirect method, merely reciting changes in
line items reported in the statement of cash flows is not sufficient. Refer
to the guidance in Section IV(B) of FR-72 (Release No. 33-8350).
RESPONSE:
The disclosure has been revised in response to the Staff's comment to
identify the underlying drivers for additional components of operating cash
flows. Please see page 69.
Tax Incentive Bonds, page 67
25. Please revise your description of the IRBs to explain in more detail the
terms of the IRBs and disclose the amounts related to the IRB bonds.
Additionally, tell us in greater detail why you believe offsetting is
appropriate.
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see pages 68 and 69.
In accordance with SFAS Interpretation No. 39, Offsetting of Amounts
Related to Certain Contracts: an Interpretation of APB Opinion No. 10 and
FASB Statement No. 105, there are four conditions that must be met for an
entity to have the ability to offset a liability against an asset. If the
conditions set forth below are satisfied, a debtor having a valid right of
set off may offset the related asset and liability and report the net
amount. The requisite conditions and our analysis follow.
(a) Each of the two parties owes the other determinable amounts.
Spirit has satisfied this condition as the amounts owed by it as
debtor under the bonds are set forth in the bonds and the lease
provides for payments of identical amounts to the holders of the
bonds, which is also Spirit.
(b) The reporting party has the right to set off the amount owed with
the amount owed by the other party. The leases provide Spirit
with the right to set off payments due under the lease with the
corresponding principal and interest due on the bonds which it
has paid in full on behalf of the issuer of the bonds, the City
of Wichita. Since Spirit is the holder of the bonds as well as
the lessee under the lease, Spirit may satisfy the bond payments
in full, and therefore, is entitled to set off against payment
due under the lease without making any payment to the bondholder.
August 29, 2006
Page 16
(c) The reporting party intends to set off. Spirit's intention is to
set off the debt at the time of repayment.
(d) The right of set off is enforceable at law. Spirit received an
opinion from the law firm of Foulston Siefkin LLP that, subject
to standard assumptions and qualifications, the set off provision
set forth in the lease is valid, binding and enforceable.
Since the IRB arrangement satisfies each of the conditions required for set
off, Spirit Holdings may offset the IRB lease obligation against its bond
receivable, and therefore, has no requirement to show net debt on its
balance sheet resulting from the IRB arrangement.
Open Infrastructure Offering, page 67
26. Please revise to briefly describe the penalties you would incur if you were
in default under the OIO agreement.
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see page 69.
Contractual Obligations, page 68
27. It appears from the December 29, 2005 consolidated balance sheet that there
is current long term debt of $11.6 million and long term debt of $710.0
million. Please tell us how these amounts reconcile to amounts reflected in
your table of contractual obligations. In addition, please provide all of
the information specified by Item 303(a)(5) of Regulation S-K in regards to
tabular disclosure of contractual obligations. Your current table does not
include other long-term liabilities reflected on your balance sheet or any
purchase obligations. We also believe that you should include any
management fee obligations to Onex, your obligations under the Transition
Services Agreement and scheduled interest payments because the purpose of
the table is to clearly show your future cash requirements. If certain
interest rates are unknown, you may use judgment in determining an
appropriate methodology to estimate the interest payments, e.g., apply the
currently applicable interest rate to calculate the value of future
payments and disclose the methodology utilized. Please revise accordingly.
RESPONSE:
The sum of the current portion of long term debt of $11.6 million and long
term debt of $710.0 million on Spirit Holdings' December 29, 2005
consolidated balance sheet equals aggregate long term debt of $721.6
million. This $721.6 million reconciles with the sum of the $696.5 million
of "Principal Payment on Term Loan B" and the $25.1 million of
"Non-Cancelable Capital Lease Payments" set forth in the "Total" column of
the contractual obligations table, which amounts also equal $721.6 million.
August 29, 2006
Page 17
The current portion of long term debt of $11.6 million on Spirit Holdings'
December 29, 2005 consolidated balance sheet represents the portion of
Spirit Holdings' long term debt payable by December 29, 2006. This amount
is included in the sum of the $7.0 million of "Principal Payment on Term
Loan B" and the $6.3 million of "Non-Cancelable Capital Lease Payments" set
forth in the "2006" column of the contractual obligations table, which
equals $13.3 million. The amounts in the 2006 column are the obligations
due any time in Spirit Holdings' 2006 fiscal year which will end on
December 31, rather than December 29. The difference between the $13.3
million of obligations in 2006 and the $11.6 million current portion of
long term debt on Spirit Holdings' December 29, 2005 consolidated balance
sheet reflects an additional principal payment under Spirit Holdings'
senior secured credit facility due on December 31, 2006.
The disclosure has been expanded in response to the Staff's comment. Please
see page 70.
28. We note your disclosure on page 69 that you incur capital expenditures for
the purpose of maintaining existing equipment and facilities. Generally
maintenance is expensed as incurred. Please tell us the facts and
circumstances surrounding the capitalization of these maintenance
expenditures.
RESPONSE:
The disclosure has been revised to clarify that Spirit Holdings incurs
capital expenditures for the purpose of maintaining production capacity
through replacement of existing equipment and facilities. Please see page
71.
Business
Our Competitive Strengths, page 78
29. Please reconcile for us the $6 billion combined insurable replacement value
of all the equipment you own or operate with the fair value of owned
equipment in your purchase price allocation disclosure on page F-9. Please
consider revising your competitive strengths disclosure to clarify the
insurable values of each of the owned and operated equipment to avoid
confusion.
RESPONSE:
The disclosure has been revised in response to the Staff's comment, and now
reflects a $5 billion insurable replacement value of all the buildings and
equipment owned or operated by Spirit Holdings, including approximately
$2.3 billion and approximately $1.7 billion for buildings and equipment,
respectively, owned by Spirit Holdings and its subsidiaries and
approximately $1.1 billion for other equipment used in the operation of
Spirit Holdings' business. Please see pages 3 and 80. The $6 billion figure
in the original filing of the Registration Statement included an additional
approximately $1 billion in coverage for inventory, minor assets, business
interruption, etc. that has now been excluded.
August 29, 2006
Page 18
The fair value set forth in the purchase price allocation disclosure was
determined by an independent corporate value consulting firm only for
purposes of financial reporting in accordance with SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
Such valuation was determined using generally accepted income, market and
cost approaches as appropriate for each type of asset. None of these
approaches necessarily reflects actual replacement value, which is the
basis for the value under Spirit Holdings' property insurance.
Our Relationship with Boeing, page 81
30. Please refer to the middle of the first paragraph. We note you describe
portions of the Supply Agreement and that the "description of the Supply
Agreement does not purport to be complete." Please revise to clarify that
your are describing the material portions of your agreement.
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see page 83.
Legal Proceedings, page 95
31. While your disclosure in this section indicates that plaintiffs in the
Apsley litigation seek more than $1.5 billion in damages, Note 15 to the
financial statements indicates that the plaintiffs seek up to $3 billion in
damages. Revise to clarify the amount sought by the plaintiffs in this
action. Additionally, ensure that your next amendment includes updated
information regarding the status of this litigation. We note, for example,
that Spirit's response to complaints with the EEOC was due June 30, 2006.
RESPONSE:
The disclosure has been revised in response to the Staff's comment. We have
also included updated information with respect to the status of the
litigation. Please see pages 20, 97 and 98.
Management, page 98
32. Please revise this section to disclose the relevant dates of business
experience during the past five years for Mr. Kadish and Mr. McGillicuddy.
Refer to Item 401(e) of Regulation S-K.
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see page 103.
August 29, 2006
Page 19
Directors, page 101
33. Please revise your disclosure to state the term of office of each director.
Please refer to Item 401(a) of Regulation S-K.
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see page 100.
Executive Compensation, page 105
34. We note footnote 4. Please revise to clarify, if true, that the table does
not include amounts of compensation that, in the aggregate, are less than
$50,000 or 10% of the total of annual salary and bonus reported in the
table.
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see page 107.
35. Your disclosure in this section and in Option Grants and Stock Awards is
confusing in that it is unclear whether the shares under Option Grants and
Stock Awards were issued in addition to the share issuances reported in the
footnotes to the executive compensation table or whether this disclosure
just provides additional information regarding the awards described in the
footnotes. Revise to clarify and please note that all compensation earned
during 2005 should be reported in the executive compensation table. See
Item 402(b)(2)(iii) of Regulation S-K.
RESPONSE:
The disclosure has been revised to clarify that the grants of stock awards
in fiscal 2005 to our named executive officers that are set forth under the
caption "Option Grants and Stock Awards" are the same grants of stock
awards set forth in the Summary Compensation Table. Please see page 108.
Employment Agreements, page 107
36. Please revise to explain for investors what you mean by "phantom stock" and
describe any rights associated with it. We also note your disclosure on
page 114.
RESPONSE:
The disclosure has been revised to remove extraneous references to phantom
stock in the description of Jeffrey Turner's and Rick Schmidt's employment
agreements on page 109 and to add a cross-reference on page 116 to a more
complete description of rights associated with phantom stock units (the
"UNITS").
August 29, 2006
Page 20
We believe the description of the Supplemental Executive Retirement Plan on
pages 110 and 111 adequately describes the rights associated with the
Units.
Long-Term Incentive Plan, page 110
37. Please revise to provide the Long-Term Incentive Plan table required by
Item 402(e) of Regulation S-K or advise.
RESPONSE:
Spirit Holdings does not believe that the Long-Term Incentive Plan table
required by Item 402(e) of Regulation S-K is required to be included in the
Registration Statement. Long-term incentive plan is defined in Item
402(a)(7)(iii) of Regulation S-K as "any plan providing compensation
intended to serve as incentive for performance to occur over a period
longer than one fiscal year, whether such performance is measured by
reference to financial performance of the registrant or an affiliate, the
registrant's stock price, or any other measure, but excluding restricted
stock, stock option and SAR plans". Even though Spirit Holdings' Long-Term
Incentive Plan does serve as incentive for performance by an executive
employee to occur over a one year period after the date such shares were
granted, all of the shares granted pursuant to this plan are required by
the terms of the plan to be restricted shares, and therefore do not meet
the definition of long-term incentive plan set forth above. For this
reason, we do not think it is appropriate to include a Long-Term Incentive
Plan table in the Registration Statement. We have included disclosure of
grants of restricted stock to our named executive officers under the
Long-Term Incentive Plan and other plans in the Summary Compensation Table
in accordance with Item 402(b)(2)(iv) of Regulation S-K. Please see pages
107 and 108.
Certain Relationships and Related Party Transactions, page 112
38. Please reconcile for us the aggregate purchase price of common shares
issued through March 31, 2006 with the balance of paid-in capital on your
balance sheet at March 31, 2006.
RESPONSE:
The aggregate purchase price of common shares issued through June 29, 2006
does not reconcile with the balance of paid-in capital on Spirit Holdings'
balance sheet at June 29, 2006 due to the following: (1) not all shares
purchased are included in the table on pages 113 and 114; the table only
includes purchases of shares by Spirit Holdings' and Spirit's directors and
executive officers and beneficial owners of more than 5% of Spirit
Holdings' outstanding voting securities; and (2) certain of the amounts
listed in the table for Onex Corporation and its affiliates are
duplicative, as more than one holder could be deemed the beneficial owner
of certain shares listed. Onex Corporation could be deemed the beneficial
owner of all of the shares beneficially owned by each of Onex Partners LP,
Onex American Holdings II LLC, Wind Executive Investco LLC, Onex U.S.
August 29, 2006
Page 21
Principals LP and Onex Spirit Co-Invest LP. Accordingly the purchase price
listed for Onex Corporation is equal to the total of the purchase prices
listed for the other five entities. In addition, the purchase prices listed
for Seth Mersky and Nigel Wright are equal to their proportional share,
based on pecuniary interests of the purchase prices for Onex Partners LP
and Onex Spirit Co-Invest LP.
Principal and Selling Stockholders, page 116
39. Please clarify who the selling stockholders will be and tell us whether any
of your selling stockholders are registered broker-dealers or affiliated
with a broker-dealer.
RESPONSE:
At this time, Spirit Holdings does not know which of its stockholders will
be participating in the offering or if any of the selling stockholders are
registered broker-dealers or affiliated with a broker-dealer. Spirit
Holdings will identify the selling stockholders in a future amendment and
will supplementally advise the Staff if any of the selling stockholders are
registered broker-dealers or affiliated with a broker-dealer.
Financial Statements
40. Please revise to include Schedule II as required by Item 5.04 of Regulation
S-X. Your schedule should include valuation allowance for deferred taxes,
obsolete inventory, warranty and bad debt.
RESPONSE:
The disclosure has been revised to include Schedule II as required by Item
5.04 of Regulation S-X. Please see page II-5.
Consolidated Financial Statements, page F-1
41. Please tell us the amount of and where on the financial statements you have
recorded the minority interests in the Kansas Industrial Energy Supply
Company.
RESPONSE:
The minority interests associated with our majority-owned subsidiary, the
Kansas Industrial Energy Supply Company, were approximately $0.5 million at
June 29, 2006 and December 29, 2005, and are reflected as a component of
Other Liabilities on the face of our consolidated balance sheet. Please see
page F-4.
Consolidated Statements of Stockholders' Equity, page F-5
42. Please revise to include a total column.
August 29, 2006
Page 22
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see page F-5.
Notes to the Consolidated Financial Statements
Note 2: Summary of Significant Accounting Policies, page F-7
43. With regard to the acquisition of Boeing Wichita, please revise to disclose
a description of the factors that contributed to a purchase price
significantly less than the fair value of net assets acquired.
RESPONSE:
The disclosure has been revised in response to the Staff's comment to
disclose that the purchase price paid by Spirit Holdings for Boeing Wichita
was negotiated in an arms-length transaction. Please see page 28.
The negotiation followed an auction conducted by Boeing and its advisors.
Spirit Holdings believes that the factors that contributed to a purchase
price which was significantly less than the fair value of net assets
acquired are too speculative to disclose in the Registration Statement. One
of the primary factors may have been the potential risk of success of the
business as a stand alone entity. The risk of success of the business was
tied to the uncompetitive cost structure associated with the purchased
assets, in particular, the cost of labor and corporate overhead. Spirit
Holdings was able to achieve substantial cost reductions by renegotiating
labor contracts, reducing pension and fringe benefit costs and utilizing
strategic sourcing to lower the cost of procuring raw materials and certain
internal processes, all of which contributed to Spirit Holdings' success.
At the time of the acquisition, it was unknown whether Spirit Holdings
would be successful in achieving cost savings with respect to the items
listed above. In addition, the long term supply agreement with Boeing
created additional risk for Spirit Holdings' future success. Since we
cannot be certain as to what factors Boeing considered in negotiating the
purchase price, we do not think that a description of the aforementioned
factors should be included in the Registration Statement.
44. Please tell us what consideration was given to measuring the fair value, if
any, of the Boeing supply agreement resulted from the acquisition.
RESPONSE:
Spirit Holdings engaged Duff & Phelps, LLC ("D&P") to assist with its
valuation of the acquired assets in the Boeing Acquisition, including the
value, if any, of the Boeing supply agreement. D&P valued substantially all
of the identifiable assets, such as acquired inventory, fixed assets,
tooling, favorable leases and the supply agreement with Boeing. This
valuation resulted in positive values being assigned to all assets, except
for the supply agreement with Boeing which was assigned a
August 29, 2006
Page 23
value of $0. The Boeing supply agreement was valued using the multi-period
excess earnings approach, a well-known and accepted approach for valuing
this type of asset. However, in the application of that approach the
required returns on the investment in contributory assets (working capital,
fixed assets, tooling and workforce) exceeded the projected profits of the
Boeing supply agreement. Hence, a zero value was assigned to the Boeing
supply agreement and it was not deemed to be an unfavorable contract.
Note 3: Inventories, page F-14
45. Please tell us your basis for deferring $19.9 million of production costs
representing the excess of costs incurred over estimated average costs per
shipset.
RESPONSE:
As described in the Inventory section of footnote 2, Summary of Significant
Accounting Policies, to Spirit Holdings' consolidated financial statements,
in accordance with SOP 81-1, costs attributed to units delivered under
long-term contracts are based on the estimated average cost of all units
expected to be produced, and may result in an "excess over average"
situation, particularly during the early years of a contract. Deferred
production costs represent such inventoriable costs incurred on in-process
and delivered units in excess of the estimated average cost of such units
that are expected to be recoverable over future deliveries of contracts.
Note 11: Stock Compensation, page F-23
46. We note your use of the market and income approaches to valuing your
equity. Given that you appraised the fair value of net assets of Boeing
Wichita upon its acquisition, please tell us why you did not consider this
appraisal in determining the fair value of your equity issuances during
2005. It appears the excess of fair value over cost of net assets acquired
of $581 million resulting from the acquisition would immediately increase
the fair value of your equity by a similar amount and provide a floor for
valuation of your equity from that date forward. In this regard, it is not
clear why you believe your equity began appreciating on August 15, 2005.
Please advise as appropriate.
RESPONSE:
To determine the fair value of equity issuances during 2005, Spirit
Holdings determined that the best indicator of the value of its equity was
the actual amount paid for common equity as part of an arms-length
acquisition of the business by Onex Partners, LP and its affiliates, as
well as Boeing's performance in the public stock market. Even though the
purchase of the business was structured as an acquisition of assets, the
equity value of a company often differs from the aggregation of individual
asset values. Until there was any objective indication of any increase in
value subsequent to the acquisition date there was a reasonable basis to
use the equity purchase price paid for the business to determine the fair
value and per share price for equity issuances.
August 29, 2006
Page 24
Standard and Poor's Corporate Value Consulting ("CVC") prepared a valuation
of certain of Spirit Holdings' assets. The results of this valuation were
used solely for financial reporting purposes. Accordingly, CVC performed
certain valuation procedures and analyses to estimate the fair values of
the Spirit Holdings assets solely to assist Onex in its allocation of the
purchase price paid for financial reporting purposes, in accordance with
SFAS No. 141, Business Combinations. The fair value of the appraised assets
exceeded the purchase price that Onex was willing to pay, resulting in
negative goodwill. Spirit Holdings believes the primary reason for the
lower purchase price, and the resulting negative goodwill, was the
uncertainty surrounding particular issues such as labor negotiations,
production performance, the ability to generate cost savings and the
overall ability of Spirit Holdings to thrive as a stand alone entity.
Therefore, the fair values did not truly represent a market value of Spirit
Holdings at that time.
Spirit Holdings assumed that its stock value remained constant at $10
per share from the date of acquisition through August 15, 2005, the last
date on which it issued stock to existing management under its Executive
Incentive Plan. The basis of holding the value at $10 was the following
factors:
1. Spirit Holdings was still in the initial startup stage. Spirit
Holdings was generating a net loss and was highly leveraged. It had
minimum liquidity and had not yet proven its performance as a stand
alone company.
2. No major events had occurred that would drive a new valuation of
Spirit Holdings' stock. The significant news at that time was
the potential of a strike by the International Association of
Machinists and Aerospace Workers union at Boeing. Spirit Holdings
assumed that if there had been a market for its stock, this news would
have depressed its stock price as Boeing was Spirit Holdings' primary
customer at the time. As illustrated by the following table, Boeing
production and orders had slowed, thus adding an element of
uncertainty to Spirit Holdings' future sales.
Boeing Airplane Deliveries, Undelivered Firm Orders and Firm Orders
(Programs: B737Next-Generation, B747, B767, B777)
Source: Boeing Form 10-Q's
1st Quarter - 2nd Quarter - 3rd Quarter -
2005 2005 2005
------------- ------------- -------------
Deliveries 66 81 59
August 29, 2006
Page 25
Undelivered Firm Orders 977 1186 1297
Firm Orders 53 290 170
3. Spirit Holdings viewed Boeing's stock price as a benchmark for the
Spirit Holdings stock price. During the third quarter of 2005,
Boeing's stock price was relatively flat. The medians for the June
2005 weekly closing prices for Boeing's stock versus the July 2005
through September 2005 weekly closing prices for Boeing's stock were
within 2% of each other. Spirit Holdings assumed that events that
drove Boeing's stock price in this period would also have driven the
value of Spirit Holdings' stock price. The graph below shows the
opening and closing prices, as well as the high and low prices, for
Boeing stock for the period from June 1, 2005 through September 26,
2005.
BOEING HISTORICAL STOCK PRICE
(PERFORMANCE GRAPH)
(PLOT POINTS TO COME)
- ----------
The white blocks represent the increase from the opening price to the
closing price of Boeing's stock in a given week and the black blocks
represent the decrease from the opening price to the closing price of
Boeing's stock in a given week. The perpendicular lines through the blocks
represent the range of trading prices of Boeing's stock for that week. The
median of the stock for the June 2005 weekly closing prices is reflected by
the black line at approximately $64.50 from 6/1/05 through 6/27/05 and the
median of the stock for the July 2005 through September 2005 weekly closing
prices is reflected by the black line at approximately $66 from 6/27/05
through 9/26/05.
As stated in the Registration Statement and more fully described in the
response to Staff Comment No. 48 below, Spirit Holdings estimated the fair
value of its common stock to be approximately $23 per share at December 29,
2005, based on an internal valuation. Since it is not customary or
cost-efficient to perform internal valuations of privately held companies
in connection with every stock issuance, Spirit Holdings did not do so.
Since no single event occurred between the closing date of the Boeing
acquisition and December 29, 2005 that would significantly increase the
value of its common stock, Spirit Holdings assumed that the appreciation
from $10 per share to $23 per share occurred gradually. Spirit chose
August 15, 2005, the midpoint of the third quarter of 2005 and a date soon
after the initial issuances of common stock to existing management, which
were intended to occur as part of the Boeing acquisition, as the date on
which such appreciation began.
47. Please tell us the dates, number of shares, and estimated fair value of all
equity awards granted.
August 29, 2006
Page 26
RESPONSE:
We have provided the dates, number of shares, and estimated fair value of
all equity awards granted as Exhibit A to this letter.
48. Please provide to us your internal valuation to support the estimated fair
value of $23 per common share at December 29, 2005 used to value your
restricted stock grants.
RESPONSE:
The restricted stock valuation was intended to value shares at current fair
market value, recognizing risks that Spirit Holdings continued to face at
the time, including its lack of customer diversification and limited
financial history. Since Spirit Holdings was a privately held company,
there was not a public market value for the shares.
In the absence of public market valuation, two alternate valuation methods
were considered. The first method was the market approach, which involved
the use of a multiple of earnings before interest, taxes, depreciation
and amortization ("EBITDA"), based on EBITDA multiples of publicly traded
peer companies. The second was a discounted cash flow analysis or income
approach.
For the valuation determination based on an EBITDA multiple, Spirit
Holdings applied multiples ranging from 9x to 11x to Spirit Holdings'
EBITDA for 2005. The EBITDA multiples used were based on EBITDA multiples
for 20 publicly traded aerospace companies. The companies selected were a
mixture of small, medium and large market capitalization companies
primarily focused on the commercial aerospace industry with exposure to
original equipment manufacturing cycles. A discount factor of 30% to 40%
was then applied to the public company multiples to account for the lack of
a public market for Spirit Holdings stock, as well as for Spirit Holdings'
limited financial history, size and lack of customer diversification. The
EBITDA multiple calculation resulted in a per share value of between $20
and $27.
For the discounted cash flow analysis or income approach, Spirit Holdings
calculated the present value of future cash flows and a residual value at
the end of the forecast period. To determine the present value of future
cash flows, Spirit Holdings discounted management's estimates of free cash
flow (defined as cash flow from operations less capital expenditures) and
residual values for the fiscal years 2006 through 2011 using discount rates
ranging from 12% to 16%. To estimate the residual value of Spirit Holdings
at the end of the forecast period, Spirit Holdings used multiples of
management's forecast of EBITDA for the fiscal year 2011 ranging from 6x to
8x, after considering comparable multiples of publicly traded companies and
available precedent transaction multiples, and discounted the results back
to the valuation date again using discount rates ranging from 12% to 16%.
August 29, 2006
Page 27
The discount rates used were based on macro-economic assumptions and
estimates of risk, and Spirit Holdings' opportunity cost of capital. The
discounted cash flow calculation resulted in a per share value of between
$23 and $30.
The final $23 per share valuation used was close to the mid-point of the
range of values determined using the EBITDA multiple methodology and at the
low end of the values determined using the discounted cash flow analysis.
Spirit Holdings gave stronger weight to the EBITDA multiple calculation, as
the discounted cash flow analysis relies heavily on estimates and
forward-looking information, and, given that Spirit Holdings had recently
become a stand alone entity, there was more uncertainty in management's
estimates and forward-looking information than in a more objective EBITDA
multiple.
Note 13: Earnings (Loss) per Share Calculation, page F-30
49. In accordance with paragraph 40(c) of SFAS 128, please disclose the amount
of any securities that could potentially dilute basic EPS in the future
that were not included in the computation of diluted EPS, as it is
antidilutive to the period(s) presented.
RESPONSE:
Spirit Holdings did not have any securities deemed to be antidilutive that
were excluded from the computation of diluted EPS for the six-month period
ending June 29, 2006. Given Spirit Holdings' net loss for the period
February 7, 2005 through December 29, 2005, all of Spirit Holdings'
non-vested restricted stock awards under the Executive Incentive Plan,
Director Stock Plan and Short Term Incentive Plan as well as the contingent
stock appreciation rights under the Union Equity Participation Program were
excluded from the computation of diluted EPS as they were deemed to be
antidilutive. The disclosure in Note 13 has also been revised to reflect
the nature and number of such securities in response to the Staff's
comment. Please see pages F-32 and F-33.
Note 19: Subsequent Events, page F-36
50. Please revise to include the audited and interim financial statements of
BAE Aerostructures in accordance with Item 305 of Regulation S-X or tell us
why you believe they are not required.
RESPONSE:
Spirit Holdings performed the tests identified in Rules 1-02(w) and 3-05(b)
of Regulation S-X to determine whether or not BAE Aerostructures was
considered a "significant subsidiary" of Spirit Holdings and, if so,
whether financial statements of BAE Aerostructures were required to be
included in the Registration Statement. As each of the tests yielded
results of less than 20%, Spirit Holdings is not required to include
financial statements of BAE Aerostructures in the Registration Statement.
The three tests for determining
August 29, 2006
Page 28
whether BAE Aerostructures is a significant subsidiary and the results of
Spirit Holdings' tests are set forth below:
(1) The registrant's and its other subsidiaries' investments in and
advances to the subsidiary exceed 10 percent of the total assets of
the registrant and its subsidiaries consolidated as of the end of the
most recently completed fiscal year.
Purchase price as a percentage of total assets = 8.4%
(2) The registrant's and its other subsidiaries' proportionate share of
the total assets (after intercompany eliminations) of the subsidiary
exceeds 10 percent of the total assets of the registrant and its
subsidiaries consolidated as of the end of the most recently completed
fiscal year.
Percentage of purchased assets to total assets = 5.3%
(3) The registrant's and its other subsidiaries' equity in the income from
continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principle of the
subsidiary exceeds 10 percent of such income of the registrant and its
subsidiaries consolidated for the most recently completed fiscal year.
Percentage of equity in BAE Aerostructures' income to total Spirit
AeroSystems, Inc. loss = 0.2%
Financial Statements of Wichita Division, page F-39
51. Please revise columns to present most recent to least recent periods from
left to right, consistent with the rest of the filing.
RESPONSE:
The disclosure has been revised in response to the Staff's comment. Please
see pages F-41 through F-54.
Item 15. Recent Sales of Unregistered Securities, II-2
52. For all issuances of securities listed in this section, please revise to
state the aggregate offering price and the aggregate underwriting discounts
or commissions for securities sold for cash. For securities issued for
consideration other than cash, please state the aggregate amount of
consideration you received.
August 29, 2006
Page 29
RESPONSE:
The disclosure has been revised in accordance with the Staff's comment to
state the price per share for each sale of securities. Spirit Holdings did
not pay any underwriting discounts or commissions for securities sold for
cash. Please see pages II-2 through II-3.
Signatures, page II-6
53. The registration statement must be signed by a majority of your board of
directors. See Instruction 1 to Signatures on Form S-1. Please revise your
signature page accordingly.
RESPONSE:
At this time, the Spirit Holdings board of directors consists only of Seth
Mersky and Nigel Wright, each of whom signed the Registration Statement in
accordance with Instruction 1 to Signatures on Form S-1. The other
directors listed in the Registration Statement currently serve on the board
of directors of Spirit Holdings' wholly-owned subsidiary, Spirit, and will
be appointed to the Spirit Holdings board of directors upon approval of the
Special Security Agreement by the U.S. Department of Defense (the "DOD") or
earlier, with the permission of the DoD. At this time, each director has
executed a consent to be named in the S-1 as a director nominee of Spirit
Holdings. See Exhibits 23.4 through 23.11. We expect that the director
nominees will be appointed to Spirit Holdings' board prior to filing of the
final pre-effective amendment to the Registration Statement and
accordingly, will sign such amendment.
Thank you for your assistance regarding this matter. Please contact Joel I.
Greenberg at (212) 836-8201 or Mark S. Kingsley at (212) 836-7092 with any
further comments or questions you may have.
Sincerely,
/s/ Mark S. Kingsley
----------------------------------------
Mark S. Kingsley
cc: Ms. Rolaine Bancroft
Mr. Patrick Kuhn
Ms. Lyn Shenk
Mr. Jeffrey L. Turner
Ms. Gloria Farha Flentje, Esq.
Joel I. Greenberg, Esq.
William J. Whelan, III, Esq.
August 29, 2006
Page 30
EXHIBIT A
SPIRIT HOLDINGS' EQUITY AWARDS
JUNE 16, 2005 THROUGH JUNE 29, 2006
DATE GRANTED NUMBER OF CLASS B SHARES(1) NAME OF PLAN AGGREGATE FAIR VALUE(2)
- ------------ --------------------------- ------------------------ -----------------------
July 18, 2005 1,861,864 Executive Incentive Plan $10,607,970
August 1, 2005 443,624 Executive Incentive Plan $ 2,527,548
September 7, 2005 12,000 Executive Incentive Plan $ 68,370
September 27, 2005 80,000 Executive Incentive Plan $ 455,800
September 29, 2005 428,000 Executive Incentive Plan $ 2,438,530
December 15, 2005 130,000 Director Stock Plan $ 2,666,521
January 2, 2006 200,000 Executive Incentive Plan $ 2,620,850
February 17, 2006 154,981 Short Term Incentive Plan $ 3,564,563
- ----------
(1) Share numbers are before giving effect to the stock split at a rate to be
determined, contemplated to occur prior to consummation of the offering.
(2) Aggregate fair value for matching shares granted pursuant to the Executive
Incentive Plan were determined using the Black-Scholes method, which
incorporates several variables related to Spirit Holdings' class B common
stock, including the value, vesting period and rate of return
probabilities. Values for other shares of class B common stock were
determined simply by multiplying the number of shares granted by the value
of the stock at the grant date.