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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 July 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 July 24, 2020, the registrant had 105,624,020 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
 
For the Six Months Ended
 
July 2,
2020

June 27,
2019
 
July 2,
2020

June 27,
2019
 
($ in millions, except per share data)
Revenue
$
644.6

 
$
2,016.1

 
$
1,721.9

 
$
3,983.9

Operating costs and expenses
 

 
 

 
 

 
 

Cost of sales
925.1

 
1,723.2

 
2,037.6

 
3,381.5

Selling, general and administrative
49.0

 
56.4

 
126.4

 
120.0

Restructuring costs
6.3

 

 
48.9

 

Research and development
8.3

 
10.5

 
20.6

 
23.4

Loss on Disposal of Assets
22.9

 

 
22.9

 

Total operating costs and expenses
1,011.6

 
1,790.1

 
2,256.4

 
3,524.9

Operating (loss) income
(367.0
)
 
226.0

 
(534.5
)
 
459.0

Interest expense and financing fee amortization
(48.6
)
 
(23.7
)
 
(80.8
)
 
(42.5
)
Other expense, net
(6.4
)
 
8.6

 
(55.4
)
 
(2.4
)
(Loss) income before income taxes and equity in net (loss) income of affiliate
(422.0
)
 
210.9

 
(670.7
)
 
414.1

Income tax benefit (provision)
167.6

 
(42.9
)
 
254.8

 
(83.0
)
(Loss) income before equity in net (loss) income of affiliate
(254.4
)
 
168.0

 
(415.9
)
 
331.1

Equity in net loss of affiliate
(1.5
)
 

 
(3.0
)
 

Net (loss) income
$
(255.9
)
 
$
168.0

 
$
(418.9
)

$
331.1

(Loss) earnings per share
 

 
 

 
 

 
 

Basic
$
(2.46
)
 
$
1.62

 
$
(4.04
)
 
$
3.19

Diluted
$
(2.46
)
 
$
1.61

 
$
(4.04
)
 
$
3.16

 
See notes to condensed consolidated financial statements (unaudited)

3


Spirit AeroSystems Holdings, Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(unaudited)
 
 
For the Three Months Ended
 
For the Six Months Ended
 
July 2,
2020
 
June 27,
2019
 
July 2,
2020
 
June 27,
2019
 
($ in millions)
Net (loss) income
$
(255.9
)
 
$
168.0

 
$
(418.9
)

$
331.1

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

 
 

 
 
 
 
Pension, SERP, and Retiree medical adjustments, net of tax effect of ($20.5) and $0.1 for the three months ended, respectively, and $8.3 and $0.2 for the six months ended, respectively
66.4


(0.3
)

(26.8
)

(0.6
)
Unrealized foreign exchange (loss) gain on intercompany loan, net of tax effect of ($0.1) and $0.3 for the three months ended, respectively, and $0.8 and $0.1 for the six months ended, respectively
0.3


(1.1
)

(2.6
)

(0.2
)
Unrealized (loss) gain on interest rate swaps, net of tax effect of $0.0 and $0.0 for the three months ended, respectively, and $3.0 and $0.0 for the six months ended, respectively
(1.3
)



(11.2
)


Reclassification of loss on interest rate swaps to earnings
$
1.3

 
$

 
$
1.4

 
$

Foreign currency translation adjustments
$
2.9

 
$
(13.3
)
 
$
(32.9
)

$
(3.9
)
Total other comprehensive (loss) gain
69.6

 
(14.7
)
 
(72.1
)
 
(4.7
)
Total comprehensive (loss) income
$
(186.3
)
 
$
153.3

 
$
(491.0
)
 
$
326.4

 

See notes to condensed consolidated financial statements (unaudited)

4


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

 
 

Cash and cash equivalents
$
1,947.1

 
$
2,350.5

Restricted cash
0.3

 
0.3

Accounts receivable, net
306.0

 
546.4

Contract assets, short-term
321.6

 
528.3

Inventory, net
1,225.9

 
1,118.8

Other current assets
99.3

 
98.7

Total current assets
3,900.2

 
4,643.0

Property, plant and equipment, net
2,180.7

 
2,271.7

Right of use assets
45.9

 
48.9

Contract assets, long-term
4.9

 
6.4

Pension assets
362.6

 
449.1

Deferred income taxes
162.2

 
106.5

Goodwill
78.3


2.4

Intangible assets, net
30.1


1.2

Other assets
278.4

 
76.8

Total assets
$
7,043.3

 
$
7,606.0

Liabilities
 
 
 
Accounts payable
$
512.0

 
$
1,058.3

Accrued expenses
245.4

 
240.2

Profit sharing
24.1

 
84.5

Current portion of long-term debt
352.8

 
50.2

Operating lease liabilities, short-term
5.6

 
6.0

Advance payments, short-term
16.2

 
21.6

Contract liabilities, short-term
121.8

 
158.3

Forward loss provision, short-term
108.8

 
83.9

Deferred revenue and other deferred credits, short-term
13.0

 
14.8

Other current liabilities
41.0

 
42.9

Total current liabilities
1,440.7

 
1,760.7

Long-term debt
3,050.6

 
2,984.1

Operating lease liabilities, long-term
40.4

 
43.0

Advance payments, long-term
328.8

 
333.3

Pension/OPEB obligation
48.1

 
35.7

Contract Liabilities, long-term
389.4

 
356.3

Forward loss provision, long-term
287.5

 
163.5

Deferred revenue and other deferred credits, long-term
37.7

 
34.4

Deferred grant income liability — non-current
27.1

 
29.0

Deferred income taxes
7.6

 
8.3

Other non-current liabilities
115.9

 
95.8

Stockholders’ Equity
 
 
 
Common Stock, Class A par value $0.01, 200,000,000 shares authorized, 105,624,828 and 104,882,379 shares issued and outstanding, respectively
1.1

 
1.1

Additional paid-in capital
1,125.9

 
1,125.0

Accumulated other comprehensive loss
(181.3
)
 
(109.2
)
Retained earnings
2,780.0

 
3,201.3

Treasury stock, at cost (41,523,470 shares each period, respectively)
(2,456.7
)
 
(2,456.8
)
Total stockholders' equity
1,269.0

 
1,761.4

Noncontrolling interest
0.5

 
0.5

Total equity
1,269.5

 
1,761.9

Total liabilities and equity
$
7,043.3

 
$
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

Net loss

 

 

 

 

 
(255.9
)
 
(255.9
)
Dividends Declared(a)

 

 

 

 

 
(1.0
)
 
(1.0
)
Employee equity awards
236,536

 

 
1.0

 

 

 

 
1.0

Stock forfeitures
(3,905
)
 

 

 

 

 

 

Net shares settled
(7,337
)
 

 
(0.7
)
 

 

 

 
(0.7
)
ESPP shares issued
(321
)
 

 

 

 

 

 

Treasury shares

 

 

 
0.1

 

 

 
0.1

Other comprehensive income

 

 

 

 
69.6

 

 
69.6

Balance — July 2, 2020
105,624,828

 
$
1.1

 
$
1,125.9

 
$
(2,456.7
)
 
$
(181.3
)
 
$
2,780.0

 
$
1,269.0

 
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 ASU 2018-02

 

 

 

 
(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

Net income










168.0

 
168.0

Dividends Declared(a)










(12.6
)
 
(12.6
)
Employee equity awards
41,474




7.4







 
7.4

Stock forfeitures
(69,550
)










 

Net shares settled
(14,372
)



(1.8
)






 
(1.8
)
ESPP shares issued
14,617




1.3







 
1.3

SERP shares issued
6,214











 

Other comprehensive loss








(14.7
)


 
(14.7
)
Balance — June 27, 2019
104,855,210

 
$
1.0

 
$
1,105.5

 
$
(2,456.0
)
 
$
(209.6
)
 
$
3,027.3

 
$
1,468.2


(a) Cash dividends declared per common share were $0.01 for the three months ended April 2, 2020, and $0.01 for the three months ended July 2, 2020. Cash dividends declared per common share were $0.12 for the three months ended March 28, 2019, and $0.12 for the three months ended June 27, 2019.

6


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

June 27, 2019
Operating activities
($ in millions)
Net (loss) income
$
(418.9
)
 
$
331.1

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

 
 
Depreciation and amortization expense
135.4

 
123.5

Amortization of deferred financing fees
5.5

 
1.7

Accretion of customer supply agreement
1.2

 
2.3

Employee stock compensation expense
10.8

 
15.1

Loss from derivative instruments
0.1

 
7.8

Gain from foreign currency transactions
(3.1
)
 
(0.1
)
Loss on disposition of assets
23.6

 
(0.2
)
Deferred taxes
(51.3
)
 
24.5

Pension and other post-retirement benefits, net
65.9

 
2.2

Grant liability amortization
(2.8
)
 
(11.4
)
Equity in net loss of affiliate
3.0

 

Forward loss provision
149.0

 
(25.3
)
Changes in assets and liabilities
 
 
 
Accounts receivable, net
244.4

 
(50.1
)
Inventory, net
(115.4
)
 
39.0

Contract assets
209.7

 
(101.4
)
Accounts payable and accrued liabilities
(551.8
)
 
157.2

Profit sharing/deferred compensation
(60.1
)
 
(30.4
)
Advance payments
(19.8
)
 
(2.2
)
Income taxes receivable/payable
(211.8
)
 
(9.6
)
Contract liabilities
(5.5
)
 
(5.5
)
Deferred revenue and other deferred credits
3.0

 
9.0

Other
29.2

 
(5.5
)
Net cash (used in) provided by operating activities
(559.7
)
 
471.7

Investing activities
 

 
 

Purchase of property, plant and equipment
(51.2
)
 
(77.9
)
Equity in assets of affiliates

 

Acquisition, net of cash acquired
(117.9
)
 

Other
2.7

 
0.1

Net cash used in investing activities
(166.4
)
 
(77.8
)
Financing activities
 

 
 

Proceeds from issuance of debt
1,200.0

 
250.0

Proceeds from revolving credit facility

 
100.0

Customer financing
10.0

 

Principal payments of debt
(14.8
)
 
(4.9
)
Payments on term loan
(11.4
)
 
(2.6
)
Payments on revolving credit facility
(800.0
)
 
(100.0
)
Taxes paid related to net share settlement awards
(13.8
)
 
(11.8
)
Proceeds from issuance of ESPP stock
1.3

 
1.3

Debt issuance and financing costs
(24.5
)
 

Purchase of treasury stock
0.1

 
(75.0
)
Dividends paid
(13.4
)
 
(25.4
)
Net cash provided by financing activities
333.5

 
131.6

Effect of exchange rate changes on cash and cash equivalents
(7.7
)
 
(1.5
)
Net (decrease) increase in cash, cash equivalents, and restricted cash for the period
(400.3
)
 
524.0

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

 
794.1

Cash, cash equivalents, and restricted cash, end of period
$
1,966.9

 
$
1,318.1


7


Reconciliation of Cash, Cash Equivalents, and Restricted Cash:
 
 
 
 
For the Six Months Ended
 
July 2, 2020
 
June 27, 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
$
1,947.1

 
$
1,301.4

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

 
0.3

Restricted cash, long-term, end of the period
19.5

 
16.4

Cash, cash equivalents, and restricted cash, end of the period
$
1,966.9

 
$
1,318.1

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, Basis of Interim Presentation and Recent Developments
 
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 six months ended July 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 2, Adoption of New Accounting Standards, and Note 5, Accounts Receivable and Allowance for Credit Losses.

Recent Developments
B737MAX. In March 2019, the B737 MAX fleet was grounded in the U.S. and internationally following the 2018 and 2019 accidents involving two B737 MAX aircraft. To date, the fleet remains grounded and the recertification process is continuing. The B737 MAX program is a critical program to the Company and for the twelve months ended December 31, 2019, approximately 53% of the Company’s net revenues were generated from sales of components to The Boeing Company (“Boeing”) for the B737 aircraft. Due to the grounding and the impacts of COVID-19 on the aviation industry, the Company has experienced significant deteriorations in its B737 MAX production rates that have reduced the Company’s revenues. A summary of the production rate changes is below.

On April 12, 2019, Boeing and the Company executed a Memorandum of Agreement (the “2019 MOA”) providing that the Company was to maintain its delivery rate of 52 shipsets per month with respect to the B737 MAX. Previously, the Company was expecting to increase production to a rate of 57 shipsets per month;
On December 19, 2019, Boeing directed the Company to stop all B737 MAX deliveries to Boeing effective January 1, 2020. Accordingly, Spirit suspended all B737 MAX production beginning on January 1, 2020;
On February 6, 2020, Boeing and Spirit entered into a Memorandum of Agreement (the “2020 MOA”) largely superseding the 2019 MOA and providing for Spirit to deliver to Boeing 216 B737 MAX shipsets in 2020;

9

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


On May 4, 2020, Boeing and the Company agreed that Spirit would deliver 125 B737 MAX shipsets to Boeing in 2020; and
On June 19, 2020, Boeing directed Spirit to reduce its 2020 B737 production plan from 125 to 72 shipsets.

COVID-19. The COVID-19 pandemic and its effects (including travel advisories, shutdowns or shelter-in-place mandates or recommendations, restrictive protocols, and canceled events) have caused a significant decline in the demand for air travel and, as a result, the Company has experienced a significant deterioration in its revenues in the first half of 2020, resulting in a net loss of $418.9 for that period. The length of the COVID-19 pandemic and its impact on the aviation industry and the Company’s operational and financial performance is uncertain and outside of the Company’s control. The Company expects the pandemic and its effects to continue to have a significant negative impact on its business for the duration of the pandemic and during the subsequent economic recovery, which could be for an extended period of time.

The Company has taken several actions to reduce costs, increase liquidity and strengthen its financial position in light of the economic impact of the COVID-19 pandemic, and the B737 MAX grounding and related production changes including the following:
Reduced pay for all U.S.-based executives by 20 percent until further notice;
Reduced 2020-2021 term non-employee director compensation by 15 percent;
Reduced planned capital expenditures and operating expenses;
Suspended its share repurchase program;
Reduced quarterly dividends to one penny per share;
Initiated multiple production worker furloughs;
Implemented a four-day work week for its salaried workforce at its Wichita, Kansas facility until further notice;
Reduced ~5,500 employees globally including voluntary retirement;
Amended our 2018 Credit Agreement for covenant relief;
Issued $1.2 billion in senior secured second-lien notes in April 2020; and
Elected to defer the payment of $15.9 in employer payroll taxes incurred through July 2, 2020, as provided by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), of which 50% is required to be deposited by December 2021 and the remaining 50% by December 2022. In addition, as of July 2, 2020 the Company has recorded a deferral of $28.5 of VAT payments until March 2021 under the United Kingdom deferral scheme.

The substantial reduction in our production rates for 2020 has significantly reduced revenue received in connection with the B737 MAX program and presents challenges to our liquidity. These challenges are exacerbated by the COVID-19 pandemic as other programs that mitigate the strain of the lower B737 MAX production rate are now suspended or producing at lower rates. The COVID-19 and B737 MAX situations are largely out of our control. If Boeing is unable to return the B737 MAX to service in one or more jurisdictions, begin timely deliveries to customers, or if our customers' production levels across our programs are reduced beyond current expectations due to depressed demand relating to COVID-19 or otherwise, our business, financial condition, results of operations and cash flows could be materially adversely impacted.





2.  Adoption of New Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, (“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 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

10

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 year-to-date forward losses relate primarily to negative changes in estimates on the B787 and A350 programs due to disruption related to production rate reductions and the global pandemic. The Company provided previous guidance which disclosed an estimated forecasted forward loss in the quarter ended July 2, 2020 on the B787 program of $70-$90 and the A350 program of $15-$20 (this was based upon data which became available after the first quarter balance sheet date of April 2, 2020). Throughout the quarter ended July 2, 2020 the dynamics of demand for wide body aircraft continued to evolve from the facts and assumptions available to the Company at the time the second quarter Form 10Q was filed as a result of uncertainty regarding timing of the resolution of the global pandemic and the ultimate impact upon the aviation and travel industries. As such, throughout the second

11

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


quarter the Company evaluated additional schedule and production demand information received from its customers and other market and analyst data including forecasted demand for wide body aircraft, and as a result adjusted the expected results on the B787 and A350 programs to include a lower rate of production for a longer duration compared to its previous forecast. This change in estimate from the quarter ended April 2, 2020 results in incremental fixed cost absorption on the B787 and A350 programs and as a result, the forward loss recognized was $102.5 on the B787 program and $84.2 on the A350 program for the quarter ended July 2, 2020.

Actual results could differ from these estimates, which were based upon circumstances that existed as of the date of the consolidated financial statements, July 2, 2020.

Changes in estimates are summarized below:

 
 
For the Three Months Ended
 
For the Six Months Ended
Changes in Estimates
 
July 2, 2020

June 27, 2019
 
July 2, 2020

June 27, 2019
(Unfavorable) Favorable Cumulative Catch-up Adjustment by Segment
 
 
 
 
 
 
 
 
Fuselage
 
$
(31.1
)
 
$
(8.3
)
 
$
(24.6
)
 
$
(5.3
)
Propulsion
 
(5.1
)
 
(6.6
)
 
(5.6
)
 
(3.5
)
Wing
 
(1.6
)
 
1.7

 
(3.3
)
 
1.7

Other
 
0.1

 
$

 
$

 
$

Total (Unfavorable) Favorable Cumulative Catch-up Adjustment
 
$
(37.7
)
 
$
(13.2
)
 
$
(33.5
)
 
$
(7.1
)
 
 
 
 
 
 
 
 
 
Changes in Estimates on Loss Programs (Forward Loss) by Segment
 
 
 
 
 
 
 
 
Fuselage
 
$
(155.1
)
 
$
1.3

 
$
(168.3
)
 
$
5.0

Propulsion
 
(16.2
)
 
0.4

 
(19.3
)
 
0.9

Wing
 
(22.8
)
 
0.6

 
(26.2
)
 
1.1

Total Changes in Estimates (Forward Loss) on Loss Programs
 
$
(194.1
)
 
$
2.3

 
$
(213.8
)
 
$
7.0

 
 
 
 
 
 
 
 
 
Total Change in Estimate
 
$
(231.8
)
 
$
(10.9
)
 
$
(247.3
)
 
$
(0.1
)
EPS Impact (diluted per share based upon 2020 forecasted effective tax rate)
 
$
(1.45
)
 
$
(0.08
)
 
$
(1.55
)
 
$




12

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


5.  Accounts Receivable and Allowance for Credit Losses
 
Accounts Receivable, net

Accounts receivable represent the Company’s unconditional rights to consideration, subject to the payment terms of the contract, for which only the passage of time is required before payment. Unbilled receivables are reflected under contract assets on the 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:
 
July 2,
2020
 
December 31,
2019
Trade receivables
$
282.0

 
$
515.2

Other
26.1

 
32.6

Less: allowance for doubtful accounts
(2.1
)
 
(1.4
)
Accounts receivable, net
$
306.0

 
$
546.4


The Company has two agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing and Airbus to third party financial institutions. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with the Company and they continue to allow Spirit to monetize the receivables prior to their payment date, subject to payment of a discount. No guarantees are delivered under the agreements. Our ability to continue using such agreements is primarily dependent upon the strength of Boeing’s and Airbus’s financial condition. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being derecognized from the Company's balance sheet. For the six months ended July 2, 2020, $1,089.2 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 sale of receivables is $4.7 for the six months ended July 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, and certain customer specific administrative conditions.

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


13

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


The changes to the allowance for credit losses and related credit loss expense reported for the current period were solely based on the results of the CECL model. For the three months ended July 2, 2020, continued worsening economic conditions related to the COVID-19 pandemic influenced management’s current estimate of expected credit losses. In particular, trade accounts receivables from certain suppliers are now included in the historical loss rate method CECL model at a higher loss-rate than previously estimated. This change did not have a material impact on reported results for the three or six month periods ended July 2, 2020. Other than this change, 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 July 2, 2020 or the period ended June 27, 2019. See also Note 5, Accounts Receivable and 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.

 
July 2, 2020

December 31, 2019

Change

Contract assets
$
326.5

$
534.7

$
(208.2
)
Contract liabilities
(511.2
)
(514.6
)
3.4

Net contract assets (liabilities)
$
(184.7
)
$
20.1

$
(204.8
)


For the period ended July 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 decrease in contract liabilities reflects the net impact of less deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $61.2 of revenue that was included in the contract liability balance at the beginning of the period.
 
June 27, 2019

December 31, 2018

Change

Contract assets
$
624.6

$
523.5

$
101.1

Contract liabilities
(522.1
)
(527.7
)
5.6

Net contract assets (liabilities)
$
102.5

$
(4.2
)
$
106.7


For the period ended June 27, 2019, the increase in contract assets reflects the net impact of additional revenues recognized in excess of billed revenues during the period. The decrease in contract liabilities reflects the net impact of less deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $39.4 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.

14

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



The following tables show disaggregated revenues for the periods ended July 2, 2020 and June 27, 2019:

 
 
For the Three Months Ended
 
For the Six Months Ended
Revenue
 
July 2,
2020
June 27,
2019
 
July 2,
2020
June 27,
2019
Contracts with performance obligations satisfied over time
 
$
395.4

$
1,542.0

 
$
1,001.3

$
3,024.9

Contracts with performance obligations satisfied at a point in time
 
249.2

474.1

 
720.6

959.0

Total Revenue
 
$
644.6

$
2,016.1

 
$
1,721.9

$
3,983.9


The following table disaggregates revenue by major customer:
 
 
For the Three Months Ended
 
For the Six Months Ended
Customer
 
July 2,
2020
June 27,
2019
 
July 2,
2020
June 27,
2019
Boeing
 
$
370.0

$
1,614.7


$
1,046.1

$
3,163.1

Airbus
 
128.0

320.1


415.1

649.9

Other
 
146.6

81.3


260.7

170.9

Total Revenue
 
$
644.6

$
2,016.1

 
$
1,721.9

$
3,983.9


The following table disaggregates revenue based upon the location where control of products are transferred to the customer:
 
 
For the Three Months Ended
 
For the Six Months Ended
Location
 
July 2,
2020
June 27,
2019
 
July 2,
2020
June 27,
2019
United States
 
$
511.9

$
1,686.8

 
$
1,294.4

$
3,315.7

International
 
 
 
 


United Kingdom
 
70.5

191.2

 
254.5

399.7

Other
 
62.2

138.1

 
173.0

268.5

Total International
 
132.7

329.3

 
427.5

668.2

Total Revenue
 
$
644.6

$
2,016.1

 
$
1,721.9

$
3,983.9



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
$
1,251.4

$
2,970.1

$
3,668.8

$
4,583.8



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

15

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


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.

 
July 2,
2020
 
December 31,
2019
Raw materials
$
314.1

 
$
253.1

Work-in-process(1)
869.4

 
822.8

Finished goods
15.4

 
14.5

Product inventory
1,198.9

 
1,090.4

Capitalized pre-production
27.0

 
28.4

Total inventory, net
$
1,225.9

 
$
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 July 2, 2020 and December 31, 2019, work-in-process inventory includes $181.0 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 $51.0 and $39.0 as of July 2, 2020 and December 31, 2019, respectively.

Excess capacity and abnormal production costs are excluded from inventory and recognized as expense in the period incurred. Cost of sales for the three and six month periods ended July 2, 2020 includes period expense of $82.8 and $156.2, respectively, of excess capacity production costs related to temporary B737 MAX and A320 production schedule changes. Cost of sales also includes abnormal costs related to temporary workforce adjustments as a result of COVID-19 production pause, net of U.K. government subsidies for the three and six month periods ended July 2, 2020 of $19.3 and $44.7, respectively.


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

 
$
15.9

Buildings (including improvements)
930.7

 
924.0

Machinery and equipment
1,966.0

 
1,941.5

Tooling
1,019.3

 
1,047.4

Capitalized software
277.4

 
277.8

Construction-in-progress
182.1

 
192.8

Total
4,392.7

 
4,399.4

Less: accumulated depreciation
(2,212.0
)
 
(2,127.7
)
Property, plant and equipment, net
$
2,180.7

 
$
2,271.7



Capitalized interest was $1.3 and $1.5 for the three months ended July 2, 2020 and June 27, 2019, respectively, and $2.5 and $3.6 for the six months ended July 2, 2020 and June 27, 2019, respectively. Repair and maintenance costs are expensed as incurred. The Company recognized repair and maintenance costs of $26.5 and $34.2 for the three months ended July 2, 2020 and June 27, 2019, respectively, and $57.0 and $69.8 for the six month ended July 2, 2020 and June 27, 2019, respectively.
 

16

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


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 $4.2 and $4.7 for the three months ended July 2, 2020 and June 27, 2019, respectively, and $8.5 and $9.0 for the six month ended July 2, 2020 and June 27, 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.  During the three month period ended July 2, 2020, the Company disposed of long-lived assets with a net book value of $19.2 and $3.7 related to production decreases, process-related changes and quality improvement initiatives on the B787 and A350 programs, respectively. By segment, the disposal charge consist of $22.5 and $0.4 related to the Fuselage System and Wing System, respectively, and is included as a separate line item of the operating loss in the Condensed Consolidated Statements of Operation for the three and six months ended as of July 2, 2020. Additionally, for the period ended July 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. After conducting such review, we determined that there was no impairment of the remaining long-lived assets as of July 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 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.

Components of lease expense:

17

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
 
For the Six Months Ended
 
July 2,
2020

June 27,
2019
 
July 2,
2020

June 27,
2019
Operating lease cost
$
2.2

 
$
2.2

 
$
4.4

 
$
4.4

Finance lease cost:


 


 


 


Amortization of assets
4.4

 
2.4

 
10.3

 
4.2

Interest on lease liabilities
1.5

 
0.5

 
3.1

 
0.9

Total net lease cost
$
8.1

 
$
5.1

 
$
17.8

 
$
9.5


Supplemental cash flow information related to leases was as follows:
 
For the Three Months Ended
 
For the Six Months Ended
 
July 2,
2020

June 27,
2019
 
July 2,
2020

June 27,
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
 
 
 
Operating cash flows from operating leases
$
2.2

 
$
2.1

 
$
4.4

 
$
4.3

Operating cash flows from finance leases
$
1.5

 
$
0.5

 
$
3.1

 
$
0.9

Financing cash flows from finance leases
$
7.0

 
$
2.0

 
$
13.7

 
$
3.8

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

 
$
0.6

 
$
0.2

 
$
0.7

Supplemental balance sheet information related to leases:
 
July 2, 2020
December 31, 2019
Finance leases:
 
 
Property and equipment, gross
$
207.2

$
165.5

Accumulated amortization
(33.8
)
(23.5
)
Property and equipment, net
$
173.4

$
142.0


The weighted average remaining lease term as of July 2, 2020 for operating and finance leases was 10.0 years and 6.0 years, respectively. The weighted average discount rate as of July 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 July 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
$
4.2

$
7.4

$
7.2

$
6.1

$
5.6

$
30.2

$
60.7

$
(14.7
)
$
46.0

Financing Leases
$
17.1

$
34.0

$
30.2

$
25.8

$
20.0

$
36.9

$
164.0

$
(19.4
)
$
144.6



18

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


As of July 2, 2020, the Company had additional operating and financing lease commitments that have not yet commenced of approximately $0.2 and $51.5 for manufacturing equipment and facilities which are in various phases of construction or customization for the Company's ultimate use, with lease terms between 3 and 7 years. The Company’s involvement in the construction and design process for these assets is generally limited to project management.

11.  Other Assets, Goodwill, and Intangible Assets
 
Other Assets are summarized as follows:

July 2,
2020

December 31,
2019
Deferred financing
 


 

Deferred financing costs
46.7


41.7

Less: Accumulated amortization - deferred financing costs
(39.0
)

(36.9
)
Deferred financing costs, net
7.7


4.8

Other
 


 

Long term income tax receivable (1)
197.1

 

Supply agreements (2)
11.3


11.5

Equity in net assets of affiliates
4.7


7.7

Restricted cash - collateral requirements
19.5


16.4

Other
38.1


36.4

Total
$
278.4


$
76.8

 

(1)
Increase in income tax receivable not expected to be received within 12 months and is an increase over the prior year as a result of the carryback provisions included in the CARES Act.
(2)
Certain payments accounted for as consideration paid by the Company to a customer are being amortized as reductions to net revenues.


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

 
2.4

Goodwill - United States(1)
76.0

 

Total
$
78.3

 
$
2.4


(1) The acquisition of Fiber Materials Inc. ("FMI") on January 10, 2020 resulted in the establishment of $76.2 goodwill. In second quarter of 2020, $0.2 was received upon final settlement of net working capital, reducing the goodwill balance to $76.0.

The balance of goodwill by reportable segment as of July 2, 2020 is allocated $42.9 to the Fuselage Systems Segment, $33.1 to the Propulsion Systems Segment, and $2.3 to the Wing Systems Segment. The total goodwill value of $78.3 includes no accumulated impairment loss in any of the periods presented. The change in value from December 31, 2019 to July 2, 2020 for the Europe goodwill item, as seen in the table above, reflects net exchange differences arising during the period. The goodwill balance as of December 31, 2019 of $2.4 is allocated to the Wing Systems Segment.

The Company assesses goodwill for impairment annually or more frequently if events or circumstances indicate that the fair value of a reporting unit that includes goodwill may be lower than its carrying value. As a result of the potential impact of the COVID-19 pandemic, the Company evaluated goodwill for impairment as of July 2, 2020. Each of the reportable segments, noted above, is comprised of a single operating segment, which is the reporting unit for goodwill. At July 2, 2020, the Fuselage Systems reporting unit has $42.9 of goodwill, the Propulsion Systems reporting unit has $33.1 of goodwill, and the Wing Systems reporting

19

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


unit has $2.3 of goodwill. No goodwill impairment was recognized, as the Company performed a qualitative assessment and determined it is not more likely than not that the fair values of our Fuselage Systems, Propulsion Systems, and Wing Systems reporting units were less than their carrying values as of July 2, 2020.




Intangible assets are summarized as follows:
 
July 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
(1.0
)
 

Intangible assets, net
30.1

 
1.2


(1) The acquisition of FMI on January 10, 2020 resulted in the establishment of a $30.0 intangible asset for developed technology.


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 July 2, 2020:
Year
Patents
Favorable leasehold interest
Developed Technology
Total
remaining in 2020

0.1

1.0

1.1

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

9.0

14.5

14.3




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 twelve-month period will offset the purchase price for shipsets 1,001 through 1,120. On December 21, 2018, the Company signed a memorandum of agreement with Boeing that again suspended the advance repayments beginning with line unit 818. The advance repayments will resume at a lower rate of $0.45 per shipset at line number 1135 and continue through line number 1605.


20

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


In the event Boeing does not take delivery of a sufficient number of shipsets to repay the full amount of advances prior to the termination of the B787 program or the B787 Supply Agreement, any advances not then repaid will be applied against any outstanding payments then due by Boeing to us, and any remaining balance will be repaid in annual installments of $27 due on December 15th of each year until the advance payments have been fully recovered by Boeing. As of July 2, 2020, the amount of advance payments received by us from Boeing under the B787 Supply Agreement and not yet repaid was approximately $212.

Advances on the B737 Program. In an effort to minimize the disruption to Spirit's operations and its supply chain, the 2019 MOA entered into on April 12, 2019 included the terms and conditions for an advance payment to be made from Boeing to Spirit in the amount of $123, which was received during the third quarter of 2019. The 2020 MOA entered into on February 6, 2020, extended the repayment date of the $123 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 July 2, 2020, the Company’s long-term debt includes the 2018 Term Loan (as such term is 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:
 

21

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


 
July 2, 2020
 
December 31, 2019
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
2018 Term Loan (including current portion)
$
426.7

 
$
401.6

(2)
$
438.5

 
$
440.1

(2)
2018 Revolver

 

(2)
800.0

 
800.0

(2)
Senior unsecured floating rate notes due 2021
299.4

 
282.1

(1)
299.1

 
298.4

(1)
Senior unsecured notes due 2023
298.6

 
253.6

(1)
298.3

 
307.2

(1)
Senior secured notes due 2026
298.0

 
272.9

(1)
297.8

 
305.6

(1)
Senior unsecured notes due 2028
694.3

 
564.2

(1)
694.1

 
734.4

(1)
Senior secured notes due 2025
1,183.3

 
1,188.6

(1)
$

 
$

 
Total
$
3,200.3

 
$
2,963.0

 
$
2,827.8

 
$
2,885.7

 

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






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 swap has 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.


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 July 2, 2020, $6.5 of which is recorded in the other current liabilities line item on the condensed consolidated balance sheet. The remaining $7.2 is recorded in the other non-current liabilities line item on the condensed consolidated balance sheet.

Changes in the fair value of cash flow hedges are recorded in Accumulated Other Comprehensive Income ("AOCI") and recorded in earnings in the period in which the hedged transaction occurs. The loss recognized in AOCI was $1.3 and $14.2 for the three and six months ended July 2, 2020, respectively. For the three and six months ended July 2, 2020, a loss of $1.3 and $1.4

22

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


was reclassified from AOCI to earnings, included in the interest expense line item on the Condensed Consolidated Statement of Operations, and in operating activities on the Condensed Consolidated Statement of Cash Flows. Within the next 12 months, the Company expects to recognize a loss of $6.5 in earnings related to these hedged contracts. As of July 2, 2020, the maximum term of hedged forecasted transactions was 2.8 years.













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

$
404.0

 
$
22.8

$
415.7

2018 Revolver


 

800.0

Senior unsecured floating rate notes due 2021
299.4


 

299.1

Senior unsecured notes due 2023

298.6

 

298.3

Senior secured notes due 2026

298.0

 

297.8

Senior unsecured notes due 2028

694.3

 

694.1

Senior secured notes due 2025

1,183.3

 


Present value of finance lease obligations
28.9

115.7

 
25.8

121.3

Other
1.8

56.7

 
1.6

57.8

Total
$
352.8

$
3,050.6

 
$
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”).


23

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


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 issuer credit rating or corporate family rating (as applicable) provided by Standard & Poor's Financial Services LLC 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.
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%