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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 April 2, 2020
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
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 April 29, 2020, the registrant had 105,543,601 shares of class A common stock, $0.01 par value per share, outstanding.
 

1


TABLE OF CONTENTS
 


2



PART 1. FINANCIAL INFORMATION
 
Item 1. Financial Statements (unaudited)
 
Spirit AeroSystems Holdings, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
 
 
For the Three
 Months Ended
 
April 2,
2020
 
March 28,
2019
 
($ in millions, except per share data)
Revenue
$
1,077.3

 
$
1,967.8

Operating costs and expenses
 

 
 

Cost of sales
1,112.5

 
1,658.3

Selling, general and administrative
77.4

 
63.6

Restructuring costs
42.6

 

Research and development
12.3

 
12.9

Total operating costs and expenses
1,244.8

 
1,734.8

Operating (loss) income
(167.5
)
 
233.0

Interest expense and financing fee amortization
(32.2
)
 
(18.8
)
Other expense, net
(49.0
)
 
(11.0
)
(Loss) income before income taxes and equity in net (loss) income of affiliate
(248.7
)
 
203.2

Income tax benefit (provision)
87.2

 
(40.1
)
(Loss) income before equity in net (loss) income of affiliate
(161.5
)
 
163.1

Equity in net loss of affiliate
(1.5
)
 

Net (loss) income
$
(163.0
)
 
$
163.1

(Loss) earnings per share
 

 
 

Basic
$
(1.57
)
 
$
1.57

Diluted
$
(1.57
)
 
$
1.55

 
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
 
April 2,
2020
 
March 28,
2019
 
($ in millions)
Net (loss) income
$
(163.0
)
 
$
163.1

Changes in other comprehensive (loss) gain, net of tax:
 

 
 

Pension, SERP, and Retiree medical adjustments, net of tax effect of $28.8 and $0.1 for the three months ended, respectively
(93.2
)
 
(0.3
)
Unrealized foreign exchange (loss) gain on intercompany loan, net of tax effect of $0.9 and ($0.2) for the three months ended, respectively
(2.9
)
 
0.9

Unrealized loss on interest rate swaps, net of tax effect of $3.0 for the three months ended
(9.8
)
 

Foreign currency translation adjustments
$
(35.8
)
 
$
9.4

Total other comprehensive (loss) gain
(141.7
)
 
10.0

Total comprehensive (loss) income
$
(304.7
)
 
$
173.1

 
See notes to condensed consolidated financial statements (unaudited)

4


Spirit AeroSystems Holdings, Inc.
Condensed Consolidated Balance Sheets
(unaudited) 
 
April 2, 2020
 
December 31, 2019
 
($ in millions)
Assets
 

 
 

Cash and cash equivalents
$
1,833.6

 
$
2,350.5

Restricted cash
0.3

 
0.3

Accounts receivable, net
508.6

 
546.4

Contract assets, short-term
380.9

 
528.3

Inventory, net
1,168.7

 
1,118.8

Other current assets
134.0

 
98.7

Total current assets
4,026.1

 
4,643.0

Property, plant and equipment, net
2,253.2

 
2,271.7

Right of use assets
47.5

 
48.9

Contract assets, long-term
10.4

 
6.4

Pension assets
282.6

 
449.1

Deferred income taxes
192.6

 
106.5

Goodwill
78.5

 
2.4

Intangible assets, net
30.6

 
1.2

Other assets
79.6

 
76.8

Total assets
$
7,001.1

 
$
7,606.0

Liabilities
 
 
 
Accounts payable
$
740.7

 
$
1,058.3

Accrued expenses
286.1

 
240.2

Profit sharing
17.6

 
84.5

Current portion of long-term debt
52.7

 
50.2

Operating lease liabilities, short-term
5.9

 
6.0

Advance payments, short-term
17.8

 
21.6

Contract liabilities, short-term
166.9

 
158.3

Forward loss provision, short-term
91.5

 
83.9

Deferred revenue and other deferred credits, short-term
17.9

 
14.8

Other current liabilities
37.0

 
42.9

Total current liabilities
1,434.1

 
1,760.7

Long-term debt
2,978.2

 
2,984.1

Operating lease liabilities, long-term
41.7

 
43.0

Advance payments, long-term
327.3

 
333.3

Pension/OPEB obligation
50.9

 
35.7

Contract Liabilities, long-term
388.9

 
356.3

Forward loss provision, long-term
146.9

 
163.5

Deferred revenue and other deferred credits, long-term
36.8

 
34.4

Deferred grant income liability — non-current
27.4

 
29.0

Deferred income taxes
8.2

 
8.3

Other non-current liabilities
104.3

 
95.8

Stockholders’ Equity
 
 
 
Common Stock, Class A par value $0.01, 200,000,000 shares authorized, 105,399,855 and 104,882,379 shares issued and outstanding, respectively
1.1

 
1.1

Additional paid-in capital
1,125.6

 
1,125.0

Accumulated other comprehensive loss
(250.9
)
 
(109.2
)
Retained earnings
3,036.9

 
3,201.3

Treasury stock, at cost (41,523,470 shares each period, respectively)
(2,456.8
)
 
(2,456.8
)
Total stockholders' equity
1,455.9

 
1,761.4

Noncontrolling interest
0.5

 
0.5

Total equity
1,456.4

 
1,761.9

Total liabilities and equity
$
7,001.1

 
$
7,606.0

 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, 2019
104,882,379

 
$
1.1

 
$
1,125.0

 
$
(2,456.8
)
 
$
(109.2
)
 
$
3,201.3

 
$
1,761.4

Net loss

 

 

 

 

 
(163.0
)
 
(163.0
)
Dividends Declared(a)

 

 

 

 

 
(1.4
)
 
(1.4
)
Employee equity awards
736,078

 

 
12.3

 

 

 

 
12.3

Stock forfeitures
(83,998
)
 

 

 

 

 

 

Net shares settled
(190,581
)
 

 
(13.0
)
 

 

 

 
(13.0
)
ESPP shares issued
55,977

 

 
1.3

 
 
 
 
 
 
 
1.3

Other comprehensive loss

 

 

 

 
(141.7
)
 

 
(141.7
)
Balance — April 2, 2020
105,399,855

 
$
1.1

 
$
1,125.6

 
$
(2,456.8
)
 
$
(250.9
)
 
$
3,036.9

 
$
1,455.9

 
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, 2018
105,461,817

 
$
1.1

 
$
1,100.9

 
$
(2,381.0
)
 
$
(196.6
)
 
$
2,713.2

 
$
1,237.6

Net income

 

 

 

 

 
163.1

 
163.1

Adoption of ASC 606

 

 

 

 
(8.3
)
 
8.3

 

Dividends Declared(a)

 

 

 

 

 
(12.7
)
 
(12.7
)
Employee equity awards
351,459

 

 
7.7

 

 

 

 
7.7

Stock forfeitures
(27,604
)
 

 

 

 

 

 

Net shares settled
(112,436
)
 

 
(10.0
)
 

 

 

 
(10.0
)
Treasury shares
(796,409
)
 
(0.1
)
 

 
(75.0
)
 

 

 
(75.1
)
Other comprehensive gain

 

 

 

 
10.0

 

 
10.0

Balance — March 28, 2019
104,876,827

 
$
1.0

 
$
1,098.6

 
$
(2,456.0
)
 
$
(194.9
)
 
$
2,871.9

 
$
1,320.6


(a) Cash dividends declared per common share were $0.01 for the three months ended April 2, 2020. Cash dividends declared per common share were $0.12 for the three months ended March 28, 2019.

6


Spirit AeroSystems Holdings, Inc. 
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
For the Three Months Ended
 
April 2, 2020

March 28, 2019
Operating activities
($ in millions)
Net (loss) income
$
(163.0
)
 
$
163.1

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

 
 
Depreciation expense
66.8

 
60.5

Amortization expense
0.5

 

Amortization of deferred financing fees
1.9

 
0.8

Accretion of customer supply agreement
1.1

 
1.1

Employee stock compensation expense
9.8

 
7.7

Loss from derivative instruments

 
9.6

Gain from foreign currency transactions
(6.5
)
 
(0.1
)
Loss (gain) on disposition of assets
0.2

 
(0.1
)
Deferred taxes
(61.5
)
 
8.1

Pension and other post-retirement benefits, net
59.9

 
(6.4
)
Grant liability amortization
(2.4
)
 
(5.7
)
Forward loss provision
(9.0
)
 
(11.3
)
Changes in assets and liabilities
 
 
 
Accounts receivable, net
36.1

 
(68.8
)
Inventory, net
(59.4
)
 
23.5

Contract assets
144.5

 
(57.6
)
Accounts payable and accrued liabilities
(278.6
)
 
129.9

Profit sharing/deferred compensation
(66.7
)
 
(48.0
)
Advance payments
(19.8
)
 
(2.2
)
Income taxes receivable/payable
(32.8
)
 
29.4

Contract liabilities
39.1

 
4.9

Deferred revenue and other deferred credits
6.3

 
11.6

Other
2.2

 
(7.8
)
Net cash (used in) provided by operating activities
(331.3
)
 
242.2

Investing activities
 

 
 

Purchase of property, plant and equipment
(31.0
)
 
(40.8
)
Equity in assets of affiliates
1.5

 

Acquisition, net of cash acquired
(118.1
)
 

Other
0.3

 
0.1

Net cash used in investing activities
(147.3
)
 
(40.7
)
Financing activities
 

 
 

Proceeds from issuance of debt

 
250.0

Proceeds from revolving credit facility

 
100.0

Customer financing
10.0

 

Principal payments of debt
(7.3
)
 
(2.6
)
Payments on term loan
(5.7
)
 

Taxes paid related to net share settlement awards
(13.1
)
 
(10.0
)
Proceeds from issuance of ESPP stock
1.3

 

Debt issuance and financing costs
(4.8
)
 

Purchase of treasury stock

 
(75.0
)
Dividends paid
(12.4
)
 
(12.7
)
Net cash (used in) provided by financing activities
(32.0
)
 
249.7

Effect of exchange rate changes on cash and cash equivalents
(6.2
)
 
(0.3
)
Net (decrease) increase in cash, cash equivalents, and restricted cash for the period
(516.8
)
 
450.9

Cash, cash equivalents, and restricted cash, beginning of period
2,367.2

 
794.1

Cash, cash equivalents, and restricted cash, end of period
$
1,850.4

 
$
1,245.0


7


Reconciliation of Cash, Cash Equivalents, and Restricted Cash:
 
 
 
 
For the Three Months Ended
 
April 2, 2020
 
March 28, 2019
Cash and cash equivalents, beginning of the period
$
2,350.5

 
$
773.6

Restricted cash, short-term, beginning of the period
0.3

 
0.3

Restricted cash, long-term, beginning of the period
16.4

 
20.2

Cash, cash equivalents, and restricted cash, beginning of the period
$
2,367.2

 
$
794.1

 
 
 
 
Cash and cash equivalents, end of the period
$
1,833.6

 
$
1,228.4

Restricted cash, short-term, end of the period
0.3

 
0.3

Restricted cash, long-term, end of the period
16.5

 
16.3

Cash, cash equivalents, and restricted cash, end of the period
$
1,850.4

 
$
1,245.0

See notes to condensed consolidated financial statements (unaudited)

8

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



1.  Organization and Basis of Interim Presentation
 
Spirit AeroSystems Holdings, Inc. (“Holdings” or the “Company”) 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 subsidiary, Spirit AeroSystems, Inc. (“Spirit”). The Company's headquarters are in Wichita, Kansas, with manufacturing and assembly facilities in Tulsa and McAlester, Oklahoma; Prestwick, Scotland; Wichita, Kansas; Kinston, North Carolina; Subang, Malaysia; Saint-Nazaire, France; San Antonio, Texas; and Biddeford, Maine.

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 entities that have functional currencies other than the U.S. dollar are translated to U.S. dollars using the end-of-month translation rate for balance sheet accounts and average period currency translation rates for revenue and income accounts. The U.K. and Malaysian subsidiaries 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 three months ended April 2, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2020 (the “2019 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 2019 Form 10-K. The single update to the significant accounting policies described in the 2019 Form 10-K is related to the impact of adopting ASU No. 2016-13, Financial Instruments - Credit losses (Topic 326) (“ASU 2016-13”) and is described in detail in Note 5, Accounts Receivable, net - Allowance for Credit Losses.

2.  Adoption of New Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, which requires the immediate recognition of management's estimates of current expected credit losses. ASU 2016-13 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2019. Early adoption is permitted after fiscal years beginning December 15, 2018. The Company adopted ASU 2016-13 as of January 1, 2020 by means of the modified retrospective method and required cumulative-effect adjustment to the opening retained earnings as of that date. The cumulative-effect adjustment to the opening retained earnings as of January 1, 2020 was not material. All credit losses in accordance with ASU 2016-13 were on receivables and/or contract assets arising from the Company’s contracts with customers including the cumulative-effect adjustment to the opening retained earnings. There is no significant impact to our operating results for the current period due to ASU 2016-13.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. Certain disclosures in ASU 2018-13 are required to be applied on a retrospective basis and others on a prospective basis. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. There was not a significant impact of adopting this guidance on our consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates Step 2 of the goodwill impairment test and the

9

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


qualitative assessment for any reporting unit with a zero or negative carrying amount. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption did not have an impact on our financial statements.



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. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12”) which modifies FASB Accounting Standards Codification 740 to simplify the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted.  The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years beginning after December 15, 2020, and for interim periods therein with early adoption permitted. Adoption on a retrospective basis for all periods presented is required. The Company is currently evaluating the potential impact of adopting this guidance on our 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. The quarterly and year-to-date forward losses relate primarily to negative changes in estimates on the B787 program due to disruption related to the rate reduction and A350 program due to cost performance and price step downs.

Actual results could differ from these estimates, which were based upon circumstances that existed as of the date of the consolidated financial statements, April 2, 2020. Subsequent to this date, there have been significant changes to the global economic situation and to public securities markets as a consequence of the novel strain of coronavirus ("COVID-19") pandemic. It is reasonably possible that this could cause changes to estimates as a result of the financial circumstances of the markets in which

10

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


the Company operates, the price of the Company’s publicly traded equity in comparison to the Company’s carrying value, and the health of the global economy.

Changes in estimates are summarized below:

 
 
For the Three Months Ended
Changes in Estimates
 
April 2, 2020

March 28, 2019
(Unfavorable) Favorable Cumulative Catch-up Adjustment by Segment
 
 
 
 
Fuselage
 
$
(4.0
)
 
$
(1.2
)
Propulsion
 
(1.5
)
 
(2.8
)
Wing
 
(2.7
)
 
(0.2
)
Total (Unfavorable) Favorable Cumulative Catch-up Adjustment
 
$
(8.2
)
 
$
(4.2
)
 
 
 
 
 
Changes in Estimates on Loss Programs (Forward Loss) by Segment
 
 
 
 
Fuselage
 
$
(13.2
)
 
$
3.7

Propulsion
 
(3.1
)
 
0.5

Wing
 
(3.4
)
 
0.5

Total Changes in Estimates (Forward Loss) on Loss Programs
 
$
(19.7
)
 
$
4.7

 
 
 
 
 
Total Change in Estimate
 
$
(27.9
)
 
$
0.5

EPS Impact (diluted per share based upon 2020 forecasted effective tax rate)
 
$
(0.17
)
 
$



5.  Accounts Receivable, net
 
Accounts receivable represent the Company’s unconditional rights to consideration, subject to the payment terms of the contract, for which only the passage of time is required before payment. Unbilled receivables are reflected under contract assets on the balance sheet. Prior periods allowance for credit losses were based on legacy GAAP. Beginning January 1, 2020, management assesses and records an allowance for credit losses using a current expected credit loss ("CECL") model. See Allowance for Credit Losses, below.

Accounts receivable, net consists of the following:
 
April 2,
2020
 
December 31,
2019
Trade receivables
$
481.4

 
$
515.2

Other
28.1

 
32.6

Less: allowance for doubtful accounts
(0.9
)
 
(1.4
)
Accounts receivable, net
$
508.6

 
$
546.4


The Company has two agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing and Airbus to third party financial institutions. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with the Company and continue to allow Spirit to monetize prior to the payment date for the receivables, subject to payment of a discount. No guarantees are delivered under the agreements. Our ability to continue using such agreements is primarily dependent upon the strength of Boeing’s and Airbus’s financial condition. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being derecognized from the Company's balance sheet. For the three months ended April 2, 2020, $718.1 of accounts receivable have been sold via these arrangements. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on

11

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


sale of receivables is $3.1 for the three months ended April 2, 2020 and is included in Other income and expense. See Note 21, Other (Expense) Income, Net.

Allowance for Credit Losses

Beginning January 1, 2020, management assesses and records an allowance for credit losses on financial assets within the scope of ASU 2016-13 using the CECL model. Prior periods allowance for credit losses were based on a review of outstanding receivables that are charged off against the allowance after the potential for recovery is considered remote in accordance with legacy GAAP. The amount necessary to adjust the allowance for credit losses to management’s current estimate, as of the reporting date, on these assets is recorded in net income as credit loss expense. All credit losses reported in accordance with ASU 2016-13 were on trade receivables and/or contract assets arising from the Company’s contracts with customers.

In determining the appropriate methodology to use within the CECL model for receivables and contract assets arising from the Company’s contracts with customers, the Company considered the risk characteristics of the applicable assets. Spirit segregated the trade receivables and Contract Assets into “pools” of assets at the major customer level. The Company's assessment was based on similarity of risk characteristics shared by these pool of assets. Management observed that risks for collectability, with regard to the trade receivables and contract assets resulting from contracts with customers include: macro level economic conditions that impact all of Spirit’s customers, macro level market conditions that could impact Spirit’s customers in certain aircraft categories, certain customer specific market conditions, certain customer specific economic conditions, certain customer specific administrative conditions.

The Company selected a loss-rate method for the CECL model, based on the relationship between historical write-offs of receivables and the underlying sales by major customer. Utilizing this model, a historical loss-rate is applied against the amortized cost of applicable assets, at the time the asset is established. The loss rate reflects the Company’s current estimate of the risk of loss (even when that risk is remote) over the expected remaining contractual life of the assets. The Company's policy is to deduct write-offs from the allowance for credit losses account in the period in which the financial assets are deemed uncollectible.

The changes to the allowance for credit losses and related credit loss expense reported for the current period were solely based on the unadjusted results of the CECL model. During the reported period, 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 CECL methodology. The beginning balances, current period activity, and ending balances of the allocation for credit losses on accounts receivable and contract assets were not material.


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 April 2, 2020 or the period ended March 28, 2019. See also Note 5, Accounts Receivable, net - Allowance for Credit Losses.

Contract liabilities are established for cash received that is in excess of revenues recognized and are contingent upon the satisfaction of performance obligations. Contract liabilities primarily consist of cash received on contracts for which revenue has been deferred since the receipts are in excess of transaction price resulting from the allocation of consideration based on relative standalone selling price to future units (including those under option that the Company believes are likely to be exercised) with prices that are lower than standalone selling price. These contract liabilities will be recognized earlier if the options are not fully exercised, or immediately, if the contract is terminated prior to the options being fully exercised.

 
April 2, 2020

December 31, 2019

Change

Contract assets
$
391.3

$
534.7

$
(143.4
)
Contract liabilities
(555.8
)
(514.6
)
(41.2
)
Net contract assets (liabilities)
$
(164.5
)
$
20.1

$
(184.6
)



12

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


For the period ended April 2, 2020, the decrease in contract assets reflects the net impact of less overtime revenue recognition in relation to billed revenues during the period. The increase in contract liabilities reflects the net impact of additional deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $33.1 of revenue that was included in the contract liability balance at the beginning of the period.
 
March 28, 2019

December 31, 2018

Change

Contract assets
$
582.2

$
523.5

$
58.7

Contract liabilities
(532.4
)
(527.7
)
(4.7
)
Net contract assets (liabilities)
$
49.8

$
(4.2
)
$
54.0


For the period ended March 28, 2019, the increase in contract assets reflects the net impact of additional revenues recognized in excess of billed revenues during the period. The increase in contract liabilities reflects the net impact of additional deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $19.4 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 three months ended April 2, 2020 and March 28, 2019:

 
 
For the Three
 Months Ended
Revenue
 
April 2,
2020
March 28,
2019
Contracts with performance obligations satisfied over time
 
$
605.9

$
1,479.7

Contracts with performance obligations satisfied at a point in time
 
471.4

488.1

Total Revenue
 
$
1,077.3

$
1,967.8


The following table disaggregates revenue by major customer:
 
 
For the Three
 Months Ended
Customer
 
April 2,
2020
March 28,
2019
Boeing
 
$
676.1

$
1,548.4

Airbus
 
287.2

329.8

Other
 
114.0

89.6

Total Revenue
 
$
1,077.3

$
1,967.8


The following table disaggregates revenue based upon the location where control of products are transferred to the customer:

13

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


 
 
For the Three
 Months Ended
Location
 
April 2,
2020
March 28,
2019
United States
 
$
782.5

$
1,627.9

International
 
 
 
United Kingdom
 
184.1

209.5

Other
 
110.7

130.4

Total International
 
294.8

339.9

Total Revenue
 
$
1,077.3

$
1,967.8



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 2020

2021

2022

2023 and After

Unsatisfied performance obligations
$
2,955.1

$
4,716.9

$
4,806.7

$
2,767.4



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 preproduction 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.

 
April 2,
2020
 
December 31,
2019
Raw materials
$
321.0

 
$
253.1

Work-in-process(1)
803.1

 
822.8

Finished goods
16.8

 
14.5

Product inventory
1,140.9

 
1,090.4

Capitalized pre-production
27.8

 
28.4

Total inventory, net
$
1,168.7

 
$
1,118.8



(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 using the input method. For the periods ended April 2, 2020 and December 31, 2019, work-in-process inventory includes $158.2 and $157.2, respectively, of costs incurred in anticipation of specific contracts and no impairments were recorded in the period.

Product inventory, summarized in the table above, is shown net of valuation reserves of $42.2 and $39.0 as of April 2, 2020 and December 31, 2019, respectively.

Excess capacity and abnormal costs are excluded from inventory and recognized as expense in the period incurred. Cost of sales for the period ended April 2, 2020 includes the impact of $73.4 in excess capacity costs related to the B737 MAX production schedule adjustment that began on January 1, 2020, and the impact of $25.4 in abnormal costs of temporary workforce adjustments resulting from the COVID-19 Boeing production suspension that began on March 25, 2020.


14

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



9.  Property, Plant and Equipment, net
 
Property, plant and equipment, net consists of the following: 
 
 
April 2,
2020
 
December 31,
2019
Land
$
17.2

 
$
15.9

Buildings (including improvements)
926.5

 
924.0

Machinery and equipment
1,989.9

 
1,941.5

Tooling
1,051.3

 
1,047.4

Capitalized software
277.3

 
277.8

Construction-in-progress
178.3

 
192.8

Total
4,440.5

 
4,399.4

Less: accumulated depreciation
(2,187.3
)
 
(2,127.7
)
Property, plant and equipment, net
$
2,253.2

 
$
2,271.7



Capitalized interest was $1.2 and $2.1 for the three months ended April 2, 2020 and March 28, 2019, respectively. Repair and maintenance costs are expensed as incurred. The Company recognized repair and maintenance costs of $30.5 and $35.6 for the three months ended April 2, 2020 and March 28, 2019, 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 $4.3 and $4.3 for the three months ended April 2, 2020 and March 28, 2019, respectively.
 
The Company reviews capital and amortizing intangible assets (long-lived assets) for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  For the period ended April 2, 2020, the Company determined that the economic uncertainty caused by the COVID-19 pandemic was a trigger for an impairment review of long-lived assets. As a result of management’s review, we determined that there is no impairment related to COVID-19 as of April 2, 2020.

10. Leases
The Company determines if an arrangement is a lease at the inception of a signed agreement. Operating leases are included in in right-of-use (“ROU”) assets (long-term), short-term operating lease liabilities, and long-term operating lease liabilities on the Company’s consolidated balance sheet. Finance leases are included in Property, Plant and Equipment, current 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.
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

15

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


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 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.
For the three months ended April 2, 2020, total net lease cost was $9.6. This was comprised of $2.2 of operating lease costs, $5.8 amortization of assets related to finance leases, and $1.6 interest on finance lease liabilities. For the three months ended March 28, 2019, total net lease cost was $4.4. This was comprised of $2.2 of operating lease costs, $1.8 amortization of assets related to finance leases, and $0.4 interest on finance lease liabilities.

Supplemental cash flow information related to leases was as follows:
 
For the Three Months Ended
For the Three Months Ended
 
April 2, 2020
March 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
$
2.2

$
2.2

Operating cash flows from finance leases
$
1.6

$
0.4

Financing cash flows from finance leases
$
6.7

$
1.8

 
 
 
ROU assets obtained in exchange for lease obligations:
 
 
Operating leases
$
0.2

$
0.1

Supplemental balance sheet information related to leases:
 
April 2, 2020
December 31, 2019
Finance leases:
 
 
Property and equipment, gross
$
194.8

$
165.5

Accumulated amortization
(28.9
)
(23.5
)
Property and equipment, net
$
165.9

$
142.0


The weighted average remaining lease term as of April 2, 2020 for operating and finance leases was 10.1 years and 6.2 years, respectively. The weighted average discount rate as of April 2, 2020 for operating and finance leases was 5.6% and 4.2%, respectively. The weighted average remaining lease term as of December 31, 2019 for operating and finance leases was 10.2 years and 6.5 years, respectively. The weighted average discount rate as of December 31, 2019 for operating and finance leases was 5.6% and 4.3%, respectively. See Note 15, Debt, for current and non-current finance lease obligations. There has not been a significant impact on lease terms, costs, cash flows, or balance sheet values, including any impairment of lease assets, as a result of the COVID-19 pandemic.

As of April 2, 2020, remaining maturities of lease liabilities were as follows:
 
2020

2021

2022

2023

2024

2025 and thereafter

Total Lease Payments

Less: Imputed Interest
Total Lease Obligations

Operating Leases
$
6.4

$
7.5

$
7.1

$
6.1

$
5.6

$
30.3

$
63.0

$
(15.4
)
$
47.6

Financing Leases
$
25.3

$
33.4

$
29.6

$
25.5

$
20.0

$
37.1

$
170.9

$
(21.1
)
$
149.8


As of April 2, 2020, the Company had additional operating and financing lease commitments that have not yet commenced of approximately $2.8 and $51.9 for manufacturing equipment and facilities which are in various phases of construction or

16

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


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 Assets are summarized as follows:

April 2,
2020

December 31,
2019
Deferred financing
 


 

Deferred financing costs
45.1


41.7

Less: Accumulated amortization - deferred financing costs
(37.5
)

(36.9
)
Deferred financing costs, net
7.6


4.8

Other
 


 

Supply agreements(1)
10.1


11.5

Equity in net assets of affiliates
6.2


7.7

Restricted cash - collateral requirements
16.5


16.4

Other
39.2


36.4

Total
$
79.6


$
76.8

 

(1)
Certain payments accounted for as consideration paid by the Company to a customer are being amortized as reductions to net revenues.



Goodwill is summarized as follows:
 
April 2,
2020
 
December 31,
2019
Goodwill - United Kingdom
2.3

 
2.4

Goodwill - United States(1)
76.2

 

Total
$
78.5

 
$
2.4


(1) The acquisition of Fiber Materials Inc. ("FMI") on January 10, 2020 resulted in the establishment of $76.2 goodwill. Management used its best judgment to assess the potential impact of COVID-19 pandemic on the valuation of this goodwill as of April 2, 2020.

17

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



The changes in the allocation of goodwill by reportable segment within the period ended April 2, 2020 reflect the FMI acquisition. The goodwill balance as of December 31, 2019 of $2.4 is allocated to the Wing Systems Segment. The balance as of April 2, 2020 is allocated $43.0 to the Fuselage Systems Segment, $33.2 to the Propulsion Systems Segment, and $2.3 to the Wing Systems Segment. The total goodwill value of $78.5 includes no accumulated impairment loss in any of the periods presented. The change in value from December 31, 2019 to April 2, 2020 for the Europe goodwill item, as seen in the table above, reflects net exchange differences arising during the period.


Intangible assets are summarized as follows:
 
April 2,
2020
 
December 31,
2019
Intangible assets
 

 
 

Patents
$
2.0

 
$
2.0

Favorable leasehold interests
2.8

 
2.8

Developed technology asset(1)
30.0

 

Total intangible assets
34.8

 
4.8

Less: Accumulated amortization - patents
(2.0
)
 
(1.9
)
    Accumulated amortization - favorable leasehold interest
(1.7
)
 
(1.7
)
         Accumulated amortization - developed technology asset
(0.5
)
 

Intangible assets, net
30.6

 
1.2


(1) The acquisition of FMI on January 10, 2020 resulted in the establishment of a $30.0 intangible asset for developed technology as of April 2, 2020. Management used its best judgment to assess the potential impact of COVID-19 pandemic on the valuation of this intangible asset.


The amortization for each of the five succeeding years relating to intangible assets currently recorded in the condensed consolidated balance sheet and the weighted average amortization is estimated to be the following as of April 2, 2020:
Year
Patents
Favorable leasehold interest
Developed Technology
Total
remaining in 2020

0.1

1.5

1.6

2021

0.1

2.0

2.1

2022

0.1

2.0

2.1

2023

0.1

2.0

2.1

2024

0.1

2.0

2.1

2025

0.1

2.0

2.1

 
 
 
 
 
Weighted average amortization period

9.5

15.0

14.8





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, the Company signed a memorandum of agreement with Boeing that suspended advance repayments related to the B787 program for a period of twelve months beginning April 1, 2014. Repayment recommenced on April 1, 2015, and any repayments that otherwise would have become due during such

18

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


twelve-month period will offset the purchase price for shipsets 1,001 through 1,120. On December 21, 2018, the Company signed the 2018 MOA with Boeing that again suspended the advance repayments beginning with line unit 818. The advance repayments will resume at a lower rate of $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 $42.0 due on December 15th of each year until the advance payments have been fully recovered by Boeing. As of April 2, 2020, the amount of advance payments received by us from Boeing under the B787 Supply Agreement and not yet repaid was approximately $212.1.

Advances on the B737 Program. On April 12, 2019, Boeing and the Company executed a Memorandum of Agreement (the “2019 MOA”) relating to Spirit's production of aircraft with respect to the B737 program. In an effort to minimize the disruption to Spirit's operations and its supply chain, the 2019 MOA included the terms and conditions for an advance payment to be made from Boeing to Spirit in the amount of $123.0, which was received during the third quarter of 2019. On February 6, 2020, Boeing and Spirit entered into a Memorandum of Agreement (the “2020 MOA”). The 2020 MOA extended the repayment date of the $123 million advance received by Spirit under the 2019 MOA to 2022. The 2020 MOA also required Boeing to pay $225 to Spirit in the first quarter of 2020, consisting of (i) $70 in support of Spirit’s inventory and production stabilization, of which $10 will be repaid by Spirit in 2021, and (ii) $155 as an incremental pre-payment for costs and shipset deliveries over the next two years.

13.  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 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 April 2, 2020, the Company’s long-term debt includes the 2018 Term Loan and 2018 Revolver (as such terms are defined below), senior secured notes, and senior unsecured notes. The estimated fair value of the Company’s debt obligations is based on the quoted market prices for such obligations or the historical default rate for debt with similar credit ratings. The following table presents the carrying amount and estimated fair value of long-term debt:
 

19

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


 
April 2, 2020
 
December 31, 2019
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
2018 Term Loan (including current portion)
$
432.4

 
$
404.9

(2)
$
438.5

 
$
440.1

(2)
2018 Revolver
800.0

 
800.0

(2)
800.0

 
800.0

(2)
Senior unsecured floating rate notes due 2021
299.3

 
286.3

(1)
299.1

 
298.4

(1)
Senior unsecured notes due 2023
298.4

 
254.0

(1)
298.3

 
307.2

(1)
Senior secured notes due 2026
297.9

 
257.1

(1)
297.8

 
305.6

(1)
Senior unsecured notes due 2028
694.2

 
576.3

(1)
694.1

 
734.4

(1)
Total
$
2,822.2

 
$
2,578.6

 
$
2,827.8

 
$
2,885.7

 

 
(1)
Level 1 Fair Value hierarchy
(2)
Level 2 Fair Value hierarchy 

On April 17, 2020, Spirit issued the 2025 Notes (as defined below). The 2025 Notes are not reflected in the table above.


14.  Derivative and Hedging Activities
 
The Company has traditionally entered into interest rate swap agreements to reduce its exposure to the variable rate portion of its long-term debt. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values.

The Company has historically entered into derivative instruments covered by master netting arrangements whereby, in the event of a default as defined by the 2018 Credit Agreement (as defined below) or termination event, the non-defaulting party has the right to offset any amounts payable against any obligation of the defaulting party under the same counterparty agreement. See Note 15, Debt, for more information.

Derivatives Not Accounted for as Hedges

Interest Rate Swaps
     
On March 15, 2017, the Company entered into an interest rate swap agreement, with an effective date of March 31, 2017. The swaps have a notional value of $250.0 and fix the variable portion of the Company’s floating rate debt at 1.815%. The swap expired in March 2020. The fair value of the swap, using Level 2 inputs, was a liability of $0.0 as of April 2, 2020 and $0.1 as of December 31, 2019. The Company recorded $0.0 swap activity for the three months ended April 2, 2020.


Derivatives Accounted for as Hedges

Cash Flow Hedges

During the third quarter of 2019, the Company entered into two interest rate swap agreements with a combined notional value of $450.0. These derivatives have been designated as cash flow hedges by the Company. The fair value of these hedges was a liability of $13.7 as of April 2, 2020.

Changes in the fair value of cash flow hedges are recorded in Accumulated Other Comprehensive Income ("AOCI") and recorded in earnings in the period in which the hedged transaction occurs. The loss recognized in AOCI was $12.9 for the three months ended April 2, 2020. For the three months ended April 2, 2020, a loss of $0.1 was reclassified from AOCI to earnings. Within the next 12 months, the Company expects to recognize a loss of $5.7 in earnings related to these hedged contracts. As of April 2, 2020, the maximum term of hedged forecasted transactions was 3 years.



20

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


15.  Debt
 
Total debt shown on the balance sheet is comprised of the following: 
 
April 2, 2020
 
December 31, 2019
 
Current
Noncurrent
 
Current
Noncurrent
2018 Term Loan
$
22.7

$
409.7

 
$
22.8

$
415.7

2018 Revolver

800.0

 

800.0

Senior unsecured floating rate notes due 2021

299.3

 

299.1

Senior unsecured notes due 2023

298.4

 

298.3

Senior secured notes due 2026

297.9

 

297.8

Senior unsecured notes due 2028

694.2

 

694.1

Present value of finance lease obligations
28.2

121.6

 
25.8

121.3

Other
1.8

57.1

 
1.6

57.8

Total
$
52.7

$
2,978.2

 
$
50.2

$
2,984.1





2018 Credit Agreement

On July 12, 2018, the Company entered into a $1,256.0 senior unsecured Second Amended and Restated Credit Agreement (the “2018 Credit Agreement”) among Spirit, as borrower, the Company, as parent guarantor, the lenders party thereto, Bank of America, N.A., as administrative agent, (the “Administrative Agent”) and the other agents named therein, consisting of a $800.0 revolving credit facility (the “2018 Revolver”), a $206.0 term loan A facility (the “2018 Term Loan”) and a $250.0 delayed draw term loan facility (the “2018 DDTL”).

Each of the 2018 Revolver, the 2018 Term Loan and the 2018 DDTL matures on July 12, 2023, and prior to the February 2020 Amendment (as defined below), bears interest, at Spirit’s option, ranging between LIBOR plus 1.125% and LIBOR plus 1.875% (or between base rate plus 0.125% and base rate plus 0.875%, as applicable) based on Spirit’s senior unsecured ratings provided by Standard & Poor’s Financial Services LLC (“S&P”) and/or Moody’s Investors Service, Inc. (“Moody’s”) The principal obligations under the 2018 Term Loan are to be repaid in equal quarterly installments of $2.6, commencing with the fiscal quarter ending March 31, 2019, and with the balance due at maturity of the 2018 Term Loan. The principal obligations under the 2018 DDTL are to be repaid in equal quarterly installments of $3.1, subject to adjustments for any extension of the availability period of the 2018 DDTL, commencing with the fiscal quarter ending June 27, 2019, and with the balance due at maturity of the 2018 DDTL.

The 2018 Credit Agreement also contains an accordion feature that provides Spirit with the option to increase the 2018 Revolver commitments and/or institute one or more additional term loans by an amount not to exceed $750.0 in the aggregate, subject to the satisfaction of certain conditions and the participation of the lenders. The 2018 Credit Agreement contains customary affirmative and negative covenants, including certain financial covenants that are tested on a quarterly basis. Spirit’s obligations under the 2018 Credit Agreement may be accelerated upon an event of default, which includes non-payment of principal or interest, material breach of a representation or warranty, material breach of a covenant, cross-default to material indebtedness, material judgments, ERISA events, change in control, bankruptcy and invalidity of the guarantee of Spirit’s obligations under the 2018 Credit Agreement made by the Company.
Under the 2018 Credit Agreement, the pricing table and tiers are as follows.

21

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


Pricing Tier
Credit Rating (S&P/Moody's)
 
Revolving Commitment
Fee
 
Applicable Rate For LIBOR Loans and Letter of Credit Fees
 
Applicable Rate for Base Rate Loans
I
Greater than or equal to BBB+ / Baa1
 
0.125%
 
1.125%
 
0.125%
II
BBB / Baa2
 
0.150%
 
1.250%
 
0.250%
III
BBB- / Baa3
 
0.200%
 
1.375%
 
0.375%
IV
BB+ / Ba1
 
0.300%
 
1.625%
 
0.625%
V
BB / Ba2
 
0.375%
 
1.875%
 
0.875%

The February 2020 Amendment
On February 24, 2020, the Company entered into an amendment (the “February 2020 Amendment”) to the 2018 Credit Agreement among Spirit, as borrower, Holdings, as parent guarantor, the lenders party thereto, the Administrative Agent, and the other agents named therein. On February 24, 2020, Spirit also entered into a $375.0 senior unsecured delayed draw term loan among Spirit, as borrower, Holdings, as parent guarantor, Spirit NC (as defined below), the lenders party thereto, and the Administrative Agent (the “2020 DDTL”). Under the terms of the 2020 DDTL, if Spirit receives net cash proceeds from issuances of indebtedness or equity that exceed the amount of the 2020 DDTL, the commitments under that facility will be canceled and any amounts outstanding prepaid.

The primary purpose for entering into the February 2020 Amendment was to obtain covenant relief with respect to expected breaches of the total leverage ratio and interest coverage ratios under the 2018 Credit Agreement. Given the production suspension beginning on January 1, 2020 and lower 2020 production rate for the B737 MAX, absent a waiver or an amendment of the 2018 Credit Agreement, the Company was expected to breach the total leverage ratio beginning with the first fiscal quarter of 2020 and continuing into 2021. The February 2020 Amendment waived or modified the testing of the ratios set forth in the 2018 Credit Agreement until the commencement of the second fiscal quarter of 2021 (the “Reversion Date”) and put the following financial ratios and tests in place for such time period:
Senior Secured Leverage Ratio: Commencing with the first fiscal quarter of 2020, the ratio of senior secured debt to consolidated EBITDA over the last twelve months shall not, as of the end of the applicable fiscal quarter, be greater than: (i) 3.00:1.00, with respect to the first fiscal quarter of 2020; (ii) 4.25:1.00, with respect to the second fiscal quarter of 2020; (iii) 5.50:1.00, with respect to the third fiscal quarter of 2020; (iv) 5.00:1.00, with respect to the fourth fiscal quarter of 2020; and (v) 3.00:1.00, with respect to the first fiscal quarter of 2021.
Interest Coverage Ratio: Commencing with the first fiscal quarter of 2020, the interest coverage ratio as of the end of the applicable fiscal quarter shall not be less than: (i) 4.00:1.00, with respect to the first fiscal quarter of 2020; (ii) 3.75:1.00, with respect to the second fiscal quarter of 2020; (iii) 2.50:1.00, with respect to the third fiscal quarter of 2020; (iv) 2.25:1.00, with respect to the fourth fiscal quarter of 2020; and (v) 3.75:1.00, with respect to the first fiscal quarter of 2021.
Minimum Liquidity: As of the end of each fiscal month, commencing with the first fiscal month after entering into the 2020 Amendment, the Company shall have minimum liquidity of not less than: (i) $1,000 through, and including, the last fiscal month ending in the third fiscal quarter of 2020; (ii) $850, as of the end of each fiscal month ending in the fourth fiscal quarter of 2020; and (iii) $750 , as of the end of each fiscal month ending in the first fiscal quarter of 2021; provided, however, that if the Company receives proceeds of at least $750 from the issuance of indebtedness before the Reversion Date, the minimum liquidity requirement shall remain at $1,000. Liquidity includes cash and cash equivalents and amounts available to be drawn under the 2018 Revolver and the 2020 DDTL.
The February 2020 Amendment provided that, upon the Reversion Date, the ratios will revert back to the ratios in the 2018 Credit Agreement except that the total leverage ratio will be 4.00:1.00, with respect to the second fiscal quarter of 2021, returning to 3.50:1:00 thereafter. The Senior Secured Leverage Ratio and minimum liquidity covenants will no longer be applicable following the Reversion Date.
The February 2020 Amendment added Spirit AeroSystems North Carolina, Inc. as an additional guarantor (“Spirit NC”) and provides for the grant of security interests to the lenders under the 2018 Credit Agreement with respect to certain real property and personal property, including certain equity interests, owned by Spirit, as borrower, and the Guarantors (as defined below), which include the Company and Spirit NC. Such guarantee and security interests will be released, at the option of Spirit, so long as no default or event of default shall exist at the time thereof, or immediately after giving effect thereto, if (A) (I) the senior unsecured debt rating of Spirit is “BBB-” or higher as determined by S&P, and (II) the senior unsecured debt rating of Spirit is “Baa3” or higher as determined by Moody’s, or (B) S&P and Moody’s have each confirmed, in a writing in form and substance

22

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


reasonably satisfactory to the administrative agent, that (I) the senior unsecured debt rating of Spirit will be “BBB-” or higher as determined by S&P, and (II) the senior unsecured debt rating of Spirit will be “Baa3” or higher as determined by Moody’s, in each case of the foregoing clauses (B)(I) and (B)(II), after giving effect to the release of the security (the date of such release, the “Security Release Date”).
The February 2020 Amendment also added increased restrictions on our ability to incur additional indebtedness, consolidate or merge, make acquisitions and other investments (although the Asco Acquisition and the Bombardier Acquisition (each as defined below) are expressly permitted thereunder), guarantee obligations of third parties, make loans or advances, declare or pay certain dividends or distributions on our stock, redeem or repurchase shares of our stock, or pledge assets. The February 2020 Amendment provides that a number of these increased restrictions will no longer apply following the Security Release Date. The accordion feature to increase the 2018 Revolver commitments and/or institute one or more additional term loans will not be available to Spirit during the period between the effective date of the February 2020 Amendment and the Security Release Date.
Spirit’s obligations under the 2018 Credit Agreement may be accelerated upon an event of default, which includes non-payment of principal or interest, material breach of a representation or warranty, breach of a covenant, cross-default to material indebtedness, material judgments, ERISA events, change in control, bankruptcy and invalidity of the guarantee of Spirit’s obligations under the Credit Agreement made by the Company. The February 2020 Amendment added new events of default for validity, perfection and priority of liens and the public announcement by Boeing of the termination or permanent cessation of the B737 MAX program that will no longer apply following the Security Release Date.
Under the February 2020 Amendment, the pricing table and tiers were updated to reflect the below. The pricing table was further updated under the April 2020 Amendment (as described below).

Pricing Tier
Credit Rating (S&P/Moody's)
 
Revolving Commitment
Fee
 
Applicable Rate For LIBOR Loans and Letter of Credit Fees
 
Applicable Rate for Base Rate Loans
I
Greater than or equal to BBB+ / Baa1
 
0.125%
 
1.625%
 
0.625%
II
BBB / Baa2
 
0.150%
 
1.750%
 
0.750%
III
BBB- / Baa3
 
0.200%
 
1.875%
 
0.875%
IV
BB+ / Ba1
 
0.300%
 
2.125%
 
1.125%
V
BB / Ba2
 
0.375%
 
2.375%
 
1.375%
VI
Less than or equal to BB- / Ba3
 
0.500%
 
2.625%
 
1.625%

April 2020 Amendment
The April 2020 Amendment. On April 13, 2020, Spirit, the Company, and Spirit NC entered into a further amendment to the 2018 Credit Agreement (the “April 2020 Amendment”). The April 2020 Amendment became effective upon April 17, 2020, when Spirit issued the 2025 Notes. As a result of the issuance of the 2025 Notes and the effectiveness of the April 2020 Amendment, the commitments under the 2020 DDTL were canceled in full and the facility was terminated.
The primary purpose for entering into the April 2020 Amendment was to permit Spirit to issue the 2025 Notes and provide covenant flexibility for future capital raises and to take into account market conditions. The April 2020 Amendment waived or modified the testing of the ratios set forth in the 2018 Credit Agreement, as amended, by the February 2020 Amendment, and put the following financial ratios and tests in place:

First Lien Leverage Ratio: Commencing with the first fiscal quarter of 2020, the ratio of first lien senior secured debt to consolidated EBITDA over the last twelve months shall not, as of the end of the applicable fiscal quarter, be greater than: (i) 3.00:1.00, with respect to the first fiscal quarter of 2020; (ii) 4.50:1.00, with respect to the second fiscal quarter of 2020; (iii) 6.50:1.00, with respect to the third fiscal quarter of 2020; (iv) 6.75:1.00, with respect to the fourth fiscal quarter of 2020; (v) 5.00:1.00, with respect to the first fiscal quarter of 2021; (vi) 4.50:1.00, with respect to the second fiscal quarter of 2021; (vii) 3.50:1.00, with respect to the third fiscal quarter of 2021; and (viii) 3.00:1.00 thereafter through the fourth fiscal quarter of 2022.


23

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


Interest Coverage Ratio: Commencing with the first fiscal quarter of 2020, the interest coverage ratio shall not, as of the end of the applicable fiscal quarter, be less than: (i) 4.00:1.00, with respect to the first fiscal quarter of 2020; (ii) 2.25:1.00, with respect to the second fiscal quarter of 2020; (iii) 1.25:1.00, with respect to the third fiscal quarter of 2020; (iv) 1.25:1.00, with respect to the fourth fiscal quarter of 2020; (v) 1.75:1.00, with respect to the first fiscal quarter of 2021; (vi) 2.25:1.00, with respect to the second fiscal quarter of 2021; (vii) 2.50:1.00, with respect to the third fiscal quarter of 2021; (viii) 2.75:1.00, with respect to the fourth fiscal quarter of 2021; (ix) 3.00:1.00, with respect to the first fiscal quarter of 2022; (x) 3.25:1.00, with respect to the second fiscal quarter of 2022; (xi) 3.75:1.00 with respect to the third fiscal quarter of 2022; (xii) 3.75:1.00 with respect to the fourth fiscal quarter of 2022; and (xiii) 4.00:1.00 thereafter.

Total Leverage Ratio: Testing of the total leverage ratio will be suspended until the first fiscal quarter of 2022. Commencing with the first fiscal quarter of 2022, the ratio of indebtedness to consolidated EBIDTA over the last twelve months, shall not, as of the end of the applicable fiscal quarter, be greater than (i) 5.50:1.00, with respect to the first fiscal quarter of 2022; (ii) 5.00:1:00, with respect to the second fiscal quarter of 2022; (iii) 4.75:1.00, with respect to the third fiscal quarter of 2022; (iv) 4.50:1.00, with respect to the fourth fiscal quarter of 2022; and (v) 3.50:1.00 thereafter.

Minimum Liquidity: As of the end of each fiscal month, commencing with the first fiscal month until the end of the fourth fiscal quarter of 2021, the Company shall have minimum liquidity of not less than $1,000.

The April 2020 Amendment provides that, following the fourth fiscal quarter of 2022, the ratios will revert back to the ratios in the 2018 Credit Agreement prior to giving effect to any amendments. The minimum liquidity covenant will no longer be applicable following the fourth fiscal quarter of 2021. The first lien leverage ratio will no longer be applicable following the fourth fiscal quarter of 2022.

Additionally, the April 2020 Amendment also requires Spirit to demonstrate pro-forma compliance with the financial covenants set forth in the 2018 Credit Agreement for future borrowings under the 2018 Revolver.

All 2018 Revolver draws and other credit extensions under the 2018 Credit Agreement are subject to the Company making a representation that no material adverse effect has occurred on the Company’s operations, business, assets, properties, liabilities, or financial condition (among other items) since a specified date. The April 2020 Amendment added a provision that the impacts of the COVID-19 pandemic on the business, operations and/or financial condition of the Company occurring prior to December 31, 2020 that were publicly disclosed or disclosed to the Administrative Agent prior to the effectiveness of the April 2020 Amendment will be disregarded when considering whether a material adverse effect has occurred when this representation is made.

Each of the 2018 Revolver, the 2018 Term Loan and the 2018 DDTL continues to mature on July 12, 2023, and, following the effectiveness of the April 2020 Amendment, will bear interest at a rate, at Spirit’s option, ranging between LIBOR plus 3.125% and LIBOR plus 4.125% (or between base rate plus 2.125% and base rate plus 3.125%, as applicable) based on Spirit’s senior unsecured ratings provided by S&P and/or Moody’s as reflected in the pricing table below:
Pricing Tier
Credit Rating (S&P/Moody's)
 
Revolving Commitment
Fee
 
Applicable Rate For LIBOR Loans and Letter of Credit Fees
 
Applicable Rate for Base Rate Loans
I
Greater than or equal to BBB+ / Baa1
 
0.250%
 
3.125%
 
2.125%
II
BBB / Baa2
 
0.275%
 
3.250%
 
2.250%
III
BBB- / Baa3
 
0.325%
 
3.375%
 
2.375%
IV
BB+ / Ba1
 
0.425%
 
3.625%
 
2.625%
V
BB / Ba2
 
0.500%
 
3.875%
 
2.875%
VI
Less than or equal to BB- / Ba3
 
0.625%
 
4.125%
 
3.125%
Upon the Security Release Date, the following pricing table and tiers will take effect:

24

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


Pricing Tier
Credit Rating (S&P/Moody's)
 
Revolving Commitment
Fee
 
Applicable Rate For LIBOR Loans and Letter of Credit Fees
 
Applicable Rate for Base Rate Loans
I
Greater than or equal to BBB+ / Baa1
 
0.250%
 
2.625%
 
1.625%
II
BBB / Baa2
 
0.275%
 
2.750%
 
1.750%
III
BBB- / Baa3
 
0.325%
 
2.875%
 
1.875%
IV
BB+ / Ba1
 
0.375%
 
3.125%
 
2.125%
V
BB / Ba2
 
0.425%
 
3.325%
 
2.375%

As of April 2, 2020, the outstanding balance of the 2018 Term Loan and 2018 DDTL was $434.0 and the carrying value was $432.4. The outstanding balance of the 2018 Revolver drawn in December 2019 was $800.0 and the carrying amount was $800.0. On April 30, 2020, the Company repaid the outstanding balance of the 2018 Revolver.

As of April 2, 2020, we were in compliance with all applicable covenants under our 2018 Credit Agreement, as amended.


Senior Notes

2025 Notes

On April 17, 2020, Spirit entered into an Indenture (the “2025 Notes Indenture”), by and among Spirit, the Company and Spirit NC, as guarantors (together with the Company, 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 aggregate principal amount of its 7.500% Senior Secured Second Lien Notes due 2025 (the “2025 Notes”).

The 2025 Notes were issued and sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and in offshore transactions to non-U.S. persons pursuant to Regulation S under the Securities Act.

The 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 is October 15, 2020.

The 2025 Notes are guaranteed by the Guarantors and secured by certain real property and personal property, including certain equity interests, owned by Spirit and the Guarantors. The 2025 Notes and guarantees are Spirit’s senior secured obligations and will rank equally in right of payment with all of its existing and future senior indebtedness, effectively junior to all of its existing and future first-priority lien indebtedness to the extent of the value of the collateral securing such indebtedness (including indebtedness under the 2018 Credit Agreement and its 2026 Notes), effectively junior to any of its other existing and future indebtedness that is secured by assets that do not constitute collateral for the 2025 Notes to the extent of the value of such assets, and senior in right of payment to any of its existing and future subordinated indebtedness.

The 2025 Notes Indenture contains covenants that limit Spirit’s, the Company’s and the Company’s subsidiaries’ ability, subject to certain exceptions and qualifications, to create liens, enter into sale and leaseback transactions and guarantee other indebtedness without guaranteeing the Notes. These covenants are subject to a number of qualifications and limitations. In addition, the 2025 Notes Indenture provides for customary events of default.

Floating Rate, 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”). The Company guaranteed Spirit’s obligations under the 2018 Notes on a senior unsecured basis.


25

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


The Floating Rate Notes bear interest at a rate per annum equal to three-month LIBOR, as determined in the case of the initial interest period, on May 25, 2018, and thereafter at the beginning of each quarterly period as described herein, plus 80 basis points and mature on June 15, 2021. Interest on the Floating Rate Notes is payable on March 15, June 15, September 15 and December 15 of each year, beginning on September 15, 2018. The 2023 Notes bear interest at a rate of 3.950% per annum and mature on June 15, 2023. The 2028 Notes bear interest at a rate of 4.600% per annum and mature on June 15, 2028. Interest on the 2023 Notes and 2028 Notes is payable on June 15 and December 15 of each year, beginning on December 15, 2018. The outstanding balance of the Floating Rate Notes, 2023 Notes, and 2028 Notes was $300.0, $300.0, and $700.0 as of April 2, 2020, respectively. The carrying value of the Floating Rate Notes, 2023 Notes, and 2028 Notes was $299.3, $298.4, and $694.2 as of April 2, 2020, respectively.

The 2018 Indenture contains covenants that limit Spirit’s, the Company’s and certain of the Company’s subsidiaries’ ability, subject to certain exceptions and qualifications, to create liens without granting equal and ratable liens to the holders of the 2018 Notes and enter into sale and leaseback transactions. These covenants are subject to a number of qualifications and limitations. In addition, the 2018 Indenture provides for customary events of default.

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. As of April 2, 2020, the outstanding balance of the 2026 Notes was $300.0 and the carrying value was $297.9. The Company and Spirit NC guarantee Spirit's obligations under the 2026 Notes on a senior secured basis.
       
On February 24, 2020, Spirit entered into a Second Supplemental Indenture (the “Second Supplemental Indenture”) by and among Spirit, the Company, Spirit NC, and The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as trustee in connection with the 2026 Notes. Under the Second Supplemental Indenture, the 2026 Noteholders were granted security on an equal and ratable basis with the lenders under the 2018 Credit Agreement (as amended by the February 2020 Amendment) until the security in favor of the lenders under the 2018 Credit Agreement is released. The Supplemental Indenture also added the Spirit NC as an additional guarantor under the indenture governing the 2026 Notes. The guarantee of the Spirit NC will be released upon the release of its guarantee under the 2018 Credit Agreement.

On April 17, 2020, Spirit entered into a Third Supplemental Indenture (the “Supplemental Indenture”), by and among Spirit, the Company, Spirit NC and The Bank of New York Mellon Trust Company, N.A., as trustee in connection with the 2025 Notes. Under the Supplemental Indenture, the noteholders were granted security on an equal and ratable basis with the holders of the 2025 Notes.



 
16. Pension and Other Post-Retirement Benefits
 
 
 
Defined Benefit Plans
 
 
For the Three
 Months Ended
Components of Net Periodic Pension Expense/(Income)
 
April 2,
2020

March 28,
2019
Service cost
 
$
0.2

 
$
0.3

Interest cost
 
8.0

 
10.1

Expected return on plan assets
 
(17.3
)
 
(16.7
)
Amortization of net loss
 

 
0.4

Curtailment loss (gain) (2)
 
33.0

 

Special termination benefits (1)
 
24.7

 

Net periodic pension expense (income)
 
$
48.6

 
$
(5.9
)


26

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


 
 
Other Benefits
 
 
For the Three
Months Ended
Components of Other Benefit Expense
 
April 2,
2020
 
March 28,
2019
Service cost
 
$
0.3

 
$
0.2

Interest cost
 
0.2

 
0.3

Amortization of prior service cost
 
(0.2
)
 
(0.2
)
Amortization of net gain
 
(0.5
)
 
(0.6
)
Curtailment (gain) loss  
 
(0.3
)
 

Special termination benefits (1)
 
$
11.8

 
$

Net periodic other benefit expense (income)
 
$
11.3

 
$
(0.3
)


(1) Special termination benefits for the three months ending April 2, 2020 is a combination of pension value plan and postretirement medical plan changes offset by a reduction in the Company's net benefit obligation. Special termination benefits, curtailment accounting, and the remeasurement of the pension assets and obligations and retiree medical resulted in a $116.8 and $4.3 impact to OCI, respectively. This impact is included in the Company’s condensed consolidated statements of comprehensive (loss) income. The Company expects to record additional charges in subsequent 2020 quarters related to settlement accounting tied to cash payments made.

(2) The Company's Voluntary Retirement Program ("VRP") resulted in an estimated 14% reduction in future working lifetime for the pension value plan and postretirement medical plan resulting in a curtailment accounting charge of $33.0 for the three months ended April 2, 2020 and is included in other (expense) income in the Company's condensed consolidated statements of operations.

The components of net periodic pension expense (income) and other benefit expense, other than the service cost component, are included in other (expense) income in the Company's condensed consolidated statements of operations.

Employer Contributions
 
The Company expects to contribute zero dollars to the U.S. qualified pension plan and a combined total of approximately $9.4 for the Supplemental Executive Retirement Plan (“SERP”) and post-retirement medical plans in 2020.  The Company’s projected contributions to the U.K. pension plan for 2020 are $1.8. The entire amount contributed can vary based on exchange rate fluctuations.

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 Class A Common Stock, par value $0.01 per share (the “Common Stock”), to certain individuals. The Company’s Omnibus Plan was amended in October 2019 to allow for participants to make tax elections with respect to their equity awards.

The Company recognized a net total of $9.8 and $7.7 of stock compensation expense for the three months ended April 2, 2020 and March 28, 2019, respectively.

Holdings has established the Long-Term Incentive Plan (the “LTIP”) under the Omnibus Plan to grant equity awards to certain employees of the Company. Generally, specified employees are entitled to receive a long-term incentive award that, for the 2020 year, consisted of the following:

60% of the award consisted of time-based, service-condition restricted Common Stock that vests in equal installments over a three-year period (the “RS Award”). Values for these awards are based on the value of Common Stock on the grant date.
20% of the award consisted of performance-based, market-condition restricted Common Stock that vests on the three-year anniversary of the grant date contingent upon TSR compared to the Company’s peers (the “TSR Award”). Values

27

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


for these awards are initially measured on the grant date using estimated payout levels derived from a Monte Carlo valuation model.
20% of the award consisted of performance-based, (performance-condition) restricted Common Stock that vests on the three-year anniversary of the grant date contingent upon the Company’s cumulative three-year free cash flow as a percentage of the Company’s cumulative three-year revenues meeting certain pre-established goals (the “FCF Percentage Award”). Values for these awards are based on the dividend adjusted value of Common Stock on the grant date.

During the three months ended April 2, 2020, 324,756 shares, 197,258 shares, and 175,815 shares of Common Stock with aggregate grant date fair values of $16.6, $6.2 and $9.2 were granted as RS Awards, TSR Awards, and FCF Percentage Awards under the Company’s LTIP. During the three months ended April 2, 2020, 38,249 shares of Common Stock with aggregate grant date fair values of $2.5 were granted and vested as a result of a union ratification bonus. Additionally, 443,775 shares of Common Stock with an aggregate grant date fair value of $29.7 under the LTIP vested during the three months ended April 2, 2020.

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. We have reviewed our material deferred tax assets to determine whether or not a valuation allowance was necessary. Based on the Company’s earnings history, in conjunction with other positive and negative evidence, we have determined it is more likely than not that the benefits from the deferred tax assets will be realized and therefore, a valuation allowance is not appropriate at this time. The total net deferred tax asset at April 2, 2020, and December 31, 2019, was $184.4 and $98.2, respectively. The difference is primarily due to the creation of deductible temporary differences and utilization of taxable temporary differences within the current year.

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.

For the three months ending April 2, 2020, the amount of income tax benefit that would have been recognized under the expected annual effective tax rate would have exceeded the tax benefit we expect to realize for the full year. Due to this, the loss was limited by the year to date tax benefit that would have been recognized if the year to date loss were the full year anticipated loss (“Loss Limitation Rule”). Essentially, the year to date period was deemed to be the full year for purposes of computing the tax benefit recognized. Certain items, however, continue to be 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.

The 35.1% effective tax rate for the three months ended April 2, 2020 differs from the 19.8% effective tax rate for the same period of 2019 primarily due to the benefit generated by state tax credits. In addition, the incorporation of the Loss Limitation Rule and the benefit generated related to the carryback of our 2020 estimated income tax loss as permitted by Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) resulted in increases to the rate which were offset by increases to GILTI and other permanent differences. As the Company is currently reporting a pre-tax loss for the three months ended April 2, 2020, increases to tax expense result in a decrease to the effective tax rate and decreases to tax expense result in an increase to the effective tax rate.

The Company's federal audit is effectively complete under the Internal Revenue Service’s Compliance Assurance Process (“CAP”) program for the 2018 tax year. The Company will continue to participate in the CAP program for the 2019 and 2020 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.  There are no open audits in the Company’s foreign jurisdictions.
 
19.  Equity
 
Earnings per Share Calculation
 

28

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


Basic net income per share is computed using the weighted-average number of outstanding shares of Common Stock during the measurement period. Diluted net income per share is computed using the weighted-average number of outstanding shares of Common Stock and, when dilutive, potential outstanding shares of Common Stock during the measurement period.

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. As of April 2, 2020, no treasury shares have been reissued or retired.

During the three month period ended April 2, 2020, the Company repurchased no shares of its Common Stock. The total authorization amount remaining under the current share repurchase program is approximately $925.0. Share repurchases are currently on hold pending the outcome of the B737 MAX grounding. The February 2020 Amendment to the 2018 Credit Agreement imposes additional restrictions on the Company’s ability to repurchase shares.

The following table sets forth the computation of basic and diluted earnings per share:
 
For the Three Months Ended
 
April 2, 2020
 
March 28, 2019
 
Income
 
Shares
 
Per Share
Amount
 
Income
 
Shares
 
Per Share
Amount
Basic EPS
 

 
 

 
 

 
 

 
 

 
 

(Loss) income available to common stockholders
$
(162.9
)
 
103.7

 
$
(1.57
)
 
$
163.0

 
104.0

 
$
1.57

(Loss) income allocated to participating securities
(0.1
)
 

 
 

 
0.1

 
0.1

 
 

Net (loss) income
$
(163.0
)
 
 

 
 

 
$
163.1

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Diluted potential common shares
 

 


 
 

 
 

 
1.2

 
 

Diluted EPS
 

 
 

 
 

 
 

 
 

 
 

Net (loss) income
$
(163.0
)
 
103.7

 
$
(1.57
)
 
$
163.1

 
105.3

 
$
1.55


Included in the outstanding Common Stock were 1.5 and 1.4 of issued but unvested shares at April 2, 2020 and March 28, 2019, respectively, which are excluded from the basic EPS calculation.
 
Accumulated Other Comprehensive Loss
 
Accumulated Other Comprehensive Loss is summarized by component as follows:
 
 
As of
 
As of
 
April 2, 2020
 
December 31, 2019
Pension
$
(142.5
)
 
$
(53.1
)
Interest swaps
(10.4
)
 
(0.6
)
SERP/Retiree medical
13.0

 
17.1

Foreign currency impact on long term intercompany loan
(16.0
)
 
(13.1
)
Currency translation adjustment
(95.0
)
 
(59.5
)
Total accumulated other comprehensive loss
$
(250.9
)
 
$
(109.2
)

 
Amortization or settlement 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 consolidated statements of operations was $1.0 and $0 for the three months ended April 2, 2020 and March 28, 2019, respectively.

    
20.  Commitments, Contingencies and Guarantees
 
Litigation
 

29

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


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.

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. Allegations in each lawsuit include (i) violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by all defendants, and (ii) violations of Section 20(a) of the Exchange Act against the individual defendants. The facts underlying the complaints relate to the accounting process compliance independent review (the “Accounting Review”) discussed in the Company’s January 30, 2020 press release and described under Management's Discussion and Analysis of Financial Condition and Results of Operations - Accounting Review of the 2019 Form 10-K, and, with respect to the action filed on March 24, 2020, certain disclosures relating to B737 MAX grounding and Spirit’s production rate after the grounding.

Prior to the issuance of Company’s January 30, 2020 press release, 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. The Company has communicated to the SEC that the Accounting Review is substantially complete. 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 Spirit.

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.


Customer and Vendor Claims

From time to time the Company receives, or is subject to, customer and vendor claims arising in the ordinary course of business, including, but not limited to, those related to product quality and late delivery. The Company accrues for matters when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we 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. Any accruals deemed necessary are reevaluated at least quarterly and updated as matters progress over time.

While the final outcome of these types of matters cannot be predicted with certainty, considering, among other things, the factual and legal defenses available, it is the opinion of the Company that, when finally resolved, no current claims will have a material adverse effect on the Company’s long-term financial position or liquidity. However, it is possible that the Company’s results of operations in a period could be materially affected by one or more of these other matters.

Guarantees
 
Outstanding guarantees were $19.0 and $21.5 at April 2, 2020 and December 31, 2019, respectively.

Restricted Cash - Collateral Requirements

The Company was required to maintain $16.5 and $16.4 of restricted cash as of April 2, 2020 and December 31, 2019, respectively, related to certain collateral requirements for obligations under its workers’ compensation programs. The restricted cash is included in “Other assets” in the Company’s condensed consolidated balance sheets.
 
Indemnification
 

30

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


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 advancement of defense costs and provisional indemnity with respect to the three private securities class action lawsuits discussed above. 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 unallocated cost of goods sold. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims, including the experience of industry peers. In the case of new development products or new customers, Spirit 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 balance sheet.

The warranty balance presented in the table below includes unresolved warranty claims that are in dispute in regards to their value as well as their contractual liability. The Company estimated the total costs related to some of these claims, however, there is significant uncertainty surrounding the disposition of these disputed claims and as such, the ultimate determination of the provision’s adequacy requires significant management judgment. The amount of the specific provisions recorded against disputed warranty claims was $8.1 as of April 2, 2020 and December 31, 2019. 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 $12.1 as of April 2, 2020 and December 31, 2019.

The following is a roll forward of the service warranty and extraordinary rework balance at April 2, 2020:
 
Balance, December 31, 2019
$
64.7

Charges to costs and expenses
1.3

Payouts
(0.4
)
Exchange rate
(0.4
)
Balance, April 2, 2020
$
65.2

 




21.  Other (Expense) Income, Net
 
Other (expense) income, net is summarized as follows:

31

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


 
 
For the Three 
Months Ended
 
April 2,
2020
 
March 28,
2019
Kansas Development Finance Authority bond
$
1.1

 
$
1.2

Rental and miscellaneous income

 
0.1

Interest income
6.9

 
3.2

Foreign currency gains (losses) (1)
5.4

 
(2.0
)
Gain (loss) on foreign currency contract and interest rate swaps
0.1

 
(15.4
)
Loss on sale of accounts receivable
(3.1
)
 
(4.6
)
Pension (loss) income (2)
(59.6
)
 
6.5

Other
0.2

 

Total
$
(49.0
)
 
$
(11.0
)


(1) Foreign currency gains and losses 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) Pension expense for the three months ended April 2, 2020 includes $69.2 of expenses related to the VRP.
 
22.  Segment Information
 
The Company operates in three principal segments: Fuselage Systems, Propulsion Systems, and Wing Systems. Revenue from Boeing represents a substantial portion of the Company's revenues in all segments. Wing Systems also includes significant revenues from Airbus. Approximately 89% of the Company's net revenues for the three months ended April 2, 2020, came from the Company's two largest customers, Boeing and Airbus. All other activities fall within the All Other segment, principally made up of sundry sales of miscellaneous services, tooling contracts and sales of natural gas through a tenancy-in-common with other companies that have operations in Wichita, Kansas. The Company's primary profitability measure to review a segment’s operating performance is segment operating income before corporate selling, general and administrative expenses, research and development, and unallocated cost of sales.

Corporate selling, general and administrative expenses include centralized functions such as accounting, treasury, and human resources that are not specifically related to the Company's operating segments and are not allocated in measuring the operating segments’ profitability and performance and net profit margins. Research and development includes research and development efforts that benefit the Company as a whole and are not unique to a specific segment. Restructuring costs represent corporate level charges related to involuntary workforce reductions and the VRP. Unallocated cost of sales includes general costs not directly attributable to segment operations, such as warranty, early retirement and other incentives. All of these items are not specifically related to the Company’s operating segments and are not utilized in measuring the operating segments’ profitability and performance.

The Company’s Fuselage Systems segment includes development, production, and marketing of forward, mid and rear fuselage sections and systems, primarily to aircraft Original Equipment Manufacturers (“OEMs”), as well as related spares and maintenance, repairs and overhaul (“MRO”) services and exterior components of rocket systems.  The Fuselage Systems segment manufactures products at the Company's facilities in Wichita, Kansas; Biddeford, Maine; Tulsa; Kinston, North Carolina; McAlester, Oklahoma; San Antonio, Texas; and Subang, Malaysia. The Fuselage Systems segment also includes an assembly plant for the A350 XWB aircraft in Saint-Nazaire, France.

The Company’s Propulsion Systems segment includes development, production and marketing of struts/pylons, nacelles (including thrust reversers), and related engine structural components primarily to aircraft or engine OEMs, as well as related spares and MRO services and internal components to rocket propulsion systems.  The Propulsion Systems segment manufactures products at the Company's facility in Wichita, Kansas; Biddeford, Maine; and San Antonio, Texas.

The Company’s Wing Systems segment includes development, production and marketing of wings and wing components (including flight control surfaces), and other miscellaneous structural parts primarily to aircraft OEMs, as well as related spares

32

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


and MRO services. These activities take place at the Company’s facilities in Kinston, North Carolina; Tulsa and McAlester, Oklahoma; San Antonio, Texas; Prestwick, Scotland; and Subang, Malaysia.

 The Company’s segments are consistent with the organization and responsibilities of management reporting to the chief operating decision-maker for the purpose of assessing performance. The Company’s definition of segment operating income differs from net profit margin as presented in its primary financial statements and a reconciliation of the segment and consolidated results is provided in the table set forth below.

 While some working capital accounts are maintained on a segment basis, much of the Company’s assets are not managed or maintained on a segment basis. Property, plant and equipment, including tooling, is used in the design and production of products for each of the segments and, therefore, is not allocated to any individual segment. In addition, cash, prepaid expenses, other assets and deferred taxes are managed and maintained on a consolidated basis and generally do not pertain to any particular segment. Raw materials and certain component parts are used in aerostructure production across all segments. Work-in-process inventory is identifiable by segment, but is managed and evaluated at the program level. As there is no segmentation of the Company’s productive assets, depreciation expense (included in fixed manufacturing costs and selling, general and administrative expenses) and capital expenditures, no allocation of these amounts has been made solely for purposes of segment disclosure requirements.

The following table shows segment revenues and operating income for the three months ended April 2, 2020 and March 28, 2019:
 
 
Three Months Ended
 
April 2,
2020
 
March 28,
2019
Segment Revenues
 

 
 

Fuselage Systems
$
551.5

 
$
1,069.6

Propulsion Systems
225.2

 
485.7

Wing Systems
291.4

 
407.9

All Other
9.2

 
4.6

 
$
1,077.3

 
$
1,967.8