e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
001-33160
Spirit AeroSystems Holdings,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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20-2436320
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(State of
Incorporation)
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(I.R.S. Employer
Identification Number)
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3801 South Oliver
Wichita, Kansas 67210
(Address of principal executive
offices and zip code)
Registrants telephone number, including area code:
(316) 526-9000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Class A Common Stock,
$0.01 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing price of
the class A common stock on February 9, 2007 as
reported on the New York Stock Exchange was approximately
$1,992,226,479.
As of February 9, 2007, the registrant had outstanding
63,345,834 shares of class A common stock,
$0.01 par value per share and 71,351,347 shares of
class B common stock, $0.01 par value per share.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for the 2007
Annual Meeting of Stockholders to be filed not later than
120 days after the end of the fiscal year covered by this
report are incorporated herein by reference in Part III of
this Annual Report on
Form 10-K.
CAUTIONARY
STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking
statements. Forward-looking statements give our current
expectations or forecasts of future events. Forward-looking
statements generally can be identified by the use of
forward-looking terminology such as may,
will, expect, intend,
estimate, anticipate,
believe, project, or
continue, or other similar words. These statements
reflect managements current views with respect to future
events and are subject to risks and uncertainties, both known
and unknown. Our actual results may vary materially from those
anticipated in forward-looking statements. We caution investors
not to place undue reliance on any forward-looking statements.
Important factors that could cause actual results to differ
materially from forward-looking statements include, but are not
limited to:
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our ability to continue to grow our business and execute our
growth strategy;
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the build rates of certain Boeing aircraft including, but not
limited to, the B737 program, the B747 program, the B767 program
and the B777 program and build rates of the Airbus A320 and A380
programs;
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our ability to enter into supply arrangements with additional
customers and to satisfy performance requirements under existing
supply contracts with Boeing and Airbus;
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any adverse impact on Boeings production of aircraft
resulting from reduced orders by Boeings customers;
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the success and timely progression of Boeings new B787
aircraft program, including receipt of necessary regulatory
approvals;
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future levels of business in the aerospace and commercial
transport industries;
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competition from original equipment manufacturers and other
aerostructures suppliers;
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the effect of governmental laws, such as U.S. export
control laws, environmental laws and agency regulation, in the
U.S. and abroad;
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the effect of new commercial and business aircraft development
programs, their timing and resource requirements that may be
placed on us;
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the cost and availability of raw materials;
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our ability to recruit and retain highly skilled employees and
our relationships with the unions representing many of our
employees;
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spending by the United States and other governments on defense;
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our continuing ability to operate successfully as a stand alone
company;
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the outcome or impact of ongoing or future litigation and
regulatory actions; and
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our exposure to potential product liability claims.
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These factors are not exhaustive, and new factors may emerge or
changes to the foregoing factors may occur that could impact our
business. Except to the extent required by law, we undertake no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
You should review carefully the sections captioned Risk
Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations
in this annual report for a more complete discussion of these
and other factors that may affect our business.
1
PART I
Our
Company
Unless the context otherwise indicates or requires, as used in
this Annual Report, references to we,
us, our or the company refer
to Spirit AeroSystems Holdings, Inc., its subsidiaries and
predecessors. References to Spirit refer only to our
subsidiary, Spirit AeroSystems, Inc., and references to
Spirit Holdings or Holdings refer only
to Spirit AeroSystems Holdings, Inc. References to
Boeing refer to The Boeing Company and references to
Airbus refer to Airbus S.A.S. We are the largest
independent original parts designer and manufacturer of
aerostructures in the world. Aerostructures are structural
components such as fuselages, propulsion systems and wing
systems for commercial and military aircraft. Spirit Holdings
was formed in February 2005 as a holding company of Spirit.
Spirits operations commenced on June 17, 2005
following the acquisition of the commercial aerostructures
manufacturing operations of Boeing, herein referred to as
Boeing Wichita. The acquisition of Boeing Wichita is
herein referred to as the Boeing Acquisition.
On April 1, 2006, we became a supplier to Airbus through
our acquisition of the aerostructures division of BAE Systems
(Operations) limited, herein referred to as BAE
Systems. The acquired division of BAE Systems is herein
referred to as BAE Aerostructures and the
acquisition of BAE Aerostructures is herein referred to as the
BAE Acquisition. Although Spirit Holdings is a
recently-formed company, its predecessor, Boeing Wichita, had
75 years of operating history and expertise in the
commercial and military aerostructures industry. For the twelve
months ended December 31, 2006 we generated revenues of
approximately $3,207.7 million and had net income of
approximately $16.8 million.
We are the largest independent supplier of aerostructures to
both Boeing and Airbus. We manufacture aerostructures for every
Boeing commercial aircraft currently in production, including
the majority of the airframe content for the Boeing B737. As a
result of our unique capabilities both in process design and
composite materials, we were awarded a contract that makes us
the largest aerostructures content supplier on the Boeing B787,
Boeings next generation twin aisle aircraft. Furthermore,
we believe we are the largest content supplier for the wing for
the Airbus A320 family and we are a significant supplier for
Airbus new A380. Sales related to the large commercial
aircraft market, some of which may be used in military
applications, represented approximately 99% of our revenues for
the twelve months ended December 31, 2006.
We derive our revenues primarily through long-term supply
agreements with both Boeing and Airbus. For the twelve months
ended December 31, 2006, approximately 91% and
approximately 8% of our combined revenues were generated from
sales to Boeing and Airbus, respectively. We are currently the
sole-source supplier of 96% of the products we sell to Boeing
and Airbus, as measured by dollar value of the products sold. We
are a critical partner to our customers due to the broad range
of products we currently supply to them and our leading design
and manufacturing capabilities using both metallic and composite
materials. Under our supply agreements with Boeing and Airbus,
we supply essentially all of our products for the life of the
aircraft program (other than the A380), including commercial
derivative models. For the A380 we have a long-term supply
contract with Airbus that covers a fixed number of product units
at established prices.
Our
History
In December 2004 and February 2005, an investor group led by
Onex Partners LP and Onex Corporation formed Spirit and Spirit
Holdings, respectively, for the purpose of acquiring Boeing
Wichita. The Boeing Acquisition was completed on June 16,
2005. Prior to the acquisition, Boeing Wichita functioned as an
internal supplier of parts and assemblies for Boeings
airplane programs and had very few sales to third parties.
In connection with the Boeing Acquisition, we entered into a
long-term supply agreement under which we are Boeings
exclusive supplier for substantially all of the products and
services provided by Boeing Wichita to Boeing prior to the
Boeing Acquisition. The supply contract is a requirements
contract covering certain products such as fuselages,
struts/pylons and wing components for Boeing B737, B747, B767
and B777 commercial aircraft programs for the life of these
programs, including any commercial derivative models. Pricing
for existing products
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on in-production models is contractually set through May 2013,
with average prices decreasing at higher volume levels and
increasing at lower volume levels. We also entered into a
long-term supply agreement for Boeings new B787 platform
covering the life of this platform, including commercial
derivatives. Under this contract we will be Boeings
exclusive supplier for the forward fuselage, fixed and moveable
leading wing edges and struts for the B787. Pricing for these
products on the B787-8 model is generally set through 2021, with
prices decreasing as cumulative production volume levels are
achieved.
On April 1, 2006, through our wholly-owned subsidiary,
Spirit Europe, we acquired BAE Aerostructures. Spirit Europe
manufactures leading and trailing wing edges and other wing
components for commercial aircraft programs for Airbus and
Boeing and produces various aerostructure components for certain
Raytheon business jets. The BAE Acquisition provides us with a
foundation to increase future sales to Airbus, as Spirit Europe
is a key supplier of wing and flight control surfaces for the
A320 platform, Airbus core single aisle program, and of
wing components for the A380 platform, one of Airbus most
important new programs and the worlds largest commercial
passenger aircraft. Under our supply agreements with Airbus, we
supply most of our products for the life of the aircraft
program, including commercial derivative models, with pricing
determined through 2010. For the A380, we have a long-term
supply contract with Airbus that covers a fixed number of units.
Our
Industry
Based on our research, the global market for aerostructures is
estimated to have totaled $27.6 billion in annual sales in
2005. Currently, aircraft original equipment manufacturers,
referred to herein as OEMs, outsource approximately
half of the aerostructures market to independent third parties
such as ourselves. We expect the outsourcing of the design,
engineering and manufacturing of aerostructures to increase as
OEMs increasingly focus operations on final assembly and support
services for their customers. The original equipment
aerostructures market can be divided by end market application
into three market sectors: (1) commercial (including
regional and business jets), (2) military and
(3) modifications, upgrades, repairs and spares. While we
serve all three market sectors, we primarily derive our current
revenues from the commercial market sector. We estimate that the
commercial original equipment sector represents approximately
63% of the total aerostructures market, while the military
original equipment sector represents approximately 28% and the
modifications, upgrades, repairs and spares (both commercial and
military) sector represents approximately 9%.
Demand for commercial aerostructures is directly correlated to
demand for new aircraft. Demand for new aircraft is a function
of several factors such as demand for commercial air transport
and freight capacity, financial health of aircraft operators,
and general economic conditions. New large commercial aircraft
deliveries by Boeing and Airbus totaled 832 in 2006, up from 668
in 2005 and 605 in 2004, which was the most recent cyclical
trough following the 1999 peak of 914 deliveries. Aircraft
orders and deliveries in 2002 and 2003 were adversely impacted
by economic recessionary conditions, the terrorist attacks of
September 11, 2001 and SARS outbreaks in 2002. In 2005
demand started to rebound, resulting in record orders for 2,057
Boeing and Airbus aircraft, which are expected to be delivered
over the next several years. According to published estimates by
Boeing and Airbus, they expect to deliver a combined total of
approximately 870 commercial aircraft in 2007. As of
December 31, 2006, Boeing and Airbus had a combined backlog
of 4,851 commercial aircraft, which has grown from a combined
backlog of 3,968 as of December 31, 2005.
The business jet market segment is driven by corporate
profitability, worldwide economic growth and the extent to which
business jets are viewed as a viable alternative to commercial
air travel. Higher corporate profit rates coupled with emerging
business jet market growth are producing what we believe will be
a record business jet market in 2007, with projected deliveries
of approximately 1,000 aircraft, and we expect the industry to
remain relatively steady in the coming years. Based on our
research, we believe that over the next ten-year period, over
10,000 business jets, worth approximately $195 billion in
sales, will be produced.
The market for military aerostructures is dependent upon
government development and procurement of military aircraft,
which is affected by many factors, including force structure and
fleet requirements, the Department of Defense, herein referred
to DoD, and foreign defense budgets, the political
environment and public support for defense spending and current
and expected threats to U.S. and foreign national security and
related interests. Following the terrorist attacks of
September 11, 2001, the DoD aircraft procurement budget
rose to
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$20.9 billion in federal fiscal 2002, excluding
supplementals, from $18.8 billion in federal fiscal 2001,
and since 2002 has risen to $26.0 billion in federal fiscal
2007.
Aircraft modifications, upgrades, repairs and spares are
intended to extend the useful life of in-service aircraft.
Modifications are structural changes that enable existing
aircraft to perform alternative missions. For example, certain
B747 models used for commercial transport service have been
modified to provide increased freight capacity by removing
seating and adding cargo doors and support structures for
increased weight loads. Upgrades represent the application of
new technology to increase performance characteristics. For
example, winglets are affixed to the tips of existing wings to
increase aerodynamics and fuel efficiencies. The market for
repairs and spares, otherwise referred to as the aftermarket,
encompasses both scheduled and event-driven maintenance of
existing aircraft structural components. Scheduled maintenance
is performed at regular intervals to ensure structural integrity
of aerostructures and drives demand for spares and repairs.
Our
Competitive Strengths
We believe our key competitive strengths include:
Leading Position in the Growing Commercial Aerostructures
Market. We are the largest independent original
parts manufacturer of commercial aerostructures with an
estimated 19% market share among all aerostructures suppliers.
We believe our market position and significant scale favorably
position us to capitalize on the increased demand for large
commercial aircraft. As of December 31, 2006, Boeing and
Airbus had a combined backlog of 4,851 commercial aircraft,
which has grown from a backlog of 3,968 as of December 31,
2005. We are under contract to provide aerostructure products
for approximately 97% of the aircraft that comprise this
commercial aircraft backlog. The significant aircraft order
backlog and our strong relationships with Boeing and Airbus
should enable us to continue to profitably grow our core
commercial aerostructures business.
Participation on High Volume and Major Growth
Platforms. We derive a high proportion of our
Boeing revenues from Boeings high volume B737 program and
a high proportion of our Airbus revenues from the high volume
A320 program. The B737 and A320 families are Boeings and
Airbus best selling commercial airplanes. We also have
been awarded a significant amount of work on the major new twin
aisle programs launched by Boeing and Airbus, the B787 and the
A380.
Stable Base Business. We have entered into
exclusive long-term supply agreements with Boeing and Airbus,
our two largest customers, making us the exclusive supplier for
most of the business covered by these contracts. Our supply
agreements with Boeing provide that we will continue to supply
essentially all of the products we currently supply to Boeing
for the life of the current aircraft programs, including
commercial derivative models. The principal supply agreements we
have entered into with Boeing make us Boeings exclusive
source for substantially all of the products covered by the
agreements, meaning that Boeing may not produce the products
internally or purchase them from other suppliers. In addition,
for essentially all of our products currently sold to Boeing,
our product pricing is variable such that at lower annual
volumes the average prices are higher, thereby helping to
protect our margins if volume is reduced.
Under our supply agreements with Airbus, we supply most of our
products for the life of the aircraft program, including
commercial derivative models, with pricing determined through
2010. For the A380, we have a long-term supply contract with
Airbus that covers a fixed number of units. We are currently the
sole-source supplier for approximately 78% of the products, as
measured by dollar value, that we sell to Airbus. We believe our
long-term supply contracts with our two largest customers
provide us with a stable base business upon which to build.
Strong Incumbent and Competitive Position. We
have a strong incumbent position on the products we currently
supply to Boeing and Airbus due not only to our long-term supply
agreements, but also to our long-standing relationships with
Boeing and Airbus, as well as to the high costs OEMs would incur
to switch suppliers on existing programs. We have strong,
embedded relationships with our primary customers as most of our
senior management team are former Boeing or Airbus executives.
We believe our senior management
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team possesses inherent knowledge of and relationships with
Boeing and Airbus that may not exist to a corresponding degree
between other suppliers and these two OEMs.
We believe that OEMs incur significant costs to change
aerostructures suppliers once contracts are awarded. Such
changes after contract award require additional testing and
certification, which may create production delays and
significant costs for both the OEM and the new supplier. We also
believe it would be cost prohibitive for other suppliers to
duplicate our facilities and the over 20,000 major pieces of
equipment that we own or operate. The combined insurable
replacement value of all the buildings and equipment we own or
operate is approximately $5.1 billion, including
approximately $2.3 billion and approximately
$1.7 billion for buildings and equipment, respectively,
that we own and approximately $1.1 billion for other
equipment used in the operation of our business. The insurable
values represent the estimated replacement cost of buildings and
equipment used in our operations and covered by property
insurance, and exceeds the fair value of assets acquired as
determined for financial reporting purposes. As a result, we
believe that so long as we continue to meet our customers
requirements, the probability of their changing suppliers on our
current statement of work is quite low.
Industry Leading Technology, Design Capabilities and
Manufacturing Expertise. Spirit Holdings
predecessor, Boeing Wichita, had over 75 years of
experience designing and manufacturing large-scale, complex
aerostructures and we possess industry-leading engineering
capabilities that include significant expertise in structural
design and technology, use of composite materials, stress
analysis, systems engineering and acoustics technology. With
approximately 850 degreed engineering and technical employees
(including over 200 degreed contract engineers), we possess
knowledge and manufacturing know-how that would be difficult for
other suppliers to replicate. In addition to our engineering
expertise, we have strong manufacturing and technological
capabilities. Our manufacturing processes are highly automated,
delivering efficiency and quality, and we have expertise in
manufacturing aerostructures using both metallic and composite
materials. We have strong technical expertise in bonding and
metals fabrication, assembly, tooling and composite
manufacturing, including handling all composite material grades
and fabricating large scale complex contour composites.
We believe our technological, engineering and manufacturing
capabilities separate us from many of our competitors and give
us a significant competitive advantage to grow our business and
increase our market share. The fact that we are the only
external supplier of forward fuselages for large commercial
aircraft demonstrates our industry leadership. The forward
fuselage is one of the most complex and technologically advanced
aerostructures on a commercial aircraft because it must satisfy
the aircrafts contour requirements, balance strength,
aerodynamics and weight, and house the cockpit and avionics.
Given this complexity, the forward fuselage sells at a premium,
for approximately twice the value per pound of other fuselage
sections.
Competitive and Predictable Labor Cost
Structure. The primary contributors to
establishing our competitive cost structure were: (1) labor
savings, (2) pension and other benefit savings,
(3) reduced corporate overhead, and (4) operational
efficiency improvements. At the time of the Boeing Acquisition,
we reduced our workforce by 15% and entered into new labor
contracts with our unions that established wage levels which are
in-line with the local market. We also changed work rules and
significantly reduced the number of job categories, resulting in
greater flexibility in work assignments and increased
productivity. We were also able to reduce pension costs, largely
through a shift from a defined benefit plan to more predictable
defined contribution and union-sponsored plans, and to reduce
fringe benefits by increasing employee contributions to health
care plans and decreasing retiree medical costs. In addition, we
replaced corporate overhead previously allocated to Boeing
Wichita when it was a division of Boeing with our own
significantly lower overhead spending. As a result of our
long-term collective bargaining agreements with most of our
labor unions, our labor costs are fairly stable and predictable
well into 2010.
We have also begun to implement a number of operational
efficiency improvements, including global sourcing to reduce
supplier costs and realignment of our business units. It is our
strong belief that our competitive cost structure has positioned
us to win significant new business and was a key factor in three
recent significant contract awards.
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Experienced Management Team with Significant Equity
Ownership. We have an experienced and proven
management team with an average of more than 20 years of
aerospace industry experience. Our management team has
successfully expanded our business, reduced costs and
established the stand alone operations of our business. Members
of our management team and the Board of Directors hold common
stock equivalent to approximately 6.1% of our companys
outstanding stock on a fully diluted basis.
Our
Strategy
Our goal is to remain a leading aerostructures manufacturer and
to increase revenues while maximizing our profitability and
growth. Our strategy includes the following:
Support Increased Aircraft Deliveries. Core to
our business strategy is a determination to meet or exceed the
expectations of Boeing and Airbus under our existing supply
arrangements. Our customers expect us to deliver high quality
products on schedule. We are constantly focused on improving our
manufacturing efficiency and maintaining our high standards of
quality and on-time delivery to meet these expectations. We are
also focused on supporting our customers increase in new
aircraft production and the introduction of key aircraft
programs such as the Boeing B787 and the Airbus A380. We are
adjusting our manufacturing processes, properties and facilities
to accommodate an increase in production and an expected shift
in mix. In 2006, we delivered the first B787 wing package out of
our Tulsa, Oklahoma production plant. With the upturn in the
commercial aerospace market, we have seen delivery rates
increase. For the twelve months ended December 31, 2006, we
delivered 392 Boeing shipsets (one shipset being a full set of
components produced by us for one airplane), as compared to 308
Boeing shipsets for the twelve months ended December 29,
2005. Deliveries of the Airbus and Raytheon products began on
April 1st,
2006 with the acquisition of BAE Aerostructures. For the nine
months ended December 31, 2006, we delivered 318 Airbus
shipsets and 51 Raytheon shipsets. Along with rising
production rates, we are also experiencing a mix change, with a
higher ratio of larger aircraft, which generally have higher
dollar value content. We believe we are well positioned to meet
the increased demand for our products by our customers.
Win New Business from Existing and New
Customers. We believe that we are well positioned
to win additional work from Boeing and Airbus, particularly work
that they currently insource but that they might shift to an
external supplier in the future and work on new aircraft
programs. Based on our research, we believe that outsourcing
design, engineering and manufacturing of aerostructures to
suppliers increased from approximately 40% in 2003 to
approximately 49% by year end in 2004 (adjusting for the
outsourcing by Boeing as a result of the Boeing Acquisition),
and decreased slightly to approximately 45% in 2005. Despite the
slight decline in 2005, our research shows that the underlying
procurement trend is for increased outsourcing. In addition,
opportunities for us to win significant new business will
typically arise when OEMs design new aircraft programs such as
the Boeing B787 or the Airbus A380, or a new aircraft
derivative, such as cargo versions of passenger aircraft, larger
or extended range versions of in-production airplanes, and
military versions of commercial airplanes. Suppliers to aircraft
OEMs must meet demanding quality and reliability standards, and
our record of meeting those standards over decades with Boeing
and Airbus is a key competitive strength. We believe we are well
positioned to increase our statement of work from our customers
given our strong relationships, our size, design and build
capabilities and our financial resources, which are necessary to
make proper investments. Since inception, Spirit has bid on
additional work with existing customers in the large commercial
aircraft, business jet, rotorcraft and military sectors.
Prior to the Boeing Acquisition, Boeing Wichita was unable to
pursue non-Boeing OEM business. However, as an independent
company, we now have significant opportunities to increase our
sales to OEMs other than Boeing. We believe our design,
engineering and manufacturing capabilities are highly attractive
to potential new customers and provide a competitive advantage
in winning new aerostructures business. For example, we believe
we are well positioned to win new composite aerostructures
business from OEMs by leveraging our composite expertise
developed from the design and production of the Boeing B777
nacelle and the development of the Boeing B787 forward fuselage.
Based on our research, the composite aerostructures market is
currently estimated to have generated over $2.5 billion in
annual sales in 2005 with a projected annual growth rate of
21.6% over the period from 2005 to 2010. Since inception, Spirit
has bid on supply
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contracts with new customers in the regional aircraft, business
jet, rotorcraft, military and engine manufacturer sectors.
We have established a sales and marketing infrastructure to
support our efforts to win business from new and existing
customers. To win new business, we market our mix of engineering
expertise in the design and manufacture of aerostructures, our
advanced manufacturing capabilities with both composites and
metals, and our competitive cost structure. As a result of our
core capabilities, competitive cost position, and sales and
marketing efforts, we have won several significant contracts
from non-Boeing customers in competitive bid processes since the
Boeing Acquisition.
Research and Development Investment in Next Generation
Technologies. We invest in direct research and
development for current programs to strengthen our relationships
with our customers and new programs to generate new business. As
part of our research and development effort, we work closely
with OEMs and integrate our engineering teams into their design
processes. As a result of our close coordination with OEMs
design engineering teams and our research and development
investments in technology, engineering and manufacturing, we
believe we are well positioned to win new business on new
commercial and military platforms.
Provide New Value-Added Services to our
Customers. We possess the core competencies to
not only manufacture, but also to integrate and assemble complex
system and structural components. We have been selected to
assemble and integrate avionics, electrical systems, hydraulics,
wiring and other components for the forward fuselage and pylons
for the Boeing B787. Boeing expects to be able to ultimately
assemble a B787 so that it is ready for test flying in
significantly less time after it receives our shipset than is
the case for B737s. We believe our ability to integrate complex
components into aerostructures is a service that greatly
benefits our customers by reducing their flow time and inventory
holding costs. As a result of our ability to integrate and
assemble components from a diverse supplier base, we believe we
are integral to our customers supply chain.
Continued Improvement to our Low Cost
Structure. Although we achieved significant cost
reductions at the time of acquisition, we remain focused on
further reducing costs. There continue to be cost saving
opportunities in our business and we have identified and begun
to implement them. We expect that most of our future cost saving
opportunities will arise from increased productivity, continued
outsourcing of non-core activities, and improved procurement and
sourcing through our global sourcing initiatives. We believe our
strategic sourcing expertise should allow us to develop and
manage low-cost supply chains in Asia and Central Europe. Our
goal is to continue to increase our material sourcing from
low-cost jurisdictions.
Pursue Strategic Acquisitions on an Opportunistic
Basis. The commercial aerostructures market is
highly fragmented, with many small private businesses and
divisions of larger public companies. Given the market
fragmentation, coupled with the trend by OEMs to outsource work
to Tier 1 manufacturers, we believe our industry could
experience significant consolidation in the coming years.
Although our main focus is to grow our business organically, we
believe we are well positioned to capture additional market
share and diversify our current business through opportunistic
strategic acquisitions.
Our
Relationship with Boeing
Supply
Agreement with Boeing for B737, B747, B767, and B777
Platforms
Overview. In connection with the Boeing
Acquisition, Spirit entered into long-term supply agreements
under which we are Boeings exclusive supplier for
substantially all of the products and services provided by
Boeing Wichita to Boeing prior to the closing of the Boeing
Acquisition. The main supply contract is primarily comprised of
two separate agreements: (1) the Special Business
Provisions, or Sustaining SBP, which sets forth the specific
terms of the supply arrangement with regard to Boeings
B737, B747, B767 and B777 aircraft and (2) the General
Terms Agreement, or GTA, which sets forth other general
contractual provisions relating to our various supply
arrangements with Boeing, including provisions relating to
termination, events of default, assignment, ordering procedures,
inspections and quality controls. The summary below describes
provisions contained in both the Sustaining SBP and the GTA as
both agreements govern the main supply arrangement. We refer
below to the Sustaining SBP, the GTA and any related purchase
order or contract collectively as the Supply
Agreement. The
7
following description of the Supply Agreement summarizes the
material portions of the agreement. The Supply Agreement is a
requirements contract which covers certain products, including
fuselages, struts/pylons and nacelles (including thrust
reversers), as well as tooling, for Boeing B737, B747, B767 and
B777 commercial aircraft programs for the life of these
programs, including any commercial derivative models. During the
term of the Supply Agreement and absent default by Spirit,
Boeing is obligated to purchase all of its requirements for
products covered by the Sustaining SBP from Spirit and
prohibited from manufacturing such products itself. Although
Boeing is not required to maintain a minimum production rate,
Boeing is subject to a maximum production rate above which it
must negotiate with us regarding responsibility for nonrecurring
expenditures related to a capacity increase.
Pricing. The Supply Agreement sets forth
established prices for recurring products through May 2013.
Prices are adjusted each year based on a quantity-based price
adjustment formula described in the Supply Agreement whereby
average per unit prices are higher at lower volumes and lower at
higher volumes. Prices are subject to adjustment for abnormal
inflation (above a specified level in any year) and for certain
production, schedule and other changes. See
Changes below.
Two years prior to the expiration of the established pricing
terms, Spirit will propose pricing for the following ten years
or another period to be agreed upon by the parties. Boeing and
Spirit are required to negotiate the pricing for such additional
period in good faith based on then-prevailing U.S. market
conditions for forward fuselages, B737 fuselages and B737/B777
struts and nacelles and based on then-prevailing global market
conditions for all other products. If the parties are unable to
agree upon pricing, then, until such dispute is resolved,
pricing will be determined according to the price as of the
expiration of the initial eight-year period, adjusted using the
then-existing quantity-based price adjustment formula and annual
escalation until such time as future pricing is agreed.
Prices for commercial derivative models are to be negotiated in
good faith by the parties based on then-prevailing market
conditions. If the parties cannot agree on price, then the
parties must engage in dispute resolution pursuant to
agreed-upon
procedures.
Tooling. Under the Supply Agreement, Boeing
owns all tooling used in production or inspection of products
covered by the Sustaining SBP. Spirit is responsible for
providing all new tooling required to manufacture and deliver
products under the Supply Agreement, and Boeing acquires title
to such tooling upon payment. Since Boeing owns this tooling,
Spirit may not sell, lease, dispose of or encumber any of it.
Spirit has the option to purchase certain limited tooling.
Although Boeing owns the tooling, Spirit has the limited right
to use all tooling without charge to perform its obligations to
Boeing under the Supply Agreement and also to provide
aftermarket services in accordance with the rights granted to
Spirit under other related agreements, including royalty-bearing
license agreements. Boeing is entitled to use the tooling only
under limited circumstances. Spirit is responsible for
maintaining and insuring the tooling. Spirits rights to
use the tooling are subject to the termination provisions of the
Supply Agreement.
Changes. Upon written notification to Spirit,
Boeing has the right to make changes within the general scope of
work performed by Spirit under the Supply Agreement. If any such
change increases or decreases the cost or time required to
perform, Boeing and Spirit will negotiate an equitable
adjustment (based on rates, factors and methodology set forth in
the Supply Agreement) to the price or schedule to reflect the
change, except that Spirit will be responsible for absorbing the
cost of certain changes. The Supply Agreement also provides for
equitable adjustments to product prices in the event there are
order accelerations or decelerations, depending on lead times
identified in the Supply Agreement. In addition, the Supply
Agreement provides for equitable adjustments to recurring part
prices as well as the price of nonrecurring work upon the
satisfaction of certain conditions and upon certain minimum
dollar thresholds being met.
Raw Materials. Spirit is required to procure
from Boeing (or its designated service provider) certain raw
materials used in producing Boeing products, except that Spirit
has the right to procure such raw materials from other sources
if it reasonably believes that Boeing or its designated service
provider cannot support its requirements. Revisions to the raw
material pricing terms set forth in the Supply Agreement may
entitle Spirit to a price adjustment.
Third Party Pricing. Spirit may be permitted
to purchase supplies or subparts directly from Boeings
subcontractors under the terms of Boeings subcontracts. If
Spirit does so, a majority of the savings achieved as a
8
result of purchasing through the subcontracts will be applied
towards price reductions on the applicable Boeing products.
Nonrecurring Work Transfer. Following an event
of default (as described below), termination by Boeing of an
airplane program, expiration of the Supply Agreement or the
termination of the Supply Agreement by mutual agreement of the
parties, Spirit must transfer to Boeing all tooling and other
nonrecurring work relating to the affected program, or if the
entire Supply Agreement is cancelled, all tooling and other
nonrecurring work covered by the Supply Agreement.
Additional Spirit Costs. In the event that
Boeing rejects a product manufactured by Spirit, Boeing is
entitled to repair or rework such product, and Spirit is
required to pay all reasonable costs and expenses incurred by
Boeing related thereto. In addition, Spirit is required to
reimburse Boeing for costs expended in providing Spirit
and/or
Spirits contractors technical or manufacturing assistance
with respect to Spirit nonperformance issues.
Termination for Convenience. Subject to the
restrictions prohibiting Boeing from manufacturing certain
products supplied by Spirit or purchasing such products from any
other supplier, Boeing may, at any time, terminate all or part
of any order under the Supply Agreement by written notice to
Spirit. If Boeing terminates all or part of an order, Spirit is
entitled to compensation for certain costs.
Termination of Airplane Program. If Boeing
decides not to initiate or continue production of a Boeing
commercial aircraft model B737, B747, B767 or B777 or commercial
derivative because it determines there is insufficient business
basis for proceeding, Boeing may terminate such model or
derivative, including any order therefore, by written notice to
Spirit. In the event of such a termination, Boeing will be
liable to Spirit for any orders issued prior to the date of the
termination notice and may also be liable for certain
termination costs. In addition, if Boeing terminates any such
commercial aircraft model within two years after the Boeing
Acquisition, Spirit also has the right to receive an
inconvenience fee equal to Boeings then-current net book
value for the tooling in support of the terminated commercial
aircraft model, determined without regard to any write-off or
other adjustment by reason of such termination.
Events of Default and Remedies. It is an
event of default under the Supply Agreement if
Spirit:
(1) fails to deliver products as required by the Supply
Agreement;
(2) fails to provide certain assurances of
performance required by the Supply Agreement;
(3) breaches the provisions of the Supply Agreement
relating to intellectual property and proprietary information;
(4) participates in the sale, purchase or manufacture of
airplane parts without the required approval of the FAA or
appropriate foreign regulatory agency;
(5) defaults under certain requirements to maintain a
system of quality assurance;
(6) fails to comply with other obligations under the Supply
Agreement (which breach continues for more than 10 days
after notice is received from Boeing);
(7) is unable to pay its debts as they become due,
dissolves or declares bankruptcy; or
(8) breaches the assignment provisions of the Supply
Agreement (which breach continues for more than 10 days
after notice is received from Boeing).
If an event of default occurs, Boeing has the right to exercise
various remedies set forth in the Supply Agreement, including
the right to manufacture or to otherwise obtain substitute
products, cancel any or all outstanding orders under the Supply
Agreement,
and/or
terminate the Supply Agreement. Boeing is limited, however, in
its ability to cancel orders or terminate the Supply Agreement
for the defaults described in items (1), (2) and
(6) of the preceding paragraph. In such cases, Boeing may
not cancel orders unless the event of default is material and
has an operational or financial impact on Boeing and may not
terminate the Supply Agreement unless there are repeated,
material events of default and certain other criteria are
satisfied. In such case, Boeing may only terminate the Supply
Agreement with respect to the aircraft program affected by the
event of default. If two or more programs are affected by the
event of default, Boeing may terminate the entire Supply
Agreement. Boeing may also
9
require Spirit to transfer tooling, raw material,
work-in-process
and other inventory and certain intellectual property to Boeing
in return for reasonable compensation therefor.
Wrongful Termination. If Boeing wrongfully
terminates an order, Spirit is entitled to recover lost profits,
in addition to any amount Spirit would be entitled to recover
for a Termination for Convenience, as described
above. If Boeing wrongfully cancels or terminates the Sustaining
SBP with respect to a model of program airplane, then Spirit is
entitled to all remedies available at law or in equity, with
monetary damages not to exceed an agreed limit.
Excusable Delay. If delivery of any product is
delayed by circumstances beyond Spirits reasonable
control, and without Spirits or its suppliers or
subcontractors error or negligence (including, without
limitation, acts of God, war, terrorist acts, fires, floods,
epidemics, strikes, unusually severe weather, riots and acts of
government), or by any material act or failure to act by Boeing,
each being an excusable delay, then, subject to
certain exceptions, Spirits delivery obligations will be
extended. If delivery of any product is delayed by an excusable
delay for more than three months, Boeing may cancel all or part
of any order relating to the delayed products.
If delivery of any product constituting more than 25% of the
shipset value for one or more models of program airplanes is
delayed by an excusable delay for more than five months, Boeing
may cancel the Sustaining SBP as it applies to such models of
program airplanes, and neither party will have any liability to
the other, other than as described in the above paragraph under
the heading Events of Default and Remedies.
Suspension of Work. Boeing may at any time
require Spirit to stop work on any order for up to
120 days. During such time, Boeing may either direct Spirit
to resume work or cancel the work covered by such stop work
order. If Boeing directs Spirit to resume work or the
120-day
period expires, Spirit must resume work, the delivery schedule
affected by the stop work order will be extended and Boeing must
compensate Spirit for its reasonable direct costs incurred as a
result of the stop work order.
Assignment. Spirit may not assign its rights
under the Supply Agreement other than with Boeings
consent, which Boeing may not unreasonably withhold unless the
assignment is to a disqualified person. A disqualified person is
one: (1) whose principal business is as an OEM of
commercial aircraft, space vehicles, satellites or defense
systems; (2) that Boeing reasonably believes will not be
able to perform its obligations under the Supply Agreement;
(3) that, after giving effect to the transaction, would be
a supplier of more than 40% by value of the major structural
components of any Boeing program then in production; or
(4) who is, or is an affiliate of, a commercial airplane
operator or is one of five named corporate groups. Sale of
majority voting power or of all or substantially all of
Spirits assets to a disqualified person is considered an
assignment.
B787
Supply Agreement with Boeing
Overview. Spirit and Boeing also entered into
a long-term supply agreement for Boeings new
B787 program, or the B787 Supply Agreement, which covers
the life of the program and commercial derivatives. The B787
Supply Agreement is a requirements contract pursuant to which
Spirit is Boeings exclusive supplier for the forward
fuselage, fixed and moveable leading wing edges, struts (or
pylons) and related tooling for the B787. The B787 Supply
Agreement does not provide for a minimum or maximum rate of
production, but does acknowledge that Spirit will equip itself
for a maximum rate of seven aircraft per month and will
negotiate with Boeing regarding an equitable price adjustment if
additional expenditures are required to increase the production
rate above that level. Spirit is evaluating facility
requirements to increase that capability to ten airplanes per
month. Additional capital expenditures would be needed for
tooling and equipment to support a production rate above seven
per month. Under the B787 Supply Agreement, Spirit also provides
certain support, development and redesign engineering services
to Boeing at an agreed hourly rate.
Pricing. Pricing for the B787-8, the base
model currently going into production, is generally established
through 2021, with prices decreasing as cumulative volume levels
are met over the life of the program. Prices are subject to
adjustment for abnormal inflation (above a specified level in
any year) and for certain production, schedule and other
changes. Prices for future commercial derivatives such as the
B787-3, B787-9 and B787-10 will be negotiated in good faith by
the parties on principles consistent with the terms of the B787
Supply Agreement as they relate to the B787-8 model of the B787.
10
Advance Payments. The B787 Supply Agreement
requires Boeing to make advance payments to Spirit for
production articles in the aggregate amount of
$700 million. As of December 31, 2006,
$600 million had been received by Spirit, and an additional
$100 million will be advanced to Spirit in 2007. Spirit
must repay these advances, without interest, in the amount of a
$1.4 million offset against the purchase price of each of
the first five hundred B787 shipsets delivered to Boeing. In the
event that Boeing does not take delivery of five hundred
B787 shipsets, any advances not then repaid will first be
applied against any outstanding B787 payments then due by Boeing
to Spirit, with any remaining balance repaid at the rate of
$84 million per year beginning the month following
Spirits final delivery of a B787 production shipset to
Boeing.
Termination of Airplane Program. If Boeing
decides not to initiate or continue production of the
B787 airplane program because Boeing determines, after
consultation with Spirit, that there is an insufficient business
basis for proceeding, Boeing may terminate the B787 airplane
program, including any orders, by written notice to Spirit. In
the event of such a termination, Boeing will be liable to Spirit
for costs incurred in connection with any orders issued prior to
the date of the termination notice and may also be liable for
certain termination costs and for compensation for any tools,
raw materials or
work-in-process
requested by Boeing in connection with the termination.
Events of Default and Remedies. It is an
event of default under the B787 Supply Agreement if
Spirit:
(1) fails to deliver products as required by the B787
Supply Agreement;
(2) breaches the provisions of the B787 Supply Agreement
relating to intellectual property and proprietary information;
(3) participates in the sale, purchase or manufacture of
airplane parts without the required approval of the FAA or
appropriate foreign regulatory agency;
(4) defaults under certain requirements to maintain a
system of quality assurance;
(5) fails to comply with other obligations under the B787
Supply Agreement (which breach continues for more than
15 days after notice is received from Boeing);
(6) is unable to pay its debts as they become due,
dissolves or declares bankruptcy;
(7) fails to comply with U.S. export control
laws; or
(8) breaches the assignment provisions of the B787 Supply
Agreement (which breach continues for more than 10 days
after notice is received from Boeing).
If an event of default occurs, Boeing has the right to exercise
various remedies set forth in the B787 Supply Agreement,
including the right to manufacture or to otherwise obtain
substitute products, cancel any or all outstanding orders under
the B787 Supply Agreement
and/or
terminate the B787 Supply Agreement. Before terminating any
order or the B787 Supply Agreement, Boeing is required to work
with Spirit to attempt to agree on a satisfactory recovery plan.
Boeing may also require Spirit to transfer tooling, raw
material,
work-in-process
and other inventory and certain intellectual property to Boeing
in return for reasonable compensation.
Assignment. Spirit may not assign its rights
under the B787 Supply Agreement or any related order other than
with Boeings consent, which Boeing may not unreasonably
withhold unless the assignment is to a disqualified person. A
disqualified person is one: (1) whose principal business is
as an OEM of commercial aircraft, space vehicles, satellites or
defense systems; (2) that Boeing reasonably believes will
not be able to perform its obligations under the B787 Supply
Agreement; (3) that, after giving effect to the
transaction, would be a supplier of more than 40% by value of
the major structural components of any Boeing program then in
production; or (4) who is, or is an affiliate of, a
commercial airplane operator or is one of five named corporate
groups. Sale of majority voting power or of all or substantially
all of Spirits assets to a disqualified person is
considered an assignment.
License
of Intellectual Property
Supply Agreement. All technical work product
and works of authorship produced by or for Spirit with respect
to any work performed by or for Spirit pursuant to the Supply
Agreement are the exclusive property of Boeing. All
11
inventions conceived by or for Spirit with respect to any work
performed by or for Spirit pursuant to the Supply Agreement and
any patents claiming such inventions are the exclusive property
of Spirit, except that Boeing will own any such inventions that
Boeing reasonably believes are applicable to the B787 platform,
and Boeing may seek patent protection for such B787 inventions
or hold them as trade secrets, provided that, if Boeing does not
seek patent protection, Spirit may do so.
Except as Boeing otherwise agrees, Spirit may only use Boeing
proprietary information and materials (such as tangible and
intangible confidential, proprietary
and/or trade
secret information and tooling) in the performance of its
obligations under the Supply Agreement. Spirit is prohibited
from selling products manufactured using Boeing proprietary
information and materials to any person other than Boeing
without Boeings authorization.
Spirit has granted to Boeing a license to Spirit proprietary
information and materials and software and related products for
use in connection with the testing, certification, use, sale or
support of a product covered by the Supply Agreement, or the
manufacture, testing, certification, use, sale or support of any
aircraft including
and/or
utilizing a product covered by the Supply Agreement. Spirit has
also granted to Boeing a license to use Spirit intellectual
property to the extent such intellectual property interferes
with Boeings use of products or intellectual property
belonging to Boeing under the Supply Agreement.
In order to protect Boeing against Spirits default, Spirit
has granted to Boeing a license, exercisable on such default to
practice
and/or use,
and license for others to practice
and/or use
on Boeings behalf, Spirits intellectual property and
tooling related to the development, production, maintenance or
repair of products in connection with making, using and selling
products. As a part of the foregoing license, Spirit must, at
the written request of and at no additional cost to Boeing,
promptly deliver to Boeing any such licensed property considered
by Boeing to be necessary to exercise Boeings rights under
the license.
B787 Supply Agreement. The B787 Supply
Agreement establishes three classifications for patented
invention and proprietary information: (1) intellectual
property developed by Spirit during activity under the
B787 Supply Agreement, or Spirit IP; (2) intellectual
property developed jointly by Boeing and Spirit during that
activity, or Joint IP; and (3) all other intellectual
property developed during activity under the B787 Supply
Agreement, or Boeing IP.
Boeing may use Spirit IP for work on the B787 program and Spirit
may license it to third parties for work on such program. Spirit
may also not unreasonably withhold consent to the license of
such intellectual property to third parties for work on other
Boeing programs, provided that it may require a reasonable
royalty to be paid and, with respect to commercial airplane
programs, that Spirit has been offered an opportunity, to the
extent commercially feasible, to work on such programs.
Each party is free to use Joint IP in connection with work on
the B787 and other Boeing programs, but each must obtain the
consent of the other to use it for other purposes. If either
party wishes to license Joint IP to a third party for work on a
Boeing program other than the B787, then the other party may
require a reasonable royalty but may not unreasonably withhold
its consent, as long as (if the program in question is another
Boeing commercial airplane program) Spirit has been offered an
opportunity, to the extent commercially feasible, to perform
work for the particular program.
Spirit is entitled to use Boeing IP for the B787 program, and
may require Boeing to license it to subcontractors for the same
purpose.
Additional License From Boeing. Boeing has
licensed certain intellectual property rights to Spirit under a
Hardware Material Services General Terms Agreement, or HMSGTA,
and four initial Supplemental License Agreements, or SLAs, under
the HMSGTA. The HMSGTA and the initial SLAs grant Spirit
licenses to use Boeing intellectual property to manufacture
listed parts for the aftermarket and to perform maintenance,
repair and overhaul, or MRO, of aircraft and aircraft components
for customers other than Boeing. These agreements also permit
Spirit to use know-how obtained by Spirit personnel prior to the
closing of the Boeing Acquisition. Spirit also may obtain
additional SLAs from Boeing and those SLAs will also supersede
the restrictions on Spirits use of Boeings
proprietary information and materials described above.
12
Our
Products
We are organized into three principal reporting segments:
(1) Fuselage Systems, which include the forward, mid, and
rear fuselage sections, (2) Propulsion Systems, which
include nacelles, struts/pylons and engine structural components
and (3) Wing Systems, which include wings, wing components
and flight control surfaces. All other activities fall within
the All Other segment, principally made up of sundry sales of
miscellaneous services and sales of natural gas through a
tenancy-in-common
with other Wichita companies. Fuselage Systems, Propulsion
Systems, Wing Systems and All Other represented approximately
49%, 28%, 22% and 1%, respectively, of our revenues for the
period ended December 31, 2006.
Commercial
Aircraft Structures
We principally design, engineer and manufacture commercial
aircraft structures such as fuselages, nacelles (including
thrust reversers), struts/pylons, wings and wing assemblies and
flight control surfaces. We are the largest independent supplier
of aerostructures to both Boeing and Airbus. Sales related to
the large commercial aircraft market, some of which may be used
in military applications, represent approximately 99% of our
combined revenues for the twelve months ended December 31,
2006.
Our structural components, in particular the forward fuselage
and nacelles, are among the most complex and highly engineered
structural components and represent a significant percentage of
the costs of each aircraft. We are currently the sole-source
supplier of 96% of the products we sell to Boeing and Airbus, as
measured by dollar value of products sold. We typically sell a
package of aerostructure components, referred to as a shipset,
to our customers.
The following table summarizes the major commercial (including
regional and business jets) programs that we currently have
under long-term contract by product and aircraft platform.
|
|
|
|
|
Product
|
|
Description
|
|
Aircraft Platform
|
|
|
|
|
|
|
Fuselage Systems
|
|
|
|
|
Forward Fuselage
|
|
Forward section of fuselage which
houses flight deck, passenger cabin and cargo area
|
|
B737, B747, B767, B777, B787
|
Other Fuselage Sections
|
|
Mid-section and other sections of
the fuselage and certain other structural components, including
floor beams
|
|
B737, B747, B777
|
Propulsion Systems
|
|
|
|
|
Nacelles (including Thrust
Reversers)
|
|
Aerodynamic structure surrounding
engines
|
|
B737, B747, B767, B777
|
Struts/Pylons
|
|
Structure that connects engine to
the wing
|
|
B737, B747, B767, B777, B787
|
Wing Systems
|
|
|
|
|
Flight Control Surfaces
|
|
Flaps and slats
|
|
B737, B777, A320 family
|
Empennages
|
|
Horizontal stabilizer and vertical
fin spar assemblies
|
|
B737, Raytheon Hawker
800 series
|
Wing Structures
|
|
Wing framework which consists
mainly of spars, ribs, fixed leading edge, stringers, trailing
edges and flap track beams
|
|
B737, B747, B767, B777, B787, A320
family, A330, A340, A380
|
In addition, we have recently won contracts for two other
business jet packages on which we expect to commence deliveries
in 2009 and 2011, respectively.
Military
Equipment
In addition to providing aerostructures to large commercial
aircraft, we also design, engineer and manufacture structural
components for military aircraft. We provide a significant
amount of content for the 737 Wedgetail and
13
have also been awarded a significant amount of work for the
737 MMA and 737 C40. The 737 Wedgetail, 737 MMA and
737 C40 are commercial aircraft modified for military use. Other
military programs for which we provide products are KC-135, V-22
and AWACs
(E-3).
The following table summarizes the major military programs that
we currently have under long-term contract by product and
military platform.
|
|
|
|
|
Product
|
|
Description
|
|
Military Platform
|
|
Low Observables
|
|
Radar absorbent and translucent
materials
|
|
Various
|
Other Military
|
|
Fabrication, bonding, assembly,
testing, tooling, processing, engineering analysis, and training
|
|
AWACS, KC-135, V-22,
E-6, and
Various
|
Aftermarket
Although we primarily manufacture aerostructures for OEMs, we
intend to increase our aftermarket sales on the products we
manufacture. We have developed a direct sales and marketing
channel for our aftermarket business. In September 2006, we
entered into a five-year distribution agreement with Aviall
Services, Inc., or Aviall, a provider of global parts
distribution and supply chain services for the aerospace
industry and a wholly-owned subsidiary of Boeing, pursuant to
which Aviall will serve as our exclusive distributor of certain
aftermarket products worldwide, excluding the United States and
Canada. We have obtained parts manufacturing approvals from the
FAA for approximately 7,000 parts which allow us to sell spare
parts directly to airlines and MRO organizations. In addition,
our Wichita and Tulsa facilities are FAA repair station
certified and have full technical capability to provide MRO
services.
The following table summarizes our aftermarket products and
services.
|
|
|
|
|
Product
|
|
Description
|
|
Aircraft Platform(1)
|
|
Spares
|
|
Provides replacement parts and
components support
|
|
B737, B747, B767, B777, A320
|
Maintenance, Repair and Overhaul
|
|
FAA certified repair stations that
provide complete
on-site
nacelle repair and overhaul; maintains global partnerships to
support MRO services
|
|
B737, B777
|
|
|
|
(1) |
|
The company also has the opportunity to produce spares for
certain
out-of-production
aircraft and is under contract to provide spares for the B787
and A380. |
Segment
Information
Spirit operates in three principal segments: Fuselage Systems,
Propulsion Systems and Wing Systems. Essentially all revenues in
the three principal segments are with Boeing in the
U.S. with the exception of Wing Systems which includes
revenues from Airbus in the U.K. All other activities fall
within the All Other segment, principally made up of sundry
sales of miscellaneous services and sales of natural gas through
a tenancy-in-common with other Wichita companies. The
Companys primary profitability measure to review a
segments operating performance is operating income before
unallocated corporate selling, general and administrative
expenses and unallocated research and development. Unallocated
corporate selling, general and administrative expenses include
centralized functions such as accounting, treasury and human
resources that are not specifically related to our operating
segments nor are they allocated in measuring the operating
segments profitability and performance and operating
margins.
Spirits Fuselage Systems segment includes development,
production and marketing of forward, mid- and rear fuselage
sections and systems, primarily to aircraft OEMs, as well as
related spares and MRO services.
14
Spirits 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.
Spirits Wing Systems segment includes development,
production and marketing of wings and wing components (including
flight control surfaces) primarily to aircraft OEMs, as well as
related spares and MRO services.
The Companys segments are consistent with the organization
and responsibilities of management reporting to the chief
operating decision-maker for the purpose of assessing
performance. The Companys definition of segment operating
income differs from operating income as presented in its primary
financial statements and a reconciliation of the segmented and
consolidated results is provided in the table set forth below.
Most selling, general and administrative expenses (SG&A),
and all interest expense/(income), related financing costs and
income tax amounts are not allocated to the operating segments.
While some working capital accounts are maintained on a segment
basis, much of the Companys assets are not managed or
maintained on a segmented 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 maintained and
managed on a consolidated basis and generally do not pertain to
any particular segment. Raw materials and certain component
parts are used in the production of aerostructures 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 by the Company of its productive assets,
depreciation expense (included in fixed manufacturing costs and
general and administrative expenses) and capital expenditures,
no allocation of these amounts has been made solely for purposes
of segment disclosure requirements. Segment data is not
presented for periods prior to the Boeing Acquisition as Boeing
Wichita did not maintain separate business segments.
The following table shows segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
June 17, 2005
|
|
|
|
Year Ended
|
|
|
through
|
|
|
|
December 31, 2006
|
|
|
December 29, 2005
|
|
|
|
(Dollars in millions)
|
|
|
Segment
Revenues
|
|
|
|
|
|
|
|
|
Fuselage Systems
|
|
$
|
1,570.0
|
|
|
$
|
637.7
|
|
Propulsion Systems
|
|
|
887.7
|
|
|
|
372.2
|
|
Wing Systems
|
|
|
720.3
|
|
|
|
170.0
|
|
All Other
|
|
|
29.7
|
|
|
|
27.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,207.7
|
|
|
$
|
1,207.6
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
(Loss)(1)
|
|
|
|
|
|
|
|
|
Fuselage Systems
|
|
$
|
112.5
|
|
|
$
|
43.7
|
|
Propulsion Systems
|
|
|
33.7
|
|
|
|
24.5
|
|
Wing Systems
|
|
|
11.8
|
|
|
|
5.1
|
|
All Other
|
|
|
4.3
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
162.3
|
|
|
|
72.1
|
|
Unallocated corporate SG&A(2)
|
|
|
(216.5
|
)
|
|
|
(138.9
|
)
|
Unallocated research and
development
|
|
|
(2.1
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
Total operating income
(loss)
|
|
$
|
(56.3
|
)
|
|
$
|
(67.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The fiscal year 2006 operating income (loss) for Fuselage
Systems, Propulsion Systems, Wing Systems, and All Other include
Union Equity Plan (UEP) charges of $172.9, $103.1, $44.9, and
$1.0, respectively. |
|
(2) |
|
Included in 2006 Unallocated corporate SG&A expenses are a
fourth quarter charge of $4.0 million related to the termination
of the intercompany agreement with Onex and a charge of $4.3
million related to the Executive Incentive Plan. Both of these
charges relate to the Companys IPO. |
15
Sales and
Marketing
We have established a sales and marketing infrastructure to
support our efforts to reach new customers, expand our business
with existing customers and win new business in three sectors of
the aerostructures industry: (1) commercial (including
regional and business jets), (2) military and (3) the
aftermarket. Our sales and marketing unit is comprised of
approximately 46 employees. Our employees are organized by focus
areas: a marketing team that performs research and analysis on
market trends, sector strategies, customers and competitors, and
a sales team led by sales directors assigned to establish and
maintain relationships with each key customer. The sales and
marketing team provides support and works closely with
salespeople in the individual business units to ensure a
consistent, single message approach with customers.
Due to (1) our long-term contracts with Boeing and Airbus
on existing and new programs such as the B737, B787, A320 and
A380, (2) the OEMs desire to limit supplier
concentration, and (3) the industry practice of rarely
changing a third party aerostructures supplier once a program
has been implemented due to the high switching costs, we are
able to minimize our marketing efforts on these specific
programs. However, our marketing team continues to research and
analyze trends in new product development and our sales team
maintains regular contact with key Airbus and Boeing
decision-makers in order to sustain strong relationships with,
and position ourselves to win new business from, both companies.
Prior to the Boeing Acquisition, as an internal Boeing supplier,
we were unable to pursue non-Boeing OEM business. As an
independent company, we have opportunities to increase our sales
to other OEMs in the commercial, military and business jet
sectors. To win new customers, we market our mix of engineering
expertise in the design and manufacture of aerostructures, our
advanced manufacturing capabilities with both composites and
metals, and our competitive cost structure.
We have established a customer contact database to maximize our
interactions with existing and potential customers. We are also
actively working to build positive identity and name recognition
for the Spirit AeroStructures brand through advertising, trade
shows, sponsorships and Spirit customer events.
Prior to the Boeing Acquisition, we were dependent upon
Boeings Commercial Aviation Services organization to
provide entry into the aftermarket business. We are now able to
provide aftermarket support directly to airlines and are in the
process of developing the necessary expertise and customer
relationships within this sector of the business.
Customers
Our primary customers are aircraft OEMs. Boeing and Airbus are
our two largest customers, and we are the largest independent
aerostructures supplier to both companies. We entered into
long-term supply agreements with our customers to provide
aerostructure products to aircraft programs. Currently,
virtually all of the products we sell are under long-term
contracts with 99% of those products, as measured by dollar
value of product sold, supplied by us on a sole-sourced basis.
We have good relationships with our customers due to our diverse
product offering, leading design and manufacturing capabilities
using both metallic and composite materials, and competitive
pricing.
Boeing. For the twelve months ended
December 31, 2006, approximately 91% of our revenues were
from sales to Boeing. We have a strong relationship with Boeing
given our 75 + year history as a Boeing division. Many members
of our senior management team are former Boeing executives who
have strong embedded relationships with Boeing and continue to
work closely with Boeing. As part of the Boeing Acquisition, we
entered into a long-term supply agreement under which we are
Boeings exclusive supplier for substantially all of the
products and services provided by Boeing Wichita prior to the
Boeing Acquisition for the life of the programs. In addition,
Boeing selected us to be the design leader for the Boeing B787
forward fuselage based in part on our strong expertise with
composite technologies.
We believe our strong relationship with Boeing is unmatched in
the industry and will allow us to continue to be an integral
partner with Boeing in the designing, engineering and
manufacturing of complex aerostructures.
16
Airbus. For the twelve months ended
December 31, 2006, approximately 8% of our combined
revenues were from sales to Airbus. As a result of the BAE
Acquisition, we have become the largest independent
aerostructures supplier to Airbus. Under our supply agreements
with Airbus, we supply most of our products for the life of the
aircraft program, including commercial derivative models, with
pricing determined through 2010. For the A380, we have a
long-term supply contract with Airbus that covers a fixed number
of units. We believe we can leverage our relationship with
Airbus and history of delivering high quality products to
further increase our sales to Airbus and continue to partner
with Airbus on new programs going forward.
Although most of our revenues are obtained from sales inside the
U.S., we generated $254.1 million in sales to international
customers for the twelve months ended December 31, 2006,
primarily to Airbus. This includes nine months of revenue since
our acquisition of BAE Aerostructures. The following chart
illustrates the split between domestic and foreign sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Period from June 17, 2005
|
|
|
December 31, 2006
|
|
through December 29, 2005
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
|
Total Net
|
|
|
|
|
Percent of Total
|
Revenue Source
|
|
Net Sales
|
|
|
Sales
|
|
Net Sales
|
|
|
Net Sales
|
|
United States
|
|
$
|
2,953.6
|
|
|
92%
|
|
$
|
1,207.6
|
|
|
100%
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
254.0
|
|
|
8%
|
|
|
|
|
|
|
Other
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
254.1
|
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
3,207.7
|
|
|
100%
|
|
$
|
1,207.6
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The international revenue is included primarily in the Wing
Systems segment. All other segment revenues are from
U.S. sales. Approximately 11.7% of our total assets based
on book value are located in the United Kingdom as part of
Spirit Europe with less than 1 percent of the remaining
assets located in other countries outside the United States.
Expected
Backlog
As of December 31, 2006, our expected backlog associated
with Boeing and Airbus deliveries through 2011, calculated based
on contractual product prices and expected delivery volumes, was
approximately $19.2 billion, based on Boeing and Airbus
published schedules. This is an increase of $4.8 billion
over our corresponding estimate as of December 31, 2005
(after giving effect to the BAE Acquisition), which reflects the
strong orders at Boeing and Airbus. Backlog is calculated based
on the lower of the number of units Spirit is under contract to
produce on our fixed quantity contracts, and Boeing or Airbus
announced backlog on our requirements contracts. The number of
units may be subject to cancellation or delay by the customer
prior to shipment, depending on contract terms. The level of
unfilled orders at any given date during the year will be
materially affected by the timing of our receipt of firm orders
and additional airplane orders, and the speed with which those
orders are filled. Accordingly, our expected backlog as of
December 31, 2006 may not necessarily represent the actual
amount of deliveries or sales for any future period.
Manufacturing
and Engineering
Manufacturing
Our expertise is in designing, engineering and manufacturing
large-scale, complex aerostructures. We maintain four
state-of-the-art
manufacturing facilities in Wichita, Kansas, Tulsa, Oklahoma,
McAlester, Oklahoma, and Prestwick, Scotland (acquired in April
2006). Following the Boeing Acquisition, we realigned our
manufacturing operations to reduce costs and improve efficiency.
We reduced our workforce by 15% while increasing productivity,
entered into new labor contracts with our unions that
established wage levels that are in-line with the local market,
changed work rules and significantly reduced the number of job
categories, resulting in greater manufacturing flexibility in
work assignments. Additionally, we are working to realign our
supply base to more fully utilize low cost, capable suppliers.
We continually strive to improve productivity and reduce costs.
We are organized into three principal reporting segments:
(1) Fuselage Systems, (2) Propulsion Systems, and
(3) Wing Systems. All other activities fall within the All
Other segment, principally made up of sundry sales of
17
miscellaneous services and sales of natural gas through a
tenancy-in-common
with other Wichita companies. The business units, process
centers and support organizations work together as one cohesive
team with a view to maximizing performance and efficiency
throughout the manufacturing process. Our core manufacturing
competencies include:
|
|
|
|
|
composites design and manufacturing processes;
|
|
|
|
leading mechanized and automated assembly and fastening
techniques;
|
|
|
|
large scale skin fabrication using both metallic and composite
materials;
|
|
|
|
chemical etching and metal bonding expertise;
|
|
|
|
monolithic structures technology; and
|
|
|
|
precision metal forming producing complex contoured shapes in
sheet metal and extruded aluminum.
|
Our manufacturing expertise is supported by our
state-of-the-art
equipment. We have over 20,000 major pieces of equipment
installed in our customized manufacturing facilities. For
example, for the manufacture of the B787 composite forward
fuselage, we installed a 30-foot diameter by 70-foot long
autoclave which is one of the largest autoclaves in the world.
An autoclave is an enclosure device that generates controlled
internal heat and pressure conditions used to cure and bond
certain resins, and which we use in the manufacture of composite
structures. We intend to continue to make the appropriate
investments in our facilities in order to support and maintain
our industry-leading manufacturing expertise.
Engineering
We have approximately 850 engineering and technical employees,
including over 200 degreed contract engineers. We also employ 20
technical fellows, who are experts in engineering and keep the
company current with new technology by producing technical
solutions for new and existing products and processes; eight FAA
designated engineering representatives, or DERs, experienced
engineers appointed by the FAA to approve engineering data used
for certification; and nine authorized representatives, who
possess the same qualifications and perform the same
certification functions as DERs, but with authority from the
Boeing Certification and Compliance organization. The primary
purpose of the engineering organization is to provide continuous
support for ongoing design, production and process improvements.
We possess a broad base of engineering skills in metal and
composite fabrication and assembly, chemical processing and
finishing, tooling design and development, and quality and
precision measurement technology, systems and controls.
Our engineering organization is composed of four primary groups,
including (1) Structures Design and Drafting, which focuses
on production support, customer introductions,
design-for-manufacturing
and major product derivatives, (2) Structures Technology,
which focuses on overall structural integrity over the lifecycle
of the airframe through stress and durability analysis, damage
tolerance analysis and vibration testing, (3) Manufacturing
Engineering, responsible for applying lean manufacturing
techniques, interpreting design drawings and providing
manufacturing sequence work plans, and (4) Liaison, Lab and
Materials, Processes and Standards, which conducts research into
defects discovered by quality assurance through analytical
chemistry, metallurgical, static and dynamic testing and
full-scale testing.
We believe our leading engineering capabilities are a key
strategic differentiating factor between us and certain of our
competitors.
Research
and Development
We believe that world class research and development helps to
maintain our position as an advanced partner to OEMs new
product development teams. As a result, we spend a significant
amount of capital and resources on our research and development,
including approximately $104.7 million during the twelve
months ended December 31, 2006. Through our research, we
aim to develop unique intellectual property and technologies
that will improve our OEM customers products and, at the
same time, position us to win work on new products. Our
development effort, which is an ongoing process that helps us
reduce production costs and streamline manufacturing, is
currently
18
focused on preparing for initial production of new products and
improving manufacturing processes on our current work.
Our research and development is geared toward the architectural
design of our principal products: fuselages, propulsion systems
and wing systems. We are currently focused on research in areas
such as advanced metallic joining, low cost composites, acoustic
attenuation, efficient structures, systems integration, advanced
design and analysis methods, and new material systems. We
collaborate with universities, research facilities and
technology partners in our research and development.
Suppliers
and Materials
The principal raw materials used in our manufacturing operations
are aluminum, titanium, and composites. We also use purchased
products such as machined parts, sheet metal parts, non-metallic
parts and assemblies. In addition, we purchase assemblies and
subassemblies from various manufacturers which are used in the
final aerostructure assembly.
Currently we have over 850 active suppliers with no one supplier
representing more than 4% of our cost of goods sold. We have
entered into long-term supply contracts with substantially all
of our suppliers. Our exposure to rising raw material prices is
somewhat limited due to such contracts under which we purchase
most of our raw materials based on fixed pricing or at reduced
rates through Boeings or Airbus high volume purchase
contracts.
Although we believe our material costs are competitive, we
continue to seek ways to further reduce these costs. We have
begun a global sourcing initiative to increase the amount of
material sourced from low cost countries in Asia and Central
Europe. Historically, Boeing Wichita and BAE Aerostructures
purchased certain parts from other Boeing or BAE Systems
facilities, respectively, since they operated as divisions of
Boeing and BAE Systems, respectively. We believe we can achieve
cost savings by reducing the amount of parts that we purchase
from Boeing and BAE Systems. Following the Boeing Acquisition,
we have been free to contract with third parties for, or to
produce internally, the parts historically supplied by Boeing.
As our current supply contracts with business units of BAE
Systems expire over the next several years, we expect to have
similar opportunities with respect to those parts that we
continue to source from BAE Systems.
Environmental
Matters
Our operations and facilities are subject to various
environmental laws and regulations governing, among other
matters, the emission, discharge, handling and disposal of
hazardous materials, the investigation and remediation of
contaminated sites, and permits required in connection with our
operations. Our operations are designed, maintained and operated
to promote protection of human health and the environment.
Although we believe that our operations and facilities are in
material compliance with applicable environmental and worker
protection laws and regulations, management cannot provide
assurance that future changes in such laws, or in the nature of
our operations will not require us to make significant
additional expenditures to ensure continued compliance. Further,
we could incur substantial costs, including cleanup costs, fines
and sanctions, and third party property damage or personal
injury claims as a result of violations of or liabilities under
environmental laws, relevant common law or the environmental
permits required for our operations.
United
States
Under some environmental laws in the United States, a current or
previous owner or operator of a contaminated site may be held
liable for the entire cost of investigation, removal or
remediation of hazardous materials at such property, whether or
not the owner or operator knew of, or was responsible for, the
presence of such hazardous materials. Persons who arrange for
disposal or treatment of hazardous materials also may be liable
for the costs of investigation, removal or remediation of those
substances at a disposal or treatment site, regardless of
whether the affected site is owned or operated by them. Because
we own
and/or
operate a number of facilities that have a history of industrial
or commercial use and because we arrange for the disposal of
hazardous materials at many disposal sites, we may and do incur
costs for investigation, removal and remediation.
19
The Asset Purchase Agreement for the Boeing Acquisition,
referred to herein as the Asset Purchase Agreement,
provides, with limited exceptions, that Boeing is responsible
for environmental liabilities relating to conditions existing at
the Wichita, Kansas and Tulsa and McAlester, Oklahoma facilities
at the time of the Boeing Acquisition. For example, Boeing is
subject to an administrative consent order issued by the KDHE to
contain and
clean-up
contaminated groundwater which underlies a majority of the
Wichita site. Pursuant to the KDHE order, Boeing has a long-term
remediation plan in place, and containment and remediation
efforts are underway. We are responsible for any environmental
conditions that we cause at these facilities after the closing
of the Boeing Acquisition.
United
Kingdom
In the United Kingdom, remediation of contaminated land may be
compelled by the government in certain situations. If a property
is to be redeveloped, in its planning role, the local authority
may require remediation as a condition to issuing a permit. In
addition, in situations in which the contamination is causing
harm to human health or polluting the environment, the local
authority may use its environmental legislative powers to force
remediation so that the environmental standards are
suitable for use. If contamination is polluting the
property of a third party or causing loss, injury or damage, the
third party may file an action in common law based on negligence
or nuisance to recover the value of the loss, injury or damage
sustained.
Prestwick Facility. BAE Systems indemnified us
for any
clean-up
costs for environmental liabilities caused by existing pollution
on the Prestwick facility, existing pollution that migrates from
the Prestwick facility to a third partys property and any
pollution that migrates to the Prestwick facility from the
property retained by BAE Systems. Subject to certain exceptions,
the indemnity extends until April 1, 2013 and is limited to
a maximum of $78.3 million as of December 31, 2006.
BAE Systems has undertaken a solvent emission program. If the
program does not enable compliance with the European Solvent
Emission Directive currently in effect, BAE Systems may be
required to install additional abatement technology such as a
thermal oxidizer.
Competition
Although we are the largest aerostructures supplier with a 19%
market share, the aerostructures market remains highly
fragmented. Competition in the aerostructures market is intense.
Our primary competition comes from either work performed by
internal divisions of OEMs or third-party aerostructures
suppliers.
Our principal competitors among OEMs may include Airbus S.A.S.,
Boeing, Dassault Aviation, Embraer Brazilian Aviation Co.,
Gulfstream Aerospace Co., Lockheed Martin Corp., Northrop
Grumman Corporation, Raytheon Company and Textron Inc. These
OEMs may choose not to outsource production of aerostructures
due to, among other things, their own direct labor and other
overhead considerations and capacity utilization at their own
facilities. Consequently, traditional factors affecting
competition, such as price and quality of service, may not be
significant determinants when OEMs decide whether to produce a
part in-house or to outsource.
Our principal competitors among non-OEM aerostructures suppliers
are Alenia Aeronautica, Fuji Aerospace Technology Co., Ltd., GKN
Aerospace, The Goodrich Corporation, Kawasaki Precision
Machinery (U.S.A.), Inc., Mitsubishi Electric Corporation, Saab
AB, Snecma, Triumph Group, Inc. and Vought Aircraft Industries.
Our ability to compete for new aerostructures contracts depends
upon (1) our design, engineering and manufacturing
capabilities, (2) our underlying cost structure,
(3) our relationship with OEMs, and (4) our available
manufacturing capacity.
Employees
As of December 27, 2006, we had approximately 11,845
employees, including contract labor, located in our three
U.S. facilities. Approximately 81% of our
U.S. employees are represented by five unions. All of our
unions in the U.S. have entered into new collective
bargaining agreements since the time of the Boeing Acquisition,
with an average initial duration of five years. Our largest
union is the IAM which represents approximately 5,600 employees
or 47% of the U.S. workforce. This union contract is in
effect through June 25, 2010. The Society of Professional
Engineering Employees in Aerospace Wichita Technical
and Professional Unit (SPEEA) represents approximately 2,225
employees or 19% of the workforce. The union contract is in
effect through July 11, 2011. The
20
International Union, United Automobile, Aerospace &
Agricultural Implement Workers of America (UAW), or UAW,
represents approximately 950 employees or 8% of the workforce.
The union contract is in effect through November 30, 2010.
The Society of Professional Engineering Employees in
Aerospace Wichita Engineering Unit represents
approximately 600 employees or 5% of the workforce. The union
contract is in effect through July 11, 2009. The
International Brotherhood of Electrical Workers, or IBEW,
represents approximately 175 employees or 2% of the
workforce. The union contract is in effect through
September 17, 2010.
Under each of our U.S. collective bargaining agreements, we
are required to meet with collective bargaining agents for the
union three years after ratification of the agreement to discuss
the terms and conditions of the agreement. However, we have no
obligation to agree to any changes to the terms and conditions
of the agreement and employees have no right to strike in the
event we do not agree to any such changes.
As of December 27, 2006, we had approximately 904 employees
located in our two U.K. facilities. Approximately 77% or 696 of
our U.K. employees are represented by one union, Amicus. We have
entered into a labor agreement with Amicus, which terms are
generally negotiated on a yearly basis. Wages are typically the
subject of our negotiations, while the other terms usually
remain the same from year to year until both parties agree to
change them (either separately or in the aggregate).
We consider our relationships with our employees to be
satisfactory.
Government
Contracts
Companies engaged in supplying defense-related equipment and
services to U.S. government agencies, either directly or by
subcontract, are subject to business risks specific to the
defense industry. These risks include the ability of the
U.S. government to unilaterally: (1) suspend or debar
us from receiving new prime contracts or subcontracts;
(2) terminate existing contracts; (3) reduce the value
of existing contracts; (4) audit our contract-related costs
and fees, including allocated indirect costs; and
(5) control and potentially prohibit the export of our
products.
Most U.S. government contracts for which we subcontract can
be terminated by the U.S. government either for its
convenience or if the prime contractor defaults by failing to
perform under the contract. In addition, the prime contractor
typically has the right to terminate our subcontract for its
convenience or if we default by failing to perform under the
subcontract. Termination for convenience provisions generally
provide only for our recovery of costs incurred or committed,
settlement expenses and profit on the work completed prior to
termination. Termination for default provisions generally
provide for the subcontractor to be liable for excess costs
incurred by the prime contractor in procuring undelivered items
from another source.
Foreign
Ownership, Control or Influence
Under the U.S. Governments National Industry Security
Program Operating Manual, or NISPOM, the U.S. government
will not award contracts to companies under foreign ownership,
control or influence, or FOCI, where DoD Facility Security
Clearances, or FSC, are required, unless certain
mitigation measures are put in place. The purpose of
the FOCI mitigation measures is to protect cleared
U.S. defense contractors against improper FOCI.
Spirit has been cleared to the secret level under a
Special Security Agreement, or SSA, which is one of the
recognized FOCI mitigation measures under the NISPOM and we are
in the process of obtaining such clearance for Spirit Holdings.
As a cleared entity, we must comply with the requirements of our
SSA, the NISPOM and any other applicable U.S. government
industrial security regulations (which could apply depending on
our contracts). Failure to follow the requirements of the SSA,
the NISPOM or any other applicable U.S. government
industrial security regulations could, among other things,
result in termination of our FSC, which in turn would preclude
us from being awarded classified contracts or, under certain
circumstances, performing on our existing classified contracts.
Governmental
Regulations
The commercial aircraft component industry is highly regulated
by both the FAA in the United States, the JAA in Europe and
other agencies throughout the world. The military aircraft
component industry is governed by
21
military quality specifications. We, and the components we
manufacture, are required to be certified by one or more of
these entities or agencies, and, in some cases, by individual
OEMs, in order to engineer and service parts and components used
in specific aircraft models.
We must also satisfy the requirements of our customers,
including OEMs and airlines that are subject to FAA regulations,
and provide these customers with products and services that
comply with the government regulations applicable to commercial
flight operations. In addition, the FAA requires that various
maintenance routines be performed on aircraft components. We
believe that we currently satisfy or exceed these maintenance
standards in our repair and overhaul services. We also maintain
several FAA approved repair stations.
The technical data and components used in the manufacture and
production of our products, as well as many of the products and
technical data we export, either as individual items or as
components incorporated into aircraft, are subject to compliance
with U.S. export control laws. Collaborative agreements
that we may have with foreign persons, including manufacturers
or suppliers, are also subject to U.S. export control laws.
Our operations are also subject to a variety of worker and
community safety laws. The Occupational Safety and Health Act,
or OSHA, mandates general requirements for safe workplaces for
all employees. In addition, OSHA provides special procedures and
measures for the handling of certain hazardous and toxic
substances. Our management believes that our operations are in
material compliance with OSHAs health and safety
requirements.
Available
Information
The Companys Internet address is
www.spiritaero.com. The content on the Companys
website is available for information purposes only. It should
not be relied upon for investment purposes, nor is it
incorporated by reference into this Annual Report.
The Company makes available through its Internet website under
the heading Investor Relations, its annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
form 8-K,
and amendments to those reports after it electronically files
such materials with the Securities and Exchange Commission.
Copies of the Companys key corporate governance documents,
including its Corporate Governance Guidelines, Code of Ethics
and Business Conduct, and charters for the Audit Committee and
the Compensation Committee are also on the Companys
website. Stockholders may request free copies of these documents
including our Annual Report to Shareholders from the Investor
Relations Department by writing to Spirit AeroSystems, Investor
Relations, P.O. Box 780008, Wichita, KS,
67278-0008,
or by calling
(316) 526-1700
or by sending an email request to
investorrelations@spiritaero.com.
Our annual and quarterly reports, proxy and other information
statements will be available to the public through the
SECs website at http://www.sec.gov.
22
An investment in our class A common stock involves risk and
uncertainties. Any of the following risks could materially
adversely affect our business, financial condition or results of
operations.
Risk
Factors Related to our Business and Industry
Our
commercial business is cyclical and sensitive to commercial
airlines profitability. The business of commercial
airlines is, in turn, affected by general economic conditions
and world safety considerations.
We compete in the aerostructures segment of the aerospace
industry. Our business is affected indirectly by the financial
condition of the commercial airlines and other economic factors,
including general economic conditions and world safety
considerations that affect the demand for air transportation.
Specifically, our commercial business is dependent on the demand
from passenger airlines for the production of new aircraft.
Accordingly, demand for our commercial products is tied to the
worldwide airline industrys ability to finance the
purchase of new aircraft and the industrys forecasted
demand for seats, flights and routes. Similarly, the size and
age of the worldwide commercial aircraft fleet affects the
demand for new aircraft and, consequently, for our products.
Such factors, in conjunction with evolving economic conditions,
cause the market in which we operate to be cyclical to varying
degrees, thereby affecting our business and operating results.
During the past several years, softening of the global and
U.S. economies, reduced corporate travel spending, excess
capacity in the market for commercial air travel, changing
pricing models among airlines and significantly increased fuel,
security and insurance costs have resulted in many airlines
reporting, and continuing to forecast, significant net losses.
Moreover, during recent years, in addition to the generally soft
global and U.S. economies, the September 11, 2001
terrorist attacks, conflicts in Iraq and Afghanistan and
concerns relating to the transmission of SARS have contributed
to diminished demand for air travel. Many major U.S. air
carriers have parked or retired a portion of their fleets and
have reduced workforces and flights to mitigate their large
losses. From 2001 to 2003, numerous carriers rescheduled or
canceled orders for aircraft to be purchased from the major
aircraft manufacturers, including Boeing and Airbus. Any
protracted economic slump or future terrorist attacks, war or
health concerns, including the prospect of human transmission of
the Avian Flu Virus, could cause airlines to cancel or delay the
purchase of additional new aircraft. If demand for new aircraft
decreases, there would likely be a decrease in demand for our
commercial aircraft products and our business, financial
condition and results of operations could be materially
adversely affected.
Our
business could be materially adversely affected if one of our
components causes an aircraft accident.
Our operations expose us to potential liabilities for personal
injury or death as a result of the failure of an aircraft
component that has been designed, manufactured or serviced by us
or our suppliers. While we believe that our liability insurance
is adequate to protect us from future product liability claims,
it may not be adequate. Also, we may not be able to maintain
insurance coverage in the future at an acceptable cost. Any such
liability not covered by insurance or for which third party
indemnification is not available could require us to dedicate a
substantial portion of our cash flows to make payments on such
liability, which could have a material adverse effect on our
business, financial condition and results of operations.
An accident caused by one of our components could also damage
our reputation for quality products. We believe our customers
consider safety and reliability as key criteria in selecting a
provider of aerostructures. If an accident were to be caused by
one of our components, or if we were otherwise to fail to
maintain a satisfactory record of safety and reliability, our
ability to retain and attract customers could be materially
adversely affected.
Because
we depend on Boeing and, to a lesser extent, Airbus, as our
largest customers, our sales, cash flows from operations and
results of operations will be negatively affected if either
Boeing or Airbus reduces the number of products it purchases
from us or if either experiences business
difficulties.
Currently, Boeing is our largest customer and Airbus is our
second-largest customer. For the twelve months ended
December 31, 2006, approximately 91% and approximately 8%
of our combined revenues were generated
23
from sales to Boeing and Airbus, respectively. Although we
intend to diversify our customer base by entering into supply
arrangements with additional customers, we cannot assure you
that we will be successful in doing so. Even if we are
successful in retaining new customers, we expect that Boeing
and, to a lesser extent, Airbus, will continue to account for a
substantial portion of our sales for the foreseeable future.
Although we are a party to various supply contracts with Boeing
and Airbus which obligate Boeing and Airbus to purchase all of
their requirements for certain products from us, if we breach
certain obligations under these supply agreements and Boeing or
Airbus exercises its right to terminate such agreements, our
business will be materially adversely affected. In addition, we
have agreed to a limitation on recoverable damages in the event
Boeing wrongfully terminates our main supply agreement with it
with respect to any model of airplane program, so if this
occurs, we may not be able to recover the full amount of our
actual damages. Furthermore, if Boeing or Airbus
(1) experiences a decrease in requirements for the products
which we supply to it, (2) experiences a major disruption
in its business, such as a strike, work stoppage or slowdown, a
supply chain problem or a decrease in orders from its customers
or (3) files for bankruptcy protection, our business,
financial condition and results of operations could be
materially adversely affected.
Our
largest customer, Boeing, operates in a very competitive
business environment.
Boeing operates in a highly competitive industry. Competition
from Airbus, Boeings main competitor, as well as from
regional jet makers, has intensified as these competitors expand
aircraft model offerings and competitively price their products.
As a result of this competitive environment, Boeing continues to
face pressure on product offerings and sale prices. While we do
have supply agreements with Airbus, we currently have
substantially more business with Boeing and thus any adverse
impact on Boeings production of aircraft resulting from
this competitive environment may have a material adverse impact
on our business, financial condition and results of operations.
Potential
and existing customers, including Airbus, may view our
historical and ongoing relationship with Boeing as a deterrent
to providing us with future business.
We operate in a highly competitive industry and any of our other
potential or existing customers, including Airbus, may be
threatened by our historical and ongoing relationship with
Boeing. Prior to the Boeing Acquisition, Boeing Wichita
functioned as an internal supplier of parts and assemblies for
Boeings aircraft programs and had very few sales to third
parties. Other potential and existing customers, including
Airbus, may be deterred from using the same supplier that
previously produced aerostructures solely for Boeing. Although
we believe we have sufficient resources to service multiple
OEMs, competitors of Boeing may see a conflict of interest in
our providing both them and Boeing with the parts for their
different aircraft programs. If we are unable to successfully
develop our relationship with other customers and OEMs,
including Airbus, we may be unable to increase our customer
base. If there is not sufficient demand for our business, our
financial condition and results of operations could be
materially adversely affected.
Our
business depends, in large part, on sales of components for a
single aircraft program, the B737.
For the twelve months ended December 31, 2006,
approximately 60% of our revenues were generated from sales of
components to Boeing for the B737 aircraft. While we have
entered into long-term supply agreements with Boeing to continue
to provide components for the B737 for the life of the aircraft
program, including commercial and the military Multi-mission
Maritime Aircraft, or MMA, derivatives, Boeing does not have any
obligation to purchase components from us for any replacement
for the B737 that is not a commercial derivative model. In the
event Boeing develops a next generation single-aisle aircraft
program to replace the B737 which is not a commercial
derivative, we may not have the next generation technology,
engineering and manufacturing capability necessary to obtain
significant aerostructures supply business for such replacement
program, may not be able to provide components for such
replacement program at competitive prices or, for other reasons,
may not be engaged by Boeing to the extent of our involvement in
the B737 or at all. If we were unable to obtain significant
aerostructures supply business for the B737 replacement program,
our business, financial condition and results of operations
could be materially adversely affected.
24
Our
business depends on the success of a new model aircraft, the
B787.
The success of our business will depend, in large part, on the
success of Boeings new B787 program. We have entered into
supply agreements with Boeing pursuant to which we will be a
Tier 1 supplier to the B787 program. We have made and will
continue to make a significant investment in this program before
the first commercial delivery of a B787 aircraft, which is
scheduled for 2008. If there is not sufficient demand for the
B787 aircraft, or if there are technological problems or
significant delays in the regulatory certification or
manufacturing and delivery schedule for such aircraft, our
business, financial condition and results of operations may be
materially adversely affected.
We
incur risk associated with new programs.
New programs with new technologies typically carry risks
associated with design responsibility, development of new
production tools, hiring and training of qualified personnel,
increased capital and funding commitments, ability to meet
customer specifications, delivery schedules and unique
contractual requirements, supplier performance, ability of the
customer to meet its contractual obligations to us, and our
ability to accurately estimate costs associated with such
programs. In addition, any new aircraft program may not generate
sufficient demand or may experience technological problems or
significant delays in the regulatory certification or
manufacturing and delivery schedule. If we were unable to
perform our obligations under new programs to the
customers satisfaction, if we were unable to manufacture
products at our estimated costs or if a new program in which we
had made a significant investment experienced weak demand,
delays or technological problems, our business, financial
condition and results of operations could be materially
adversely affected.
In addition, beginning new work on existing programs also
carries risks associated with the transfer of technology,
knowledge and tooling.
Our
operations depend on our ability to maintain continuing,
uninterrupted production at our manufacturing facilities. Our
production facilities are subject to physical and other risks
that could disrupt production.
Our manufacturing facilities could be damaged or disrupted by a
natural disaster, war, terrorist activity or sustained
mechanical failure. Although we have obtained property damage
and business interruption insurance, a major catastrophe, such
as a fire, flood, tornado or other natural disaster at any of
our sites, war or terrorist activities in any of the areas where
we conduct operations or the sustained mechanical failure of a
key piece of equipment could result in a prolonged interruption
of all or a substantial portion of our business. Any disruption
resulting from these events could cause significant delays in
shipments of products and the loss of sales and customers and we
may not have insurance to adequately compensate us for any of
these events. A large portion of our operations takes place at
one facility in Wichita, Kansas and any significant damage or
disruption to this facility in particular would materially
adversely affect our ability to service our customers.
We
operate in a very competitive business
environment.
Competition in the aerostructures segment of the aerospace
industry is intense. Although we have entered into requirements
contracts with Boeing and Airbus under which we are their
exclusive supplier for certain aircraft parts, in trying to
expand our customer base and the types of parts we make we will
face substantial competition from both OEMs and non-OEM
aerostructures suppliers.
OEMs may choose not to outsource production of aerostructures
due to, among other things, their own direct labor and other
overhead considerations and capacity utilization at their own
facilities. Consequently, traditional factors affecting
competition, such as price and quality of service, may not be
significant determinants when OEMs decide whether to produce a
part in-house or to outsource.
Our principal competitors among aerostructures suppliers are
Alenia Aeronautica, Fuji Aerospace Technology Co., Ltd., GKN
Aerospace, The Goodrich Corporation, Kawasaki Precision
Machinery (U.S.A.), Inc., Mitsubishi Electric Corporation, Saab
AB, Snecma, Triumph Group, Inc. and Vought Aircraft Industries.
Some of our competitors have greater resources than we do and,
therefore, may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or devote
greater resources to the promotion and sale of their
25
products than we can. Providers of aerostructures have
traditionally competed on the basis of cost, technology, quality
and service. We believe that developing and maintaining a
competitive advantage will require continued investment in
product development, engineering, supply chain management and
sales and marketing, and we may not have enough resources to
make such investments. For these reasons, we may not be able to
compete successfully in this market or against such competitors,
which could have a material adverse effect on our business,
financial condition and results of operations.
High
switching costs may substantially limit our ability to obtain
business that is currently under contract with other
suppliers.
Once a contract is awarded by an OEM to an aerostructures
supplier, the OEM and the supplier are typically required to
spend significant amounts of time and capital on design,
manufacture, testing and certification of tooling and other
equipment. For an OEM to change suppliers during the life of an
aircraft program, further testing and certification would be
necessary, and the OEM would be required either to move the
tooling and equipment used by the existing supplier for
performance under the existing contract, which may be expensive
and difficult (or impossible), or to manufacture new tooling and
equipment. Accordingly, any change of suppliers would likely
result in production delays and additional costs to both the OEM
and the new supplier. These high switching costs may make it
more difficult for us to bid competitively against existing
suppliers and less likely that an OEM will be willing to switch
suppliers during the life of an aircraft program, which could
materially adversely affect our ability to obtain new work on
existing aircraft programs.
Pre-Boeing
Acquisition financial statements are not comparable to
post-Boeing Acquisition statements and, because of our limited
operating history, nothing in our financial statements can show
you how we would operate in a market downturn.
Our historical financial statements prior to the Boeing
Acquisition are not comparable to our financial
statements subsequent to June 16, 2005. Historically,
Boeing Wichita was operated as a cost center of BCA and
recognized the cost of products manufactured for BCA programs
without recognizing any corresponding revenues for those
products. Accordingly, the financial statements with respect to
periods prior to the Boeing Acquisition included in this Annual
Report do not represent the financial results that would have
been achieved had Boeing Wichita been operated as a stand alone
entity during those periods. Additionally, our financial
statements are not indicative of how we would operate through a
market downturn. Since the Boeing Acquisition on June 16,
2005, we have operated in a market experiencing an upturn, with
both Boeing and Airbus posting record orders in 2005 and 2006.
Our financial results from this limited history cannot give you
any indication of our ability to operate in a market
experiencing significantly lower demand for our products and the
products of our customers. As such, we cannot assure you that we
will be able to successfully operate in such a market.
Increases
in labor costs, potential labor disputes and work stoppages at
our facilities or the facilities of our suppliers or customers
could materially adversely affect our financial
performance.
Our financial performance is affected by the availability of
qualified personnel and the cost of labor. A majority of our
workforce is represented by unions. If our workers were to
engage in a strike, work stoppage or other slowdown, we could
experience a significant disruption of our operations, which
could cause us to be unable to deliver products to our customers
on a timely basis and could result in a breach of our supply
agreements. This could result in a loss of business and an
increase in our operating expenses, which could have a material
adverse effect on our business, financial condition and results
of operations. In addition, our non-unionized labor force may
become subject to labor union organizing efforts, which could
cause us to incur additional labor costs and increase the
related risks that we now face.
We have agreed with Boeing to continue to operate substantial
manufacturing operations in Wichita, Kansas until at least
June 16, 2015. As a result, we may not be able to utilize
lower cost labor from other locations. This may prevent us from
being able to offer our products at prices which are competitive
in the marketplace and could have a material adverse effect on
our ability to generate new business.
26
In addition, many aircraft manufacturers, airlines and aerospace
suppliers have unionized work forces. In 2005, a labor strike by
unionized employees at Boeing, our largest customer, temporarily
halted commercial aircraft production by Boeing, which had a
significant short-term adverse impact on our operations.
Additional strikes, work stoppages or slowdowns experienced by
aircraft manufacturers, airlines or aerospace suppliers could
reduce our customers demand for additional aircraft
structures or prevent us from completing production of our
aircraft structures.
Our
business may be materially adversely affected if we lose our
government, regulatory or industry approvals, if more stringent
government regulations are enacted or if industry oversight is
increased.
The Federal Aviation Administration, or FAA, prescribes
standards and qualification requirements for aerostructures,
including virtually all commercial airline and general aviation
products, and licenses component repair stations within the
United States. Comparable agencies, such as the Joint Aviation
Authorities, or JAA, in Europe, regulate these matters in other
countries. If we fail to qualify for or obtain a required
license for one of our products or services or lose a
qualification or license previously granted, the sale of the
subject product or service would be prohibited by law until such
license is obtained or renewed and our business, financial
condition and results of operations could be materially
adversely affected. In addition, designing new products to meet
existing regulatory requirements and retrofitting installed
products to comply with new regulatory requirements can be
expensive and time consuming.
From time to time, the FAA, the JAA or comparable agencies
propose new regulations or changes to existing regulations.
These changes or new regulations generally increase the costs of
compliance. To the extent the FAA, the JAA or comparable
agencies implement regulatory changes, we may incur significant
additional costs to achieve compliance.
In addition, certain aircraft repair activities we intend to
engage in may require the approval of the aircrafts OEM.
Our inability to obtain OEM approval could materially restrict
our ability to perform such aircraft repair activities.
We are
subject to regulation of our technical data and goods under
U.S. export control laws.
As a manufacturer and exporter of defense and dual-use technical
data and commodities, we are subject to U.S. laws and
regulations governing international trade and exports, including
but not limited to the International Traffic in Arms
Regulations, administered by the U.S. Department of State,
and the Export Administration Regulations, administered by the
U.S. Department of Commerce. Collaborative agreements that
we may have with foreign persons, including manufacturers and
suppliers, are also subject to U.S. export control laws. In
addition, we are subject to trade sanctions against embargoed
countries, administered by the Office of Foreign Assets Control
within the U.S. Department of the Treasury.
A determination that we have failed to comply with one or more
of these export controls or trade sanctions could result in
civil or criminal penalties, including the imposition of fines
upon us as well as the denial of export privileges and debarment
from participation in U.S. government contracts.
Additionally, restrictions may be placed on the export of
technical data and goods in the future as a result of changing
geo-political conditions. Any one or more of such sanctions
could have a material adverse effect on our business, financial
condition and results of operations.
We are
subject to environmental regulation and our ongoing operations
may expose us to environmental liabilities.
Our operations are subject to extensive regulation under
environmental, health and safety laws and regulations in the
United States and the United Kingdom. We may be subject to
potentially significant fines or penalties, including criminal
sanctions, if we fail to comply with these requirements. We have
made, and will continue to make, significant capital and other
expenditures in order to comply with these laws and regulations.
We cannot predict with certainty what environmental legislation
will be enacted in the future or how existing laws will be
administered or interpreted. Our operations involve the use of
large amounts of hazardous substances and generate many types of
wastes. Spills and releases of these materials may subject us to
clean-up
liability. We cannot assure you that the aggregate amount of
future
clean-up
costs and other environmental liabilities will not be material.
27
Boeing, our predecessor at the Wichita facility, is under an
administrative consent order issued by the Kansas Department of
Health and Environment, or KDHE, to contain and
clean-up
contaminated groundwater which underlies a majority of the site.
Pursuant to this order and its agreements with us, Boeing has a
long-term remediation plan in place, and treatment, containment
and remediation efforts are underway. If Boeing does not comply
with its obligations under the order and these agreements, we
may be required to undertake such efforts and make material
expenditures.
In connection with the BAE Acquisition, we acquired a
manufacturing facility in Prestwick, Scotland that is adjacent
to contaminated property retained by BAE Systems. The
contaminated property may be subject to a regulatory action
requiring remediation of the land. It is also possible that the
contamination may spread into the property we acquired. BAE
Systems has agreed to indemnify us for certain
clean-up
costs related to existing pollution on the acquired property,
existing pollution that migrates from the acquired property to a
third partys property and any pollution that migrates to
our property from property retained by BAE Systems. If BAE
Systems does not comply with its obligations under the
agreement, we may be required to undertake such efforts and make
material expenditures.
In the future, contamination may be discovered at our facilities
or at off-site locations where we send waste. The remediation of
such newly-discovered contamination, or the enactment of new
laws or a stricter interpretation of existing laws, may require
us to make additional expenditures, some of which could be
material. See Business Environmental
Matters.
Significant
consolidation in the aerospace industry could make it difficult
for us to obtain new business.
The aerospace industry has recently experienced consolidation
among suppliers. Suppliers have consolidated and formed
alliances to broaden their product and integrated system
offerings and achieve critical mass. This supplier consolidation
is in part attributable to aircraft manufacturers more
frequently awarding long-term sole-source or preferred supplier
contracts to the most capable suppliers, thus reducing the total
number of suppliers. If this consolidation were to continue, it
may become more difficult for us to be successful in obtaining
new customers.
We may
be materially adversely affected by high fuel
prices.
Due to the competitive nature of the airline industry, airlines
are often unable to pass on increased fuel prices to customers
by increasing fares. Fluctuations in the global supply of crude
oil and the possibility of changes in government policy on jet
fuel production, transportation and marketing make it impossible
to predict the future availability of jet fuel. In the event
there is an outbreak or escalation of hostilities or other
conflicts or significant disruptions in oil production or
delivery in oil-producing areas or elsewhere, there could be
reductions in the production or importation of crude oil and
significant increases in the cost of fuel. If there were major
reductions in the availability of jet fuel or significant
increases in its cost, or if current high prices are sustained
for a significant period of time, the airline industry and, as a
result, our business, could be materially adversely affected.
Interruptions
in deliveries of components or raw materials or increased prices
for components or raw materials used in our products could
materially adversely affect our profitability, margins and
revenues.
Our dependency upon regular deliveries from particular suppliers
of components and raw materials means that interruptions or
stoppages in such deliveries could materially adversely affect
our operations until arrangements with alternate suppliers, to
the extent alternate suppliers exist, could be made. If any of
our suppliers were unable or refused to deliver materials to us
for an extended period of time, or if we were unable to
negotiate acceptable terms for the supply of materials with
these or alternative suppliers, our business could suffer. We
may not be able to find acceptable alternatives, and any such
alternatives could result in increased costs for us. Even if
acceptable alternatives are found, the process of locating and
securing such alternatives might be disruptive to our business
and might lead to termination of our supply agreements with our
customers.
In addition, our profitability is affected by the prices of the
components and raw materials, such as titanium, aluminum and
carbon fiber, used in the manufacture of our products. These
prices may fluctuate based on a number of factors beyond our
control, including world oil prices, changes in supply and
demand, general economic
28
conditions, labor costs, competition, import duties, tariffs,
currency exchange rates and, in some cases, government
regulation. Although our supply agreements with Boeing and
Airbus allow us to pass on certain unusual increases in
component and raw material costs to Boeing and Airbus in limited
situations, we will not be fully compensated for such increased
costs.
Our
business will suffer if certain key officers or employees
discontinue employment with us or if we are unable to recruit
and retain highly skilled staff.
The success of our business is highly dependent upon the skills,
experience and efforts of our President and Chief Executive
Officer, Jeffrey Turner, and certain of our other key officers
and employees. As the top executive officer of Boeing Wichita
for almost ten years prior to the Boeing Acquisition,
Mr. Turner gained extensive experience in running our
business and long-standing relationships with many high-level
executives at Boeing, our largest customer. We believe
Mr. Turners reputation in the aerospace industry and
relationship with Boeing are critical elements in maintaining
and expanding our business. The loss of Mr. Turner or other
key personnel could have a material adverse effect on our
business, operating results or financial condition. Our business
also depends on our ability to continue to recruit, train and
retain skilled employees, particularly skilled engineers. The
market for these resources is highly competitive. We may be
unsuccessful in attracting and retaining the engineers we need
and, in such event, our business could be materially adversely
affected. The loss of the services of any key personnel, or our
inability to hire new personnel with the requisite skills, could
impair our ability to provide products to our customers or
manage our business effectively.
We are
subject to the requirements of the National Industrial Security
Program Operating Manual for our facility security clearance,
which is a prerequisite for our ability to perform on classified
contracts for the U.S. government.
A DoD facility security clearance is required in order to be
awarded and perform on classified contracts for the DoD and
certain other agencies of the U.S. government. We currently
perform on several classified contracts, which generated no
revenues for the period from June 17, 2005 through
December 29, 2005 and which generated less than 1% of our
revenues for the fiscal year ended December 31, 2006.
Spirit has obtained clearance at the secret level,
and we are in the process of obtaining such clearance for Spirit
Holdings. Due to the fact that more than 50% of our voting power
is effectively controlled by a
non-U.S. entity,
we will be required to operate in accordance with the terms and
requirements of our Special Security Agreement, or SSA, with the
DoD. If we were to violate the terms and requirements of our
SSA, the National Industrial Security Program Operating Manual,
or any other applicable U.S. government industrial security
regulations (which may apply to us under the terms of our
classified contracts), we could lose our security clearance. We
cannot assure you that we will be able to maintain our security
clearance. If for some reason our security clearance is
invalidated or terminated, we may not be able to continue to
perform our present classified contracts and we would not be
able to enter into new classified contracts, which could
adversely affect our revenues.
We
derive a significant portion of our revenues from direct and
indirect sales outside the United States and are subject to the
risks of doing business in foreign countries.
We derive a significant portion of our revenues from sales by
Boeing and Airbus to customers outside the United States. In
addition, for the twelve months ended December 31, 2006,
direct sales to our
non-U.S. customers
accounted for approximately 8% of our combined revenues. We
expect that our and our customers international sales will
continue to account for a significant portion of our revenues
for the foreseeable future. As a result, we are subject to risks
of doing business internationally, including:
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changes in regulatory requirements;
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domestic and foreign government policies, including requirements
to expend a portion of program funds locally and governmental
industrial cooperation requirements;
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fluctuations in foreign currency exchange rates;
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the complexity and necessity of using foreign representatives
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uncertainties and restrictions concerning the availability of
funding credit or guarantees;
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imposition of tariffs and embargos, export controls and other
trade restrictions;
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the difficulty of management and operation of an enterprise
spread over various countries;
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compliance with a variety of foreign laws, as well as
U.S. laws affecting the activities of U.S. companies
abroad; and
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economic and geopolitical developments and conditions, including
international hostilities, acts of terrorism and governmental
reactions, inflation, trade relationships and military and
political alliances.
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While these factors or the impact of these factors are difficult
to predict, adverse developments of any one or more of these
factors could materially adversely affect our business,
financial condition and results of operations in the future.
Our
fixed-price contracts may commit us to unfavorable
terms.
We provide most of our products and services through long-term
contracts with Boeing and Airbus in which the pricing terms are
fixed based on certain production volumes. Accordingly, we bear
the risk that increased or unexpected costs may reduce our
profit margins or cause us to sustain losses on these contracts.
Other than certain increases in raw material costs which can be
passed on to Boeing and Airbus, we must fully absorb cost
overruns, notwithstanding the difficulty of estimating all of
the costs we will incur in performing these contracts and in
projecting the ultimate level of sales that we may achieve. Our
failure to anticipate technical problems, estimate delivery
reductions, estimate costs accurately or control costs during
performance of a fixed-price contract may reduce the
profitability of a contract or cause a loss.
This is particularly a risk in relation to products such as the
Boeing B787 for which we have not yet delivered production
articles and in respect of which our profitability at the
contracted price depends on our being able to achieve production
cost reductions as we gain production experience. Pricing for
the B787-8, the base model currently going into production, is
generally established through 2021, with prices decreasing as
cumulative volume levels are met over the life of the program.
When we negotiated the B787-8 pricing, we assumed that our
development of new technologies and capabilities would reduce
our production costs over the life of the B787 program, thus
maintaining or improving our margin on each B787 we produced. We
cannot assure you that our development of new technologies or
capabilities will be successful or that we will be able to
reduce our B787 production costs over the life of the program.
Our failure to reduce production costs as we have anticipated
could result in decreasing margins on the B787 during the life
of the program.
Many of our other production cost estimates also contain pricing
terms which anticipate cost reductions over time. In addition,
although we have entered into these fixed price contracts with
Boeing and Airbus, they may nonetheless seek to re-negotiate
pricing with us in the future. Any such higher costs or
re-negotiations could materially adversely affect our
profitability, margins and revenues.
We
identified a material weakness in our internal control over
financial reporting.
This annual report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
companys registered public accounting firm due to a
transition period established by rules of the Securities and
Exchange Commission for newly public companies.
Prior to the Boeing Acquisition, Boeing Wichita relied on
Boeings shared services group for certain business
processes associated with its financial reporting including
treasury, income tax accounting and external reporting. Since
the Boeing Acquisition, we have had to develop these and other
functional areas as a stand alone entity including the necessary
processes and internal control to prepare our financial
statements on a timely basis in accordance with U.S. GAAP.
Generally accepted auditing standards define a material weakness
as a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial
statements will not be prevented or detected.
30
In connection with the issuance of our December 29, 2005
and June 29, 2006 financial statements during the third
quarter of 2006, we concluded that we had a material weakness in
our internal control over financial reporting as described below.
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We did not maintain effective controls over our determination of
the fair values ascribed for financial reporting purposes to
stock compensation awards granted to our employees and directors
through June 29, 2006 in accordance with
SFAS No. 123(R), Share Based Payment.
Specifically, we did not properly estimate the fair values of
these awards in determining the accuracy of our stock
compensation expense under SFAS No. 123(R). This
control deficiency resulted in a restatement of our financial
results as of December 29, 2005 and June 29, 2006 and
for the periods then ended to adjust selling, general and
administrative expenses, income taxes and equity accounts as
well as our earnings per share and stock compensation financial
statement disclosures.
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While we believe that this material weakness has been
remediated, we cannot be certain that additional material
weaknesses or significant deficiencies will not develop or be
identified. Any failure to maintain adequate internal control
over financial reporting or to implement required, new or
improved controls, or difficulties encountered in their
implementation could cause us to report material weaknesses or
other deficiencies in our internal control over financial
reporting and could result in a more than remote possibility of
errors or misstatements in the restated consolidated financial
statements that would be material. Under current rules,
beginning with our Annual Report on
Form 10-K
for fiscal year 2007, pursuant to Section 404 of the
Sarbanes-Oxley Act, our management will be required to assess
the effectiveness of our internal control over financial
reporting, and we will be required to have our independent
registered public accounting firm, audit managements
assessment and the operating effectiveness of our internal
control over financial reporting. If our management or our
independent registered public accounting firm were to conclude
in their reports that our internal control over financial
reporting was not effective, investors could lose confidence in
our reported financial information and the value of our stock
could be adversely impacted.
We face a potential class action lawsuit which could
result in substantial costs, diversion of managements
attention and resources and negative publicity.
Spirit, Boeing and Onex have been named as defendants in a
lawsuit by certain former employees of Boeing who assert several
claims and purport to bring the case as a class action and
collective action on behalf of all individuals who were employed
by Boeing (BCA) in Wichita, Kansas or Tulsa, Oklahoma within two
years prior to the date of the Boeing Acquisition and who were
terminated by or not hired by Spirit. The plaintiffs seek
damages and injunctive relief for age discrimination,
interference with ERISA rights, breach of contract and
retaliation. Plaintiffs seek an unspecified amount of
compensatory damages and more than $1.5 billion in punitive
damages. On November 15, 2006, the court granted the
plaintiffs motion for conditional class certification and
held that the plaintiffs may send notice of the collective
action to all former Boeing employees who were terminated by
Boeing on or after January 1, 2002, were 40 years of
age or older at the time of termination and were not hired by
Spirit. Pursuant to the Asset Purchase Agreement, we agreed to
indemnify Boeing for damages resulting from the employment
decisions that were made by us with respect to former employees
of Boeing Wichita which relate or allegedly relate to the
involvement of, or consultation with, employees of Boeing in
such employment decisions. The lawsuit could result in
substantial costs, divert managements attention and
resources from our operations and negatively affect our public
image and reputation. An unfavorable outcome or prolonged
litigation related to these matters could materially harm our
business.
We
have a very limited operating history as a stand alone company
and we may not be successful operating as a stand alone
company.
Prior to the Boeing Acquisition, Boeing Wichita was a division
of Boeing. Boeing Wichita relied on Boeing for many of its
internal functions, including, without limitation, accounting
and tax, payroll, technology support, benefit plan
administration and human resources. Although we have replaced
most of these services either through outsourcing or internal
sources, we may not be able to perform any or all of these
services in a cost-effective manner. In addition, while we
implement our plan to replace certain technology and systems
support services provided by Boeing, Boeing continues to provide
such services to us under a transition services agreement which
we entered into
31
at the time of the Boeing Acquisition. We cannot assure you that
we will be able to successfully implement our plan to replace
the services that we continue to use and in particular, our
Enterprise Resource Planning System, upon expiration of the
transition services agreement, which will expire in its entirety
on June 15, 2007, unless otherwise extended. As such, we
cannot assure you that we will be successful in operating Boeing
Wichita as a stand alone company.
We do
not own most of the intellectual property and tooling used in
our business.
Our business depends on using certain intellectual property and
tooling that we have rights to use under license grants from
Boeing. These licenses contain restrictions on our use of Boeing
intellectual property and tooling and may be terminated if we
default under certain of these restrictions. Our loss of license
rights to use Boeing intellectual property or tooling would
materially adversely affect our business. In addition, we must
honor our contractual commitments to our other customers related
to intellectual property and comply with infringement laws in
the use of intellectual property. In the event we obtain new
business from new or existing customers, we will need to pay
particular attention to these contractual commitments and any
other restrictions on our use of intellectual property to make
sure that we will not be using intellectual property improperly
in the performance of such new business. In the event we use any
such intellectual property improperly, we could be subject to an
infringement claim by the owner or licensee of such intellectual
property. See Business Our Relationship with
Boeing License of Intellectual Property.
In the future, our entry into new markets may require obtaining
additional license grants from Boeing
and/or from
other third parties. If we are unable to negotiate additional
license rights on acceptable terms (or at all) from Boeing
and/or other
third parties as the need arises, our ability to enter new
markets may be materially restricted. In addition, we may be
subject to restrictions in future licenses granted to us that
may materially restrict our use of third party intellectual
property.
Our
success depends in part on the success of our research and
development initiatives.
We spent approximately $104.7 million on research and
development during the twelve months ended December 31,
2006. Our significant expenditures on our research and
development efforts may not create any new sales opportunities
or increases in productivity that are commensurate with the
level of resources invested.
We are in the process of developing specific technologies and
capabilities in pursuit of new business and in anticipation of
customers going forward with new programs, including the Boeing
B787-8 Model and other programs which have not yet been
developed. For the period from January 1, 2006 through
December 31, 2006, we spent approximately
$76.0 million on these activities. Work in connection with
the Boeing B787-8 Model consisted of approximately 72% of our
total development costs during such period. If the Boeing B787
or any other such programs do not go forward or are not
successful, we may be unable to recover the costs incurred in
anticipation of such programs and our profitability and revenues
may be materially adversely affected.
The
BAE Acquisition and any future business combinations,
acquisitions or mergers expose us to risks, including the risk
that we may not be able to successfully integrate these
businesses or achieve expected operating
synergies.
The BAE Acquisition involves risks, including difficulties in
integrating the operations and personnel of BAE Aerostructures
and the potential loss of key employees of BAE Aerostructures.
We may not be able to satisfactorily integrate the acquired
business in a manner and a timeframe that achieves the cost
savings and operating synergies that we expect.
In addition, we actively consider strategic transactions from
time to time. We evaluate acquisitions, joint ventures,
alliances or co-production programs as opportunities arise, and
we may be engaged in varying levels of negotiations with
potential competitors at any time. We may not be able to effect
transactions with strategic alliance, acquisition or
co-production program candidates on commercially reasonable
terms or at all. If we enter into these transactions, we also
may not realize the benefits we anticipate. In addition, we may
not be able to obtain additional financing for these
transactions.
32
The integration of companies that have previously been operated
separately involves a number of risks, including, but not
limited to:
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demands on management related to the increase in size after the
transaction;
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the diversion of managements attention from the management
of daily operations to the integration of operations;
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difficulties in the assimilation and retention of employees;
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difficulties in the assimilation of different cultures and
practices, as well as in the assimilation of geographically
dispersed operations and personnel, who may speak different
languages;
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difficulties combining operations that use different currencies
or operate under different legal structures;
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difficulties in the integration of departments, systems
(including accounting systems), technologies, books and records
and procedures, as well as in maintaining uniform standards,
controls (including internal accounting controls), procedures
and policies; and
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constraints (contractual or otherwise) limiting our ability to
consolidate, rationalize
and/or
leverage supplier arrangements to achieve integration.
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Consummating any acquisitions, joint ventures, alliances or
co-production programs could result in the incurrence of
additional debt and related interest expense, as well as
unforeseen contingent liabilities.
Risk
Factors Related to our Capital Structure
The
interests of our controlling stockholder may conflict with your
interests.
Onex Partners LP, Onex Corporation and their respective partners
and affiliates that beneficially own our class B common
stock, herein referred to collectively as the Onex
entities, own 64,215,743 shares of our class B
common stock. Our class A common stock has one vote per
share, while our class B common stock has ten votes per
share on all matters to be voted on by our stockholders. The
Onex entities control approximately 89.6% of the combined voting
power of our outstanding common stock. Accordingly, and for so
long as the Onex entities continue to hold class B common
stock that represents at least 10% of the total number of shares
of common stock outstanding, Onex will exercise a controlling
influence over our business and affairs and will have the power
to determine all matters submitted to a vote of our
stockholders, including the election of directors and approval
of significant corporate transactions such as amendments to our
certificate of incorporation, mergers and the sale of all or
substantially all of our assets. Onex could cause corporate
actions to be taken even if the interests of Onex conflict with
the interests of our other stockholders. This concentration of
voting power could have the effect of deterring or preventing a
change in control of Spirit that might otherwise be beneficial
to our stockholders. Gerald W. Schwartz, the Chairman, President
and Chief Executive Officer of Onex Corporation, owns shares
representing a majority of the voting rights of the shares of
Onex Corporation.
Our
substantial indebtedness could materially adversely affect our
financial condition and our ability to operate our
business.
As a result of the Boeing Acquisition, we have a substantial
amount of debt and debt servicing requirements. As of
December 31, 2006, we had total debt of approximately
$618.2 million, including approximately $590.0 million
of borrowings under our senior secured credit facility and
approximately $28.0 million of capital lease obligations.
In addition to our debt, we have less than $1 million of
letters of credit outstanding. In addition, subject to
restrictions in the credit agreement governing our senior
secured credit facility, we may incur additional debt.
Our substantial debt could have important consequences to you,
including the following:
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our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, debt service requirements or
other general corporate purposes may be impaired;
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we must use a significant portion of our cash flow for payments
on our debt, which will reduce the funds available to us for
other purposes;
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we are more vulnerable to economic downturns and adverse
industry conditions and our flexibility to plan for, or react
to, changes in our business or industry is more limited;
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our ability to capitalize on business opportunities and to react
to competitive pressures, as compared to our competitors, may be
compromised due to our high level of debt; and
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our ability to borrow additional funds or to refinance debt may
be limited.
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Servicing
our debt will require a significant amount of cash. Our ability
to generate sufficient cash depends on numerous factors beyond
our control, and we may be unable to generate sufficient cash
flow to service our debt obligations.
Our business may not generate sufficient cash flow from
operating activities. We may need to obtain new credit
arrangements and other sources of financing in order to meet our
current and future obligations and working capital requirements
and to fund our future capital expenditures. In addition, our
ability to make payments on and to refinance our debt and to
fund planned capital expenditures will depend on our ability to
generate cash in the future. We cannot assure you of our future
performance, which depends in part on general economic,
financial, competitive, legislative, regulatory and other
factors that are beyond our control, including those described
above under Risk Factors Related to our
Business and Industry. Lower net revenues generally will
reduce our cash flow.
If we are unable to generate sufficient cash flow to service our
debt and meet our other commitments, we may need to refinance
all or a portion of our debt, sell material assets or operations
or raise additional debt or equity capital. We cannot assure you
that we could effect any of these actions on a timely basis, on
commercially reasonable terms or at all, or that these actions
would be sufficient to meet our capital requirements. In
addition, the terms of our existing or future debt agreements
may restrict us from effecting certain or any of these
alternatives.
Restrictive
covenants in our senior secured credit facility may restrict our
ability to pursue our business strategies.
Our senior secured credit facility limits our ability, among
other things, to:
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incur additional debt or issue our preferred stock;
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pay dividends or make distributions to our stockholders;
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repurchase or redeem our capital stock;
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make investments;
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incur liens;
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enter into transactions with our stockholders and affiliates;
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sell certain assets;
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acquire the assets of, or merge or consolidate with, other
companies; and
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incur restrictions on the ability of our subsidiaries to make
distributions or transfer assets to us.
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Our ability to comply with these covenants may be affected by
events beyond our control, and any material deviation from our
forecasts could require us to seek waivers or amendments of
covenants, alternative sources of financing or reductions in
expenditures. We cannot assure you that such waivers, amendments
or alternative financings could be obtained, or, if obtained,
would be on terms acceptable to us.
In addition, the credit agreement governing our senior secured
credit facility requires us to meet a financial ratio of EBITDA
as defined by the credit agreement and total debt. We may not be
able to meet this ratio.
If a breach of any covenant or restriction contained in our
credit agreement governing our senior secured credit facility
results in an event of default, the lenders thereunder could
discontinue lending, accelerate the related debt (which would
accelerate other debt) and declare all borrowings outstanding
thereunder to be due and payable. In
34
addition, the lenders could terminate any commitments they had
made to supply us with additional funds. In the event of an
acceleration of our debt, we may not have or be able to obtain
sufficient funds to make any accelerated debt payments, and we
may not have sufficient capital to perform our obligations under
our supply agreements.
We may
sell more equity and reduce your ownership in Spirit
Holdings.
Our business plan may require the investment of new capital,
which we may raise by issuing additional equity (including
equity interests which may have a preference over shares of our
class A common stock) or additional debt (including debt
securities
and/or bank
loans). However, this capital may not be available at all, or
when needed, or upon terms and conditions favorable to us. The
issuance of additional equity in Spirit Holdings may result in
significant dilution of shares of our class A common stock.
We may issue additional equity in connection with or to finance
subsequent acquisitions. Further, our subsidiaries could issue
securities in the future to persons or entities (including our
affiliates) other than us or another subsidiary. This could
materially adversely affect your investment in us because it
would dilute your indirect ownership interest in our
subsidiaries.
Spirit
Holdings certificate of incorporation and by-laws and our
supply agreements with Boeing contain provisions that could
discourage another company from acquiring us and may prevent
attempts by our stockholders to replace or remove our current
management.
Provisions of Spirit Holdings certificate of incorporation
and by-laws may discourage, delay or prevent a merger or
acquisition that stockholders may consider favorable, including
transactions in which you might otherwise receive a premium for
your shares. In addition, these provisions may frustrate or
prevent any attempts by our stockholders to replace or remove
our current management by making it more difficult for
stockholders to replace or remove our current board of
directors. These provisions include:
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multi-vote shares of common stock, which are owned by the Onex
entities and management stockholders;
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advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings; and
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the authority of the board of directors to issue, without
stockholder approval, up to 10 million shares of preferred
stock with such terms as the board of directors may determine
and an additional 65,302,819 shares of class A common
stock (not including shares reserved for issuance upon
conversion of outstanding shares of class B common stock)
and an additional 78,648,653 shares of class B common
stock (not including shares issued but subject to vesting
requirements under our benefit plans).
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In addition, our supply agreements with Boeing include
provisions giving Boeing the ability to terminate the agreements
in the event any of certain disqualified persons acquire a
majority of Spirits direct or indirect voting power or all
or substantially all of Spirits assets. See
Business Our Relationship with Boeing.
Spirit
Holdings is a controlled company within the meaning
of the New York Stock Exchange rules and, as a result, will
qualify for, and intends to rely on, exemptions from certain
corporate governance requirements.
Because the Onex entities own more than 50% of the combined
voting power of our common stock, we are deemed a
controlled company under the rules of the New York
Stock Exchange, or NYSE. As a result, we qualify for, and
intend to rely upon, the controlled company
exception to the board of directors and committee composition
requirements under the rules of the NYSE. Pursuant to this
exception, we are exempt from rules that would otherwise require
that Spirit Holdings board of directors be comprised of a
majority of independent directors (as defined under
the rules of the NYSE), and that Spirit Holdings
compensation committee and corporate governance and nominating
committee be comprised solely of independent
directors, so long as the Onex entities continue to own
more than 50% of the combined voting power of our common stock.
Spirit Holdings board of directors consists of ten
directors, five of whom qualify as independent. In
addition, Spirit Holdings compensation and corporate
governance and nominating committees are comprised solely of
independent directors. See
Management Executive Officers and
Directors and Committees of the Board of
Directors.
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Our
stock price may be volatile.
Price fluctuations in our class A common stock could result
from general market and economic conditions and a variety of
other factors, including:
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actual or anticipated fluctuations in our operating results;
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changes in aerostructures pricing;
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our competitors and customers announcements of
significant contracts, acquisitions or strategic investments;
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changes in our growth rates or our competitors and
customers growth rates;
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the timing or results of regulatory submissions or actions with
respect to our business;
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our inability to raise additional capital;
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conditions of the aerostructure industry or in the financial
markets or economic conditions in general; and
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changes in stock market analyst recommendations regarding our
class A common stock, other comparable companies or the
aerospace industry in general.
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Item 1B.
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Unresolved
Staff Comments
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None.
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The location, primary use, approximate square footage and
ownership status of our principal properties as of
December 31, 2006 are set forth below:
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Approximate
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Location
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Primary Use
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Square Footage
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Owned/Leased
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United States
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Wichita, Kansas
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Primary Manufacturing
Facility/Offices/Warehouse
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10.8 million
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Owned*/Leased*
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Tulsa, Oklahoma
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Manufacturing Facility
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1.6 million
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Leased
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Tulsa, Oklahoma
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Offices/Warehouse
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117,000
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Leased
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McAlester, Oklahoma
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Manufacturing Facility
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135,000
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Owned
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United Kingdom
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Prestwick, Scotland
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Manufacturing Facility
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1.1 million
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Owned
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Samlesbury, England
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Administrative Offices
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15,919
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Leased
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A portion of the Wichita facility is owned and a portion is
leased. |
Our physical assets consist of 13.6 million square feet of
building space located on 946 acres in five facilities. We
produce our fuselages, propulsion systems and wing systems from
our primary manufacturing facility located in Wichita, Kansas
and we also produce wing systems in our manufacturing facilities
in Tulsa, Oklahoma and Prestwick, Scotland. In addition to these
three sites, we have a facility located in McAlester, Oklahoma
dedicated to supplying the Tulsa facility and office space in
Samlesbury, England, where a number of Spirit Europes
employees are located. The Wichita facilities are owned or
leased, the Tulsa facility is leased from the city of Tulsa and
the Tulsa Airports Improvement Trust, the Prestwick facility is
owned, the McAlester facility is owned, and the Samlesbury
facility is leased.
The Wichita facility, including the corporate offices, comprises
616 acres, 6.0 million square feet of manufacturing
space, 1.3 million square feet of offices and laboratories
for the engineering and design group and 3.5 million square
feet for support functions and warehouses. A total of
821,000 square feet is currently vacant (of which
194,000 square feet is being customized for the B787).
Additionally, a 127,000 square foot expansion of our
Composites Fuselage Facility to support the B787 was completed
in August 2006. The Wichita site has access to transportation by
rail, road and air. For air cargo, the Wichita site has access
to the runways of the McConnell Air Force Base. We have renewed
a lease as of July 1, 2006 for 135,000 square feet of
manufacturing space at our Wichita, Kansas facility for a
five-year term. We have also acquired a new 101,000 square
foot lease adjacent to the plant for tool storage.
The Tulsa facility consists of 1.6 million square feet of
building space set on 135 acres. The Tulsa plant is located
five miles from an international shipping port and is located
next to the Tulsa International Airport. In addition, we entered
into an eighteen month lease effective August 16, 2006 for
117,000 square feet of warehousing space located near our
Tulsa plant. The McAlester site, which manufactures parts and
sub-assemblies
primarily for the Tulsa facility, consists of
135,000 square feet of building space on 92 acres.
The Prestwick facility consists of 1.1 million square feet
of building space, comprised of 0.7 million square feet of
manufacturing space, 0.2 million square feet of office
space, and 0.2 million square feet of office/support space.
This facility is set on 100 acres. The Prestwick plant is
located on the west coast of Scotland, approximately
33 miles south of Glasgow, within close proximity to the
motorway network that provides access between England and
continental Europe. It is also easily accessible by air (at
Prestwick International Airport) or by sea. We lease a
portion of our Prestwick facility to the Regional Aircraft
division of BAE Systems and certain other tenants.
The Wichita and Tulsa manufacturing facilities have significant
scale in order to accommodate the very large structures that are
manufactured there, including entire fuselages. The three
U.S. facilities are in close proximity, with approximately
175 miles between Wichita and Tulsa and 90 miles
between Tulsa and McAlester. Currently, the three
U.S. facilities utilize approximately 90% of the available
building space. The Prestwick manufacturing
37
facility currently utilizes only 49% of the space; of the
remaining space, 27% is leased and 24% is vacant. The Samlesbury
office space is located in North Lancashire, England,
approximately 195 miles south of Prestwick.
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Item 3.
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Legal
Proceedings
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We are from time to time subject to, and are presently involved
in, litigation or other legal proceedings arising in the
ordinary course of business. In the opinion of management, we
are not engaged in any legal proceedings that we expect will
have, individually or in the aggregate, a material adverse
effect on our business, financial condition, cash flows, results
of operations or liquidity, other than as set forth below.
From time to time, in the ordinary course of business and like
others in the industry, we receive requests for information from
government agencies in connection with their regulatory or
investigational authority. Such requests can include subpoenas
or demand letters for documents to assist the government in
audits or investigations. We review such requests and notices
and take appropriate action. We have been subject to certain
requests for information and investigations in the past and
could be subject to such requests for information and
investigations in the future.
On December 19, 2005, an action entitled Perry Apsley
et al. v. The Boeing Company, Onex Corporation and
Spirit AeroSystems, Inc. was filed in the U.S. District
Court for the District of Kansas. The plaintiffs served us and
the other defendants in early March 2006. The plaintiffs assert
several claims and purport to bring the case as a class action
and collective action on behalf of all individuals who were
employed by Boeing (BCA) in Wichita, Kansas or Tulsa, Oklahoma
within two years prior to the date of the Boeing Acquisition and
who were terminated or not hired by Spirit. The plaintiffs seek
damages and injunctive relief for age discrimination,
interference with ERISA rights, breach of contract and
retaliation. Plaintiffs seek an unspecified amount of
compensatory damages and more than $1.5 billion in punitive
damages. On November 15, 2006, the court granted the
plaintiffs motion for conditional class certification and
held that the plaintiffs may send notice of the collective
action to all former Boeing employees who were terminated by
Boeing on or after January 1, 2002, were 40 years of
age or older at the time of termination and were not hired by
Spirit. Pursuant to the Asset Purchase Agreement, we agreed to
indemnify Boeing for damages resulting from the employment
decisions that were made by us with respect to former employees
of Boeing Wichita which relate or allegedly relate to the
involvement of, or consultation with, employees of Boeing in
such employment decisions.
During the period from July 2005 through March 2006, 35 former
Boeing employees who worked in Tulsa and McAlester, Oklahoma
filed discrimination complaints against Spirit, Onex and Boeing
with the Equal Employment Opportunity Commission, or EEOC, in
Oklahoma City, Oklahoma claiming age, retaliation, disability
and other types of discrimination as a result of their not being
hired by Spirit at the time of the Boeing Acquisition. Spirit
responded to the 35 individual complaints. The EEOC has issued a
notice of right to sue on all 35 of the complaints and stated
that it was unable to conclude that the information
establishes violations of the statutes. On
December 22, 2006 eight of the individuals who had worked
at the McAlester, Oklahoma facility filed a lawsuit in the
Eastern District of Oklahoma of the United States District
Court. The suit is against Spirit, Boeing, Onex and the UAW. The
Plaintiffs are claiming age, disability, sex and race
discrimination as well as breach of the duty of fair
representation, retaliatory discharge, violation of FMLA
(retaliation) and ERISA. The defendants have all been served and
answers by Spirit, Onex and Boeing were filed with the court on
February 2, 2006. Twenty-six of the complainants did not
file their own lawsuit within the 90 day period. They will
have the opportunity to join the Kansas case. The last
complainant was issued a Right to Sue letter on
November 16, 2006 and has 90 days from receipt of the
letter to file her own action. She also has the opportunity to
join the Kansas case.
In December 2005, a federal grand jury sitting in Topeka, Kansas
issued subpoenas regarding the vapor degreasing equipment at our
Wichita, Kansas facility. The governments investigation
appears to focus on whether the degreasers were operating within
permit parameters and whether chemical wastes from the
degreasers were disposed of properly. The subpoenas cover a time
period both before and after our purchase of the Wichita, Kansas
facility. Subpoenas were issued to Boeing, Spirit and
individuals who were employed by Boeing prior to the Boeing
Acquisition but are now employed by us. We are in the process of
responding to the subpoena and are cooperating with the
governments investigation. At this time, we do not have
enough information to make any predictions about the outcome of
this matter.
38
Airbus has filed oppositions to six European patents originally
issued to or applied for by Boeing and acquired by Spirit in the
Boeing Acquisition. Airbus claims that the subject matter in
these patents is not patentable because of a lack of novelty and
a lack of inventive activity. Responses to three of the Airbus
oppositions have been filed. Spirits response to a fourth
opposition is due on March 19, 2007. After Spirit responds,
the European Patent Office, or EPO, will issue a preliminary
opinion. If the opinion does not resolve all issues, then the
parties will participate in oral proceedings before a three
member board of the EPO. The decision of the board is
appealable. The remaining two patents have gone before the three
panel board. In one case the patent was maintained without
amendments to the claims. On the second patent, the board
accepted the claims with limitation and Spirit has appealed.
Spirit is awaiting confirmation of whether Airbus has appealed
either decision.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of the Companys
security holders during the fourth quarter of 2006.
Executive
Officers of the Registrant
Listed below are the names, ages, positions held, and
biographies of all executive officers of Spirit AeroSystems.
Executive officers hold office until their successors are
elected or appointed, or until their death, retirement,
resignation, or removal.
Jeffrey L. Turner, 55. Mr. Turner
has been the President and Chief Executive Officer of Spirit
Holdings since June 2006 and became a director of Spirit
Holdings on November 15, 2006. Since June 16, 2005,
the date of the Boeing Acquisition, he has also served in such
capacities for Spirit. Mr. Turner joined Boeing in 1973 and
was appointed Vice President General Manager in
November 1995. Mr. Turner received his Bachelor of Science
in Mathematics and Computer Science and his M.S. in Engineering
Management Science, both from Wichita State University. He was
selected as a Boeing Sloan Fellow to the Massachusetts Institute
of Technologys (MIT) Sloan School of Management where he
earned a Masters Degree in Management.
Ulrich (Rick) Schmidt,
57. Mr. Schmidt has been the Executive
Vice President, Chief Financial Officer of Spirit Holdings since
June 2006 and was Treasurer of Spirit Holdings from June 2006
through January 2007. He has also served in such capacities for
Spirit since August 2005. Previously, Mr. Schmidt was the
Executive Vice President and Chief Financial Officer of the
Goodrich Corporation from October 2000 until August 2005.
Mr. Schmidt received his Bachelor of Arts and Masters of
Business from Michigan State University.
Ronald C. Brunton, 59. Mr. Brunton
became the Executive Vice President and Chief Operating Officer
of Spirit Holdings on November 15, 2006. Since the date of
the Boeing Acquisition, he has served in this capacity for
Spirit. Mr. Brunton joined Boeing in 1983 and was appointed
Vice President of Manufacturing in December 2000.
Mr. Brunton received his Bachelor of Science in Mechanical
Engineering and equivalent undergraduate in Business from
Wichita State University.
H. David Walker,
55. Mr. Walker became the Senior Vice
President of Sales/Marketing of Spirit Holdings on
November 15, 2006. Mr. Walker joined Spirit in
September 2005 in these same capacities. From 2003 through
September 2005, Mr. Walker was Vice President of Vought
Aircraft Industries. Mr. Walker served as the Vice
President/General Manager of The Aerostructures Corp. from 2002
until 2003 and served as Vice President of Programs and
Marketing from 1997 through 2002. Mr. Walker received his
BEME and MSME from Vanderbilt University.
Gloria Farha Flentje,
63. Ms. Flentje became the Vice
President, General Counsel and Secretary of Spirit Holdings on
November 15, 2006. Since the date of the Boeing
Acquisition, she has served in these capacities for Spirit.
Prior to the Boeing Acquisition, she worked for Boeing as Chief
Legal Counsel for five years. Prior to joining Boeing, she was a
partner in the Wichita, Kansas law firm of Foulston &
Siefkin, L.L.P., where she represented numerous clients,
including Boeing, on employment and labor matters and school law
issues. Ms. Flentje graduated from the University of Kansas
with a Bachelor of Arts in Mathematics and International
Relations. She received her J.D. from Southern Illinois
University.
Janet S. Nicolson,
50. Ms. Nicolson became the Senior Vice
President of Human Resources of Spirit Holdings on
November 15, 2006. Since the beginning of 2006, she has
served in this capacity for Spirit and is
39
responsible for all aspects of human resources and labor
relations. Prior to joining Spirit, Ms. Nicolson was a
principal with Mercer Human Resource Consulting, one of the
largest global Human Resources consulting firms, from January
2001 to December 2005. From 1998 to 2001, she served as Vice
President Human Resources with Allied Worldwide, a global
logistics and transportation company. Her corporate human
resources experience includes executive and leadership positions
with diverse organizations such as PepsiCo, SIRVA, North
American Van Lines, Norfolk Southern Corporation and United
Technologies. She holds a Bachelor of Science degree in Business
from Concordia University and a Masters degree in Human
Resources from Pennsylvania State University.
John Lewelling, 46. Mr. Lewelling
became the Senior Vice President, Strategy and Information
Technology of Spirit Holdings on November 15, 2006. Since
February 2006, he has served in this capacity for Spirit. Prior
to joining Spirit, Mr. Lewelling was the Chief Operating
Officer of GVW Holdings from 2004 to 2006. Mr. Lewelling
was a Managing Director with AlixPartners from 2002 to 2003.
Prior to that, he was a Partner with AT Kearney from 1999 to
2002. Mr. Lewelling received his Bachelor of Science degree
in Materials and Logistics Management with a dual focus in
Industrial Engineering and Business from Michigan State
University.
Richard Buchanan, 56. Mr. Buchanan
became the Vice President/General Manager of Fuselage
Structures/Systems Business Unit of Spirit Holdings in July of
2005. Since the date of the Boeing Acquisition, he has served in
this capacity for Spirit. Prior to the Boeing Acquisition, he
was employed by Boeing for more than 25 years, all of which
were spent at Boeing Wichita, expect one and one-half years in
Everett, Washington as Fuselage Leader for the 787. During his
tenure with Boeing, Mr. Buchanan held the positions of
Director for SubAssembly/ Lot Time, Director for Light
Structures, and the Director and Leader of B737 Structures Value
Chain. Mr. Buchanan is a graduate of Friends University
with a Bachelor of Science degree in Human Resource Management.
Michael G. King, 51. Mr. King
became the Vice President/General Manager of the Propulsion
Structures and Systems Business Unit of Spirit Holdings on
November 15, 2006. Since the date of the Boeing
Acquisition, he has served in this capacity for Spirit. Prior to
the Boeing Acquisition, Mr. King worked for Boeing for
24 years, from 1980 until 2005. In 1990, Mr. King was
assigned to the
Sub-Assembly/Lot
Time (SA/LT) Manufacturing Business Unit at Boeing, responsible
for the lot time production activities. From 1996 until 2002, he
worked at Boeings Machining Fabrication Manufacturing
Business Unit with responsibility for production of complex
machined detail parts and assemblies for all commercial airplane
models. In 2002, Mr. King became the director of the Strut,
Nacelle and Composite Responsibility Center at Boeing.
Mr. King earned an Associate of Arts degree from Butler
County Community College. He completed his Bachelor of Science
in Manufacturing Technology through Southwestern College and
received a Mini-MBA through Wichita State University.
Mr. King also completed the Duke University Executive
Management Program in 2002.
Neil McManus, 41. Mr. McManus is
the Vice President and Managing Director of Spirit AeroSystems
(Europe) Limited. Since the date of the BAE Systems
Aerostructures Acquisition, he has served in that capacity for
Spirit Europe. Mr. McManus joined BAE Systems
Aerostructures in 1986 and was appointed Managing
Director Aerostructures in January 2003.
Mr. McManus was educated at Loughborough University of
Science and Technology, where he received his Bachelor of
Science Honors Degree in Engineering Manufacturing and a diploma
in Industrial Studies.
Donald R. Carlisle,
53. Mr. Carlisle became the Vice
President/General Manager of the AeroStructures Business Unit of
Spirit Holdings on November 15, 2006. Since the date of the
Boeing Acquisition, he has served in this capacity for Spirit
and is responsible for the design and manufacture of major
aerostructure products for commercial and military aerospace
programs. Mr. Carlisle served as Managing Director of
Boeings Tulsa and McAlester, Oklahoma plants from 2002
until the Boeing Acquisition. Prior to that assignment, he was
managing director of Boeings Tulsa Division with
responsibility for plants in Tennessee, Arkansas and Oklahoma.
Mr. Carlisle has over 30 years of leadership
experience in a wide range of aerospace business assignments
with Cessna, Martin Marietta, Rockwell International and Boeing
including production engineering, operations, product and
business development, program management and sales and marketing
for both government and commercial programs.
40
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our class A common stock has been quoted on The New York
Stock Exchange under the symbol SPR since
November 21, 2006. Prior to that time, there was no public
market for our stock. As of February 9, 2007, there were
approximately 25 holders of record of class A common
stock. However, we believe that many additional holders of our
class A common stock are unidentified because a substantial
number of shares are held of record by brokers or dealers for
their customers in street names. The closing price on February
9, 2007 was $31.45 per share as reported by The New York
Stock Exchange.
As of February 9, 2007, there were approximately
87 holders of record of class B common stock.
The following table sets forth for the indicated period the high
and low sales price for our class A common stock on The New
York Stock Exchange.
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|
|
Fiscal Year 2006 Quarter Ended(1):
|
|
High
|
|
|
Low
|
|
|
December 31, 2006
|
|
$
|
33.65
|
|
|
$
|
27.48
|
|
|
|
|
(1) |
|
From IPO date of November 21, 2006 through
December 31, 2006 |
Our class B common stock is neither listed nor publicly
traded.
Dividend
Policy
We did not pay any cash dividends in 2005 or 2006 and we
currently do not intend to pay cash dividends and, under
conditions in which our cash is below specific levels, are
prohibited from doing so under credit agreements governing our
credit facilities. Our future dividend policy will depend on the
requirements of financing agreements to which we may be a party.
Any future determination to pay dividends will be at the
discretion of our board of directors and will depend upon, among
other factors, our results of operations, financial condition,
capital requirements and contractual restrictions.
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table represents restricted shares outstanding
under the 2005 Executive Incentive Plan, the 2005 Board of
Directors Plan, and the 2006 Short-term and Long-term Incentive
plans as of December 31, 2006.
Equity
Compensation Plan Information
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|
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|
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|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
Number of Securities
|
|
|
|
|
|
for Future Issuances
|
|
|
|
to be Issued
|
|
|
Weighted-Average
|
|
|
Under the Equity
|
|
|
|
Upon Exercise of
|
|
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Exercise Price of
|
|
|
Compensation Plans
|
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|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column)(a)
|
|
|
|
(a)
|
|
|
(b)
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|
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(c)
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|
Restricted Stock
Awards
|
|
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|
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|
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Equity compensation plans approved
by security holders(1)
|
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|
5,826,360
|
|
|
$
|
|
|
|
|
7,464,486
|
|
Equity compensation plans not
approved by security holders(2)
|
|
|
|
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|
$
|
|
|
|
|
0
|
|
Total
|
|
|
5,826,360
|
|
|
$
|
|
|
|
|
7,464,486
|
|
|
|
|
(1) |
|
Approved by previous security holders in place before our
initial public offering. |
|
(2) |
|
Our equity incentive plans provide for the issuance of incentive
awards to officers, directors, employees and consultants in the
form of stock appreciation rights, restricted stock and deferred
stock, in lieu of cash compensation. |
41
Recent
Sales of Unregistered Securities
The following share amounts give effect to the
3-for-1
stock split of our common stock that occurred on
November 16, 2006.
On June 16, 2005, Spirit Holdings issued
112,500,000 shares of class B common stock for an
aggregate purchase price of $375,000,000 to four investors in
reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended.
On June 17, 2005, Spirit Holdings issued 30,000 shares
of class B common stock for an aggregate purchase price of
$100,000 to a member of senior management pursuant to Spirit
Holdings Executive Incentive Plan in reliance upon the
exemption provided by Section 4(2) of the Securities Act.
On July 18, 2005, Spirit Holdings issued
6,179,478 shares of class B common stock for an
aggregate purchase price of $1,979,620 to members of senior
management pursuant to Spirit Holdings Executive Incentive
Plan in reliance upon the exemption provided by Rule 701 of
the Securities Act.
On August 1, 2005, Spirit Holdings issued an additional
1,575,858 shares of class B common stock for an
aggregate purchase price of $816,620 to members of senior
management pursuant to Spirit Holdings Executive Incentive
Plan in reliance upon the exemption provided by Rule 701 of
the Securities Act.
In September 2005, Spirit Holdings issued an aggregate of
1,950,000 shares of class B common stock for an
aggregate purchase price of $1,300,000 to members of senior
management pursuant to Spirit Holdings Executive Incentive
Plan and in reliance upon the exemption provided by
Rule 701 of the Securities Act.
On December 15, 2005, Spirit Holdings issued
75,000 shares of class B common stock to one of our
directors pursuant to Spirit Holdings Director Stock Plan
in reliance upon the exemption provided by Rule 506 of the
Securities Act.
On December 15, 2005, Spirit Holdings granted a total of
315,000 shares of class B common stock to seven
directors of Spirit pursuant to Spirit Holdings Director
Stock Plan. We do not believe such grants constituted sales of
securities under the securities act; however, if they were sales
of securities, they were issued in reliance on the exemption
provided by Section 4(2) of the Securities Act.
On January 2, 2006, Spirit Holdings issued
795,000 shares of class B common stock for an
aggregate purchase price of $500,000 to three accredited
investors in reliance upon the exemption provided by
Rule 506 of the Securities Act.
On February 17, 2006, Spirit Holdings granted a total of
390,393 shares of class B common stock to members of
senior management pursuant to Spirit Holdings Short Term
Incentive Plan. Such grants did not constitute sales of
securities under the Securities Act.
On February 17, 2006, Spirit Holdings granted a total of
74,550 shares of class B common stock to a member of
senior management pursuant to Spirit Holdings Long Term
Incentive Plan. Such grant did not constitute a sale of
securities under the Securities Act.
In July 2006, Spirit Holdings issued an aggregate of
79,047 shares of class B common stock for an aggregate
purchase price of $606,027 to members of senior management
pursuant to Spirit Holdings Executive Incentive Plan and
in reliance upon the exemption provided by Rule 701 of the
Securities Act.
Use of
Proceeds
On November 20, 2006, a registration statement
(Registration
No. 333-135486)
relating to our initial public offering of our class A
common stock was declared effective by the Securities and
Exchange Commission and an additional registration statement
(Registration
No. 333-138854)
relating to the initial public offering became automatically
effective upon its filing. These registration statements covered
55,083,334 shares of our class A common stock, and an
additional 8,262,500 shares subject to the
underwriters over-allotment option granted by certain
selling stockholders identified in the registration statement.
On November 21, 2006 we sold 10,416,667 shares and the
selling stockholders
42
sold 52,929,167 shares at a price of $26.00 per share
less underwriter discounts and commissions. The managing
underwriters were Credit Suisse Securities (USA) LLC, Goldman,
Sachs & Co. and Morgan Stanley & Co.
Incorporated.
The aggregate gross proceeds, to us and the selling stockholders
from the shares of class A common stock sold to the public
were approximately $1.65 billion, before deducting offering
expenses and underwriting discounts and commissions. The
aggregate net proceeds to us from sales of shares by us were
approximately $249.3 million after deducting approximately
$13.5 million of underwriting discounts and commissions and
an estimated $8.0 million of other expenses we incurred in
connection with the offering. We did not receive any of the
proceeds from the sale of shares by the selling stockholders.
The net proceeds were used as follows:
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|
|
approximately $100 million to repay debt outstanding under
our Term Loan B under our senior secured credit facility;
and
|
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|
the balance to pay a portion of the obligations which became due
upon the closing of the offering under our Union Equity
Participation Plan.
|
An affiliate of Credit Suisse Securities (USA) LLC, one of the
representatives of the underwriters, was a lender under, and
received a portion of the net proceeds used to repay debt under,
our senior secured credit facility.
43
|
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Item 6.
|
Selected
Financial Data
|
SELECTED
CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth our selected consolidated
financial data for each of the periods indicated. The periods
prior to and including June 16, 2005 reflect data of our
Predecessor for financial accounting purposes. The periods
beginning June 17, 2005 reflect our financial data after
the Boeing Acquisition. Financial data for the year ended
December 31, 2002 (Predecessor), the year ended
December 31, 2003 (Predecessor), the year ended
December 31, 2004 (Predecessor), and the period from
January 1, 2005 through June 16, 2005 (Predecessor).
The period from June 17, 2005 through December 29,
2005 (Spirit Holdings) and the twelve months ended
December 31, 2006 (Spirit Holdings) are derived from the
audited consolidated financial statements of Predecessor or the
audited consolidated financial statements of Spirit Holdings, as
applicable. The audited consolidated financial statements for
the year ended December 31, 2004 (Predecessor), the period
from January 1, 2005 through June 16, 2005
(Predecessor), and the period from June 17, 2005 through
December 29, 2005 (Spirit Holdings) and the
twelve months ended December 31, 2006 (Spirit
Holdings) are included in this Annual Report. You should read
the information presented below in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our combined and
consolidated financial statements and related notes contained
elsewhere in this Annual Report.
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Spirit Holdings
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Predecessor
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Period
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Period
|
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from
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from
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|
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Twelve
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June 17,
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January 1,
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Months
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2005
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2005
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Ended
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through
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through
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Fiscal Year Ended
|
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December 31,
|
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December 29,
|
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|
June 16,
|
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December 31,
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December 31,
|
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December 31,
|
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2006
|
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2005
|
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2005
|
|
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2004
|
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2003
|
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2002
|
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(Dollars in millions, except per share data)
|
|
Statement of Income
Data:
|
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|
|
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|
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|
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Net sales
|
|
$
|
3,207.7
|
|
|
$
|
1,207.6
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Cost of sales (1)
|
|
|
2,934.3
|
|
|
|
1,056.4
|
|
|
|
$
|
1,163.9
|
|
|
$
|
2,074.3
|
|
|
$
|
2,063.9
|
|
|
$
|
2,350.7
|
|
Selling, general and administrative
expenses (2)
|
|
|
225.0
|
|
|
|
140.7
|
|
|
|
|
79.7
|
|
|
|
155.1
|
|
|
|
116.7
|
|
|
|
135.1
|
|
Research and development
|
|
|
104.7
|
|
|
|
78.3
|
|
|
|
|
11.0
|
|
|
|
18.1
|
|
|
|
17.3
|
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|
|
18.5
|
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Special charge (3)
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|
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|
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|
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|
|
|
|
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10.3
|
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|
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|
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|
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|
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Operating loss
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(56.3
|
)
|
|
|
(67.8
|
)
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N/A
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N/A
|
|
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|
N/A
|
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|
|
N/A
|
|
Interest expense and financing fee
amortization (4)
|
|
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(50.1
|
)
|
|
|
(25.5
|
)
|
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|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
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Interest income
|
|
|
29.0
|
|
|
|
15.4
|
|
|
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Other income (loss), net
|
|
|
5.9
|
|
|
|
1.3
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(71.5
|
)
|
|
|
(76.6
|
)
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Provision for income taxes
|
|
|
88.3
|
|
|
|
(13.7
|
)
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16.8
|
|
|
$
|
(90.3
|
)
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per basic share
|
|
$
|
0.15
|
|
|
$
|
(0.80
|
)
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Shares used in per share
calculation, basic
|
|
|
115.6
|
|
|
|
113.5
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Net income (loss) per share, diluted
|
|
$
|
0.14
|
|
|
$
|
(0.80
|
)
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Shares used in per share
calculation, diluted
|
|
|
122.0
|
|
|
|
113.5
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spirit Holdings
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Period
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
from
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
June 17,
|
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
2005
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
through
|
|
|
|
through
|
|
|
Fiscal Year Ended
|
|
|
|
December 31,
|
|
|
December 29,
|
|
|
|
June 16,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Dollars in millions)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by operating
activities
|
|
$
|
273.6
|
|
|
$
|
223.8
|
|
|
|
$
|
(1,177.8
|
)
|
|
$
|
(2,164.9
|
)
|
|
$
|
(2,081.8
|
)
|
|
$
|
(2,281.8
|
)
|
Cash flow used in investing
activities
|
|
$
|
(473.6
|
)
|
|
$
|
(1,030.3
|
)
|
|
|
$
|
(48.2
|
)
|
|
$
|
(54.4
|
)
|
|
$
|
(43.3
|
)
|
|
$
|
(50.4
|
)
|
Cash flow provided by financing
activities
|
|
$
|
140.9
|
|
|
$
|
1,047.8
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Capital expenditures
|
|
$
|
(343.2
|
)
|
|
$
|
(144.6
|
)
|
|
|
$
|
(48.2
|
)
|
|
$
|
(54.4
|
)
|
|
$
|
(43.3
|
)
|
|
$
|
(50.4
|
)
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (5)
|
|
$
|
184.3
|
|
|
$
|
241.3
|
|
|
|
$
|
0.8
|
|
|
$
|
3.0
|
|
|
$
|
3.6
|
|
|
$
|
1.3
|
|
Accounts receivable, net
|
|
$
|
200.2
|
|
|
$
|
98.8
|
|
|
|
$
|
0.4
|
|
|
$
|
2.0
|
|
|
$
|
2.0
|
|
|
$
|
1.6
|
|
Inventories
|
|
$
|
882.2
|
|
|
$
|
510.7
|
|
|
|
$
|
487.6
|
|
|
$
|
524.6
|
|
|
$
|
529.4
|
|
|
$
|
535.1
|
|
Property, plant &
equipment, net
|
|
$
|
773.8
|
|
|
$
|
518.8
|
|
|
|
$
|
528.4
|
|
|
$
|
511.0
|
|
|
$
|
555.3
|
|
|
$
|
611.8
|
|
Total assets
|
|
$
|
2,722.2
|
|
|
$
|
1,656.6
|
|
|
|
$
|
1,020.4
|
|
|
$
|
1,043.6
|
|
|
$
|
1,093.3
|
|
|
$
|
1,153.1
|
|
Total debt
|
|
$
|
618.2
|
|
|
$
|
721.6
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Long-term debt
|
|
$
|
594.3
|
|
|
$
|
710.0
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Shareholders equity
|
|
$
|
859.0
|
|
|
$
|
325.8
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
Included in 2006 cost of sales are non-recurring charges of
$321.9 million for the Union Equity Participation Plan. |
|
(2) |
|
Includes non-cash stock compensation expenses of
$56.6 million, $34.7 million, $22.1 million,
$23.3 million, $12.9 million, and $9.1 million
for the respective periods starting with the twelve months ended
December 31, 2006. Also included in 2006 are
$8.3 million of IPO related charges. |
|
(3) |
|
In 2003, a charge was allocable to Boeing Wichita in connection
with the close-out of the Boeing B757 program. |
|
(4) |
|
Included in 2006 interest expense and financing fee amortization
are expenses related to the IPO of $3.7 million. |
|
(5) |
|
Prior to the Boeing Acquisition, the Predecessor was part of
Boeings cash management system, and consequently, had no
separate cash balance. Therefore, at June 16, 2005,
December 31, 2004, December 31, 2003, and
December 31, 2002, the Predecessor had negligible cash on
the balance sheet. |
45
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion of our financial
condition and results of operations in conjunction with the
audited consolidated financial statements, the notes to the
audited consolidated financial statements and the Selected
Consolidated Financial Information and Other Data
appearing elsewhere in this Annual Report. This discussion
covers periods before and after the closing of the Boeing
Acquisition. The discussion and analysis of historical periods
prior to the Boeing Acquisition do not reflect the impact of the
Boeing Acquisition. In addition, this discussion contains
forward-looking statements that must be understood in the
context of numerous risks and uncertainties, including, but not
limited to, those described in the Risk Factors
section of this Annual Report. See Cautionary Statements
Regarding Forward-Looking Statements. Our results may
differ materially from those anticipated in any forward-looking
statements.
Recent
Events
Initial Public Offering. On June 30,
2006, the Company filed a Registration Statement on
Form S-1
(Registration
No. 333-135486)
with the Securities and Exchange Commission for an initial
public offering of the Companys class A common
stock. On November 20, 2006, that registration statement
was declared effective by the Securities and Exchange Commission
and an additional registration statement (Registration
No. 333-138854)
relating to the initial public offering became automatically
effective upon its filing. These registration statements covered
55,083,334 shares of our class A common stock, and an
additional 8,262,500 shares subject to the
underwriters over-allotment option granted by certain
selling stockholders identified in the registration statement.
We sold 10,416,667 shares and the selling stockholders sold
52,929,167 shares at a price of $26.00 per share less
underwriter discounts and commissions.
Acquisition of BAE Aerostructures. On
April 1, 2006, through our wholly-owned subsidiary, Spirit
Europe, we acquired BAE Aerostructures for a cash purchase price
of approximately $145.7 million and the assumption of
certain normal course liabilities (including accounts payable of
approximately $67.0 million). Spirit Europe manufactures
leading and trailing wing edges and other wing components for
commercial aircraft programs for Airbus and Boeing and produces
various aerostructure components for certain Raytheon business
jets. The BAE Acquisition provides us with a foundation to
increase future sales to Airbus, as Spirit Europe is a key
supplier of wing and flight control surfaces for the A320
platform, Airbus core single aisle program, and of wing
components for the A380 platform, one of Airbus most
important new programs and the worlds largest commercial
passenger aircraft. Under our supply agreements with Airbus, we
supply most of our products for the life of the aircraft
program, including commercial derivative models, with pricing
determined through 2010. For the A380, we have a long-term
supply contract with Airbus that covers a fixed number of units.
IAM Strike at Boeing Commercial Airplanes. On
September 2, 2005, Boeing experienced a strike during
collective bargaining discussions with the International
Association of Machinists and Aerospace Workers, or the IAM. At
the onset of the strike, Boeing implemented a
ship-in-place
plan for all Spirit-produced major components. During the
ship-in-place
period, we continued production at a reduced rate, but did not
physically deliver any products to Boeing, other than
miscellaneous spares and small components. We recognized revenue
on these
ship-in-place
units consistent with contractual terms. During this time
period, we worked with our employees to reduce work weeks
instead of implementing layoffs and furloughs. After Boeing
reached a three-year agreement with the IAM on
September 29, 2005, Spirit and Boeing worked together to
return production to normal rates by January 2006. The reduced
production rates during and for a period of time after the
strike reduced Spirits revenue by an estimated
$172 million for the six and one-half months ended
December 29, 2005 and negatively impacted our revenue,
income and cash flows for the first quarter of 2006.
Overview
We are the largest independent original parts designer and
manufacturer of aerostructures in the world. Aerostructures are
structural components, such as fuselages, propulsion systems and
wing systems for commercial, military and business jet aircraft.
We derive our revenues primarily through long-term supply
agreements with Boeing and Airbus. For the twelve months ended
December 31, 2006, we generated net revenues of
approximately $3,207.7 million and net income of
approximately $16.8 million.
46
We are organized into three principal reporting segments:
(1) Fuselage Systems, which include the forward, mid and
rear fuselage sections, (2) Propulsion Systems, which
include nacelles, struts/pylons and engine structural components
and (3) Wing Systems, which include wings, wing components
and flight control surfaces. All other activities fall within
the All Other segment, principally made up of sundry sales of
miscellaneous services and sales of natural gas through a
tenancy-in-common
with other Wichita companies. Fuselage Systems, Propulsion
Systems, Wing Systems and All Other represented approximately
49%, 28%, 22% and 1%, respectively, of our revenues for the
twelve months ended December 31, 2006.
Market
Trends
The financial health of the commercial airline industry has a
direct and significant effect on our commercial aircraft
programs. The commercial airline industry is impacted by the
strength of the global economy and geo-political events around
the world. The commercial airline industry suffered after the
terrorist attacks of September 11, 2001 and the subsequent
downturn in the global economy, the SARS epidemic in 2002 and,
more recently, from rising fuel prices and the conflicts in the
Middle East. In the last two years, the industry has shown signs
of strengthening with increases in global revenue passenger
miles (RPMs) driven in large part by deregulation and economic
growth in Asia and the Middle East, although rising fuel prices,
conflicts in the Middle East, major U.S. airline financial
distress and the risk of additional terrorist activity have
tempered the recovery.
Both Boeing and Airbus experienced record airplane orders in
2005 and 2006. As reported by Boeing and Airbus as of
December 31, 2006, they had a combined backlog of 4,851
commercial aircraft, which has grown from a backlog of 3,968 as
of December 31, 2005. The current backlog represents
approximately 4.8 years of production at 2006 delivery
rates. Many industry experts believe that the strength of
commercial orders will continue through the next several years,
although they are not expected to approach the record 2005 and
2006 levels. As a result, Boeing has announced delivery
increases in 2007 and 2008. The following table sets forth the
historical deliveries of Boeing and Airbus for 2002 through 2006
and Boeings announced delivery expectations for 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007(1)
|
|
|
Boeing
|
|
|
381
|
|
|
|
281
|
|
|
|
285
|
|
|
|
290
|
|
|
|
398
|
|
|
|
440
|
|
Airbus
|
|
|
303
|
|
|
|
305
|
|
|
|
320
|
|
|
|
378
|
|
|
|
434
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
684
|
|
|
|
586
|
|
|
|
605
|
|
|
|
668
|
|
|
|
832
|
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Boeing has announced 2007 deliveries to be between 440-445. We
have included 430 deliveries for Airbus as an estimate as
Airbus has not yet published their 2007 guidance. |
Although the commercial aerospace industry is in a cycle of
increased production, our business could be adversely affected
by significant changes in the U.S. or global economy.
Historically, aircraft travel, as measured by global RPMs,
generally correlates to economic conditions and a reduction in
aircraft travel could result in a decrease in new orders, or
even cancellation of existing orders, for new or replacement
aircraft, which in turn could adversely affect our business.
Part of our strategy during this upturn is to work on
diversifying our customer base and reducing our fixed to
variable cost ratio so we have downside protection in this
cyclical market.
47
2007
Outlook
We expect the following results for the year ending
December 31, 2007:
|
|
|
|
|
|
|
2007 Outlook
|
|
2006 Actuals
|
|
Revenues
|
|
$4.0-4.1 billion
|
|
$3.2 billion
|
Operating earnings (loss)
|
|
$400-420 million
|
|
($56.3) million
|
Operating margins
|
|
9.8-10.5%
|
|
(1.76%)
|
Depreciation and amortization
|
|
$120-125 million
|
|
$64.8 million
|
Earnings per share, diluted
|
|
$1.80-1.90 per share
|
|
$0.14 per share
|
Cash flow from operations (1)
|
|
approx. $280 million
|
|
$273.6 million
|
Capital expenditures
|
|
approx. $300 million
|
|
$343.2 million
|
|
|
|
(1) |
|
2007 Cash flow from operations includes $40-50 million of
capital expenditures funded by customers |
Our 2007 outlook is based on the following market assumptions:
|
|
|
|
|
We expect 2007 revenues between $4.0 billion and
$4.1 billion, approximately 25 percent higher than
2006, as increased market demand for large commercial transport
aircraft from Boeing and Airbus drives additional shipset
deliveries. This revenue projection is based on previously
issued 2007 Boeing delivery guidance of
440-445
aircraft and our estimate of 430 Airbus deliveries. This
projection also includes the initial deliveries to Boeing of
Spirit products on the 787 program as well as a full year of
revenue from Spirit Europe.
|
|
|
|
We expect our operating margins to be between 9.8 percent
and 10.5 percent as benefits from higher volumes, cost
reduction and productivity initiatives, as well as lower
R&D, stock compensation, and transition expenses expand
operating margins versus 2006 actual results. We expect 2007
fully diluted earnings per share to be $1.80 to $1.90.
|
|
|
|
We expect our cash flow from operations to be approximately
$280 million, which includes additional working capital
spending for the new 787 program. Fiscal 2007 capital
expenditures are expected to be approximately $300 million.
We expect to utilize approximately 50 percent of the
capital expenditures to complete the installation of production
capacity for the new 787 program. We anticipate that
approximately $45 million of customer financing will
partially offset these capital expenditures.
|
|
|
|
We expect depreciation and amortization expenses to be between
$120 and $125 million as new capital equipment is placed
into service.
|
The
Boeing Acquisition and Related Transactions
In December 2004 and February 2005, an investor group led by
Onex Partners LP and Onex Corporation formed the companies of
Spirit and Spirit Holdings, respectively, for the purpose of
acquiring Boeing Wichita. On June 16, 2005, Spirit acquired
Boeing Wichita for a cash purchase price of approximately
$903.9 million and the assumption of certain liabilities,
pursuant to the Asset Purchase Agreement. Based on final working
capital and other factors specified in the Asset Purchase
Agreement, a purchase price adjustment of $19.0 million was
paid to Spirit in the fourth quarter of 2005. The acquisition
was financed through borrowings of a $700.0 million Term
Loan B under our senior secured credit facilities and an
equity investment of $375.0 million. Proceeds from the Term
Loan B were used to consummate the Boeing Acquisition and
pay fees and expenses incurred in connection therewith and for
working capital. Our senior secured credit facilities also
included a $175.0 million revolving credit facility, none
of which was borrowed at the closing date of the Boeing
Acquisition and $0.3 million of which is outstanding in the
form of letters of credit as of December 31, 2006. In
connection with the Boeing Acquisition, Boeing is required to
make future payments to Spirit in amounts of $45.5 million,
$116.1 million and $115.4 million in 2007, 2008 and
2009, respectively, in payment for various tooling and capital
assets built or purchased by Spirit. These amounts are included
at their net present value within current and non-current assets
in the consolidated balance sheet. Spirit will retain unimpeded
usage rights and custody of these assets for their remaining
useful lives without compensation to Boeing. Boeing also
contributed $30.0 million to us to partially offset our
costs to transition to a stand alone company. The fair value of
the various assets acquired and liabilities assumed were
48
determined by management based on valuations performed by an
independent third party. The fair value of the net assets
acquired exceeded the total consideration for the acquisition by
approximately $739.1 million. The excess (negative
goodwill) was allocated on a pro rata basis to long-lived assets.
In connection with the Boeing Acquisition, we entered into a
long-term supply agreement under which we are Boeings
exclusive supplier for substantially all of the products and
services that Boeing Wichita provided to Boeing prior to the
Boeing Acquisition. The supply contract is a requirements
contract covering certain products such as fuselages, struts,
wing components and nacelles for Boeing B737, B747, B767 and
B777 commercial aircraft programs for the life of these
programs, including any commercial derivative models. Pricing
for existing products is contractually set through May 2013,
with average prices decreasing at higher volume levels and
increasing at lower volume levels. We also entered into a
long-term supply agreement for Boeings new B787 platform
covering the life of this platform, including commercial
derivatives. Under this contract, we will be Boeings
exclusive supplier for the forward fuselage, fixed and moveable
leading wing edges and struts for the B787. Pricing for these
products on the B787-8 model is generally set through 2021, with
prices decreasing as cumulative production volume levels are
achieved over time.
Union
Equity Participation Plan Compensation Expense
We established a Union Equity Participation Plan (UEP) pursuant
to which we were obligated to pay benefits tied to the value of
our class B common stock for the benefit of certain
employees represented by the IAM, IBEW and UAW upon the
consummation of our initial public offering. The stock
appreciation rights entitled certain of these employees to
receive proceeds, which, at our option, were paid in the form of
cash and / or future issuance of shares of our common stock.
Generally, former Boeing employees represented by one of these
unions whom we hired effective on the first day following the
Boeing Acquisition and who were employed by us for at least
three consecutive months between the closing of the Boeing
Acquisition and December 31, 2005, were identified as
eligible to receive a portion of the proceeds to be paid to
union employees as a result of the consummation of this
offering. Upon the consummation of the initial public offering,
and including the appreciation in stock value for the benefits
to be paid in cash, the Company expensed a total of
$321.9 million related to the Union Equity Participation
Plan as of December 31, 2006, (included in the total of
$333.9 million of IPO expenses) a portion of which was
agreed to be paid by us, at our option, in shares of
class A common stock, valued at the public offering price.
We currently anticipate paying approximately 39.0% of such
amount in shares of class A common stock, through the
issuance of approximately 4,834,984 shares, which we expect
to issue on or prior to March 15, 2007. The portion of the
benefit that is to be paid in stock is accounted for as an
equity based plan under SFAS 123(R), Shared-Based
Payment. This treatment has resulted in a
$125.7 million increase to additional paid-in capital on
the Companys consolidated balance sheet. Most of the
remainder of the benefit was paid in cash using
$149.3 million of the proceeds of the offering and
$36.0 million from available cash. Additional amounts will
be paid on or before March 15, 2007 to certain participants who
are not entitled to receive stock and to taxing authorities on
account of the employers portion of payroll taxes payable
in connection with the issuance of stock. The Union Equity
Participation Plan will terminate following the issuance of
shares in final payment to the employees.
Basis of
Presentation
Since the Boeing Acquisition was effective on June 17,
2005, the financial statements and subsidiary detail for prior
periods relate to its predecessor, the Wichita Division of
Boeing Commercial Airplanes, which we refer to as Boeing Wichita
or the Predecessor, and are presented on a carve-out basis. As a
result, we believe that the financial statements for the
Predecessor are not comparable to the financial statements for
Spirit Holdings for periods following the Boeing Acquisition, as
described under the heading Pre-Boeing
Acquisition Results are Not Comparable to Post-Boeing
Acquisition Results.
Prior to the Boeing Acquisition. Prior to the
completion of the Boeing Acquisition, the Predecessor was a
division of Boeing and was not a separate legal entity.
Historically, the Predecessor functioned as an internal supplier
of parts and assemblies to Boeing aircraft programs and had very
few sales to third parties. It operated as a cost center within
Boeing, meaning that it recognized its cost of products
manufactured for BCA programs, but did not recognize any
corresponding revenues for those products. No intra-company
pricing was established for the parts and assemblies that the
Predecessor supplied to Boeing. Revenues from sales to third
parties were
49
insignificant, consisting of less than $100,000 in each year
from 2002 through 2004, and in the period from January 1,
2005 through the closing date of the Boeing Acquisition. As a
cost center, the division operated under intra-company
arrangements with Boeing, with all transactions with Boeing
conducted on a non-cash basis. The Predecessor accumulated
incurred costs and assigned a per-finished item value to the
airplane programs as completed items were delivered to
Boeings Puget Sound facilities for final assembly.
Certain amounts included in the Predecessors financial
statements have been allocated from BCA
and/or
Boeing. Spirit believes that these allocations are reasonable,
but not necessarily indicative of costs that would have been
incurred by Boeing Wichita had it operated as a stand alone
business for the same periods.
Statements of cash flows have not been presented for the
Predecessor because it did not maintain cash accounts and
participated in Boeings centralized cash management
systems and Boeing funded all of its cash requirements.
The Predecessors financial statements include both the
Wichita and Tulsa/McAlester sites. All intercompany balances and
transactions involving the consolidating entities have been
eliminated in consolidation.
Post Boeing Acquisition. Since the Boeing
Acquisition, Spirit has operated as a stand alone entity with
its own accounting records. The consolidated financial
statements for the period from June 17, 2005 through
December 29, 2005 and the consolidated financial statements
for the year ended December 31, 2006 include Spirit
Holdings, Spirit and its other subsidiaries in accordance with
Accounting Research Bulletin No. 51,
SFAS No. 94 and Financial Accounting Standards Board,
or FASB, Interpretation No. 46(R). All intercompany
balances and transactions have been eliminated in consolidation.
Critical
Accounting Policies
The following discussion and analysis of our financial condition
and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance
with U.S. GAAP. The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates,
including those related to inventory, income taxes, financing
obligations, warranties, pensions and other post-retirement
benefits and contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Management believes that the quality and
reasonableness of our most critical policies enable the fair
presentation of our financial position and results of
operations. However, the sensitivity of financial statements to
these methods, assumptions and estimates could create materially
different results under different conditions or using different
assumptions.
The following are the most critical accounting policies of
Spirit Holdings, which are those that require managements
most subjective and complex judgments, requiring the use of
estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.
Revenue
and Profit Recognition
A significant portion of Spirits revenues are recognized
under long-term, volume-based pricing contracts, requiring
delivery of products over several years. Spirit recognizes
revenue under the contract method of accounting and records
sales and profits on each contract in accordance with the
percentage-of-completion
method of accounting, using the units of delivery method. We
follow the requirements of Statement of Position
81-1
(SOP 81-1),
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts (the contract method of
accounting), using the cumulative
catch-up
method in accounting for revisions in estimates. Under the
cumulative
catch-up
method, the impact of revisions in estimates is recognized
immediately when changes in estimated contract profitability
become known.
A profit rate is estimated based on the difference between total
revenues and total costs of a contract. Total revenues at any
given time include actual historical revenues up to that time
plus future estimated revenues. Total costs at any given time
include actual historical costs up to that time plus future
estimated costs. Estimated revenues include negotiated or
expected values for units delivered, estimates of probable
recoveries asserted against the
50
customer for changes in specifications, price adjustments for
contract and volume changes, and escalation. Costs include the
estimated cost of certain pre-production effort (including
non-recurring engineering and planning subsequent to completion
of final design) plus the estimated cost of manufacturing a
specified number of production units. Estimates take into
account assumptions relative to future labor performance and
rates, and projections relative to material and overhead costs
including expected learning curve cost reductions
over the term of the contract. The specified number of
production units used to establish the profit margin
(contract block) is predicated upon contractual
terms and market forecasts. The assumed timeframe/period covered
by the contract block is generally equal to the period specified
in the contract or the future timeframe for which we can project
reasonably dependable cost estimates. If the contract is a
life of program contract, then the life of the
contract block is usually the latter of these timeframes.
Estimated revenues and costs also take into account the expected
impact of specific contingencies that we believe are probable.
Estimates of revenue and cost for our contracts span a period of
multiple years and are based on a substantial number of
underlying assumptions. We believe that the underlying
assumptions are sufficiently reliable to provide a reasonable
estimate of the profit to be generated. However, due to the
significant length of time over which revenue streams will be
generated, the variability of the revenue and cost streams can
be significant if the assumptions change.
For revenues not recognized under the contract method of
accounting, we recognize revenues from the sale of products at
the point of passage of title, which is generally at the time of
shipment. Revenues earned from providing maintenance service are
recognized when the service is complete.
For hardware end items, the Predecessor recognized transferred
costs when the item was due on dock at Boeings major
assembly facility. Costs of products manufactured at the
Predecessors Wichita site were valued at discrete unit
cost, while costs of products manufactured at its
Tulsa/McAlester facility were valued based on the estimated
average cost for a Boeing-defined block of units. The cost of
other work (services, tooling, etc.) was measured at actual cost
as the costs were incurred by the Predecessor.
We treat the Boeing-owned tooling that we use in the performance
of our supply agreements with Boeing as having been obtained in
the Boeing Acquisition pursuant to the equivalent of a capital
lease and we take a charge against revenues for the amortization
of such tooling in accordance with EITF
No. 01-3,
Accounting in a Business Combination for Deferred Revenue of
an Acquiree and EITF
No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(including a Reseller of the Vendors Products).
Inventory
Raw materials are stated at the lower of cost (on an actual or
average cost basis) or market which is consistent with the
Predecessors valuation of raw materials. Inventory costs
relating to long-term contracts are stated at the actual
production costs, including manufacturing and engineering
overhead incurred to date, reduced by amounts associated with
revenue recognized on units delivered.
Inventory costs on long-term contracts include certain
pre-production costs incurred once research and development
activity has ended and the product is ready for manufacture,
including applicable overhead, in accordance with
SOP 81-1.
In addition, inventory costs typically include higher learning
curve costs on new programs. These factors usually result in an
increase in inventory (referred to as
excess-over-average
or deferred production costs) during the early years
of a contract. These costs are deferred only to the extent the
amount of actual or expected
excess-over-average
is reasonably expected to be fully offset by lower than average
costs in future periods of a contract.
If we determine that in-process inventory plus estimated costs
to complete a specific contract exceeds the anticipated
remaining sales value of such contract, such excess is charged
to cost of sales in the period in which such determination is
made, thus reducing inventory to estimated realizable value.
Finished goods inventory is stated at its estimated average per
unit cost based on all units expected to be produced.
51
Income
Taxes
Income taxes are accounted for in accordance with
SFAS No. 109, Accounting for Income Taxes.
Deferred income tax assets and liabilities are recognized for
future income tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. A
valuation allowance is recorded to reduce deferred income tax
assets to an amount that, in the opinion of management, will
ultimately be realized. The effect of changes in tax rates is
recognized during the period in which the rate change occurs.
We record an income tax expense or benefit based on the net
income earned or net loss incurred in each tax jurisdiction and
the tax rate applicable to that income or loss. In the ordinary
course of business, there are transactions for which the
ultimate tax outcome is uncertain. The final tax outcome of
these matters may be different than the estimates originally
made by management in determining the income tax provision. A
change to these estimates could impact the effective tax rate
and, subsequently, net income or net loss.
The Predecessor had no income taxes identified or allocated to
it (all income taxes were held at the Boeing corporate level).
Pensions
and Other Post-Retirement Benefits
We account for pensions and other post-retirement benefits in
accordance with SFAS No. 87, Employers
Accounting for Pensions and SFAS No. 106,
Employers Accounting for Post-retirement Benefits Other
Than Pensions, both as modified by SFAS 132(R),
Employers Disclosures about Pensions and Other
Post-retirement Benefits (As Amended) and SFAS 158
(SFAS 158), Employers Accounting for Defined
Benefit Pension and Other Post-retirement Plans. The
Financial Accounting Standards Board issued Statement 158,
Employers Accounting for Defined Benefit Pension and
Other Post-retirement Plans, during 2006 and it requires
companies to reflect the funded status for each of their defined
benefit and post-retirement plans on the balance sheet. Results
as of fiscal year end 2006 reflect the changes pursuant to this
new accounting standard.
Assumptions used in determining the benefit obligations and the
annual expense for our pension and post-retirement benefits
other than pensions are evaluated and established in conjunction
with an independent actuary.
We set the discount rate assumption annually for each of our
retirement-related benefit plans as of the measurement date,
based on a review of projected cash flows and long-term high
quality corporate bond yield curves. The discount rate
determined on each measurement date is used to calculate the
benefit obligation as of that date, and is also used to
calculate the net periodic benefit expense (income) for the
upcoming plan year.
We derive assumed expected rate of return on pension assets from
the long-term expected returns based on the investment
allocation by class specified in our investment policy. The
expected return on plan assets determined on each measurement
date is used to calculate the net periodic benefit
expense/(income) for the upcoming plan year.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the post-retirement health care
plans. To determine the health care cost trend rates, we
consider national health trends and adjust for our specific plan
designs and locations.
The Predecessor participated in various pension and
post-retirement plans sponsored by Boeing which covered
substantially all of its employees. The costs of such plans were
not discretely identifiable to the Predecessor but were
allocated by Boeing to the Predecessor and included in the cost
of products transferred. The assets and obligations under these
plans were also not discretely identified to the Predecessor.
Stock
Compensation Plans
Upon inception, we adopted SFAS No. 123(R), which
generally requires companies to measure the cost of employee and
non-employee services received in exchange for an award of
equity instruments based on the grant-date fair value and to
recognize this cost over the requisite service period or
immediately if there is no service period or other performance
requirements. Stock-based compensation represents a significant
accounting policy of ours which is further described in
Note 2 within the notes to our consolidated financial
statements included in this Annual Report.
52
We have established various stock compensation plans which
include restricted share grants and stock purchase plans.
Purchase
Accounting
Boeing Acquisition. We have accounted for the
Boeing Acquisition as a purchase in accordance with
SFAS No. 141, Business Combinations, and
recorded the assets acquired and liabilities assumed based upon
the estimated fair value of the consideration paid, which is
summarized in the following table.
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Cash payment to Boeing
|
|
$
|
903.9
|
|
Direct costs of the acquisition
|
|
|
20.2
|
|
Less:
|
|
|
|
|
Consideration to be returned from
Boeing for sale of capital assets
|
|
|
(202.8
|
)
|
Consideration to be returned from
Boeing for transition costs
|
|
|
(30.0
|
)
|
Working capital settlement
|
|
|
(19.0
|
)
|
|
|
|
|
|
Total consideration
|
|
$
|
672.3
|
|
|
|
|
|
|
Direct costs of the acquisition include professional fees paid
to outside advisors for investment banking, legal, tax, due
diligence, appraisal and valuation services.
In connection with the Boeing Acquisition, Boeing is required to
make future non-interest bearing payments to Spirit in amounts
of $45.5 million, $116.1 million and
$115.4 million in 2007, 2008 and 2009, respectively, in
payment for various tooling and capital assets built or
purchased by Spirit. Spirit will retain usage rights and custody
of the assets for their remaining useful lives without
compensation to Boeing. Since Spirit retains the risks and
rewards of ownership to such assets, Spirit recorded such
amounts as consideration to be returned from Boeing at a net
present value of approximately $203.0 million. The initial
amount will be accreted as interest income until payments occur
and is recorded as a component of other assets. The accretion of
interest income was approximately $15.3 million and
approximately $9.7 million in the twelve months of 2006 and
in fiscal 2005, respectively.
In connection with the Boeing Acquisition, Boeing also made
payments to us totaling $30.0 million through June 2006 for
Spirits costs of transition to a newly formed enterprise.
Since Spirit had no obligations under this arrangement, such
amounts were recorded as consideration to be returned from
Boeing. These payments were not discounted as they were realized
within one year of closing.
In accordance with the Asset Purchase Agreement, in fiscal 2005,
Boeing reimbursed Spirit approximately $19.0 million for
the contractually determined working capital settlement.
The fair value of the various assets acquired and liabilities
assumed were determined by management. The fair value of the net
assets acquired exceeded the total consideration for the
acquisition by approximately $739.1 million. The excess
(negative goodwill) was allocated on a pro rata basis to
long-lived assets and resulted in the purchase price allocation
as follows:
|
|
|
|
|
|
|
Book value
|
|
|
|
June 16, 2005
|
|
|
|
(Dollars in millions)
|
|
|
Cash
|
|
$
|
1.3
|
|
Accounts receivable
|
|
|
0.3
|
|
Inventory
|
|
|
479.2
|
|
Other current assets
|
|
|
0.3
|
|
Property, plant and equipment
|
|
|
231.1
|
|
Intangible assets
|
|
|
17.3
|
|
Other assets
|
|
|
6.8
|
|
Pension asset
|
|
|
101.2
|
|
Accounts payable and accrued
liabilities
|
|
|
(130.2
|
)
|
Pension and post-retirement
liabilities
|
|
|
(35.0
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
672.3
|
|
|
|
|
|
|
53
BAE Acquisition. We accounted for the BAE
Acquisition as a purchase in accordance with the provisions of
SFAS No. 141, Business Combinations, and
recorded the assets acquired and liabilities assumed based upon
the fair value of the consideration paid, which is summarized in
the following table:
|
|
|
|
|
Cash payment to BAE Systems
|
|
$
|
139.1
|
|
Direct costs of the acquisition
|
|
|
3.6
|
|
Working capital settlement
|
|
|
3.0
|
|
|
|
|
|
|
Total consideration
|
|
$
|
145.7
|
|
|
|
|
|
|
The fair value of the various assets acquired and liabilities
assumed was determined by management based on valuations
performed by an independent third party. The total consideration
exceeded the fair value of the net assets acquired by
approximately $10.3 million, resulting in goodwill. The
purchase price was allocated as follows:
|
|
|
|
|
|
|
Book value
|
|
|
|
April 1, 2006
|
|
|
|
(Dollars in millions)
|
|
|
Cash
|
|
$
|
0.3
|
|
Accounts receivable
|
|
|
61.9
|
|
Inventory
|
|
|
44.2
|
|
Other current assets
|
|
|
|
|
Property, plant and equipment
|
|
|
88.0
|
|
Intangible assets
|
|
|
30.1
|
|
Goodwill
|
|
|
10.3
|
|
Currency hedge assets
|
|
|
11.1
|
|
Accounts payable and accrued
liabilities
|
|
|
(67.0
|
)
|
Pension liabilities
|
|
|
(19.1
|
)
|
Other liabilities
|
|
|
(12.4
|
)
|
Currency hedge liabilities
|
|
|
(1.7
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
145.7
|
|
|
|
|
|
|
New
Accounting Standards
In February 2006, FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments,
which amends SFAS No. 133 and SFAS No. 140,
and improves the financial reporting of certain hybrid financial
instruments by requiring more consistent accounting that
eliminates exemptions and simplifies the accounting for those
instruments. SFAS No. 155 allows financial instruments
that have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host)
if the holder elects to account for the whole instrument on a
fair value basis. SFAS No. 155 is effective for all
financial instruments acquired or issued after the beginning of
an entitys first fiscal year that begins after
September 15, 2006. We have not issued or acquired the
hybrid instruments included in the scope of
SFAS No. 155 and do not expect the adoption of
SFAS No. 155 to have a material impact on our
financial condition, results of operations or cash flows.
In June 2006, FASB issued FASB Interpretation No. 48, or
FIN 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109, effective for fiscal years beginning after
December 15, 2006. FIN 48 prescribes the minimum
recognition threshold a tax position must meet before being
recognized in the financial statements and provides guidance on
derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. We do not expect the adoption of FIN 48 to have
a material impact on our financial condition, results of
operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and
requires enhanced disclosures about fair value measurements.
SFAS No. 157 requires companies to disclose the fair
value of their financial instruments according to a fair value
hierarchy as defined in the standard. Additionally, companies
are required to provide enhanced
54
disclosure regarding financial instruments in one of the
categories (level 3), including a reconciliation of the
beginning and ending balances separately for each major category
of assets and liabilities. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We believe that the adoption of SFAS No. 157
will not have a material impact on our consolidated financial
statements.
On September 29, 2006, FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Post-Retirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R). The standard requires us to:
|
|
|
|
|
Recognize the funded status of our defined benefit plans in our
consolidated financial statements.
|
|
|
|
Recognize as a component of other compensation income any
actuarial gains and losses and prior service costs and credits
that arise during the period but are not immediately recognized
as components of net periodic benefit cost.
|
|
|
|
Measure defined benefit plan assets and obligations as of our
fiscal year end.
|
|
|
|
Disclose in the notes to the financial statements additional
information about certain effects on net periodic cost for the
subsequent fiscal year that arise from delayed recognition of
gains or losses, prior to service costs or credits, and
transition asset or obligation.
|
|
|
|
Requires that we change our measurement date from November to
the fiscal year end (i.e., December 31) by year-end
2008.
|
The standard is effective for fiscal years ending after
December 15, 2006. See Note 9, Pensions and Other
Post-retirement Benefits in the enclosed Notes to Consolidated
Financial Statements.
Accounting
Changes and Pronouncements
Following the Boeing Acquisition, we adopted a number of
accounting policies, practices and conventions that differ from
the Predecessor, including but not limited to the following:
|
|
|
|
|
change from discrete unit or block costing to the use of
long-term contract accounting;
|
|
|
|
reclassification of certain costs from cost of sales to selling,
general and administrative costs, or SG&A;
|
|
|
|
change from accelerated depreciation methods for most personal
property to straight line depreciation methods for all property,
plant and equipment;
|
|
|
|
implementation of accounting for new activities that were not
performed by or otherwise recognized by the Predecessor; and
|
|
|
|
establishment of a lower dollar threshold for capitalization of
internal use software.
|
Other than the above changes associated with the transition of
Boeing Wichita to a stand alone business, there have been no
significant changes in our critical accounting policies during
the periods presented. Announced new SFAS or other
pronouncements with effective dates subsequent to the periods
presented are not expected to materially impact us.
Results
of Operations
The Predecessors results were driven primarily by
Boeings commercial airplane demand and the resulting
production volume. A shipset is a full set of components
produced by us for one airplane, and may include fuselage
components, wing systems and propulsion systems. For purposes
of measuring production or deliveries for Boeing aircraft in a
given period, the term shipset refers to sets of
structural fuselage components produced or delivered in such
period. For purposes of measuring production or deliveries for
Airbus aircraft in a given period, the term shipset
refers to sets of wing components produced or delivered in such
period. Other components which are part of the same aircraft
shipsets could be produced or shipped in earlier or later
accounting periods than the components
55
used to measure production or deliveries, which may result in
slight variations in production or delivery quantities of the
various shipset components in any given period.
In 2004, the Predecessor produced 270 shipsets, increasing to
308 shipsets from combined deliveries by Spirit and the
Predecessor in the twelve months ended December 29, 2005.
In the twelve months ended December 31, 2006, Spirit
delivered 392 shipsets, an increase of 84 shipsets over the
prior year.
Deliveries for the B737 increased from 201 shipsets in 2004 to
233 in 2005 and 302 in 2006. Deliveries for the B777 increased
from 37 shipsets delivered in 2004 to 49 in 2005 and 65 in
2006. B747, B757 and B767 production remained at comparatively
low levels during the same periods, with the B757 completing its
production run in 2004.
The Predecessors
period-to-period
cost of sales also reflects changes in model mix, incremental
cost improvements, an increase in cost of material and a
decrease in labor content as the increase in deliveries over
such periods was led by the more material intensive B737 and
B777 models. Period costs include expenses such as SG&A and
research and development that are charged directly to expense
and not capitalized in inventory as a cost of production.
As a stand alone company, our cost of sales reflects a lower
cost structure, reclassification of some costs of sales to
SG&A and implementation of long term contract accounting.
Our higher period costs for the post-Boeing Acquisition period
of 2005 and the twelve months of 2006 as compared to those of
the Predecessor for the prior periods reflect new functions
required to establish a stand alone business, accounting
reclassifications and nonrecurring transition costs of
$35.8 million in 2005 and $27.5 million for the twelve
months ended December 31, 2006.
The following table sets forth, for the periods indicated,
certain of our operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spirit Holdings
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Period
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
from
|
|
|
|
|
|
|
Twelve
|
|
|
June 17,
|
|
|
|
January 1,
|
|
|
|
|
|
|
Months
|
|
|
2005
|
|
|
|
2005
|
|
|
|
|
|
|
Ended
|
|
|
through
|
|
|
|
through
|
|
|
Fiscal Year
|
|
|
|
December 31,
|
|
|
December 29,
|
|
|
|
June 16,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
Net sales
|
|
$
|
3,207.7
|
|
|
$
|
1,207.6
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Cost of sales (a)
|
|
|
2,934.3
|
|
|
|
1,056.4
|
|
|
|
$
|
1,163.9
|
|
|
$
|
2,074.3
|
|
SG&A, R&D, other period
costs (b)
|
|
|
329.7
|
|
|
|
219.0
|
|
|
|
|
90.7
|
|
|
|
173.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(56.3
|
)
|
|
|
(67.8
|
)
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Interest expense and financing fee
amortization (c)
|
|
|
(50.1
|
)
|
|
|
(25.5
|
)
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Interest income
|
|
|
29.0
|
|
|
|
15.4
|
|
|
|
|
|
|
|
|
|
|
Other income (loss), net
|
|
|
5.9
|
|
|
|
1.3
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Provision for income taxes
|
|
|
88.3
|
|
|
|
(13.7
|
)
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16.8
|
|
|
$
|
(90.3
|
)
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in 2006 cost of sales are the fourth quarter charges
related to the UEP payout of $321.9 million. |
|
(b) |
|
Includes non-cash stock compensation expense of
$56.6 million, $34.7 million, $22.1 million, and
$23.3 million, respectively, for the periods starting with
the twelve months ended December 31, 2006. |
|
(c) |
|
Included in 2006 interest expense and financing fee amortization
are expenses related to the IPO of $3.7 million. |
Pre-Boeing
Acquisition Results are Not Comparable to Post-Boeing
Acquisition Results
Spirit Holdings historical financial statements prior to
the Boeing Acquisition are not comparable to its
financial statements subsequent to June 16, 2005. Spirit
Holdings was formed in February 2005 as a holding company of
Spirit, but did not commence operations until June 17,
2005. Prior to the Boeing Acquisition, the
56
Predecessor was a division of Boeing and was not a separate
legal entity. Historically, the Predecessor functioned as an
internal supplier of parts and assemblies to Boeing airplane
programs and had insignificant sales to third parties. It
operated as a cost center of Boeing, meaning that it recognized
the cost of products manufactured for BCA programs but did not
recognize any corresponding revenues for those products. No
intra-company pricing was established for the parts and
assemblies that the Predecessor supplied to Boeing.
On the closing date of the Boeing Acquisition, Spirit entered
into exclusive supply agreements with Boeing pursuant to which
Spirit began to supply parts and assemblies to Boeing at pricing
established under those agreements, and began to operate as a
stand alone entity with revenues and its own accounting records.
In addition, prior to the Boeing Acquisition, certain costs were
allocated to the Predecessor which were not necessarily
representative of the costs the Predecessor would have incurred
for the corresponding functions had it been a stand alone
entity. At the time of the Boeing Acquisition significant cost
savings were realized through labor savings, pension and other
benefit savings, reduced corporate overhead and operational
improvements. As a result of these substantial changes which
occurred concurrently with the Boeing Acquisition, the
Predecessors historical financials pre-Boeing Acquisition
are not comparable to Spirit Holdings financials
post-Boeing Acquisition.
Twelve
Months Ended December 31, 2006 as Compared to Ten and
One-Half Months Ended December 29, 2005
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
Ten and One-Half
|
|
|
|
Ended
|
|
|
Months Ended
|
|
|
|
December 31,
|
|
|
December 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Net revenues
|
|
$
|
3,207.7
|
|
|
$
|
1,207.6
|
|
Operating costs and
expenses
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,934.3
|
|
|
|
1,056.4
|
|
Selling, general and administrative
|
|
|
225.0
|
|
|
|
140.7
|
|
Research and development
|
|
|
104.7
|
|
|
|
78.3
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
3,264.0
|
|
|
|
1,275.4
|
|
Operating income (loss)
|
|
|
(56.3
|
)
|
|
|
(67.8
|
)
|
Interest expense and financing fee
amortization
|
|
|
(50.1
|
)
|
|
|
(25.5
|
)
|
Interest income
|
|
|
29.0
|
|
|
|
15.4
|
|
Other income, net
|
|
|
5.9
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(71.5
|
)
|
|
|
(76.6
|
)
|
Income tax provision
|
|
|
88.3
|
|
|
|
(13.7
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16.8
|
|
|
$
|
(90.3
|
)
|
|
|
|
|
|
|
|
|
|
Net Revenues. Net revenues for the twelve
months ended December 31, 2006 cannot be compared to net
revenues for the ten and one-half months ended December 29,
2005 as the current year contains twelve months of operations
compared to six and one-half months of operations for the
comparable period of 2005 due to the fact that the operations of
Spirit as a standalone entity did not commence until
June 17, 2005. The 2006 amounts also include the results of
Spirit Europe beginning April 1, 2006, the date we acquired
Spirit Europe. Spirit delivered 392 shipsets to Boeing during
the twelve months of 2006, as compared with 155 shipsets
delivered during the ten and one-half months ended
December 29, 2005. As discussed above under the heading
Recent Events, the strike experienced by
Boeing from September 2, 2005 through September 29,
2005 impacted delivery rates during the last six months of 2005
and the first quarter of 2006. Revenues attributable to Airbus,
through Spirit Europe, were approximately 8% of our total
revenues for the twelve months ended December 31, 2006. We
expect sales of shipsets to Airbus to be approximately 10% of
total revenue on an annual basis.
Cost of Sales. Cost of sales for 2006 cannot
be compared to cost of sales for 2005 as the current period
contains twelve months of operations compared to six and
one-half months of operations for the comparable period of 2005.
Cost of sales for 2006 also includes the results of Spirit
Europe beginning April 1, 2006, the date we
57
acquired Spirit Europe. Cost of sales as a percentage of net
revenues was 92% and 87% for the fiscal year of 2006 and the ten
and one-half months of 2005, respectively. Included in 2006 cost
of sales are the fourth quarter charges related to the UEP
payout of $321.9 million. The results for the fiscal year
ended December 31, 2006 also contained a favorable
cumulative catch up adjustment of approximately $59 million
which was related to revenues recognized in 2005 resulting from
revised contract accounting estimates, primarily with respect to
cost reduction initiatives, and adjustments to reduce
depreciation and amortization expense as a result of the final
pension asset transfer from Boeing.
SG&A, Research and Development and Other Period
Costs. SG&A, research and development and
other period costs for 2006 cannot be compared to 2005 because
the current period contains twelve months of operations compared
to six and one-half months of operations for the comparable
period of 2005. Expenses for 2006 also included Spirit Europe
beginning April 1, 2006, the date we acquired Spirit
Europe. SG&A, research and development, and other period
costs as a percentage of net revenues was 10% and 18% for the
fiscal year ended December 31, 2006 and the ten and
one-half months ended December 31, 2005, respectively.
Included in 2006 SG&A expenses are a fourth quarter charge
of $4 million related to the termination of the
intercompany agreement with Onex and a charge of
$4.3 million related to the Executive Incentive Plan. This
reduction in percentage of net revenues between periods was
driven by decreasing transition expenses as we near completion
of the transition from Boeing to Spirit and decreasing research
and development spending on the B787 program as production
commences. This decrease was also partially attributable to the
stock compensation charge incurred in 2005 related to the
revision of fair values assigned to stock purchases and grants
made in that year. This caused stock compensation expense to
increase to $34.7 million in the 2005 period. Fiscal year
2006 stock compensation expense included in SG&A was
$56.6 million.
Operating Income. Operating income for 2006
cannot be compared to Operating income for 2005 as the 2006
period contains twelve months of operations compared to six and
one-half months of operations for the comparable period of 2005.
The operating income for 2006 also includes Spirit Europe
results beginning April 1, 2006, the date we acquired
Spirit Europe. Operating income for the year ended
December 31, 2006 included the favorable effect of the
cumulative catch-up adjustment discussed above,
$321.9 million of UEP charges and $8.3 million of
expense as described above. Operating loss of
($56.3) million also includes unallocated corporate
expenses in addition to these IPO related charges for the twelve
month period of 2006, as well as $75.5 million of B787
research and development costs and $27.5 million of
non-recurring transition costs related to the Boeing Acquisition.
Interest Expense and Financing Fee
Amortization. Interest expense and financing fee
amortization for 2006 cannot be compared to Interest expense and
financing fee amortization for 2005 as the current period
contains twelve months of expenses and amortization compared to
six and one-half months of expenses and amortization for the
comparable period of 2005. Interest expense and financing fee
amortization for the twelve months ended December 31, 2006
included primarily interest and fees paid or accrued in
connection with long-term debt and $4.7 million in
amortization of deferred financing costs. Also included were
expenses related to the IPO of $3.7 million.
Interest Income. Interest income for 2006
cannot be compared to interest income for 2005 as the current
period contains twelve months of interest income compared to six
and one-half months of interest income for the comparable period
of 2005. Interest income for the twelve months ended
December 31, 2006, consisted of $20.7 million of
accretion of the discounted long-term receivable from Boeing for
capital expense reimbursement pursuant to the Asset Purchase
Agreement and $8.3 million in interest income.
Provision for Income Taxes. Provision for
income tax for 2006 cannot be compared to provision for income
tax for 2005 as the current period contains twelve months of
operations compared to the six and one-half months of operations
for the comparable period of 2005. The income tax provision for
the twelve months ended December 31, 2006, consisted of
($63.5) million for federal income taxes,
($25.4) million for state taxes and $0.6 million for
foreign taxes. During the period from inception through
September 28, 2006, upon weighing available positive and
negative evidence, including the fact that Spirit Holdings was a
new legal entity that had no earnings history, we established a
valuation allowance against 100% of our net deferred tax assets
as it was, at that time, considered more likely than not that we
would not have the ability to realize these assets. This
affected our tax provision by deferring
58
tax benefits until such time as management determined under
SFAS No. 109 that we had sufficient earnings history,
among other factors, to recognize those benefits. Management
reviews the need for a valuation allowance on a quarterly basis.
In the fourth quarter of 2006, management determined there was
sufficient evidence indicating it was more likely than not that
our deferred tax asset would be realized, which led to the
release of the valuation allowance on our net deferred tax
assets. Based on the nature of the underlying deferred tax
assets, the reversal of the valuation allowance resulted in a
decrease to non-current intangibles of $5.6 million and a
net income tax benefit of $75.2 million.
Segments. The following table shows segment
information for the twelve months ended December 31, 2006
as compared to ten and one-half months ended December 29,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten and One-Half
|
|
|
|
Twelve Months Ended
|
|
|
Months Ended
|
|
|
|
December 31,
|
|
|
December 29,
|
|
|
|
2006(1)
|
|
|
2005(2)
|
|
|
|
(Dollars in millions)
|
|
|
Segment Revenues
|
|
|
|
|
|
|
|
|
Fuselage Systems
|
|
$
|
1,570.0
|
|
|
$
|
637.7
|
|
Propulsion Systems
|
|
|
887.7
|
|
|
|
372.2
|
|
Wing Systems
|
|
|
720.3
|
|
|
|
170.0
|
|
All Other
|
|
|
29.7
|
|
|
|
27.7
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,207.7
|
|
|
$
|
1,207.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Revenues for Wing Systems include Spirit Europe after
April 1, 2006, the date we acquired BAE Aerostructures. |
|
(2) |
|
Includes only six and one-half months of operations and excludes
Spirit Europe. |
Fuselage Systems, Propulsion Systems, Wing Systems and All Other
represented approximately 49%, 28%, 22% and 1% respectively, of
our net sales for the twelve months ended December 31,
2006. Revenues attributable to Airbus are recorded within Wing
Systems. We expect that the value of Airbus deliveries will
account for approximately 50% of Wing Systems revenues annually.
Comparative shipset deliveries by model are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spirit Holdings
|
|
|
Predecessor
|
|
|
|
Twelve Months
|
|
|
Ten and One-Half
|
|
|
Five and One-Half
|
|
|
|
Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
Model
|
|
December 31, 2006(1)
|
|
|
December 29, 2005(2)
|
|
|
June 16, 2005
|
|
|
B737
|
|
|
302
|
|
|
|
119
|
|
|
|
114
|
|
B747
|
|
|
13
|
|
|
|
7
|
|
|
|
8
|
|
B767
|
|
|
12
|
|
|
|
5
|
|
|
|
6
|
|
B777
|
|
|
65
|
|
|
|
24
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Boeing
|
|
|
392
|
|
|
|
155
|
|
|
|
153
|
|
A320
|
|
|
241
|
|
|
|
|
|
|
|
|
|
A330/340
|
|
|
73
|
|
|
|
|
|
|
|
|
|
A380
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Raytheon Hawker 800 Series
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Spirit
|
|
|
761
|
|
|
|
155
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deliveries of the Airbus and Raytheon products began on
April 1, 2006 with the acquisition of BAE Aerostructures. |
|
(2) |
|
Spirit commenced operations on June 17, 2005. |
59
The following table shows segment information for the twelve
month period ended December 31, 2006 as compared to ten and
one-half months ended December 29, 2005:
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
Ten and One-Half
|
|
|
|
Ended
|
|
|
Months Ended
|
|
|
|
December 31, 2006(1)
|
|
|
December 29, 2005(2)
|
|
|
|
(Dollars in millions)
|
|
|
Segment Operating
Income
|
|
|
|
|
|
|
|
|
Fuselage Systems
|
|
$
|
112.5
|
|
|
$
|
43.7
|
|
Propulsion Systems
|
|
|
33.7
|
|
|
|
24.5
|
|
Wing Systems
|
|
|
11.8
|
|
|
|
5.1
|
|
All Other
|
|
|
4.3
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Income
|
|
|
162.3
|
|
|
|
72.1
|
|
Unallocated Corporate Expenses (3)
|
|
|
(218.6
|
)
|
|
|
(139.9
|
)
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
$
|
(56.3
|
)
|
|
$
|
(67.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating income for Wing Systems includes Spirit Europe after
April 1, 2006, the date we acquired BAE Aerostructures. |
|
(2) |
|
Includes only six and one-half months of operations and excludes
Spirit Europe. |
|
(3) |
|
Unallocated corporate expenses for 2006 is comprised of $2.1 of
research and development, $27.5 of non-recurring transition
costs, and $189.0 of selling, general and administrative costs
which includes $8.3 million of fourth quarter charges related to
the Companys IPO. |
Fuselage Systems, Propulsion Systems, Wing Systems and All Other
represented approximately 69%, 21%, 7% and 3%, respectively, of
our operating income before unallocated corporate expenses for
the fiscal year ended December 31, 2006. Operating income
before unallocated corporate expenses as a percentage of net
sales was 4%, 1%, <1% and <1%, respectively, for
Fuselage Systems, Propulsion Systems, Wing Systems and All Other
for the year ended December 31, 2006. The 2006 segment
income before unallocated corporate expenses for Fuselage
Systems, Propulsion Systems, Wing Systems, and All Other
includes UEP charges of $172.9 million,
$103.1 million, $44.9 million, and $1.0 million,
respectively.
Year
Ended December 29, 2005 as Compared to Year Ended
December 31, 2004
Since the Boeing Acquisition occurred in the middle of 2005,
financial results for the full calendar year 2005 and a
comparison of these results with any prior period would not be
meaningful.
Product Deliveries. Spirit and the Predecessor
delivered 308 shipsets during 2005, as compared with 270
shipsets delivered by the Predecessor in 2004, reflecting
Boeings increased production rates.
Comparative shipset deliveries by model are as follows:
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
January 1, 2005 to
|
|
|
January 1, 2004 to
|
|
|
|
December 29,
|
|
|
December 31,
|
|
Model
|
|
2005
|
|
|
2004
|
|
|
B737
|
|
|
233
|
|
|
|
201
|
|
B747
|
|
|
15
|
|
|
|
13
|
|
B757
|
|
|
0
|
|
|
|
9
|
|
B767
|
|
|
11
|
|
|
|
10
|
|
B777
|
|
|
49
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
308
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
60
The most significant volume increases were on the B737 and B777
models. The B737 is less costly to produce and also generates
lower revenues per shipset than the other Boeing models for
which we provide parts. Boeing ended production of the B757 in
2004.
Period
from June 17, 2005 through December 29,
2005
For the reasons discussed above, the Predecessors
historical financial statements for the periods prior to the
Boeing Acquisition are not comparable to Spirit Holdings
financial statements for periods subsequent to the Boeing
Acquisition, so a comparison of financial results for the period
from June 17, 2005 through December 29, 2005 with
those of any prior period would not be meaningful. Accordingly,
we describe the results of operations for such period below
without comparison to any prior period.
Net Sales. Spirit Holdings
$1,207.6 million of net sales in the period from
June 17, 2005 through December 29, 2005 were driven
primarily by sales of shipsets for Boeing aircraft. During this
period, Spirit delivered 155 airplane units (expressed in terms
of shipsets). Revenues and deliveries were negatively impacted
for this period as a result of the Boeing strike which lasted
28 days. Although Boeing continued to make payment for
ship-in-place
units completed during the Boeing IAM strike, and revenues were
recorded on such units consistent with contractual terms,
strike-driven changes to Boeings production schedule
reduced Spirits revenue by an estimated $172 million
for the six and one-half months ended December 29, 2005.
Fuselage Systems, Propulsion Systems, Wing Systems and All Other
represented approximately 53%, 31%, 14% and 2%, respectively, of
our net sales for the period.
The following table shows segment information for the period
ending December 29, 2005:
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Segment Revenues
|
|
|
|
|
Fuselage Systems
|
|
$
|
637.7
|
|
Propulsion Systems
|
|
|
372.2
|
|
Wing Systems
|
|
|
170.0
|
|
All Other
|
|
|
27.7
|
|
|
|
|
|
|
Total
|
|
$
|
1,207.6
|
|
|
|
|
|
|
Shipset deliveries by model were as follows:
|
|
|
|
|
|
|
Spirit Holdings
|
|
|
|
Period from
|
|
|
|
June 17, 2005 through
|
|
Model
|
|
December 29, 2005
|
|
|
B737
|
|
|
119
|
|
B747
|
|
|
7
|
|
B767
|
|
|
5
|
|
B777
|
|
|
24
|
|
|
|
|
|
|
Total
|
|
|
155
|
|
|
|
|
|
|
Cost of Sales. Spirit Holdings total
cost of sales for the period from June 17, 2005 through
December 29, 2005 was $1,056.4 million, which includes
costs related to labor, material and allocable indirect costs,
as well as Spirit Holdings previously described stand
alone cost structure and effects of Spirit Holdings
previously described accounting policy for revenue and profit
recognition.
SG&A. Spirits $140.7 million of
SG&A included $100.6 million in recurring costs of
finance, sales and marketing, human resources, legal and other
SG&A functions, plus $35.8 million in nonrecurring
costs to establish stand alone human resources and other
functions, recruit key executive personnel and transition
computing systems from Boeing or to segregate Spirit and Boeing
applications. The $100.6 million in recurring costs include
$34.7 million in non-cash stock compensation expense which
represents the difference between the fair value of stock
purchased by employees and the price paid by employees for the
stock, and the vested portion of the fair
61
value of restricted stock grants to employees and others
pursuant to Spirits stock compensation plans or other
agreements. The amounts above include the reclassification to
SG&A of certain costs that were inventoried by the
Predecessor, and the elimination of cost allocations made
previously to the Predecessor by its parent for SG&A support.
Research and Development. Spirits
$78.3 million in research and development consisted
primarily of $75.7 million incurred on the B787 program.
The Predecessors research and development was for internal
manufacturing process development, most of which related to the
B787 program.
Interest Expense and Financing Fee
Amortization. Spirits $25.5 million in
interest expense and financing fee amortization consisted
primarily of $22.4 million in interest and fees paid or
accrued in connection with long-term debt and $2.6 million
in amortization of deferred financing costs. Since the
Predecessors parent handled all financing activities, no
significant interest expense and financing fee amortization was
recorded by the Predecessor.
Interest Income. Spirits interest income
consisted primarily of $9.7 million in accretion of the
discounted long-term receivable from Boeing for capital expense
reimbursement pursuant to the Asset Purchase Agreement and
$5.7 million in interest income. Since the
Predecessors parent handled all financing activities, no
significant interest income was recorded by the Predecessor.
Provision for Income Taxes. The
$13.7 million income tax provision consisted of
$14.0 million for federal taxes and $(0.3) million for
state taxes. Since the Predecessors parent filed a
consolidated tax return for the entire parent company with no
income specifically identifiable to the Predecessor, no income
tax provision was recorded by the Predecessor. During the period
from inception through December 29, 2005, upon weighing
available positive and negative evidence, including the fact
that Spirit Holdings was a new legal entity that had no earnings
history, we established a valuation allowance against 100% of
our net deferred tax assets as it was, at that time, considered
more likely than not that we would not have the ability to
realize these assets. This affected our tax provision by
deferring tax benefits until such time as management determines
under SFAS No. 109 that we have a sufficient earnings
history, among other factors, to recognize these benefits.
Operating Income (Loss). The operating loss of
$67.8 million (after unallocated corporate expenses of
$139.9 million) for the period included $75.7 million
of B787 research and development costs and $35.8 million of
non-recurring transition costs related to the Boeing
Acquisition. Fuselage Systems, Propulsion Systems, Wing Systems
and All Other represented approximately 61%, 34%, 7% and (2)%,
respectively, of our operating income before unallocated
corporate expenses for the period. Operating income (before
unallocated corporate expenses of $139.9 million) as a
percentage of sales was 7%, 7%, 3% and (5)%, respectively, for
Fuselage Systems, Propulsion Systems, Wing Systems and All Other.
Period
from January 1, 2005 through June 16, 2005 as Compared
to Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Period from
|
|
|
|
|
|
|
January 1, 2005
|
|
|
|
|
|
|
through
|
|
|
Year Ended
|
|
|
|
June 16, 2005
|
|
|
December 31, 2004
|
|
|
|
(Dollars in millions)
|
|
|
Cost of products transferred
|
|
$
|
1,163.9
|
|
|
$
|
2,074.3
|
|
SG&A, R&D, other period
costs
|
|
$
|
90.7
|
|
|
$
|
173.2
|
|
SG&A, R&D, other period
costs as a percentage of cost of products transferred
|
|
|
7.8
|
%
|
|
|
8.3
|
%
|
Cost of Products Transferred. The
Predecessors cost of products transferred decreased
significantly from 2004 to 2005 driven by the fact that the
Predecessor ceased operating as the Predecessor five and
one-half months through 2005 and began operating as Spirit at
the time of the Boeing Acquisition. As a result, the Predecessor
delivered significantly fewer units in 2005 as compared to 2004.
On a per unit basis, the cost of products transferred was
relatively unchanged for the five and one-half month period
ended June 16, 2005 as compared to the year ended
December 31, 2004, reflecting similar product mix and cost
structures in both periods.
62
SG&A, Research and Development and Other Period
Costs. The Predecessors SG&A, research
and development and other period costs decreased significantly
from 2004 to 2005 driven by the fact that the Predecessor ceased
operating as the Predecessor five and one-half months through
2005 and began operating as Spirit at the time of the Boeing
Acquisition.
Liquidity
and Capital Resources
Liquidity, or access to cash, is an important factor in
determining our financial stability. The primary sources of our
liquidity include cash flow from operations, borrowing capacity
through our credit facilities and advance payments and
receivables from Boeing. Our liquidity requirements and working
capital needs depend on a number of factors, including delivery
rates under our contracts, the level of research and development
expenditures related to new programs (including the B787 program
as discussed below), capital expenditures, growth and
contractions in the business cycle, contributions to our
union-sponsored plans and interest and debt payments.
We expect that our working capital requirements will increase
significantly over the next two years as the B787-8 program
progresses toward FAA certification and we build inventory in
support of the program. Under our arrangement with Boeing, we
will not receive payment for B787-8 shipsets delivered to Boeing
prior to FAA certification. We anticipate that this will lead to
a short-term increase in our accounts receivable balances as we
expect to deliver shipsets beginning in mid-2007, but do not
expect Boeing to receive FAA certification of the
B787-8 until
2008. Accounts receivable balances associated with the B787-8
program will return to normal levels after FAA certification is
received. In the aggregate, we expect total working capital for
the B787-8 program, including the net of production inventory,
engineering costs capitalized into inventory, accounts
receivable and accounts payable, to increase by
$300 million to $550 million between December 31,
2006 and when the B787-8 achieves FAA certification. We believe
we can finance this increase from our cash flow from operations
and existing financing sources.
Upon the consummation of our initial public offering, and
including the appreciation in stock value for the benefits to be
paid in cash, the Company expensed a total of
$321.9 million related to the Union Equity Participation
Plan as of December 31, 2006 (included in the total $333.9
million of IPO expenses). We currently anticipate paying
approximately 39.0% of such amount in shares of class A
common stock through the issuance of approximately
4,834,984 shares, which we expect to issue on or prior to
March 15, 2007. Most of the remainder of the benefit
was paid in cash using $149.3 million of the proceeds of
the offering and $36.0 million from available cash.
Additional amounts will be paid on or before March 15, 2007
to certain participants who are not entitled to receive stock
and to taxing authorities on account of the employers
portion of payroll taxes payable in connection with the issuance
of stock. The entire cost of the plan is reflected in cost of
sales on the Companys consolidated statement of operations.
Our ability to make scheduled payments of principal of, or to
pay the interest on, or to refinance, our indebtedness, or to
fund non-acquisition related capital expenditures and research
and development efforts, will depend on our ability to generate
cash in the future. This is subject, in part, to general
economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. Based on our current
levels of operations and absent any disruptive events,
management believes that internally generated funds, advance
payments and receivables from Boeing described below, and
borrowings available under our revolving loan facility should
provide sufficient resources to finance our operations,
non-acquisition related capital expenditures, research and
development efforts and long-term indebtedness obligations
through at least fiscal year 2007. We cannot assure you,
however, that our business will generate sufficient cash flow
from operations or that future borrowings will be available to
us under our credit facilities in an amount sufficient to enable
us to pay our indebtedness or to fund our other liquidity needs.
If we cannot generate sufficient cash flow, we may need to
refinance all or a portion of our indebtedness on or before
maturity. Also, to the extent we accelerate our growth plans,
consummate acquisitions or have lower than anticipated sales or
increases in expenses, we may also need to raise additional
capital. In particular, increased working capital needs occur
whenever we consummate acquisitions or experience strong
incremental demand for our products. We cannot assure you that
we will be able to raise additional capital on commercially
reasonable terms or at all.
63
We may pursue strategic acquisitions on an opportunistic basis.
Our acquisition strategy may require substantial capital, and we
may not be able to raise any necessary funds on acceptable terms
or at all. If we incur additional debt to finance acquisitions,
our total interest expense will increase.
We currently have manufacturing capacity to produce shipsets at
the rates we have committed to our customers. Our capacity
utilization on the products we produced prior to the Boeing
Acquisition averages about 60%, while our capacity utilization
on the fuselages for the B737 and B777 are at close to 95% at
our current production rates. These capacity utilization rates
are based on five days per week, three shifts per day
operations. Significant capital expenditures may be required if
our customers request that we increase production rates for an
extended period of time. Our supply agreements typically have
maximum production rates. If a customer requests that we
increase production rates above these stated maximum levels,
additional negotiation would be required to determine whether we
or our customer would bear the cost of any capital expenditures,
tooling and nonrecurring engineering required as a result of
such production rate increase.
Cash. At December 31, 2006 and
December 29, 2005 we had cash and cash equivalents of
$184.3 million and $241.3 million, respectively. On
April 1, 2006, we used approximately $145.7 million of
cash to pay the purchase price for the BAE Acquisition. Prior to
the Boeing Acquisition, the Predecessor was part of
Boeings cash management system, and consequently, had no
separate cash balance. Therefore, at December 31, 2004, the
Predecessor had negligible cash on the balance sheet.
Credit Facilities. In connection with the
Boeing Acquisition, Spirit and certain of its affiliates entered
into $875.0 million of Senior Secured Credit Facilities
with Citicorp North America, Inc. and a syndicate of other
lenders, consisting of a six and one-half year
$700.0 million Term Loan B and a five year
$175.0 million Revolver. The Term Loan B was used to pay a
portion of the consideration for the Boeing Acquisition and
certain fees and expenses incurred in connection therewith. We
repaid $100.0 million of principal of the Term Loan B at
the time of our initial public offering and entered into an
amendment and restatement of the Senior Secured Credit
Facilities at that time which, among other things, extended the
maturity of the Term Loan B by twenty-one months and increased
the Revolver from $175.0 million to $400.0 million.
The Term Loan B is repayable in quarterly installments of 1% of
the aggregate principal amount thereof through
September 30, 2012 with the remaining balance due in the
final four quarters. The Revolver is available for general
corporate purposes of Spirit and its subsidiaries, and contains
a letter of credit
sub-facility.
As of December 31, 2006, approximately $589.8 million
was outstanding under the Term Loan B, no amounts were
outstanding under the Revolver and $0.3 million of letter
of credit were outstanding.
Borrowings under the Senior Secured Credit Facilities bear
interest at a rate equal to the sum of LIBOR plus the applicable
margin (as defined below) or, at our option, the alternate base
rate, which will be the highest of (x) the Citicorp North
America, Inc. prime rate, (y) the certificate of deposit
rate, plus 0.50% and (z) the federal funds rate plus 0.50%,
plus the applicable margin. The applicable margin with respect
to the Term Loan B is 1.75% per annum in the case of
such portion of the Term Loan B that bears interest at
LIBOR and 0.75% in the case of such portion of the Term
Loan B that bears interest at the alternate base rate. The
applicable margin with respect to borrowings under the Revolver
is determined in accordance with a performance grid based on our
total leverage ratio and ranges from 2.75% to 2.25% per
annum in the case of LIBOR advances and from 1.75% to
1.25% per annum in the case of alternate base rate
advances. We are also obligated to pay a commitment fee of
0.50% per annum on the unused portion of the Revolver. See
Quantitative and Qualitative Disclosures About Market
Risk Interest Rate Risks.
The obligations under the Senior Secured Credit Facilities are
guaranteed by Spirit Holdings, Spirit AeroSystems Finance, Inc.
and each of Spirits direct and indirect domestic
subsidiaries (other than non-wholly-owned domestic subsidiaries
that are prohibited from providing such guarantees). All
obligations under the Senior Secured Credit Facilities and the
guarantees are secured by a first priority security interest in
substantially all of Spirits and the guarantors
assets.
The Senior Secured Credit Facilities contain customary
affirmative and negative covenants, including restrictions on
our ability to incur additional indebtedness, create liens on
our assets, engage in transactions with affiliates, make
investments, pay dividends, redeem stock and engage in mergers,
consolidations and sales of assets. The Senior Secured Credit
Facilities also contain a financial covenant consisting of a
maximum senior credit facility leverage ratio. We were in
compliance with this covenant as of December 31, 2006.
64
In connection with our initial public offering, the Senior
Secured Credit Facilities were amended to, among other things,
(1) eliminate the structure whereby Spirit borrows from an
indirect subsidiary of Onex Wind and reflect the release of Onex
Wind and its subsidiaries from all of their obligations under
the Senior Secured Credit Facilities upon the assumption of the
same by Spirit, (2) refinance the existing term loans under
the Senior Secured Credit Facilities on substantially similar
terms, with certain changes including a reduction in the
applicable interest margin and an extension of the final
maturity date to September 30, 2013, (3) increase the
amount of the revolving commitments under the Senior Secured
Credit Facility from $175.0 million to $400.0 million,
(4) replace the existing financial covenants with a
covenant limiting the maximum total senior credit facility
leverage ratio of Spirit and its subsidiaries on a consolidated
basis, and (5) remove the mandatory prepayment requirements
with respect to proceeds of equity issuances.
In connection with the Boeing Acquisition, Spirit and certain of
its affiliates also entered into a $150.0 million subordinated
delayed draw credit facility with Boeing. This credit facility
was terminated on November 27, 2006.
Investment in B787 Program. We have received
and, over the next several years, will receive cash from Boeing
to fund development in connection with the B787 program, capital
expenditures in connection with our other Boeing production work
and stand alone transition costs. We expect to invest
approximately $915.0 million, excluding capitalized
interest, on the B787-8 Model program for research and
development, capitalized pre-production costs and capitalized
expenditures (including Tooling), of which approximately
$589.0 million, excluding capitalized interest, had been
spent as of December 31, 2006.
The B787 Supply Agreement requires Boeing to make advance
payments to us for production articles in the aggregate amount
of $700.0 million. As of December 31, 2006,
$600.0 million had been received by us, and an additional
$100.0 million will be advanced to us in 2007. We must
repay these advances, without interest, in the amount of a
$1.4 million offset against the purchase price of each of
the first five hundred B787 shipsets delivered to Boeing. In the
event that Boeing does not take delivery of five hundred B787
shipsets, any advances not then repaid will first be applied
against any outstanding B787 payments then due by Boeing to us,
with any remaining balance repaid at the rate of
$84.0 million per year beginning the month following our
final delivery of a B787 production shipset to Boeing.
Receivables from Boeing. Boeing is required to
make future payments to us in amounts of $45.5 million,
$116.1 million and $115.4 million in 2007, 2008 and
2009, respectively, in payment for various tooling and capital
assets built or purchased by us, although we will retain usage
rights and custody of these assets for their remaining useful
lives without compensation to Boeing. Boeing also contributed
$30.0 million to us to partially offset our costs to
transition to a stand alone company.
We accrued revenue for volume-based price increases retroactive
to June 17, 2005, which we were contractually
entitled to collect after June 1, 2006. Our supply
agreement with Boeing provides for prices to be established
based on planned production volumes for each period beginning
June 1 through May 31, with higher prices at lower
volumes and lower prices at higher volumes. These
pre-established prices are the basis for billing and payment for
the entire year regardless of actual volume, with any
differences settled after the yearly period has ended. The
Boeing strike reduced volume for 2005 and the first part of 2006
below planned levels, resulting in higher average prices than
had been established. Since we were contractually entitled to
payment at the higher prices after the end of the first pricing
year (approximately June 2006), we accrued revenue for these
volume-based price increases retroactive to June 17, 2005.
We collected this amount in August 2006.
Tax Incentive Bonds. Both Spirit and the
Predecessor utilized IRBs issued by the City of Wichita to
finance the purchase
and/or
construction of real and personal property at the Wichita site.
Tax benefits associated with IRBs include a provision for a
ten-year property tax abatement and a sales tax exemption from
the Kansas Department of Revenue. Spirit and the Predecessor,
being both holders of the bonds and debtors thereunder, offset
the amounts on a consolidating basis. Each of Spirit and the
Predecessor also purchased the IRBs and therefore is the
bondholder as well as the borrower/lessee of the property
purchased with the IRB proceeds. The City of Wichita owns the
property purchased with the IRBs and leases it to Spirit (with
respect to the bonds issued in 2005) and to the Predecessor
(with respect to the bonds issued in 1996 through 2004). Upon
maturity or redemption of the bonds, title to the leased
property reverts to the lessee. The bonds issued in December
2006 and December 2005 are ten year bonds
65
and mature in 2017 and 2016, respectively. The bonds issued in
1996 through 2004 mature 25 years following issuance.
Certain personal property assets of Boeing Wichita that were
subject to IRBs owned by Boeing prior to the Boeing Acquisition
continue to be subject to those IRBs. In connection with the
Boeing Acquisition, Boeing assigned its leasehold interest in
these assets and the related bonds to a special purpose trust
beneficially owned by Boeing, which subleases these assets to
Spirit. Pursuant to the terms of the sublease, as these assets
cease to qualify for the ten-year property tax abatement, the
special purpose trust will purchase the assets from the City of
Wichita, terminate the related leases, redeem the related bonds
and transfer the assets to Spirit.
The principal amount of the portion of the bonds subleased from
the special purpose trust is approximately $713.0 million.
The IRBs obtained by Spirit in 2005 and 2006 have an aggregate
principal amount of $332.0 million.
We entered into an incentive agreement with the Kansas
Department of Commerce, pursuant to which the Kansas Development
Finance Authority will finance an eligible project by entering
into a debt structure with us consisting of a loan and the
issuance of bonds. The purpose of the program is to provide
incentives to us to invest in the State of Kansas. In return, we
receive a tax benefit in the form of a rebate of certain payroll
taxes from the Kansas Department of Revenue. Pursuant to offset
provisions in the debt instruments, there is no cash payment of
principal or interest upon payment or in respect of the bonds,
other than the tax benefit to us and the costs of issuance. We
offset the amount owed by us, as debtor, to Spirit AeroSystems
Finance, Inc., as bondholder, on a consolidated basis. The
instruments are in the amount of $80.0 million and expire
in December 2025.
Open Infrastructure Offering (OIO). On
September 29, 2005, we entered into a five-year agreement
with International Business Machines Corporation, or IBM, and
IBM Credit, LLC, or IBM Credit. This agreement includes the
financing of the purchase of software licenses with a value of
$26.2 million payable in monthly payments of
$0.6 million for 48 months with an interest rate of
7.8%. On July 18, 2006 this initial loan was refinanced.
This refinancing agreement increased the monthly payment from
$0.6 to $1.0 million and reduced the number of payments by
15 months. During the third quarter of 2006 additional
software was purchased totaling $7.9 million and was
financed with IBM Credit. These additional loans have a combined
monthly payment of $0.4 million and are for terms of 24 and
36 months with effective interest rates of 3.7% and 4.8%,
respectively. Under the terms of the OIO Agreement, we would be
in default if our credit rating with Standard and Poors
for secured debt falls below BB-. Our debt rating as of the date
of this Annual Report was BB. In the event that IBM or IBM
Credit determines that we are in default under the OIO
Agreement, we would be required to pay IBM any previously unpaid
monthly payments under the agreement and pay IBM Credit a
settlement charge. Additionally, if we do not make the required
payments to IBM or IBM Credit, as applicable, we could be
required to cease using and surrender all licensed program
materials financed by IBM Credit and destroy our copies of such
program materials. IBM has a security interest in any equipment
acquired through the lease agreement included in the OIO. As of
December 31, 2006, we had debt related to OIO of
$20.7 million.
Other Debt. In addition to the OIO agreement
with IBM we entered into an agreement on March 31, 2006 to
finance a service contract with IBM for assisting us in
implementing our operating systems. This contract has a total
value of $11.8 million. The agreement is to make monthly
draws against the contract as the work is performed and certain
milestones are achieved. Each draw is a separate loan with
twenty-four equal payments paid monthly, and carries an interest
rate of 4.75%. As of December 31, 2006 we have drawn a
total of $10.1 million and have paid back $2.5 million
leaving a balance of approximately $7.6 million.
Cash
Flow
The Predecessors cash was provided by and managed at the
Boeing corporate level and, consequently, the Predecessor had no
separate cash balance. While certain cash flow information is
included in a note to the Predecessors historical
financial statements, such information is estimated using a
change in net working capital approach. The Predecessor did not
have any significant cash inflows, and therefore the
Predecessors cash flows are not comparable to
Spirits cash flows as a stand alone entity following the
Boeing Acquisition. The Predecessors cash flows from
operating activities are largely based on cost of products
transferred and period costs and the Predecessors cash
flows from investing activities are equivalent to capital
expenditures.
66
Twelve
Months Ended December 31, 2006
Operating Activities. Spirit had a net cash
inflow of $273.6 million in the twelve months ended 2006
related to operations. This was primarily due to receipt of a
$400.0 million advance payment from Boeing on the B787
program, earnings of $16.8 million, a $149.4 million
increase in accounts payable (primarily as a result of increases
in inventory resulting from higher production rates), partially
offset by a $41.9 million increase in accounts receivable,
and $318.6 million in inventory growth as a result of
higher production rates and
build-up of
inventory for the B787 contract.
Investing Activities. Spirit had a net cash
outflow of $473.6 million in the twelve months ended 2006
related to investing activities. This was primarily due to
investments of $343.2 million in property, plant and
equipment, software and program tooling, most of which was
related to capital investments in preparation of the start of
B787 production. We also invested $145.4 million in the
acquisition of BAE Systems aerostructures business (net of
cash acquired).
Financing Activities. Spirit had a net cash
inflow of $140.9 million in the twelve months ended 2006
related to financing activities. This was primarily due to
$249.3 million in proceeds from our initial public offering
and $15.3 million in pool of windfall tax benefits related
to FAS 123(R) accounting for restricted stock vesting,
partially offset by $124.0 in principal debt payments.
Period
from June 17, 2005 through December 29,
2005
Operating Activities. Spirit had cash flows
related to operating activities of $223.8 million in the
six and one-half months ended December 29, 2005. This was
primarily due to the receipt of $200.0 million in advance
payments from Boeing related to the B787 program, an increase of
$163.4 million in accounts payable driven by a combination
of increased production rates, and higher research and
development expenses, offset by the operating loss, an increase
of $88.4 million in accounts receivable and an increase of
$31.4 million in inventory. The increase in accounts
receivable was a result of Spirit commencing external sales
under contractual payment terms. The increase in inventory
reflects unbilled product development activity on certain Boeing
derivative models and the residual impact of lower production
rates during the Boeing strike.
Investing Activities. In the six and one-half
months ended December 29, 2005, we had cash outflows of
$1,030.3 million related to investing activities. This
reflects a cash payment of $885.7 million paid in
connection with the Boeing Acquisition and investment of
$144.6 million in property, plant and equipment, software
and program tooling. The investment in property, plant and
equipment was primarily related to capital investments in
preparation of the start of B787 production.
Financing Activities. We had cash flow from
financing activities of $1,047.8 million in the six and
one-half months ended December 29, 2005. This cash flow was
primarily driven by the issuance of $700.0 million in long
term debt in connection with the Boeing Acquisition and the
equity investment of $370.0 million in connection with the
Boeing Acquisition.
67
Contractual
Obligations
The following table summarizes our contractual cash obligations
as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 and
|
|
|
|
|
Contractual Obligations
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
After
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Principal Payment on Term
Loan B(1)
|
|
$
|
5.9
|
|
|
$
|
5.9
|
|
|
$
|
5.9
|
|
|
$
|
5.9
|
|
|
$
|
5.9
|
|
|
$
|
143.4
|
|
|
$
|
416.9
|
|
|
$
|
589.8
|
|
Non-Cancelable Operating Lease
Payments
|
|
|
5.8
|
|
|
|
4.7
|
|
|
|
3.4
|
|
|
|
2.1
|
|
|
|
1.2
|
|
|
|
0.6
|
|
|
|
3.7
|
|
|
|
21.5
|
|
Non-Cancelable Capital Lease
Payments(2)
|
|
|
19.3
|
|
|
|
9.6
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.9
|
|
Interest on Debt(3)
|
|
|
37.0
|
|
|
|
36.6
|
|
|
|
36.2
|
|
|
|
35.8
|
|
|
|
35.5
|
|
|
|
35.1
|
|
|
|
13.1
|
|
|
|
229.3
|
|
Purchase Obligations(4)
|
|
|
71.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
139.4
|
|
|
$
|
56.8
|
|
|
$
|
46.5
|
|
|
$
|
43.8
|
|
|
$
|
42.6
|
|
|
$
|
179.1
|
|
|
$
|
433.7
|
|
|
$
|
941.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include repayment of B787 advances to Boeing, which are
reflected in our balance sheet as long-term liabilities. |
|
(2) |
|
Treats the financing of software license purchases and direct
financing of system implementation as capital leases. |
|
(3) |
|
Interest on our debt was calculated for all years using the
effective rate as of December 31, 2006 of 6.29%. |
|
(4) |
|
Purchase obligations represent property, plant and equipment
commitments at December 31, 2006. Although we also have
significant other purchase obligations, most commonly in the
form of purchase orders, the timing of these purchases is often
variable rather than specific and the payments made by our
customers in accordance with our long-term contracts, including
advance payments, substantially reimburse the payments due.
Accordingly, these obligations are not included in the table. |
A Transition Services Agreement, or TSA, with Boeing is excluded
from Contractual Obligations shown above because it may be
terminated by Spirit with 30 days advance notice. The TSA
covers services to be supplied to Spirit by Boeing during a
transition period ending in 2007. The services supplied by
Boeing include computer systems and services, certain financial
transaction processing operations, and certain non-production
operations. Spirit pays Boeing approximately $3.2 million
per month for services under the TSA.
Our primary future cash needs will consist of working capital,
debt service, research and development and capital expenditures.
We expend significant capital on research and development during
the start-up phase of new programs, to develop new technologies
for next generation aircraft and to improve the manufacturing
processes of aircraft already in production. Research and
development expenditures totaled approximately
$104.7 million and $78.3 million for the twelve months
ended December 31, 2006 and the ten and one-half months
ended December 29, 2005, respectively, and approximately
$18.1 million for the year ended December 31, 2004. We
incur capital expenditures for the purpose of maintaining
production capacity through replacement of existing equipment
and facilities and, from time to time, for facility expansion.
Capital expenditures totaled approximately $343.2 million
and $144.6 million for the twelve months ended
December 31, 2006 and the ten and one-half months ended
December 29, 2005, respectively, and approximately
$54.4 million for the year ended December 31, 2004.
The significant increases in research and development and
capital expenditures in the period from June 17, 2005
through December 29, 2005 and the twelve months of 2006 are
primarily attributable to increased spending on the B787 program.
We may from time to time seek to retire our outstanding debt.
The amounts involved may be material. In addition, we may issue
additional debt if prevailing market conditions are favorable to
do so and contractual restrictions permit us.
Off-Balance
Sheet Arrangements
Other than operating leases disclosed in the notes to Spirit
Holdings financial statements included in this Annual
Report, we have not entered into any off-balance sheet
arrangements as of December 31, 2006.
68
Tax
As indicated in Critical Accounting
Policies Income Tax in accordance with
SFAS No. 109, Accounting for Income Taxes and
SFAS No. 5, Accounting for Contingencies, we
establish reserves for certain tax contingencies when, despite
our view that the tax return positions are fully supportable, we
anticipate that certain positions may be challenged by the
various taxing authorities and it is probable that our positions
may not be fully sustained. The reserves are adjusted quarterly
to reflect changing facts and circumstances, such as the
progress of a tax audit, case law developments and new or
emerging legislation. We believe that the current tax reserves
of $21.6 million are adequate and reflect the most probable
outcome of known tax contingencies at December 31, 2006.
Any additional taxes will be determined only after the
completion of any future tax audits. The timing of such payments
cannot be determined, but we expect that they will not be made
within one year. Accordingly, the tax contingency liability is
included as a long term liability in our consolidated balance
sheet.
During the period from inception through September 28,
2006, upon weighing available positive and negative evidence,
including the fact that Spirit Holdings was a new legal entity
that had no earnings history, we established a valuation
allowance against 100% of our net deferred tax assets as it was,
at that time, considered more likely than not that we would not
have the ability to realize these assets. This affected our tax
provision by deferring tax benefits until such time as
management determined under SFAS No. 109 that we had
sufficient earnings history, among other factors, to recognize
those benefits. Management reviews the need for a valuation
allowance on a quarterly basis. In the fourth quarter of 2006,
management determined there was sufficient earnings history to
release the valuation allowance on our net deferred tax assets.
Based on the nature of the underlying deferred tax assets, the
reversal of the valuation allowance resulted in a decrease to
non-current intangibles of $5.6 million and a net income
tax benefit of $75.2 million.
For income tax purposes, we are required to use the
percentage-of-completion
(POC) method of accounting for our long-term contracts. The tax
POC method essentially defers deductions for research and
certain development costs incurred in the early years of
long-term programs. For the period from inception through
December 29, 2005, we reflected a net loss on our financial
statements driven in large part by B787 development costs. For
tax purposes, such development costs are deferred under the tax
POC method and, accordingly, we generated taxable income and a
current period tax liability.
Repayment
of B787 Advance Payments
The B787 Supply Agreement requires Boeing to make advance
payments to us for production articles in the aggregate amount
of $700.0 million, payable to us through 2007. We must then
repay this advance, without interest, in the amount of a
$1.4 million offset against the purchase price of each of
the first five hundred B787 shipsets delivered to Boeing. These
repayments will not have an effect on cash flows from
operations. In the event that Boeing does not take delivery of
five hundred B787 shipsets, any advances not then repaid will
first be applied against any outstanding B787 payments then due
by Boeing to us, with any remaining balance repaid at the rate
of $84.0 million per year beginning the year following our
final delivery of a B787 production shipset to Boeing.
Accordingly, portions of the repayment liability are included as
current and long-term liabilities in our consolidated balance
sheet.
Expected
Backlog
We estimate that, as of December 31, 2006, our expected
backlog associated with Boeing and Airbus deliveries through
2011, calculated based on contractual product prices and
expected delivery volumes, will be approximately
$19.2 billion, based on Boeing and Airbus published
schedules. This is an increase of $4.8 billion over our
corresponding estimate as of the end of 2005 (after giving
effect to the BAE Acquisition), which reflects strong orders at
Boeing and Airbus. Backlog is calculated based on the lower of
the number of units Spirit is under contract to produce on our
fixed quantity contracts, and Boeing or Airbus announced backlog
on our requirements contracts. The number of units may be
subject to cancellation or delay by the customer prior to
shipment, depending on contract terms. The level of unfilled
orders at any given date during the year will be materially
affected by the timing of our receipt of firm orders and
additional airplane orders, and the speed with which those
orders are filled. Accordingly, our expected backlog as of
December 31, 2006 may not necessarily represent the actual
amount of deliveries or sales for any future period.
69
Foreign
Operations
We engage in business in various
non-U.S. markets.
As of April 1, 2006, we have a foreign subsidiary with one
production facility in the United Kingdom and a worldwide
supplier base. We purchase certain components and materials that
we use in our products from foreign suppliers and a portion of
our products will be sold directly to foreign customers,
including Airbus, or resold to foreign end-users (i.e. foreign
airlines and militaries).
Currency fluctuations, tariffs and similar import limitations,
price controls and labor regulations can affect our foreign
operations. Other potential limitations on our foreign
operations include expropriation, nationalization, restrictions
on foreign investments or their transfers and additional
political and economic risks. In addition, the transfer of funds
from foreign operations could be impaired by any restrictive
regulations that foreign governments could enact.
Sales to foreign customers are subject to numerous additional
risks, including the impact of foreign government regulations,
political uncertainties and differences in business practices.
There can be no assurance that foreign governments will not
adopt regulations or take other actions that would have a direct
or indirect adverse impact on our business or market
opportunities with such governments countries.
Furthermore, the political, cultural and economic climate
outside the United States may be unfavorable to our operations
and growth strategy.
For the twelve months ended December 31, 2006, our revenues
from direct sales to
non-U.S. customers
were approximately $254.1 million, or approximately 8% of
total revenue for the same period. All of these sales occurred
during the period from April 1, 2006 through
December 31, 2006, following our acquisition of Spirit
Europe.
Inflation
A majority of our sales are conducted pursuant to long-term
contracts that set fixed unit prices, some of which provide for
price adjustment for inflation. In addition, we typically
consider expected inflation in determining proposed pricing when
we bid on new work. Although we have attempted to minimize the
effect of inflation on our business through these protections,
sustained or higher than anticipated increases in costs of labor
or materials could have a material adverse effect on our results
of operations.
Spirits contracts with suppliers currently provide for
fixed pricing in U.S. dollars; Spirit Europes supply
contracts are denominated in U.S. dollars, British pounds
sterling and Euros. In some cases our supplier arrangements
contain inflationary adjustment provisions based on accepted
industry indices, and we typically include an inflation
component in estimating our supply costs. As the metallic raw
material industry is experiencing significant demand pressure,
we expect that raw material market pricing will increase to a
level that may impact our costs, despite protections in our
existing supplier arrangements. We will continue to focus our
strategic cost reduction plans on mitigating the effects of this
cost increase on our operations.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
As a result of our operating and financing activities, we are
exposed to various market risks that may affect our consolidated
results of operations and financial position. These market risks
include fluctuations in interest rates, which impact the amount
of interest we must pay on our variable rate debt.
Other than the interest rate swaps described below, financial
instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash
investments and trade accounts receivable.
Accounts receivable include amounts billed and currently due
from customers, amounts earned but unbilled, particular
estimated contract changes, claims in negotiation that are
probable of recovery, and amounts retained by the customer
pending contract completion. For the twelve months ended
December 31, 2006, approximately 91% of our revenues
(approximately 89% of our combined revenues assuming the BAE
Acquisition had occurred on January 1, 2006) were from
sales to Boeing. We continuously monitor collections and
payments from customers and maintain a provision for estimated
credit losses as deemed appropriate based upon historical
experience and any specific customer collection issues that have
been identified. While such credit losses have historically not
been material, we cannot guarantee that we will continue to
experience the same credit loss rates in the future.
70
We maintain cash and cash equivalents with various financial
institutions and perform periodic evaluations of the relative
credit standing of those financial institutions. We have not
experienced any losses in such accounts and believe that we are
not exposed to any significant credit risk on cash and cash
equivalents.
Some raw materials and operating supplies are subject to price
and supply fluctuations caused by market dynamics. Our strategic
sourcing initiatives are focused on mitigating the impact of
commodity price risk. We are party to collective raw material
sourcing contracts arranged through Boeing, Airbus and BAE
Systems. These collective sourcing contracts allow us to obtain
raw materials at pre-negotiated rates and help insulate us from
disruption associated with the unprecedented market demand
across the industry for metallic and composite raw materials. We
also have long-term supply agreements with a number of our major
parts suppliers. We, as well as our supply base, are
experiencing delays in the receipt of, and pricing increases
for, metallic raw materials (primarily aluminum and titanium)
due to unprecedented market demand across the industry. Based
upon discussions with customers and suppliers, we expect these
conditions to continue through at least 2012 as metallic raw
material supply adjusts to the industry upturn, market
conditions shift due to increased infrastructure demand in China
and Russia, and aluminum and titanium usage increases in a
widening range of global products. These market conditions began
to affect cost and production schedules in mid-2005, and may
have an impact on cash flows or results of operations in future
periods. We generally do not employ forward contracts or other
financial instruments to hedge commodity price risk, although we
are reviewing a full range of business options focused on
strategic risk management for all raw material commodities.
Any failure by our suppliers to provide acceptable raw
materials, components, kits or subassemblies could adversely
affect our production schedules and contract profitability. We
assess qualification of suppliers and continually monitor them
to control risk associated with such supply base reliance.
To a lesser extent, we also are exposed to fluctuations in the
prices of certain utilities and services, such as electricity,
natural gas, chemicals and freight. We utilize a range of
long-term agreements to minimize procurement expense and supply
risk in these areas.
Interest
Rate Risks
After the effect of interest rate swaps, as of December 31,
2006, we had $500.0 million of total fixed rate debt and
$89.8 million of variable rate debt outstanding as compared
to $500.0 million of total fixed rate debt and
$196.5 million of variable rate debt outstanding as of
December 31, 2005. Borrowings under our senior secured
credit facility bear interest that varies with LIBOR. Interest
rate changes generally do not affect the market value of such
debt, but do impact the amount of our interest payments and,
therefore, our future earnings and cash flows, assuming other
factors are held constant. Assuming other variables remain
constant, including levels of indebtedness, a one percentage
point increase in interest rates on our variable debt would have
an estimated impact on pre-tax earnings and cash flows for the
next twelve months of approximately $0.9 million.
As required under our senior secured credit facility, in July
2005 we entered into
floating-to-fixed
interest rate swap agreements with notional amounts totaling
$500.0 million as follows:
|
|
|
|
|
an effective fixed interest rate of 5.99% from June 2005 to July
2008 on $100.0 million of the Term Loan B;
|
|
|
|
an effective fixed interest rate of 6.05% from June 2005 to July
2009 on $300.0 million of the Term Loan B; and
|
|
|
|
an effective fixed interest rate of 6.12% from June 2005 to July
2010 on $100.0 million of the Term Loan B.
|
The purpose of entering into these swaps was to reduce our
exposure to variable interest rates. In accordance with
SFAS No. 133, the interest rate swaps are being
accounted for as cash flow hedges and the fair value of the swap
agreements is reported as an asset on the balance sheet. The
fair value of the interest rate swaps was a net asset of
approximately $8.6 million at December 31, 2006.
Foreign
Exchange Risks
On April 1, 2006, in connection with the BAE Acquisition,
we acquired forward foreign currency exchange contracts
denominated in British pounds sterling with notional amounts
totaling approximately $94.0 million. The purpose of these
forward contracts is to allow Spirit Europe to reduce its
exposure to fluctuations of U.S. dollars.
71
As a result of the BAE Acquisition, we have sales, expenses,
assets and liabilities that are denominated in British pounds
sterling. Spirit Europes functional currency is the
British pound sterling. However, sales of Spirit Europes
products to Boeing and some procurement costs are denominated in
U.S. dollars. As a consequence, movements in exchange rates
could cause net sales and our expenses to fluctuate, affecting
our profitability and cash flows. We use foreign currency
forward contracts to reduce our exposure to currency exchange
rate fluctuations. The objective of these contracts is to
minimize the impact of currency exchange rate movements on our
operating results. We do not use these contracts for speculative
or trading purposes.
In addition, even when revenues and expenses are matched, we
must translate British pound sterling denominated results of
operations, assets and liabilities for our foreign subsidiaries
to U.S. dollars in our consolidated financial statements.
Consequently, increases and decreases in the value of the
U.S. dollar as compared to the British pound sterling will
affect our reported results of operations and the value of our
assets and liabilities on our consolidated balance sheet, even
if our results of operations or the value of those assets and
liabilities has not changed in its original currency. These
transactions could significantly affect the comparability of our
results between financial periods
and/or
result in significant changes to the carrying value of our
assets, liabilities and shareholders equity.
In accordance with SFAS No. 133, the foreign exchange
contracts are being accounted for as cash flow hedges. The fair
value of the foreign exchange contracts was a net asset of
approximately $12.4 million at December 31, 2006. At
December 31, 2006, a 10% unfavorable exchange rate movement
in our portfolio of foreign currency contracts would have
reduced our unrealized gains by $1.2 million.
Other than the interest rate swaps and foreign exchange
contracts, we have no other derivative financial instruments.
72
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
SPIRIT
AEROSYSTEMS HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial
Statements of Spirit AeroSystems Holdings, Inc. for the periods
ended December 31, 2006 and from February 7, 2005
(date of inception) through December 29, 2005
|
|
|
73
|
|
|
|
|
74
|
|
|
|
|
75
|
|
|
|
|
76
|
|
|
|
|
77
|
|
|
|
|
78
|
|
|
|
|
79
|
|
73
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Spirit AeroSystems Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income/(loss),
shareholders equity and cash flows, present fairly, in all
material respects, the financial position of Spirit AeroSystems
Holdings, Inc. (the Company) at December 31,
2006 and 2005 and the results of its operations and its cash
flows for the year ended December 31, 2006 and the period
between February 7, 2005 (date of inception) and
December 29, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule appearing under
Item 15 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 9 to the consolidated financial
statements, the Company changed the manner in which it accounts
for its defined benefit pension and other post-retirement plans
in 2006.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers LLP
Saint Louis, Missouri
March 2, 2007
74
Spirit
AeroSystems Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
For the Twelve
|
|
|
June 17, 2005
|
|
|
|
Months Ended
|
|
|
through
|
|
|
|
December 31, 2006
|
|
|
December 29, 2005
|
|
|
|
($ in millions, except per share data)
|
|
|
Net revenues
|
|
$
|
3,207.7
|
|
|
$
|
1,207.6
|
|
Operating costs and
expenses
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,934.3
|
|
|
|
1,056.4
|
|
Selling, general and administrative
|
|
|
225.0
|
|
|
|
140.7
|
|
Research and development
|
|
|
104.7
|
|
|
|
78.3
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
3,264.0
|
|
|
|
1,275.4
|
|
Operating loss
|
|
|
(56.3
|
)
|
|
|
(67.8
|
)
|
Interest expense and financing fee
amortization
|
|
|
(50.1
|
)
|
|
|
(25.5
|
)
|
Interest income
|
|
|
29.0
|
|
|
|
15.4
|
|
Other income, net
|
|
|
5.9
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(71.5
|
)
|
|
|
(76.6
|
)
|
Income tax provision
|
|
|
88.3
|
|
|
|
(13.7
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16.8
|
|
|
$
|
(90.3
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
(0.80
|
)
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
(0.80
|
)
|
See notes to consolidated financial statements
75
Spirit
AeroSystems Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in millions)
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
184.3
|
|
|
$
|
241.3
|
|
Accounts receivable, net
|
|
|
200.2
|
|
|
|
98.8
|
|
Other receivable
|
|
|
43.0
|
|
|
|
|
|
Inventory, net
|
|
|
882.2
|
|
|
|
510.7
|
|
Prepaids
|
|
|
20.8
|
|
|
|
10.2
|
|
Income tax receivable
|
|
|
21.7
|
|
|
|
|
|
Deferred tax asset-current
|
|
|
68.3
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,420.5
|
|
|
|
862.1
|
|
Property, plant and equipment, net
|
|
|
773.8
|
|
|
|
518.8
|
|
Long-term receivable
|
|
|
191.5
|
|
|
|
212.5
|
|
Pension assets
|
|
|
207.3
|
|
|
|
|
|
Other assets
|
|
|
129.1
|
|
|
|
63.2
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,722.2
|
|
|
$
|
1,656.6
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
339.1
|
|
|
$
|
173.7
|
|
Accrued expenses
|
|
|
170.0
|
|
|
|
125.6
|
|
Profit sharing/deferred
compensation
|
|
|
28.5
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
23.9
|
|
|
|
11.6
|
|
Deferred revenue
|
|
|
8.2
|
|
|
|
|
|
Income taxes
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
569.7
|
|
|
|
311.5
|
|
Long-term debt
|
|
|
594.3
|
|
|
|
710.0
|
|
Advance payments
|
|
|
587.4
|
|
|
|
200.0
|
|
Other liabilities
|
|
|
111.8
|
|
|
|
108.2
|
|
Deferred tax
liability - non-current
|
|
|
|
|
|
|
1.1
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01,
10,000,000 shares authorized, no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, Class A par
value $0.01, 200,000,000 shares authorized, 63,345,834 and
no shares issued and outstanding, respectively
|
|
|
0.6
|
|
|
|
|
|
Common stock, Class B par
value $0.01, 150,000,000 shares authorized, 71,351,347 and
122,670,336 shares issued and outstanding, respectively
|
|
|
0.7
|
|
|
|
1.2
|
|
Additional paid-in capital
|
|
|
858.7
|
|
|
|
410.7
|
|
Accumulated other comprehensive
income
|
|
|
72.5
|
|
|
|
4.2
|
|
Accumulated deficit
|
|
|
(73.5
|
)
|
|
|
(90.3
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
859.0
|
|
|
|
325.8
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
2,722.2
|
|
|
$
|
1,656.6
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
76
Spirit
AeroSystems Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Income/(Loss)
|
|
|
|
( $ in millions)
|
|
Initial
capitalization February 7, 2005
|
|
|
100
|
(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
Cancellation of Shares(1)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity issuance to investors
|
|
|
112,500,000
|
|
|
|
1.1
|
|
|
|
368.9
|
|
|
|
|
|
|
|
|
|
|
|
370.0
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90.3
|
)
|
|
|
(90.3
|
)
|
|
|
|
(90.3
|
)
|
Unrealized gain on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
|
|
|
|
|
|
4.2
|
|
|
|
|
4.2
|
|
Employee equity awards
|
|
|
8,476,464
|
|
|
|
0.1
|
|
|
|
18.5
|
|
|
|
|
|
|
|
|
|
|
|
18.6
|
|
|
|
|
|
|
Non-employee equity awards
|
|
|
435,000
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
Equity issuances to management
|
|
|
1,258,872
|
|
|
|
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
13.7
|
|
|
|
|
|
|
Supplemental executive retirement
plan conversion
|
|
|
|
|
|
|
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 29, 2005
|
|
|
122,670,336
|
|
|
|
1.2
|
|
|
|
410.7
|
|
|
|
4.2
|
|
|
|
(90.3
|
)
|
|
|
325.8
|
|
|
|
|
(86.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.8
|
|
|
|
16.8
|
|
|
|
|
16.8
|
|
Pension valuation adjustment, net
of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.0
|
|
|
|
|
|
|
|
40.0
|
|
|
|
|
|
|
Post-retirement benefit valuation
adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.8
|
|
|
|
|
|
|
|
2.8
|
|
|
|
|
|
|
Unrealized gain on cash flow
hedges, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.8
|
|
|
|
|
|
|
|
5.8
|
|
|
|
|
5.8
|
|
Employee equity awards
|
|
|
1,381,131
|
|
|
|
|
|
|
|
51.1
|
|
|
|
|
|
|
|
|
|
|
|
51.1
|
|
|
|
|
|
|
UEP Stock
|
|
|
|
|
|
|
|
|
|
|
125.7
|
|
|
|
|
|
|
|
|
|
|
|
125.7
|
|
|
|
|
|
|
Pool of windfall tax benefits
|
|
|
|
|
|
|
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
15.3
|
|
|
|
|
|
|
Non-employee equity awards
|
|
|
|
|
|
|
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
5.6
|
|
|
|
|
|
|
Equity issuances IPO,
net of issuance costs
|
|
|
10,416,667
|
|
|
|
0.1
|
|
|
|
249.2
|
|
|
|
|
|
|
|
|
|
|
|
249.3
|
|
|
|
|
|
|
Equity issuances
Management
|
|
|
229,047
|
|
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
Unrealized gain on currency
translation adjustments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.7
|
|
|
|
|
|
|
|
19.7
|
|
|
|
|
19.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2006
|
|
|
134,697,181
|
|
|
$
|
1.3
|
|
|
$
|
858.7
|
|
|
$
|
72.5
|
|
|
$
|
(73.5
|
)
|
|
$
|
859.0
|
|
|
|
$
|
42.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Issued as common stock without designation as to class. Shares
were cancelled as of June 16, 2005. |
See notes to consolidated financial statements
77
Spirit
AeroSystems Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
For the Twelve
|
|
|
|
|
|
|
Months Ended
|
|
|
Period from
|
|
|
|
December 31,
|
|
|
June 17, 2005 through
|
|
|
|
2006
|
|
|
December 29, 2005
|
|
|
|
($ in millions)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16.8
|
|
|
$
|
(90.3
|
)
|
Adjustments to reconcile net income
(loss) to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
52.8
|
|
|
|
28.6
|
|
Amortization expense
|
|
|
12.0
|
|
|
|
3.3
|
|
Accretion of long-term receivable
|
|
|
(22.0
|
)
|
|
|
(9.7
|
)
|
Employee stock compensation expense
|
|
|
182.3
|
|
|
|
34.7
|
|
Loss on disposition of assets
|
|
|
0.9
|
|
|
|
|
|
Deferred taxes
|
|
|
(125.1
|
)
|
|
|
|
|
Income taxes payable
|
|
|
(7.9
|
)
|
|
|
7.2
|
|
Pension, net
|
|
|
(33.2
|
)
|
|
|
(8.9
|
)
|
Other
|
|
|
13.1
|
|
|
|
14.0
|
|
Changes in assets and liabilities,
net of acquisition
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(41.9
|
)
|
|
|
(88.4
|
)
|
Inventory, net
|
|
|
(318.6
|
)
|
|
|
(31.4
|
)
|
Other current assets
|
|
|
(10.5
|
)
|
|
|
1.3
|
|
Accounts payable and accrued
liabilities
|
|
|
149.4
|
|
|
|
163.4
|
|
Profit sharing/deferred compensation
|
|
|
5.5
|
|
|
|
|
|
Customer advance from Boeing
|
|
|
400.0
|
|
|
|
200.0
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
273.6
|
|
|
|
223.8
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of property, plant and
equipment
|
|
|
(343.2
|
)
|
|
|
(144.6
|
)
|
Acquisition of business, net of
cash acquired
|
|
|
(145.4
|
)
|
|
|
(885.7
|
)
|
Financial derivatives
|
|
|
4.7
|
|
|
|
|
|
Transition payments
|
|
|
10.0
|
|
|
|
|
|
Proceeds from sale of assets
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing
activities
|
|
|
(473.6
|
)
|
|
|
(1,030.3
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from short-term debt
|
|
|
85.0
|
|
|
|
|
|
Payments on short-term debt
|
|
|
(85.0
|
)
|
|
|
|
|
Proceeds from long-term debt
|
|
|
|
|
|
|
700.0
|
|
Principal payments of debt
|
|
|
(124.0
|
)
|
|
|
(5.0
|
)
|
Debt issuance costs
|
|
|
(0.8
|
)
|
|
|
(21.4
|
)
|
Pool of windfall tax benefits
|
|
|
15.3
|
|
|
|
|
|
Equity contributions from
shareholders
|
|
|
|
|
|
|
370.0
|
|
Proceeds from IPO, net of issuance
costs
|
|
|
249.3
|
|
|
|
|
|
Executive stock investments
|
|
|
1.1
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
140.9
|
|
|
|
1,047.8
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and
cash equivalents for the period
|
|
|
(57.0
|
)
|
|
|
241.3
|
|
Cash and cash equivalents,
beginning of the period
|
|
|
241.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
the period
|
|
$
|
184.3
|
|
|
$
|
241.3
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
55.1
|
|
|
$
|
28.1
|
|
Income taxes paid
|
|
$
|
29.3
|
|
|
$
|
8.5
|
|
Appreciation of financial
instruments
|
|
$
|
9.0
|
|
|
$
|
4.2
|
|
Property acquired through capital
leases
|
|
$
|
11.5
|
|
|
$
|
26.7
|
|
See notes to consolidated financial statements
78
Spirit
AeroSystems Holdings, Inc.
($ in
millions other than per share and per hour
amounts)
Spirit AeroSystems Holdings, Inc. (Holdings) was
incorporated in the state of Delaware on February 7, 2005,
and commenced operations on June 17, 2005 through the
acquisition of The Boeing Companys (Boeing)
operations in Wichita, Kansas, Tulsa, Oklahoma and McAlester,
Oklahoma (see Note 2). Holdings provides manufacturing and
design expertise in a wide range of products and services for
aircraft original equipment manufacturers and operators through
its subsidiary, Spirit AeroSystems, Inc. (Spirit or
the Company). Onex Corporation of Toronto, Canada
maintains majority voting power of Holdings. In April 2006,
Holdings acquired the aerostructures division of BAE Systems
(Operations) Limited (BAE Aerostructures), which
builds structural components for Airbus, Boeing and Raytheon.
Prior to this acquisition, Holdings essentially sold all of its
production to Boeing. The Company has its headquarters in
Wichita, Kansas, with manufacturing facilities in Tulsa and
McAlester, Oklahoma and Prestwick, Scotland as well as Wichita.
Spirit is the majority participant in the Kansas Industrial
Energy Supply Company (KIESC), a tenancy in common with other
Wichita companies established to purchase natural gas.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The consolidated financial statements include Spirits
financial statements and the financial statements of its
majority owned subsidiaries and have been prepared in accordance
with accounting principles generally accepted in the United
States of America. All intercompany balances and transactions
have been eliminated in consolidation. Spirits U.K.
subsidiary uses local currency, the British pound, as its
functional currency. As part of the monthly consolidation
process, the functional currency is 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 as defined by
SFAS No. 52, Foreign Currency Translation (as
amended). In addition, Kansas Industrial Energy Supply
Company (KIESC), a tenancy in common, is included in
consolidation as Spirit owns 77.8% of the entitys equity.
Acquisition
of Spirit
Onex Corporation and Onex Partners LP, an affiliate of Onex
Corporation (collectively referred to as Onex or the
Parent) formed Spirit AeroSystems Holdings, Inc.
(formerly Mid-Western Aircraft Systems Holdings, Inc.), for the
purpose of acquiring various assets and liabilities of certain
operating divisions of Boeing, in accordance with an acquisition
agreement dated February 22, 2005, as amended. The
stockholders initially capitalized Holdings by acquiring
Holdings stock for approximately $375.0, which was
contributed as capital to Spirit.
Spirit acquired the assets and liabilities through proceeds from
the initial capitalization and the $875.0 credit agreement
described in Note 8. Spirit commenced operations upon
closing. At acquisition, Spirit entered into
long-term
agreements with Boeing to supply components for all of
Boeings existing B737, B747, B767 and B777 platforms and
the new B787 platform. In connection with the acquisition,
Boeing provided the Company with a delayed draw term loan
facility of up to $150.0, also described in Note 8, which
terminated in connection with Spirits initial public
offering in November 2006.
79
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Spirit accounted for the acquisition as a purchase in accordance
with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 141, Business
Combinations, and recorded the assets acquired and
liabilities assumed based upon fair value of the consideration
paid, which is summarized in the following table.
|
|
|
|
|
Cash payment to Boeing
|
|
$
|
903.9
|
|
Direct costs of the acquisition
|
|
|
20.2
|
|
Less:
|
|
|
|
|
Consideration to be returned from
Boeing for sale of capital assets
|
|
|
(202.8
|
)
|
Consideration to be returned from
Boeing for transition costs
|
|
|
(30.0
|
)
|
Working capital settlement
|
|
|
(19.0
|
)
|
|
|
|
|
|
Total consideration
|
|
$
|
672.3
|
|
|
|
|
|
|
For income tax purposes, Spirit allocated the purchase price
under IRC Sec. 1060 and applied deferred taxes against any
differences in the book and tax bases of the acquired assets and
assumed liabilities, resulting in a net deferred tax asset. In
accordance with SFAS No. 109, Accounting for Income
Taxes, a full valuation allowance was provided against the
net deferred tax assets existing at the June 17, 2005
opening balance sheet date. The valuation allowance was reversed
in the fourth quarter of 2006 as described in Note 12.
Direct costs of the acquisition include professional fees paid
to outside advisors for investment banking, legal, tax, due
diligence, appraisal and valuation services.
In connection with the acquisition, Boeing is required to make
future non-interest bearing payments to Spirit in amounts of
$45.5, $116.1 and $115.4 in 2007, 2008 and 2009, respectively,
attributable to the acquisition of title of various tooling and
other capital assets to be determined by Spirit. Spirit will
retain usage rights and custody of the assets for their
remaining useful lives without compensation to Boeing. Since
Spirit retains the risks and rewards of ownership to such
assets, Spirit recorded such amounts as consideration to be
returned from Boeing at net present value of approximately
$233.2. The initial amount will be accreted as interest income
until payments occur and is recorded as a component of other
assets. The accretion of interest income was approximately $9.7
in fiscal 2005, and approximately $20.7 for fiscal 2006.
In connection with the acquisition, Boeing made payments
totaling $30.0 through September 2006 for Spirits costs of
transition to a newly formed enterprise. Since Spirit had no
obligations under this arrangement, such amounts were recorded
as consideration to be returned from Boeing. These payments were
not discounted as they were realized within one year of closing.
In accordance with the acquisition agreement, Boeing reimbursed
the Company in fiscal 2005 approximately $19.0 for the
contractually determined working capital settlement.
80
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
The fair value of the various assets acquired and liabilities
assumed were determined by management. The fair value of the net
assets acquired exceeded the total consideration for the
acquisition by approximately $739.1. The excess (negative
goodwill) was allocated on a pro rata basis to long-lived assets
and resulted in the purchase price allocation noted below:
|
|
|
|
|
|
|
Book Value
|
|
|
|
June 16, 2005
|
|
|
|
(Dollars in millions)
|
|
|
Cash
|
|
$
|
1.3
|
|
Accounts receivable
|
|
|
0.3
|
|
Inventory
|
|
|
479.2
|
|
Other current assets
|
|
|
0.3
|
|
Property, plant and equipment
|
|
|
231.1
|
|
Intangible assets
|
|
|
17.3
|
|
Other assets
|
|
|
6.8
|
|
Pension asset
|
|
|
101.2
|
|
Accounts payable and accrued
liabilities
|
|
|
(130.2
|
)
|
Post-retirement liabilities
|
|
|
(35.0
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
672.3
|
|
|
|
|
|
|
On May 30, 2006, the Companys defined benefit pension
trust received $60.7 from Boeings defined benefit pension
trust, representing the final transfer of pension assets in
accordance with the acquisition agreement. This transfer, which
was based on final actuarial and other valuation data completed
in 2006, exceeded the original estimate calculated in 2005,
which was based on preliminary actuarial and other valuation
data. As a result, adjustments were recorded in June 2006 to
eliminate the defined pension liability, record a prepaid
pension asset, and adjust the book value of property, plant and
equipment and intangible assets as of June 17, 2005. As a
result of these adjustments, a cumulative
catch-up
adjustment was recorded to the statement of income (loss) in
June 2006 to reflect higher pension income and lower
depreciation and amortization expense.
In connection with the acquisition, Boeing paid Spirit $200.0 in
advances in June 2005 to be applied against future B787 shipset
deliveries, which is a component of long-term liabilities.
Additional advance payments of $400.0 have been paid by Boeing
to Spirit through December 31, 2006, and advance payments
of $100.0 will be paid to Spirit in 2007. These advance payments
will be applied to the first five hundred B787 shipsets
purchased by Boeing at the rate of $1.4 per shipset. If
Boeing does not take delivery of five hundred shipsets, the
remaining balance of the advance payments will be first applied
against any outstanding payments due to Spirit by Boeing for
other B787 costs. Any remaining balance will be repaid to Boeing
on December 15 each year at a prorated rate of $84.0 per
year until any remaining balance of the advance payment has been
recovered.
Acquisition
of BAE Aerostructures
On April 1, 2006, the Company completed its purchase of BAE
Aerostructures operations in Prestwick, Scotland and
Samlesbury, England for a cash purchase price of approximately
$145.7 and the assumption of certain normal course liabilities
(including accounts payable of approximately $67.0), financed
with available cash balances. The purpose of the acquisition was
to diversify the Companys revenue base and accelerate
growth. The production facilities build structural components
for Airbus models A320, A330, A340 and the A380, as well as
Boeing models B767 and B777 and the Raytheon Hawker 800 Series.
The acquisition of the European unit gave the Company an
additional 814 employees all of which are located in the United
Kingdom. The European unit is known as Spirit AeroSystems
(Europe) Limited (Spirit Europe).
81
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Spirit accounted for the acquisition as a purchase in accordance
with the provisions of SFAS No. 141, Business
Combinations, and recorded the assets acquired and
liabilities assumed based upon the fair value of the
consideration paid, which is summarized in the following table:
|
|
|
|
|
Cash payment to BAE Systems
|
|
$
|
139.1
|
|
Direct costs of the acquisition
|
|
|
3.6
|
|
Working capital settlement
|
|
|
3.0
|
|
|
|
|
|
|
Total consideration
|
|
$
|
145.7
|
|
|
|
|
|
|
The acquisition of BAE Aerostructures was negotiated in an
arms-length transaction. Factors that may have influenced the
determination of the purchase price include the expected
duration of production of the A320 and risks associated with the
ramp-up in
production of the A380.
The fair value of the various assets acquired and liabilities
assumed was determined by management based on valuations
performed by an independent third party. The total consideration
exceeded the fair value of the net assets acquired by
approximately $10.3, resulting in goodwill. The purchase price
was allocated as follows:
|
|
|
|
|
|
|
Book Value
|
|
|
|
April 1, 2006
|
|
|
|
(Dollars in millions)
|
|
|
Cash
|
|
$
|
0.3
|
|
Accounts receivable
|
|
|
61.9
|
|
Inventory
|
|
|
44.2
|
|
Property, plant and equipment
|
|
|
88.0
|
|
Intangible assets
|
|
|
30.1
|
|
Goodwill
|
|
|
10.3
|
|
Currency hedge assets
|
|
|
11.1
|
|
Accounts payable and accrued
liabilities
|
|
|
(67.0
|
)
|
Pension liabilities
|
|
|
(19.1
|
)
|
Other liabilities
|
|
|
(12.4
|
)
|
Currency hedge liabilities
|
|
|
(1.7
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
145.7
|
|
|
|
|
|
|
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates and
assumptions.
The results of operations during fiscal 2006 include the
favorable impact of cumulative
catch-up
adjustments related to 2005 revenues of $59.0 resulting from
revised contract accounting estimates, primarily as a result of
cost reduction initiatives, lower fringe benefits, and
depreciation and amortization costs. In the first quarter of
2006, the Company implemented new fringe benefit cost estimates
to reflect the impact of increased employment levels to support
rising production rates and its benefit cost experience to that
point in time. In the second quarter of 2006, the Company raised
its estimate of pension income and lowered its estimates of
depreciation and amortization costs to reflect the final pension
asset transfer received from Boeing in May 2006. Total
cumulative
catch-up
adjustments, relating to 2005 deliveries, recorded in the first
quarter were $33.6, total cumulative
catch-up
adjustments recorded in
82
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
the second quarter were $10.0 (includes $5.0 of contra-revenue
adjustments for 2005), total cumulative
catch-up
adjustments recorded in the third quarter were $7.4, and the
cumulative
catch-up
adjustments recorded in the fourth quarter were $8.0.
Revenue
Recognition
A significant portion of Spirits revenues are under
long-term, volume-based pricing contracts, requiring delivery of
products over several years.
Spirit recognizes revenue under the contract method of
accounting and records sales and profits on each contract in
accordance with the
percentage-of-completion
method of accounting, using the units of delivery method. The
Company follows the guidelines of American Institute of
Certified Public Accounting Statement of Position
81-1
(SOP 81-1),
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts (the contract method of
accounting). The contract method of accounting involves
the use of various estimating techniques to project costs at
completion and includes estimates of recoveries asserted against
the customer for changes in specifications. These estimates
involve various assumptions and projections relative to the
outcome of future events, including the quantity and timing of
product deliveries. Also included are assumptions relative to
future labor performance and rates, and projections relative to
material and overhead costs. These assumptions involve various
levels of expected performance improvements. The Company
re-evaluates its contract estimates periodically and reflects
changes in estimates in the current and future periods, and uses
the cumulative
catch-up
method of accounting for revisions in estimates of total
revenue, total costs or extent of progress on a contract.
For revenues not recognized under the contract method of
accounting, Spirit recognizes revenues from the sale of products
at the point of passage of title, which is generally at the time
of shipment. Shipping and handling costs are included in cost of
sales. Revenues earned from providing maintenance services
including any contracted research and development are recognized
when the service is complete or other contractual milestones are
attained.
Since Boeing retained title to tooling assets and provides such
tooling to Spirit at no cost, the Company treats the
amortization of Boeing-owned tooling as a reduction to revenues
as required by Emerging Issues Task Force (EITF)
01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products).
Purchase accounting adjustments in 2006 related to the pension
asset resulted in lower assigned value to the Boeing owned
tooling which in turn reduced the amortization
year-over-year.
The Company recognized $8.5 and $12.3, as a reduction to net
revenues for the periods ended December 31, 2006 and
December 29, 2005, respectively. The Company expects to
recognize the following amounts as reductions to net revenues
each of the next five years.
|
|
|
|
|
2007
|
|
$
|
13.5
|
|
2008
|
|
|
13.5
|
|
2009
|
|
|
8.7
|
|
2010
|
|
|
1.9
|
|
2011
|
|
|
|
|
Does not reflect future amortization resulting from sale of
tooling to Boeing as provided in Note 5.
Research
and Development
Research and development includes costs incurred for
experimentation, design and testing and are expensed as incurred
as required under the provisions of SFAS No. 2,
Accounting for Research and Development Costs.
83
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Reclassifications
and Revisions
Certain prior year amounts in the consolidated financial
statements have been reclassified or revised to conform to the
current year presentation.
Cash
and Cash Equivalents
Cash and cash equivalents represent all highly liquid
investments with original maturities of three months or less.
Accounts
Receivable
Accounts receivable are recorded at the invoiced amount and do
not bear interest. The Company determines an allowance for
doubtful accounts based on a review of outstanding receivables.
Account balances are charged off against the allowance after the
potential for recovery is considered remote. The Companys
allowance for doubtful accounts was approximately $0.6 at each
of December 31, 2006 and December 29, 2005.
Inventory
Raw materials are stated at lower of cost (principally on an
actual or average cost basis) or market. Inventoried costs
attributed to units delivered under long-term contracts are
based on the estimated average cost of all units expected to be
produced and are determined under the learning curve concept
which anticipates a predictable decrease in unit costs as tasks
and production techniques become more efficient through
repetition. This usually results in an increase in inventory
(referred to as
excess-over-average
or deferred production costs) during the early years
of a contract. These costs are deferred only to the extent the
amount of actual or expected
excess-over-average
is reasonably expected to be fully offset by lower-than-average
costs in future periods of a contract. If
in-process
inventory plus estimated costs to complete a specific contract
exceed the anticipated remaining sales value of such contract,
such excess is charged to cost of sales in the period the loss
becomes known, thus reducing inventory to estimated realizable
value. Costs in inventory include amounts relating to contracts
with long production cycles, some of which are not expected to
be realized within one year.
The Company reviews its general stock materials and spare parts
inventory each quarter to identify impaired inventory, including
excess or obsolete inventory, based on historical sales trends
and expected production usage. Impaired inventories are written
off as an expense to cost of sales in the period identified.
Finished goods inventory is stated at its estimated average per
unit cost based on all units expected to be produced.
Property,
Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation. Depreciation is applied using a
straight-line method over the useful lives of the respective
assets as described in the following table:
|
|
|
|
|
|
|
Estimated Useful Life
|
|
|
Land improvements
|
|
|
20 years
|
|
Buildings
|
|
|
40 years
|
|
Machinery and equipment
|
|
|
3-11 years
|
|
Tooling Airplane
program B787
|
|
|
5-20 years
|
|
Tooling Airplane
program all others
|
|
|
2-10 years
|
|
Interest costs associated with
construction-in-progress
are capitalized until the assets are completed and ready for
use. Repair and maintenance costs are expensed as incurred.
84
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Intangible
Assets
Intangible assets are recorded at estimated fair value and are
comprised of patents, favorable leasehold interests, and
customer relationships that are amortized on a straight-line
basis over their estimated useful lives, ranging from 6 to
16 years for patents, 14 to 24 years for favorable
leasehold interests, and 8 years for customer
relationships. The acquisition of Spirit Europe added $10.3 of
goodwill.
Impairment
or Disposal of Long-Lived Assets and Goodwill
Spirit reviews capital and intangible assets (long-lived assets)
for impairment on an annual basis or whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. Under the standard, assets must be classified as
either
held-for-use
or
available-for-sale.
An impairment loss is recognized when the carrying amount of an
asset that is held for use exceeds the projected undiscounted
future net cash flows expected from its use and disposal, and is
measured as the amount by which the carrying amount of the asset
exceeds its fair value, which is measured by discounted cash
flows when quoted market prices are not available. For assets
available-for-sale,
an impairment loss is recognized when the carrying amount
exceeds the fair value less cost to sell. The Company performs
an annual impairment test for goodwill, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets.
Deferred
Financing Costs
Costs relating to long-term debt are deferred and included in
long-term assets. These costs are amortized over the term of the
related debt or debt facilities, and are included as a component
of interest expense.
Derivative
Instruments and Hedging Activity
We use derivative financial instruments to manage the economic
impact of fluctuations in currency exchange rates and interest
rates. To account for our derivative financial instruments, we
follow the provisions of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 137 and SFAS No. 138.
Derivative financial instruments are recognized on the
Consolidated Balance Sheets as either assets or liabilities and
are measured at fair value. Changes in fair value of derivatives
are recorded at each period in earnings or accumulated other
comprehensive income, depending on whether a derivative is
designed and effective as part of a hedge transaction, and if it
is, the type of hedge transaction. Gains and losses on
derivative instruments reported in accumulated other
comprehensive income are subsequently included in earnings in
the periods in which earnings are affected by the hedged item.
Our use of derivatives has generally been limited to interest
rate swaps, but in fiscal 2006 we also began using derivative
instruments to mange our risk associated with U.S. dollar
revenues.
Income
Taxes
Income taxes are accounted for in accordance with
SFAS No. 109, Accounting for Income Taxes.
Deferred income tax assets and liabilities are recognized for
future income tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. A
valuation allowance is recorded to reduce deferred income tax
assets to an amount that, in the opinion of management, will
ultimately be realized. The effect of changes in tax rates is
recognized during the period in which the rate change occurs.
The Company records an income tax expense or benefit based on
the net income earned or net loss incurred in each tax
jurisdiction and the tax rate applicable to that income or loss.
In the ordinary course of business, there are transactions for
which the ultimate tax outcome is uncertain. The final tax
outcome of these matters may be different
85
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
than the estimates originally made by management in determining
the income tax provision. A change to these estimates could
impact the effective tax rate and, subsequently, net income or
net loss.
The Company files a U.S. consolidated federal income tax
return. Under the terms of an informal tax sharing arrangement,
the amount of the cumulative tax liability of each member shall
not exceed the total tax liability as computed on a separate
return basis.
Stock-Based
Compensation and Other Share-Based Payments
The Companys employees are participants in various stock
compensation plans. The Company accounts for stock option plans,
restricted share plans and other stock-based payments in
accordance with SFAS No. 123(R), Share-Based
Payment. The expense attributable to the Companys
employees is recognized over the period the amounts are earned
and vested, as described in Note 11.
Warranty
Provisions for estimated expenses related to product warranties
are made at the time products are sold. These estimates are
established using historical information on the nature,
frequency and average cost of warranty claims. The
Companys provision for warranty expenses at
December 31, 2006 and December 29, 2005 is $9.6 and
$0.9, respectively.
Fiscal
Year End
The Companys fiscal years ended on December 29, 2005,
and December 31, 2006. Both Holdings and the
Companys fiscal quarters end on the Thursday closest to
the calendar quarter end. The Companys 2005 results
include the period from inception (February 7,
2005) through December 29, 2005.
New
Accounting Standards
In February 2006, FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments,
which amends SFAS No. 133 and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, and improves the
financial reporting of certain hybrid financial instruments by
requiring more consistent accounting that eliminates exemptions
and simplifies the accounting for those instruments.
SFAS No. 155 allows financial instruments that have
embedded derivatives to be accounted for as a whole (eliminating
the need to bifurcate the derivative from its host) if the
holder elects to account for the whole instrument on a fair
value basis. SFAS No. 155 is effective for all
financial instruments acquired or issued after the beginning of
an entitys first fiscal year that begins after
September 15, 2006. The Company has not issued or acquired
the hybrid instruments included in the scope of
SFAS No. 155 and does not expect the adoption of
SFAS No. 155 to have a material impact on the
Companys financial condition, results of operations or
cash flows.
In June 2006, FASB issued FASB Interpretation No. 48, or
FIN 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109, effective for fiscal years beginning after
December 15, 2006. FIN 48 prescribes the minimum
recognition threshold a tax position must meet before being
recognized in the financial statements and provides guidance on
derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. The Company is currently evaluating the impact of
FIN 48 on its consolidated financial statements, but is not
yet in a position to make this determination. We do not expect
the adoption of FIN 48 to have a material impact on our
financial condition, results of operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and
requires enhanced disclosures about fair value measurements.
SFAS No. 157 requires companies to disclose the fair
value of their financial instruments according to a fair value
hierarchy as defined in the standard. Additionally, companies
are required to provide enhanced disclosure regarding financial
instruments in one of the categories (level 3), including a
reconciliation of the
86
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
beginning and ending balances separately for each major category
of assets and liabilities. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We believe that the adoption of SFAS No. 157
will not have a material impact on our consolidated financial
statements.
On September 29, 2006, the Financial Accounting Standards
Board (FASB) issued SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other
Post-Retirement
Plans, an amendment of FASB Statements No. 87, 88, 106
and 132(R). See Note 9, Pension and Other
Post-Retirement Benefits. The standard is effective for fiscal
years ending after December 15, 2006, and requires the
Company to:
|
|
|
|
|
Recognize the funded status of the Companys defined
benefit plans in its consolidated financial statements.
|
|
|
|
Recognize as a component of other comprehensive income any
actuarial gains and losses and prior service costs and credits
that arise during the period but are not immediately recognized
as components of net periodic benefit cost.
|
|
|
|
Measure defined benefit plan assets and obligations as of the
Companys fiscal year end.
|
|
|
|
Disclose in the notes to the financial statements additional
information about certain effects on net periodic cost for the
subsequent fiscal year that arise from delayed recognition of
gains or losses, prior to service costs or credits, and
transition asset or obligation.
|
|
|
|
Requires that we change our measurement date from November to
the fiscal year end (i.e. December 31) by year-end 2008.
|
The standard is effective for fiscal years ending after
December 15, 2006. See Note 9, Pensions and Other
Post-Retirement Benefits.
3. Inventory
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
Raw materials
|
|
$
|
118.1
|
|
|
$
|
68.6
|
|
Work-in-process
|
|
|
729.9
|
|
|
|
442.1
|
|
Finished goods
|
|
|
34.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory, net
|
|
$
|
882.2
|
|
|
$
|
510.7
|
|
|
|
|
|
|
|
|
|
|
Inventories as of December 31, 2006 and December 29,
2005 are summarized by platform as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
B737
|
|
$
|
280.6
|
|
|
$
|
243.8
|
|
B747
|
|
|
62.8
|
|
|
|
60.9
|
|
B767
|
|
|
25.2
|
|
|
|
16.2
|
|
B777
|
|
|
152.9
|
|
|
|
126.5
|
|
B787(1)
|
|
|
172.2
|
|
|
|
|
|
Airbus-All platforms
|
|
|
70.2
|
|
|
|
|
|
Other in-process inventory related
to long-term contracts and other programs (2)
|
|
|
118.3
|
|
|
|
63.3
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2006
|
|
$
|
882.2
|
|
|
$
|
510.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
B787 inventory includes $143.3 in capitalized pre-production
costs. |
|
(2) |
|
Contracted non-recurring services for certain derivative
aircraft programs to be paid by OEM, plus miscellaneous other
work-in-process. |
87
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
At December 31, 2006 and December 29, 2005, inventory
included deferred production costs of approximately $41.8 and
$0.0, respectively. These deferred production values represent
the excess of costs incurred over estimated average costs per
Boeing shipset for the 547 Boeing shipsets delivered since
inception through December 31, 2006, as well as 318 Airbus
shipsets delivered from April 1, 2006 through
December 31, 2006. Recovery of the deferred production
costs is dependent on the number of shipsets ultimately sold and
actual selling prices and production costs associated with
future production.
Sales significantly under estimates or costs significantly over
estimates could result in the realization of losses on these
contracts in future periods.
|
|
4.
|
Property,
Plant and Equipment
|
Property, plant and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
Land (including improvements)
|
|
$
|
22.5
|
|
|
$
|
18.8
|
|
Buildings
|
|
|
154.2
|
|
|
|
116.0
|
|
Machinery and equipment
|
|
|
219.5
|
|
|
|
121.8
|
|
Tooling
|
|
|
245.4
|
|
|
|
121.6
|
|
Construction in progress
|
|
|
213.4
|
|
|
|
169.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
855.0
|
|
|
|
547.4
|
|
Less: accumulated depreciation
|
|
|
(81.2
|
)
|
|
|
(28.6
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
773.8
|
|
|
$
|
518.8
|
|
|
|
|
|
|
|
|
|
|
In connection with the acquisition, Boeing is required to make
future non-interest bearing payments to Spirit attributable to
the acquisition of title of various tooling and other capital
assets to be determined by Spirit. Spirit will retain usage
rights and custody of the assets for their remaining useful
lives without compensation to Boeing. See Note 2, Revenue
Recognition for discussion on tooling.
Boeing is required to make non-interest bearing cash payments to
the Company as follows:
|
|
|
|
|
2008
|
|
$
|
116.1
|
|
2009
|
|
|
115.4
|
|
|
|
|
|
|
Total
|
|
$
|
231.5
|
|
|
|
|
|
|
A discount rate of 9.75 percent was used to record these
payments at their estimated present value of $233.2 and $212.5
at December 31, 2006 and December 29, 2005,
respectively. Also included in long-term receivable is $1.3 of
B787 sales not due until first delivery of full unit. At
December 31, 2006, the current portion of long-term
receivable in the amount of $43.0 was reclassified to current
assets.
88
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Other assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
2.0
|
|
|
$
|
3.5
|
|
Favorable leasehold interests
|
|
|
9.7
|
|
|
|
27.3
|
|
Customer relationships
|
|
|
33.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
45.5
|
|
|
|
30.8
|
|
Less: Accumulated
amortization-patents
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Accumulated amortization-favorable
leasehold interest
|
|
|
(1.3
|
)
|
|
|
(1.1
|
)
|
Accumulated amortization-customer
relationships
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
40.8
|
|
|
|
29.5
|
|
Deferred tax asset
|
|
|
39.1
|
|
|
|
|
|
Deferred financing costs, net
|
|
|
14.8
|
|
|
|
22.4
|
|
Fair value of derivative
instruments
|
|
|
24.3
|
|
|
|
6.9
|
|
Goodwill Europe
|
|
|
6.0
|
|
|
|
|
|
Other
|
|
|
4.1
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
129.1
|
|
|
$
|
63.2
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs are recorded net of $8.4 and $2.6 of
accumulated amortization at December 31, 2006 and
December 29, 2005, respectively.
Estimated amortization expense associated with the
Companys amortizable intangible assets for each of the
next five years is as follows:
|
|
|
|
|
2007
|
|
$
|
4.8
|
|
2008
|
|
$
|
4.8
|
|
2009
|
|
$
|
4.8
|
|
2010
|
|
$
|
4.8
|
|
2011
|
|
$
|
4.9
|
|
|
|
7.
|
Derivative
and Hedging Activities
|
In July 2005, in connection with the execution of the credit
agreement as described in Note 8, the Company entered into
floating-to-fixed
interest rate swap agreements with notional amounts totaling
$500.0. The terms and fair value of the swaps are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
Fair Value,
|
|
|
|
|
|
|
Variable
|
|
|
Fixed
|
|
|
Fixed
|
|
|
December 31,
|
|
Principal Amount
|
|
Expires
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
2006
|
|
|
$100
|
|
|
July 2008
|
|
|
|
LIBOR
|
|
|
|
4.24
|
%
|
|
|
5.99
|
%
|
|
$
|
1.3
|
|
$300
|
|
|
July 2009
|
|
|
|
LIBOR
|
|
|
|
4.30
|
%
|
|
|
6.05
|
%
|
|
$
|
5.2
|
|
$100
|
|
|
July 2010
|
|
|
|
LIBOR
|
|
|
|
4.37
|
%
|
|
|
6.12
|
%
|
|
$
|
2.1
|
|
The purpose of entering into these swaps was to reduce
Spirits exposure to variable interest rates. The
settlement and maturity dates are provided above. In accordance
with SFAS No. 133, Accounting for Derivative
89
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Instruments and Hedging Activities, the interest rate
swaps are being accounted for as cash flow hedges and the
carrying value of the notes has been adjusted to reflect the
fair values of the interest rate swaps. The fair value of the
interest rate swaps was an asset (unrealized gain) of $8.6 and
$6.9 at December 31, 2006 and December 29, 2005,
respectively. The after-tax impact of $5.3 and $4.2 was recorded
as a component of Other Comprehensive Income for the periods
ended December 31, 2006 and December 29, 2005,
respectively.
In April 2006, the Company acquired BAE Aerostructures
headquartered in Prestwick, Scotland. The functional currency of
BAE Aerostructures is the British pound sterling with
approximately 80% of revenue from contracts denominated in
British pounds. These contracts expose the Company to the
effects of changes in foreign currency exchange rates. To reduce
the risks associated with the changes in exchange rates, the
Company acquired foreign currency exchange contracts to purchase
British pounds sterling with maturity dates that approximate the
receipt of U.S. dollars. In accordance with
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, the foreign currency exchange
contracts are being accounted for as cash flow hedges. As of
December 31, 2006 the Company has determined that some of
the forward contracts have become ineffective resulting in a
charge to current earnings of $0.1. The fair value of the
forward contracts was a net asset of $12.4 as of
December 31, 2006, which was recorded to Other
Comprehensive Income.
The Company, as of December 31, 2006 and December 29,
2005, did not hold any derivative instruments for trading
purposes. The only derivatives that the Company transacts are
interest rate swaps related to its variable interest rate on
debt and foreign currency exchange contracts related to net
U.S. dollar receipts in its foreign subsidiary. On the date
a derivative contract is entered into, the Company designates
the derivative as a hedge of the variability of cash flows to be
received or paid related to the debt or foreign exchange
contract, an asset or liability (cash flow hedge). For such
hedges the Company formally documents the hedging relationship
and its risk-management objective and strategy for undertaking
the hedge, the hedging instruments, the item, the nature of the
risk being hedged, how the hedging instruments
effectiveness in offsetting the hedged risk will be assessed,
and a description of the method of measuring ineffectiveness.
This process includes linking such derivatives that are
designated as cash-flow hedges specific to debt liabilities on
the balance sheet. The Company also formally assesses, both at
the hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows of hedged items.
When it is determined that a derivative is not highly effective
as a hedge or that it has ceased to be a highly effective hedge,
the Company discontinues hedge accounting prospectively.
Changes in the fair value of a derivative that is highly
effective and that is designated and qualifies as a
cash-flow
hedge is recorded in Other Comprehensive Income, to the extent
that the derivative is effective as a hedge, until earnings are
affected by the variability in cash flows of the designated
hedged item. The ineffective portion of the change in fair value
of a derivative instrument that qualifies as a cash-flow hedge
is reported in operations.
Spirit discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in
offsetting changes in the cash flows of the hedged item; the
derivative expires or is sold, terminated or exercised; the
derivative is no longer designated as a hedging instrument
because it is unlikely that a forecasted transaction will occur;
or management determines that designation of the derivative as a
hedging instrument is no longer appropriate.
When hedge accounting is discontinued because it is probable
that a forecasted transaction will not occur, the Company
continues to carry the derivative on the balance sheet at its
fair value with subsequent changes in fair value included in
earnings, and gains and losses that were accumulated in Other
Comprehensive Income are recognized immediately in earnings. In
all other situations in which hedge accounting is discontinued,
the Company continues to carry the derivative at its fair value
on the balance sheet and recognizes any subsequent changes in
its fair value in earnings.
90
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Changes in the fair value of interest rate swaps designated as
hedging instruments that effectively offset the variability of
cash flows associated with variable-rate long-term debt
obligations are reported in accumulated Other Comprehensive
Income. Similarly, the changes in fair value of the foreign
currency exchange contracts designated as cash-flow hedges are
also reported in accumulated Other Comprehensive Income. These
amounts related to interest rate swaps subsequently are
reclassified into interest expense as a yield adjustment of the
hedged interest payments in the same period in which the related
interest affects earnings. Reclassification of the amounts
related to the foreign currency exchange contracts are recorded
to revenue in the same period in which the contract is settled.
If the Company receives funds from the interest rate swaps, the
amount received is classified as interest income.
To the extent that derivatives do not qualify for hedge
accounting treatment, the derivatives are marked to
market with the changes in fair market value of the
instruments reported in the current period.
Credit
Agreement
In connection with the Boeing Acquisition as described in
Note 2, Spirit executed an $875.0 credit agreement that
consisted of a $700.0 senior secured term loan used to fund the
acquisition and pay all related fees and expenses associated
with the acquisition and the credit agreement, and a $175.0
senior secured revolving credit facility. On November 27,
2006, the credit agreement was amended to, among other things,
increase the revolving credit facility to $400.0. As of
December 31, 2006, the Company has no outstanding loans
under the revolving credit facility. Both the term loan and the
revolving credit facility are secured by the entire asset
classes of the Company including inventory and property, plant,
and equipment.
Prior to the November 27, 2006 amendment of the credit
agreement, the senior secured term loan required quarterly
principal installments of $1.75 beginning in September 2005
through December 2010, with the balance due in four equal
quarterly installments of $165.4 in 2011. As part of the
November 27, 2006 amendment, the quarterly principal
payments on the senior secured term loan were reduced to $1.48
starting December 31, 2006 and continuing through September
2012, with the balance due in four equal quarterly payments of
$138.9 starting December 2012 through September 2013. There are
provisions in the agreement that require mandatory prepayments
to be made with specified percentages of net cash proceeds
received by Spirit and its subsidiaries from the sale of certain
assets or the incurrence of additional debt not otherwise
permitted under the credit agreement and certain insurance and
indemnity payments. Per the agreement, as in effect prior to the
November 27, 2006 amendment, the Company made a principal
payment of $100.0 on the senior debt on November 27, 2006,
using proceeds from the public offering of Spirit AeroSystems
Holdings, Inc. stock. In addition, Spirit is required to prepay
the loans annually with a percentage of its excess cash flow (as
calculated in accordance with the credit agreement) if the
Companys debt leverage ratio is greater than 2.5x. As of
December 31, 2006 no additional payment is anticipated. The
amended secured term loan matures September 2013 and the
revolving facility matures June 2010. As of December 31,
2006 and December 29, 2005, the outstanding balance of the
term loan was $589.8 and $696.5, respectively. No amounts were
outstanding under the revolving credit facility at either
December 31, 2006 or December 29, 2005.
Prior to the November 27, 2006 amendment of the credit
agreement, the borrowings under the term loan bore interest
based on LIBOR plus an interest rate margin of 2.35 percent
or a base rate plus an interest rate margin of 1.35 percent,
which in either case, included 0.1 percent payable to Onex
Corporation. With the amendment dated November 27, 2006,
the interest rate margin was reduced to 1.75 percent for
term loans bearing interest based on LIBOR, and
0.75 percent for term loans bearing interest based on the
base rate, and the 0.1 percent payable to Onex Corporation
was eliminated, (interest rates at December 31, 2006 and at
December 29, 2005 were 7.11 percent and 6.51 percent,
respectively), payable quarterly. In connection with the term
loan, Spirit entered into interest rate swap agreements on
$500.0 of the term loan, as described in Note 7. The
borrowings under the revolving facility bear
91
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
interest based on LIBOR or a base rate plus an interest rate
margin of up to 2.75 percent, and 1.75 percent,
respectively, payable quarterly.
The amended credit agreement contains customary affirmative and
negative covenants, including restrictions on indebtedness,
liens, type of business, acquisitions, investments, sales or
transfers of assets, payments of dividends, transactions with
affiliates, change in control and other matters customarily
restricted in such agreements. This agreement also contains a
financial covenant, consisting of a maximum total leverage ratio
that decreases over time, starting at 4.5x in 2005, 4.25x in
2006, 4.0x in 2007, 3.5x in 2008, 3.0x in 2009, 2.5x in 2010,
and 2.25x in 2011 through 2013. The credit agreement contained a
minimum interest coverage ratio that was removed as part of the
November 27, 2006 amendment, together with the limitation
on annual capital expenditures that existed prior to the
amendment. The leverage ratio compares the balance of total
senior credit facility debt to an adjusted EBITDA, which is the
amount of income (loss) from operations before depreciation and
amortization expenses and other specifically identified
exclusions. The leverage ratio is calculated each quarter in
accordance with the credit agreement. Failure to meet this
financial covenant would be an event of default under the senior
secured credit facility. The Company remained in compliance with
such covenant as of and during the fiscal periods ending
December 31, 2006 and December 29, 2005.
Total debt shown on the balance sheet is comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
Senior secured debt
|
|
$
|
589.8
|
|
|
$
|
696.5
|
|
Present value of capital lease
obligations
|
|
|
28.4
|
|
|
|
25.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
618.2
|
|
|
$
|
721.6
|
|
|
|
|
|
|
|
|
|
|
Boeing
Delayed Draw Term Loan Facility
In connection with the acquisition, Boeing provided Spirit with
a delayed draw term loan facility of up to $150. The delayed
draw term loan facility bore interest at a rate of 90 day
LIBOR (established at the end of each calendar quarter) plus
6.0 percent and was subordinate to the borrowings under the
credit agreement. The delayed draw term loan facility could have
been drawn upon any time up to December 31, 2008 and any
such borrowings would have matured in June 2013. No amounts were
ever borrowed under this delayed draw term loan facility.
The Company terminated this credit facility upon completion of
the initial public offering on November 27, 2006.
Principal
Repayments
The annual minimum repayment requirements for the next five
years on long-term debt are as follows:
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
$
|
5.9
|
|
2008
|
|
$
|
5.9
|
|
2009
|
|
$
|
5.9
|
|
2010
|
|
$
|
5.9
|
|
2011
|
|
$
|
5.9
|
|
Thereafter
|
|
$
|
560.3
|
|
92
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
|
|
9.
|
Pension
and Other Post-Retirement Benefits
|
Multi-Employer
Pension Plan
In connection with the collective bargaining agreement signed
with the International Association of Machinists and Aerospace
Workers (IAM), the Company contributes to a multi-employer
defined benefit pension plan (IAM National Pension Fund). The
level of contribution, as specified in the bargaining agreement,
is fixed over the next five years at $1.35 per hour of
employee service. The collective bargaining agreement with the
IAM, United Automobile, Aerospace & Agricultural
Implement Workers of America (UAW), specifies that the Company
will contribute $1.20 per hour to a multi-employer defined
benefit pension plan (IAM National Pension Fund) beginning in
2006. The UAW bargaining agreement provides for a $0.05 increase
per hour in the contribution rate beginning in 2008, and an
additional $0.05 increase per hour beginning in 2010.
The collective bargaining agreements provided for an additional
contribution by the Company of $0.30 per hour of employee
service starting in 2005 to an IAM pension escrow account. In
2005, Spirit contributed $1.0. As a result of action taken by
the Board of Trustees of the IAM National Pension Fund in
January 2006, the IAM National Pension Fund no longer
requires Spirits contribution and amounts contributed in
2005 were returned to the Company on May 10, 2006.
The Company made contributions of $15.8 and $3.6 to the IAM and
the UAW Pension Plan for the twelve months ended
December 31, 2006 and the ten and one-half month period
ended December 31, 2005, respectively.
Defined
Contribution Plans
The Company contributes to a defined contribution plan available
to all employees, excluding IAM and UAW represented employees.
Under the plan, the Company can make a matching contribution of
75 percent of the employee contribution to a maximum
8 percent of eligible individual employee compensation. In
addition,
non-matching
contributions based on an employees age and service are
paid at the end of each calendar year for certain employee
groups.
The Company recorded $31.0 and $16.7 in contributions to these
plans for the twelve months ended December 31, 2006 and the
ten and one-half month period ended December 29, 2005,
respectively.
On April 1, 2006, as part of the acquisition of BAE
Aerostructures, the Company established a defined contribution
pension plan for those employees who hire into the company after
the date of acquisition. Under the plan, the Company contributes
8 percent of basic salary while participating employees are
required to contribute 4 percent of basic salary. The
Company recorded $0.2 in contributions to this plan for the
period April 1, 2006 through December 31, 2006.
Defined
Benefit Pension Plans
Effective June 17, 2005, pension assets and liabilities
were spun-off from three Boeing qualified plans into four
qualified Spirit AeroSystems plans for each Spirit AeroSystems
employee who did not retire from Boeing by August 1, 2005.
Effective December 31, 2005, all four qualified plans were
merged together. In addition, Spirit AeroSystems has one
nonqualified plan providing supplemental benefits to executives
(SERP) who transferred from a Boeing nonqualified plan to a
Spirit AeroSystems plan and elected to keep their benefits in
this plan. Both plans are frozen as of the date of acquisition
(i.e., no future service benefits are being earned in these
plans). We intend to fund our qualified pension plan through a
trust. Pension assets are placed in trust solely for the benefit
of the pension plans participants, and are structured to
maintain liquidity that is sufficient to pay benefit obligations.
On May 30, 2006, the Companys defined benefit pension
trust received $60.7 from Boeings defined benefit pension
trust, representing the final transfer of pension assets in
accordance with the acquisition agreement. This transfer, which
was based on final actuarial and other valuation data completed
in 2006, exceeded the original
93
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
estimate calculated in 2005, which was based on preliminary
actuarial and other valuation data. As a result, adjustments
were recorded in June 2006 to eliminate the defined benefit
pension plan liability, record a prepaid pension asset, and
adjust the book value of property, plant and equipment and
intangible assets as of June 17, 2005. As a result of these
adjustments, a cumulative
catch-up
adjustment was recorded in June 2006 to reflect higher pension
income and lower depreciation and amortization expense.
On April 1, 2006, as part of the acquisition of BAE
Aerostructures in the U.K., the Company established a defined
benefit pension plan for those employees that had pension
benefits remaining in BAE Systems pension plan. The plan
is not open to new participants. The liability to the Company
represents the cost of providing benefits in line with salary
increases to the extent that future salary increases exceed the
inflation adjustments applied to the benefits within the BAE
Systems plan. BAE Systems will provide increases to past service
benefits in line with inflation, subject to a maximum of
5% per annum compounded, and the Companys plan is
responsible for funding the difference between the BAE Systems
increases and actual salary increases. In addition, this plan
provides future service benefit accruals for covered employees.
The amount included for this pension plan within other
liabilities on the Companys balance sheet is $19.9 at
December 31, 2006.
Other
Post-Retirement Benefit Plans
We also have postretirement health care coverage for eligible
U.S. retirees and qualifying dependents prior to
age 65. Eligibility for employer-provided benefits is
limited to those employees who were hired at the date of
acquisition (Spirit) and retire on or after attainment of
age 62 and 10 years of service. Employees who do not
satisfy these eligibility requirements can retire with
postretirement medical benefits at age 55 and 10 years
of service, but they must pay the full cost of medical benefits
provided.
The Company recorded $3.6 and $1.9 in expense associated with
its other post-retirement plans for the fiscal year ended
December 31, 2006, the ten and one-half month period ended
December 29, 2005, respectively.
Changes
Required by FAS 158
During 2006, the Financial Accounting Standards Board (FASB)
issued Statement 158. In accordance with this new
statement, we have reflected the year-end funded status for each
defined benefit and other postretirement benefit plan on the
companys balance sheet. As of December 31, 2006, we
have recorded an asset of $207.3 for our qualified pension plan,
a liability of $0.7 for our nonqualified pension plan and a
liability of $33.1 for our postretirement medical plan. For the
U.K. plan, we have recorded a liability of $19.9. FAS 158
did not change net income nor comprehensive income for the
fiscal year ending December 31, 2006, but it did require a
one-time adjustment to accumulated other comprehensive income
(AOCI) in shareholders equity ($69.2 total for U.S. and
U.K. plans, before tax effect). The adjustments to AOCI were
comprised of $64.7 pension, or $40.0 net of tax, and $4.5
of post-retirement benefits, or $2.8 net of tax.
FAS 158 also requires that we change our measurement date
from November 30 to the fiscal year end (i.e.,
December 31) by year-end 2008. In the year that we
make this change, it will result in a separate adjustment to
retained earnings to reflect one additional month of expense and
a separate adjustment in AOCI to reflect changes in plan assets
and benefit obligations between November 30 and
December 31. We intend to make this change in the 2008
fiscal year for all plans in the U.S. Our Europe plans
currently use a December 31 measurement date.
Obligations
and Funded Status
The following tables reconcile the funded status of both pension
and postretirement medical benefits to the balance on the
Consolidated Statements of Financial Position for the fiscal
years 2006 and 2005 respectively. Benefit obligation balances
presented in the table reflect the projected benefit obligation
(PBO) and accumulated benefit obligation (ABO) for our pension
plans, and accumulated postretirement benefit obligations (APBO)
for our
94
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
postretirement medical plan. We use a measurement date of
November 30 for our U.S. pension and postretirement
medical plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Defined Benefit
|
|
|
Post-Retirement
|
|
U.S. Plans 2006
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
Change in benefit
obligation
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of
period
|
|
$
|
543.1
|
|
|
$
|
31.2
|
|
Acquisitions
|
|
|
12.3
|
|
|
|
0.3
|
|
Service cost
|
|
|
|
|
|
|
1.8
|
|
Interest cost
|
|
|
33.3
|
|
|
|
1.8
|
|
Amendments
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
|
|
25.7
|
|
|
|
(2.0
|
)
|
Benefits paid
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of period
|
|
$
|
613.3
|
|
|
$
|
33.1
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets,
beginning of period
|
|
$
|
549.4
|
|
|
$
|
|
|
Acquisitions
|
|
|
177.5
|
|
|
|
|
|
Actual return on plan assets
|
|
|
95.0
|
|
|
|
|
|
Benefits paid
|
|
|
(1.1
|
)
|
|
|
|
|
Expenses paid
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of
period
|
|
$
|
819.9
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of funded
status
|
|
|
|
|
|
|
|
|
Funded status at the end of the year
|
|
$
|
206.6
|
|
|
$
|
(33.1
|
)
|
Employer contributions between
measurement date and fiscal year-end
|
|
|
|
|
|
|
|
|
Net amount recognized (after
FAS 158)
|
|
|
206.6
|
|
|
|
(33.1
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the
financial statements
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
207.3
|
|
|
$
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
(0.7
|
)
|
|
|
(33.1
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized (after
FAS 158)
|
|
$
|
206.6
|
|
|
$
|
(33.1
|
)
|
|
|
|
|
|
|
|
|
|
Amounts not yet reflected in net
periodic benefit cost and included In AOCI
(FAS 158)
|
|
|
|
|
|
|
|
|
Prior service cost credit
|
|
$
|
|
|
|
$
|
|
|
Accumulated gain(loss)
|
|
|
65.4
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income (AOCI)
|
|
$
|
65.4
|
|
|
$
|
4.5
|
|
Cumulative employer contributions
in excess of net periodic benefit cost
|
|
|
141.2
|
|
|
|
(37.6
|
)
|
Net amount recognized in statement
of financial position
|
|
|
206.6
|
|
|
|
(33.1
|
)
|
AOCI before FAS 158
|
|
$
|
|
|
|
$
|
|
|
Change in AOCI due to FAS 158
|
|
|
65.4
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
Information for pension plans
with benefit obligations in excess of plan assets
|
|
|
|
|
|
|
|
|
Projected benefit obligation/APBO
|
|
$
|
0.7
|
|
|
$
|
33.1
|
|
Accumulated benefit obligation
|
|
|
0.7
|
|
|
|
|
|
Fair value of assets
|
|
|
|
|
|
|
|
|
The above recognized amounts of $207.3 for U.S. defined
benefit pension plans were included in long-term assets and $0.7
were included in long-term liabilities at December 31,
2006. The above recognized amount of $33.1 for other
post-retirement benefit plans was included in long-term
liabilities on the consolidated balance sheet at
December 31, 2006.
95
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
|
|
|
|
|
|
|
Defined Benefit
|
|
U.K. Plans 2006
|
|
Pension Plans
|
|
|
Change in benefit
obligation
|
|
|
|
|
Benefit obligation, beginning of
period
|
|
$
|
|
|
Service cost
|
|
|
5.2
|
|
Interest cost
|
|
|
0.8
|
|
Employee contributions
|
|
|
0.1
|
|
Amendments
|
|
|
|
|
Actuarial loss (gain)
|
|
|
|
|
Settlements
|
|
|
|
|
Benefits paid
|
|
|
|
|
Rebates from U.K. government
|
|
|
0.6
|
|
Acquisitions
|
|
|
19.1
|
|
Exchange rate changes
|
|
|
2.7
|
|
|
|
|
|
|
Benefit obligation, end of period
|
|
$
|
28.5
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
Fair value of plan assets,
beginning of period
|
|
$
|
|
|
Acquisitions
|
|
|
|
|
Actual return on plan assets
|
|
|
0.1
|
|
Company contributions
|
|
|
8.0
|
|
Employee contributions
|
|
|
0.1
|
|
Settlement/curtailment
|
|
|
|
|
Benefits paid
|
|
|
|
|
Expenses paid
|
|
|
|
|
Exchange rate changes
|
|
|
0.4
|
|
|
|
|
|
|
Fair value of plan assets, end of
period
|
|
$
|
8.6
|
|
|
|
|
|
|
Reconciliation of funded
status
|
|
|
|
|
Funded status at the end of the
year
|
|
$
|
(19.9
|
)
|
Employer contributions between
measurement date and fiscal year-end
|
|
|
|
|
Net amount recognized (after
FAS 158)
|
|
|
(19.9
|
)
|
|
|
|
|
|
Amounts recognized in the
financial statements
|
|
|
|
|
Noncurrent assets
|
|
$
|
|
|
Current liabilities
|
|
|
|
|
Noncurrent liabilities
|
|
|
(19.9
|
)
|
|
|
|
|
|
Net amount recognized (after
FAS 158)
|
|
$
|
(19.9
|
)
|
|
|
|
|
|
Amounts not yet reflected in
net periodic benefit cost and included In AOCI
(FAS 158)
|
|
|
|
|
Prior service (cost) credit
|
|
$
|
|
|
Accumulated gain(loss)
|
|
|
(0.7
|
)
|
|
|
|
|
|
Accumulated other comprehensive
income (AOCI)
|
|
$
|
(0.7
|
)
|
Prepaid (unfunded accrued) pension
cost
|
|
|
(19.2
|
)
|
Net amount recognized in statement
of financial position
|
|
|
(19.9
|
)
|
The above recognized amount of $19.9 for defined benefit pension
was included in long-term liabilities on the consolidated
balance sheet at December 31, 2006.
96
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Defined Benefit
|
|
|
Post-Retirement
|
|
U.S. Plans 2005
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
Change in benefit
obligation
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of
period
|
|
$
|
|
|
|
$
|
|
|
Acquisitions
|
|
|
583.8
|
|
|
|
31.8
|
|
Service cost
|
|
|
|
|
|
|
1.0
|
|
Interest cost
|
|
|
17.4
|
|
|
|
0.9
|
|
Amendments
|
|
|
|
|
|
|
|
|
Actuarial losses
|
|
|
(58.1
|
)
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of period
|
|
$
|
543.1
|
|
|
$
|
31.2
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets,
beginning of period
|
|
$
|
|
|
|
$
|
|
|
Acquisitions
|
|
|
525.0
|
|
|
|
|
|
Actual return on plan assets
|
|
|
24.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of
period
|
|
$
|
549.4
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of funded
status
|
|
|
|
|
|
|
|
|
Funded status assets
minus obligation
|
|
$
|
6.3
|
|
|
$
|
(31.2
|
)
|
Unrecognized actuarial loss (gain)
|
|
|
(59.0
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(52.7
|
)
|
|
$
|
(33.6
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the
financial statements
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$
|
|
|
|
$
|
|
|
Accrued benefit liability
|
|
|
(52.7
|
)
|
|
|
(33.6
|
)
|
Accumulated other comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(52.7
|
)
|
|
$
|
(33.6
|
)
|
|
|
|
|
|
|
|
|
|
The above recognized amounts of $52.7 and $33.6 for defined
benefit pension and other post-retirement benefit plans,
respectively, were included in long-term liabilities on the
consolidated balance sheet at December 31, 2005.
97
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
The components of pension and other post-retirement benefit
plans expense along with the assumptions used to determine
benefit obligations for 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Defined Benefit
|
|
|
Post-Retirement
|
|
U.S. Plans 2006
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
Assumptions used to determine
benefit obligation for the period ended December 31,
2006
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75 percent
|
|
|
|
5.60 percent
|
|
Salary increases
|
|
|
N/A
|
|
|
|
N/A
|
|
Medical assumptions
|
|
|
|
|
|
|
|
|
Trend assumed for next year
|
|
|
N/A
|
|
|
|
9 percent
|
|
Ultimate trend rate
|
|
|
N/A
|
|
|
|
5 percent
|
|
Year that ultimate trend rate is
reached
|
|
|
N/A
|
|
|
|
2011
|
|
Components of benefit (income)
expense
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
1.8
|
|
Interest cost
|
|
|
33.3
|
|
|
|
1.8
|
|
Expected return on plan assets
|
|
|
(59.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit (income) expense
|
|
$
|
(26.6
|
)
|
|
$
|
3.6
|
|
|
|
|
|
|
|
|
|
|
Other Changes Recognized on
OCI
|
|
|
|
|
|
|
|
|
Total recognized in OCI
|
|
$
|
|
|
|
$
|
|
|
Total recognized in net periodic
benefit cost and OCI
|
|
|
(26.6
|
)
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine
benefit expense for the period ended December 31,
2006
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6 percent
|
|
|
|
5.75 percent
|
|
Expected return on plan assets
|
|
|
8.25 percent
|
|
|
|
N/A
|
|
Salary increases
|
|
|
N/A
|
|
|
|
N/A
|
|
Medical assumptions
|
|
|
|
|
|
|
|
|
Trend assumed for next year
|
|
|
N/A
|
|
|
|
10 percent
|
|
Ultimate trend rate
|
|
|
N/A
|
|
|
|
5 percent
|
|
Year that ultimate trend rate is
reached
|
|
|
N/A
|
|
|
|
2011
|
|
98
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
|
|
|
|
|
|
|
Defined Benefit
|
|
U.K. Plans 2006
|
|
Pension Plans
|
|
|
Assumptions used to determine
benefit obligation for the period ended December 31,
2006
|
|
|
|
|
Discount rate
|
|
|
5 percent
|
|
Salary increases
|
|
|
4 percent
|
|
Medical assumptions
|
|
|
|
|
Trend assumed for next year
|
|
|
N/A
|
|
Ultimate trend rate
|
|
|
N/A
|
|
Year that ultimate trend rate is
reached
|
|
|
N/A
|
|
Components of benefit (income)
expense
|
|
|
|
|
Service cost
|
|
$
|
5.2
|
|
Interest cost
|
|
|
0.8
|
|
Expected return on plan assets
|
|
|
(0.2
|
)
|
|
|
|
|
|
Net benefit (income) expense
|
|
$
|
5.8
|
|
|
|
|
|
|
Other Changes Recognized on
OCI
|
|
|
|
|
Total recognized in OCI
|
|
$
|
|
|
Total recognized in net periodic
benefit cost and OCI
|
|
|
5.8
|
|
|
|
|
|
|
Assumptions used to determine
benefit expense for the period ended December 31,
2006
|
|
|
|
|
Discount rate
|
|
|
5 percent
|
|
Expected return on plan assets
|
|
|
5 percent
|
|
Salary increases
|
|
|
4 percent
|
|
99
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
The components of pension and other post-retirement benefit
plans expense along with the assumptions used to determine
benefit obligations for 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Defined Benefit
|
|
|
Post-Retirement
|
|
U.S. Plans 2005
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
Assumptions used to determine
benefit obligation for the period ended December 29,
2005
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6 percent
|
|
|
|
5.75 percent
|
|
Salary increases
|
|
|
N/A
|
|
|
|
N/A
|
|
Medical assumptions
|
|
|
|
|
|
|
|
|
Trend assumed for next year
|
|
|
N/A
|
|
|
|
10 percent
|
|
Ultimate trend rate
|
|
|
N/A
|
|
|
|
5 percent
|
|
Year that ultimate trend rate is
reached
|
|
|
N/A
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Components of benefit (income)
expense
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
1.0
|
|
Interest cost
|
|
|
17.4
|
|
|
|
0.9
|
|
Expected return on plan assets
|
|
|
(23.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit (income) expense
|
|
$
|
(6.1
|
)
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine
benefit expense for the period ended December 29,
2005
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.5 percent
|
|
|
|
5.25 percent
|
|
Expected return on plan assets
|
|
|
8.25 percent
|
|
|
|
N/A
|
|
Salary increases
|
|
|
N/A
|
|
|
|
N/A
|
|
Medical assumptions
|
|
|
|
|
|
|
|
|
Trend assumed for next year
|
|
|
N/A
|
|
|
|
11.0 percent
|
|
Ultimate trend rate
|
|
|
N/A
|
|
|
|
5.0 percent
|
|
Year that ultimate trend rate is
reached
|
|
|
N/A
|
|
|
|
2011
|
|
The estimated prior service cost (credit) and net (gain) loss
that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year
are $0.0 and $(0.1), respectively.
The Company sets the discount rate assumption annually for each
of its retirement-related benefit plans as of the measurement
date, based on a review of projected cash flow and a long-term
high quality corporate bond yield curve. The discount rate
determined on each measurement date is used to calculate the
benefit obligation as of that date, and is also used to
calculate the net periodic benefit (income)/cost for the
upcoming plan year.
The pension expected return on assets assumption is derived from
the long-term expected returns based on the investment
allocation by class specified in Spirits investment
policy. The expected return on plan assets determined on each
measurement date is used to calculate the net periodic benefit
(income)/cost of the upcoming plan year.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. To determine
the health care cost trend rates the Company considers national
health trends and adjusts for its specific plan design and
locations.
A one percentage point increase in the initial through ultimate
assumed health care trend rates would have increased the
Accumulated Postretirement Benefit Obligation by $4.7 at
November 30, 2006 and the aggregate service and interest
cost components of non-pension postretirement benefit expense
for 2006 by $0.5. A
100
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
one-percentage
point decrease would have decreased the obligation by $4.1 and
the aggregate service and interest cost components of
non-pension post-retirement benefit expense for 2006 by $0.5.
The Companys plans have asset allocations for the U.S., as
of November 30, 2006 and November 30, 2005, as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Asset Category
U.S.
|
|
|
|
|
|
|
|
|
Equity securities
U.S.
|
|
|
50
|
%
|
|
|
55
|
%
|
Equity securities
International
|
|
|
13
|
%
|
|
|
7
|
%
|
Debt securities
|
|
|
29
|
%
|
|
|
37
|
%
|
Real estate
|
|
|
5
|
%
|
|
|
|
|
Other
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
U.S.
Plan
The companys investment objective is to achieve long-term
growth of capital, with exposure to risk set at an appropriate
level. This objective shall be accomplished through the
utilization of a diversified asset mix consisting of equities
(domestic and international) and taxable fixed income
securities. The allowable asset allocation range is:
|
|
|
Equities
|
|
40% - 80%
|
Fixed Income
|
|
20% - 60%
|
Real Estate
|
|
0% - 7%
|
Investment guidelines include that no security, excepting issues
of the U.S. Government, shall comprise more than 5% of total
Plan assets and further, no individual portfolio shall hold more
than 7% of its assets in the securities of any single entity,
excepting issues of the U.S. Government. The following
derivative transactions are prohibited leverage,
unrelated speculation and exotic collateralized
mortgage obligations or CMOs. Investments in hedge funds,
private placements, oil and gas and venture capital must be
specifically approved by the company in advance of their
purchase.
The Companys plans have asset allocations for the U.K., as
of December 31, 2006, as follows:
|
|
|
|
|
Asset Category
U.K.
|
|
|
|
|
Equity securities
|
|
|
44
|
%
|
Debt securities
|
|
|
56
|
%
|
Real Estate
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
|
|
|
U.K.
Plan
The Trustees investment objective is to ensure that they
can meet their obligation to the beneficiaries of the Plan. An
additional objective is, to achieve a return on the total Plan
which is compatible with the level of risk considered
appropriate. The overall benchmark allocation of the Plans
assets is:
101
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Required pension contributions under Employee Retirement Income
Security Act (ERISA) regulations are expected to be $0.0 in 2007
and discretionary contributions are not expected in 2007. SERP
and post-retirement medical plan contributions in 2007 are not
expected to exceed $0.1. Expected contributions to the U.K. plan
for 2007 are $11.2.
The total benefits expected to be paid over the next ten years
from the plans assets or the assets of the Company, by
country, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Post-
|
|
|
|
|
|
|
Retirement
|
|
U.S.
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
2007
|
|
$
|
1.7
|
|
|
$
|
|
|
2008
|
|
$
|
3.1
|
|
|
$
|
0.1
|
|
2009
|
|
$
|
4.9
|
|
|
$
|
0.2
|
|
2010
|
|
$
|
7.3
|
|
|
$
|
0.3
|
|
2011
|
|
$
|
10.0
|
|
|
$
|
0.4
|
|
2012-2016
|
|
$
|
109.4
|
|
|
$
|
16.7
|
|
|
|
|
|
|
U.K.
|
|
Pension Plans
|
|
|
2007
|
|
$
|
0.3
|
|
2008
|
|
$
|
0.5
|
|
2009
|
|
$
|
0.9
|
|
2010
|
|
$
|
1.3
|
|
2011
|
|
$
|
1.8
|
|
2012-2016
|
|
$
|
19.1
|
|
A 3-for-1
stock split occurred on November 16, 2006. This split
affected both classes of Holdings common stock, including
class A common stock and class B common stock. The
post-split par value of our shares remains $0.01 per share.
All common share and per common share amounts in these
consolidated financial statements have been adjusted to reflect
the stock split.
Holdings has authorized 360,000,000 shares of stock. Of
that, 200,000,000 shares are class A common stock, par
value $0.01 per share, one vote per share,
150,000,000 shares are class B common stock, par value
$0.01 per share, ten votes per share, and
10,000,000 shares are preferred stock, par value
$0.01 per share.
In association with the acquisition, Spirit executives with
balances in Boeings Supplemental Executive Retirement Plan
(SERP) were authorized to purchase a fixed number of units of
Holdings phantom stock at $3.33 per unit based
on the present value of their SERP balances. Under this
arrangement, 860,244 phantom units were purchased. Any payment
on account of units may be made in cash and/ or shares of
class B common stock at the sole discretion of Holdings.
Holdings has established various stock compensation plans which
include restricted share grants and stock purchase plans.
Compensation values are based on the value of Spirit stock at
the grant date. The stock value is added to equity and charged
to period expense or included in inventory and cost of sales.
For the fiscal period ended December 31, 2006, the Company
recognized a total of $56.6 of stock compensation expense. The
restricted stock grants that occurred post-acquisition were
approximately 390,393; 74,550;
102
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
9,392,652; 390,000; and 0 shares under the Companys
Short Term Incentive Plan, the Long Term Incentive Plan,
Executive Incentive Plan, Director Stock Plan, and the Union
Equity Participation Plan, respectively. The fair value of
vested shares was $43.8 and $20.1 at December 31, 2006 and
December 29, 2005, respectively, based on the value of
Holdings stock on those dates.
Executive
Incentive Plan
Holdings Executive Incentive Plan (EIP) is designed to
provide participants with the opportunity to acquire an equity
interest in the Company through direct purchase of
Holdings class B shares at prices established by the
board of directors or through grants of class B restricted
shares with performance based vesting. The Company has the sole
authority to designate either stock purchase or grants of
restricted shares. The total authorized shares are 15,000,000
and the grant terminates at the end of ten years.
Holdings has issued restricted shares as part of the
Companys long-term executive incentive plan. The
restricted shares have been granted in groups of four shares.
Participants do not have the unrestricted rights of stockholders
until those shares vest. The shares may vest upon a liquidity
event, with the number of shares vested based upon a
participants number of years of service to the Company,
the portion of the investment by Onex and its affiliates
liquidated through the date of the liquidity event and the
return on invested capital by Onex and its affiliates through
the date of the liquidity event. If no liquidity event has
occurred by the 10th year, shares may vest based on a
valuation of Holdings. The Companys initial public
offering in November 2006 was considered a liquidity event. An
expense for the fair value of the award, based on the value of
each share at the time of the grant multiplied by the
probability of the share vesting based on historical performance
of Onexs controlled investments, is being recorded by
Holdings over a five year vesting period. Holdings expensed
$41.1 and $18.6 during the periods ended December 31, 2006
and December 29, 2005, respectively. Spirits
unamortized stock compensation related to these restricted
shares is $47.7 and $72.3 at December 31, 2006 and
December 29, 2005, respectively, and will be recognized
using a graded vesting basis over five years. The weighted
average remaining period for the vesting of these shares is
3.64 years. The fair values of the unvested shares at
December 31, 2006 and December 29, 2005 were $179.4
and $130.4, respectively, based on the value of Holdings
stock and the number of unvested shares.
The following table summarizes the activity of restricted shares
under the Executive Incentive Plan for the periods ended
December 29, 2005 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
Executive Incentive
Plan
|
|
|
|
|
|
|
|
|
Nonvested at February 7, 2005
(date of inception)
|
|
|
|
|
|
$
|
|
|
Granted during period
|
|
|
8,476
|
|
|
|
90.8
|
|
Vested during period
|
|
|
|
|
|
|
|
|
Forfeited during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 29, 2005
|
|
|
8,476
|
|
|
$
|
90.8
|
|
Granted during period
|
|
|
916
|
|
|
|
16.6
|
|
Vested during period
|
|
|
(4,031
|
)
|
|
|
(46.2
|
)
|
Forfeited during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
5,361
|
|
|
$
|
61.2
|
|
|
|
|
|
|
|
|
|
|
103
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Board
of Directors Stock Awards
This plan provides non-employee directors the opportunity to
receive grants of restricted shares subject to certain vesting
provisions. The maximum aggregate number of shares that may be
granted to participants is 3,000,000 shares.
As part of their overall compensation package, Holdings
restricted stock valued at $5.8 was granted to the Spirit board
of directors in December 2005 based on the value of
Holdings stock at the grant date. These shares vest upon
the achievement of certain performance conditions and the
occurrence of a liquidity event. If participants cease to serve
as directors within a year of the grant, the restricted shares
are forfeited. In addition, any remaining restricted shares are
forfeited five years after a participant ceases to serve as a
director. Holdings expensed $5.6 and $0.2 during the periods
ended December 31, 2006 and December 29, 2005,
respectively.
The following table summarizes stock grants to members of the
Spirit board of directors for the periods ended
December 29, 2005 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
Board of Directors Stock
Grants
|
|
|
|
|
|
|
|
|
Nonvested at February 7, 2005
(date of inception)
|
|
|
|
|
|
$
|
|
|
Granted during period
|
|
|
390
|
|
|
|
5.8
|
|
Vested during period
|
|
|
|
|
|
|
|
|
Forfeited during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 29, 2005
|
|
|
390
|
|
|
$
|
5.8
|
|
Granted during period
|
|
|
|
|
|
|
|
|
Vested during period
|
|
|
(390
|
)
|
|
|
(5.8
|
)
|
Forfeited during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Short
Term Incentive Plan
This plan enables eligible employees to receive incentive
benefits in the form of restricted stock in Holdings, cash or
both, as determined by the board of directors or its authorized
committee. The stock portion vests one year from the date
granted. For 2005, $11.6 was awarded under this plan, $7.8 in
restricted stock and $3.8 in cash. The cash portion was treated
as 2005 compensation expense, and $6.9 was expensed for the
stock portion awarded in 2006. The fair value of the unvested
shares at December 31, 2006 was $15.6, based on the value
of Holdings stock and the number of unvested shares.
104
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
The following table summarizes the activity of the restricted
shares under the Short Term Incentive Plan for the twelve months
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Value(1)
|
|
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
Short Term Incentive
Plan
|
|
|
|
|
|
|
|
|
Nonvested at December 29, 2005
|
|
|
|
|
|
|
|
|
Granted during period
|
|
|
465
|
|
|
$
|
7.8
|
|
Vested during period
|
|
|
|
|
|
|
|
|
Exercised during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited during period
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
465
|
|
|
$
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Value represents grant date fair value. |
Dividends
on Restricted Share Grants
The Company does not currently have plans to pay dividends in
the foreseeable future. However, any dividends declared by
Holdings Board of Directors with respect to common shares
and with respect to any restricted share grants under any of the
Companys compensation plans will be cumulative and paid to
the participants only at the time and to the extent the
participant acquires an interest in, or vests, in any of the
restricted shares.
Union
Equity Participation Plan
As part of certain collective bargaining agreements, Holdings
has established a Union Equity Participation Plan pursuant to
which it will issue shares of its class A common stock for
the benefit of approximately 4,676 employees represented by the
IAM, UAW and IBEW based on benefits determined on the closing
date of the initial public offering. The number of shares issued
will equal 1,034 times the number of employees eligible to
receive stock under the Union Equity Participation Plan.
The following table summarizes the activity of Union Equity
Participation Plan Stock Appreciation Rights for the periods
ended December 29, 2005 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
SARs
|
|
|
Value(1)
|
|
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
Union Equity Participation
Plan
|
|
|
|
|
|
|
|
|
Nonvested at February 7, 2005
(date of inception)
|
|
|
|
|
|
|
|
|
Granted during period(2)
|
|
|
4,835
|
|
|
$
|
125.7
|
|
Vested during period
|
|
|
|
|
|
|
|
|
Exercised during period
|
|
|
|
|
|
|
|
|
Forfeited during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 29, 2005
|
|
|
4,835
|
|
|
|
125.7
|
|
Granted during period
|
|
|
|
|
|
|
|
|
Vested during period(3)
|
|
|
(4,835
|
)
|
|
|
(125.7
|
)
|
Exercised during period
|
|
|
|
|
|
|
|
|
Forfeited during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Value represents the IPO stock
value of $26 per share on closing date of IPO on
November 27, 2006.
|
|
(2)
|
|
Although the UEP plan began in June
2005, no expenses were recorded at that time as the IPO which
triggered the obligation had not yet occurred.
|
|
(3)
|
|
Upon the closing date of the IPO,
all rights to receive stock were considered vested. The share
figure represents the estimated amount of shares that will be
issued to eligible employees on or before March 15, 2007.
|
105
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
The following summarizes pretax income (loss) (in millions):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
U.S.
|
|
$
|
(73.2
|
)
|
|
$
|
(76.6
|
)
|
International
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(71.5
|
)
|
|
$
|
(76.6
|
)
|
|
|
|
|
|
|
|
|
|
The provision for income taxes for the periods ended
December 31, 2006 and December 29, 2005 was estimated
as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Income taxes estimated to be
payable currently
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
10.3
|
|
|
$
|
9.1
|
|
U.S. state and local
|
|
|
0.9
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payable currently
|
|
|
11.2
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
Income taxes estimated to be
payable long term
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
15.0
|
|
|
|
7.2
|
|
U.S. state and local
|
|
|
0.2
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payable long term
|
|
|
15.2
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense
(credit) net
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(88.8
|
)
|
|
|
(2.3
|
)
|
U.S. state and local
|
|
|
(26.5
|
)
|
|
|
(0.3
|
)
|
Foreign
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(114.7
|
)
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
Total (benefit) provision for
income taxes
|
|
$
|
(88.3
|
)
|
|
$
|
13.7
|
|
|
|
|
|
|
|
|
|
|
Annual tax provisions (benefits) include amounts considered
sufficient to pay assessments that may result from examination
of prior year tax returns. A reconciliation of the provision for
income taxes compared with the amounts at the U.S. federal
statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Tax (benefit) at U.S. federal
statutory income tax rate
|
|
$
|
(25.0
|
)
|
|
$
|
(26.8
|
)
|
State and local tax benefit
|
|
|
(16.3
|
)
|
|
|
(3.9
|
)
|
Valuation allowance (reversal)
|
|
|
(40.1
|
)
|
|
|
41.5
|
|
Research and Development Credit
|
|
|
(7.3
|
)
|
|
|
|
|
Other
|
|
|
(0.7
|
)
|
|
|
(0.5
|
)
|
Stock compensation
|
|
|
1.1
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
Total (benefit) provision for
income taxes
|
|
$
|
(88.3
|
)
|
|
$
|
13.7
|
|
|
|
|
|
|
|
|
|
|
106
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Deferred income tax assets and liabilities for the periods ended
December 31, 2006 and December 29, 2005 reflect the
effect of temporary differences between amounts of assets,
liabilities and equity for financial reporting purposes and the
bases of such assets, liabilities and equity as measured by tax
laws, as well as tax loss and tax credit carryforwards.
Temporary differences and carryforwards that gave rise to
deferred tax assets and (liabilities) included the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Long-term contract methods of
income recognition
|
|
$
|
67.9
|
|
|
$
|
28.2
|
|
Post-retirement benefits other
than pensions
|
|
|
12.7
|
|
|
|
12.8
|
|
Pension and other employee benefit
plans
|
|
|
(62.7
|
)
|
|
|
20.2
|
|
Employee compensation accruals
|
|
|
23.3
|
|
|
|
15.8
|
|
Depreciation and amortization
|
|
|
21.5
|
|
|
|
(28.3
|
)
|
Inventory
|
|
|
38.9
|
|
|
|
2.3
|
|
Interest swap contracts
|
|
|
(5.3
|
)
|
|
|
(2.6
|
)
|
State income tax credits
|
|
|
8.1
|
|
|
|
0.4
|
|
Other
|
|
|
2.9
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
107.3
|
|
|
|
47.1
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowances
|
|
|
|
|
|
|
(47.1
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
107.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax detail above is included in the consolidated
balance sheet and supplemental information as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Current deferred tax assets
|
|
$
|
64.9
|
|
|
$
|
3.1
|
|
Current deferred tax liabilities
|
|
|
|
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
Net current deferred tax asset
|
|
|
64.9
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets
|
|
|
117.8
|
|
|
|
29.8
|
|
Non-current deferred tax
liabilities
|
|
|
(75.4
|
)
|
|
|
(30.9
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax asset
(liability)
|
|
$
|
42.4
|
|
|
$
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
The Company made income tax payments of $29.3 and $8.5 in the
periods ended December 31, 2006 and December 29, 2005,
respectively.
A valuation allowance is recorded when it is more likely than
not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of the deferred tax assets
depends on the ability to generate sufficient taxable income of
the appropriate character in the future and in the appropriate
taxing jurisdictions. Due to the loss generated for financial
reporting purposes for the year ending December 29, 2005
and due to the fact that the Company was a new entity, a
valuation allowance had been provided against net deferred tax
assets. A valuation allowance was also recorded on the net
deferred tax assets existing at the June 16, 2005 opening
balance sheet date in the amount of $5.6 ($5.2 and $0.4 for
federal and state, respectively). At December 29, 2005,
Spirit recorded a valuation allowance against the net deferred
tax assets in the amount of $47.1 ($42.8 and $4.3 for federal
and state, respectively). The net change in the respective
valuation allowance for the period ended December 29, 2005
was $41.5 composed of $37.7 federal, net of $2.4 related to
other comprehensive income, and $3.8 state. In the fourth
quarter of 2006, management determined there was sufficient
evidence to release the full valuation allowance on our net
deferred tax assets. Based on the nature of the underlying
deferred tax assets, the reversal of the valuation
107
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
allowance resulted in a decrease to non-current intangibles of
$5.6 and a $75.2 net income tax benefit in net income. As a
result of the acquisition of BAE Aerostructures on April 1,
2006, the Company has operations in the United Kingdom. A
valuation allowance was recorded on the net deferred tax assets
existing at the April 1, 2006 opening balance sheet date of
Spirit Europe in the amount of $5.7. Based on the cumulative
earnings of the UK entity at December 31, 2006, management
determined that a full valuation allowance against the net
deferred tax assets at the opening balance sheet date was no
longer necessary. As a result, the $5.7 was recorded as a
reduction to goodwill in the fourth quarter of 2006. This
reduction was partially offset by fluctuations in exchange rates
between the British pound and the U.S. dollar.
As allowed under APB 23, Accounting for Income
Taxes-Special Areas and SFAS 109, management has
maintained a permanent reinvestment strategy as it relates to
the Companys foreign operations. As such, deferred taxes
have not been provided on unremitted earnings of our U.K.
subsidiary. As indicated in Critical
Accounting Policies Income Tax in accordance
with SFAS No. 109, Accounting for Income Taxes
and SFAS No. 5, Accounting for
Contingencies, we establish reserves for certain tax
contingencies when, despite our view that the tax return
positions are fully supportable, we anticipate that certain
positions may be challenged by the various taxing authorities
and it is probable that our positions may not be fully
sustained. The reserves are adjusted quarterly to reflect
changing facts and circumstances, such as the progress of a tax
audit, case law developments and new or emerging legislation. We
believe that the current tax reserves of $21.6 are adequate and
reflect the most probable outcome of known tax contingencies at
December 31, 2006. Any additional taxes will be determined
only after the completion of any future tax audits. The timing
of such payments cannot be determined, but we expect that they
will not be made within one year. Accordingly, the tax
contingency liability is included as a long term liability in
our consolidated balance sheet.
The Company is not currently under audit with the Internal
Revenue Service or any State taxing authorities.
Included in the deferred tax assets at December 31, 2006,
net of federal benefit, are $8.1 of state income tax credit
carryforwards comprised of a $5.4 Kansas High Performance
Incentive Program (HPIP) Credit and a $2.7 Kansas R&D
Credit. The Kansas HPIP credit provides a 10% investment tax
credit in a qualified business facility located in Kansas of
which $0.5 expires in 2015 and $4.9 expires in 2016. The $2.7
Kansas R&D Credit is a credit against income tax for
qualifying expenditures in research and development activities
conducted within Kansas and can be carried forward indefinitely
until utilized. Management believes the $8.1 state income
tax credit carryforwards will be utilized before they expire.
|
|
13.
|
Earnings
(Loss) per Share Calculation
|
Basic earnings (loss) per share represents the income (loss)
available to common shareholders divided by the weighted average
number of common shares outstanding during the measurement
period. Diluted earnings per share represents the income
available to common shareholders divided by the weighted average
number of common shares outstanding during the measurement
period while also giving effect to all potentially dilutive
common shares that were outstanding during the period. Holdings
incurred a net loss for the period February 7, 2005 through
December 29, 2005 therefore, all of Holdings
8,866,464 non-vested restricted stock awards granted under the
Executive Incentive Plan and Director Stock Plan, as well as the
contingent stock appreciation rights under the Union Equity
Participation Plan, at December 29, 2005, were excluded
from the computation of diluted loss per share as they were
deemed to be antidilutive.
Subject to preferences that may apply to shares of preferred
stock outstanding at the time, holders of our outstanding common
stock are entitled to any dividend declared by the board of
directors out of funds legally available for this purpose. No
dividend may be declared on the class A or class B
common stock unless at the same time an equal dividend is paid
on every share of class A and class B common stock.
Dividends paid in shares of our common stock must be paid, with
respect to a particular class of common stock, in shares of that
class. We do not
108
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
intend to pay cash dividends on our common stock. In addition,
the terms of our current financing agreements preclude us from
paying any cash dividends on our common stock.
The following table sets forth the computation of basic and
diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from February 7, 2005
|
|
|
|
(Date of Inception)
|
|
|
|
through December 29, 2005
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
Basic & Diluted
EPS
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss available to common
shareholders
|
|
$
|
(90.3
|
)
|
|
|
113.5
|
|
|
$
|
(0.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
Basic EPS
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income available to common
shareholders
|
|
$
|
16.8
|
|
|
|
115.6
|
|
|
$
|
0.15
|
|
Diluted Potential Common
Shares
|
|
|
|
|
|
|
6.4
|
|
|
|
|
|
Diluted
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders + assumed vesting and conversion
|
|
$
|
16.8
|
|
|
|
122.0
|
|
|
$
|
0.14
|
|
Not included in the computation of basic weighted average shares
were 464,943 Short Term Incentive Plan shares, which vested
February 17, 2007.
|
|
14.
|
Related
Party Transactions
|
In June 2005, Spirit paid a subsidiary of Onex a fee of $5.0,
for services performed in connection with the acquisition, as
described in Note 2, which was recorded as a return of
initial capital. Also, the Company has expensed the payment of
service fees of $5.5 and $1.0 to a subsidiary of Onex for
services rendered in the periods ended December 31, 2006
and December 29, 2005, respectively. On November 27,
2006, Spirit terminated the agreement with the Onex subsidiary
with a final payment of $4.0. Management believes the fees
charged were reasonable in relation to the services provided.
As described in Note 8, the Company has a $589.8 term loan
outstanding at December 31, 2006. Prior to
November 27, 2006 this loan was with a subsidiary of Onex
Corporation. During the periods ended December 31, 2006 and
December 29, 2005, the Company paid interest of $47.4 and
$23.5, respectively, to the subsidiary on the term loan.
Management believes the interest charged was reasonable in
relation to the loan provided.
Boeing owns and operates significant information technology
systems utilized by the Company and, as required under the
acquisition agreement, is providing those systems and support
services to Spirit under a transition services agreement. A
number of services covered by the transition services agreement
have now been established by the Company, and the remaining
services are scheduled to be completed during 2007, subject to
renewal options. The Company incurred fees of $38.3 and $38.6
for services performed in 2006 and 2005, respectively. These
amounts included accrued liabilities of $11.8 and $22.1 at
December 31, 2006 and December 29, 2005, respectively.
Purchase Service Agreement (PSA) is an agreement between Spirit
and Boeing in which Spirit would continue to provide certain
functions (e.g., Health Services, Finance Systems, etc.) for
Boeing after the divestiture. These services covered by the
agreement are now being established by Boeing. Boeing paid fees
to Spirit of $0.5 and $2.2 for services performed in 2006 and
2005, respectively.
109
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
The spouse of one of the Companys executives is a special
counsel at a law firm utilized by the Company and at which the
executive was previously employed. The Company paid fees of
$1.4 million and $0.5 million to the firm for the
period ended December 31, 2006 and December 29, 2005,
respectively.
An executive of the Company is a member of the board of
directors of a Wichita, Kansas bank that provides banking
services to Spirit. No fees have been paid to the bank since
inception, which is consistent with commercial terms that would
be available to other unrelated parties.
|
|
15.
|
Commitments,
Contingencies and Guarantees
|
Litigation
Spirit may be involved from time to time in legal proceedings,
claims and litigation arising in the ordinary course of
business. In the opinion of management, the resolution of these
matters will not materially affect the Companys financial
position, results of operations or liquidity.
Age Discrimination
Litigation
A lawsuit has been filed against Spirit, the Onex Corporation,
and Boeing alleging age discrimination in the hiring of
employees by Spirit when Boeing sold its Wichita commercial
division to Onex. The complaint was filed in U.S. District Court
in Wichita, Kansas and seeks
class-action
status, an unspecified amount of compensatory damages and more
than $1.5 billion in punitive damages. The purchase
agreement between Onex and Boeing requires Spirit to indemnify
Boeing for damages against Boeing in the suit. The Company
intends to vigorously defend itself in this matter. Although
discovery has not yet begun, management believes the resolution
of these matters will not materially affect the Companys
financial position, results of operation or liquidity.
On December 22, 2006, a lawsuit was filed against Spirit,
Boeing, Onex and the UAW alleging age, disability, sex and race
discrimination as well as breach of the duty of fair
representation, retaliatory discharge, violation of FMLA
(retaliation) and ERISA. The complaint was filed in the U.S.
District Court in the Eastern District of Oklahoma. The Company
intends to vigorously defend itself in this matter. Management
believes the resolution of this matter will not materially
affect the Companys financial position, results of
operation or liquidity.
Commitments
The Company leases equipment and facilities under various
non-cancelable capital and operating leases. The capital leasing
arrangements extend through 2009. Minimum future lease payments
under these leases at December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Present
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Value
|
|
|
Interest
|
|
|
Total
|
|
|
2007
|
|
$
|
5.8
|
|
|
$
|
18.0
|
|
|
$
|
1.3
|
|
|
$
|
19.3
|
|
2008
|
|
$
|
4.7
|
|
|
$
|
9.4
|
|
|
$
|
0.2
|
|
|
$
|
9.6
|
|
2009
|
|
$
|
3.4
|
|
|
$
|
1.0
|
|
|
$
|
|
|
|
$
|
1.0
|
|
2010
|
|
$
|
2.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2011
|
|
$
|
1.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2012 and thereafter
|
|
$
|
4.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Spirit has aggregate capital commitments of $71.4 and $73.7 at
December 31, 2006 and December 29, 2005, respectively.
The Company paid $2.0 in interest expense related to the capital
leases for the period ending December 31, 2006.
110
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Service
and Product Warranties
The Company provides service and warranty policies on its
products. Liability under service and warranty policies is based
upon specific claims and a review of historical warranty and
service claim experience. Adjustments are made to accruals as
claim data and historical experience change. In addition, the
Company incurs discretionary costs to service its products in
connection with product performance issues.
Guarantees
Contingent liabilities in the form of letters of credit, letters
of guarantee and performance bonds have been provided by the
Company. As of December 31, 2006 and December 29,
2005, $0.8 and $4.6 was outstanding in respect of these
guarantees, respectively.
Indemnification
The Company has entered into indemnification agreements with
each of its directors, and some of its executive employment
agreements include indemnification provisions. Under those
agreements, the Company agrees to indemnify each of these
individuals against claims arising out of events or occurrences
related to that individuals service as the Companys
agent or the agent of any of its subsidiaries to the fullest
extent legally permitted.
Environmental
The Company is subject to laws and regulations concerning the
environment and to the risk of environmental liability inherent
in activities relating to past and present operations. Under
terms of the acquisition agreement, as described in Note 2,
the Company accepted certain contingent liabilities after having
obtained indemnifications from Boeing.
In December 2005, a federal grand jury sitting in Topeka, Kansas
issued subpoenas regarding the vapor degreasing equipment at the
Companys Wichita, Kansas facility. The governments
investigation appears to focus on whether the degreasers were
operating within permit parameters and whether chemical wastes
from the degreasers were disposed of properly. The subpoenas
cover a time period both before and after the Companys
purchase of the Wichita, Kansas facility. Subpoenas were issued
to Boeing, the Company and individuals who were employed by
Boeing prior to the Boeing acquisition but are now employed by
the Company. The Company is in the process of responding to the
subpoena and is cooperating with the governments
investigation. At this time, the Company does not have enough
information to make any predictions about the outcome of this
matter.
Boeing is under an administrative consent order issued by the
Kansas Department of Health and Environment (KDHE)
to conduct certain soil and groundwater investigation,
remediation and containment efforts at the Companys
Wichita facility, as contaminated groundwater underlies a
majority of the site. Pursuant to this order and its agreements
with the Company, Boeing has a long-term remediation plan in
place and treatment, containment and remediation efforts are
underway. Pursuant to the acquisition agreement, Boeing also
agreed to retain certain obligations regarding environmental
conditions existing at the Wichita facility at the time of the
acquisition. Spirit has entered into an access agreement and an
environmental support agreement necessary to allow Boeing to
conduct work required by the KDHE orders or the retained
obligations. In addition, under the environmental support
agreement, Spirit has agreed to provide Boeing with certain
environmental support services for certain portions of the
Wichita facility which Boeing still owns. These services include
the treatment and transport of industrial wastewater and
transport of sanitary discharges.
In general, under the acquisition agreement, Boeing is
responsible for environmental liabilities caused prior to the
acquisition date and Spirit is responsible for environmental
liabilities caused after that date, subject to certain
exceptions. For example, the acquisition agreement specifies
certain restricted areas at the Wichita facility, including a
construction demolition landfill, where Spirit has agreed to
certain restrictions on our activities. In the
111
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
event Spirit conducts certain activities in these specified
areas, environmental liabilities and costs (such as
environmental disposal costs) may be apportioned between Spirit
and Boeing depending on the activity conducted, the location of
the activity and when the environmental condition first existed.
If Spirit performs certain activities in specified areas, the
Company will share certain excess disposal costs with Boeing.
However, with respect to those excess costs which will be shared
equally, Spirits liability is limited to $.75 per
year through June 16, 2008, and $2.0 per year
thereafter. In addition, in the event the Companys
activities in certain areas result in asbestos abatement or
disposal costs for demolition debris contaminated with lead,
Spirit will bear 100% of the costs unless the activities are
necessary in response to an act of God.
Boeings obligations to reimburse Spirit for certain
environmental liabilities and costs are subject to certain
conditions, including that the Company minimize disposal costs
and reuse soil to the extent practicable.
Also, in the event that Spirit contributed to an environmental
liability for which Boeing also has liability, each company will
be responsible for its proportional allocation of the liability.
Spirit is responsible for certain damage to Boeings onsite
remediation activities resulting from interference with or
damage to them.
Under the acquisition agreement, Spirit is responsible for any
environmental liability caused at the Tulsa and McAlester
facilities after the date of the acquisition. In the event that
Spirit contributed to any environmental liability at these
facilities for which Boeing also had an environmental liability,
each Company will be responsible for its proportional allocation
of the damage.
Boeing has agreed to indemnify Spirit for known environmental
liabilities at the Tulsa and McAlester facilities in existence
as of the date of the acquisition or which were identified in
the Phase II environmental site assessments that were
conducted at the Oklahoma facilities in October 2005. Boeing
also agreed to indemnify Spirit for environmental liabilities at
these facilities in existence as of the acquisition date but
unknown to Boeing as of such date, as long as Spirit gives it
notice of any such liability on or before January 16, 2013.
The Company also has insurance to cover costs incurred for
certain environmental matters. Although the effect on operating
results and liquidity, if any, cannot be reasonably estimated,
management believes, based on current information, that these
environmental matters should not have a material adverse effect
on the Companys consolidated financial position,
operations, or liquidity.
Bonds
The Company utilizes Industrial Revenue Bonds (IRBs)
issued by the City of Wichita to finance the purchase
and/or
construction of certain real and personal property at the
Wichita site. Tax benefits associated with IRBs include a
provision for a ten year property tax abatement and a sales tax
exemption from the Kansas Department of Revenue. The Company
recorded the property on its consolidating balance sheet, along
with a capital lease obligation to repay the proceeds of the
IRB. The Company also purchased the IRBs and therefore is the
Bondholder as well as the Borrower/ Lessee of the property
purchased with the IRB proceeds. As the right of offset exists
on these bonds, no net debt is reflected.
Spirit also utilized a Kansas Development Finance Authority
(KDFA) bond in the amount of $80.0, issued by the
KDFA. Tax benefits associated with the KDFA bond include a
rebate of payroll taxes from the Kansas Department of Revenue. A
subsidiary of the Company also issued a bond with identical
principal, terms and conditions to the KDFA. The two bonds
legally offset and therefore, in accordance with FASB
Interpretation No. 39, the principal and interest on the
bonds have been offset in these consolidated financial
statements.
112
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
|
|
16.
|
Significant
Concentrations of Risk
|
Economic
Dependence
Spirit has one major customer (Boeing) that accounts for more
than 90 percent of the revenue for the periods ending
December 31, 2006 and December 29, 2005 and
approximately 67 percent and 70 percent of accounts
receivable at December 31, 2006 and December 29, 2005,
respectively.
|
|
17.
|
Supplemental
Balance Sheet Information
|
Accrued expenses and other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 29,
|
|
|
|
2006
|
|
|
2005(1)
|
|
|
Accrued expenses
|
|
|
|
|
|
|
|
|
Accrued wages and bonuses
|
|
$
|
35.3
|
|
|
$
|
21.9
|
|
Accrued fringe benefits
|
|
|
91.0
|
|
|
|
65.1
|
|
Accrued interest
|
|
|
3.3
|
|
|
|
9.2
|
|
Advance payments - B787 (2)
|
|
|
12.6
|
|
|
|
|
|
Workers compensation
|
|
|
8.6
|
|
|
|
|
|
Other
|
|
|
19.2
|
|
|
|
29.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
170.0
|
|
|
$
|
125.6
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
Pension obligation
|
|
$
|
19.9
|
|
|
$
|
52.7
|
|
Post-employment benefit obligation
|
|
|
33.8
|
|
|
|
33.6
|
|
Federal income taxes - long-term
|
|
|
21.6
|
|
|
|
7.2
|
|
Deferred revenue and other
deferred credits
|
|
|
36.0
|
|
|
|
|
|
Other
|
|
|
0.5
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
111.8
|
|
|
$
|
108.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2005, unreserved sick leave of $14.2 was recorded in other
liabilities. In 2006, unreserved sick leave was recorded in
accrued fringe benefits. |
|
(2) |
|
Represents the current portion of the $600.0 advance payment
received from Boeing for the B787 Supply Agreement. |
Spirit operates in three principal
segments: Fuselage Systems, Propulsion Systems
and Wing Systems. Essentially all revenues in the three
principal segments are with Boeing, with the exception of Wing
Systems, which includes revenues from Airbus in the U.K. All
other activities fall within the All Other segment, principally
made up of sundry sales of miscellaneous services and the KIESC.
The Companys primary profitability measure to review a
segments operating performance is operating income before
unallocated corporate selling, general and administrative
expenses and unallocated research and development. Unallocated
corporate selling, general and administrative expenses include
centralized functions such as accounting, treasury and human
resources that are not specifically related to our operating
segments nor are they allocated in measuring the operating
segments profitability and performance and operating
margins.
113
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
Spirits Fuselage Systems segment includes development,
production and marketing of forward, mid- and rear fuselage
sections and systems, primarily to aircraft OEMs, as well as
related spares and MRO services.
Spirits 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.
Spirits Wing Systems segment includes development,
production and marketing of wings and wing components (including
flight control surfaces) primarily to aircraft OEMs, as well as
related spares and MRO services.
The Companys segments are consistent with the organization
and responsibilities of management reporting to the chief
operating decision-maker for the purpose of assessing
performance. The Companys definition of segment operating
income differs from operating income as presented in its primary
financial statements and a reconciliation of the segmented and
consolidated results is provided in the table set forth below.
Most selling, general and administrative expenses (SG&A),
and all interest expense/(income), related financing costs and
income tax amounts are not allocated to the operating segments.
While some working capital accounts are maintained on a segment
basis, much of the Companys assets are not managed or
maintained on a segmented 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 maintained and
managed on a consolidated basis and generally do not pertain to
any particular segment. Raw materials and certain component
parts are used in the production of aerostructures 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 Companys productive assets, depreciation expense
(included in fixed manufacturing costs and general and
administrative expenses) and capital expenditures, no allocation
of these amounts has been made solely for purposes of segment
disclosure requirements. Segment Data is not presented for
periods prior to the Boeing Acquisition as Boeing Wichita did
not maintain separate business segments.
114
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
The following table shows segment information:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
|
|
Period from June 17,
|
|
|
|
|
|
|
2005 through
|
|
|
|
December 31, 2006
|
|
|
December 29, 2005
|
|
|
Segment
Revenues
|
|
|
|
|
|
|
|
|
Fuselage Systems
|
|
$
|
1,570.0
|
|
|
$
|
637.7
|
|
Propulsion Systems
|
|
|
887.7
|
|
|
|
372.2
|
|
Wing Systems
|
|
|
720.3
|
|
|
|
170.0
|
|
All Other
|
|
|
29.7
|
|
|
|
27.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,207.7
|
|
|
$
|
1,207.6
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
(Loss)(1)
|
|
|
|
|
|
|
|
|
Fuselage Systems
|
|
$
|
112.5
|
|
|
$
|
43.7
|
|
Propulsion Systems
|
|
|
33.7
|
|
|
|
24.5
|
|
Wing Systems
|
|
|
11.8
|
|
|
|
5.1
|
|
All Other
|
|
|
4.3
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
162.3
|
|
|
|
72.1
|
|
Unallocated corporate SG&A(2)
|
|
|
(216.5
|
)
|
|
|
(138.9
|
)
|
Unallocated research and
development
|
|
|
(2.1
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
Total operating income
(loss)
|
|
$
|
(56.3
|
)
|
|
$
|
(67.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The fiscal year 2006 operating income (loss) for Fuselage
Systems, Propulsion Systems, Wing Systems, and All Other include
Union Equity Plan (UEP) charges of $172.9, $103.1, $44.9, and
$1.0, respectively. |
|
(2) |
|
Included in 2006 Unallocated corporate SG&A expenses are a
fourth quarter charge of $4.0 million related to the termination
of the intercompany agreement with Onex and a charge of $4.3
million related to the Executive Incentive Plan. Both of these
charges relate to the Companys IPO. |
115
Spirit
AeroSystems Holdings, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
($ in
millions other than per share and per hour amounts)
|
|
19.
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
December 31,
|
|
|
September 28,
|
|
|
June 29,
|
|
|
March 30,
|
|
2006
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Revenues
|
|
$
|
851.8
|
|
|
$
|
829.7
|
|
|
$
|
855.4
|
|
|
$
|
670.8
|
|
Operating income (loss)
|
|
$
|
(240.4
|
)
|
|
$
|
77.5
|
|
|
$
|
56.0
|
|
|
$
|
50.6
|
|
Net income (loss)
|
|
$
|
(69.4
|
)
|
|
$
|
34.0
|
|
|
$
|
29.7
|
|
|
$
|
22.5
|
|
Earnings per share, basic
|
|
$
|
(0.58
|
)
|
|
$
|
0.30
|
|
|
$
|
0.26
|
|
|
$
|
0.20
|
|
Earnings per share, diluted
|
|
$
|
(0.58
|
)
|
|
$
|
0.28
|
|
|
$
|
0.25
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
For the Period June 17,
|
|
|
|
December 29,
|
|
|
2005 through
|
|
2005
|
|
2005
|
|
|
September 29, 2005(a)
|
|
|
Revenues
|
|
$
|
557.4
|
|
|
$
|
650.2
|
|
Operating income (loss)
|
|
$
|
(39.0
|
)
|
|
$
|
(28.8
|
)
|
Net income (loss)
|
|
$
|
(46.9
|
)
|
|
$
|
(43.4
|
)
|
Earnings per share, basic
|
|
$
|
(0.42
|
)
|
|
$
|
(0.38
|
)
|
Earnings per share, diluted
|
|
$
|
(0.42
|
)
|
|
$
|
(0.38
|
)
|
|
|
|
(a) |
|
Spirit AeroSystems Holdings, Inc. was incorporated in the state
of Delaware on February 7, 2005 and commenced operations on
June 17, 2005 through the acquisition of The Boeing
Companys operations in Wichita, Kansas, Tulsa, Oklahoma
and McAlester, Oklahoma. |
116
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
The Boeing Company
Chicago, Illinois
We have audited the accompanying statements of assets and
liabilities of the Wichita Division of the Boeing Commercial
Airplanes Group (the Division) of The Boeing Company
(the Company) as of June 16, 2005 and
December 31, 2004, and the related statements of cost
center activity for the period from January 1, 2005 through
June 16, 2005, and for the years ended December 31,
2004 and 2003 (the Divisions financial
statements). The Divisions financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Division is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Divisions internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the accompanying financial
statements, the financial statements were prepared to present
assets and liabilities of the Division, along with the related
cost center activity, and are not necessarily indicative of the
conditions that would have existed or the results of operations
if the Division had been operated as a standalone company during
the periods presented. Portions of certain expenses represent
allocations made from, and are applicable to, the Company as a
whole.
In our opinion, the Divisions financial statements present
fairly, in all material respects, the assets and liabilities of
the Division as of June 16, 2005 and December 31,
2004, and the cost center activity for the period from
January 1, 2005 through June 16, 2005, and for the
years ended December 31, 2004 and 2003, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ Deloitte
& Touche LLP
Seattle, Washington
June 27, 2006
117
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
STATEMENT OF ASSETS AND LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
June 16,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in millions)
|
|
|
ASSETS:
|
Cash
|
|
$
|
0.8
|
|
|
$
|
3.0
|
|
Accounts receivable
|
|
|
0.4
|
|
|
|
2.0
|
|
Inventories
|
|
|
487.6
|
|
|
|
524.6
|
|
Long-term assets
|
|
|
3.2
|
|
|
|
3.0
|
|
Property, plant, and
equipment net
|
|
|
528.4
|
|
|
|
511.0
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,020.4
|
|
|
|
1,043.6
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
Accounts payable
|
|
|
57.4
|
|
|
|
45.7
|
|
Accrued expenses
|
|
|
2.0
|
|
|
|
6.1
|
|
Employee vacation
|
|
|
40.3
|
|
|
|
47.5
|
|
Accrued employee-related expenses
|
|
|
7.9
|
|
|
|
8.4
|
|
KIESC minority interest
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
108.1
|
|
|
|
108.2
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
$
|
912.3
|
|
|
$
|
935.4
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
118
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
STATEMENTS OF COST CENTER ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
January 1, 2005
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
June 16,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Amounts in millions)
|
|
|
COST OF PRODUCTS
TRANSFERRED:
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
|
|
$
|
326.6
|
|
|
$
|
688.8
|
|
|
$
|
733.9
|
|
Material
|
|
|
503.0
|
|
|
|
885.1
|
|
|
|
821.6
|
|
Overhead and nonlabor
|
|
|
334.3
|
|
|
|
500.4
|
|
|
|
508.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products transferred
|
|
|
1,163.9
|
|
|
|
2,074.3
|
|
|
|
2,063.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION OF ENERGY
SERVICES Net
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
PERIOD EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
79.7
|
|
|
|
155.1
|
|
|
|
116.7
|
|
Internal application development
|
|
|
11.0
|
|
|
|
18.1
|
|
|
|
17.3
|
|
757 production phase out
|
|
|
|
|
|
|
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total period expenses
|
|
|
90.7
|
|
|
|
173.2
|
|
|
|
144.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INCURRED AND ALLOCATED
COSTS OF THE WICHITA DIVISION
|
|
$
|
1,254.4
|
|
|
$
|
2,247.5
|
|
|
$
|
2,208.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
119
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
JUNE 16, 2005 AND DECEMBER 31, 2004 AND 2003
(Amounts are in millions unless otherwise indicated)
The Wichita Division (Division), which is not a
separate legal entity, is operated as a cost center within the
Boeing Commercial Airplanes Group (BCA) of The
Boeing Company (Boeing). The Division includes the
manufacturing operations of BCA located in Wichita, Kansas;
Tulsa, Oklahoma, and McAlester, Oklahoma, along with certain
assets and operations of the Shared Services Group
(SSG) of Boeing. The Division has historically been
an internal supplier of parts and assemblies to the 737, 747,
757, 767, and 777 Airplane Programs of BCA, with very few sales
to third-party customers. The Division has also been selected as
a supplier to the 787 Airplane Program currently under
development by Boeing. These financial statements, hereafter
referred to as the Financial Statements, reflect the
standalone financial statements of the Division. Certain amounts
in these financial statements have been allocated from
Boeings financial statements. Allocations are generally
based on the specific identification of costs, assets and
liabilities, as well as on headcount and direct labor dollars
where specific attribution is not practical. The General and
Administrative (G&A) expense included in these
statements is an allocation of Boeing Corporate
(Corporate), SSG and BCA G&A expense
(collectively Boeing G&A).
Management believes these allocations are reasonable, but may
not be indicative of costs that would have been incurred had the
Division been operated as a standalone business.
Most support function costs represent allocations to the
Division. However, there is a portion of these support functions
that occur at the Division, for example, general management,
human resources, and finance that provide support directly to
product-related organizations.
Boeing entered into an Asset Purchase Agreement
(APA) dated February 22, 2005, as revised
June 15, 2005, to sell the Division to Mid-Western Aircraft
Systems, Inc. (Mid-Western), an indirect
majority-owned subsidiary of Onex Partners L.P. The accompanying
financial statements have been prepared with reference to this
agreement and present assets and liabilities as well as a
statement of cost center activities. The accompanying financial
statements may not be indicative of the conditions that would
have existed or the results of operations if the Division had
been operated as a standalone company during the periods
presented.
On June 16, 2005, Boeing completed the sale of
substantially all of the assets at BCAs facilities in
Wichita, Kansas and Tulsa and McAlester, Oklahoma under the APA
to Mid-Western, which was subsequently named Spirit Aerosystems,
Inc. (Spirit). Transaction consideration given to Boeing
included cash of approximately $900, together with the transfer
of certain liabilities and the establishment of long-term supply
agreements. All assets and liabilities presented in these
financial statements were included in the sale.
Statements of cash flows have not been presented as the Division
participated in Boeings centralized cash management
systems and all its cash management activities were funded by
Boeing. Other than cash on hand to meet immediate cash
requirements the Divisions cash flow information is
estimated in Note 9 using a change in net working capital.
Transactions with Boeing Transactions with
Boeing were conducted on a noncash basis, and generally involved
performance under intracompany arrangements between the Division
and Boeing.
Certain costs were incurred by Boeing on the Divisions
behalf. To the extent practical, these costs are discretely
transferred to the Division, but in some cases an allocation
methodology is used to transfer the costs to the Division. These
costs fall into three major categories and all such costs have
been included in these financial statements.
The first category represents costs directly related to the
activities of the Division, which were incurred by Boeing and
transferred to the Division for administrative purposes
including payroll, accounts payable, travel and
120
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
Continued
employee benefits such as pension costs, and medical coverage.
These costs are primarily included in Cost of Products
Transferred and the balance included in Period
Expenses.
A second category of costs incurred by Boeing on the
Divisions behalf represented the purchase of parts from
Boeing that are incorporated into the products of the Division.
The cost of these parts is treated the same as the cost of parts
acquired from third parties and is included in Cost of
Products Transferred.
The third category of costs incurred by Boeing on the
Divisions behalf are either general and administrative or
relate to support services provided by Boeing for the benefit of
the Division. These costs, except for those identified as
G&A, are included in Cost of Products
Transferred. These allocated costs are described in detail
below. The following table reconciles total G&A and Internal
Application Development (IAD) reported on the
Statement of Cost Center Activity to the detailed cost tables
that follow. IAD costs are certain costs incurred at the
Division to improve processes or internal applications rather
than product.
Table
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
Incurring Org and Description
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
Allocated WHQ G&A
|
|
$
|
15.9
|
|
|
$
|
31.2
|
|
|
$
|
31.7
|
|
Allocated WHQ
Share-Based Plans
|
|
|
20.1
|
|
|
|
19.4
|
|
|
|
8.9
|
|
Allocated WHQ
Share-Value Trust
|
|
|
2.0
|
|
|
|
3.9
|
|
|
|
4.0
|
|
Allocated BCA G&A
|
|
|
26.7
|
|
|
|
53.2
|
|
|
|
46.9
|
|
SSG G&A included in SSG
Support Allocations (below)
|
|
|
5.5
|
|
|
|
29.6
|
|
|
|
30.0
|
|
Division Incurred
G&A
|
|
|
9.5
|
|
|
|
17.8
|
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Division G&A Expense
|
|
$
|
79.7
|
|
|
$
|
155.1
|
|
|
$
|
116.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
Incurring Org and Description
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
Division Incurred
IAD (A period expense on the Statement of Cost Center Activity)
|
|
$
|
17.3
|
|
|
$
|
18.1
|
|
|
$
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
Continued
Support Allocations Boeing provides certain
services to the Division and pays for certain expenditures on
its behalf. The following table summarizes and describes the
approximate amounts billed to the Division.
Table
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
Incurring Org and Description
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
BCA CAD/ CAM and Other
|
|
$
|
4.9
|
|
|
$
|
4.3
|
|
|
$
|
2.1
|
|
SSG Workplace Services
|
|
|
114.6
|
|
|
|
233.4
|
|
|
|
212.9
|
|
SSG Information
Technology Services
|
|
|
25.1
|
|
|
|
46.3
|
|
|
|
54.3
|
|
SSG Administrative
Services
|
|
|
21.2
|
|
|
|
41.9
|
|
|
|
42.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Support Allocations
(including SSG G&A)
|
|
|
165.8
|
|
|
|
325.9
|
|
|
|
312.1
|
|
Less SSG G&A Allocations
included in Cost Allocation Table(1) above
|
|
|
5.5
|
|
|
|
29.6
|
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SSG Costs and BCA CAD/ CAM
and Other included in Division Cost of Products Transferred
|
|
$
|
160.3
|
|
|
$
|
296.3
|
|
|
$
|
282.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BCA Computer Aided Design (CAD), BCA Computer Aided
Manufacturing (CAM), and other cost allocated
include calibration and certification costs and computer-aided
design costs.
SSG costs (including an element of SSG-incurred G&A) were
allocated to the Division based on SSGs cost collection
and cost allocation processes which are primarily based on
pooling of common costs and allocating pooled costs based on a
measure of usage. SSG Workplace Services includes the cost of
providing facilities, food, mail and in-plant transportation
services, security and fire protection, technical services and
safety, health, and environmental affairs. SSG Information
Technology Services includes business systems and computing and
network operations. SSG Administrative Services includes
external transportation services, enterprise human resource
management, payroll services and learning, training, and
development. An estimate of the SSG G&A included in the
above support allocations were recorded by the Division as
period expense in accordance with established Boeing-wide
practice. The remaining SSG-related amounts as well as the BCA
CAD/CAM allocations were included in the Overhead and nonlabor
portion of Cost of Products Transferred.
In 2005, SSG revised its methodology for allocating G&A
costs. As a result of the revision, the January 1 through
June 16, 2005 SSG G&A Allocations amount recorded was
$5.5 rather than $14.8.
Period Expenses Incurred at the Division
These costs are not inventoriable costs and therefore are not
included in Costs of Products Transferred.
Table
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
Incurring Org and Description
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
Division Incurred
G&A (Included in Table(1))
|
|
$
|
9.5
|
|
|
$
|
17.8
|
|
|
$
|
(4.8
|
)
|
Division Incurred
IAD (Included in Table(2))
|
|
|
11.0
|
|
|
|
18.1
|
|
|
|
17.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20.5
|
|
|
$
|
35.9
|
|
|
$
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
Continued
Division G&A costs are incurred at the Division and
include salaries and costs associated with G&A-type
functions such as site financial accounting. IAD costs are costs
incurred at the Division to improve processes or internal
applications rather than products.
Period Expense Incurred by Boeing not Billed or Incurred at
the Division For purposes of these statements,
certain costs have been allocated to the Division. These costs
have not been billed to or incurred by, nor is the Division
obligated to pay for these costs in the past or in the future.
These allocations are conducted on a noncash basis and generally
involve the performance of corporate-wide functions that have no
direct relationship to the Divisions cost center
activities. These costs are included in the total
Division G&A expense (see Table 1).
Table
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
Incurring Org and Description
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
Corporate G&A
|
|
$
|
15.9
|
|
|
$
|
31.2
|
|
|
$
|
31.7
|
|
Corporate Share-Based
Plans
|
|
|
20.1
|
|
|
|
19.4
|
|
|
|
8.9
|
|
Corporate Share-Value
Trust
|
|
|
2.0
|
|
|
|
3.9
|
|
|
|
4.0
|
|
BCA G&A
|
|
|
26.7
|
|
|
|
53.2
|
|
|
|
46.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Period Expense incurred by
Boeing not billed or incurred
|
|
$
|
64.7
|
|
|
$
|
107.7
|
|
|
$
|
91.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate costs allocated include centralized services such as
government affairs, legal, tax, office of internal governance,
international relations, communications and advertising, CEO and
staff, investor relations, and miscellaneous liability,
property, and foreign insurances. Corporate Share-Based plans
and Share-Value Trust are described in Note 8 below.
BCA G&A costs allocated include business operations, sales
and marketing, contracts, finance, communications, and BCA
office of the president.
|
|
2.
|
Significant
Accounting Policies
|
Principles of Consolidation The consolidated
financial statements of the Division include the accounts of the
majority-owned interest in Kansas Industrial Energy Supply
Company (KIESC). The KIESC (formerly known as
Wichita Gas Utility) arrangement has been in place since 1980.
It was formed to purchase gas directly from the gas suppliers
rather than through the city of Wichita. The current arrangement
gives participants in KIESC more control over their cost. The
agreement between the participating companies is titled
Tenants-in-Common
Management Agreement. It designates the arrangement as a
tenancy in common and stipulates that nothing in the agreement
should be construed as creating a joint venture, association, or
partnership. All assets are owned in common. Nothing can be
severed in a way that hurts the other tenants. Each tenant is
prohibited from selling or assigning their interest to another
party without the approval of the other tenants. The Division
owned 79% of all outstanding interests and considered that a
controlling share. 100% of KIESCs results have been
consolidated in these financial statements. Accordingly, the
Divisions intercompany profits, transactions, and balances
have been eliminated with the consolidation of KIESC. The result
of KIESC income and expense is shown as Provision of Energy
Services, Net. 77.77% of KIESC was sold on June 16, 2005 in
connection with the transaction, with the
123
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
Continued
remainder retained by Boeing to support Boeings remaining
operations in Wichita, Kansas. KIESCs net assets are shown
below:
Table
(6)
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
through
|
|
|
|
|
Incurring Org and Description
|
|
6/16/2005
|
|
|
12/31/04
|
|
|
KIESC Total Net Assets
|
|
$
|
2.7
|
|
|
$
|
2.2
|
|
|
|
|
|
|
|
|
|
|
Use of Estimates The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that directly affect the amounts
reported in the financial statements. Actual results could
differ from those estimates.
Cost of Products Transferred As a cost center
to the BCA Airplane Programs, the Division does not have sales
to parties other than Boeing. For purposes of these financial
statements, the Division recognizes cost of products transferred
in an amount equal to the cost assigned. Through May 31,
2005, the Wichita Site Cost of Products Transferred was
recognized when completed parts and assemblies were received or
the scheduled receipt date occurred at BCA Airplane
Programs Final Assembly Areas. On June 1, 2005 this
treatment changed to reflect the provisions of the supply
agreement that was to be implemented post-divestiture. From
June 1, 2005 to June 16, 2005, the Wichita Site Cost
of Products Transferred was recognized when completed parts and
assemblies were shipped from the Wichita plant. The Tulsa and
McAlester Sites Cost of Products Transferred is recognized when
completed parts and assemblies are shipped from the site. Costs
of Products Transferred also includes costs assigned to programs
as incurred, for support of non-recurring activities performed
on behalf of the programs. Non-recurring support refers to
activities like design or design and build of tooling. 787
design activities included in Division Cost of Products
Transferred totals $65.6 for the period from January 1,
2005 through June 16, 2005.
Cost of Products Transferred consists of material, labor,
nonlabor, and site overhead, which includes fringe benefits,
production-related indirect and plant management salaries, and
plant services. Labor cost includes direct and indirect labor,
related fringe costs, and labor bonuses. Fringe benefit
allocations are based on a rate applied to labor dollars. The
rate includes elements such as vacation, holiday, sick leave,
medical, pension, and postretirement medical.
Nonlabor costs included in overhead include cost of shop
supplies, travel, software licensing, equipment depreciation,
perishable tools, and cost allocations (see Transactions
with Boeing above).
Cash Cash primarily consists of balances
maintained by the Divisions consolidated interest in
KIESC. The Division participates in Boeings centralized
cash management systems. Accordingly, the financial statements
exclude cash, debt, interest income, and interest expense
maintained in the centralized cash management systems.
Accounts Receivable Accounts receivable
consist of amounts on KIESC books due from third parties and are
stated at the amount billed to customers, plus any accrued and
unpaid interest. An allowance is provided for based upon a
review of outstanding receivables, historical collection
information, and existing economic conditions.
Inventories Inventories consist of raw
materials and work in process (WIP). Finished goods
are shipped immediately upon completion. Costs of raw materials
and component parts that are identified as obsolete or surplus,
including a provision for anticipated amounts, are included as a
cost of products transferred.
The Divisions Wichita site in-process inventories are
stated at the cost of products based on the stage of completion
within production. The individual elements of inventory (e.g.,
raw material, WIP, and production stores)
124
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
Continued
are valued using a standard cost methodology with any resulting
variances to the standard allocated monthly to cost of products
transferred.
The Divisions Tulsa/McAlester sites in-process inventories
are stated at the cost of products based on the stage of
completion within production. Raw materials are valued based on
an average cost method. Commercial Airplane Programs WIP
inventory is valued based on total actual incurred costs for a
block of aircraft, less the billed amount. The billed amount is
calculated based on the average unit cost of an end-item (e.g.,
737 Slats/ Flaps) for a block of aircraft based on the Estimate
at Completion.
Long-Term Assets Long-term assets consists of
amounts on the KIESC books for investments in marketable
securities. KIESC has the positive intent and ability to hold
these until maturity. They are valued at historical cost,
adjusted for amortization of premiums and accretion of discounts
computed by the level-yield method.
Property, Plant, and Equipment Property,
plant, and equipment are recorded at cost, including applicable
construction-period interest, less accumulated depreciation, and
are depreciated principally over the following estimated useful
lives: new buildings and land improvements, from 10 to
40 years; and new machinery and equipment, from 3 to
20 years. The principal methods of depreciation are as
follows: buildings and land improvements, 150% declining
balance; and machinery and equipment,
sum-of-the-years
digits. The Division periodically evaluates the appropriateness
of remaining depreciable lives assigned to long-lived assets
subject to a management plan for disposition.
The Division reviews long-lived assets, which includes property,
plant, and equipment, for impairments in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Long-lived assets held for sale are
stated at the lower of cost or fair value, less cost to sell.
Long-lived assets held for use are subject to an impairment
assessment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the carrying
value is no longer recoverable based upon the undiscounted
future cash flows of the asset, the amount of the impairment is
the difference between the carrying amount and the fair value of
the asset.
757 Production Phase Out On October 16,
2003, Boeing announced that production of the 757 would end with
the final aircraft to be produced in late 2004. This resulted in
a Division charge to Period Expenses incurred for the year ended
December 31, 2003, of $10.3, $3.5 related to vendor
penalties and $6.8 related to obsolete and excess inventory. The
vendor penalties are expected to be settled in cash by the end
of 2006. The related liabilities are excluded from the Statement
of Assets and Liabilities as they were not assumed in the
acquisition.
Income Taxes Boeing does not allocate income
tax expense and related assets and liabilities to the Division.
In accordance with the APA, the Statement of Net Assets and
Liabilities does not include assets and liabilities related to
income tax. Accordingly, the Statement of Cost Center Activity
does not reflect the effect of income taxes.
Leases The Division has entered into
contracts, having noncancelable lease terms in excess of one
year, for operating leases requiring future rental payments.
Pension and Postretirement Benefits Plan The
Division participates in various pension plans sponsored by
Boeing which cover substantially all employees. Discrete,
detailed information concerning costs of these plans is not
available for the Division but is part of the Overhead and
nonlabor costs allocated by Boeing and included in the Cost of
Products Transferred. The assets and obligations under these
plans are not separately identifiable for the Division.
Boeing also provides certain other postretirement benefit plans
other than pensions which consist principally of health care
coverage for eligible retirees. Discrete, detailed information
concerning costs of these plans is not available for the
Division but is part of the Overhead and nonlabor costs
allocated by Boeing and included in the
125
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
Continued
Cost of Products Transferred. The assets and obligations under
these plans are not separately identifiable for the Division.
Share-Based Plans Division employees
participate in certain of Boeings share-based compensation
plans. In these financial statements, the share-based plan
expenses are accounted for under SFAS 123R, Share-Based
Payment (SFAS 123R) as of January 1,
2005, and under SFAS No. 123, Accounting for
Stock-Based Compensation, for periods prior to
January 1, 2005.
|
|
3.
|
STANDARDS
ISSUED AND NOT YET IMPLEMENTED
|
In November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 151, Inventory Costs an amendment of ARB
No. 43. This Standard requires abnormal amounts of idle
facility expense, freight, handling costs, and wasted material
(spoilage) to be recognized as current period charges.
Additionally, it requires that fixed production overhead costs
be allocated to inventory based on the normal capacity of the
production facility. The provisions of this Standard apply
prospectively and are effective for inventory costs incurred
after January 1, 2006. While the Division believes this
Standard will not have a material effect on its financial
statements, the impact of adopting these new rules is dependent
on events that could occur in future periods, and as such, an
estimate of the impact cannot be determined until the event
occurs in future periods.
Inventories are summarized as follows for the periods ending:
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
through
|
|
|
|
|
|
|
6/16/2005
|
|
|
12/31/2004
|
|
|
Raw materials
|
|
$
|
213.5
|
|
|
$
|
209.1
|
|
Work in process
|
|
|
274.1
|
|
|
|
315.5
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
487.6
|
|
|
$
|
524.6
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
PROPERTY,
PLANT, AND EQUIPMENT
|
Property, plant, and equipment are summarized as follows for the
periods ending:
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
through
|
|
|
|
|
|
|
6/16/2005
|
|
|
12/31/2004
|
|
|
Land
|
|
$
|
5.0
|
|
|
$
|
7.4
|
|
Buildings
|
|
|
709.5
|
|
|
|
718.2
|
|
Machinery and equipment
|
|
|
1,331.7
|
|
|
|
1,371.8
|
|
Construction in progress
|
|
|
63.5
|
|
|
|
15.1
|
|
Less accumulated depreciation
|
|
|
(1,581.3
|
)
|
|
|
(1,601.5
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant, and
equipment net
|
|
$
|
528.4
|
|
|
$
|
511.0
|
|
|
|
|
|
|
|
|
|
|
126
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
Continued
Depreciation expense, which is included in Cost of Products
Transferred, is as follows for the periods ending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
Year
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
Depreciation expense
|
|
$
|
40.3
|
|
|
$
|
90.7
|
|
|
$
|
97.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest capitalized as construction-period property, plant, and
equipment costs is as follows for the periods ending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
Year
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
Interest capitalized
|
|
$
|
2.1
|
|
|
$
|
4.9
|
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Minimum future rental commitments under
operating leases having noncancelable lease terms in excess of
one year aggregated approximately $18.7 at June 16, 2005
and are payable as follows:
|
|
|
|
|
Future Minimum Payments
|
|
|
|
|
6/17/05-12/31/05
|
|
$
|
3.0
|
|
2006
|
|
|
4.3
|
|
2007
|
|
|
2.4
|
|
2008
|
|
|
2.2
|
|
2009
|
|
|
1.4
|
|
2010
|
|
|
0.6
|
|
Thereafter
|
|
|
4.8
|
|
Total rent expense was approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
Year
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
Total rent expense
|
|
$
|
4.3
|
|
|
$
|
9.7
|
|
|
$
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
PENSION
AND POSTRETIREMENT BENEFITS
|
The Division participates in various pension and postretirement
plans sponsored by Boeing which cover substantially all
employees. Discrete, detailed information concerning costs of
these plans is not available for the Division but is part of the
Overhead and nonlabor costs allocated by Boeing and included in
the Cost of Products Transferred. The assets and obligations
under these plans are not separately identifiable for the
Division.
The amounts below represent total Boeing balances. Note that
Boeing uses a September 30 measurement date for its pension
plans.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
9/30/05
|
|
|
9/30/04
|
|
|
Pension plan assets
|
|
$
|
43,484
|
|
|
$
|
38,977
|
|
Pension plan benefit obligation
|
|
|
45,183
|
|
|
|
42,781
|
|
127
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
Continued
Boeing also provides certain other postretirement benefits other
than pensions which consist principally of health care coverage
for eligible retirees. Discrete, detailed information concerning
costs of these plans is not available for the Division but is
part of the Overhead and nonlabor costs allocated by Boeing and
included in the Cost of Products Transferred. The assets and
obligations under these plans are not separately identifiable
for the Division.
The amounts below represent total Boeing balances. Note that
Boeing uses a September 30 measurement date for its
postretirement plans.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
9/30/05
|
|
|
9/30/04
|
|
|
Postretirement benefits plan assets
|
|
$
|
82
|
|
|
$
|
72
|
|
Postretirement benefit obligation
|
|
|
8,057
|
|
|
|
8,135
|
|
Share-Based Plans The following is a
discussion of share-based compensation plans. Qualifying
Division employees may retain eligibility under provisions of
these plans going forward. Under the provisions of the APA,
Boeing will retain these obligations. Division employees
participate in certain of Boeings share-based compensation
plans. In these financial statements, the share-based plan
expenses are accounted for under SFAS 123R, as of
January 1, 2005, using the modified prospective method, and
under SFAS No. 123 for periods prior to
January 1, 2005. The share-based plans are described below.
Share-based plan expense allocated to the Division is included
in the Statement of Cost Center Activity as a Period Expense
classified as G&A.
Performance Shares Performance Shares are
stock units that are convertible to Boeing common stock
contingent upon Boeings stock price performance. If, at
any time up to five years after award, Boeings stock price
reaches and maintains a price equal to 161.0% of the
Boeings stock issue price at the date of the award
(representing a growth rate of 10% compounded annually for five
years), 25% of the Performance Shares awarded are convertible to
Boeing common stock. Likewise, at stock prices equal to 168.5%,
176.2%, 184.2%, 192.5%, and 201.1% of the Boeing stock price at
the date of award, the cumulative portions of awarded
Performance Shares convertible to Boeing common stock are 40%,
55%, 75%, 100%, and 125%, respectively. Performance Shares
awards not converted to Boeing common stock expire five years
after the date of the award; however, the Compensation Committee
of the Boeing Board of Directors may, at its discretion, allow
vesting of up to 100% of the target Performance Shares if
Boeings total shareholder return (stock price appreciation
plus dividends) during the five-year performance period exceeds
the average total shareholder return of the S&P 500 over the
same period.
Beginning with the 2003 grants, all new Performance Shares
awarded are subject to different terms and conditions from those
issued prior to 2003. If at any time up to five years after
award Boeings stock price reaches and maintains for 20
consecutive days a price equal to a cumulative growth rate of
40% above the grant price, 15% of the Performance Shares awarded
are convertible to common stock. Likewise, at cumulative growth
rates above the grant price equal to 50%, 60%, 70%, 80%, 90%,
100%, 110%, 120%, and 125%, the cumulative portion of awarded
shares convertible to Boeing common stock are 30%, 45%, 60%,
75%, 90%, 100%, 110%, 120%, and 125%, respectively. Performance
Share awards not converted to Boeing common stock expire five
years after the date of the award. In the event all stock price
hurdles have not been met at the end of the performance period,
unvested shares may vest based on Boeings Total
Shareholder Return (TSR) performance relative to the
S&P 500. If less than 125% of the grant has vested at the
end of the five-year performance period, an award formula will
be applied to the initial grant based on the percentile rank of
Boeings TSR relative to the S&P 500. This can result
in a vesting of the Performance Shares award up to a total of
125% and only applies if (1) Boeings total
shareholder return during the five-year performance period meets
or exceeds the median total shareholder return of the S&P
500 over the same period and (2) total shareholder return
is in excess of the five-year Treasury Bill rate at the start of
the
128
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
Continued
five-year period. The Division was allocated share-based expense
amounts calculated based on SFAS No. 123 for
Performance Share awards granted to employees of the Division.
The allocated share-based plans expense, which is included in
Period Expense as G&A in the Statement of Cost Center
Activity, was approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
Performance shares
|
|
$
|
17.1
|
|
|
$
|
18.5
|
|
|
$
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ShareValue Trust The ShareValue Trust,
established effective July 1, 1996, is a
14-year
irrevocable trust that holds Boeing common stock, receives
dividends, and distributes to employees appreciation in value
above a 3% per annum threshold rate of return. As of
December 31, 2004, the Trust held 38,982,205 shares of
Boeing common stock, split between two funds,
fund 1 and fund 2.
The Division was allocated ShareValue Trust expense based upon
headcount at the Division. The allocated ShareValue Trust
expense, which is included in Period Expenses as G&A in the
Statement of Cost Center Activity, was approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
Share-value trust
|
|
$
|
2.0
|
|
|
$
|
3.9
|
|
|
$
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Share-Based Compensation Boeing offers
employees stock awards, at no cost to the employee, under its
Career Shares, Learning Together, and Engineering Technical
Fellows stock programs. Additionally, Boeing common stock is
issued or interest is accrued to certain Boeing employees
electing deferrals under certain share-based compensation or
salary deferral plans. The Division was allocated Other
Share-Based Compensation expense based upon headcount at the
Division. The allocated Other Share-Based Compensation expense,
which is included in Period Expenses as G&A in the Statement
of Cost Center Activity, was approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
Other share-based plan totals
|
|
$
|
3.0
|
|
|
$
|
0.9
|
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
Continued
As a cost center, the Divisions cash funding activities
were managed and funded by Corporate. The Divisions cash
impacts are estimated below using a change in net working
capital approach:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
1/1/2005
|
|
|
|
|
|
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
6/16/2005
|
|
|
2004
|
|
|
2003
|
|
|
Cash flow from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany cost of products
transferred
|
|
$
|
(1,163.9
|
)
|
|
$
|
(2,074.3
|
)
|
|
$
|
(2,063.9
|
)
|
Period expenses
|
|
|
(90.7
|
)
|
|
|
(173.2
|
)
|
|
|
(144.3
|
)
|
Net energy services
|
|
|
0.2
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Depreciation
|
|
|
40.3
|
|
|
|
90.7
|
|
|
|
97.4
|
|
Changes in working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (KIESC)
|
|
|
(2.2
|
)
|
|
|
(0.6
|
)
|
|
|
2.3
|
|
Accounts receivable
|
|
|
1.6
|
|
|
|
0.0
|
|
|
|
(0.4
|
)
|
Inventories
|
|
|
37.0
|
|
|
|
4.8
|
|
|
|
5.7
|
|
Prepaid expenses
|
|
|
0.0
|
|
|
|
0.3
|
|
|
|
(0.2
|
)
|
Accounts payable
|
|
|
11.7
|
|
|
|
(11.5
|
)
|
|
|
14.6
|
|
Accrued expenses
|
|
|
(4.1
|
)
|
|
|
(1.9
|
)
|
|
|
3.5
|
|
Employee vacation
|
|
|
(7.2
|
)
|
|
|
0.8
|
|
|
|
0.4
|
|
Accrued employee related expenses
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by operating
activities
|
|
|
(1,177.8
|
)
|
|
|
(2,164.9
|
)
|
|
|
(2,081.8
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(48.2
|
)
|
|
|
(54.4
|
)
|
|
|
(43.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash impact
|
|
$
|
(1,226.0
|
)
|
|
$
|
(2,219.3
|
)
|
|
$
|
(2,125.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
SIGNIFICANT
CONCENTRATIONS OF RISK
|
For all of the periods covered by these financial statements,
all of the Divisions product transfers were to Boeing
Programs. The Division is subject to both operational and
external business environment risks. Operational risks that can
disrupt the ability to make timely delivery of commercial jet
aircraft components and assemblies and meet contractual
commitments include execution of internal performance plans,
product performance risks associated with regulatory
certifications by the U.S. government, other regulatory
uncertainties, collective bargaining disputes, performance
issues with key suppliers and subcontractors, and the cost and
availability of energy resources, such as electrical power.
Aircraft programs, particularly new aircraft models, face the
additional risk of pricing pressures and cost management issues
inherent in the design and production of complex products.
External business environment risks include adverse governmental
import and export policies, factors that result in significant
and prolonged disruption to air travel worldwide, and other
factors that affect the economic viability of the commercial
airline industry. Examples of factors relating to external
business environment risks include the volatility of aircraft
fuel prices, global trade policies, worldwide political
stability and economic growth, acts of aggression that impact
the perceived safety of commercial flight, escalation trends
inherent in pricing, and a competitive industry structure which
results in market pressure to reduce product prices. As of
June 16, 2005, the principal collective bargaining
agreements were with the International Association of Machinists
and Aerospace Workers (IAM) representing 51% of the Division
employees; the Society of Professional Engineering Employees
(SPEEA) representing 34% of the Division employees; The United
Automobile, Aerospace, and Agricultural
130
WICHITA
DIVISION
(A Business Unit of The Boeing Company)
NOTES TO FINANCIAL STATEMENTS
Continued
Implement Workers of America representing 9% of the Division
employees. At the end of June 16, 2005, all Division
employees left the Boeing payroll as a result of the sale of the
Division to Mid-Western and are no longer working under the
terms and conditions of the Boeing labor agreements. Employees
who transferred to Mid-Western were covered by their labor
agreements or employment practices, if no labor agreement was in
place.
The Division is subject to federal and state requirements for
protection of the environment, including those for discharge of
hazardous materials and remediation of contaminated sites. The
costs incurred and expected to be incurred have not had, and are
not expected to have, a material adverse impact.
The provisions of the APA specifically exclude the assumption of
environmental liabilities relating to conditions existing on or
prior to June 16, 2005 and also exclude liabilities arising
from any environmental proceedings pending as of June 16,
2005, as well as any proceeding commenced after June 16,
2005 to the extent arising out of or relating to any act or
omission occurring on or prior to the closing date.
Also, the provisions of the APA specifically exclude liabilities
arising out of any proceedings pending as of June 16, 2005
or that arise after June 16, 2005 to the extent the matter
relates to an act or omission that occurred prior to
June 16, 2005.
131
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
This annual report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
companys registered public accounting firm due to a
transition period established by rules of the Securities and
Exchange Commission for newly public companies.
Evaluation
of Disclosure Controls and Procedures
Our President and Chief Executive Officer and Executive Vice
President and Chief Financial Officer have evaluated our
disclosure controls as of December 31, 2006 and have
concluded that these disclosure controls and procedures are
effective to ensure that information required to be disclosed by
us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported within the time period specified in the SECs
rules and forms. These disclosure controls and procedures
include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the
reports we file or submit is accumulated and communicated to
management, including the President and Chief Executive Officer
and the Executive Vice President and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
Managements
Annual Report on Internal Control over Financial
Reporting
We are not currently required to evaluate our internal control
over financial reporting in the same manner that is currently
required of certain public companies, nor have we performed such
an evaluation. Such an evaluation would include documentation of
internal control activities and procedures over financial
reporting, assessment of design effectiveness of such controls
and testing of operating effectiveness of such controls which
could result in the identification of material weaknesses in our
internal control over financial reporting.
Prior to the Boeing Acquisition, Boeing Wichita relied on
Boeings shared services group for certain business
processes associated with its financial reporting including
treasury, income tax accounting and external reporting. Since
the Boeing Acquisition, we have had to develop these and other
functional areas as a stand alone entity including the necessary
processes and internal control to prepare our financial
statements on a timely basis in accordance with U.S. GAAP.
Generally accepted auditing standards define a material weakness
as a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial
statements will not be prevented or detected.
In connection with the issuance of our December 29, 2005
and June 29, 2006 financial statements in the third quarter
of 2006, we concluded that we had a material weakness in our
internal control over financial reporting as described below.
|
|
|
|
|
We did not maintain effective controls over our determination of
the fair values ascribed for financial reporting purposes to
stock compensation awards granted to our employees and directors
through June 29, 2006 in accordance with
SFAS No. 123(R), Share Based Payment.
Specifically, we did not properly estimate the fair values of
these awards in determining the accuracy of our stock
compensation expense under SFAS No. 123(R). This
control deficiency resulted in a restatement of our financial
results as of December 29, 2005 and June 29, 2006 and
for the periods then ended to adjust selling, general and
administrative expenses, income taxes and equity accounts as
well as our earnings per share and stock compensation financial
statement disclosures.
|
During the third quarter of 2006, we began to remediate the
material weakness associated with determining the fair value of
our stock compensation awards. These remediation efforts
included the development of a valuation methodology and
corresponding model to determine the fair value of our
underlying equity on a per share basis at each of our equity
award grant dates. In addition, we have implemented additional
corporate accounting oversight,
132
monitoring and review procedures to validate the fair values and
resulting stock compensation expense to be recorded in
accordance with SFAS No. 123(R). As a result, we
believe that this material weakness has been remediated.
Changes
in Internal Controls over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during the fourth quarter of 2006, other
than the remediation efforts described above, that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
133
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
Information concerning the directors of Spirit AeroSystems
Holdings, Inc. will be provided in Spirits proxy statement
for its 2007 annual meeting of stockholders, which will be filed
with the Securities and Exchange Commission no later than
120 days after the end of the fiscal year, and that
information is hereby incorporated by reference.
Information concerning the executive officers of Spirit is
included in Part I of this Report on
Form 10-K.
Information concerning compliance with Section 16(a) of the
Securities Act of 1934 will be provided in Spirits proxy
statement for its 2007 annual meeting of stockholders which will
be filed with the Securities and Exchange Commission no later
than 120 days after the end of the fiscal year, and that
information is hereby incorporated by reference.
The Company has adopted a Code of Ethics that applies to the
Companys Principal Executive Officer, Principal Financial
Officer, Principal Accounting Officer, and persons performing
similar functions. A copy of the Code of Ethics is available on
the Companys website at www.spiritaero.com under the
Investor Relations link, and any waiver from the
Code of Ethics will be timely disclosed on the Companys
website as will any amendments to the Code of Ethics.
|
|
Item 11.
|
Executive
Compensation
|
Information concerning the compensation of directors and
executive officers of Spirit AeroSystems Holdings, Inc. will be
provided in Spirits proxy statement for its 2007 annual
meeting of stockholders, which will be filed with the Securities
and Exchange Commission no later than 120 days after the
end of the fiscal year, and that information is hereby
incorporated by reference.
|
|
Item 12.
|
Security
Ownership and Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information concerning the ownership of Spirit equity securities
by certain beneficial owners and by management will be provided
in Spirits proxy statement for its 2007 annual meeting of
stockholders, which will be filed with the Securities and
Exchange Commission no later than 120 days after the end of
the fiscal year, and that information is hereby incorporated by
reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
Information concerning certain relationships and related
transactions will be provided in Spirits proxy statement
for its 2007 annual meeting of stockholders, which will be filed
with the Securities and Exchange Commission no later than
120 days after the end of the fiscal year, and that
information is hereby incorporated by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Information concerning principal accounting fees and services
will be provided in Spirits proxy statement for its 2007
annual meeting of stockholders, which will be filed with the
Securities and Exchange Commission no later than 120 days
after the end of the fiscal year, and that information is hereby
incorporated by reference.
134
Part IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by
|
Article I. Exhibit
|
|
|
|
Reference to the
|
Number
|
|
Section 1.01 Exhibit
|
|
Following Documents
|
|
|
|
|
|
|
|
|
|
2
|
.1
|
|
Asset Purchase Agreement, dated as
of February 22, 2005, between Spirit AeroSystems, Inc. (f/k/a
Mid-Western Aircraft Systems, Inc.) and The Boeing Company
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 2.1
|
|
2
|
.2
|
|
First Amendment to Asset Purchase
Agreement, dated June 15, 2005, between Spirit AeroSystems, Inc.
(f/k/a Mid-Western Aircraft Systems, Inc.) and The Boeing Company
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 2.2
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation of Spirit AeroSystems Holdings, Inc.
|
|
Amendment No. 2 to
Registration Statement on
Form S-1/A
(File
No. 333-135486),
filed October 30, 2006, Exhibit 3.1
|
|
3
|
.2
|
|
Amended and Restated By-Laws of
Spirit AeroSystems Holdings, Inc.
|
|
Amendment No. 2 to
Registration Statement on
Form S-1/A
(File
No. 333-135486),
filed October 30, 2006, Exhibit 3.2
|
|
4
|
.1
|
|
Form of Class A Common Stock
Certificate
|
|
Amendment No. 5 to
Registration Statement on
Form S-1/A
(File
No. 333-135486),
filed November 17, 2006, Exhibit 4.1
|
|
4
|
.2
|
|
Form of Class B Common Stock
Certificate
|
|
Amendment No. 5 to
Registration Statement on
Form S-1/A
(File
No. 333-135486),
filed November 17, 2006, Exhibit 4.2
|
|
4
|
.3
|
|
Investor Stockholders Agreement,
dated June 16, 2005, among Spirit AeroSystems Holdings, Inc.
(f/k/a Mid-Western Aircraft Systems, Inc.), Onex Partners LP and
the stockholders listed on the signature pages thereto
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 4.3
|
|
4
|
.4
|
|
Registration Agreement, dated June
16, 2005, among Spirit AeroSystems Holdings, Inc. (f/k/a
Mid-Western Aircraft Systems, Inc.) and the persons listed on
Schedule A thereto
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 4.4
|
|
10
|
.1
|
|
Employment Agreement, dated June
16, 2005, between Jeffrey L. Turner and Spirit AeroSystems, Inc.
(f/k/a Mid-Western Aircraft Systems, Inc.)
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.1
|
|
10
|
.2
|
|
Employment Agreement, dated August
3, 2005, between Ulrich Schmidt and Spirit AeroSystems, Inc.
(f/k/a Mid-Western Aircraft Systems, Inc.)
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.2
|
|
10
|
.3
|
|
Employment Agreement, dated
September 13, 2005, between Spirit AeroSystems, Inc. and H.
David Walker
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.3
|
|
10
|
.4
|
|
Employment Agreement, dated
December 28, 2005, between Spirit AeroSystems, Inc. and John
Lewelling
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.4
|
135
|
|
|
|
|
|
|
|
|
|
|
Incorporated by
|
Article I. Exhibit
|
|
|
|
Reference to the
|
Number
|
|
Section 1.01 Exhibit
|
|
Following Documents
|
|
|
10
|
.5
|
|
Employment Agreement, dated
December 30, 2005, between Spirit AeroSystems, Inc. and Janet S.
Nicolson
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed August 29, 2006, Exhibit 10.5
|
|
10
|
.6
|
|
Employment Agreement, dated March
20, 2006, between Spirit AeroSystems (Europe) Limited and Neil
McManus
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.6
|
|
10
|
.7
|
|
Spirit AeroSystems Holdings, Inc.
(f/k/a Mid-Western Aircraft Systems, Inc.) Executive Incentive
Plan
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.7
|
|
10
|
.8
|
|
Spirit AeroSystems Holdings, Inc.
(f/k/a Mid-Western Aircraft Systems, Inc.) Supplemental
Executive Retirement Plan
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.8
|
|
10
|
.9
|
|
Spirit AeroSystems Holdings, Inc.
(f/k/a Mid-Western Aircraft Systems, Inc.) Short Term Incentive
Plan
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.9
|
|
10
|
.10
|
|
Spirit AeroSystems Holdings, Inc.
Long-Term Incentive Plan
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.10
|
|
10
|
.11
|
|
Spirit AeroSystems Holdings, Inc.
Cash Incentive Plan
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.11
|
|
10
|
.12
|
|
Spirit AeroSystems Holdings, Inc.
Union Equity Participation Program
|
|
Amendment No. 2 to
Registration Statement on
Form S-1/A
(File
No. 333-135486),
filed October 30, 2006, Exhibit 10.12
|
|
10
|
.13
|
|
Spirit AeroSystems Holdings, Inc.
Director Stock Plan
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.13
|
|
10
|
.14
|
|
Form of Indemnification Agreement
|
|
Amendment No. 1 to
Registration Statement on
Form S-1/A
(File
No. 333-135486),
filed August 29, 2006, Exhibit 10.14
|
|
10
|
.15
|
|
Intercompany Agreement, dated June
30, 2005, between Onex Partners Manager L.P. and Spirit
AeroSystems, Inc.
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.15
|
|
10
|
.16
|
|
Consulting Agreement, dated as of
February 25, 2005, between Gephardt and Associates LLC and
Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft Systems,
Inc.).
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.16
|
|
10
|
.17
|
|
Amended and Restated Credit
Agreement, dated as of July 20, 2005, by and among Spirit
AeroSystems, Inc. (f/k/a Mid-Western Aircraft Systems, Inc.),
Spirit AeroSystems Holdings, Inc. (f/k/a Mid-Western Aircraft
Systems Holdings, Inc.), Onex Wind Finance LP, the guarantors
party thereto, Citicorp North America, Inc. and the other
lenders party thereto.
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.17
|
136
|
|
|
|
|
|
|
|
|
|
|
Incorporated by
|
Article I. Exhibit
|
|
|
|
Reference to the
|
Number
|
|
Section 1.01 Exhibit
|
|
Following Documents
|
|
|
10
|
.18
|
|
Amendment No. 1 to the Amended and
Restated Credit Agreement, dated as of December 11, 2005, by and
among Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft
Systems, Inc.), Spirit AeroSystems Holdings, Inc. (f/k/a
Mid-Western Aircraft Systems Holdings, Inc.), Onex Wind Finance
LP, the guarantors party thereto, Citicorp North America, Inc.
and the other lenders party thereto.
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.18
|
|
10
|
.19
|
|
Amendment No. 2 to the Amended and
Restated Credit Agreement, dated as of March 31, 2006, by and
among Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft
Systems, Inc.), Spirit AeroSystems Holdings, Inc. (f/k/a
Mid-Western Aircraft Systems Holdings, Inc.), Onex Wind Finance
LP, the guarantors party thereto, Citicorp North America, Inc.
and the other lenders party thereto.
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.19
|
|
10
|
.20
|
|
Security Agreement, dated as of
June 16, 2005, made by and among Spirit AeroSystems, Inc. (f/k/a
Mid-Western Aircraft Systems, Inc.), Spirit AeroSystems
Holdings, Inc. (f/k/a Mid-Western Aircraft Systems Holdings,
Inc.), Onex Wind Finance LP, 3101447 Nova Scotia Company, Onex
Wind Finance LLC and Citicorp North America, Inc., as collateral
agent.
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.20
|
|
10
|
.21
|
|
Credit Agreement, dated as of June
16, 2005, by and among Spirit AeroSystems, Inc. (f/k/a
Mid-Western Aircraft Systems, Inc.), Spirit AeroSystems
Holdings, Inc. (f/k/a Mid-Western Aircraft Systems Holdings,
Inc.), Onex Wind Finance LP, 3101447 Nova Scotia Company, the
other guarantor party thereto, and The Boeing Company.
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.21
|
|
10
|
.22
|
|
Security Agreement, dated as of
June 16, 2005, made by and among Spirit AeroSystems, Inc. (f/k/a
Mid-Western Aircraft Systems, Inc.), Spirit AeroSystems
Holdings, Inc. (f/k/a Mid-Western Aircraft Systems Holdings,
Inc.), Spirit AeroSystems Finance, Inc. (f/k/a Mid-Western
Aircraft Finance, Inc.), Onex Wind Finance LP, 3101447 Nova
Scotia Company, Onex Wind Finance LLC and The Boeing Company, as
agent.
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.22
|
137
|
|
|
|
|
|
|
|
|
|
|
Incorporated by
|
Article I. Exhibit
|
|
|
|
Reference to the
|
Number
|
|
Section 1.01 Exhibit
|
|
Following Documents
|
|
|
10
|
.23
|
|
Special Business Provisions
(Sustaining), dated as of June 16, 2005, between The Boeing
Company and Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft
Systems, Inc.)
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.23
|
|
10
|
.24
|
|
General Terms Agreement
(Sustaining and others), dated as of June 16, 2005, between The
Boeing Company and Spirit AeroSystems, Inc. (f/k/a Mid-Western
Aircraft Systems, Inc.)
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.24
|
|
10
|
.25
|
|
Hardware Material Services General
Terms Agreement, dated as of June 16, 2005, between The Boeing
Company and Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft
Systems, Inc.)
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.25
|
|
10
|
.26
|
|
Ancillary Know-How Supplemental
License Agreement, dated as of June 16, 2005, between The
Boeing Company and Spirit AeroSystems, Inc. (f/k/a Mid-Western
Aircraft Systems, Inc.)
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.26
|
|
10
|
.27
|
|
Sublease Agreement, dated as of
June 16, 2005, among The Boeing Company, Boeing IRB Asset Trust
and Spirit AeroSystems, Inc. (f/k/a Mid-Western Aircraft
Systems, Inc)
|
|
Registration Statement on
Form S-1
(File
No. 333-135486),
filed June 30, 2006, Exhibit 10.27
|
|
10
|
.28
|
|
Spirit AeroSystems Holdings, Inc.
Long Term Incentive Plan
|
|
Registration Statement on
Form S-1/A
(File
No. 333-135486),
filed November 6, 2006, Exhibit 10.28
|
|
10
|
.29
|
|
Amendment to the Amended and
Restated Credit Agreement, dated as of November 27, 2006,
by and among Spirit AeroSystems, Inc.
(f/k/a
Mid-Western
Aircraft Systems, Inc.), Spirit AeroSystems Holdings, Inc.,
(f/k/a
Mid-Western
Aircraft Systems Holdings, Inc.), Onex Wind Finance LP, the
guarantor party thereto, Citicorp North America, Inc. and the
other lenders party thereto.
|
|
Current Report on Form 8-K
(File No. 001-33160), filed December 1, 2006,
Exhibit 10.1
|
|
10
|
.30
|
|
Second Amended and Restated Credit
Agreement by and among Spirit AeroSystems, Inc.
(f/k/a
Mid-Western Aircraft Systems, Inc.), the guarantor party
thereto, Citicorp North America, Inc. and the other lenders
party thereto.
|
|
Current Report on Form 8-K
(File No. 001-33160), filed December 1, 2006,
Exhibit 10.2
|
|
14
|
.1
|
|
Code of Ethics
|
|
Filed herewith
|
|
|
|
|
(i) Spirit Code of Conduct
|
|
|
|
|
|
|
(ii) Spirit Finance Code of
Professional Conduct
|
|
|
|
21
|
.1
|
|
Subsidiaries of Spirit AeroSystems
Holdings, Inc.
|
|
Filed herewith
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers
LLP
|
|
Filed herewith
|
138
|
|
|
|
|
|
|
|
|
|
|
Incorporated by
|
Article I. Exhibit
|
|
|
|
Reference to the
|
Number
|
|
Section 1.01 Exhibit
|
|
Following Documents
|
|
|
23
|
.2
|
|
Consent of Deloitte & Touche
LLP
|
|
Filed herewith
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
|
32
|
.2
|
|
Certification of Chief Financial
Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
139
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Wichita, State of
Kansas on March 2, 2007.
SPIRIT AEROSYSTEMS HOLDINGS, INC.
Ulrich Schmidt
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed by the following persons in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Jeffrey
L. Turner
Jeffrey
L. Turner
|
|
President and Chief Executive
Officer (Principal Executive Officer)
|
|
March 2, 2007
|
|
|
|
|
|
/s/ Ulrich
Schmidt
Ulrich
Schmidt
|
|
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer)
|
|
March 2, 2007
|
|
|
|
|
|
/s/ Daniel
R. Davis
Daniel
R. Davis
|
|
Corporate Controller (Principal
Accounting Officer)
|
|
March 2, 2007
|
|
|
|
|
|
/s/ Ivor
Evans
Ivor
Evans
|
|
Director
|
|
March 2, 2007
|
|
|
|
|
|
/s/ Paul
Fulchino
Paul
Fulchino
|
|
Director
|
|
March 2, 2007
|
|
|
|
|
|
/s/ Richard
Gephardt
Richard
Gephardt
|
|
Director
|
|
March 2, 2007
|
|
|
|
|
|
/s/ Robert
Johnson
Robert
Johnson
|
|
Director
|
|
March 2, 2007
|
|
|
|
|
|
/s/ Ronald
Kadish
Ronald
Kadish
|
|
Director
|
|
March 2, 2007
|
|
|
|
|
|
/s/ Cornelius
McGillicuddy, III
Cornelius
McGillicuddy, III
|
|
Director
|
|
March 2, 2007
|
140
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Seth
Mersky
Seth
Mersky
|
|
Director
|
|
March 2, 2007
|
|
|
|
|
|
/s/ Francis
Raborn
Francis
Raborn
|
|
Director
|
|
March 2, 2007
|
|
|
|
|
|
/s/ Nigel
Wright
Nigel
Wright
|
|
Director
|
|
March 2, 2007
|
141
SCHEDULE II
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Charge to
|
|
|
Write-offs
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
December 29,
|
|
|
Costs and
|
|
|
Net of
|
|
|
Purchased
|
|
|
Exchange
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Expenses
|
|
|
Recoveries
|
|
|
Reserves(1)
|
|
|
Rate
|
|
|
2006
|
|
|
Tax valuation
|
|
$
|
47.1
|
|
|
$
|
(47.1
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Inventory obsolete and
surplus
|
|
|
16.8
|
|
|
|
(3.2
|
)
|
|
|
(0.1
|
)
|
|
|
1.5
|
|
|
|
0.2
|
|
|
|
15.2
|
|
Warranties
|
|
|
0.9
|
|
|
|
5.6
|
|
|
|
|
|
|
|
2.8
|
|
|
|
0.3
|
|
|
|
9.6
|
|
Allowance for doubtful accounts
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
(1) |
|
Related to the BAE Acquisition |
II-1