Spirit AeroSystems Holdings, Inc. - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 29, 2022
Or
| ☐ | 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
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||
| Class A common stock, par value $0.01 per share | SPR | New York Stock Exchange | ||||||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging Growth Company | ||||||||||||||||||||||
| ☒ | ☐ | ☐ | ☐ | ☐ | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of October 20, 2022, the registrant had 105,253,573 shares of class A common stock, $0.01 par value per share, outstanding.
1
TABLE OF CONTENTS
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Spirit AeroSystems Holdings, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||||||
| ($ in millions, except per share data) | |||||||||||||||||||||||
| Revenue | $ | 1,276.9 | $ | 980.0 | $ | 3,709.5 | $ | 2,882.9 | |||||||||||||||
| Operating costs and expenses | |||||||||||||||||||||||
| Cost of sales | 1,194.0 | 1,036.2 | 3,611.4 | 3,009.4 | |||||||||||||||||||
| Selling, general and administrative | 69.1 | 86.8 | 203.8 | 211.3 | |||||||||||||||||||
| Restructuring costs | — | 0.8 | 0.2 | 8.1 | |||||||||||||||||||
| Research and development | 9.3 | 12.8 | 36.5 | 34.3 | |||||||||||||||||||
| Total operating costs and expenses | 1,272.4 | 1,136.6 | 3,851.9 | 3,263.1 | |||||||||||||||||||
| Operating income (loss) | 4.5 | (156.6) | (142.4) | (380.2) | |||||||||||||||||||
| Interest expense and financing fee amortization | (56.8) | (58.8) | (170.8) | (177.7) | |||||||||||||||||||
| Other (expense) income, net | (42.1) | 94.8 | 30.2 | 138.7 | |||||||||||||||||||
| Loss before income taxes and equity in net loss of affiliates | (94.4) | (120.6) | (283.0) | (419.2) | |||||||||||||||||||
| Income tax (expense) benefit | (32.9) | 7.9 | (18.4) | 0.6 | |||||||||||||||||||
| Loss before equity in net loss of affiliates | (127.3) | (112.7) | (301.4) | (418.6) | |||||||||||||||||||
| Equity in net loss of affiliates | (0.3) | (0.9) | (1.2) | (1.9) | |||||||||||||||||||
| Net loss | $ | (127.6) | $ | (113.6) | $ | (302.6) | $ | (420.5) | |||||||||||||||
| Loss per share | |||||||||||||||||||||||
| Basic | $ | (1.22) | $ | (1.09) | $ | (2.89) | $ | (4.04) | |||||||||||||||
| Diluted | $ | (1.22) | $ | (1.09) | $ | (2.89) | $ | (4.04) | |||||||||||||||
See notes to condensed consolidated financial statements (unaudited)
3
Spirit AeroSystems Holdings, Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(unaudited)
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||
| Net loss | $ | (127.6) | $ | (113.6) | $ | (302.6) | $ | (420.5) | |||||||||||||||
| Changes in other comprehensive loss, net of tax: | |||||||||||||||||||||||
Pension, SERP, and retiree medical adjustments, net of tax effect of $31.9 and $0.1 for the three months ended, respectively, and $30.9 and $0.4 for the nine months ended, respectively | (100.8) | 7.6 | (98.2) | 3.8 | |||||||||||||||||||
Unrealized foreign exchange loss on intercompany loan, net of tax effect of $1.3 and $0.3 for the three months ended, respectively, and $3.1 and $0.2 for the nine months ended, respectively | (3.2) | (0.9) | (7.2) | (0.6) | |||||||||||||||||||
Unrealized loss on foreign currency hedges, net of tax effect of $0.0 and $0.0 for the three months ended, respectively, and $0.0 and $0.0 for the nine months ended, respectively | (18.5) | (6.2) | (35.5) | (5.5) | |||||||||||||||||||
Reclassification of loss (gain) on cash flow hedges to earnings, net of tax effect of $0.0 and $0.0 for the three months ended, respectively, and $0.0 and ($0.3) for the nine months ended, respectively | 6.5 | (0.1) | 12.1 | 0.8 | |||||||||||||||||||
| Foreign currency translation adjustments | (37.0) | (11.6) | (83.5) | (7.7) | |||||||||||||||||||
| Total other comprehensive loss | (153.0) | (11.2) | (212.3) | (9.2) | |||||||||||||||||||
| Total comprehensive loss | $ | (280.6) | $ | (124.8) | $ | (514.9) | $ | (429.7) | |||||||||||||||
See notes to condensed consolidated financial statements (unaudited)
4
Spirit AeroSystems Holdings, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
| September 29, 2022 | December 31, 2021 | ||||||||||
| ($ in millions) | |||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 670.5 | $ | 1,478.6 | |||||||
| Restricted cash | 0.2 | 0.3 | |||||||||
| Accounts receivable, net | 527.8 | 461.6 | |||||||||
| Contract assets, short-term | 546.0 | 443.2 | |||||||||
| Inventory, net | 1,392.4 | 1,382.6 | |||||||||
| Other current assets | 33.4 | 39.7 | |||||||||
| Total current assets | 3,170.3 | 3,806.0 | |||||||||
| Property, plant and equipment, net | 2,215.4 | 2,385.5 | |||||||||
| Right of use assets | 86.8 | 85.3 | |||||||||
| Contract assets, long-term | 1.4 | — | |||||||||
| Pension assets | 244.6 | 532.5 | |||||||||
| Restricted plan assets | 70.7 | — | |||||||||
| Deferred income taxes | 1.1 | 0.4 | |||||||||
| Goodwill | 623.2 | 623.7 | |||||||||
| Intangible assets, net | 201.4 | 212.3 | |||||||||
| Other assets | 98.7 | 91.6 | |||||||||
| Total assets | $ | 6,713.6 | $ | 7,737.3 | |||||||
| Liabilities | |||||||||||
| Accounts payable | $ | 848.0 | $ | 720.3 | |||||||
| Accrued expenses | 445.3 | 376.1 | |||||||||
| Profit sharing | 15.2 | 63.7 | |||||||||
| Current portion of long-term debt | 355.4 | 49.5 | |||||||||
| Operating lease liabilities, short-term | 8.0 | 8.2 | |||||||||
| Advance payments, short-term | 70.0 | 137.8 | |||||||||
| Contract liabilities, short-term | 94.0 | 97.9 | |||||||||
| Forward loss provision, short-term | 284.0 | 244.6 | |||||||||
| Deferred revenue and other deferred credits, short-term | 20.1 | 72.7 | |||||||||
| Other current liabilities | 97.5 | 105.2 | |||||||||
| Total current liabilities | 2,237.5 | 1,876.0 | |||||||||
| Long-term debt | 3,428.0 | 3,742.7 | |||||||||
| Operating lease liabilities, long-term | 75.9 | 78.8 | |||||||||
| Advance payments, long-term | 188.7 | 201.3 | |||||||||
| Pension/OPEB obligation | 30.2 | 74.8 | |||||||||
| Contract liabilities, long-term | 267.7 | 289.1 | |||||||||
| Forward loss provision, long-term | 364.9 | 521.6 | |||||||||
| Deferred revenue and other deferred credits, long-term | 20.2 | 32.1 | |||||||||
| Deferred grant income liability - non-current | 24.8 | 26.4 | |||||||||
| Deferred income taxes | 2.6 | 21.8 | |||||||||
| Other non-current liabilities | 118.7 | 423.9 | |||||||||
| Stockholders’ Equity | |||||||||||
Common Stock, Class A par value $0.01, 200,000,000 shares authorized, 105,159,585 and 105,037,845 shares issued and outstanding, respectively | 1.1 | 1.1 | |||||||||
| Additional paid-in capital | 1,169.8 | 1,146.2 | |||||||||
| Accumulated other comprehensive loss | (236.0) | (23.7) | |||||||||
| Retained earnings | 1,475.7 | 1,781.4 | |||||||||
Treasury stock, at cost (41,587,480 and 41,523,470 shares each period, respectively) | (2,456.7) | (2,456.7) | |||||||||
| Total stockholders' equity | (46.1) | 448.3 | |||||||||
| Noncontrolling interest | 0.5 | 0.5 | |||||||||
| Total equity | (45.6) | 448.8 | |||||||||
| Total liabilities and equity | $ | 6,713.6 | $ | 7,737.3 | |||||||
See notes to condensed consolidated financial statements (unaudited)
5
Spirit AeroSystems Holdings, Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
| Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||
| ($ in millions, except share data) | |||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2021 | 105,037,845 | $ | 1.1 | $ | 1,146.2 | $ | (2,456.7) | $ | (23.7) | $ | 1,781.4 | $ | 448.3 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (175.0) | (175.0) | ||||||||||||||||||||||||||||||||||
Dividends declared(a) | — | — | — | — | — | (2.2) | (2.2) | ||||||||||||||||||||||||||||||||||
| Employee equity awards | 294,175 | — | 18.2 | — | — | — | 18.2 | ||||||||||||||||||||||||||||||||||
| Stock forfeitures | (91,196) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Net shares settled | (142,743) | — | (6.5) | — | — | — | (6.5) | ||||||||||||||||||||||||||||||||||
| ESPP shares issued | 40,078 | — | 1.9 | — | — | — | 1.9 | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (59.3) | — | (59.3) | ||||||||||||||||||||||||||||||||||
| Balance — June 30, 2022 | 105,138,159 | $ | 1.1 | $ | 1,159.8 | $ | (2,456.7) | $ | (83.0) | $ | 1,604.3 | $ | 225.5 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (127.6) | (127.6) | ||||||||||||||||||||||||||||||||||
Dividends declared(a) | — | — | — | — | — | (1.0) | (1.0) | ||||||||||||||||||||||||||||||||||
| Employee equity awards | 36,890 | — | 10.5 | — | — | — | 10.5 | ||||||||||||||||||||||||||||||||||
| Stock forfeitures | (1,574) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Net shares settled | (13,890) | — | (0.5) | — | — | — | (0.5) | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (153.0) | — | (153.0) | ||||||||||||||||||||||||||||||||||
| Balance — September 29, 2022 | 105,159,585 | $ | 1.1 | $ | 1,169.8 | $ | (2,456.7) | $ | (236.0) | $ | 1,475.7 | $ | (46.1) | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||
| ($ in millions, except share data) | |||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2020 | 105,542,162 | $ | 1.1 | $ | 1,139.8 | $ | (2,456.7) | $ | (154.1) | $ | 2,326.4 | $ | 856.5 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (306.9) | (306.9) | ||||||||||||||||||||||||||||||||||
Dividends declared(a) | — | — | — | — | — | (2.2) | (2.2) | ||||||||||||||||||||||||||||||||||
| Employee equity awards | 59,538 | — | 13.3 | — | — | — | 13.3 | ||||||||||||||||||||||||||||||||||
| Stock forfeitures | (105,320) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Net shares settled | (105,238) | — | (4.4) | — | — | — | (4.4) | ||||||||||||||||||||||||||||||||||
| ESPP shares issued | 29,500 | — | 1.4 | — | — | — | 1.4 | ||||||||||||||||||||||||||||||||||
| SERP shares issued | 9,198 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||
| Other comprehensive gain | — | — | — | — | 2.0 | — | 2.0 | ||||||||||||||||||||||||||||||||||
| Balance — July 1, 2021 | 105,429,840 | $ | 1.1 | $ | 1,150.1 | $ | (2,456.7) | $ | (152.1) | $ | 2,017.4 | $ | 559.8 | ||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (113.6) | (113.6) | ||||||||||||||||||||||||||||||||||
Dividends declared(a) | — | — | — | — | — | (1.1) | (1.1) | ||||||||||||||||||||||||||||||||||
| Employee equity awards | — | — | 6.3 | — | — | — | 6.3 | ||||||||||||||||||||||||||||||||||
| Stock forfeitures | (415,714) | — | (17.1) | — | — | — | (17.1) | ||||||||||||||||||||||||||||||||||
| Net shares settled | (2,923) | — | (0.5) | — | — | — | (0.5) | ||||||||||||||||||||||||||||||||||
| ESPP shares issued | 37,023 | — | 1.6 | — | — | — | 1.6 | ||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (11.2) | — | (11.2) | ||||||||||||||||||||||||||||||||||
| Balance — September 30, 2021 | 105,048,226 | $ | 1.1 | $ | 1,140.4 | $ | (2,456.7) | $ | (163.3) | $ | 1,902.8 | $ | 424.3 | ||||||||||||||||||||||||||||
(a) Cash dividends declared per common share were $0.01 for the three months ended September 29, 2022 and September 30, 2021, respectively. Cash dividends declared per common share were $0.03 for the nine months ended September 29, 2022 and September 30, 2021, respectively.
6
Spirit AeroSystems Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
| For the Nine Months Ended | |||||||||||
| September 29, 2022 | September 30, 2021 | ||||||||||
| Operating activities | ($ in millions) | ||||||||||
| Net loss | $ | (302.6) | $ | (420.5) | |||||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities | |||||||||||
| Depreciation and amortization expense | 253.2 | 241.9 | |||||||||
| Amortization of deferred financing fees | 5.6 | 6.4 | |||||||||
| Accretion of customer supply agreement | 1.6 | 1.6 | |||||||||
| Employee stock compensation expense | 28.7 | 19.6 | |||||||||
| Loss (gain) from derivative instruments | 10.5 | (0.1) | |||||||||
| Gain from foreign currency transactions | (36.9) | (7.3) | |||||||||
| Loss on disposition of assets | 0.8 | 2.3 | |||||||||
| Deferred taxes | 15.7 | 13.5 | |||||||||
| Pension and other post-retirement plans loss (income) | 17.2 | (104.5) | |||||||||
| Grant liability amortization | (1.1) | (1.2) | |||||||||
| Equity in net loss of affiliates | 1.2 | 1.9 | |||||||||
| Forward loss provision | (115.3) | (1.1) | |||||||||
| Gain on settlement of financial instrument | (21.4) | — | |||||||||
| Changes in assets and liabilities | |||||||||||
| Accounts receivable, net | (89.0) | (4.7) | |||||||||
| Inventory, net | (47.9) | 83.4 | |||||||||
| Contract assets | (112.5) | (38.8) | |||||||||
| Accounts payable and accrued liabilities | 210.6 | 99.4 | |||||||||
| Profit sharing/deferred compensation | (47.6) | (17.7) | |||||||||
| Advance payments | (99.3) | (1.2) | |||||||||
| Income taxes receivable/payable | 17.8 | 227.2 | |||||||||
| Contract liabilities | (25.1) | (79.8) | |||||||||
| Pension plans employer contributions | 19.1 | (21.9) | |||||||||
| Deferred revenue and other deferred credits | (44.4) | 42.0 | |||||||||
| Other | (6.3) | (27.1) | |||||||||
| Net cash (used in) provided by operating activities | (367.4) | 13.3 | |||||||||
| Investing activities | |||||||||||
| Purchase of property, plant and equipment | (82.7) | (90.0) | |||||||||
| Acquisition, net of cash acquired | — | (21.1) | |||||||||
| Other | (6.1) | 4.7 | |||||||||
| Net cash used in investing activities | (88.8) | (106.4) | |||||||||
| Financing activities | |||||||||||
| Payment of principal- settlement of financial instrument | (289.5) | — | |||||||||
| Customer financing | — | (7.5) | |||||||||
| Principal payments of debt | (33.7) | (30.1) | |||||||||
| Payments on term loans | (3.0) | (3.0) | |||||||||
| Payments on floating rate notes | — | (300.0) | |||||||||
| Taxes paid related to net share settlement awards | (7.0) | (5.0) | |||||||||
| Proceeds from issuance of ESPP stock | 1.9 | 3.0 | |||||||||
| Dividends paid | (3.2) | (3.2) | |||||||||
| Net cash used in financing activities | (334.5) | (345.8) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (17.5) | (3.8) | |||||||||
| Net decrease in cash, cash equivalents, and restricted cash for the period | (808.2) | (442.7) | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | 1,498.4 | 1,893.1 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 690.2 | $ | 1,450.4 | |||||||
7
| Reconciliation of Cash, Cash Equivalents, and Restricted Cash: | |||||||||||
| For the Nine Months Ended | |||||||||||
| September 29, 2022 | September 30, 2021 | ||||||||||
| Cash and cash equivalents, beginning of the period | $ | 1,478.6 | $ | 1,873.3 | |||||||
| Restricted cash, short-term, beginning of the period | 0.3 | 0.3 | |||||||||
| Restricted cash, long-term, beginning of the period | 19.5 | 19.5 | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of the period | $ | 1,498.4 | $ | 1,893.1 | |||||||
| Cash and cash equivalents, end of the period | $ | 670.5 | $ | 1,430.6 | |||||||
| Restricted cash, short-term, end of the period | 0.2 | 0.3 | |||||||||
| Restricted cash, long-term, end of the period | 19.5 | 19.5 | |||||||||
| Cash, cash equivalents, and restricted cash, end of the period | $ | 690.2 | $ | 1,450.4 | |||||||
See notes to condensed consolidated financial statements (unaudited)
8
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
1. Organization, Basis of Interim Presentation and Recent Developments
Unless the context otherwise indicates or requires, as used in this Quarterly Report on Form 10-Q, references to “we,” “us,” “our,” and the “Company” refer to Spirit AeroSystems Holdings, Inc. and its consolidated subsidiaries. References to “Spirit” refer only to our subsidiary, Spirit AeroSystems, Inc., and references to “Holdings” refer only to Spirit AeroSystems Holdings, Inc.
The Company provides manufacturing and design expertise in a wide range of fuselage, propulsion, and wing products and services for aircraft original equipment manufacturers (“OEM”) and operators through its subsidiaries including Spirit. The Company's headquarters are in Wichita, Kansas, with manufacturing and assembly facilities in Tulsa, Oklahoma; Prestwick, Scotland; Wichita, Kansas; Kinston, North Carolina; Subang, Malaysia; Saint-Nazaire, France; Biddeford, Maine; Belfast, Northern Ireland; Casablanca, Morocco; and Dallas, Texas.
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. Since 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. All intercompany balances and transactions have been eliminated in consolidation.
As part of the monthly consolidation process, the Company’s international subsidiaries 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. The subsidiaries in Prestwick, Scotland and Subang, Malaysia use the British pound as their functional currency. All other foreign subsidiaries and branches use the U.S. dollar as their functional currency.
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments and elimination of intercompany balances and transactions) considered necessary to fairly present the results of operations for the interim period. The results of operations for the nine months ended September 29, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
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 the Company’s 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 15, 2022 (the “2021 Form 10-K”).
The Company's significant accounting policies are described in Note 3, Summary of Significant Accounting Policies to our consolidated financial statements in the 2021 Form 10-K.
B737 MAX
Boeing's deliveries of the B737 MAX resumed in the fourth quarter of 2020 when the FAA rescinded the order that grounded B737 MAX aircraft in the United States. Since November 2020, regulators from Brazil, Canada, the EU, U.K., India, and other countries have taken similar actions to unground the B737 MAX and permit return to service. The Civil Aviation Administration of China, which is the most significant country remaining not to allow the B737 MAX to return to service, issued an airworthiness directive in December 2021, directing corrective actions necessary to allow for return to service, and held a special meeting in September 2022 to review the training specifications for the aircraft. During the nine-month period ended September 29, 2022, Boeing continued to announce orders for the B737 MAX, and air carriers generally continued resuming flights on the aircraft.
9
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
Global Economic Events
Global economic conditions may impact the Company's results of operations. Russia’s February 2022 invasion of Ukraine, the resultant sanctions and other measures imposed by the U.S. and other governments, and other related impacts have resulted in economic and political uncertainty and risks. In response to the Russian invasion of Ukraine, and the associated U.S. sanctions, the Company suspended all sanctioned activities relating to Russia, primarily consisting of sales and service activities. In the second quarter of 2022, the Company recorded an aggregate pre-tax loss of $28.1 related to adjustments of certain assets and liabilities associated with sanctioned Russian business activities. The charges are included on the Company's Condensed Consolidated Statements of Operations for the nine-month period ended September 29, 2022. Continuation or significant expansion of economic disruption or escalation of the conflict, or other geopolitical events of a similar nature, could have a material adverse effect on orders from the Company's customers, the public’s ability or willingness to continue to travel, and/or the Company's results of operations. Energy, freight, raw material and other costs have been impacted by, and may continue to be impacted by, the conflict. These costs have also been impacted by global inflationary pressures, including significant increases in inflation in many countries in which the Company operates. The Company's associated estimates of such costs, where applicable, use the most recent information available. The economic impact of inflation, together with the impact of increases in interest rates and actions taken to attempt to reduce inflation, may have a significant effect on the global economy, air travel, the Company's supply chain and the Company's customers, and, as a result, on the Company's business. The Company continues to monitor and evaluate related risks and uncertainties, including the items discussed in Item 1A. “Risk Factors” in the 2021 Form 10-K.
COVID-19
During the nine months ended September 29, 2022, the COVID-19 pandemic continued to have a significant negative impact on the aviation industry, the Company's customers, and the Company's business globally. Continued impacts on the aviation industry and the Company’s operational and financial performance remains uncertain and outside of the Company’s control. The Company expects the pandemic and its effects to continue to have a significant negative impact on its business for the duration of the pandemic and during the subsequent economic recovery, which could be for an extended period of time.
2. Adoption of New Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12”) which modifies FASB Accounting Standards Codification (“ASC”) 740 to simplify the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. The adoption of ASU 2019-12 as of January 1, 2021 did not have a material impact on our financial position or results of operations.
3. New Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022, and an entity may elect to apply ASU 2020-04 for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. An entity may elect to apply ASU 2020-04 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. To date, the Company has not had a modification to which the application of this guidance is applicable. The Company will continue evaluating the potential impact of adopting this guidance on its consolidated financial statements.
10
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832) Disclosures by Business Entities about Government Assistance (“ASU 2021-10”). The amendments in the update require annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. ASU 2021-10 is effective for all entities within its scope for financial statements issued for annual periods beginning after December 15, 2021. Early application is permitted. An entity should apply ASU 2021-10 either prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions entered into after the date of initial application, or retrospectively to those transactions. The Company is preparing for the initial application of this guidance on its annual financial statements to be issued for the period ended December 31, 2022, which is not expected to have a significant impact on its consolidated financial statements.
In September 2022, the FASB issued ASU No. 2022-04, Liabilities-Supplier Finance Programs (Subtopic 405-50). The amendments in the update require additional qualitative and quantitative disclosure about supplier finance programs. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. ASU No. 2022-04 is effective on a retrospective basis for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for an amended disclosure requirement related to certain rollforward information, which is effective on a prospective basis for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance, which is not expected to have a significant impact on its consolidated financial statements.
4. Changes in Estimates
The Company has a periodic forecasting process in which management assesses the progress and performance of the Company’s programs. This process requires management to review each program’s progress by evaluating the program schedule, changes to identified risks and opportunities, changes to estimated revenues and costs for the accounting contracts (and options, if applicable), and any outstanding contract matters. Risks and opportunities include but are not limited to management’s judgment about the cost associated with the Company’s ability to achieve the schedule, technical requirements (e.g., a newly-developed product versus a mature product), and any other program requirements. Due to the span of years it may take to completely satisfy the performance obligations for the accounting contracts (and options, if any) and the scope and nature of the work required to be performed on those contracts, the estimation of total revenue and costs is subject to many variables and, accordingly, is subject to change based upon judgment. When adjustments in estimated total consideration or estimated total cost are required, any changes from prior estimates for fully satisfied performance obligations are recognized in the current period as a cumulative catch-up adjustment for the inception-to-date effect of such changes. Cumulative catch-up adjustments are driven by several factors including production efficiencies, assumed rate of production, the rate of overhead absorption, changes to scope of work, and contract modifications.
During the third quarter ended September 29, 2022, the Company recognized unfavorable changes in estimates of $54.0, which included net forward loss charges of $49.1, and unfavorable cumulative catch-up adjustments related to periods prior to the third quarter of 2022 of $4.9.
The forward losses in the third quarter were primarily driven by losses on the A350, B787, and RB3070 programs. Increased cost estimates for production on the A350 program resulted in a forward loss reflecting additional labor, freight, and other cost requirements driven by parts shortages and production and quality issues. The B787 program forward loss was driven by increased cost estimates for supply chain, rework, and fixed cost absorption. The RB3070 nacelle program forward loss taken this quarter was driven by increased engineering cost estimates. To a lesser extent, the B767, KC-46 Tanker, and A330 programs also contributed to the forward loss, as each had adjustments to increase the forward loss charges in the third quarter. The unfavorable cumulative catch-up adjustments primarily relate to adjustments for production schedule changes and increased costs on the A320 program.
During the third quarter ended September 30, 2021, the Company recognized unfavorable changes in estimates of $73.2, which included net forward loss charges of $70.4, and unfavorable cumulative catch-up adjustments related to periods prior to the third quarter of 2021 of $2.8. The forward losses were primarily driven by the impact of reduced production volumes and production schedule changes on the B787 and A350 programs.
11
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
Changes in estimates are summarized below:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||
| Changes in Estimates | September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||||||||
| (Unfavorable) Favorable Cumulative Catch-up Adjustment by Segment | ||||||||||||||||||||||||||
| Commercial | $ | (6.9) | $ | (3.4) | $ | (27.8) | $ | (3.1) | ||||||||||||||||||
| Defense & Space | 2.0 | 0.6 | 1.6 | 0.6 | ||||||||||||||||||||||
| Aftermarket | — | — | — | — | ||||||||||||||||||||||
| Total (Unfavorable) Favorable Cumulative Catch-up Adjustment | $ | (4.9) | $ | (2.8) | $ | (26.2) | $ | (2.5) | ||||||||||||||||||
| Changes in Estimates on Loss Programs (Forward Loss) by Segment | ||||||||||||||||||||||||||
| Commercial | $ | (47.4) | $ | (61.5) | $ | (132.6) | $ | (180.3) | ||||||||||||||||||
| Defense & Space | (1.7) | (8.9) | (4.0) | (14.7) | ||||||||||||||||||||||
| Aftermarket | — | — | — | — | ||||||||||||||||||||||
| Total Changes in Estimates (Forward Loss) on Loss Programs | $ | (49.1) | $ | (70.4) | $ | (136.6) | $ | (195.0) | ||||||||||||||||||
| Total Change in Estimate | $ | (54.0) | $ | (73.2) | $ | (162.8) | $ | (197.5) | ||||||||||||||||||
| EPS Impact (diluted per share based upon applicable forecasted effective tax rate) | $ | (0.55) | $ | (0.69) | $ | (1.66) | $ | (1.86) | ||||||||||||||||||
5. Accounts Receivable and Allowance for Credit Losses
Accounts Receivable, net
Accounts receivable represent the Company’s unconditional rights to consideration, subject to the payment terms of the contract, for which only the passage of time is required before payment. Unbilled receivables are reflected under contract assets on the Condensed Consolidated Balance Sheet. See also Allowance for Credit Losses, below.
Accounts receivable, net consists of the following:
| September 29, 2022 | December 31, 2021 | ||||||||||
| Trade receivables | $ | 499.2 | $ | 412.0 | |||||||
| Other | 39.2 | 58.1 | |||||||||
| Less: allowance for credit losses | (10.6) | (8.5) | |||||||||
| Accounts receivable, net | $ | 527.8 | $ | 461.6 | |||||||
Other receivables as of December 31, 2021 in the table above included an amount related to the Department of Transportation’s approval of the Company’s grant claim filed under the Aviation Manufacturing Jobs Protection Program, a component of the American Rescue Plan Act of 2021. This program provided funding for a portion of the compensation costs of certain categories of employees for up to six months. In return, the Company was required to make several commitments, including a commitment that the Company would not involuntarily furlough or lay off employees within those categories of employees during the same six-month period. As of December 31, 2021, the Company's other receivable balance, noted in the table above, included $37.7 for the program, reflecting the amount that had not yet been paid of the full amount of the award of $75.5. As of September 29, 2022, the amount in other receivables was $0, reflecting a payment of $37.7 received in the nine months ended September 29, 2022. The full amount of the award has been amortized against Cost of sales on the Condensed Consolidated Statements of Operations as of September 29, 2022.
12
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
The Company has agreements (through its subsidiaries) to sell, on a revolving basis, certain trade accounts receivable balances with Boeing, Airbus Group SE and its affiliates (collectively, “Airbus”), and Rolls-Royce PLC and its affiliates (collectively, “Rolls-Royce”) to third-party financial institutions. These programs were primarily entered into as a result of customers seeking payment term extensions with the Company and they continue to allow the Company to monetize the receivables prior to their payment date, subject to payment of a discount. No guarantees are delivered under the agreements. The Company's ability to continue using such agreements is primarily dependent upon the strength of the applicable customer’s financial condition. Transfers under these agreements are accounted for as sales of receivables resulting in the receivables being derecognized from the Company's balance sheet. For the nine months ended September 29, 2022, $2,083.0 of accounts receivable were sold via these arrangements. The proceeds from these sales of receivables are included in cash from operating activities in the Condensed Consolidated Statements of Cash Flows. The recorded net loss on sale of receivables was $12.8 for the nine months ended September 29, 2022 and is included in Other income and expense. See Note 21 Other Income (Expense), Net.
Allowance for Credit Losses
During the nine months ended September 29, 2022, there have been no significant changes in the factors that influenced management’s current estimate of expected credit losses, nor changes to the Company’s accounting policies or Current Expected Credit Losses methodology. The beginning balances, current period activity, and ending balances of the allocation for credit losses on accounts receivable and contract assets were not material.
6. Contract Assets and Contract Liabilities
Contract assets primarily represent revenues recognized for performance obligations that have been satisfied but for which amounts have not been billed. Contract assets, current are those that are expected to be billed to our customer within 12 months. Contract assets, long-term are those that are expected to be billed to our customer over periods greater than 12 months. No impairments to contract assets were recorded for the period ended September 29, 2022 or the period ended September 30, 2021. See also Note 5 Accounts Receivable and Allowance for Credit Losses.
Contract liabilities are established for cash received in excess of revenues recognized and are contingent upon the satisfaction of performance obligations. Contract liabilities primarily consist of cash received on contracts for which revenue has been deferred since the receipts are in excess of transaction price resulting from the allocation of consideration based on relative standalone selling price to future units (including those under option that the Company believes are likely to be exercised) with prices that are lower than standalone selling price. These contract liabilities will be recognized earlier if the options are not fully exercised, or immediately, if the contract is terminated prior to the options being fully exercised.
| September 29, 2022 | December 31, 2021 | Change | |||||||||
| Contract assets | $ | 547.4 | $ | 443.2 | $ | 104.2 | |||||
| Contract liabilities | (361.7) | (387.0) | 25.3 | ||||||||
| Net contract assets (liabilities) | $ | 185.7 | $ | 56.2 | $ | 129.5 | |||||
For the period ended September 29, 2022, the increase in contract assets reflects the net impact of more over time revenue recognition in relation to billed revenues during the period. The decrease in contract liabilities reflects the net impact of less deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $63.2 of revenue that was included in the contract liability balance at the beginning of the period.
| September 30, 2021 | December 31, 2020 | Change | |||||||||
| Contract assets | $ | 411.0 | $ | 372.8 | $ | 38.2 | |||||
| Contract liabilities | (389.6) | (469.6) | 80.0 | ||||||||
| Net contract assets (liabilities) | $ | 21.4 | $ | (96.8) | $ | 118.2 | |||||
For the period ended September 30, 2021, the increase in contract assets reflects the net impact of more over time revenue recognition in relation to billed revenues during the period. The decrease in contract liabilities reflects the net impact of less
13
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $156.1 of revenue that was included in the contract liability balance at the beginning of the period.
7. Revenue Disaggregation and Outstanding Performance Obligations
Disaggregation of Revenue
The Company disaggregates revenue based on the method of measuring satisfaction of the performance obligation either over time or at a point in time, based upon the location where products and services are transferred to the customer, and based upon major customer. The Company’s principal operating segments and related revenue are noted in Note 22, Segment Information.
The following tables show disaggregated revenues for the periods ended September 29, 2022 and September 30, 2021:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||
| Revenue | September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||
| Contracts with performance obligations satisfied over time | $ | 970.6 | $ | 774.9 | $ | 2,733.3 | $ | 2,187.3 | ||||||||||||
| Contracts with performance obligations satisfied at a point in time | 306.3 | 205.1 | 976.2 | 695.6 | ||||||||||||||||
| Total Revenue | $ | 1,276.9 | $ | 980.0 | $ | 3,709.5 | $ | 2,882.9 | ||||||||||||
The following table disaggregates revenue by major customer:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||
| Customer | September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||
| Boeing | $ | 824.3 | $ | 566.1 | $ | 2,233.7 | $ | 1,595.8 | ||||||||||||
| Airbus | 237.2 | 211.6 | 822.2 | 687.8 | ||||||||||||||||
| Other | 215.4 | 202.3 | 653.6 | 599.3 | ||||||||||||||||
| Total Revenue | $ | 1,276.9 | $ | 980.0 | $ | 3,709.5 | $ | 2,882.9 | ||||||||||||
The following table disaggregates revenue based upon the location where control of products are transferred to the customer:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||
| Location | September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||
| United States | $ | 1,037.0 | $ | 715.5 | $ | 2,768.0 | $ | 2,048.1 | ||||||||||||
| International | ||||||||||||||||||||
| United Kingdom | 145.5 | 142.5 | 473.5 | 419.8 | ||||||||||||||||
| Other | 94.4 | 122.0 | 468.0 | 415.0 | ||||||||||||||||
| Total International | 239.9 | 264.5 | 941.5 | 834.8 | ||||||||||||||||
| Total Revenue | $ | 1,276.9 | $ | 980.0 | $ | 3,709.5 | $ | 2,882.9 | ||||||||||||
14
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
Remaining Performance Obligations
Unsatisfied, or partially unsatisfied, performance obligations that are expected to be recognized in the future are noted in the table below. The Company expects options to be exercised in addition to the amounts presented below:
| Remaining in 2022 | 2023 | 2024 | 2025 and After | |||||||||||
| Unsatisfied performance obligations | $ | 1,114.2 | $ | 4,197.6 | $ | 4,235.9 | $ | 717.4 | ||||||
8. Inventory
Inventory consists of raw materials used in the production process, work-in-process, which is direct material, direct labor, overhead and purchases, and capitalized pre-production costs. Raw materials are stated at lower of cost (principally on an actual or average cost basis) or net realizable value. Capitalized pre-production costs include certain contract costs, including applicable overhead, incurred before a product is manufactured on a recurring basis. These costs are typically amortized over a period that is consistent with the satisfaction of the underlying performance obligations to which these relate.
| September 29, 2022 | December 31, 2021 | ||||||||||
| Raw materials | $ | 329.6 | $ | 301.4 | |||||||
Work-in-process(1) | 974.2 | 999.1 | |||||||||
| Finished goods | 64.5 | 56.9 | |||||||||
| Product inventory | 1,368.3 | 1,357.4 | |||||||||
| Capitalized pre-production | 24.1 | 25.2 | |||||||||
| Total inventory, net | $ | 1,392.4 | $ | 1,382.6 | |||||||
(1)Work-in-process inventory includes direct labor, direct material, overhead, and purchases on contracts for which revenue is recognized at a point in time as well as sub-assembly parts that have not been issued to production on contracts for which revenue is recognized over time using an input method. For the periods ended September 29, 2022 and December 31, 2021, work-in-process inventory includes $372.0 and $381.2, respectively, of costs incurred in anticipation of specific contracts and no impairments were recorded in the periods.
Product inventory, summarized in the table above, is shown net of valuation reserves of $130.8 and $97.3 as of September 29, 2022 and December 31, 2021, respectively. The increase in reserves from the prior period was driven by reserves recorded against inventory as of September 29, 2022 that were impacted by the suspension of activities in Russia noted above. See Note 1 Organization, Basis of Interim Presentation and Recent Developments.
Excess capacity and abnormal production costs are excluded from inventory and recognized as expense in the period incurred. Cost of sales for three and nine months ended September 29, 2022 includes period expense of $31.4 and $126.1, respectively, for excess capacity production costs related to temporary B737 MAX, A220 and A320 production schedule changes. Cost of sales also includes abnormal costs related to temporary workforce adjustments as a result of COVID-19 production pause, net of the U.S. employee retention credit and U.K. government subsidies for the three and nine months ended September 29, 2022 of $0.3 and $9.8, respectively.
15
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
9. Property, Plant and Equipment, net
Property, plant and equipment, net consists of the following:
| September 29, 2022 | December 31, 2021 | ||||||||||
| Land | $ | 28.8 | $ | 30.7 | |||||||
| Buildings (including improvements) | 1,243.5 | 1,242.0 | |||||||||
| Machinery and equipment | 2,337.8 | 2,276.5 | |||||||||
| Tooling | 1,046.6 | 1,051.1 | |||||||||
| Capitalized software | 328.8 | 323.0 | |||||||||
| Construction-in-progress | 95.9 | 117.1 | |||||||||
| Total | 5,081.4 | 5,040.4 | |||||||||
| Less: accumulated depreciation | (2,866.0) | (2,654.9) | |||||||||
| Property, plant and equipment, net | $ | 2,215.4 | $ | 2,385.5 | |||||||
Capitalized interest was $1.0 and $1.4 for the three months ended September 29, 2022 and September 30, 2021, respectively, and $2.9 and $4.5 for the nine months ended September 29, 2022 and September 30, 2021, respectively. Repair and maintenance costs are expensed as incurred. The Company recognized repair and maintenance costs of $43.7 and $36.1 for the three months ended September 29, 2022 and September 30, 2021, respectively, and $115.0 and $102.7 for the nine months ended September 29, 2022 and September 30, 2021, respectively.
The Company capitalizes certain costs, such as software coding, installation, and testing, that are incurred to purchase or to create and implement internal-use computer software. Depreciation expense related to capitalized software was $5.0 and $3.8 for the three months ended September 29, 2022 and September 30, 2021, respectively, and $16.5 and $11.4 for the nine months ended September 29, 2022 and September 30, 2021, respectively.
The Company reviews capital and amortizing intangible assets (long-lived assets) for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For the period ended September 29, 2022, there were no events which would require the Company to update its impairment analysis.
10. Leases
The Company determines if an arrangement is a lease at the inception of a signed agreement. Operating leases are included in right-of-use (“ROU”) assets (long-term), short-term operating lease liabilities, and long-term operating lease liabilities on the Company’s Condensed Consolidated Balance Sheets. Finance leases are included in Property, Plant and Equipment, current maturities of long-term debt, and long-term debt.
ROU assets represent the right of the Company to use an underlying asset for the length of the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
To determine the present value of lease payments, the Company uses its estimated incremental borrowing rate or the implicit rate, if readily determinable. The estimated incremental borrowing rate is based on information available at the lease commencement date, including any recent debt issuances and publicly available data for instruments with similar characteristics. The ROU asset also includes any lease payments made and excludes lease incentives.
The Company's lease terms may include options to extend or terminate the lease and, when it is reasonably certain that an option will be exercised, those options are included in the net present value calculation. Leases with a term of 12 months or less, which are primarily related to automobiles and manufacturing equipment, are not recorded on the balance sheet. The aggregate amount of lease cost for leases with a term of 12 months or less is not material.
16
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
The Company has lease agreements that include lease and non-lease components, which are generally accounted for separately. For certain leases (primarily related to IT equipment), the Company does account for the lease and non-lease components as a single lease component. A portfolio approach is applied to effectively account for the ROU assets and liabilities for those specific leases referenced above. The Company does not have any material leases containing variable lease payments or residual value guarantees. The Company also does not have any material subleases.
The Company currently has operating and finance leases for items such as manufacturing facilities, corporate offices, manufacturing equipment, transportation equipment, and vehicles. The majority of the Company's active leases have remaining lease terms that range between less than one year to 18 years, some of which include options to extend the leases for up to 30 years, and some of which include options to terminate the leases within one year.
Components of lease expense:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||||||
| Operating lease cost | $ | 3.2 | $ | 3.3 | $ | 9.8 | $ | 8.3 | |||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of assets | 8.3 | 7.2 | 24.6 | 19.6 | |||||||||||||||||||
| Interest on lease liabilities | 1.7 | 1.8 | 5.0 | 5.3 | |||||||||||||||||||
| Total net lease cost | $ | 13.2 | $ | 12.3 | $ | 39.4 | $ | 33.2 | |||||||||||||||
Supplemental cash flow information related to leases was as follows:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||||||||
| Operating cash flows from operating leases | $ | 3.2 | $ | 3.2 | $ | 9.5 | $ | 7.9 | |||||||||||||||
| Operating cash flows from finance leases | $ | 1.7 | $ | 1.8 | $ | 5.0 | $ | 5.3 | |||||||||||||||
| Financing cash flows from finance leases | $ | 11.2 | $ | 11.3 | $ | 33.7 | $ | 30.1 | |||||||||||||||
| ROU assets obtained in exchange for lease obligations: | |||||||||||||||||||||||
| Operating leases | $ | 0.1 | $ | 5.0 | $ | 1.3 | $ | 21.8 | |||||||||||||||
Supplemental balance sheet information related to leases:
| September 29, 2022 | December 31, 2021 | ||||||||||
| Finance leases: | |||||||||||
| Property and equipment, gross | $ | 281.8 | $ | 266.1 | |||||||
| Accumulated amortization | (94.2) | (73.1) | |||||||||
| Property and equipment, net | $ | 187.6 | $ | 193.0 | |||||||
The weighted average remaining lease term as of September 29, 2022 for operating and finance leases was 33.0 years and 5.4 years, respectively. The weighted average discount rate as of September 29, 2022 for operating and finance leases was 5.6% and 4.7%, respectively. The weighted average remaining lease term as of December 31, 2021 for operating and finance leases was 36.3 years and 4.9 years, respectively. The weighted average discount rate as of December 31, 2021 for operating and finance leases was 5.6% and 4.5%, respectively. See Note 15 Debt for current and non-current finance lease obligations.
17
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
As of September 29, 2022, remaining maturities of lease liabilities were as follows:
| 2022 | 2023 | 2024 | 2025 | 2026 | 2027 and thereafter | Total Lease Payments | Less: Imputed Interest | Total Lease Obligations | |||||||||||||||||||||
| Operating Leases | $ | 3.1 | $ | 11.9 | $ | 11.5 | $ | 11.6 | $ | 9.7 | $ | 150.8 | $ | 198.6 | $ | (114.7) | $ | 83.9 | |||||||||||
| Financing Leases | $ | 12.4 | $ | 45.9 | $ | 37.6 | $ | 24.6 | $ | 16.6 | $ | 32.7 | $ | 169.8 | $ | (22.2) | $ | 147.6 | |||||||||||
As of September 29, 2022, the Company had additional operating and financing lease commitments that have not yet commenced of approximately $0.4 and $66.4, respectively, for manufacturing equipment, software, and facilities that are in various phases of construction or customization for the Company's ultimate use, with lease terms between 3 and 7 years. The Company’s involvement in the construction and design process for these assets is generally limited to project management.
11. Other Assets, Goodwill, and Intangible Assets
Other current assets are summarized as follows:
| September 29, 2022 | December 31, 2021 | ||||||||||
| Prepaid expenses | $ | 26.6 | $ | 20.7 | |||||||
| Income tax receivable | — | 14.0 | |||||||||
| Other assets - short-term | 6.8 | 5.0 | |||||||||
| Total other current assets | $ | 33.4 | $ | 39.7 | |||||||
Other assets are summarized as follows:
| September 29, 2022 | December 31, 2021 | ||||||||||
| Deferred financing | |||||||||||
| Deferred financing costs | $ | 0.9 | $ | 0.9 | |||||||
| Less: Accumulated amortization - deferred financing costs | (0.7) | (0.6) | |||||||||
| Deferred financing costs, net | $ | 0.2 | $ | 0.3 | |||||||
| Other | |||||||||||
Supply agreements (1) | $ | 6.9 | $ | 9.2 | |||||||
| Equity in net assets of affiliates | 5.2 | 0.8 | |||||||||
| Restricted cash - collateral requirements | 19.5 | 19.5 | |||||||||
| Rotables | 40.0 | 38.3 | |||||||||
| Other | 26.9 | 23.5 | |||||||||
| Total other long-term assets | $ | 98.7 | $ | 91.6 | |||||||
(1) Certain payments accounted for as consideration paid by the Company to a customer are being amortized as reductions to net revenues.
18
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
Goodwill is summarized as follows:
| Changes in Goodwill Balance | |||||||||||||||||||||||||||||
| Balance at | Balance at | ||||||||||||||||||||||||||||
| Segment | December 31, 2021 | Acquisitions | Adjustments/Other | Currency Exchange | September 29, 2022 | ||||||||||||||||||||||||
| Commercial | $ | 296.8 | $ | — | $ | — | $ | (0.5) | $ | 296.3 | |||||||||||||||||||
| Defense & Space | $ | 5.5 | $ | — | $ | — | $ | — | $ | 5.5 | |||||||||||||||||||
| Aftermarket | $ | 321.4 | $ | — | $ | — | $ | — | $ | 321.4 | |||||||||||||||||||
| $ | 623.7 | $ | — | $ | — | $ | (0.5) | $ | 623.2 | ||||||||||||||||||||
The total goodwill value includes no accumulated impairment loss in any of the periods presented. The Company assesses goodwill for impairment annually or more frequently if events or circumstances indicate that the fair value of a reporting unit that includes goodwill may be lower than its carrying value. For the period ended September 29, 2022, there were no events or circumstances which would require the Company to update its goodwill impairment analysis.
Intangible assets are summarized as follows:
| September 29, 2022 | December 31, 2021 | ||||||||||
| Intangible assets | |||||||||||
| Favorable leasehold interests | 2.8 | 2.8 | |||||||||
| Developed technology asset | 92.0 | 92.0 | |||||||||
| Customer relationships intangible asset | 137.2 | 137.2 | |||||||||
| Total intangible assets | $ | 232.0 | $ | 232.0 | |||||||
| Less: Accumulated amortization - favorable leasehold interest | (2.0) | (1.9) | |||||||||
| Accumulated amortization - developed technology asset | (13.4) | (8.8) | |||||||||
| Accumulated amortization - customer relationship | (15.2) | (9.0) | |||||||||
| Intangible assets, net | $ | 201.4 | $ | 212.3 | |||||||
The amortization for each of the five succeeding years relating to intangible assets currently recorded in the Condensed Consolidated Balance Sheets and the weighted average amortization is estimated to be the following as of September 29, 2022:
| Year | Customer relationships | Favorable leasehold interest | Developed Technology | Total | ||||||||||
| remaining in 2022 | $ | 2.0 | $ | — | $ | 1.5 | $ | 3.5 | ||||||
| 2023 | 8.1 | 0.1 | 6.1 | 14.3 | ||||||||||
| 2024 | 8.1 | 0.1 | 6.1 | 14.3 | ||||||||||
| 2025 | 8.1 | 0.1 | 6.1 | 14.3 | ||||||||||
| 2026 | 8.1 | 0.1 | 6.1 | 14.3 | ||||||||||
| 2027 | 8.1 | 0.1 | 6.1 | 14.3 | ||||||||||
| Weighted average amortization period | 15.7 years | 6.8 years | 12.8 years | 14.5 years | ||||||||||
19
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
12. Advance Payments
Advances on the B787 Program. Boeing has made advance payments to Spirit under the B787 Special Business Provisions and General Terms Agreement (collectively, the “B787 Supply Agreement”) that are required to be repaid to Boeing by way of offset against the purchase price for future shipset deliveries. Advance repayments were initially scheduled to be spread evenly over the remainder of the first 1,000 B787 shipsets delivered to Boeing. On April 8, 2014, Spirit signed a memorandum of agreement with Boeing that suspended advance repayments related to the B787 program for a period of twelve months beginning April 1, 2014. Repayment recommenced on April 1, 2015, and any repayments that otherwise would have become due during such twelve-month period will offset the purchase price for shipsets 1,001 through 1,120. On December 21, 2018, Spirit signed a memorandum of agreement with Boeing that again suspended the advance repayments beginning with line unit 818. The advance repayments will resume at a lower rate of $0.45 per shipset at line number 1135 and continue through line number 1605.
In the event Boeing does not take delivery of a sufficient number of shipsets to repay the full amount of advances prior to the termination of the B787 program or the B787 Supply Agreement, any advances not then repaid will be applied against any outstanding payments then due by Boeing to us, and any remaining balance will be repaid in annual installments of $27 due on December 15th of each year until the advance payments have been fully recovered by Boeing. As of September 29, 2022, the amount of advance payments received from Boeing under the B787 Supply Agreement and not yet repaid was approximately $208.5.
Advances on the B737 Program. In an effort to minimize the disruption to Spirit's operations and its supply chain, Spirit and Boeing entered into a Memorandum of Agreement on April 12, 2019 (the "2019 MOA"), which included the terms and conditions for an advance payment to be made from Boeing to Spirit in the amount of $123, which was received during the third quarter of 2019. The parties entered into another memorandum of agreement on February 6, 2020 (the "2020 MOA"), which extended the repayment date of the $123 advance received by Spirit under the 2019 MOA to 2022. The 2020 MOA also required Boeing to pay $225 to Spirit in the first quarter of 2020, consisting of (i) $70 in support of Spirit's inventory and production stabilization, of which $10 was repaid by Spirit in 2021, and (ii) $155 as an incremental pre-payment for costs and shipset deliveries over the next two years. On February 9, 2021, Spirit signed a letter of agreement under which Boeing paid $38.5 to Spirit in the first quarter of 2021, which consisted of (i) $68.5 as additional pre-payment for the costs and shipset deliveries less the (ii) $30 credit owed to Boeing for rate-based pricing premium. During the nine-month period ended September 29, 2022, $92.3 of the advance payment was repaid. As of September 29, 2022, the amount of advance payments received from Boeing and not yet repaid was $30.7.
Other. The Advance payments, short-term line item on the Condensed Consolidated Balance Sheet for the period ended September 29, 2022 includes $18.9 related to payments received from an Aftermarket segment customer for contracted work that was impacted by the sanctions imposed by the U.S. and other governments on Russia following its invasion of Ukraine.
13. Fair Value Measurements
The FASB’s authoritative guidance on fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance discloses three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market.
Level 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
20
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
interest rates and foreign exchange rates, are used in determining the fair value of the interest rate swaps and foreign currency hedge contracts.
Level 3 Unobservable inputs that are supported by little or no market activity and are significant to the fair value of assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
At September 29, 2022, the Company’s long-term debt includes a senior secured term loan and senior notes described further under Note 15 Debt. The estimated fair value of the Company’s debt obligations is based on the quoted market prices for such obligations or the historical default rate for debt with similar credit ratings. The following table presents the carrying amount and estimated fair value of long-term debt. See also Note 14 Derivative and Hedging Activities, and Note 16 Pension and Other Post-Retirement Benefits.
| September 29, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||||||
| Senior secured term loan B (including current portion) | $ | 593.0 | $ | 585.6 | (2) | $ | 595.2 | $ | 595.2 | (2) | ||||||||||||||||
| Senior notes due 2023 | 299.7 | 290.3 | (1) | 299.3 | 303.6 | (1) | ||||||||||||||||||||
| Senior secured first lien notes due 2025 | 496.4 | 469.9 | (1) | 495.3 | 513.3 | (1) | ||||||||||||||||||||
| Senior secured second lien notes due 2025 | 1,190.1 | 1,118.6 | (1) | 1,187.5 | 1,252.4 | (1) | ||||||||||||||||||||
| Senior notes due 2026 | 298.7 | 265.1 | (1) | 298.4 | 307.5 | (1) | ||||||||||||||||||||
| Senior notes due 2028 | 695.7 | 510.1 | (1) | 695.2 | 697.4 | (1) | ||||||||||||||||||||
| Total | $ | 3,573.6 | $ | 3,239.6 | $ | 3,570.9 | $ | 3,669.4 | ||||||||||||||||||
(1)Level 1 Fair Value hierarchy
(2)Level 2 Fair Value hierarchy
14. Derivative and Hedging Activities
Derivatives Accounted for as Hedges
Cash Flow Hedges - Interest Rate Swaps
The Company has traditionally entered into interest rate swap agreements to reduce its exposure to the variable rate portion of its long-term debt. As of December 31, 2020, the Company had one interest rate swap agreement, designated as cash flow hedge, with a notional value of $150. In February, 2021, the Company terminated the swap agreement. The Company had no interest rate swaps outstanding during the nine-month period ended September 29, 2022.
Changes in the fair value of cash flow hedges are recorded in Accumulated Other Comprehensive Income ("AOCI") and recorded in earnings in the period in which the hedged transaction occurs. No gain or loss was recognized in AOCI for the three or nine months ended September 30, 2021. For the three and nine months ended September 30, 2021 a loss of $0.0 and $0.4, respectively, was reclassified from AOCI to earnings, and included in the interest expense line item on the Condensed Consolidated Statements of Operations, and in operating activities on the Condensed Consolidated Statements of Cash Flows. For the three and nine months ended September 30, 2021 a loss of $0.0 and $0.7, respectively, was reclassified from AOCI to earnings resulting from the termination of a swap agreement, and included in the other income line item on the Condensed Consolidated Statements of Operations, and in operating activities on the Condensed Consolidated Statements of Cash Flows.
21
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
Cash Flow Hedges – Foreign Currency Forward Contract
The Company has entered into currency forward contracts, each designated as a cash flow hedge upon the date of execution, for the purpose of reducing the variability of cash flows and hedging against the foreign currency exposure for forecasted payroll, pension and vendor disbursements that are expected to be made in the British Pound Sterling. The hedging program implemented is intended to reduce foreign currency exposure, and the associated forward currency contracts hedge forecasted transactions through September 2023.
The following table summarizes the notional amounts (representing the gross contract/notional amount of the derivatives outstanding) and fair values of the derivative instruments in the Condensed Consolidated Balance Sheets as of September 29, 2022, and December 31, 2021. The foreign currency exchange contracts are measured within Level 1 of the Fair Value hierarchy. See Note 13 Fair Value Measurements.
| Notional amount | Other assets | Other liabilities | ||||||||||||||||||
| September 29, 2022 | December 31, 2021 | September 29, 2022 | December 31, 2021 | September 29, 2022 | December 31, 2021 | |||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||
| Foreign currency exchange contracts | $ | 222.3 | $ | 167.7 | $ | — | $ | — | $ | 25.4 | $ | 2.0 | ||||||||
| Total derivatives at fair value | $ | — | $ | — | $ | 25.4 | $ | 2.0 | ||||||||||||
Changes in the fair value of cash flow hedges are recorded in AOCI and recorded in earnings in the period in which the hedged transaction settles. The gain (loss) recognized in AOCI associated with our hedging transactions is presented in the following table:
| Three Months Ended | Nine Months Ended | |||||||||||||
| September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | |||||||||||
| Recognized in total other comprehensive loss: | ||||||||||||||
| Foreign currency exchange contracts | $ | (15.5) | $ | (6.2) | $ | (32.5) | $ | (5.5) | ||||||
The following table summarizes the gains/(losses) associated with our hedging transactions reclassified from AOCI to earnings:
| Three Months Ended | Nine Months Ended | |||||||||||||
| September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | |||||||||||
| Foreign currency exchange contracts: | ||||||||||||||
| Other income (expense) | $ | (6.5) | $ | 0.1 | $ | (12.1) | $ | 0.1 | ||||||
Within the next 12 months, the Company expects to recognize a loss of $25.4 in earnings related to the foreign currency forward contracts. As of September 29, 2022, the maximum term of the hedged forecasted transaction was 12 months. Generally, the Company has agreements with its counterparties that contain a provision whereby if the Company defaults on its existing credit facilities and payment of the loans extended under such facilities is accelerated, the Company could be declared in default under its agreements, which may result in the early termination of the outstanding derivatives governed by such agreements and the payment of an early termination amount.
Derivatives Not Accounted for as Hedges
During the nine months ended September 29, 2022, the Company entered into foreign currency forward contracts in the amount of $291.5 to minimize the risk of currency exchange rate movements on the Company's planned settlement of the
22
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
repayable investment agreement between the Company and the U.K.'s Department for Business, Energy and Industrial Strategy. During the nine-month period ended September 29, 2022, these foreign currency forward contracts were settled and new contracts were entered into in the amount of $293.7, which were also settled during the period. The Company did not designate these forward contracts as hedges or apply hedge accounting to the forward contracts. For the nine months ended September 29, 2022, the Company recorded a net gain of $1.6 to other income on the Condensed Consolidated Statements of Operations related to the foreign currency forward contracts.
15. Debt
Total debt shown on the Condensed Consolidated Balance Sheets is comprised of the following:
| September 29, 2022 | December 31, 2021 | ||||||||||||||||
| Current | Noncurrent | Current | Noncurrent | ||||||||||||||
| Senior secured term loan B | $ | 6.0 | $ | 587.0 | $ | 5.9 | $ | 589.3 | |||||||||
| Senior notes due 2023 | 299.7 | — | — | 299.3 | |||||||||||||
| Senior secured first lien notes due 2025 | — | 496.4 | — | 495.3 | |||||||||||||
| Senior secured second lien notes due 2025 | — | 1,190.1 | — | 1,187.5 | |||||||||||||
| Senior notes due 2026 | — | 298.7 | — | 298.4 | |||||||||||||
| Senior notes due 2028 | — | 695.7 | — | 695.2 | |||||||||||||
| Present value of finance lease obligations | 41.0 | 106.6 | 42.2 | 122.9 | |||||||||||||
| Other | 8.7 | 53.5 | 1.4 | 54.8 | |||||||||||||
| Total | $ | 355.4 | $ | 3,428.0 | $ | 49.5 | $ | 3,742.7 | |||||||||
Credit Agreement
On October 5, 2020, Spirit entered into a term loan credit agreement (the “Credit Agreement”) providing for a $400.0 senior secured term loan B credit facility with the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent. On October 5, 2020, Spirit borrowed the full amount of initial term loans available under the Credit Agreement. On November 15, 2021, the Company entered into a first refinancing, incremental assumption and amendment agreement (the “November 2021 Amendment”) to the Credit Agreement (the Credit Agreement as amended by the November 2021 Amendment, the “Amended Credit Agreement”). The November 2021 Amendment provides for, among other things, (i) the refinancing of the $397.0 aggregate principal amount of term loans outstanding under the Credit Agreement immediately prior to the effectiveness of the November 2021 Amendment (the “Existing Term Loans”) with term loans in an equal principal amount with a lower interest rate (the “Repriced Term Loans”) and (ii) an incremental term loan facility of $203.0 in aggregate principal amount with the same terms as the Repriced Term Loans (the "Incremental Term Loans" and, together with the Repriced Term Loans, the “Term Loans”).
The obligations under the Amended Credit Agreement are guaranteed by Holdings and Spirit AeroSystems North Carolina, Inc., a wholly-owned subsidiary of the Company (“Spirit NC”), (collectively, the “Guarantors”) and each existing and future, direct and indirect, wholly-owned material domestic subsidiary of Spirit, subject to certain customary exceptions. The obligations are secured by a first-priority lien with respect to substantially all assets of Spirit and the Guarantors, subject to certain exceptions.
As of September 29, 2022, the outstanding balance of the Credit Agreement was $595.5 and the carrying value was $593.0.
As of September 29, 2022, the Company was in compliance with all covenants in the Credit Agreement.
23
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
First Lien 2025 Notes
On October 5, 2020, Spirit entered into an Indenture (the “First Lien 2025 Notes Indenture”), by and among Spirit, the Guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent, in connection with Spirit’s offering of $500.0 aggregate principal amount of its 5.500% Senior Secured First Lien Notes due 2025 (the “First Lien 2025 Notes").
The First Lien 2025 Notes are guaranteed by the Guarantors and secured by certain real property and personal property, including certain equity interests, owned by Spirit and the Guarantors.
As of September 29, 2022, the outstanding balance of the First Lien 2025 Notes was $500.0 and the carrying value was $496.4.
2026 Notes
In June 2016, the Company issued $300.0 in aggregate principal amount of 3.850% Senior Notes due June 15, 2026 (the “2026 Notes”) with interest payable, in cash in arrears, on June 15 and December 15 of each year, beginning December 15, 2016.
On October 5, 2020, Spirit entered into a Fourth Supplemental Indenture (the “Fourth Supplemental Indenture”), by and among Spirit, the Company, Spirit NC and The Bank of New York Mellon Trust Company, N.A., as trustee in connection with 2026 Notes. Under the Fourth Supplemental Indenture, the holders of the 2026 Notes were granted security on an equal and ratable basis with the holders of the First Lien 2025 Notes and the secured parties under the Credit Agreement.
As of September 29, 2022, the outstanding balance of the 2026 Notes was $300.0 and the carrying value was $298.7.
Second Lien 2025 Notes
On April 17, 2020, Spirit entered into an Indenture (the “Second Lien 2025 Notes Indenture”), by and among Spirit, the Guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent, in connection with Spirit’s offering of $1,200.0 aggregate principal amount of its 7.500% Senior Secured Second Lien Notes due 2025 (the “Second Lien 2025 Notes”).
The Second Lien 2025 Notes mature on April 15, 2025 and bear interest at a rate of 7.500% per year payable semiannually in cash in arrears on April 15 and October 15 of each year. The first interest payment date was October 15, 2020.
The Second Lien 2025 Notes are guaranteed by the Guarantors and secured by certain real property and personal property, including certain equity interests, owned by Spirit and the Guarantors.
As of September 29, 2022, the outstanding balance of the Second Lien 2025 Notes was $1,200.0 and the carrying value was $1,190.1.
2023 and 2028 Notes
On May 30, 2018, Spirit entered into an Indenture (the “2018 Indenture”) by and among Spirit, the Company and The Bank of New York Mellon Trust Company, N.A., as trustee in connection with Spirit’s offering of $300.0 aggregate principal amount of its Senior Floating Rate Notes due 2021 (the “Floating Rate Notes”), $300.0 aggregate principal amount of its 3.950% Senior Notes due 2023 (the “2023 Notes”) and $700.0 aggregate principal amount of its 4.600% Senior Notes due 2028 (the “2028 Notes” and, together with the Floating Rate Notes and the 2023 Notes, the “2018 Notes”). Holdings guaranteed Spirit’s obligations under the 2018 Notes on a senior unsecured basis. On February 24, 2021, Spirit redeemed the outstanding $300.0 principal amount of the Floating Rate Notes. As of September 29, 2022, the outstanding balance of the Floating Rate Notes was $0.
As of September 29, 2022, the outstanding balance of the 2023 Notes and the 2028 Notes was $300.0 and $700.0, respectively, and the carrying value was $299.7 and $695.7, respectively.
24
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
As of September 29, 2022, the Company was in compliance with all covenants contained in the indentures governing the First Lien 2025 Notes, 2026 Notes, Second Lien 2025 Notes, 2023 Notes and 2028 Notes.
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 Expense (Income) | September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||||||||
| Service cost | $ | 0.5 | $ | 11.2 | $ | 1.7 | $ | 32.9 | ||||||||||||||||||
| Interest cost | 13.1 | 15.8 | 42.2 | 43.3 | ||||||||||||||||||||||
| Expected return on plan assets | (28.9) | (40.0) | (99.2) | (119.0) | ||||||||||||||||||||||
Amortization of prior service cost(1) | 71.7 | — | 73.8 | — | ||||||||||||||||||||||
Curtailment loss (gain)(2) | — | (61.0) | — | (61.0) | ||||||||||||||||||||||
Settlement loss(3) | 0.9 | — | (0.5) | (0.1) | ||||||||||||||||||||||
| Net periodic pension expense (income) | $ | 57.3 | $ | (74.0) | $ | 18.0 | $ | (103.9) | ||||||||||||||||||
| Other Benefits | ||||||||||||||||||||||||||
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||
| Components of Other Benefit Expense (Income) | September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||||||||
| Service cost | $ | 0.2 | $ | 0.3 | $ | 0.6 | $ | 0.7 | ||||||||||||||||||
| Interest cost | 0.1 | 0.1 | 0.4 | 0.3 | ||||||||||||||||||||||
| Amortization of prior service cost | (0.2) | (0.2) | (0.6) | (0.6) | ||||||||||||||||||||||
| Amortization of net gain | (0.3) | (0.2) | (1.0) | (1.0) | ||||||||||||||||||||||
| Net periodic other benefit expense (income) | $ | (0.2) | $ | — | $ | (0.6) | $ | (0.6) | ||||||||||||||||||
(1) In July 2022 the Company adopted and communicated to participants a plan to terminate the Company's Pension Value Plan A ("PVP A"). As further described in the Company's 2021 Form 10-K, the PVP A consists of pension plans which were frozen as of the date Holdings became a standalone company and commenced operations. During the three months ended September 29, 2022, the PVP A plan was amended, providing for an enhancement to benefits the Company is providing to certain U.S. employees in conjunction with the plan termination. The estimated liability impact of this plan amendment, $71.7, was recognized immediately as a non-cash, pre-tax non-operating charge for amortization of prior service costs.
(2) As of July 15, 2021, the Company concluded its consultation and communication with employee and trade union representatives on the closure of the largest of the defined benefit plans acquired as part of the Bombardier Acquisition ("the Shorts Pension"). For the three and nine months ended September 30, 2021, the impact of the closure of the Shorts Pension resulted in a curtailment gain of $61.0.
(3) Includes a $0.9 settlement charge for PVP A during the three months ended September 29, 2022, and a ($1.4) settlement credit for PVP B related to final asset distribution in the nine months ended September 29, 2022.
The components of net periodic pension expense (income) and other benefit expense, other than the service cost component, are included in other income (expense) in the Company's Condensed Consolidated Statements of Operations. See Note 21 Other Income (Expense), Net.
As disclosed in the Company's 2021 Form 10-K, effective October 1, 2021, the Company spun off a portion of the existing Pension Value Plan ("PVP A"), to a new plan called PVP B. As part of the PVP B plan termination process, a lump sum offering was provided during 2021 for PVP B participants and the final asset distribution was completed in the first quarter of 2022. At September 29, 2022, a pension reversion asset of $70.7 is recorded on the Restricted plan assets line item on the Company’s Condensed Consolidated Balance Sheets. Restricted plan assets are expected to be reduced over the next seven years as they are distributed to employees under a qualified compensation and benefit program. Restricted plan assets are valued at fair value with gain or loss on fair value adjustments recognized within other income. The underlying investments' fair
25
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
value measurement levels under the FASB's authoritative guidance on fair value measurements are Level 2, see Note 13 Fair Value Measurements.
Separately, during the nine months ended September 29, 2022, the Company withdrew $34.0 of cash from PVP B, which represented an excess plan assets reversion. This transaction was accounted for as a negative contribution, and is included on the Pension plans employer contributions line item on the Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2022. Excise tax of $6.8 related to the reversion of excess plan assets was separately recorded to the Other income (expense), net line item on the Company's Condensed Consolidated Statements of Operations for the nine months ended September 29, 2022. See also Note 21 Other Income (Expense), Net.
In connection with the special accounting related to the termination of the PVP A plan, mentioned above, a subsequent interim measurement of the Company's U.S. pension and other postretirement plan assets and obligations was completed during the three months ended September 29, 2022. The interim measurement, including the estimated impact of the plan termination liability and enhanced benefits liability noted above, prior to the current period settlement loss and amortization of prior service cost impacts included in Net Periodic Pension Expense above, was recorded to the Accumulated other comprehensive loss line item in the Stockholders' Equity section of the Company's Condensed Consolidated Balance Sheet for the period ended September 29, 2022. See also Note 19 Equity.
Employer Contributions
Other than the reversion of excess plan assets noted above, which was accounted for as a negative contribution, the Company's expected contributions for the current year have not significantly changed from those described in the Company's 2021 Form 10-K.
17. Stock Compensation
Holdings has established the stockholder-approved 2014 Omnibus Incentive Plan, as amended (the “Omnibus Plan”), to grant cash and equity awards of Holdings' Class A Common Stock, par value $0.01 per share (the “Common Stock”), to certain individuals. Holdings has established the Long-Term Incentive Plan (the “LTIP”) under the Omnibus Plan to grant equity awards to certain employees of the Company.
The Company recognized a net total of $10.4 and $6.2 of stock compensation expense for the three months ended September 29, 2022 and September 30, 2021, respectively, and a net total of $28.7 and $19.6 of stock compensation expense for the nine months ended September 29, 2022 and September 30, 2021, respectively.
During the nine months ended September 29, 2022, 514,892 time or service-based restricted stock units ("RSUs") were granted with aggregate date fair values of $22.9 under the Company's LTIP. Awards generally vest over a two or three-year period, beginning on the date of grant. Values for these awards are based on the value of Common Stock on the grant date.
During the nine months ended September 29, 2022, 284,653 performance-based restricted stock units ("PBRSUs") were granted with aggregate grant date fair value of $22.0 under the Company’s LTIP. These awards are earned based on Holdings’ total shareholder return relative to its peer group over a three-year performance period. Values for these awards are initially measured on the grant date using the estimated payout levels derived from a Monte Carlo valuation model.
During the nine months ended September 29, 2022, 41,096 shares of restricted Common Stock and 22,155 non-employee director restricted stock units (“DRSUs”) were granted to the Board of Directors of the Company (the "Board") with an aggregate grant date fair value of $2.0. Both types of awards vest if the non-employee director remains continuously in service for the entire one year term to which the grant relates. If the non-employee director incurs a termination for any reason before the end of the term (before the annual meeting of stockholders following the grant), the awards are forfeited. Upon vesting, shares relating to restricted Common Stock awards are delivered to the director free of restriction; however, vested shares of Common Stock underlying DRSUs are not delivered to the director until the date that the director leaves the Board. Values for these awards are based on the value of Common Stock on the grant date.
During the nine months ended September 29, 2022, 1,247 shares of restricted Common Stock and 3,113 non-employee director restricted stock units (“DRSUs”) were granted, as pro rata equity awards under the current 2021-2022 non-employee director compensation program, to recently appointed members of the Board of Directors with an aggregate grant date fair value
26
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
of $0.2. Both types of awards vest if the non-employee director remains continuously in service for the entire one year term to which the grant relates. If the non-employee director incurs a termination for any reason before the end of the term (before the annual meeting of stockholders following the grant), the awards are forfeited. Upon vesting, shares relating to restricted Common Stock awards are delivered to the director free of restriction; however, vested shares of Common Stock underlying DRSUs are not delivered to the director until the date that the director leaves the Board. Values for these awards are based on the value of Common Stock on the grant date.
During the nine months ended September 29, 2022, 381,616 shares of Common Stock with an aggregate grant date value of $19.8 vested under the Company's LTIP. During the nine months ended September 29, 2022, 93,565 shares of Common Stock with aggregate grant date fair value of $3.0 were granted, and vested immediately, to employees in connection with the ratification of new labor contracts. Additionally, 30,761 shares of Common Stock previously granted to the Board vested with an aggregate grant date fair value of $1.4, and 9,168 DRSUs previously awarded to the Board vested with an aggregate grant date fair value of $0.4.
18. Income Taxes
The process for calculating the Company’s 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 and whether a valuation allowance is necessary.
A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, the Company assesses all available positive and negative evidence. The weight given to the positive and negative evidence is commensurate with the extent 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 our prior earnings history, including the forward losses previously recognized in the U.S., the Company recorded an incremental valuation allowance against U.S. deferred tax assets of $92.1 for the nine month period ended September 29, 2022. As of September 29, 2022, the total net U.S. deferred tax asset before the valuation allowance was $389.4 and the total net U.S. valuation allowance was $388.3. The net U.S. deferred tax asset after valuation allowances was $1.1. The change from December 31, 2021 is additional net valuation allowance recognized on the deferred tax assets generated from the 2022 activity.
The Company has determined a valuation allowance on certain U.K. deferred tax assets is needed based upon cumulative losses generated in the U.K. Increases in the valuation allowances recorded against U.K. deferred tax assets in the nine month period ended September 29, 2022 were $19.2. This is comprised of $5.8 related to other comprehensive income ("OCI") and $13.4 from continuing operations, including utilization of NOL's. As of September 29, 2022, the total net U.K. deferred tax asset before the valuation allowance was $258.4 and the total net U.K. valuation allowance was $259.8. The net U.K. deferred tax liability after valuation allowance was $1.4.
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 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 may give rise to discrete recognition include excess tax benefits with respect to share-based compensation, finalizing amounts in income tax returns filed, finalizing audit examinations for open tax years and expiration of statutes of limitations, and changes in tax law.
27
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
The (6.49%) effective tax rate for the nine months ended September 29, 2022 differs from the 0.15% effective tax rate for the same period of 2021 primarily due to increase in the valuation allowances recorded on U.S. and U.K. deferred tax assets. As the Company is currently reporting a pre-tax loss for the nine months ended September 29, 2022, an increase in the effective tax rate results in an increase of income tax benefits while a decrease in the rate results in a reduction of income tax benefits.
As of September 29, 2022, the Company had deferred $16.5 of employer payroll taxes, as allowed by the Coronavirus Aid, Relief, and Economic Security Act, which are required to be deposited by December 2022. As of September 29, 2022, the Company had recorded an estimated pre-tax employee retention credit of approximately $18.8 related to calendar year 2020 and $1.0 related to calendar year 2021. In addition, as of September 29, 2022, the Company has fully paid $31.8 of previously deferred value added tax payments under the U.K. deferral scheme.
The Company's federal audit for the 2020 tax year is substantially complete under the Internal Revenue Service Compliance Assurance Program ("CAP"). The Company will continue to participate in the CAP program for the 2021 and 2022 tax years. The CAP program’s objective is to resolve issues in a timely, contemporaneous manner and eliminate the need for a lengthy post-filing examination. The Company has an open tax audit in the Kingdom of Morocco for the tax years ended prior to the Company's ownership of the Moroccan legal entity. There are ongoing audits in other jurisdictions that are not material to the financial statements and the Company believes appropriate provisions for all outstanding tax issues have been made for all jurisdictions and years.
During the quarter ended September 29, 2022, President Biden signed into law the CHIPS and Science Act and the Inflation Reduction Act. The new legislation provides tax incentives as well as imposes a 15% minimum tax on certain corporations' book income and a 1% excise tax on certain stock buybacks. The Company has evaluated the effect, if any, of these new laws on the consolidated financial statements and does not expect a material impact. The impact of these new laws will be monitored as additional guidance and clarification is presented on these items.
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. Diluted earnings per share includes any dilutive impact of RSUs, DRSUs, RSAs, and PBRSUs.
The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. As of September 29, 2022, no treasury shares have been reissued or retired. The number of treasury stock shares as of September 29, 2022 includes a minor adjustment related to the October 19, 2021 court ruling described in Note 20, Commitments, Contingencies and Guarantees for certain shares that were previously awarded to the Company’s former Chief Executive Officer that were not settled in stock per the terms of the ruling.
The total authorization amount remaining under the current share repurchase program is approximately $925.0. During the nine-month period ended September 29, 2022, the Company did not repurchase any shares of its Common Stock under this share repurchase program. Share repurchases are currently on hold. The Credit Agreement imposes restrictions on the Company’s ability to repurchase shares.
The following table sets forth the computation of basic and diluted earnings per share:
28
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
| For the Three Months Ended | |||||||||||||||||||||||||||||||||||
| September 29, 2022 | September 30, 2021 | ||||||||||||||||||||||||||||||||||
| Income | Shares | Per Share Amount | Income | Shares | Per Share Amount | ||||||||||||||||||||||||||||||
| Basic EPS | |||||||||||||||||||||||||||||||||||
| Loss available to common stockholders | $ | (127.6) | 104.7 | $ | (1.22) | $ | (113.6) | 104.3 | $ | (1.09) | |||||||||||||||||||||||||
| Income allocated to participating securities | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | $ | (127.6) | $ | (113.6) | |||||||||||||||||||||||||||||||
| Diluted potential common shares | — | — | |||||||||||||||||||||||||||||||||
| Diluted EPS | |||||||||||||||||||||||||||||||||||
| Net loss | $ | (127.6) | 104.7 | $ | (1.22) | $ | (113.6) | 104.3 | $ | (1.09) | |||||||||||||||||||||||||
| For the Nine Months Ended | |||||||||||||||||||||||||||||||||||
| September 29, 2022 | September 30, 2021 | ||||||||||||||||||||||||||||||||||
| Income | Shares | Per Share Amount | Income | Shares | Per Share Amount | ||||||||||||||||||||||||||||||
| Basic EPS | |||||||||||||||||||||||||||||||||||
| Loss available to common stockholders | $ | (302.6) | 104.6 | $ | (2.89) | $ | (420.5) | 104.2 | $ | (4.04) | |||||||||||||||||||||||||
| Income allocated to participating securities | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | $ | (302.6) | $ | (420.5) | |||||||||||||||||||||||||||||||
| Diluted potential common shares | — | — | |||||||||||||||||||||||||||||||||
| Diluted EPS | |||||||||||||||||||||||||||||||||||
| Net loss | $ | (302.6) | 104.6 | $ | (2.89) | $ | (420.5) | 104.2 | $ | (4.04) | |||||||||||||||||||||||||
Included in the outstanding Common Stock were 0.4 million and 0.7 million of issued but unvested shares at September 29, 2022 and September 30, 2021, respectively, which are excluded from the basic Earnings Per Share ("EPS") calculation.
Common shares of 0.5 million and 0.6 million, respectively, were excluded from diluted EPS as a result of incurring a net loss for the three and nine months ended September 29, 2022, as the effect would have been antidilutive. Additionally, diluted EPS for the three and nine months ended September 29, 2022 excludes 0.3 million shares that may be dilutive common shares in the future, but were not included in the computation of diluted EPS because the effect was either antidilutive or the performance condition was not met.
Common shares of 0.4 million and 0.5 million, respectively, were excluded from diluted EPS as a result of incurring a net loss for the three and nine months ended September 30, 2021, as the effect would have been antidilutive. Additionally, diluted EPS for the three and nine months ended September 30, 2021 excludes 0.3 million and 0.3 million shares, respectively, that may be dilutive common shares in the future, but were not included in the computation of diluted EPS because the effect was either antidilutive or the performance condition was not met.
Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Loss is summarized by component as follows:
29
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
| As of | As of | ||||||||||
| September 29, 2022 | December 31, 2021 | ||||||||||
| Pension | $ | (70.3) | $ | 26.6 | |||||||
| SERP/Retiree medical | 10.9 | 12.1 | |||||||||
| Derivatives - foreign currency hedge | (25.4) | (2.0) | |||||||||
| Foreign currency impact on long-term intercompany loan | (19.4) | (12.2) | |||||||||
| Currency translation adjustment | (131.8) | (48.2) | |||||||||
| Total accumulated other comprehensive loss | $ | (236.0) | $ | (23.7) | |||||||
Amortization or curtailment cost recognition of the pension plans’ net gain/(loss) reclassified from accumulated other comprehensive loss and realized into costs of sales and selling, general and administrative on the Condensed Consolidated Statements of Operations was a gain of $0.5 and a gain of $0.4 for the three months ended September 29, 2022 and September 30, 2021, respectively, and a gain of $1.7 and a gain of $1.6 for the nine months ended September 29, 2022 and September 30, 2021, respectively.
See also Note 16 Pension and Other Post-Retirement Benefits. In connection with the special accounting related to the termination of the PVP A plan, mentioned above, a subsequent interim measurement of the Company's U.S. pension and other postretirement plan assets and obligations was completed during the three months ended September 29, 2022. The interim measurement included the estimated impact of the plan termination liability and enhanced benefits liability noted above and resulted in an adjustment of $134.4 to the Accumulated other comprehensive loss line item in the Stockholders' Equity section of the Company's Condensed Consolidated Balance Sheet for the period ended September 29, 2022, net of the current period settlement loss and amortization of prior service cost impacts included in Net Periodic Pension Expense above.
20. Commitments, Contingencies and Guarantees
Litigation
On February 10, 2020, February 24, 2020, and March 24, 2020, three separate private securities class action lawsuits were filed against the Company in the U.S. District Court for the Northern District of Oklahoma, its Chief Executive Officer, Tom Gentile III, former Chief Financial Officer, Jose Garcia, and former Controller (principal accounting officer), John Gilson. On April 20, 2020, the Class Actions were consolidated by the court (the “Consolidated Class Action”), and on July 20, 2020, the plaintiffs filed a Consolidated Class Action Complaint which added Shawn Campbell, the Company’s former Vice President for the 737NG and B737 MAX program, as a defendant. Allegations in the Consolidated Class Action include (i) violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against the Company and Messrs. Gentile, Garcia and Gilson, (ii) violations of Section 20(a) of the Exchange Act against the individual defendants, and (iii) violations of Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c) promulgated thereunder against all defendants.
On June 11, 2020, a shareholder derivative lawsuit (the “Derivative Action 1”) was filed against the Company (as nominal defendant), all members of the Company’s Board of Directors, and Messrs. Garcia and Gilson in the U.S. District Court for the Northern District of Oklahoma. Allegations in the Derivative Action 1 include (i) breach of fiduciary duty, (ii) abuse of control, and (iii) gross mismanagement. On October 5, 2020, a shareholder derivative lawsuit (the “Derivative Action 2” and, together with Derivative Action 1, the “Derivative Actions”) was filed against the Company (as nominal defendant), all members of the Company’s Board of Directors, and Messrs. Garcia and Gilson in the Eighteenth Judicial District, District Court of Sedgwick County, Kansas. Allegations in the Derivative Action 2 include (i) breach of fiduciary duty, (ii) waste of corporate assets, and (iii) unjust enrichment.
The facts underlying the Consolidated Class Action and Derivative Actions relate to the accounting process compliance independent review (the “Accounting Review”) discussed in the Company’s January 30, 2020 press release and described under Management's Discussion and Analysis of Financial Condition and Results of Operations - Accounting Review in Part II, Item 7 of the Annual Report on Form 10-K for the year ended December 31, 2019, and its resulting conclusions. The Company voluntarily reported to the SEC the determination that, with respect to the third quarter of 2019, the Company did not comply with its established accounting processes related to potential third quarter contingent liabilities received after the quarter-end.
30
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
On March 24, 2020, the Staff of the SEC Enforcement Division informed the Company that it had determined to close its inquiry without recommending any enforcement action against the Company. In addition, the facts underlying the Consolidated Class Action and Derivative Actions relate to the Company’s disclosures regarding the B737 MAX grounding and Spirit’s production rate (and related matters) after the grounding. On September 18, 2020, the Company and individual defendants filed a motion to dismiss the Consolidated Class Action. That motion was granted by the U.S. District Court on January 7, 2022, which denied leave to amend and dismissed the Consolidated Class Action with prejudice. On February 4, 2022, the plaintiffs in the Consolidated Class Action appealed this decision to the Tenth Circuit Court of Appeals. In the appellate proceedings, both parties have filed briefs in support of their respective positions and oral argument will be held on November 18, 2022. The Company and the individual defendants have denied, and continue to deny, the allegations in the Consolidated Class Action and the Derivative Actions.
Spirit is also involved in litigation with its former Chief Executive Officer related to a disputed violation of restrictive covenants in his retirement agreement. On October 19, 2021, the U.S. District Court for the District of Kansas ruled in favor of the former Chief Executive Officer and awarded him $44.8 for benefits withheld in connection with the disputed violation. The Company has appealed this decision to the Tenth Circuit Court of Appeals, which is still pending with oral argument scheduled for November 15, 2022. A liability for the full amount of the award, plus accrued interest, has been recognized in the Consolidated Balance Sheets as of December 31, 2021 and September 29, 2022.
From time to time, in the ordinary course of business and similar to others in the industry, the Company receives requests for information from government agencies in connection with their regulatory or investigational authority. Such requests can include subpoenas or demand letters for documents to assist the government in audits or investigations. The Company reviews such requests and notices and takes appropriate action. Additionally, the Company is subject to federal and state requirements for protection of the environment, including those for disposal of hazardous waste and remediation of contaminated sites. As a result, the Company is required to participate in certain government investigations regarding environmental remediation actions.
In addition to the items addressed above, from time to time, the Company is subject to, and is presently involved in, litigation, legal proceedings, or other claims 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, the Company believes that, on a basis of information presently available, none of these items, when finally resolved, will have a material adverse effect on the Company’s long-term financial position or liquidity.
Customer and Vendor Claims
The Company receives, and is currently subject to, customer and vendor claims arising in the ordinary course of business, including, but not limited to, those related to product quality and late delivery. The Company accrues for matters when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we take into consideration multiple factors including without limitation our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of an unfavorable outcome, and the severity of any potential loss.
The Company has evaluated and refined management’s original estimate of costs related to rework on the B787 aircraft, including a preliminary assessment related to rework on the forward section of the fuselage, for which the Company identified an additional fit and finish issue in the prior year. The Company continues to coordinate with Boeing for necessary rework. The Company cannot reasonably estimate the amount of any potential claims related to this issue at this time.
On June 25, 2022, the Company received notice of a claim from a key customer related to product quality and onsite manufacturing support. During the three months ended September 29, 2022, the Company continued to evaluate the details included within this claim, however, the Company cannot currently reasonably estimate the amount of any potential loss due to various reasons, including, among others: (i) that there is uncertainty as to the outcome of this claim, (ii) that there may be significant factual, commercial, and/or legal issues to be resolved, and (iii) the availability of data required to complete an assessment of the potential loss.
While the final outcome of these matters cannot be predicted with certainty, considering, among other things, the factual and legal defenses available, it is the opinion of the Company that none of these items, when finally resolved, will have a material adverse effect on the Company’s long-term financial position or liquidity. However, it is possible that the Company’s results of operations in a specific period could be materially affected by one or more of these other matters.
31
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
Guarantees
Outstanding guarantees were $12.9 and $15.9 at September 29, 2022 and December 31, 2021, respectively.
Restricted Cash - Collateral Requirements
The Company was required to maintain $19.5 and $19.5 of restricted cash as of September 29, 2022 and December 31, 2021, respectively, related to certain collateral requirements for obligations under its workers’ compensation programs. The restricted cash is included in "Restricted cash" and “Other assets” in the Company’s Condensed Consolidated Balance Sheets.
Indemnification
The Company has entered into customary indemnification agreements with its non-employee directors, and its bylaws and certain executive employment agreements include indemnification and advancement provisions. Pursuant to the terms of the bylaws and, with respect to Jose Garcia, his employment agreement, the Company is providing Messrs. Garcia and Gilson and all other individual defendants with defense costs and provisional indemnity with respect to the Consolidated Class Action and Derivative Actions, as appropriate. Under the bylaws and any applicable agreements, the Company agrees to indemnify each of these individuals against claims arising out of events or occurrences related to that individual’s service as the Company’s agent or the agent of any of its subsidiaries to the fullest extent legally permitted.
The Company has agreed to indemnify parties for specified liabilities incurred, or that may be incurred, in connection with transactions they have entered into with the Company. The Company is unable to assess the potential number of future claims that may be asserted under these indemnities, nor the amounts thereof (if any). As a result, the Company cannot estimate the maximum potential amount of future payments under these indemnities and therefore, no liability has been recorded.
Service and Product Warranties and Extraordinary Rework
Provisions for estimated expenses related to service and product warranties and certain extraordinary rework are evaluated on a quarterly basis. These costs are accrued and are recorded to cost of goods sold. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims, including the experience of industry peers. In the case of new development products or new customers, the Company considers other factors including the experience of other entities in the same business and management judgment, among others. Service warranty and extraordinary rework is reported in Current liabilities and Other liabilities on the Company's Condensed Consolidated Balance Sheets.
The warranty balance presented in the table below includes unresolved warranty claims that are in dispute in regards to their value as well as their contractual liability. The Company estimated the total costs related to some of these claims; however, there is significant uncertainty surrounding the disposition of these disputed claims and as such, the ultimate determination of the provision’s adequacy requires significant management judgment. The amount of the specific provisions recorded against disputed warranty claims was $2.3 as of September 29, 2022 and December 31, 2021. These specific provisions represent the Company’s best estimate of probable warranty claims. Should the Company incur higher than expected warranty costs and/or discover new or additional information related to these warranty provisions, the Company may incur additional charges that exceed these recorded provisions. The Company utilized available information to make appropriate assessments, however, the Company recognizes that data on actual claims experience is of limited duration and therefore, claims projections are subject to significant judgment. The amount of the reasonably possible disputed warranty claims in excess of the specific warranty provision was $3.4 as of September 29, 2022 and December 31, 2021.
32
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
The following is a roll forward of the service warranty and extraordinary rework balance at September 29, 2022:
| Balance, December 31, 2021 | $ | 71.3 | |||
| Charges to costs and expenses | 2.3 | ||||
| Payouts | (2.0) | ||||
| Exchange rate | (0.1) | ||||
| Balance, September 29, 2022 | $ | 71.5 | |||
21. Other Income (Expense), Net
Other income (expense), net is summarized as follows:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||||||
| Kansas Development Finance Authority bond | $ | 0.5 | $ | 0.6 | $ | 1.8 | $ | 2.2 | |||||||||||||||
Foreign currency gains (1) | 13.4 | 11.3 | 40.6 | 3.8 | |||||||||||||||||||
| (Loss) gain on foreign currency forward contract | (6.5) | 0.1 | (10.5) | 0.1 | |||||||||||||||||||
| Loss on sale of accounts receivable | (6.0) | (1.8) | (12.8) | (4.8) | |||||||||||||||||||
Pension (expense) income(2) | (56.4) | 84.8 | (15.1) | 137.3 | |||||||||||||||||||
Excise tax on pension assets reversion(3) | — | — | (6.8) | — | |||||||||||||||||||
Gain on settlement of financial instrument(4) | — | — | 20.7 | — | |||||||||||||||||||
Other (5) | 12.9 | (0.2) | 12.3 | 0.1 | |||||||||||||||||||
| Total | $ | (42.1) | $ | 94.8 | $ | 30.2 | $ | 138.7 | |||||||||||||||
(1) Foreign currency gains are due to the impact of movement in foreign currency exchange rates on long-term contractual rights/obligations, as well as cash and both trade and intercompany receivables/payables that are denominated in a currency other than the entity’s functional currency.
(2) See Note 16 Pension and Other Post-Retirement Benefits. Pension income for the three and nine months ended September 29, 2022 includes a $71.7 non-cash, pre-tax non-operating charge for amortization of prior service costs. Pension income for the three and nine months ended September 30, 2021 includes a curtailment gain of $61.0.
(3) Excise tax related to the reversion of excess plan assets for the three and nine months ended September 29, 2022. See Note 16 Pension and Other Post-Retirement Benefits
(4) The nine-month period ended September 29, 2022 includes a $20.7 gain related to a deed of release and related cash payment that fully settled the existing repayable investment agreement between the Company and the U.K.'s Department for Business, Energy and Industrial Strategy ("BEIS"). The repayable investment obligation, which was denominated in GBP, was included on the Company’s Consolidated Balance Sheet as of December 31, 2021, as $41.7 recorded to "Other current liabilities" and $301.9 recorded to "Other non-current liabilities". In January 2022, the Company made repayments of $25.6 to the UK’s Department for Business Energy and Industrial Strategy for units sold, including interest, in respect to the agreement. In April 2022, the deed of release settled the remaining outstanding repayment obligation, including current year interest accrual and foreign currency measurement impacts, in exchange for a payment of $292.8. The portion of the payments related to interest expense and the portion of the payments related to principal repayment are included in net cash used in operating activities and net cash used in financing activities, respectively, on the Company's Condensed Consolidated Statement of Cash Flows for the period ended September 29, 2022.
(5) The three and nine month periods ended September 29, 2022 include a gain of $10.0 related to the termination of a previously existing joint venture agreement within the period.
33
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
22. Segment Information
The Company operates in three principal segments: Commercial, Defense & Space and Aftermarket. Approximately 83% and 82% of the Company's net revenues for the three and nine months ended September 29, 2022, respectively, came from the Company's two largest customers, Boeing and Airbus. Boeing represents a substantial portion of the Company's revenues across segments. Airbus represents a substantial portion of revenues in the Commercial segment. The Company's primary profitability measure to review a segment’s operating performance is segment operating income before corporate selling, general and administrative expenses, and research and development.
Corporate selling, general and administrative expenses include centralized functions such as accounting, treasury and human resources that are not specifically related to the Company's operating segments and are not allocated in measuring the operating segments’ profitability and performance and net profit margins. Research and development includes research and development efforts that benefit the Company as a whole and are not unique to a specific segment. These items are not specifically related to the Company’s operating segments and are not utilized in measuring the operating segments’ profitability and performance.
The Company’s Commercial segment includes design and manufacturing of forward, mid and rear fuselage sections and systems, struts/pylons, nacelles (including thrust reversers) and related engine structural components, wings and wing components (including flight control surfaces), as well as other miscellaneous structural parts for large commercial aircraft and/or business/regional jets. Sales from this segment are primarily to the aircraft OEMs or engine OEMs of large commercial aircraft and/or business/regional jet programs. Approximately 65% and 60% of Commercial segment net revenues came from the Company's contracts with Boeing for the nine months ended September 29, 2022, and September 30, 2021, respectively. Approximately 27% and 30% of Commercial segment net revenues came from the Company's contracts with Airbus for the nine months ended September 29, 2022, and September 30, 2021, respectively. The Commercial segment manufactures products at the Company's facilities in Wichita, Kansas; Tulsa, Oklahoma; Kinston, North Carolina; Prestwick, Scotland; Casablanca, Morocco; Belfast, Northern Ireland; and Subang, Malaysia. The Commercial segment also includes an assembly plant for the A350 XWB aircraft in Saint-Nazaire, France.
The Company's Defense & Space segment includes design and manufacturing of fuselage, strut, nacelle, and wing aerostructures (primarily) for U.S. Government defense programs, including Boeing P-8, C40, and KC-46 Tanker, which are commercial aircraft that are modified for military use. The segment also includes fabrication, bonding, assembly, testing tooling, processing, engineering analysis, and training on fixed wing aircraft aerostructures, missiles and hypersonics work, including solid rocket motor throats and nozzles and re-entry vehicle thermal protections systems, forward cockpit and cabin, and fuselage work on rotorcraft aerostructures. Sales from this segment are primarily to the prime contractors on various U.S. Government defense program contracts for which the Company is a sub-contractor. A significant portion of the Company's Defense & Space segment revenues are represented by defense business that is classified by the U.S. Government and cannot be specifically described. A significant portion of Defense & Space segment net revenues came from the Company's contracts with two individual customers for the nine months ended September 29, 2022, and September 30, 2021. The Defense & Space segment manufactures products at the Company's facilities in Wichita, KS; Tulsa, OK; Biddeford, ME; Belfast, Northern Ireland; and Prestwick, Scotland.
The Company's Aftermarket segment includes design, manufacturing, and marketing of spare parts and maintenance, repair, and overhaul ("MRO") services, repairs for flight control surfaces and nacelles, radome repairs, rotable assets, engineering services, advanced composite repair, and other repair and overhaul services. Approximately 47% and 43% of Aftermarket segment net revenues came from the Company's contracts with a single customer for the nine months ended September 29, 2022, and September 30, 2021, respectively. The Aftermarket segment manufactures products at the Company's facilities in Wichita, KS; Tulsa, OK; Kinston, North Carolina; Dallas, TX; Prestwick, Scotland; Casablanca, Morocco; and Belfast, Northern Ireland.
The Company’s segments are consistent with the organization and responsibilities of management reporting to the chief operating decision-maker for the purpose of assessing performance. The Company’s definition of segment operating income differs from Operating income as presented in its primary financial statements and a reconciliation of the segment and consolidated results is provided in the table set forth below.
While some working capital accounts are maintained on a segment basis, much of the Company’s assets are not managed or maintained on a segment basis. Property, plant and equipment, including tooling, is used in the design and production of
34
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
products for each of the segments and, therefore, is not allocated to any individual segment. In addition, cash, prepaid expenses, other assets, and deferred taxes are managed and maintained on a consolidated basis and generally do not pertain to any particular segment. Raw materials and certain component parts are used in aerostructure production across all segments. Work-in-process inventory is identifiable by segment, but is managed and evaluated at the program level. As there is no segmentation of the Company’s productive assets, depreciation expense (included in fixed manufacturing costs and selling, general and administrative expenses) and capital expenditures, no allocation of these amounts has been made solely for purposes of segment disclosure requirements.
The following table shows segment revenues and operating loss for the three and nine months ended September 29, 2022 and September 30, 2021:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||||||
| Segment Revenues | |||||||||||||||||||||||
| Commercial | $ | 1,034.9 | $ | 784.1 | $ | 3,004.4 | $ | 2,283.8 | |||||||||||||||
| Defense & Space | 161.7 | 137.8 | 466.6 | 433.0 | |||||||||||||||||||
| Aftermarket | 80.3 | 58.1 | 238.5 | 166.1 | |||||||||||||||||||
| $ | 1,276.9 | $ | 980.0 | $ | 3,709.5 | $ | 2,882.9 | ||||||||||||||||
| Segment Operating Income (Loss) | |||||||||||||||||||||||
Commercial(1) | $ | 45.0 | $ | (72.8) | $ | (3.5) | $ | (200.4) | |||||||||||||||
Defense & Space(2) | 18.4 | 7.9 | 52.1 | 32.3 | |||||||||||||||||||
Aftermarket(3) | 19.5 | 7.9 | 49.3 | 33.5 | |||||||||||||||||||
| $ | 82.9 | $ | (57.0) | $ | 97.9 | $ | (134.6) | ||||||||||||||||
| SG&A | (69.1) | (86.8) | (203.8) | (211.3) | |||||||||||||||||||
| Research and development | (9.3) | (12.8) | (36.5) | (34.3) | |||||||||||||||||||
| Total operating gain/(loss) | $ | 4.5 | $ | (156.6) | $ | (142.4) | $ | (380.2) | |||||||||||||||
(1) The nine months ended September 29, 2022 include the impact of $23.9 of the total charge, mentioned above, in relation to the suspension of activities in Russia. See Note 1 Organization, Basis of Interim Presentation and Recent Developments. The three and nine months ended September 29, 2022 include excess capacity production costs of $29.9 and $119.8, respectively, related to the temporary B737 MAX, A320 and A220 production schedule changes, $0.3 and $9.8, respectively, of temporary workforce adjustment costs as a result of the COVID-19 pandemic net of U.S. employee retention credit and U.K government subsidies, and net $0.0 and ($25.5), respectively, of restructuring costs and other costs, including partial offset related to the Aviation Manufacturing Jobs Protection Program grant ("AMJP"). The three and nine months ended September 30, 2021 include $54.8 and $163.4, respectively, of excess capacity cost, $2.6 and $7.1, respectively, of temporary workforce adjustment costs as a result of the COVID-19 pandemic net of U.S. employee retention credit and U.K government subsidies, and $0.9 and $6.9, respectively, of restructuring costs and other costs, including partial offset related to AMJP.
(2) The three and nine months ended September 29, 2022 include excess capacity production costs of $1.5 and $6.3, respectively, related to the temporary B737 production schedule changes, and $0.0 and ($2.3), respectively, of restructuring costs and partial offset related to AMJP. The three and nine months ended September 30, 2021 include excess capacity cost of $2.3 and $8.8, respectively, related to the B737 production schedule adjustment, and ($0.2) and $0.9, respectively, of restructuring costs and other costs, including partial offset related to AMJP.
(3) The three and nine months ended September 29, 2022 include the impact of $4.2 of the total charge, mentioned above, in relation to the suspension of activities in Russia. See Note 1 Organization, Basis of Interim Presentation and Recent Developments. The three and nine months ended September 29, 2022 include $0.0 and ($1.9), respectively, of partial offset related to AMJP. The three and nine months ended September 30, 2021 include ($0.2) and $0.0, respectively, of restructuring costs and other costs, including partial offset related to AMJP.
35
Spirit AeroSystems Holdings, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
(U.S. Dollars in millions other than per share amounts)
23. Restructuring Costs
The Company's results of operations for both the three and nine months ended September 29, 2022 and September 30, 2021 include restructuring costs related to actions the Company has taken to align costs to updated production levels that have been directed by the Company's customers (restructuring activity). Largely beginning in the first quarter of 2020, the Company's customers, including Boeing and Airbus, significantly reduced their overall production rates as a result of the COVID-19 pandemic and, in the case of Boeing, the B737 MAX grounding. The restructuring activity materially affected the scope of operations and manner in which business is conducted by the Company compared to periods prior to the restructuring activities.
Restructuring costs are presented separately as a component of operating loss on the Condensed Consolidated Statements of Operations. The total restructuring costs for the three and nine months ended September 29, 2022 were $0.0 and $0.2, respectively, and are included in segment operating margins for the Commercial Segment.
For the three and nine months ended September 30, 2021, total restructuring costs of $0.8 and $8.1, respectively, were comprised largely of costs incurred during the period related to site closures. The total amount for the three and nine months ended September 30, 2021 was $0.7 and $6.7, respectively, for the Commercial Segment, $0.1 and $1.2, respectively, for the Defense & Space Segment, and $0.0 and $0.2, respectively, for the Aftermarket Segment.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise indicates or requires, as used in this Quarterly Report on Form 10-Q (this "Quarterly Report"), references to “we,” “us,” “our,” and the “Company” refer to Spirit AeroSystems Holdings, Inc. and its consolidated subsidiaries. References to “Spirit” refer only to our subsidiary, Spirit AeroSystems, Inc., and references to “Holdings” refer only to Spirit AeroSystems Holdings, Inc.
Global Economic Events
Global economic conditions may impact our results of operations. Russia’s February 2022 invasion of Ukraine, the resultant sanctions and other measures imposed by the U.S. and other governments, and other related impacts have resulted in economic and political uncertainty and risks. In response to the Russian invasion of Ukraine, and the associated U.S. sanctions, the Company suspended all sanctioned activities relating to Russia, primarily consisting of sales and service activities. In the second quarter of 2022, we recorded an aggregate pre-tax loss of $28.1 million related to adjustments of certain assets and liabilities associated with sanctioned Russian business activities. The charges are included on the Condensed Consolidated Statements of Operations for the nine months ended September 29, 2022. Continuation or significant expansion of economic disruption or escalation of the conflict, or other geopolitical events of a similar nature, could have a material adverse effect on orders from our customers, the public’s ability or willingness to continue to travel, and/or our results of operations. Energy, freight, raw material and other costs have been impacted by, and may continue to be impacted by, the conflict. These costs have also been impacted by global inflationary pressures, including significant increases in inflation in many countries in which we operate. Our associated estimates of such costs, where applicable, use the most recent information available. The economic impact of inflation, together with the impact of increases in interest rates and actions taken to attempt to reduce inflation, may have a significant effect on the global economy, air travel, our supply chain and our customers, and, as a result, on our business. We continue to monitor and evaluate related risks and uncertainties, including the items discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Form 10-K").
COVID-19
During the nine months ended September 29, 2022, the lingering effects of the COVID-19 pandemic continued to have a significant negative impact on the aviation industry, our customers, and our business globally. Due to the uncertain nature of current conditions around the world, and the capability of conditions to evolve rapidly, we are unable to predict accurately the impact that COVID-19 will have on our business going forward, including for the reasons stated in the 2021 Form 10-K. Our expectation is that our business operations will not improve until our customers are willing to produce aircraft at sufficient levels, which is dependent upon the public's willingness to use aircraft travel, sufficient OEM orders (without suspension) from airlines and the financial resources of airlines, other companies and individuals.
B737 Program
The B737 MAX program is a critical program to the Company. For the twelve months ended December 31, 2021, 2020 and 2019 approximately 35%, 19%, and 53% of our net revenues, respectively, were generated from sales of components to Boeing for the B737 aircraft. While we have entered into long-term supply agreements with Boeing to continue to provide components for the B737 for the life of the aircraft program, including commercial and military P-8 derivatives, Boeing does not have any obligation to purchase components from us for any replacement for the B737 that is not a commercial derivative model as defined by the Special Business Provisions and the General Terms Agreement (collectively, the “Sustaining Agreement”) between Spirit and Boeing. The Sustaining Agreement is a requirements contract and Boeing can reduce the purchase volume at any time.
In March 2019, the B737 MAX fleet was grounded in the U.S. and internationally following the 2018 and 2019 accidents involving two B737 MAX aircraft. On November 18, 2020, the FAA issued an order rescinding the grounding of the B737 MAX and published an Airworthiness Directive specifying design changes to be made before the aircraft returned to service. Boeing's deliveries of the B737 MAX resumed in the fourth quarter of 2020. Since November 2020, regulators from Brazil, Canada, the EU, U.K., India, and other countries have taken similar actions to unground the B737 MAX and permit return to service. The Civil Aviation Administration of China, which is the most significant country remaining to allow the B737 MAX to return to service, issued an airworthiness directive in December 2021, directing corrective actions necessary to allow for return to service, and held a special meeting in September 2022 to review the training specifications for the aircraft. No timetable has been established for ungrounding the B737 MAX in China. During the nine months ended September 29, 2022, Boeing continued to announce orders for the B737 MAX, and air carriers generally continued resuming flights on the aircraft.
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We expect that ongoing demand challenges from the B737 MAX grounding will continue to be exacerbated by the COVID-19 pandemic because other programs that mitigate the strain of the lower B737 MAX production rate are producing at lower rates. We expect that domestic air travel demand will continue to improve in the near term with international air travel demand continuing to lag behind. As a result, we expect that the B737 MAX and other narrowbody production rates will recover to pre-pandemic levels before widebody production rates. We expect that air travel demand will continue to improve from 2021 levels, with the overall pace of any recovery of air travel demand dependent on the availability, speed and acceptance of vaccinations, the occurrence and spread of continued COVID-19 mutations, the effectiveness of vaccines on new strains of the COVID-19 virus, and governmental travel restrictions. For additional information, see the “Risk Factors” section of our 2021 Form 10-K.
The 737 MAX 7 and MAX 10 models are currently going through Federal Aviation Administration (FAA) certification activities. If our customer is unable to achieve certification of these models or the entry into service is inconsistent with current assumptions, future revenues, earnings and cash flows are likely to be adversely impacted.
B787 Program
In the year ended December 31, 2020, production rate decreases from our customer on the B787 program resulted in incremental forward loss charges of $192.5 million. During the year ended December 31, 2021, the combination of further production rate decreases from our customer and estimated costs of rework and engineering changes resulted in incremental forward loss charges of $153.5 million. For the three and nine months ended September 29, 2022, our estimates for further production rate decreases and build schedule changes, supply chain costs, and other costs, including costs of rework, drove additional forward losses of $11.0 million and $55.3 million on the program, respectively. Changes to the scope of quality issues and any associated rework may increase or decrease the total estimated loss provision. Additionally, production rate changes, changes in cost assessments, or claims could result in additional incremental forward loss charges. See also Note 20 Commitments, Contingencies and Guarantees.
Results of Operations
The following table sets forth, for the periods indicated, certain of our operating data:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||
| Revenue | $ | 1,276.9 | $ | 980.0 | $ | 3,709.5 | $ | 2,882.9 | |||||||||||||||
| Cost of sales | 1,194.0 | 1,036.2 | 3,611.4 | 3,009.4 | |||||||||||||||||||
| Gross profit (loss) | 82.9 | (56.2) | 98.1 | (126.5) | |||||||||||||||||||
| Selling, general and administrative | 69.1 | 86.8 | 203.8 | 211.3 | |||||||||||||||||||
| Restructuring costs | — | 0.8 | 0.2 | 8.1 | |||||||||||||||||||
| Research and development | 9.3 | 12.8 | 36.5 | 34.3 | |||||||||||||||||||
| Operating income (loss) | 4.5 | (156.6) | (142.4) | (380.2) | |||||||||||||||||||
| Interest expense and financing fee amortization | (56.8) | (58.8) | (170.8) | (177.7) | |||||||||||||||||||
| Other income (expense), net | (42.1) | 94.8 | 30.2 | 138.7 | |||||||||||||||||||
| Loss before income taxes and equity in net loss of affiliates | (94.4) | (120.6) | (283.0) | (419.2) | |||||||||||||||||||
| Income tax (expense) benefit | (32.9) | 7.9 | (18.4) | 0.6 | |||||||||||||||||||
| Loss before equity in net loss of affiliates | (127.3) | (112.7) | (301.4) | (418.6) | |||||||||||||||||||
| Equity in net loss of affiliates | (0.3) | (0.9) | (1.2) | (1.9) | |||||||||||||||||||
| Net loss | $ | (127.6) | $ | (113.6) | $ | (302.6) | $ | (420.5) | |||||||||||||||
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Comparative shipset deliveries by model are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| Model | September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | ||||||||||||||||||||||
| B737 | 69 | 47 | 200 | 111 | ||||||||||||||||||||||
| B747 | — | 1 | 1 | 4 | ||||||||||||||||||||||
| B767 | 7 | 8 | 23 | 27 | ||||||||||||||||||||||
| B777 | 8 | 7 | 19 | 18 | ||||||||||||||||||||||
| B787 | 6 | 5 | 13 | 31 | ||||||||||||||||||||||
| Total Boeing | 90 | 68 | 256 | 191 | ||||||||||||||||||||||
A220(1) | 12 | 10 | 46 | 37 | ||||||||||||||||||||||
| A320 Family | 145 | 105 | 447 | 331 | ||||||||||||||||||||||
| A330 | 8 | 6 | 20 | 15 | ||||||||||||||||||||||
| A350 | 11 | 9 | 37 | 32 | ||||||||||||||||||||||
| Total Airbus | 176 | 130 | 550 | 415 | ||||||||||||||||||||||
| Total Business and Regional Jets | 50 | 50 | 149 | 139 | ||||||||||||||||||||||
| Total | 316 | 248 | 955 | 745 | ||||||||||||||||||||||
(1) Beginning in 2022, A220 deliveries reflect the number of wing end item deliveries instead of pylon end item deliveries, as previously reported. A220 deliveries for the three and nine months ended September 30, 2021 have been updated to reflect wing units.
For purposes of measuring production or shipset deliveries for Boeing aircraft in a given period, the term “shipset” refers to sets of structural fuselage components produced or delivered for one aircraft in such period. For purposes of measuring production or shipset deliveries for Airbus A220 aircraft in a given period, the term “shipset” refers to sets of structural wing components produced or delivered for one aircraft in such period. For purposes of measuring production or shipset deliveries for all other Airbus and Business/Regional Jet aircraft in a given period, the term “shipset” refers to all structural aircraft components produced or delivered for one aircraft in such period. Other components that are part of the same aircraft shipsets could be produced or shipped in earlier or later accounting periods than the components used to measure production or shipset deliveries, which may result in slight variations in production or delivery quantities of the various shipset components in any given period.
Net revenues by prime customer are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| Prime Customer | September 29, 2022 | September 30, 2021 | September 29, 2022 | September 30, 2021 | |||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||
| Boeing | $ | 824.3 | $ | 566.1 | $ | 2,233.7 | $ | 1,595.8 | |||||||||||||||
| Airbus | 237.2 | 211.6 | 822.2 | 687.8 | |||||||||||||||||||
| Other | 215.4 | 202.3 | 653.6 | 599.3 | |||||||||||||||||||
| Total net revenues | $ | 1,276.9 | $ | 980.0 | $ | 3,709.5 | $ | 2,882.9 | |||||||||||||||
Changes in Estimates
During the third quarter of 2022, we recognized unfavorable changes in estimates of $54.0 million, which included net forward loss charges of $49.1 million, and unfavorable cumulative catch-up adjustments related to periods prior to the third quarter of 2022 of $4.9 million. The forward losses in the third quarter were primarily driven by losses on the A350, B787, and RB3070 programs. Increased cost estimates for production on the A350 program resulted in a forward loss reflecting additional labor, freight, and other cost requirements driven by parts shortages and production and quality issues. The B787 program forward loss was driven by increased cost estimates for supply chain, rework, and fixed cost absorption. The RB3070 nacelle program forward loss taken this quarter was driven by increased engineering cost estimates. To a lesser extent, the B767, KC-46 Tanker, and A330 programs each had adjustments to increase the forward loss charges in the third quarter of 2022. The unfavorable cumulative catch-up adjustments primarily relate to adjustments for production schedule changes and increased costs on the A320 program. As referenced above, we utilize a periodic forecasting process to assess the progress and performance of our programs. We may continue to experience forward losses in the future as a result of production schedule
39
impacts from our customers, increases in costs related to persistent inflation, or other factors resulting in cost estimates higher than our original forecast.
During the same period in the prior year, we recognized total unfavorable changes in estimates of $73.2 million, which included net forward loss charges of $70.4 million, and unfavorable cumulative catch-up adjustments related to periods prior to the third quarter of 2020 of $2.8 million.
Three Months Ended September 29, 2022 as Compared to Three Months Ended September 30, 2021
Revenue. Net revenue for the three months ended September 29, 2022 was $1,276.9 million, an increase of $296.9 million, or 30.3%, compared to net revenue of $980.0 million for the same period in the prior year. The increase in revenue was primarily driven by increased Commercial Segment production on the B737 MAX program in the current year period. To a lesser extent, the B777, A320, B787, and A350 programs each drove increased revenue period over period in the Commercial Segment, Boeing P-8 and Sikorsky programs each drove increased revenue period over period in the Defense Segment, and our Aftermarket Segment sales also increased period over period. These increases were partially offset by decreased B747 program revenues in the Commercial Segment and decreased KC-46 Tanker revenue in the Defense Segment versus the prior year period. Approximately 83% and 79% of Spirit’s net revenues for the third quarter of 2022 and 2021, respectively, came from our two largest customers, Boeing and Airbus.
Total deliveries to Boeing increased to 90 shipsets during the third quarter of 2022, compared to 68 shipsets delivered in the same period of the prior year, primarily driven by increased production on the B737 MAX program. Total deliveries to Airbus increased to 176 shipsets during the third quarter of 2022, compared to 130 shipsets delivered in the same period of the prior year, primarily driven by increased production on the A320 program. Deliveries for business/regional jet components remained flat with 50 shipsets delivered during the third quarter of 2022, compared to 50 shipsets delivered in the same period of the prior year. In total, deliveries increased to 316 shipsets during the third quarter of 2022, compared to 248 shipsets delivered in the same period of the prior year.
Gross (Loss) Profit. Gross profit was $82.9 million for the three months ended September 29, 2022, compared to gross loss of ($56.2) million for the same period in the prior year. The increase in profit from the prior year period was primarily driven by Commercial Segment results, which included profit on the increased B737 MAX production revenue mentioned above and a lower forward loss charge than the same period in the prior year on the B787 program. These increases to profit were partially offset by the impact of a greater forward loss charge in the current year period, relative to the prior year period, on the A350 program and a forward loss charge taken in the current year period on the RB3070 nacelle business jet program. In the Defense Segment, the impact of increased classified program profit and the current year absence of a forward loss charge taken in the prior year on the Bell V-280 OTA program were partially offset by margin deterioration, relative to the prior year period, on the Sikorsky CH-53K program. Additionally, the increased profit from the same period in the prior year included greater profit on non-recurring Commercial Segment contracts, greater profit on Aftermarket Segment sales, lower warranty expense, and lower excess capacity production costs in the current year period. In the third quarter of 2022, we recognized $31.4 million of excess capacity production costs driven by production schedule changes on B737 MAX, A220 and A320 programs and $0.3 million net workforce adjustments as a result of COVID-19, compared to prior year excess capacity cost of $57.1 million and abnormal costs related to workforce adjustments, net of the U.S. employee retention credit and U.K. government subsidies, of $2.6 million. In the third quarter of 2022, we recognized $4.9 million of unfavorable cumulative catch-up adjustments related to periods prior to the third quarter of 2022, and $49.1 million of net forward loss charges. As mentioned in the Changes in Estimates section above, the forward losses recorded in the third quarter of 2022 were driven by increased cost estimates for production on the A350 program, increased engineering cost estimates on the RB3070 program, and increased cost estimates for supply chain, rework, and fixed cost absorption on the B787 program. In the third quarter of 2021, we recorded $2.8 million of unfavorable cumulative catch-up adjustments related to periods prior to the third quarter of 2021, and $70.4 million of net forward loss charges primarily related to the impact of reduced production volumes and production schedule changes on the B787 and A350 programs.
SG&A and Research and Development. Current period SG&A was lower than the prior year period by $17.7 million, primarily due to a net $26.6 million charge to SG&A in the prior year period related to a court ruling. The prior year charge was partially offset by increased labor and administrative activity, relative to the prior year period, for the three months ended September 29, 2022. Relatively less research and development activity drove expense $3.5 million lower for the three months ended September 29, 2022, as compared to the same period in the prior year.
Restructuring Costs. Restructuring costs for cost-alignment and headcount reductions as a result of B737 MAX grounding and COVID-19 decreased $0.8 million for the three months ended September 29, 2022, as compared to the same period in the prior year. There were no restructuring costs recorded in the current period, and the variance reflects the cost-alignment and headcount reduction activity executed in the prior year period.
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Operating (Loss) Income. Operating income for the three months ended September 29, 2022 was $4.5 million, an increase of $161.1 million, compared to operating loss of $156.6 million for the same period in the prior year. The variance reflects the increased gross profit on sales and changes to restructuring costs, SG&A costs, and research and development costs mentioned above.
Interest Expense and Financing Fee Amortization. Interest expense and financing fee amortization for the three months ended September 29, 2022 decreased $2 million compared to the same period in the prior year, driven by the impact of lower interest expense on the repayable investment agreement with BEIS which was in place in the prior year period but fully settled prior to the current year period. See also Note 21 Other Income (Expense), Net. The three months ended September 29, 2022 includes $51.3 million of interest and fees paid or accrued in connection with long-term debt and $1.9 million in amortization of deferred financing costs and original issue discount, compared to $47.6 million of interest and fees paid or accrued in connection with long-term debt and $2.2 million in amortization of deferred financing costs and original issue discount for the same period in the prior year. See also Note 15 Debt.
Other (Expense) Income, net. Other expense, net for the three months ended September 29, 2022 was ($42.1) million, compared to other income of $94.8 million for the same period in the prior year, an increase in expense of $136.9 million. The increase in other expense primarily reflects net pension related expense in the current year period of $(56.4) million versus net pension related income of $84.8 million in the prior year period. The respective pension income/expense values are separately driven by special accounting impacts related to pension plan termination activities that were respectively undertaken in each period. See also Note 16 Pension and Other Post-Retirement Benefits. A gain of $10.0 million related to the termination of a joint venture agreement, increased loss on foreign currency forward contracts relative to the prior year period, and increased net loss on sale of receivables drive the remaining variance. See also Note 21 Other Income (Expense), Net.
Provision for Income Taxes. Our reported tax rate includes two principal components: an expected annual tax rate and discrete items resulting in additional provisions or benefits that are recorded in the quarter that an event arises. Events or items that could give rise to discrete recognition include excess tax benefit in respect of share-based compensation, finalizing audit examinations for open tax years, statute of limitations expiration, or a change in tax law.
Deferred income tax assets and liabilities are recognized for future income tax consequences attributable to differences between the financial statement carrying amounts for existing asset and liabilities and their respective tax bases. A valuation allowance is recorded to reduce deferred income tax assets to an amount that in management’s opinion will ultimately be realized. We have reviewed our material deferred tax assets to determine whether or not a valuation allowance was necessary. Based on evaluation of both the positive and negative evidence available, management determined that it was necessary to continue to maintain a valuation allowance against nearly all of its net U.S. and U.K. deferred tax assets as of September 29, 2022. The net valuation allowance was increased by $48.5 million in the U.S. and increased by $15.0 million in the U.K. for the three months ended September 29, 2022.
The income tax expense for the three months ended September 29, 2022 includes $19.6 million for federal taxes, $4.3 million for state taxes and $9.0 million for foreign taxes. The income tax provision for the three months ended September 30, 2021 includes ($6.4) million for federal taxes, ($0.9) million for state taxes and ($0.6) million for foreign taxes. The effective tax rate for the three months ended September 29, 2022 is (34.73%) as compared to 6.6% for the same period in 2021. As we are reporting a pre-tax loss for the three months ended September 29, 2022, an increase in the effective tax rate results in an increase of income tax benefits while a decrease in the rate results in a reduction of income tax benefits.
The decrease from the U.S. statutory tax rate (resulting in tax expense, given the loss and the negative rate) is attributable primarily to the increase of valuation allowances, partially offset by state and R&D credits generated, net of valuation allowance.
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Segments. The following table shows segment revenues and operating income for the three months ended September 29, 2022 and September 30, 2021:
| Three Months Ended | |||||||||||
| September 29, 2022 | September 30, 2021 | ||||||||||
| ($ in millions) | |||||||||||
| Segment Revenues | |||||||||||
| Commercial | $ | 1,034.9 | $ | 784.1 | |||||||
| Defense & Space | 161.7 | 137.8 | |||||||||
| Aftermarket | 80.3 | 58.1 | |||||||||
| $ | 1,276.9 | $ | 980.0 | ||||||||
| Segment Operating Income (Loss) | |||||||||||
| Commercial | $ | 45.0 | $ | (72.8) | |||||||
| Defense & Space | 18.4 | 7.9 | |||||||||
| Aftermarket | 19.5 | 7.9 | |||||||||
| $ | 82.9 | $ | (57.0) | ||||||||
| SG&A | (69.1) | (86.8) | |||||||||
| Research and development | (9.3) | (12.8) | |||||||||
| Total operating income (loss) | $ | 4.5 | $ | (156.6) | |||||||
Commercial segment, Defense & Space segment, and Aftermarket segment represented approximately 81%, 13%, and 6%, respectively, of our net revenues for the three months ended September 29, 2022 and approximately 80%, 14%, and 6%, respectively, of our net revenues for the three months ended September 30, 2021.
Commercial segment. Commercial segment net revenues for the three months ended September 29, 2022 were $1,034.9 million, an increase of $250.8 million, or 32%, compared to the same period in the prior year. The increase in revenues was primarily driven by increased production on the B737 program versus the prior year period. To a lesser extent, the period over period revenue variance in the Commercial Segment reflects increased production revenues on the B777, A320, B787, and A350 programs, which were partially offset by lower B747 program production revenues and lower business jet program revenues in the current year period.
Commercial segment operating margins were 4% for the three months ended September 29, 2022, compared to (9%) for the same period in the prior year. The margin increase for the three months ended September 29, 2022, as compared to the prior year period, was driven by the impact of profit on increased B737 production revenue and a lower forward loss charge than the same period in the prior year on the B787 program. These increases to margin were partially offset by the impact of a greater forward loss charge in the current year period, relative to the prior year period, on the A350 S15 program and a forward loss charge taken in the current year period on the RB3070 nacelle business jet program. The results also include lower warranty expense and lower excess capacity costs, workforce adjustment costs, and restructuring costs in the current period. In the third quarter of 2022, the segment recorded unfavorable cumulative catch-up adjustments of $6.9 million and net forward loss charges of $47.4 million. In comparison, during the third quarter of 2021, the segment recorded unfavorable cumulative catch-up adjustments of $3.4 million and net forward loss charges of $61.5 million. For the three months ended September 29, 2022, the Commercial segment included $29.9 million of excess capacity production costs, $0.3 million net workforce adjustments as a result of COVID-19, and no net restructuring and other costs, compared with excess capacity costs of $54.8 million, net workforce reductions of $2.6 million, and restructuring costs of $0.7 million for the same period in the prior year.
Defense & Space segment. Defense & Space segment net revenues for the three months ended September 29, 2022 were $161.7 million, an increase of $23.9 million, or 17%, compared to the same period in the prior year. The variance from the prior year period includes the impact of increased production revenue on the Boeing P-8 and Sikorsky programs, increased non-recurring Defense Segment program revenues and greater sales of high-temperature materials and composites from our Fiber Materials Inc. subsidiary, partially offset by decreased KC-46 Tanker revenue in the current year period.
Defense & Space segment operating margins increased to 11% for the three months ended September 29, 2022, compared to 6% for the same period in the prior year. The increase in margin over the prior year period was driven by the impact of profit
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on increased Boeing P-8 production revenue, increased classified program profit, and the current year absence of a forward loss charge taken in the prior year on the Bell V-280 OTA program. These increases to margin were partially offset by margin deterioration in the current year period on the Sikorsky CH-53K program. For the three months ended September 29, 2022 the Defense & Space segment included $1.5 million of excess capacity production costs, compared with excess capacity costs of $2.3 million, and restructuring costs of $0.1 million for the same period in the prior year. The segment recorded favorable cumulative catch-up adjustments of $2.0 million for the three months ended September 29, 2022. The segment recorded net forward loss charges of $1.7 million for the three months ended September 29, 2022. In comparison, during the same period of the prior year, the segment recorded net favorable cumulative catch-up adjustments of $0.6 million and net forward loss charges of $8.9 million.
Aftermarket. Aftermarket segment net revenues for the three months ended September 29, 2022 were $80.3 million, an increase of $22.2 million, or 38%, compared to the same period in the prior year. Aftermarket segment operating margins were 24% for the three months ended September 29, 2022, compared to 14% for the same period in the prior year. Higher margins were seen on both increased spare part sales and increased maintenance, repair, and overhaul ("MRO") sales activity compared to the same period in the prior year. For the three months ended September 29, 2022 the Aftermarket segment includes no net restructuring and other costs, compared with restructuring costs of $0.0 million for the same period in the prior year.
Nine Months Ended September 29, 2022 as Compared to Nine Months Ended September 30, 2021
Revenue. Net revenue for the nine months ended September 29, 2022 was $3,709.5 million, an increase of $826.6 million, or 28.7%, compared to net revenue of $2,882.9 million for the same period in the prior year. The increase in revenue was primarily driven by increased Commercial Segment production on the B737 MAX program in the current year period. The remaining increase to prior year revenue included greater Commercial Segment revenues on A220, A320, business jet and B777 programs, partially offset by a decrease in revenue on the B787 and B747 programs, increased Defense Segment Boeing P-8 production revenue relative to the prior year to date period, and greater Aftermarket Segment sales relative to the prior year period. Approximately 82% and 79% of Spirit’s net revenues for the nine months ended September 29, 2022 and September 30, 2021, respectively, came from our two largest customers, Boeing and Airbus.
Total deliveries to Boeing increased to 256 shipsets during the nine months ended September 29, 2022, compared to 191 shipsets delivered in the same period of the prior year, primarily driven by increased B737 deliveries. Total deliveries to Airbus increased to 550 shipsets during the nine months ended September 29, 2022, compared to 415 shipsets delivered in the same period of the prior year, primarily driven by more A320 deliveries in the current year period. Deliveries for business/regional jet components increased to 149 shipsets during the nine months ended September 29, 2022, compared to 139 shipsets delivered in the same period of the prior year. In total, deliveries increased to 955 shipsets during the nine months ended September 29, 2022, compared to 745 shipsets delivered in the same period of the prior year.
Gross (Loss) Profit. Gross profit was $98.1 million for the nine months ended September 29, 2022, compared to gross loss of ($126.5) million for the same period in the prior year. The $224.6 million increase in profit from the prior year period was primarily driven by Commercial Segment results, which included profit on the increased B737 MAX production revenue mentioned above and a lower forward loss charge than the same period in the prior year on the B787 program. The Commercial Segment also includes the impact of margin deterioration, relative to the prior year period, on the A320, A220, and RB3070 programs. In the Defense Segment, the impact of a lower forward loss charge, relative to the same period in the prior year, on the Bell V-280 OTA program and profit recognized on the increased Boeing P-8 production revenue, mentioned above, drove increased gross profit. The variance in profit from the prior year period also includes the impact of higher COVID related costs in the current year period and the charge, mentioned above, in the second quarter of 2022 in relation to the suspension of activities related to customers in Russia. These increased costs were offset by increased profit on Aftermarket Segment sales, lower excess capacity costs driven by increased production during the current year period on B737 MAX, A220 and A320 programs, and the impact of recognition of the Aviation Manufacturing Jobs Protection Program award, which was awarded in the second half of 2021 and was amortized as a reduction to cost of sales through the applicable production period that included the first three months of the current year. In the nine months ended September 29, 2022, we recognized $126.1 million of excess capacity production costs driven by production schedule changes on B737 MAX, A220 and A320 programs, and $9.8 million of net workforce adjustments as a result of COVID-19, compared to prior year excess capacity cost of $172.2 million and abnormal costs related to workforce adjustments of $7.1 million. In the nine months ended September 29, 2022, we recognized $26.2 million of unfavorable cumulative catch-up adjustments related to periods prior to the nine months ended September 29, 2022, and $136.6 million of net forward loss charges. In the nine months ended September 30, 2021, we recorded $2.5 million of unfavorable cumulative catch-up adjustments related to periods prior to the nine months ended September 30, 2021, and $195.0 million of net forward loss charges.
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SG&A and Research and Development. SG&A expense was $7.5 million lower for the nine months ended September 29, 2022, compared to the same period in the prior year. The comparative impact of a net $26.6 million charge to SG&A in the prior year period related to a court ruling was partially offset by increased labor and administrative activity, relative to the prior year period, for the nine months ended September 29, 2022. Greater research and development activity is reflected in research and development expense that was $2.2 million higher for the nine months ended September 29, 2022, as compared to the same period in the prior year.
Restructuring Costs. Restructuring costs of $0.2 million for cost-alignment and headcount reductions as a result of B737 MAX grounding and COVID-19 impacts decreased $7.9 million for the nine months ended September 29, 2022, compared to the same period in the prior year. The variance reflects the relatively higher cost-alignment and headcount reduction activity seen in the prior year period.
Operating (Loss) Income. Operating loss for the nine months ended September 29, 2022 was ($142.4) million, an improvement of $237.8 million, compared to operating loss of ($380.2) million for the same period in the prior year. The improvement reflects the increased gross profit and changes to restructuring costs, SG&A costs, and research and development costs mentioned above.
Interest Expense and Financing Fee Amortization. Interest expense and financing fee amortization for the nine months ended September 29, 2022 decreased $6.9 million compared to the same period in the prior year, driven by lower interest expense on the repayable investment agreement with BEIS which was in place in the prior year period but fully settled during the current period (see Note 21 Other Income (Expense), Net). The nine months ended September 29, 2022 includes $148.9 million of interest and fees paid or accrued in connection with long-term debt and $5.7 million in amortization of deferred financing costs and original issue discount, compared to $143.9 million of interest and fees paid or accrued in connection with long-term debt and $6.8 million in amortization of deferred financing costs and original issue discount for the same period in the prior year. See also Note 15 Debt.
Other (Expense) Income, net. Other income, net for the nine months ended September 29, 2022 was $30.2 million, compared to a net income of $138.7 million for the same period in the prior year. The decrease in other income reflects net pension related expense in the current year period of $(15.1) million versus net pension related income of $137.3 million in the prior year period. The respective pension income/expense values are separately driven by special accounting impacts related to pension plan termination activities that were respectively undertaken in each period. See also Note 16 Pension and Other Post-Retirement Benefits. The increase in other income also reflects a gain in the current period on the settlement of the repayable investment agreement with BEIS (see Note 21 Other Income (Expense), Net), relatively higher foreign currency gains in the current year period, and a gain related to the termination of a joint venture agreement in the current year period. These increases to income were partially offset by losses in the current period related to settlement of hedged foreign currency exchange contracts (see Note 14 Derivative and Hedging Activities), increased excise tax related to a pension plan assets reversion in the current period (see Note 16 Pension and Other Post-Retirement Benefits), and increased loss on sale of receivables as compared to the prior year period (see Note 5 Accounts Receivable and Allowance for Credit Losses).
Provision for Income Taxes. Our reported tax rate includes two principal components: an expected annual tax rate and discrete items resulting in additional provisions or benefits that are recorded in the quarter that an event arises. Events or items that could give rise to discrete recognition include excess tax benefit in respect of share-based compensation, finalizing audit examinations for open tax years, statute of limitations expiration, or a change in tax law.
Deferred income tax assets and liabilities are recognized for future income tax consequences attributable to differences between the financial statement carrying amounts for existing asset and liabilities and their respective tax bases. A valuation allowance is recorded to reduce deferred income tax assets to an amount that in management’s opinion will ultimately be realized. We have reviewed our material deferred tax assets to determine whether or not a valuation allowance was necessary. Based on evaluation of both the positive and negative evidence available, management determined that it was necessary to continue to maintain a valuation allowance against nearly all of its net U.S. and U.K. deferred tax assets as of September 29, 2022. The net valuation allowance was increased by $92.1 million in the U.S. and increased by $19.2 million in the U.K. for the nine months ended September 29, 2022.
The income tax expense for the nine months ended September 29, 2022 includes $14.2 million for federal taxes, $2.2 million for state taxes and $2.0 million for foreign taxes. The income tax provision for the nine months ended September 30, 2021 includes ($18.7) million for federal taxes, $17.9 million for state taxes and $0.2 million for foreign taxes. The effective tax rate for the nine months ended September 29, 2022 is (6.49%) as compared to 0.15% for the same period in 2021. As we are reporting a pre-tax loss for the nine months ended September 29, 2022, an increase in the effective tax rate results in an increase of income tax benefits while a decrease in the rate results in a reduction of income tax benefits.
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The decrease from the U.S. statutory tax rate (resulting in tax expense given the loss and negative rate) is attributable primarily to the increase of valuation allowances, partially offset by state and R&D credits generated, net of valuation allowance.
Segments. The following table shows segment revenues and operating income for the nine months ended September 29, 2022 and September 30, 2021:
| Nine Months Ended | ||||||||||||||
| September 29, 2022 | September 30, 2021 | |||||||||||||
| ($ in millions) | ||||||||||||||
| Segment Revenues | ||||||||||||||
| Commercial | $ | 3,004.4 | $ | 2,283.8 | ||||||||||
| Defense & Space | 466.6 | 433.0 | ||||||||||||
| Aftermarket | 238.5 | 166.1 | ||||||||||||
| $ | 3,709.5 | $ | 2,882.9 | |||||||||||
| Segment Operating Income (Loss) | ||||||||||||||
| Commercial | $ | (3.5) | $ | (200.4) | ||||||||||
| Defense & Space | 52.1 | 32.3 | ||||||||||||
| Aftermarket | 49.3 | 33.5 | ||||||||||||
| $ | 97.9 | $ | (134.6) | |||||||||||
| SG&A | (203.8) | (211.3) | ||||||||||||
| Research and development | (36.5) | (34.3) | ||||||||||||
| Total operating loss | $ | (142.4) | $ | (380.2) | ||||||||||
Commercial segment, Defense & Space segment, and Aftermarket segment represented approximately 81%, 13%, and 6%, respectively, of our net revenues for the nine months ended September 29, 2022 and approximately 79%, 15%, and 6% respectively, of our net revenues for the nine months ended September 30, 2021.
Commercial segment. Commercial segment net revenues for the nine months ended September 29, 2022 were $3,004.4 million, an increase of $720.6 million, or 32%, compared to the same period in the prior year. The increase in revenues was primarily driven by increased production on the B737 MAX program in the current year period. The remaining increase to prior year revenue included greater revenues on increased A220, A320, business jet, B777, and A350 programs production, partially offset by a decrease in revenue on the B787 and B747 programs, and lower net non-recurring program revenues.
Commercial segment operating margins were 0% for the nine months ended September 29, 2022, compared to (9%) for the same period in the prior year. The increase in margin, compared to the same period in the prior year, was driven by the incremental margin impact of the greater volume of B737 program sales, lower forward losses relative to the prior year period on the B787 production program, and lower excess capacity costs and restructuring costs in the current period. To a lesser extent, the variance includes the relative impact of lower forward losses on the A350 program, offset by margin deterioration on the A320, A220, RB3070, and Bombardier business jet programs versus the prior year period. The margin for the nine months ended September 29, 2022 also includes the impact of $23.9 million of the charge, mentioned above, in relation to the suspension of activities related to customers in Russia due to the Russian invasion of Ukraine, and the associated sanctions. For the nine months ended September 29, 2022, the Commercial segment included $119.8 million of excess capacity production costs, $9.8 million of net workforce adjustments as a result of COVID-19, and ($25.5) million, net, of restructuring and other costs, including partial offset related to the Aviation Manufacturing Jobs Protection Program grant of ($28.4) million. compared with excess capacity costs of $163.4 million, net workforce reductions of $7.1 million, and restructuring costs of $6.9 million for the same period in the prior year. For the nine months ended September 29, 2022, the segment recorded unfavorable cumulative catch-up adjustments of $27.8 million and net forward loss charges of $132.6 million. In comparison, for the nine months ended September 30, 2021, the segment recorded unfavorable cumulative catch-up adjustments of $3.1 million and net forward loss charges of $180.3 million.
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Defense & Space. Defense & Space segment net revenues for the nine months ended September 29, 2022 were $466.6 million, an increase of $33.6 million, or 8%, compared to the same period in the prior year. The increase from the prior year period includes increased Boeing P-8 program production revenue, increased Sikorsky CH-53K program production revenue, and greater sales of high-temperature materials and composites from our Fiber Materials Inc. subsidiary versus the prior year period, partially offset by lower KC-46 Tanker program production revenue during the current year period.
Defense & Space segment operating margins were 11% for the nine months ended September 29, 2022, compared to 7% for the same period in the prior year. The increase in operating income margin for the segment was driven largely by lower excess capacity production costs, lower restructuring costs, current year recognition of the Aviation Manufacturing Jobs Protection Program grant, the impact of lower forward loss charges, relative to the same period in the prior year, on the Bell V-280 OTA and KC-46 Tanker programs and increased profit recognized on the increased Boeing P-8 production revenue, mentioned above. For the nine months ended September 29, 2022, the Defense & Space segment included $6.3 million of excess capacity production costs and ($2.3) million of partial offset related to the Aviation Manufacturing Jobs Protection Program grant, compared with excess capacity costs of $8.8 million and restructuring costs of $1.2 million for the same period in the prior year. The segment recorded favorable cumulative catch-up adjustments of $1.6 million and net forward loss charges of $4.0 million for the nine months ended September 29, 2022. In comparison, during the same period of the prior year, the segment recorded favorable cumulative catch-up adjustments of $0.6 million and net forward loss charges of $14.7 million.
Aftermarket. Aftermarket segment net revenues for the nine months ended September 29, 2022 were $238.5 million, an increase of $72.4 million, or 44%, compared to the same period in the prior year. The increase reflects greater spare part sales and increased maintenance, repair, and overhaul ("MRO") sales activity compared to the same period in the prior year. Aftermarket segment operating margins were 21% for the nine months ended September 29, 2022, compared to 20% for the same period in the prior year. The margin for the nine months ended September 29, 2022 includes the impact of $4.2 million of the charge, mentioned above, in relation to the suspension of activities related to customers in Russia due to the Russian invasion of Ukraine, and the associated sanctions. For the nine months ended September 29, 2022, the Aftermarket segment included ($1.9) million, net, of restructuring and other costs, including partial offset related to the Aviation Manufacturing Jobs Protection Program grant, compared with restructuring costs of $0.2 million for the same period in the prior year.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our principal source of liquidity is operating cash flows from continuing operations. Our operating cash flows from continuing operations have been adversely impacted by, among other things, the B737 MAX grounding, the COVID-19 pandemic, production rate changes for the B737 MAX program and other programs, supply chain disruptions, labor shortages and cost increases affecting our business. We expect those adverse impacts to continue for the remainder of 2022 and beyond. For purposes of assessing our liquidity needs in this section, we have assumed that Boeing would not further reduce the B737 MAX production rate and that other customers generally would not further reduce their production rates.
As of September 29, 2022, our debt balance was $3,783.4 million, including $355.4 million of debt classified as short-term. As of September 29, 2022, we had $670.5 million of cash and cash equivalents on the Condensed Consolidated Balance Sheet, which reflects a decrease of $808.1 million from the cash and cash equivalents balance of $1,478.6 million as of December 31, 2021.
Based on current operating trends, we believe our cash on hand and cash flows generated from operations, together with other sources of liquidity and our ability to vary our cost structure quickly, will provide sufficient liquidity for the next twelve months and for the foreseeable future beyond the next twelve months. Beyond the next twelve months, this belief assumes that we will be able to refinance our indebtedness at or prior to maturity with new borrowings or other sources of liquidity. Limitations on our ability to access the capital or credit markets, the cost impacts of additional production rate changes, difficulty with managing costs due to labor shortages, supply chain disruptions, inflation or other factors, or unfavorable terms or general reductions in liquidity, may adversely and materially impact our business, financial condition, and results of operations, and prevent us from being able to meet our obligations as they become due. There can be no assurance that we will be able to access the capital or credit markets or, if we do have such access, that it will be on favorable terms.
Further, we could experience significant fluctuations in our cash flows from period to period, particularly during the continued uncertainty in the timing of the aviation industry recovery and the current challenging macroeconomic environment. We use our cash for many activities, including operations, capital expenditures, debt service, working capital, and M&A integration activities. While we may be able to modify, defer or eliminate some of these uses to manage our cash consumption, other uses are relatively fixed and are difficult to modify in the short-term.
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As of September 29, 2022, we were in compliance with all applicable covenants in the agreements governing our indebtedness.
In connection with the Company’s acquisition of select assets of Bombardier aerostructures and aftermarket services businesses on October 30, 2020, the Company acquired certain liabilities as previously disclosed including financial payment obligation under a repayable investment agreement with the U.K.'s Department for Business, Energy and Industrial Strategy. The repayable investment obligation, which was denominated in GBP, was included on the Company’s Consolidated Balance Sheet as of December 31, 2021, as $41.7 million recorded to other current liabilities and $301.9 million recorded to Other non-current liabilities. In January 2022, the Company made repayments of $25.6 million to the UK’s Department for Business Energy and Industrial Strategy for units sold, including interest, in respect to the agreement. In April 2022, the deed of release settled the remaining outstanding repayment obligation in exchange for a payment of $292.8 million. The portion of the payments related to interest expense and the portion of the payments related to principal repayment are included in net cash used in operating activities and net cash used in financing activities, respectively, on the Company's Condensed Consolidated Statement of Cash Flows for the period ended September 29, 2022.
During the year ended December 31, 2021, the Department of Transportation approved our grant claim of $75.5 million filed under the Aviation Manufacturing Jobs Protection Program, a component of the American Rescue Plan Act of 2021. As of September 29, 2022, we have received the full amount approved of $75.5 million. See also Note 5 Accounts Receivable and Allowance for Credit Losses.
We have agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing, Airbus, and Rolls-Royce to third-party financial institutions. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with us, and they continue to allow us to monetize the receivables prior to their payment date, subject to payment of a discount. Our ability to continue using such agreements is primarily dependent upon the strength of Boeing’s, Airbus’s, and Rolls-Royce's financial condition. If any of these financial institutions involved with these arrangements experiences financial difficulties, becomes unwilling to support Boeing, Airbus, or Rolls-Royce due to a deterioration in their financial condition or otherwise, or is otherwise unable to honor the terms of the factoring arrangements, we may experience significant disruption and potential liquidity issues, which could have an adverse impact upon our operating results, financial condition and cash flows. For the nine months ended September 29, 2022, $2,083.0 million of accounts receivable were sold via these arrangements.
Cash Flows
The following table provides a summary of our cash flows for the nine months ended September 29, 2022 and September 30, 2021:
| For the Nine Months Ended | |||||||||||
| September 29, 2022 | September 30, 2021 | ||||||||||
| ($ in millions) | |||||||||||
| Net cash (used in) provided by operating activities | $ | (367.4) | $ | 13.3 | |||||||
| Net cash used in investing activities | (88.8) | (106.4) | |||||||||
| Net cash used in financing activities | (334.5) | (345.8) | |||||||||
| Effect of exchange rate change on cash and cash equivalents | (17.5) | (3.8) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash for the period | (808.2) | (442.7) | |||||||||
| Cash, cash equivalents, and restricted cash beginning of period | 1,498.4 | 1,893.1 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 690.2 | $ | 1,450.4 | |||||||
Nine Months Ended September 29, 2022 as Compared to Nine Months Ended September 30, 2021
Operating Activities. For the nine months ended September 29, 2022, we had a net cash outflow of $367.4 million from operating activities, an increase in net outflow of $380.7 million compared to a net cash inflow of $13.3 million for the same period in the prior year. The increase in net cash outflow, period over period, primarily represents working capital growth associated with increased production activities as compared to the prior year, and a $227.9 million income tax refund received in the prior year period. The cash outflows from working capital growth offset the impact of comparatively greater earnings and the pension asset reversion to cash discussed in Note 16 Pension and Other Post-Retirement Benefits. The variance to the prior year period also includes cash repayments of $92.3 million made in the current year of the advance payment received from Boeing on the B737 program, and the interest payment associated with the settlement of the repayable investment agreement
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between the Company and the U.K.'s Department for Business, Energy and Industrial Strategy. See also Note 12 Advance Payments and Note 21 Other Income (Expense), Net.
Investing Activities. For the nine months ended September 29, 2022, we had a net cash outflow of $88.8 million for investing activities, a decrease in outflow of $17.6 million compared to a net cash outflow of $106.4 million for the same period in the prior year. The decrease primarily relates to the prior year acquisition of Applied Aerodynamics.
Financing Activities. For the nine months ended September 29, 2022, we had a net cash outflow of $334.5 million for financing activities, a decrease in outflow of $11.3 million, compared to a net cash outflow of $345.8 million for the same period in the prior year. The decreased cash outflow was primarily driven by the differences between the $289.5 million current year principal repayment of the repayable investment agreement between the Company and the U.K.'s Department for Business, Energy and Industrial Strategy, and the prior year redemption of the $300.0 million principal amount of the $300 million aggregate principal amount of Senior Floating Rate Notes due 2021. During the nine months ended September 29, 2022, we paid a dividend of $3.2 million to our stockholders of record, compared to a dividend of $3.2 million paid in the same period in the prior year. There were no repurchases of Common Stock under our share repurchase program during either the nine months ended September 29, 2022 or September 30, 2021.
Pension and Other Post-Retirement Benefit Obligations
As disclosed in the Company's 2021 Form 10-K, effective October 1, 2021, we spun off a portion of the existing Pension Value Plan ("PVP A"), to a new plan called PVP B. As part of the PVP B plan termination process, a lump sum offering was provided during 2021 for PVP B participants and the final asset distribution was completed in the first quarter of 2022. At September 29, 2022, a pension reversion asset of $70.7 million is recorded on the Restricted plan assets line item on the Condensed Consolidated Balance Sheets. Restricted plan assets are expected to be reduced over the next seven years as amounts are distributed to employees under a qualified compensation and benefit program.
Separately, during the three and nine months ended September 29, 2022, we withdrew $34.0 million of cash from PVP B, which represented an excess plan assets reversion. This transaction was accounted for as a negative contribution, and is included on the Pension plans employer contributions line item on the Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2022. Excise tax of $6.8 million related to the reversion of excess plan assets was separately recorded to the Other income (expense), net line item on the Condensed Consolidated Statements of Operations for the nine months ended September 29, 2022. See also Note 21 Other Income (Expense), Net.
In July 2022, the Company adopted and communicated to participants a plan to terminate the Company's Pension Value Plan A ("PVP A"). As further described in the Company's 2021 Form 10-K, the PVP A consists of pension plans which were frozen as of the date Holdings became a standalone company and commenced operations. During the three months ended September 29, 2022, the PVP A plan was amended, providing for an enhancement to benefits the Company is providing to certain U.S. employees in conjunction with the plan termination. The estimated liability impact of this plan amendment, $71.7 million, was recognized immediately as a non-cash, pre-tax non-operating charge for amortization of prior service costs. See also Note 16 Pension and Other Post-Retirement Benefits. In connection with the special accounting related to the termination of the PVP A plan, mentioned above, a subsequent interim measurement of the Company's U.S. pension and other postretirement plan assets and obligations was completed during the three months ended September 29, 2022. The interim measurement included the estimated impact of the plan termination liability and enhanced benefits liability noted above and resulted in an adjustment of $134.4 million to the Accumulated other comprehensive loss line item in the Stockholders' Equity section of the Company's Condensed Consolidated Balance Sheet for the period ended September 29, 2022, net of the current period settlement loss and amortization of prior service cost impacts included in Net Periodic Pension Expense.
The Company expects to recognize additional non-cash, pre-tax non-operating settlement accounting charges of approximately $80-$100 million related to a bulk lump-sum payment to be made in the fourth quarter of 2022 and first quarter of 2023 and the purchase of annuities for any participants not electing a lump-sum distribution. These amounts will be reflected as settlement charges related to the accelerated recognition of the actuarial losses for the PVP A plan that are currently included in the Accumulated other comprehensive loss line item in the Stockholders' Equity section of the Company's Condensed Consolidated Balance Sheet for the period ended September 29, 2022. Once these actions are complete, the Company anticipates an after-tax cash reversion of any remaining surplus, which the company currently estimates to be within a range of $120 million to $150 million, which the Company expects to take place in the second quarter of 2023. The amounts of these charges and after-tax reversion are dependent upon finalization of the actuarial assumptions, including discount rate, investment rate of return, and benefit payment selections, as of the measurement date of the settlement, which will take place between the fourth quarter of 2022 and first quarter of 2023.
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Our U.S. pension plan remained fully funded at September 29, 2022. Our plan investments are broadly diversified and we do not anticipate a near-term requirement to make cash contributions to our U.S. pension plan. See Note 16 Pension and Other Post-Retirement Benefits, for more information on the Company’s pension plans. Other than the reversion of excess plan assets noted above, which was accounted for as a negative contribution, the Company's expected contributions for the current year have not significantly changed from those described in the Company's 2021 Form 10-K. The Shorts’ Pension has been in a deficit position during the current year, and there is a risk that additional contributions will be required from the trustees or the U.K. Pension Regulator as described under Part I, Item 1A. "Risk Factors" of our 2021 Form 10-K.
Derivatives Accounted for as Hedges
Cash Flow Hedges – Foreign Currency Forward Contract
The Company has entered into a series of currency forward contracts, each designated as a cash flow hedge upon the date of execution, for the purpose of reducing the variability of cash flows and hedging against the foreign currency exposure for forecasted payroll, pension and vendor disbursements that are expected to be made in the British pound sterling at our operations located in Belfast, Northern Ireland. The hedging program implemented is intended to reduce foreign currency exposure, and the associated forward currency contracts hedge forecasted transactions through September 2023. Changes in the fair value of cash flow hedges are recorded in AOCI and recorded in earnings in the period in which the hedged transaction settles. The loss recognized in AOCI was $32.5 million for the nine months ended September 29, 2022. Within the next 12 months, the Company expects to recognize a loss of $25.4 million in earnings related to the foreign currency forward contracts. As of September 29, 2022, the maximum term of the hedged forecasted transaction was 12 months.
Derivatives Not Accounted for as Hedges
During the nine months ended September 29, 2022, the Company entered into foreign currency forward contracts in the amount of $291.5 million to minimize the risk of currency exchange rate movements on the Company's planned settlement of the repayable investment agreement between the Company and the U.K.'s Department for Business, Energy and Industrial Strategy. During the nine-month period ended September 29, 2022, these foreign currency forward contracts were settled and new contracts were entered into in the amount of $293.7 million, which were also settled during the period. The Company did not designate these forward contracts as hedges or apply hedge accounting to the forward contracts. For the nine months ended September 29, 2022, the Company recorded a net gain of $1.6 million to other income on the Condensed Consolidated Statements of Operations related to the foreign currency forward contracts.
See Note 14 Derivative and Hedging Activities, to our condensed consolidated financial statements included in Part I of this Quarterly Report for more information.
Debt and Other Financing Arrangements
As of September 29, 2022, the outstanding balance of the senior secured Term Loan B Credit Agreement was $595.5 million and the carrying value was $593.0 million.
As of September 29, 2022, the outstanding balance of the 2023 Notes and the 2028 Notes was $300.0 million and $700.0 million, respectively, and the carrying value was $299.7 million and $695.7 million, respectively. The carrying value of the 2023 Notes is classified as current on the Condensed Consolidated Balance Sheet as of September 29, 2022
As of September 29, 2022, the outstanding balance of the Second Lien 2025 Notes, First Lien 2025 Notes, and 2026 Notes was $1,200.0 million, $500.0 million, and $300.0 million, respectively, and the carrying value was $1,190.1 million, $496.4 million, and $298.7 million.
See Note 15 Debt, to our condensed consolidated financial statements included in Part I of this Quarterly Report for more information.
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Information Regarding Guarantors of Spirit’s Notes Registered Under the Securities Act of 1933
Spirit’s 2026 Notes are guaranteed by Spirit NC and the Company, and Spirit’s 2023 Notes and 2028 Notes are guaranteed by the Company. None of Spirit’s notes are guaranteed by Spirit’s or the Company’s other domestic subsidiaries or any foreign subsidiaries (together, the “non-guarantor subsidiaries”). The Company consolidates each of Spirit and Spirit NC in its consolidated financial statements. Spirit and Spirit NC are both 100 percent-owned and controlled by the Company. The Company’s guarantees of Spirit’s indebtedness are full and unconditional, except that the guarantees may be automatically released and relieved upon satisfaction of the requirements for legal defeasance or covenant defeasance under the applicable indenture being met. The Company’s guarantees are also subject to a standard limitation which provides that the maximum amount guaranteed by the Company will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws.
The guarantees of the Company and Spirit NC with respect to Spirit’s 2026 Notes are made on a joint and several basis. The guarantee of Spirit NC is not full and unconditional because Spirit NC can be automatically released and relieved of its obligations under certain circumstances, including if it no longer guarantees Spirit’s credit facility. Like the Company’s guarantees, the guarantee of Spirit NC is subject to a standard limitation which provides that the maximum amount guaranteed by Spirit NC will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws.
All of the existing guarantees by the Company and Spirit NC rank equally in right of payment with all of the guarantors’ existing and future senior indebtedness. The secured indebtedness of the Company and Spirit NC (including guarantees of Spirit’s existing and future secured indebtedness) will be effectively senior to guarantees of any unsecured indebtedness to the extent of the value of the assets securing such indebtedness. Future guarantees of subordinated indebtedness will rank junior to any existing and future senior indebtedness of the guarantors. The guarantees are structurally junior to any debt or obligations of non-guarantor subsidiaries, including all debt or obligations of subsidiaries that are released from their guarantees of the notes. As of September 29, 2022, indebtedness of our non-guarantor subsidiaries included $295.2 million of outstanding borrowings under intercompany agreements with guarantor subsidiaries and $16.9 million of finance leases of our non-guarantor subsidiaries.
Based on our understanding of Rule 3-10 of Regulation S-X (“Rule 3-10”), we believe that the Company’s guarantees of Spirit’s indebtedness comply with the conditions set forth in Rule 3-10, which enable us to present summarized financial information for the Company, Spirit and Spirit NC, which is a consolidated guarantor subsidiary, in accordance with Rule 13-01 of Regulation S-X. The summarized financial information excludes information regarding the non-guarantor subsidiaries. In accordance with Rule 3-10, separate financial statements of the guarantor subsidiaries have not been presented.
The following tables include summarized financial information of Spirit, Holdings, and Spirit NC (together, the “obligor group”). Investments in and equity in the earnings of the Company’s other subsidiaries (the “Non-Guarantor Subsidiaries”), which are not a member of the obligor group, have been excluded. The summarized financial information of the obligor group is presented on a combined basis for Spirit and Holdings, and separately for Spirit NC, with intercompany balances and transactions between entities in the obligor group eliminated. The obligor group’s amounts due from, amounts due to and transactions with Non-Guarantor Subsidiaries have been presented in separate line items, if they are material. There are no non-controlling interest in any of the obligor group entities.
| Summarized Statements of Income | Nine months ended September 29, 2022 | ||||||||||
| ($ millions) | Holdings and Spirit | Spirit NC | |||||||||
| Net Sales to unrelated parties | $ | 2,821.1 | $ | — | |||||||
| Net Sales to Non-Guarantor Subsidiaries | 13.2 | 24.2 | |||||||||
| Gross profit on sales to unrelated parties | 161.1 | — | |||||||||
| Gross loss on sales to Non-Guarantor Subsidiaries | (4.4) | (0.7) | |||||||||
| (Loss) Income from continuing operations | (257.5) | (4.5) | |||||||||
| Net (loss) income | $ | (257.5) | $ | (4.5) | |||||||
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| Summarized Balance Sheets | Holdings and Spirit | Spirit NC | |||||||||||||||||||||
| ($ millions) | September 29, 2022 | December 31, 2021 | September 29, 2022 | December 31, 2021 | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 503.8 | $ | 1,291.2 | $ | — | $ | — | |||||||||||||||
| Receivables due from Non-Guarantor Subsidiaries | 81.8 | 51.7 | 18.4 | 19.1 | |||||||||||||||||||
| Receivables due from unrelated parties | 308.6 | 262.3 | — | — | |||||||||||||||||||
| Contract assets | 505.9 | 400.5 | — | — | |||||||||||||||||||
| Inventory, net | 800.8 | 804.9 | 121.8 | 139.0 | |||||||||||||||||||
| Other current assets | 3.5 | — | — | — | |||||||||||||||||||
| Total current assets | $ | 2,204.4 | $ | 2,810.6 | $ | 140.2 | $ | 158.1 | |||||||||||||||
| Loan receivable from Non-Guarantor Subsidiaries | 295.2 | 107.2 | — | — | |||||||||||||||||||
| Property, plant and equipment, net | 1,508.4 | 1,591.2 | 214.6 | 242.6 | |||||||||||||||||||
| Pension assets, net | 278.6 | 505.9 | — | — | |||||||||||||||||||
| Other non-current assets | 296.1 | 313.3 | 5.4 | 5.8 | |||||||||||||||||||
| Total non-current assets | $ | 2,378.3 | $ | 2,517.6 | $ | 220.0 | $ | 248.4 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Accounts payable to Non-Guarantor Subsidiaries | $ | 130.3 | $ | 86.3 | $ | 7.0 | $ | 10.5 | |||||||||||||||
| Accounts payable to unrelated parties | 616.2 | 516.3 | 22.4 | 22.3 | |||||||||||||||||||
| Accrued expenses | 331.4 | 279.5 | 2.2 | 0.6 | |||||||||||||||||||
| Current portion of long-term debt | 349.1 | 42.9 | 1.1 | 1.1 | |||||||||||||||||||
| Other current liabilities | 319.4 | 487.9 | 0.5 | 0.6 | |||||||||||||||||||
| Total current liabilities | $ | 1,746.4 | $ | 1,412.9 | $ | 33.2 | $ | 35.1 | |||||||||||||||
| Long-term debt | 3,411.7 | 3,721.5 | 4.7 | 5.5 | |||||||||||||||||||
| Contract liabilities, long-term | 267.7 | 289.1 | — | — | |||||||||||||||||||
| Forward loss provision, long-term | 192.1 | 283.0 | — | — | |||||||||||||||||||
| Other non-current liabilities | 491.0 | 565.9 | 4.8 | 5.2 | |||||||||||||||||||
| Total non-current liabilities | $ | 4,362.5 | $ | 4,859.5 | $ | 9.5 | $ | 10.7 | |||||||||||||||
Supply Chain Financing Applicable to Suppliers
We have provided our suppliers with access to a supply chain financing program through a facility with a third-party financing institution. This program was primarily entered into as a result of seeking payment term extensions with suppliers, and the program allows suppliers to monetize the receivables prior to their payment date, subject to payment of a discount. Our suppliers’ ability to continue using such agreements is primarily dependent upon the strength of our financial condition. During the nine-month period ended September 29, 2022, we increased capacity under our existing supply chain financing program in order to support increases to production. While our suppliers’ access to this supply chain financing program could be curtailed if our credit ratings are downgraded, we do not expect that changes in the availability of supply chain financing to our suppliers will have a significant impact on our liquidity.
The balance of payables to suppliers who elected to participate in the supply chain financing program included in our accounts payable balance as of September 29, 2022 was $103.5 million. The balance as of September 30, 2021 was $58.9 million. Payables to suppliers who elected to participate in the supply chain financing program increased by $44.6 million during the nine-month period ended September 29, 2022. Payables to suppliers who elected to participate in the supply chain financing program did not significantly increase or decrease during the nine-month period ended September 30, 2021 The changes in each period primarily reflect purchases from suppliers related to production levels during the applicable period.
Advance Payments
Advances on the B787 Program. Boeing has made advance payments to Spirit under the B787 Supply Agreement that are required to be repaid to Boeing by way of offset against the purchase price for future shipset deliveries. As of September 29, 2022, the amount of advance payments received by us from Boeing under the B787 Supply Agreement and not yet repaid was approximately $208.5 million.
Advances on the B737 Program. In an effort to minimize the disruption to Spirit's operations and its supply chain, Spirit and Boeing entered into a Memorandum of Agreement on April 12, 2019 (the "2019 MOA"), which included the terms and conditions for an advance payment to be made from Boeing to Spirit in the amount of $123 million, which was received during the third quarter of 2019. The parties entered into another memorandum of agreement on February 6, 2020 (the "2020 MOA"), which extended the repayment date of the $123 million advance received by Spirit under the 2019 MOA to 2022. The 2020
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MOA also required Boeing to pay $225 million to Spirit in the first quarter of 2020, consisting of (i) $70 million in support of Spirit's inventory and production stabilization, of which $10 million was repaid by Spirit in 2021, and (ii) $155 million as an incremental pre-payment for costs and shipset deliveries over the next two years. On February 9, 2021, Spirit signed a letter of agreement under which Boeing paid $38.5 million to Spirit in the first quarter of 2021, which consisted of (i) $68.5 million as additional pre-payment for the costs and shipset deliveries less the (ii) $30 million credit owed to Boeing for rate-based pricing premium. During the nine-month period ended September 29, 2022, $92.3 million of the advance payment was repaid. As of September 29, 2022, the amount of advance payments received from Boeing and not yet repaid was $30.7 million.
Other. The Advance payments, short-term line item on the Condensed Consolidated Balance Sheet for the period ended September 29, 2022 includes $18.9 million related to payment received from an Aftermarket segment customer for contracted work that was impacted by the sanctions imposed by the U.S. and other governments on Russia following its invasion of Ukraine.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
You should read the discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and the notes to the unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report"). The section may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements reflect our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “aim,” “anticipate,” “believe,” “could,” “continue,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “might,” “objective,” “plan,” “predict,” “project,” “should,” “target,” “will,” “would,” and other similar words, or phrases, or the negative thereof, unless the context requires otherwise. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties, both known and unknown, including, but not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K. Our actual results may vary materially from those anticipated in forward-looking statements. We caution investors not to place undue reliance on any forward-looking statements.
Important factors that could cause actual results to differ materially from those reflected in such forward-looking statements and that should be considered in evaluating our outlook include, but are not limited to, the following:
•the impact of the COVID-19 pandemic on our business and operations, including on the demand for our and our customers’ products and services, on trade and transport restrictions, on the global aerospace supply chain, on our ability to attract and retain the skilled work force necessary for production and development in an extremely competitive market, and generally on our ability to effectively manage the impacts of the COVID-19 pandemic on our business operations;
•the general effect of geopolitical conditions, including Russia’s invasion of Ukraine and the resultant sanctions being imposed in response to the conflict, or other events, such as pandemics, on the demand for our products and services and on the industries and markets in which we operate in the U.S. and globally;
•the effect of economic conditions, including increases in interest rates and inflation, on the demand for our products and services and on the industries and markets in which we operate in the U.S. and globally
•the timing and conditions surrounding the full worldwide return to service (including receiving the remaining regulatory approvals) of the B737 MAX, future demand for the aircraft, and any residual impacts of the B737 MAX grounding on production rates for the aircraft;
•our reliance on The Boeing Company (“Boeing”) and Airbus Group SE and its affiliates (collectively, “Airbus”) for a significant portion of our revenues;
•the business condition and liquidity of our customers and their ability to satisfy their contractual obligations to the Company;
•the certainty of our backlog, including the ability of customers to cancel or delay orders prior to shipment on short notice, and the potential impact of regulatory approvals of existing and derivative models;
•our ability to accurately estimate and manage performance, cost, margins, and revenue under our contracts, and the potential for additional forward losses on new and maturing programs;
•our accounting estimates for revenue and costs for our contracts and potential changes to those estimates;
•our ability to continue to grow and diversify our business, execute our growth strategy, and secure replacement programs, including our ability to enter into profitable supply arrangements with additional customers;
•the outcome of product warranty or defective product claims and the impact settlement of such claims may have on our accounting assumptions;
•our dependence on our suppliers, as well as the cost and availability of raw materials and purchased components, including increases in energy, freight, and other raw material costs as a result of inflation or continued global
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inflationary pressures and the continued impact of sanctions being imposed in response to Russia’s invasion of Ukraine;
•our ability and our suppliers’ ability to meet stringent delivery (including quality and timeliness) standards and accommodate changes in the build rates of aircraft, including the ability to staff appropriately for current production volumes and anticipated production volume increases;
•our ability to maintain continuing, uninterrupted production at our manufacturing facilities and our suppliers’ facilities;
•competitive conditions in the markets in which we operate, including in-sourcing by commercial aerospace original equipment manufacturers;
•our ability to successfully negotiate, or re-negotiate, future pricing under our supply agreements with Boeing, Airbus and other customers;
•our ability to effectively integrate the acquisition of select assets of Bombardier along with other acquisitions that we pursue, and generate synergies and other cost savings therefrom, while avoiding unexpected costs, charges, expenses, and adverse changes to business relationships and business disruptions;
•the possibility that our cash flows may not be adequate for our additional capital needs;
•any reduction in our credit ratings;
•our ability to access the capital markets to fund our liquidity needs, and the costs and terms of any additional financing;
•our ability to avoid or recover from cyber or other security attacks and other operations disruptions;
•legislative or regulatory actions, both domestic and foreign, impacting our operations, including the effect of changes in tax laws and rates and our ability to accurately calculate and estimate the effect of such changes;
•our ability to recruit and retain a critical mass of highly skilled employees;
•our relationships with the unions representing many of our employees, including our ability to successfully negotiate new agreements, and avoid labor disputes and work stoppages with respect to our union employees;
•spending by the U.S. and other governments on defense;
•pension plan assumptions and future contributions;
•the effectiveness of our internal control over financial reporting;
•the outcome or impact of ongoing or future litigation, arbitration, claims, and regulatory actions or investigations, including our exposure to potential product liability and warranty claims;
•adequacy of our insurance coverage;
•our ability to continue selling certain receivables through our supplier financing programs; and
•the risks of doing business internationally, including fluctuations in foreign currency exchange rates, impositions of tariffs or embargoes, trade restrictions, compliance with foreign laws, and domestic and foreign government policies.
These factors are not exhaustive and it is not possible for us to predict all factors that could cause actual results to differ materially from those reflected in our forward-looking statements. These factors speak only as of the date hereof, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. As with any projection or forecast, these statements are inherently susceptible to uncertainty and changes in circumstances. Except to the extent required by law, we undertake no obligation to, and expressly disclaim any obligation to, publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should review carefully the section captioned “Risk Factors” in our most recent Annual Report on Form 10-K for a more complete discussion of these and other factors that may affect our business.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of our operating and financing activities, we are exposed to various market risks that may affect our consolidated results of operations and financial position. These market risks include fluctuations in interest rates, which impact the amount of interest we must pay on our variable rate debt. In addition to other information set forth in this report, you should carefully consider the factors discussed in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our 2021 Form 10-K which could materially affect our business, financial condition or results of operations. There have been no material changes in the Company’s market risk from the information provided under “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of the Company’s 2021 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our President and Chief Executive Officer and Senior Vice President and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 29, 2022 and have concluded that these disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management of the Company, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 29, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding any recent material development relating to our legal proceedings since the filing of our 2021 Form 10-K is included in Note 20, Commitments, Contingencies and Guarantees to our condensed consolidated financial statements included in Part I of this Quarterly Report and incorporated herein by reference.
Item 1A. Risk Factors
“Item 1A. Risk Factors” of our 2021 Form 10-K includes a discussion of our known material risk factors, other than risks that could apply to any issuer or offering. There have been no material changes from the risk factors described in our 2021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about our repurchases of our Common Stock that is registered pursuant to Section 12 of the Exchange Act during the three months ended September 29, 2022.
ISSUER PURCHASES OF EQUITY SECURITIES
Period (1) | Total Number of Shares Purchased(1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Repurchased Under the Plans or Programs (2) | |||||||||||||||||||
| ($ in millions other than per share amounts) | |||||||||||||||||||||||
| July 1, 2022 - August 4, 2022 | 1,421 | $32.76 | — | $925.0 | |||||||||||||||||||
| August 5, 2022 - September 1, 2022 | 12,321 | $30.67 | — | $925.0 | |||||||||||||||||||
| September 2, 2022 - September 29, 2022 | 148 | $23.70 | — | $925.0 | |||||||||||||||||||
| Total | 13,890 | $30.84 | — | $925.0 | |||||||||||||||||||
(1) 13,890 shares were transferred to us from employees in satisfaction of tax withholding obligations associated with the vesting of restricted stock awards under the 2014 Omnibus Incentive Plan. No purchases were made under our Board-approved share repurchase program.
(2) The total authorization amount remaining under the Company's Board-approved share repurchase program is $925.0 million. Share repurchases are currently on hold. The Credit Agreement imposes additional restrictions on the Company’s ability to repurchase shares.
Item 3. Defaults Upon Senior Securities
None
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Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
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Item 6. Exhibits
| Exhibit Number | Exhibit | Incorporated by Reference to the Following Documents | ||||||||||||
| Amendment No. 37 to Special Business Provisions (SBP) BCA-MS-65530-0019 by and between Spirit AeroSystems, Inc. and The Boeing Company | ||||||||||||||
| Amendment 48 to Special Business Provisions (SBP) MS-65530-0016 by and between Spirit AeroSystems, Inc. and The Boeing Company | ||||||||||||||
| Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | * | |||||||||||||
| Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | * | |||||||||||||
| Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. | ** | |||||||||||||
| Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. | ** | |||||||||||||
| 101.INS* | Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | * | ||||||||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | * | ||||||||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | * | ||||||||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | * | ||||||||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | * | ||||||||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | * | ||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||||||||
| * | Filed herewith. | |||||||||||||
| ** | Furnished herewith. | |||||||||||||
†† | Indicates that portions of the exhibit have been omitted and separately filed with Securities and Exchange Commission pursuant to a request for confidential treatment | |||||||||||||
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SPIRIT AEROSYSTEMS HOLDINGS, INC.
| Signature | Title | Date | ||||||||||||
| /s/ Mark J. Suchinski | Senior Vice President and Chief Financial | November 3, 2022 | ||||||||||||
| Mark J. Suchinski | Officer (Principal Financial Officer) | |||||||||||||
| Signature | Title | Date | ||||||||||||
| /s/ Damon Ward | Vice President, Corporate Controller | November 3, 2022 | ||||||||||||
| Damon Ward | (Principal Accounting Officer) | |||||||||||||
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