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EX-31.1 - EXHIBIT - Spirit AeroSystems Holdings, Inc.spr_20141002-ex3111.htm
EX-10.1 - EXHIBIT - Spirit AeroSystems Holdings, Inc.spr_20141002-ex1011.htm
EX-10.2 - EXHIBIT - Spirit AeroSystems Holdings, Inc.spr_20141002-ex1021.htm
EX-31.2 - EXHIBIT - Spirit AeroSystems Holdings, Inc.spr_20141002-ex3121.htm
EX-32.2 - EXHIBIT - Spirit AeroSystems Holdings, Inc.spr_20141002-ex3221.htm
EX-32.1 - EXHIBIT - Spirit AeroSystems Holdings, Inc.spr_20141002-ex3211.htm
EXCEL - IDEA: XBRL DOCUMENT - Spirit AeroSystems Holdings, Inc.Financial_Report.xls

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 Form 10-Q
 (Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended October 2, 2014
 
Or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to                 
 
Commission File Number 001-33160
 
Spirit AeroSystems Holdings, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-2436320
(State or other jurisdiction of
 incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
3801 South Oliver
Wichita, Kansas 67210
(Address of principal executive offices and zip code)
 
Registrant’s telephone number, including area code:
(316) 526-9000
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
 
As of October 24, 2014, the registrant had outstanding 141,153,769 shares of class A common stock, $0.01 par value per share, and 73,330 shares of class B common stock, $0.01 par value per share.
 

1


TABLE OF CONTENTS
 


2


PART 1. FINANCIAL INFORMATION
 
Item 1. Financial Statements (unaudited)
 
Spirit AeroSystems Holdings, Inc.
 
Condensed Consolidated Statements of Operations
(unaudited)
 
 
For the Three
 Months Ended
 
For the Nine 
 Months Ended
 
October 2,
2014
 
September 26,
2013
 
October 2,
2014
 
September 26,
2013
 
($ in millions, except per share data)
Net revenues
$
1,693.0

 
$
1,503.7

 
$
5,224.8

 
$
4,466.6

Operating costs and expenses
 

 
 

 
 

 
 

Cost of sales
1,418.0

 
1,388.4

 
4,411.2

 
4,315.7

Selling, general and administrative
50.0

 
52.8

 
164.9

 
151.2

Impact from severe weather event

 
4.5

 

 
19.6

Research and development
8.7

 
7.5

 
21.8

 
23.6

Total operating costs and expenses
1,476.7

 
1,453.2

 
4,597.9

 
4,510.1

Operating income (loss)
216.3

 
50.5

 
626.9

 
(43.5
)
Interest expense and financing fee amortization
(16.0
)
 
(17.1
)
 
(72.2
)
 
(52.0
)
Interest income
0.2

 
0.1

 
0.4

 
0.2

Other (expense) income, net
(8.6
)
 
7.4

 
(1.6
)
 
(1.2
)
Income (loss) before income taxes and equity in net income (loss) of affiliate
191.9

 
40.9

 
553.5

 
(96.5
)
Income tax (provision) benefit
(23.9
)
 
53.0

 
(88.9
)
 
62.3

Income (loss) before equity in net income (loss) of affiliate
168.0

 
93.9

 
464.6

 
(34.2
)
Equity in net income (loss) of affiliate

 
(0.2
)
 
0.4

 
(0.3
)
Net income (loss)
$
168.0

 
$
93.7

 
$
465.0

 
$
(34.5
)
Earnings (loss) per share
 

 
 

 
 

 
 

Basic
$
1.21

 
$
0.66

 
$
3.30

 
$
(0.24
)
Diluted
$
1.20

 
$
0.65

 
$
3.27

 
$
(0.24
)
 
See notes to condensed consolidated financial statements (unaudited)

3


Spirit AeroSystems Holdings, Inc.
 
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
 
 
For the Three
Months Ended
 
For the Nine 
 Months Ended
 
October 2,
2014
 
September 26,
2013
 
October 2,
2014
 
September 26,
2013
 
($ in millions)
Net income (loss)
$
168.0

 
$
93.7

 
$
465.0

 
$
(34.5
)
Changes in other comprehensive (loss) income, net of tax:
 

 
 

 
 

 
 

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

 
(0.5
)
 

Net loss on interest rate swaps
(0.5
)
 

 
(0.5
)
 

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

 
0.2

 

 
0.6

Unrealized foreign exchange (loss) gain on intercompany loan, net of tax effect of $0.9 for each of the three months ended, respectively and $0.5 and $0.2 for the nine months ended, respectively
(3.1
)
 
2.4

 
(1.6
)
 
(0.8
)
Foreign currency translation adjustments
(15.9
)
 
8.1

 
(7.2
)
 
(1.8
)
Total other comprehensive (loss) income
(19.5
)
 
10.7

 
(9.3
)
 
(2.0
)
Total comprehensive income (loss)
$
148.5

 
$
104.4

 
$
455.7

 
$
(36.5
)
 
See notes to condensed consolidated financial statements (unaudited)

4


Spirit AeroSystems Holdings, Inc.
 
Condensed Consolidated Balance Sheets
(unaudited)
 
 
October 2,
2014
 
December 31,
2013
 
($ in millions)
Current assets
 

 
 

Cash and cash equivalents
$
452.8

 
$
420.7

Accounts receivable, net
809.3

 
550.8

Inventory, net
1,886.1

 
1,842.6

Deferred tax asset - current
31.8

 
26.9

Other current assets
47.2

 
103.2

Total current assets
3,227.2

 
2,944.2

Property, plant and equipment, net
1,784.9

 
1,803.3

Pension assets, net
276.8

 
252.6

Other assets
116.2

 
107.1

Total assets
$
5,405.1

 
$
5,107.2

Current liabilities
 

 
 

Accounts payable
$
709.3

 
$
753.7

Accrued expenses
272.9

 
220.6

Profit sharing
78.0

 
38.4

Current portion of long-term debt
9.6

 
16.8

Advance payments, short-term
103.1

 
133.5

Deferred revenue, short-term
21.8

 
19.8

Deferred grant income liability - current
9.8

 
8.6

Other current liabilities
91.6

 
144.2

Total current liabilities
1,296.1

 
1,335.6

Long-term debt
1,147.0

 
1,150.5

Advance payments, long-term
713.3

 
728.9

Pension/OPEB obligation
74.9

 
69.8

Deferred grant income liability - non-current
99.9

 
108.2

Deferred revenue and other deferred credits
27.8

 
30.9

Other liabilities
231.3

 
202.3

Equity
 

 
 

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

 

Common stock, Class A par value $0.01, 200,000,000 shares authorized, 141,164,346 and 120,946,429 shares issued, respectively
1.4

 
1.2

Common stock, Class B par value $0.01, 150,000,000 shares authorized, 73,330 and 23,851,694 shares issued, respectively

 
0.2

Additional paid-in capital
1,032.3

 
1,025.0

Accumulated other comprehensive (loss)
(63.9
)
 
(54.6
)
Retained earnings
973.7

 
508.7

Treasury stock, at cost (4,000,000 and zero shares, respectively)
(129.2
)
 

Total shareholders’ equity
1,814.3

 
1,480.5

Noncontrolling interest
0.5

 
0.5

Total equity
1,814.8

 
1,481.0

Total liabilities and equity
$
5,405.1

 
$
5,107.2

 See notes to condensed consolidated financial statements (unaudited)

5


Spirit AeroSystems Holdings, Inc. 
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
For the Nine
Months Ended
 
October 2,
2014
 
September 26,
2013
 
($ in millions)
Operating activities
 

 
 

Net income (loss)
$
465.0

 
$
(34.5
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 

 
 

Depreciation expense
126.3

 
117.4

Amortization expense
5.7

 
3.9

Amortization of deferred financing fees
21.0

 
4.8

Accretion of customer supply agreement
0.8

 
0.3

Employee stock compensation expense
12.7

 
15.7

Excess tax benefit of share-based payment arrangements
(2.4
)
 
(0.5
)
Loss from interest rate swaps
0.1

 

Gain from hedge contracts
(1.4
)
 
(1.9
)
Loss from foreign currency transactions
4.3

 
3.3

Loss on disposition of assets
0.3

 
0.2

Deferred taxes
2.1

 
(104.6
)
Long-term tax provision
(1.2
)
 
(2.5
)
Pension and other post retirement benefits, net
(19.2
)
 
(10.8
)
Grant income
(6.3
)
 
(5.3
)
Equity in net (income) loss of affiliate
(0.4
)
 
0.3

Changes in assets and liabilities
 

 
 

Accounts receivable
(264.2
)
 
(206.5
)
Inventory, net
(122.5
)
 
331.4

Accounts payable and accrued liabilities
21.6

 
72.1

Profit sharing/deferred compensation
39.7

 
15.4

Advance payments
(46.0
)
 
(23.8
)
Income taxes receivable/payable
37.2

 
(8.3
)
Deferred revenue and other deferred credits
0.9

 
9.5

Other
54.2

 
23.7

Net cash provided by operating activities
328.3

 
199.3

Investing activities
 

 
 

Purchase of property, plant and equipment
(134.0
)
 
(168.1
)
Purchase of property, plant and equipment - severe weather event (see Note 4)

 
(23.4
)
Proceeds from sale of assets
0.4

 
0.1

Other

 
(0.6
)
Net cash used in investing activities
(133.6
)
 
(192.0
)
Financing activities
 

 
 

Proceeds from issuance of bonds
300.0

 

Principal payments of debt
(14.6
)
 
(8.0
)
Payments on bonds
(300.0
)
 

Excess tax benefit of share-based payment arrangements
2.4

 
0.5

Debt issuance and financing costs
(20.8
)
 
(4.1
)
Purchase of treasury stock
(129.2
)
 

Net cash used in financing activities
(162.2
)
 
(11.6
)
Effect of exchange rate changes on cash and cash equivalents
(0.4
)
 
(0.8
)
Net increase (decrease) in cash and cash equivalents for the period
32.1

 
(5.1
)
Cash and cash equivalents, beginning of period
420.7

 
440.7

Cash and cash equivalents, end of period
$
452.8

 
$
435.6

See notes to condensed consolidated financial statements (unaudited)

6

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)



1.  Organization and Basis of Interim Presentation
 
Spirit AeroSystems Holdings, Inc. ("Holdings" or the "Company") was incorporated in the state of Delaware on February 7, 2005, and commenced operations on June 17, 2005 through the acquisition by an investor group led by Onex Partners LP and Onex Corporation (together with its affiliates, "Onex") of The Boeing Company's ("Boeing") operations in Wichita, Kansas, Tulsa, Oklahoma and McAlester, Oklahoma (the "Boeing Acquisition"). Holdings provides manufacturing and design expertise in a wide range of products and services for aircraft original equipment manufacturers and operators through its subsidiary, Spirit AeroSystems, Inc. ("Spirit"). The Company has its headquarters in Wichita, Kansas, with manufacturing facilities in Tulsa and McAlester, Oklahoma; Prestwick, Scotland; Wichita, Kansas; Kinston, North Carolina and Subang, Malaysia. The Company has assembly facilities in Saint-Nazaire, France, and Chanute, Kansas. The Company is the majority participant in the Kansas Industrial Energy Supply Company ("KIESC"), a tenancy-in-common with other Wichita companies established to purchase natural gas. The Company participates in a joint venture, Taikoo Spirit AeroSystems Composite Co. Ltd. ("TSACCL"), of which Spirit's ownership interest is 31.5%. TSACCL was formed to develop and implement a state of the art composite and metal bond component repair station in the Asia-Pacific region.

On August 7, 2014, the Company, Onex and certain current and former members of Spirit management entered into an underwriting agreement for the sale by such stockholders of 8,577,155 shares of the Company's class A common stock in a secondary public offering. Following the completion of the offering, which closed on August 13, 2014, Onex no longer owned any shares of the Company.

The accompanying unaudited interim condensed 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 United States of America (“GAAP”) and the instructions to Form 10-Q and Article 10 of Regulation S-X.  The Company's fiscal quarters are 13 weeks in length. Because the Company's fiscal year ends on December 31, the number of days in the Company's first and fourth quarters varies slightly from year to year. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.  The Company's investment in TSACCL, in which the Company does not have a controlling interest, is accounted for under the equity method.  KIESC is fully consolidated as the Company owns 77.8% of the entity’s equity.  All intercompany balances and transactions have been eliminated in consolidation. The Company’s U.K. subsidiary uses local currency, the British pound, as its functional currency; the Malaysian subsidiary uses the British pound and the Singapore subsidiary uses the Singapore dollar.  All other foreign subsidiaries and branches use the U.S. dollar as their functional currency.
 
As part of the monthly consolidation process, our international entities that have functional currencies other than the U.S. dollar are translated to U.S. dollars using the end-of-month translation rate for balance sheet accounts and average period currency translation rates for revenue and income accounts.
 
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of operations for the interim periods. The results of operations for the nine months ended October 2, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. Certain reclassifications have been made to the prior year financial statements and notes to conform to the 2014 presentation.

In connection with the preparation of the condensed consolidated financial statements, the Company evaluated subsequent events through the date the financial statements were issued. The interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 19, 2014 (the “2013 Form 10-K”).

2.  New Accounting Pronouncements
 
In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-12, Compensation - Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period (FASB ASU 2014-12). This update requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance

7

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The provisions of FASB ASU 2014-12 are effective in annual periods beginning on or after December 15, 2014 and interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it may have to its consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition (FASB ASU 2014-09). This update is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. FASB ASU 2014-09 is effective in annual periods beginning after December 15, 2016 and for interim and annual reporting periods thereafter. Early application is not permitted for public entities. The Company is currently evaluating the new guidance to determine the impact it may have to its consolidated financial statements.

In April 2014, the FASB issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (FASB ASU 2014-08). This update changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The provisions of FASB ASU 2014-08 are effective in annual periods beginning on or after December 15, 2014 and interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it may have to its consolidated financial statements.
 
3.  Changes in Estimates
We have a Company-wide quarterly Estimate at Completion (EAC) process in which management assesses the progress and performance of our contracts. This process requires management to review each program’s progress towards completion by evaluating the program schedule, changes to identified risks and opportunities, changes to estimated contract revenues and estimated contract costs over the current contract block, and any outstanding contract matters. Risks and opportunities include management's judgment about the cost associated with a program’s ability to achieve the schedule, technical requirements (e.g., a newly-developed product versus a mature product), and any other contract requirements. The majority of our fixed priced contracts are life of aircraft program contracts. Due to the span of years it may take to complete a contract block and the scope and nature of the work required to be performed on those contracts, the estimation of total revenue and costs at completion is complicated and subject to many variables and, accordingly, is subject to change. When adjustments in estimated total contract block revenue or estimated total costs are required, any changes from prior estimates for delivered units are recognized in the current period for the inception-to-date effect of such changes. When estimates of total costs to be incurred on a contract block exceed estimates of total revenue to be earned, a provision for the entire loss on the contract block is recorded in the period in which the loss is determined.

During the third quarter of 2014, favorable cumulative catch-up adjustments positively impacted the results of operations by $32.7 ($0.15 per diluted share based on statutory rates). Results of operations during the third quarter of 2013 were negatively impacted by $96.2 ($0.42 per diluted share based on statutory rates) due to $123.8 of forward loss charges partially offset by $27.6 of favorable cumulative catch-up adjustments.
During the first nine months of 2014, aggregate net changes in contract estimates positively impacted the results of operations by $44.6 ($0.20 per diluted share based on statutory rates) due to $45.8 of favorable cumulative catch-up adjustments partially offset by $1.2 of forward loss charges. Results of operations during the first nine months of 2013 were negatively impacted by $519.2 ($2.31 per diluted share based on statutory rates) due to $595.8 of forward loss charges partially offset by $68.2 favorable cumulative catch-up adjustments and an $8.4 forward loss reduction.
The Company is currently working on several new and maturing programs, which are in various stages of development including the B787, A350 XWB, G280, G650, BR725 and B737 MAX programs. These programs carry risks associated with design responsibility, development of production tooling, production inefficiencies during the initial 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.





8

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


4. Impact from Severe Weather Event
 
On April 14, 2012, during a severe weather event, the Company’s Wichita, Kansas facility, which includes its headquarters and manufacturing facilities for all Boeing models as well as operations for maintenance, repair and overhaul support and services (MRO), was hit by a tornado which caused significant damage to many buildings, disrupted utilities and resulted in a short suspension of production. Over the last two years, the Company used proceeds from a global insurance settlement to restore, clean-up and repair damages to its Wichita facility. Expenditures associated with Impact from Severe Weather Event concluded in 2013.
 
The Company recorded charges of $4.5 and $19.6 for the three and nine months ended September 26, 2013, respectively, related to the severe weather event, which represented continuing incremental freight, warehousing, facilities restoration and other costs which were recorded as incurred. 
 
5.  Accounts Receivable, net
 
Accounts receivable, net consists of the following:
 
October 2,
2014
 
December 31,
2013
Trade receivables (1)(2)(3)
$
801.2

 
$
544.2

Other
8.4

 
6.8

Less: allowance for doubtful accounts
(0.3
)
 
(0.2
)
Accounts receivable, net
$
809.3

 
$
550.8

 
 

(1)
Includes unbilled receivables of $30.7 and $33.5 at October 2, 2014 and December 31, 2013, respectively.
(2)
Includes $135.1 held in retainage by a customer at October 2, 2014 and December 31, 2013.
(3)
Includes zero and $24.6 of withheld payments by a customer pending completion of retrofit work at October 2, 2014 and December 31, 2013, respectively.

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

Also included in accounts receivable are amounts held in retainage which, as of October 2, 2014, are all related to Gulfstream and represent amounts due on G650 deliveries from 2010 through the third quarter of 2013. While the Company believes that the short-paid amount is collectible, if the Company is unable to collect this amount or if it becomes part of an overall settlement or arbitration award, recognition of additional forward losses on the G650 program could be required and the future cash flows of the Company could be significantly impacted. See Note 21, "Commitments, Contingencies and Guarantees," for further discussion regarding the Company's arbitration against Gulfstream Aerospace Corporation.

















9

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


6.  Inventory
 
Inventories are summarized as follows:
 
 
October 2,
2014
 
December 31,
2013
Raw materials
$
252.8

 
$
240.2

Work-in-process
984.6

 
1,057.8

Finished goods
45.8

 
43.7

Product inventory
1,283.2

 
1,341.7

Capitalized pre-production
406.9

 
486.2

Deferred production
1,901.6

 
1,661.2

Forward loss provision
(1,705.6
)
 
(1,646.5
)
Total inventory, net
$
1,886.1

 
$
1,842.6

 
Capitalized pre-production costs include certain contract costs, including applicable overhead, incurred before a product is manufactured on a recurring basis. Significant statement of work changes considered not reimbursable by the customer can also cause pre-production costs to be incurred.  These costs are typically amortized over a certain number of shipset deliveries.
 
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. The Company believes these amounts will be fully recovered.  Sales significantly under estimates or costs significantly over estimates could result in the realization of losses on these contracts in future periods.

Provisions for anticipated losses on contract blocks are recorded in the period in which they become evident (“forward losses”) and included in inventory with any remaining amount reflected in accrued contract liabilities.
 
Non-recurring production costs include design and engineering costs and test articles.
























10

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


Inventories are summarized by platform and costs below:
 
 
October 2, 2014
 
Product Inventory
 
 
 
 
 
 
 
 
 
Inventory
 
Non-Recurring
 
Capitalized Pre-
Production
 
Deferred
Production
 
Forward Loss
Provision(1) (2)
 
Total Inventory,
net October 2, 2014
B747(3)
$
85.7

 
$
0.1

 
$
1.7

 
$
(2.7
)
 
$
(31.3
)
 
$
53.5

B787
229.3

 
0.4

 
115.7

 
555.7

 
(606.0
)
 
295.1

Boeing - All other platforms(4)
406.7

 
4.5

 
6.5

 
(49.0
)
 
(8.4
)
 
360.3

A350 XWB
178.0

 
46.2

 
76.9

 
572.3

 
(123.5
)
 
749.9

Airbus - All other platforms
84.2

 

 

 
5.5

 

 
89.7

G280(5)
50.5

 

 
4.3

 
293.9

 
(348.7
)
 

G650
95.5

 

 
164.1

 
443.8

 
(450.8
)
 
252.6

Rolls-Royce(6)
19.9

 

 
37.7

 
79.3

 
(136.9
)
 

Sikorsky

 
4.8

 

 

 

 
4.8

Bombardier C-Series
6.6

 

 

 
2.8

 

 
9.4

Aftermarket
44.1

 

 

 

 

 
44.1

Other platforms(7)
26.0

 
0.7

 

 

 

 
26.7

Total
$
1,226.5

 
$
56.7

 
$
406.9

 
$
1,901.6

 
$
(1,705.6
)
 
$
1,886.1

 
 
December 31, 2013
 
Product Inventory
 
 
 
 
 
 
 
 
 
Inventory
 
Non-Recurring
 
Capitalized Pre-
Production
 
Deferred
Production
 
Forward Loss
Provision(1) (2)
 
Total Inventory,
net December 31,
2013
B747(3)
$
96.4

 
$
0.1

 
$
4.4

 
$
1.0

 
$
(37.2
)
 
$
64.7

B787
263.9

 
14.7

 
158.2

 
597.3

 
(606.0
)
 
428.1

Boeing - All other platforms(4)
421.4

 
11.5

 
7.0

 
(21.7
)
 
(18.6
)
 
399.6

A350 XWB
166.7

 
42.5

 
76.5

 
388.8

 
(120.8
)
 
553.7

Airbus - All other platforms
83.2

 

 

 
18.8

 

 
102.0

G280(5)
46.9

 

 
4.9

 
233.7

 
(285.5
)
 

G650
59.2

 

 
192.7

 
373.3

 
(450.8
)
 
174.4

Rolls-Royce(6)
15.8

 

 
42.5

 
69.3

 
(127.6
)
 

Sikorsky

 
5.4

 

 

 

 
5.4

Bombardier C-Series
9.1

 

 

 
0.7

 

 
9.8

Aftermarket
37.0

 

 

 

 

 
37.0

Other platforms(7)
67.1

 
0.8

 

 

 

 
67.9

Total
$
1,266.7

 
$
75.0

 
$
486.2

 
$
1,661.2

 
$
(1,646.5
)
 
$
1,842.6

 
 
(1)
Forward loss charges taken since January 1, 2012 on blocks that have not closed.
(2)
Forward loss charges taken through December 31, 2011 were reflected within capitalized pre-production and inventory for the respective programs and are therefore not reflected as part of the Forward Loss Provision figure presented.  The cumulative forward loss charges, net of contract liabilities, reflected within capitalized pre-production and inventory were $3.0, $177.6 and $29.0 for the A350 XWB, G280 and Sikorsky programs, respectively.

11

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


(3)
Forward loss charges recorded in prior periods on the fuselage portion of the B747 program exceeded the total inventory balance for the fuselage portion of the program. The excess of charge over program inventory is classified as a contract liability and reported in other current liabilities. The total contract liability was $9.8 and $3.9 as of October 2, 2014 and December 31, 2013, respectively.
(4)
Forward loss charges recorded in prior periods on the propulsion portion of the B767 program exceeded the inventory balance for the propulsion portion of the program. The excess of charge over program inventory is classified as a contract liability and reported in other current liabilities. The total contract liability was $3.2 and $5.8 as of October 2, 2014 and December 31, 2013, respectively.
(5)
Forward loss charges recorded in prior periods on the G280 program exceeded the total inventory balance.  The excess of charge over program inventory is classified as a contract liability and reported in other current liabilities. The total contract liability was $11.3 and $74.2 as of October 2, 2014 and December 31, 2013, respectively.
(6)
Forward loss charges recorded in prior periods on the Rolls-Royce BR725 program exceeded the total inventory balance. The excess of the charge over program inventory is classified as a contract liability and reported in other current liabilities.  The total contract liability was $27.4 and $36.7 as of October 2, 2014 and December 31, 2013, respectively.
(7)
Includes over-applied and under-applied overhead.
 

The following is a roll forward of the capitalized pre-production costs included in the inventory balance at October 2, 2014:
 
Balance, December 31, 2013
$
486.2

Charges to costs and expenses
(81.5
)
Capitalized costs
2.2

Balance, October 2, 2014
$
406.9



The following is a roll forward of the deferred production costs included in the inventory balance at October 2, 2014:
 
Balance, December 31, 2013
$
1,661.2

Charges to costs and expenses
(278.6
)
Capitalized costs
524.2

Exchange rate
(5.2
)
Balance, October 2, 2014
$
1,901.6

 
Significant amortization of capitalized pre-production and deferred production inventory will occur over the following contract blocks: 
Model
 
Contract Block
Quantity
 
Orders(1)
B787
 
500

 
861

A350 XWB
 
400

 
750

G280
 
250

 
154

G650
 
350

 
168

Rolls-Royce
 
350

 
194

 
 

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

12

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


 
Current block deliveries are as follows:
 
Model
 
Current Block
Deliveries
B787
 
254

A350 XWB
 
22

Business/Regional Jets
 
319

 
Contract block quantities are projected to fully absorb the balance of deferred production inventory.  Capitalized pre-production and deferred production inventories are at risk to the extent that the Company does not achieve the orders in the forecasted blocks or if future actual costs exceed current projected estimates, as those categories of inventory are recoverable over future deliveries.  In the case of capitalized pre-production this may be over multiple blocks.  Should orders not materialize in future periods to fulfill the block, potential forward loss charges may be necessary to the extent the final delivered quantity does not absorb deferred inventory costs.
 
7.  Property, Plant and Equipment, net
 
Property, plant and equipment, net consists of the following: 
 
 
October 2,
2014
 
December 31,
2013
Land
$
17.6

 
$
17.9

Buildings (including improvements)
573.6

 
566.0

Machinery and equipment
1,134.2

 
1,084.0

Tooling
814.8

 
801.6

Capitalized software
206.0

 
172.2

Construction-in-progress
127.4

 
130.2

Total
2,873.6

 
2,771.9

Less: accumulated depreciation
(1,088.7
)
 
(968.6
)
Property, plant and equipment, net
$
1,784.9

 
$
1,803.3

 
Interest costs associated with construction-in-progress are capitalized until the assets are completed and ready for use. Capitalized interest was $1.0 and $1.7 for the three months ended October 2, 2014 and September 26, 2013, respectively, and $2.8 and $4.5 for the nine months ended October 2, 2014 and September 26, 2013, respectively. Repair and maintenance costs are expensed as incurred. The Company recognized repair and maintenance costs, excluding the impact of the severe weather event, of $22.9 and $21.8 for the three months ended October 2, 2014 and September 26, 2013, respectively, and $74.0 and $65.6 for the nine months ended October 2, 2014 and September 26, 2013, 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 in accordance with FASB authoritative guidance pertaining to capitalization of costs for internal-use software.  Depreciation expense related to capitalized software was $4.9 and $5.1 for the three months ended October 2, 2014 and September 26, 2013, respectively, and $13.4 and $15.0 for the nine months ended October 2, 2014 and September 26, 2013, respectively.
 
The Company reviews capital and amortizing intangible assets (long-lived assets) for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with FASB authoritative guidance on accounting for the impairment or disposal of long-lived assets.  The Company evaluated its long-lived assets at its locations and determined no impairment was necessary.  


13

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


8.  Other Assets
 
Other assets are summarized as follows:
 
 
October 2,
2014
 
December 31,
2013
Intangible assets
 

 
 

Patents
$
1.9

 
$
1.9

Favorable leasehold interests
6.3

 
6.3

Customer relationships
27.9

 
28.7

Total intangible assets
36.1

 
36.9

Less: Accumulated amortization - patents
(1.4
)
 
(1.3
)
Accumulated amortization - favorable leasehold interest
(3.4
)
 
(3.1
)
Accumulated amortization - customer relationships
(27.9
)
 
(27.8
)
Intangible assets, net
3.4

 
4.7

Deferred financing
 

 
 

Deferred financing costs
101.2

 
80.5

Less: Accumulated amortization - deferred financing costs (1)
(77.2
)
 
(56.3
)
Deferred financing costs, net
24.0

 
24.2

Other
 

 
 

Goodwill - Europe
3.0

 
3.0

Equity in net assets of affiliates
1.8

 
1.4

Customer supply agreement (2)
35.4

 
37.6

Other
48.6

 
36.2

Total
$
116.2

 
$
107.1

 

(1)
Includes charges related to debt extinguishment.
(2)
Under an agreement with our customer Airbus, certain payments accounted for as consideration given by the Company to Airbus are being amortized as a reduction to net revenues.
 
The Company recognized $0.1 and $0.9 of amortization expense of intangibles for the three months ended October 2, 2014 and September 26, 2013, respectively, and $1.3 and $3.0 of amortization expense of intangibles for each of the nine month periods ended October 2, 2014 and September 26, 2013, respectively.  

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

As part of our ongoing participation in the B787-9 program, the Company received research and development milestone payments of $11.4 and $13.7 for the three months ended October 2, 2014 and September 26, 2013, respectively, and $14.0 and $18.3 for the nine months ended October 2, 2014 and September 26, 2013, respectively.  Revenue and cost associated with the performance of this research and development are included in program revenue and costs.   






14

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


10.  Advance Payments and Deferred Revenue/Credits
 
Advance payments.  Advance payments are those payments made to Spirit by third parties in contemplation of the future performance of services, receipt of goods, incurrence of expenditures, or for other assets to be provided by Spirit on a contract and are repayable if such obligation is not satisfied. The amount of advance payments to be recovered against units expected to be delivered within a year is classified as a short-term liability, with the balance of the unliquidated advance payments classified as a long-term liability.
 
On April 8, 2014, the Company signed a memorandum of agreement with Boeing which suspends advance repayments related to the B787 program for a period of twelve months beginning April 1, 2014 which repayment will be made by offset against the purchase price for shipset 1,001 and beyond.
 
Deferred revenue/credits.  Deferred revenue/credits generally consist of nonrefundable amounts received in advance of revenue being earned for specific contractual deliverables. These payments are classified as deferred revenue/credits when received and recognized as revenue as the production units are delivered.
 
Advance payments and deferred revenue/credits are summarized by platform as follows:

 
October 2,
2014
 
December 31,
2013
B737
$
16.9

 
$
18.7

B787
580.1

 
600.2

A350 XWB
229.9

 
243.9

Airbus — All other platforms
4.5

 
7.3

Gulfstream
15.0

 
22.0

Other
19.6

 
21.0

Total advance payments and deferred revenue/credits
$
866.0

 
$
913.1

 

11. Government Grants
 
The Company received grants in the form of government funding for a portion of the site construction and other specific capital asset costs at our Kinston, North Carolina and Subang, Malaysia sites. Deferred grant income is being amortized as a reduction to production cost. This amortization is based on specific terms associated with the different grants. In North Carolina, the deferred grant income related to the capital investment criteria, which represents half of the grant, is being amortized over the lives of the assets purchased to satisfy the capital investment performance criteria. The other half of the deferred grant income is being amortized over a ten-year period, beginning in 2010, in a manner consistent with the job performance criteria. In Malaysia, the deferred grant income is being amortized based on the lives of the eligible assets constructed with the grant funds as there are no performance criteria. The assets related to deferred grant income are consolidated within property, plant, and equipment.
 
Deferred grant income liability, net consists of the following:

Balance, December 31, 2013
$
116.8

Grant liability amortized
(1.0
)
Grant income recognized
(5.3
)
Exchange rate
(0.8
)
Total asset value related to deferred grant income, October 2, 2014
$
109.7

 

15

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


The asset related to the deferred grant income consists of the following:
 
Balance, December 31, 2013
$
120.3

Amortization
(3.9
)
Exchange rate
(0.8
)
Total asset value related to deferred grant income, October 2, 2014
$
115.6

 

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

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

Level 2                      Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Observable inputs, such as current and forward interest rates and foreign exchange rates, are used in determining the fair value of our interest rate swaps and foreign currency hedge contracts.
 
Level 3                      Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 
Fair Value Measurements
 
October 2, 2014
 
At October 2, 2014 using
Description
Total Carrying
Amount in
Balance Sheet
 
Assets
Measured at
Fair Value
 
Liabilities
Measured at Fair
Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Money Market Fund
$
115.3

 
$
115.3

 
$

 
$
115.3

 
$

 
$

Interest Rate Swaps
$
(0.5
)
 
$

 
$
(0.5
)
 
$

 
$
(0.5
)
 
$

 
 
Fair Value Measurements
 
December 31, 2013
 
At December 31, 2013 using
Description
Total Carrying
Amount in
Balance Sheet
 
Assets
Measured at
Fair Value
 
Liabilities
Measured at Fair
Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Money Market Fund
$
293.3

 
$
293.3

 
$

 
$
293.3

 
$

 
$

Interest Rate Swaps
$
(1.4
)
 
$

 
$
(1.4
)
 
$

 
$
(1.4
)
 
$

 

16

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


The fair value of the interest rate swaps are determined by using mark-to-market reports generated for each derivative and evaluated for counterparty risk. In the case of the interest rate swaps, the Company evaluated its counterparty risk using credit default swaps, historical default rates and credit spreads.
 
The Company’s long-term debt includes a senior secured term loan, senior unsecured notes and the Malaysian term loan.  The estimated fair value of our debt obligations is based on the quoted market prices for such obligations or the historical default rate for debt with similar credit ratings.  The following table presents the carrying amount and estimated fair value of long-term debt in accordance with FASB authoritative guidance on fair value measurements related to disclosures of financial instruments:
 
 
October 2, 2014
 
December 31, 2013
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Senior secured term loan (including current portion)
$
535.8

 
$
531.1

(1)
$
538.2

 
$
541.9

(1)
Senior unsecured notes due 2017

 

(1)
296.4

 
309.0

(1)
Senior unsecured notes due 2020
300.0

 
318.9

(1)
300.0

 
323.4

(1)
Senior unsecured notes due 2022
299.4

 
302.4

(1)

 

(1)
Malaysian loan
7.8

 
6.5

(2)
10.0

 
8.5

(2)
Total
$
1,143.0

 
$
1,158.9

 
$
1,144.6

 
$
1,182.8

 
 
(1)
Level 1 Fair Value hierarchy
(2)
Level 2 Fair Value hierarchy
 
See Note 14, Investments for fair value disclosure on government and corporate debt securities.

13.  Derivative and Hedging Activities
 
The Company enters into interest rate swap agreements to reduce its exposure to the variable rate portion of its long-term debt. On the inception date, the Company designates a derivative contract as either a fair value or cash flow hedge in accordance with FASB guidance on accounting for derivatives and hedges and links the contract to either a specific asset or liability on the balance sheet, or to forecasted commitments or transactions. The Company assesses, both at the hedges' inception and on a quarterly basis, whether the derivative item is effective in offsetting changes in fair value or cash flows. Any gains or losses on hedges are included in earnings when the underlying transaction that was hedged occurs.
 
The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. The Company has applied these valuation techniques as of October 2, 2014 and believes it has obtained the most accurate information available for the types of derivative contracts it holds.
 
The Company has certain derivative instruments covered by master netting arrangements whereby, in the event of a default as defined by the senior secured credit facility or termination event, the non-defaulting party has the right to offset any amounts payable against any obligation of the defaulting party under the same counterparty agreement.
 
All assets of the Company are pledged as collateral for both the term loan and the revolving credit facility under the Company’s senior secured credit facility. See Note 15, Debt for discussion of the Company's senior secured credit facilities.
 
Interest Rate Swaps
 
The Company enters into floating-to-fixed interest rate swap agreements periodically. During the third quarter of 2014, the Company entered into a new interest rate swap agreement to replace the interest rate swap agreement which matured in July 2014. Because the critical terms of the interest rate swap and hedged item coincide, the hedge is expected to exactly offset changes in expected cash flows due to fluctuations in 1-month LIBOR over the term of the hedge. Therefore, the effectiveness of the hedge relationship will be assessed on a quarterly basis during the life of the hedge to assure the critical terms of the swap coincide with the Term Loan. Should the critical terms no longer match exactly, hedge effectiveness will be measured by evaluating the cumulative dollar offset ratio for the actual derivative and the hedged item.


17

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


As of October 2, 2014, the Company had one outstanding interest rate swap agreement which had a notional amount of $250.0.

 
 
 
 
 
 
 
 
Effective
 
Fair Value,
Notional Amount (1)
 
Expires
 
Variable Rate
 
Fixed Rate (2)
 
Fixed Rate(3)
 
October 2, 2014
$
250.0

 
September 2018
 
1 Month LIBOR
 
1.636
%
 
4.136
%
 
$
(0.5
)
 
(1)
The notional amount will reduce to $150.0 in September 2017.
(2)
The fixed rate represents the rate at which interest is paid by the Company pursuant to the terms of its interest rate swap agreement.
(3)
The effective Term B fixed interest rate represents the fixed rate of the derivative instrument plus the 250 basis point margin above the greater of 1-month LIBOR or 75 basis points.
 
The interest rate swap settles on a monthly basis when interest payments are made. These settlements occur through the maturity date. The fair value of the interest rate swaps was a liability (unrealized loss) of $0.5 at October 2, 2014 and $1.4 at December 31, 2013.
 
The following table summarizes the Company’s fair value of outstanding derivatives at October 2, 2014 and December 31, 2013:
 
Other Liability Derivatives
 
October 2, 2014
 
December 31, 2013
Derivatives designated as hedging instruments
 

 
 

Interest rate swaps
 

 
 

Current
$
0.5

 
$
1.4

Total derivatives designated as hedging instruments
0.5

 
1.4

Total derivatives
$
0.5

 
$
1.4



The impact on other comprehensive income ("OCI") and earnings from cash flow hedges for the three and nine months ended October 2, 2014 and September 26, 2013 was as follows:
Derivatives in Cash Flow Hedging Relationships
Amount of Gain (Loss) Recognized in OCI, net of tax, on Derivative (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income (effective Portion
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
For the Three Months Ended
 
 
 
For the Three Months Ended
 
October 2, 2014

 
September 26, 2013
 
 
 
October 2, 2014
 
September 26, 2013
Interest rate swaps
$
(0.5
)
 
$

 
Interest expense
 
$
(0.1
)
 
$

Total
$
(0.5
)
 
$

 
 
 
$
(0.1
)
 
$



18

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


Derivatives in Cash Flow Hedging Relationships
Amount of Gain (Loss) Recognized in OCI, net of tax, on Derivative (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income (effective Portion
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
For the Nine Months Ended
 
 
 
For the Nine Months Ended
 
October 2, 2014

 
September 26, 2013
 
 
 
October 2, 2014
 
September 26, 2013
Interest rate swaps
$
(0.5
)
 
$

 
Interest expense
 
$
(0.1
)
 
$

Total
$
(0.5
)
 
$

 
 
 
$
(0.1
)
 
$



Gains and losses accumulated in OCI for interest rate swaps are reclassified into earnings as each interest rate period is reset. During the next twelve months, the Company estimates that a loss of $0.5 will be reclassified from OCI, net of tax, as a charge to earnings from interest rate swaps. Interest rate swaps are placed for a period of time not to exceed the maturity of the Company's senior secured term loan. None of the gains or losses reclassified to earnings were attributable to the discontinuance of cash flow hedges.

The impact on earnings from interest rate swaps that were no longer effective which matured in July 2014 was a loss of $0.1 and a loss of $0.9 for the nine months ended October 2, 2014 and September 26, 2013, respectively, which is reflected in Other Income on the Condensed Consolidated Statement of Operations.
 
14.  Investments
 
The Company's investment securities consist of $3.7 in government and corporate debt securities. The amortized cost and approximate fair value of held-to-maturity securities are as follows:
 
 
October 2, 2014
 
December 31, 2013
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Government and Corporate Debt
Securities
 

 
 

 
 

 
 

Amortized cost
$
0.7

 
$
3.0

 
$
0.5

 
$
3.1

Unrealized gains

 

 

 
0.1

Unrealized losses

 

 

 
(0.1
)
Fair value
$
0.7

 
$
3.0

 
$
0.5

 
$
3.1


Maturities of held-to-maturity securities at October 2, 2014 are as follows:
 
 
Amortized
Cost
 
Approximate
Fair Value
Within One Year
$
0.7

 
$
0.7

One to Five Years
0.8

 
0.8

Five to Ten Years
0.5

 
0.5

After Ten Years
1.7

 
1.7

Total
$
3.7

 
$
3.7

 
At October 2, 2014 and December 31, 2013, the fair value of certain held-to-maturity investments in debt and marketable securities are less than their historical cost. Total fair value of these investments were $1.8 for each of the periods then ended, which is approximately 48% and 51%, respectively, of the Company’s held-to-maturity investment portfolio. These declines

19

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


primarily resulted from decreases in market interest rates and failure of certain investments to maintain consistent credit quality ratings or meet projected earnings targets.
 
Based on evaluation of available evidence, including changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.
 
Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period in which the permanent impairment is identified.
 
15.  Debt
 
Total debt shown on the balance sheet is comprised of the following:
 
 
October 2, 2014
 
December 31, 2013
 
Current
Noncurrent
 
Current
Noncurrent
Senior secured term loan
$
5.5

$
530.3

 
$
5.5

$
532.7

Senior notes due 2017


 

296.4

Senior notes due 2020

300.0

 

300.0

Senior notes due 2022

299.4

 


Malaysian term loan
3.1

4.7

 
3.0

7.0

Present value of capital lease obligations
1.0

12.6

 
1.1

14.2

Other


 
7.2

0.2

Total
$
9.6

$
1,147.0

 
$
16.8

$
1,150.5

 
Senior Secured Credit Facilities
 
On March 18, 2014, the Company entered into Amendment No. 3 to its senior secured Credit Agreement, dated as of April 18, 2012, as amended by Amendment No. 1, dated as of October 26, 2012 and Amendment No. 2, dated as of August 2, 2013 (the "Credit Agreement"). The amendment provided for a new $540.4 senior secured term loan B with a maturity date of September 15, 2020, which replaced the $540.4 term loan B that was scheduled to mature on April 18, 2019. The new term loan bears interest, at Spirit’s option, at LIBOR plus 2.50% with a LIBOR floor of 0.75% or base rate plus 1.50%.  The amendment also provided that (i) any failure to comply with the financial covenants will not constitute an event of default with respect to the new term loan, however the financial covenants continue to apply to the revolving credit facility under the Credit Agreement and the administrative agent or the requisite number of lenders (the “Requisite Revolving Lenders”) may accelerate the obligations under the revolving credit facility and (ii) the financial covenants may be amended or waived by the Requisite Revolving Lenders. Substantially all of Spirit's assets, including inventory and property, plant and equipment, continue to be pledged as collateral for both the term loan, as replaced, and the revolving credit facility. As of October 2, 2014, the outstanding balance of the term loan was $536.3 and the carrying amount of the term loan was $535.8. As a result of extinguishment of the old term loan, the Company recognized a loss on extinguishment of debt of $4.6 and incurred third party fees of $0.5. Of this total charge of $5.1 related to extinguishment of the old term loan, $3.5 is reflected within amortization of deferred financing fees and $1.6 is reflected within amortization expense on the Condensed Consolidated Statement of Cash Flows for the nine months ended October 2, 2014.
 
On June 3, 2014, the Company entered into Amendment No. 4 to its senior secured Credit Agreement. The amendment permits the Company to incur certain debt and make certain restricted payments during the suspension period currently imposed upon the Company, including the payment for the repurchase of 4 million shares of the Company's class A common stock made in June 2014.

Senior Notes
 
On March 4, 2014, the Company commenced a cash tender offer to purchase any and all of the $300.0 outstanding principal amount of its 2017 Notes and a consent solicitation to amend the indenture governing the 2017 Notes (the "2017 Notes Indenture") and eliminate substantially all of the restrictive covenants and certain default provisions applicable to the 2017 Notes (the "Tender

20

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


Offer"). Holders of 2017 Notes who validly tendered their 2017 Notes prior to March 17, 2014 received, in whole dollars, total consideration of $1,041.25 per $1,000 principal amount, which included a consent payment of $30.00 per $1,000 principal amount. Tender and consent fees related to the early extinguishment of debt was $9.4, which is included within debt issuance cost on the Condensed Consolidated Statement of Cash Flows for the nine months ended October 2, 2014.

As a result of the extinguishment of the 2017 Notes, the Company recognized a loss on extinguishment of bonds of $13.4 and incurred third party fees of $1.1. Of this total charge of $14.5 related to extinguishment of the 2017 Notes, $11.6 is reflected within amortization of deferred financing fees and $2.9 is reflected within amortization expense on the Condensed Consolidated Statement of Cash Flows for the nine months ended October 2, 2014.

On March 17, 2014, Spirit entered into a supplemental indenture to effect the proposed amendment to the 2017 Notes Indenture, which became operative on March 18, 2014 when Spirit accepted for purchase $227.2 aggregate of the 2017 Notes that were tendered prior to March 17, 2014 for an aggregate purchase price of $244.4 inclusive of accrued and unpaid interest on the purchased 2017 Notes as of March 18, 2014. The supplemental indenture was binding on the 2017 Notes not purchased in the Tender Offer. The Tender Offer expired on March 31, 2014.

On March 18, 2014, in order to fund the Tender Offer or otherwise acquire, redeem or repurchase the 2017 Notes, the Company issued the $300.0 aggregate principal amount of 5.25% Senior Notes due March 15, 2022 (the "2022 Notes") with interest payable, in cash in arrears, on March 15 and September 15 of each year, beginning September 15, 2014. The 2022 Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by the Company and its existing and future domestic subsidiaries that guarantee Spirit's obligations under its amended senior secured credit facility. The carrying value of the 2022 Notes was $299.4 as of October 2, 2014.

The indenture governing the 2022 Notes (the "2022 Notes Indenture") contains covenants that limit Spirit’s, the Company’s and certain of Spirit’s subsidiaries’ ability, subject to certain exceptions and qualifications, to (i) incur additional debt, (ii) pay dividends, redeem stock or make other distributions, (iii) make other restricted payments and investments, (iv) create liens without granting equal and ratable liens to the holders of the 2022 Notes, (v) enter into sale and leaseback transactions, (vi) merge, consolidate or transfer or dispose of substantially all of their assets, and (vii) enter into certain types of transactions with affiliates. These covenants are subject to a number of qualifications and limitations. In addition, the 2022 Notes Indenture limits Spirit’s, the Company’s and the guarantor subsidiaries’ ability to engage in businesses other than businesses in which such companies are engaged on the date of issuance of the 2022 Notes and related businesses.

In addition, the 2022 Notes Indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among other things: failure to make payments on the 2022 Notes when due, failure to comply with covenants under the 2022 Notes Indenture, failure to pay certain other indebtedness or acceleration of maturity of certain other indebtedness, failure to satisfy or discharge certain final judgments and occurrence of certain bankruptcy events. If an event of default occurs, the trustee or holders of at least 25% of the aggregate principal amount of the then outstanding 2022 Notes may, among other things, declare the entire outstanding balance of principal of and interest on all outstanding Notes to be immediately due and payable. If an event of default involving certain bankruptcy events occurs, payment of principal of and interest on the 2022 Notes will be accelerated without the necessity of notice or any other action on the part of any person.

On May 1, 2014, Spirit called for redemption the $72.8 aggregate of 2017 Notes outstanding following the expiration of the Tender Offer. The 2017 Notes were redeemed at a redemption price equal to 103.75% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the redemption date. Following the redemption, none of the 2017 Notes remained outstanding.
 
Malaysian Facility Agreement
 
On June 2, 2008, the Company’s wholly-owned subsidiary, Spirit AeroSystems Malaysia SDN BHD entered into a Facility Agreement for a term loan facility for Ringgit Malaysia (“RM”) 69.2 (approximately USD $20.0 equivalent) (the “Malaysia Facility”), with the Malaysian Export-Import Bank. The Malaysia Facility requires quarterly principal repayments of RM3.3 (approximately USD $1.0 equivalent) from September 2011 through May 2017 and quarterly interest payments payable at a fixed interest rate of 3.50% per annum.  The Malaysia Facility loan balance as of October 2, 2014 was $7.8.


 

21

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


French Factory Capital Lease Agreement
 
On July 17, 2009, the Company’s indirect wholly-owned subsidiary, Spirit AeroSystems France SARL entered into a capital lease agreement for €9.0 (approximately USD $13.1 equivalent) with a subsidiary of BNP Paribas Bank to be used towards the construction of our aerospace-related component assembly plant in Saint-Nazaire, France.  Lease payments under the capital lease agreement are variable, subject to the three-month Euribor rate plus 2.20%. Lease payments are due quarterly through April 2025. As of October 2, 2014, the Saint-Nazaire capital lease balance was $9.2.
 
Nashville Design Center Capital Lease Agreement
 
On September 21, 2012, the Company entered into a capital lease agreement for $2.6 for a portion of an office building in Nashville, Tennessee to be used for design of aerospace components.  Lease payments under the capital lease agreement are due monthly, and are subject to yearly rate increases until the end of the lease term of 124 months. As of October 2, 2014, the Nashville Design Center capital lease balance was $2.3.
 
16. Pension and Other Post-Retirement Benefits
 
 
 
Defined Benefit Plans
 
 
For the Three
 Months Ended
 
For the Nine
 Months Ended
Components of Net Periodic Pension
Income
 
October 2,
2014
 
September 26,
2013
 
October 2,
2014
 
September 26,
2013
Service cost
 
$

 
$
1.9

 
$

 
$
5.7

Interest cost
 
12.4

 
11.5

 
37.2

 
34.5

Expected return on plan assets
 
(20.4
)
 
(21.1
)
 
(61.4
)
 
(63.4
)
Amortization of net loss
 

 
2.9

 

 
8.8

Net periodic pension income
 
$
(8.0
)
 
$
(4.8
)
 
$
(24.2
)
 
$
(14.4
)
 
 
 
Other Benefits
 
 
For the Three
Months Ended
 
For the Nine
 Months Ended
Components of Other Benefit Expense
 
October 2,
2014
 
September 26,
2013
 
October 2,
2014
 
September 26,
2013
Service cost
 
$
0.6

 
$
0.7

 
$
1.7

 
$
2.0

Interest cost
 
0.6

 
0.5

 
2.0

 
1.6

Special termination benefits
 
0.4

 

 
1.3

 

Net periodic other benefit expense
 
$
1.6

 
$
1.2

 
$
5.0

 
$
3.6

 

Employer Contributions
 
The Company expects to contribute zero dollars to the U.S. qualified pension plan and a combined total of approximately $3.3 for the Supplemental Executive Retirement Plan (SERP) and post-retirement medical plans in 2014.  Effective December 31, 2013, the BAE Aerostructures pension plan benefits were frozen due to an amendment which closed the plan. Our projected contributions to the U.K. pension plan for 2014 are $0.5, all of which was contributed at the end of the second quarter of 2014. The entire amount contributed can vary based on exchange rate fluctuations.
 
17.  Stock Compensation
 
Holdings has established various stock compensation plans which include restricted share grants. Compensation values are based on the value of Holdings' common stock at the grant date. The common stock value is added to equity and charged to period expense or included in inventory and cost of sales.


22

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


On April 30, 2014, the Company’s Board of Directors approved an Omnibus Incentive Plan (the "Omnibus Plan"), which replaces the Executive Incentive Plan, Short-Term Incentive Plan (STIP), and Director Stock Plan (collectively referred to as "Prior Plans"). No new awards will be granted under such Prior Plans. Outstanding awards under the Prior Plans will continue to be governed by the terms of such plans until exercised, expired, or otherwise terminated or canceled. The adoption of the Omnibus Plan was non-dilutive to the Company's stockholders.

The Omnibus Plan includes a Long-Term Incentive Award (LTIA) for the 2014 plan year and forward. The awards are based on the new LTIA design that provide both time and performance based incentives.

75% of the LTIA is service-based restricted stock that will vest in equal installments over a three-year period.
25% of the LTIA is market-based restricted stock that will vest in the third year contingent upon total shareholder return (TSR) compared to the Company’s peers.

For the three months ended October 2, 2014, the Company recognized a net total of $4.7 of stock compensation expense, which is net of stock forfeitures, and includes expense for the Prior Plans and the LTIA under the Omnibus Plan. For the three months ended September 26, 2013, the Company recognized $3.7 of stock compensation expense, net of forfeitures.  The entire $4.7 of stock compensation expense was recorded as selling, general and administrative expense in accordance with FASB authoritative guidance. Of the total $3.7 of stock compensation expense recorded for the three months ended September 26, 2013, the full amount was recorded as selling, general and administrative expense.

For the nine months ended October 2, 2014, the Company recognized a total of $12.7 of stock compensation expense, net of forfeitures, and includes expense for the Prior Plans and LTIA. For the nine months ended September 26, 2013, the Company recognized $15.7 of stock compensation expense, net of forfeitures. Of the total $12.7 of stock compensation expense recorded for the nine months ended October 2, 2014, the full amount was recorded as selling, general and administrative expense in accordance with FASB authoritative guidance with no accelerated vesting expense for participants meeting the conditions for “Qualifying Retirement” under the STIP as set out in the Proxy Statement for our 2014 annual meeting of stockholders. Of the $15.7 of stock compensation expense recorded for the nine months ended September 26, 2013 the full amount was recorded as selling, general and administrative expense, which includes $0.5 of accelerated vesting expense for participants meeting the conditions for “Qualifying Retirement.”

 During the first quarter ended April 3, 2014, 62,080 shares of class A common stock with an aggregate grant date fair value of $1.0 awarded under the STIP vested. Effective in the first quarter of 2014, the Company made the determination to pay its short term incentive awards, which are based on company performance, 100% in cash.

In May 2014, 506,116 shares of class A common stock with an aggregate grant date fair value of $16.8 were granted under the service-based portion of the Company's LTIA under the Omnibus Plan and such shares will vest annually in three equal installments beginning on the one-year anniversary of the grant date. In addition, 124,320 shares of class A common stock with an aggregate grant date fair value of $5.6 were granted under the market-based portion of the Company's LTIA under the Omnibus Plan and such shares are eligible to vest on the three-year anniversary of the grant date depending on total shareholder return compared to the Company's peers. Additionally, 528,230 shares of class A common stock with an aggregate grant date fair value of $11.9 awarded under the Company's Long-Term Incentive Plan vested during the quarter ended July 3, 2014.

In the second quarter ended July 3, 2014, 25,096 shares of class A common stock with an aggregate grant date fair value of $0.8 were granted under the Company’s Board of Directors portion of the Omnibus Plan and such shares will vest on the one-year anniversary of the grant date. Additionally, 36,932 shares of class A common stock with an aggregate grant date fair value of $0.8 awarded under the Board of Director’s Stock Plan vested during the quarter.

In the third quarter ended October 2, 2014, 51,079 shares of class A common stock with an aggregate grant date fair value of $1.9 were granted under the service-based portion of the Company's LTIA. In addition, 292 shares of class A common stock with an aggregate grant date fair value of less than $0.1 were granted under the market-based portion of the Company's LTIA. Also, 5,067 shares of class A common stock with an aggregate grant date fair value of $0.2 were granted under the Company’s Board of Directors portion of the Omnibus. Additionally, 19,752 shares of class A common stock with an aggregate grant date fair value of $0.6 awarded under the Company's Long-Term Incentive Plan vested during the quarter ended October 2, 2014.




23

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


18. Income Taxes
 
The process for calculating our income tax expense involves estimating actual current taxes due plus assessing temporary differences arising from differing treatment for tax and accounting purposes that are recorded as deferred tax assets and liabilities. Deferred tax assets are periodically evaluated to determine their recoverability. The total net deferred tax liability at October 2, 2014 and December 31, 2013 were $17.4 and $15.8, respectively. This increase is primarily due to temporary differences reducing taxable income in the United Kingdom (U.K.) netted with a reduction to the Malaysia deferred tax liability as a result of securing the tax holiday.
 
The Company files income tax returns in all jurisdictions in which it operates. The Company establishes reserves to provide for additional income taxes that may be due upon audit. These reserves are established based on management’s assessment as to the potential exposure attributable to permanent tax adjustments and associated interest. All tax reserves are analyzed quarterly and adjustments made as events occur that warrant modification.

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

However, the Company has determined that a calculation of an annual effective tax rate would not represent a reliable estimate for its U.S. operations due to historical differences between forecasted and actual U.S. pre-tax earnings and the effect of the Company's U.S. deferred tax valuation allowance, which create results with significant variations in the customary relationship between income tax expense and pre-tax income for the interim periods. Under the discrete method, the Company determines tax expense based upon actual results as if the interim period were an annual period.  The discrete method was used for our U.S. pre-tax income and an annual effective rate was used for our international pre-tax income.

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, management assesses all available positive and negative evidence. This evidence includes, but is not limited to, prior earnings history, expected future earnings, carry-back and carry-forward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. 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 continue to maintain a valuation allowance against nearly all of its net U.S. deferred tax assets as of October 2, 2014. At each reporting date, management considers all available positive and negative evidence, both new and historical, that could impact the future realization of deferred tax assets. Management will consider a release of the valuation allowance once there is sufficient positive evidence that it is more likely than not that the deferred tax assets will be realized, or when it is clearly demonstrated that the underlying deferred tax asset has been realized due to positive taxable income in the period the temporary difference was reversed. Any release of the valuation allowance will be recorded as a tax benefit increasing net income or other comprehensive income.

The net valuation allowance was decreased by $77.9 for the nine months ended October 2, 2014. The reduction reflects the realization of certain deferred tax assets within the Company’s discrete method taxable income calculation and changes in deferred tax assets associated with certain state income tax credits for the nine months ending October 2, 2014 and the overall favorable resolution of tax accounting methods and other issues agreed upon concurrent with the Company’s IRS CAP examination and tax return filing for the 2013 tax year in the third quarter of 2014.  To the extent that the Company generates positive taxable income and expects, with reasonable certainty, to continue to generate positive income we may release additional valuation allowance in future periods. This release would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period such release is recorded. The release of all or a portion of the valuation allowance may have a significant effect on our tax expense in the period it is released.

During the first quarter of 2014, the Company received formal approval of the tax holiday from the Malaysian tax authorities, with conditional renewals once every five years beginning in September 2014. As a result of this approval, the Company released

24

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


$12.2 of tax reserves and $0.7 of deferred tax liabilities into earnings in the first quarter of 2014. The company has submitted all required documentation to the Malaysian tax authorities regarding the five year renewal period to September of 2019. The Company’s position is that all conditions of the renewal have been met and continues to operate under a tax holiday in Malaysia effective through September 2024.  
       
The Company released $1.2 of tax reserves associated with our 2010 and 2013 tax years due to the expiration of the statute of limitations on our 2010 Federal Income Tax Return and the overall favorable resolution of tax accounting methods and other issues agreed upon concurrent with the Company’s IRS CAP examination and tax return filing for the 2013 tax year in the third quarter of 2014.
        
The Company's income tax expense for 2014 does not reflect any benefit of the U.S. Federal Research Tax Credit attributable to 2014 as the legislation has not been extended beyond December, 2013. Should the legislation be extended during the year, the Company may record additional tax benefits for 2014 Research Tax Credit.

The 12.5% effective tax rate for the three months ended October 2, 2014 differs from the (129.4)% effective tax rate for the same period of 2013 primarily due to the U.S. net deferred tax asset valuation allowance decrease in 2014 and reduced earnings and the tax treatment for long-term contracts in 2013.

The 16.1% effective tax rate for the nine months ended October 2, 2014 differs from the 64.6% effective tax rate for the same period of 2013 primarily due to the U.S. net deferred tax asset valuation allowance decrease in 2014, the Malaysia tax reserve release in 2014, reduced earnings and the tax treatment for long-term contracts in 2013 and the inclusion of 2012 and 2013 U.S. Federal Research Tax Credit in 2013.
 
The Company is participating in the Internal Revenue Service’s Compliance Assurance Process (“CAP”) program for our 2013 tax year.  Additionally, the Company has been selected for the Compliance Maintenance phase of the CAP program for the 2014 tax year.  The CAP program’s objective is to resolve issues in a timely, contemporaneous manner and eliminate the need for a lengthy post-filing examination. During the second quarter of 2014 HM Revenue & Customs completed its examination of our 2009-2011 U.K. income tax returns.  The Directorate General of Public Finance is currently examining our 2011 and 2012 France income tax returns.  While a change could result from the ongoing examinations, the Company expects no material change in its recorded unrecognized tax benefit liability in the next 12 months.

 
19.  Equity
 
Earnings per Share Calculation
 
Basic net income per share is computed using the weighted-average number of outstanding shares of common stock during the measurement period. Diluted net income per share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential outstanding shares of common stock during the measurement period.
 
Subject to preferences that may apply to shares of preferred stock outstanding at the time, holders of the Company’s outstanding common stock are entitled to any dividend declared by the Board of Directors out of funds legally available for this purpose. No dividend may be declared on the class A or class B common stock unless at the same time an equal dividend is paid on every share of class A and class B common stock. Dividends paid in shares of the Company’s common stock must be paid, with respect to a particular class of common stock, in shares of that class. The Company does not intend to pay cash dividends on its common stock. The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. As of October 2, 2014, no treasury shares have been reissued or retired.
 

25

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


The following table sets forth the computation of basic and diluted earnings per share:
 
 
For the Three Months Ended
 
October 2, 2014
 
September 26, 2013
 
Income
 
Shares
 
Per Share
Amount
 
Income
 
Shares
 
Per Share
Amount
Basic EPS
 

 
 

 
 

 
 

 
 

 
 

Income available to common shareholders
$
167.5

 
138.6

 
$
1.21

 
$
92.7

 
141.4

 
$
0.66

Income allocated to participating securities
0.5

 
0.4

 
 

 
1.0

 
1.4

 
 

Net income
$
168.0

 
 

 
 

 
$
93.7

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Diluted potential common shares
 

 
1.0

 
 

 
 

 
0.6

 
 

Diluted EPS
 

 
 

 
 

 
 

 
 

 
 

Net income
$
168.0

 
140.0

 
$
1.20

 
$
93.7

 
143.4

 
$
0.65

 

 
For the Nine Months Ended
 
October 2, 2014
 
September 26, 2013
 
Income
 
Shares
 
Per Share
Amount
 
Income
 
Shares
 
Per Share
Amount
Basic EPS
 

 
 

 
 

 
 

 
 

 
 

Income (loss) available to common shareholders
$
462.5

 
140.4

 
$
3.30

 
$
(34.2
)
 
141.2

 
$
(0.24
)
Income (loss) allocated to participating securities
2.5

 
0.8

 
 
 
(0.3
)
 
1.5

 
 

Net income (loss)
$
465.0

 
 

 
 

 
$
(34.5
)
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Diluted potential common shares
 

 
1.0

 
 

 
 

 

 
 

Diluted EPS
 

 
 

 
 

 
 

 
 

 
 

Net income (loss)
$
465.0

 
142.2

 
$
3.27

 
$
(34.5
)
 
141.2

 
$
(0.24
)


The balance of outstanding common shares presented in the condensed consolidated balance sheets was 141.2 million and 144.7 million at October 2, 2014 and September 26, 2013, respectively. Included in the outstanding common shares were 2.4 million and 3.2 million of issued but unvested shares at October 2, 2014 and September 26, 2013, respectively, which are excluded from the basic EPS calculation.
 
Accumulated Other Comprehensive Loss
 
Accumulated Other Comprehensive Loss is summarized by component as follows:
 
 
For the Nine Months Ended
 
For the Twelve Months Ended
 
October 2, 2014
 
December 31, 2013
Interest rate swaps
$
(0.5
)
 
$

Pension
(52.9
)
 
(52.7
)
SERP/Retiree medical
3.1

 
3.1

Foreign currency impact on long term intercompany loan
(3.8
)
 
(2.2
)
Currency translation adjustment
(9.8
)
 
(2.8
)
Total accumulated other comprehensive (loss)
$
(63.9
)
 
$
(54.6
)
 

26

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)



Noncontrolling Interest
 
The balance of noncontrolling interest presented in the consolidated balance sheet was $0.5 and $0.5 at October 2, 2014 and December 31, 2013, respectively. Noncontrolling interest reported in 2013 includes Spirit's interest in a joint venture named Spirit-Progresstech LLC. Spirit sold its interest in that joint venture on December 19, 2013.

20.  Related Party Transactions
 
On August 7, 2014, the Company, Onex and certain current and former members of Spirit management entered into an underwriting agreement for the sale by such stockholders of 8,577,155 shares of the Company's class A common stock in a secondary public offering. Following the completion of the offering, which closed on August 13, 2014, Onex no longer owned any shares of the Company. During the time period in which Onex was a related party, the Company paid zero and $0.2 to a subsidiary of Onex for services rendered for the three month periods ended October 2, 2014 and September 26, 2013, respectively, and $0.3 for each of the nine month periods ended October 2, 2014 and September 26, 2013. Management believes the amounts charged were reasonable in relation to the services provided.
 
A former director and executive of the Company is a member of the Board of Directors of Rockwell Collins, Inc., a supplier of manufacturing parts to the Company.  Under the commercial terms of the arrangement with the supplier, Spirit paid less than $0.1 for the three month periods ended October 2, 2014 and September 26, 2013, and $0.2 and $0.1 for the nine month periods ended October 2, 2014 and September 26, 2013, respectively. The amounts owed to Rockwell Collins and recorded as accrued liabilities were less than $0.1 as of October 2, 2014 and December 31, 2013.
 
A former director and executive of the Company is a member of the Board of Directors of a Wichita, Kansas bank that provides banking services to Spirit. In connection with the banking services provided to Spirit, the Company pays fees consistent with commercial terms that would be available to unrelated third parties. Such fees are not material to the Company.
 
21.  Commitments, Contingencies and Guarantees
 
Litigation
 
From time to time 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 financial position or liquidity. Consistent with the requirements of authoritative guidance on accounting for contingencies, the Company had an accrual of less than $1.0 related to the following litigation matters as of October 2, 2014 and December 31, 2013. However, an unexpected adverse resolution of one or more of these items could have a material adverse effect on the results of operations and cash flows in a particular quarter or fiscal year.

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

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

27

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


investigation. Management believes the resolution of this matter will not materially affect the Company’s financial position, results of operations or liquidity.

On February 16, 2007, an action entitled Harkness et al. v. The Boeing Company et al. was filed in the U.S. District Court for the District of Kansas. The defendants were served in early July 2007. The defendants included Spirit AeroSystems Holdings, Inc., Spirit AeroSystems, Inc., the Spirit AeroSystems Holdings Inc. Retirement Plan for the International Brotherhood of Electrical Workers (IBEW), Wichita Engineering Unit (SPEEA WEU) and Wichita Technical and Professional Unit (SPEEA WTPU) Employees, and the Spirit AeroSystems Retirement Plan for International Association of Machinists and Aerospace Workers (IAM) Employees, along with Boeing and Boeing retirement and health plan entities. The named plaintiffs are twelve former Boeing employees, eight of whom were or are employees of Spirit. The plaintiffs assert several claims under the Employee Retirement Income Security Act and general contract law and brought the case as a class action on behalf of similarly situated individuals. The putative class consists of approximately 2,500 current or former employees of Spirit. The parties agreed to class certification. The sub-class members who asserted claims against the Spirit entities are those individuals who, as of June 2005, were employed by Boeing in Wichita, Kansas, were participants in the Boeing pension plan, had at least 10 years of vesting service in the Boeing plan, were in jobs represented by a union, were between the ages of 49 and 55, and who went to work for Spirit on or about June 17, 2005. Although there were many claims in the suit, the plaintiffs’ claims against the Spirit entities, asserted under various theories, were (1) that the Spirit plans wrongfully failed to determine that certain plaintiffs are entitled to early retirement “bridging rights” to pension and retiree medical benefits that were allegedly triggered by their separation from employment by Boeing and (2) that the plaintiffs’ pension benefits were unlawfully transferred from Boeing to Spirit in that their claimed early retirement “bridging rights” are not being afforded these individuals as a result of their separation from Boeing, thereby decreasing their benefits. The plaintiffs initially sought a declaration that they were entitled to the early retirement pension benefits and retiree medical benefits, an injunction ordering that the defendants provide the benefits, damages pursuant to breach of contract claims and attorney fees. On June 20, 2013, the district court entered an order dismissing all claims against the Spirit entities with prejudice. Plaintiffs’ claims against Boeing entities remain pending in the litigation. Boeing has announced that the plaintiffs and Boeing agreed on June 12, 2014, to a settlement of this matter, subject to a fairness hearing. Boeing has notified Spirit that it believes it is entitled to indemnification from Spirit for any “indemnifiable damages” it may incur in the Harkness litigation, under the terms of the asset purchase agreement from the Boeing Acquisition between Boeing and Spirit and has invoked the dispute mechanism of the asset purchase agreement. Spirit disputes Boeing’s position on indemnity. Management believes the resolution of this matter will not materially affect the Company’s financial position, results of operations or liquidity.

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

On May 11, 2009, Spirit filed a lawsuit in the United States District Court for the District of Kansas against SPS Technologies LLC (“SPS”) and Precision Castparts Corp. Spirit’s claims are based on the sale by SPS of certain non-conforming nut plate fasteners to Spirit between August 2007 and August 2008. Many of the fasteners were used on assemblies that Spirit sold to a customer. In the fall of 2008, Spirit discovered the non-conformity and notified the customer of the discrepancy. Subsequently, Spirit and the customer removed and replaced nut plates on various in-process aircraft assemblies and subsequently agreed to an appropriate cost related to those efforts. Spirit’s lawsuit sought damages, including damages related to these efforts, under various theories, including breach of contract and breach of implied warranty. On September 30, 2014, the parties announced to the court that a settlement of the matter had been reached and filed in a joint stipulation of dismissal. The resolution of the matter did not materially affect the Company's financial position, results of operation or liquidity.

28

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)



On June 3, 2013, a putative class action lawsuit was commenced against the Company, Jeffrey L. Turner, and Philip D. Anderson in the U.S. District Court for the District of Kansas. The court-appointed lead plaintiffs - two pension funds that claim to represent a class of investors in the Company's stock - filed an amended complaint on April 7, 2014, naming as additional defendants Vice President of the B787 Program Terry J. George and former Senior Vice President of Oklahoma Operations Alexander K. Kummant. The amended complaint alleges that defendants engaged in a scheme to artificially inflate the market price of the Company's stock by making false statements and omissions about certain programs' performance and costs. It contends that the alleged scheme was revealed by the Company’s accrual of $590.0 in forward loss charges on October 25, 2012. The lead plaintiffs seek certification of a class of all persons other than defendants who purchased Holdings securities between May 5, 2011 and October 24, 2012, and seek an unspecified amount of damages on behalf of the putative class. In June 2014, the defendants filed a motion to dismiss the claims set forth in the Amended Complaint. The Company intends to vigorously defend against these allegations, and management believes the resolution of this matter will not materially affect the Company’s financial position, results of operations or liquidity.

In August 2013, the Company instituted a demand for arbitration against Gulfstream Aerospace Corporation.  Spirit seeks damages from Gulfstream for its incomplete payments to Spirit for the wings Spirit manufactures for the G650 airplane, as well as other damages and relief.  Gulfstream counterclaimed against Spirit in the arbitration, seeking liquidated damages for delayed deliveries of wings, as well as other damages and relief.  The parties have selected arbitrators, and currently expect the arbitration hearing will take place in the first quarter of 2015.  The Company intends to vigorously prosecute and defend the claims in arbitration. Management believes the resolution of this matter will not materially affect the Company's financial position, results of operations or liquidity.

SEC Matters

In October 2012, Spirit was advised by the Staff of the Securities and Exchange Commission, Division of Enforcement, that they were conducting an inquiry that the Company believes to be focused on the timing of forward losses recognized in the third quarter of 2012. The Company has fully cooperated with the inquiry.  In October 2014, the Enforcement Division Staff informed the Company that it had determined to close its inquiry without recommending any enforcement action against Spirit.

Guarantees
 
Contingent liabilities in the form of letters of credit, letters of guarantee and performance bonds have been provided by the Company. As of both October 2, 2014 and December 31, 2013, outstanding letters of credit were $19.9. Outstanding guarantees were $22.3 and $24.8 at October 2, 2014 and December 31, 2013, respectively.
 
Indemnification
 
The Company has entered into customary indemnification agreements with each of its Directors, and some of its executive employment agreements include indemnification provisions. Under those agreements, the Company agrees to indemnify each of these individuals against claims arising out of events or occurrences related to that individual’s service as the Company’s agent or the agent of any of its subsidiaries to the fullest extent legally permitted.

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








29

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, and RM in millions other than per share amounts)


The following is a roll forward of the service warranty and extraordinary rework balance at October 2, 2014:
 
Balance, December 31, 2013
$
68.7

Charges to costs and expenses
34.9

Payouts
(0.4
)
Exchange rate
(0.1
)
Balance, October 2, 2014
$
103.1

 

22.  Other (Expense) Income, Net
 
Other (expense) income, net is summarized as follows:
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
October 2,
2014
 
September 26,
2013
 
October 2,
2014
 
September 26,
2013
KDFA bond
$
0.7

 
$
0.8

 
$
2.5

 
$
2.5

Rental and miscellaneous income
0.3

 
(0.2
)
 
0.4

 
(0.1
)
Foreign currency (losses) gains
(9.6
)
 
6.8

 
(4.5
)
 
(3.6
)
Total
$
(8.6
)
 
$
7.4

 
$
(1.6
)
 
$
(1.2
)

Foreign currency (losses) gains 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 which are denominated in a currency other than the entity’s functional currency.
 
23.  Segment Information
 
The Company operates in three principal segments: Fuselage Systems, Propulsion Systems and Wing Systems. Substantially all revenues in the three principal segments are from Boeing, with the exception of Wing Systems, which includes revenues from Airbus and other customers.  Approximately 93% of the Company’s net revenues for the nine months ended October 2, 2014 came from our two largest customers, Boeing and Airbus. 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. The Company's primary profitability measure to review a segment’s operating performance is segment operating income before corporate selling, general and administrative expenses, impact of severe weather event, 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 our operating segments and are not allocated in measuring the operating segments’ profitability and performance and net profit margins. Corporate selling, general and administrative expenses also includes the remaining incremental costs associated with property repairs, clean up and recovery costs related to the severe weather event at the Company’s Wichita facility. 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 our operating segments and are not utilized in measuring the operating segments’ profitability and performance.

 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.  The Fuselage Systems segment manufactures products at our facilities in Wichita, Kansas and Kinston, North Carolina.  The Fuselage Systems segment also includes an assembly plant for the A350 XWB aircraft in Saint-Nazaire, France.
 

30

Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, £, 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 our facilities in Wichita and Chanute, Kansas.
 
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. These activities take place at the Company’s facilities in Tulsa and McAlester, Oklahoma; Kinston, North Carolina; Prestwick, Scotland; and Subang, Malaysia.