SPIRIT AEROSYSTEMS HOLDINGS, INC. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and the notes to the unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report"). The following section may include "forward-looking statements." Forward-looking statements reflect our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "aim," "anticipate," "believe," "could," "continue," "estimate," "expect," "forecast," "goal," "intend," "may," "might," "objective," "plan," "predict," "project," "should," "target," "will," "would," and other similar words, or phrases, or the negative thereof, unless the context requires otherwise. These statements reflect management's current views with respect to future events and are subject to risks and uncertainties, both known and unknown, including, but not limited to, those described in the "Risk Factors" section of our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Our actual results may vary materially from those anticipated in forward-looking statements. We caution investors not to place undue reliance on any forward-looking statements.
Important factors that could cause actual results to differ materially from those reflected in such forward-looking statements and that should be considered in evaluating our outlook include, but are not limited to, the following:
1) the timing and conditions surrounding the return to service of the B737
MAX, future demand for the aircraft, and any residual impacts of the
grounding on production rates for the aircraft;
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2) our reliance on Boeing for a significant portion of our revenues;
3) our ability to continue to grow our business and execute our growth
strategy including our ability to enter into profitable supply
arrangements with additional customers;
4) the business condition and liquidity of Boeing and Airbus and their
ability to satisfy their contractual obligations to the Company;
5) demand for our products and services and the effect of economic or
geopolitical conditions, or other events, such as pandemics, in the
industries and markets in which we operate in the U.S. and globally;
6) the impact of the COVID-19 pandemic on our business and operations,
including on the demand for our and our customers' products and
services, on trade and transport restrictions, on the global aerospace
supply chain, on our ability to retain the skilled work force necessary
for production and development and generally on our ability to
effectively manage the impacts of the COVID-19 pandemic on our business
operations;
7) the certainty of our backlog, including the ability of customers to
cancel or delay orders prior to shipment;
8) our ability to accurately estimate and manage performance, cost,
margins, and revenue under our contracts, and the potential for
additional forward losses on new and maturing programs;
9) our ability and our suppliers' ability to accommodate, and the cost of
accommodating, increases in the build rates of certain aircraft;
10) competitive conditions in the markets in which we operate, including
in-sourcing by commercial aerospace original equipment manufacturers;
11) our ability to successfully negotiate, or renegotiate, future pricing
under our supply agreements with Boeing, Airbus and other customers;
12) the success and timely execution of key milestones, such as the receipt
of necessary regulatory approvals and satisfaction of closing
conditions, in our announced acquisitions of Asco and select Bombardier
assets, and our ability to effectively assess, manage, close, and
integrate such acquisitions along with others that we pursue, and
generate synergies and other cost savings therefrom, while avoiding
unexpected costs, charges, expenses, and adverse changes to business
relationships and business disruptions;
13) the possibility that our cash flows may not be adequate for our
additional capital needs;
14) our ability to avoid or recover from cyber-based or other security
attacks and other operations disruptions;
15) legislative or regulatory actions, both domestic and foreign, impacting
our operations;
16) the effect of changes in tax laws and the Company's ability to
accurately calculate and estimate the effect of such changes;
17) any reduction in our credit ratings;
18) our dependence on our suppliers, as well as the cost and availability
of raw materials and purchased components;
19) our ability to recruit and retain a critical mass of highly skilled
employees;
20) our relationships with the unions representing many of our employees,
including our ability to avoid labor disputes and work stoppages with
respect to our union employees;
21) spending by the
22) pension plan assumptions and future contributions;
23) the effectiveness of our internal control over financial reporting; and
any difficulties or delays that could affect the Company's ability to
effectively implement the remediation plan, in whole or in part, to
address the material weakness identified in the Company's internal
control over financial reporting, as described in Item 9A. "Controls
and Procedures" of the Annual Report on Form 10-K for 2019;
24) the outcome or impact of ongoing or future litigation, claims, and
regulatory actions, including our exposure to potential product
liability and warranty claims;
25) our ability to continue selling certain receivables through our
supplier financing programs;
26) our ability to access the capital markets to fund our liquidity needs,
and the costs and terms of any additional financing;
27) any regulatory or legal action arising from the review of our
accounting processes; and
28) the risks of doing business internationally, including fluctuations in
foreign currency exchange rates, impositions of tariffs or embargoes,
trade restrictions, compliance with foreign laws, and domestic and
foreign government policies.
These factors are not exhaustive and it is not possible for us to predict all factors that could cause actual results to differ materially from those reflected in our forward-looking statements. These factors speak only as of the date hereof, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. As with any projection or forecast, these statements are inherently susceptible to uncertainty and changes in circumstances. Except to the extent required by law, we undertake no obligation to, and expressly disclaim any obligation to, publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should review carefully the section captioned "Risk Factors" in our most recent Annual Report on Form 10-K and under Part II, Item 1A. "Risk Factors" in Form 10-Q for the first quarter of 2020 and hereunder for a more complete discussion of these and other factors that may affect our business.
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Table of Contents COVID-19
During the three months ended
In response to the COVID-19 pandemic, we have enacted our crisis management and response process as part of our enterprise risk management program to help us navigate the challenges we face due to the COVID-19 pandemic. Actions that we have taken include the following:
• deployed global teams to monitor the situation and recommend
appropriate actions;
• implemented travel restrictions for our employees;
• implemented social-distancing standards throughout the workplace and
mandated mask use;
• initiated consistent and ongoing cleaning of high-touch areas;
• conducted deep cleaning and sanitization of work spaces potentially
exposed to the virus;
• established processes aligned with CDC guidelines to work with any
exposed individual on the necessary quarantine period and the process
to return to work; and
• implemented working from home to minimize potential exposure to the virus.
Spirit has taken several actions to reduce costs, increase liquidity and strengthen our financial position in light of the economic impact of the COVID-19 pandemic, and the B737 MAX impact (further described below), including the following:
• reduced pay for allU.S. -based executives by 20 percent until further notice. The company has reduced non-U.S. executive pay in accordance with local law and statutory requirements;
• reduced 2020-2021 term non-employee director compensation by 15 percent;
• reduced planned capital expenditures and operating expenses;
• suspended its share repurchase program;
• reduced quarterly dividends to one penny per share;
• initiated multiple production worker furloughs;
• implemented a four-day work week for its salaried workforce at its
Wichita, Kansas facility until further notice;
• reduced ~5500 employees globally;
• amended our 2018 Credit Agreement for covenant relief;
• issued
• elected to defer the payment of$15.9 million in employer payroll taxes incurred throughJuly 2, 2020 , as provided by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), of which 50% is required to be deposited byDecember 2021 and the remaining 50% byDecember 2022 . In addition, as ofJuly 2, 2020 the Company has recorded a deferral of$28.5 million of VAT payments untilMarch 2021 under theUnited Kingdom deferral scheme.
If OEM production rates decline in the future or the expected pandemic recovery timeline lengthens, Spirit will evaluate further cost reduction actions, including additional workforce actions.
Our customers, including Boeing and Airbus, have significantly reduced their overall production rates as a result of the COVID-19 pandemic and, in the case of Boeing, the B737 MAX grounding, described below. A discussion of current rates is set forth below:
Boeing Production Volumes
The overall rates announced by Boeing and used by the Company in second quarter are as follows: • B737 MAX including P-8 to 72 shipsets for 2020
• B787 average production volume of 10 APM in 2020, and gradually
decrease to 7 APM by 2022
• B777 average production volume will be reduced from 3.6 APM to 3 APM in 2021
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The Company is currently evaluating the potential impact to the B787 program
based on Boeing's announcement on
The Company is attempting to calibrate its cost structure to the lower production volumes and manage the impact of excess production capacity across our sites. The Company's strategy to recalibrate its cost structure is likely to lead to a consolidation of sites where excess capacity exists.
Airbus Production Volumes
The overall rates announced by Airbus and used by the Company in second quarter are as follows: • Single-aisle average production volume of 40 APM
• A350 average production volume of 6 APM
• A330 average production volume of 2 APM
The Company is currently evaluating the production schedule changes to the A350
program, and, based on its preliminary assessment, expects to incur an
incremental forward loss of approximately
Due to the uncertain and rapidly evolving nature of current conditions around the world, we are unable to predict accurately the impact that COVID-19 will have on our business going forward, including:
• whether there will be additional production suspensions or production
rate reductions relating to the COVID-19 pandemic and the resulting
impact on our financial performance, liquidity and our cash flows;
• if we will have significant employee absenteeism due to fear of
COVID-19 infection;
• if we may experience lawsuits or regulatory actions due to COVID-19
spread in the workplace;
• reputational risk we may experience due to COVID-19 spread in the workplace;
• the effect of significant salary cuts across our workforce, which may
result in critical employee departures;
• the impact remote working arrangements, salary reductions, and
shortened work weeks for salaried employees will have on the health and
productivity of management and our employees, and our ability to
maintain our financial reporting processes and related controls and
manage the complex accounting issues presented by the COVID-19 pandemic
such as excess cost accounting, impairment analysis and business
combination controls;
• the impact on the Company's vendors and outsourced business processes
and their process and controls documentation;
• the impact on our suppliers, including whether they will be able to
meet our future needs;
• the impact on our contracts with our customers and suppliers, including
force majeure provisions;
• our ability to withstand and recover from any cyberattacks as a result
of a remote working environment, and potential reputational impacts or
loss of customer contracts as a result of such cyberattacks; and
• the impact on the public's demand and ability to pay for future airline
travel, whether or not vaccines or effective treatments for COVID-19
become available.
Any of these items or all of these items may occur, which individually or in the aggregate may have a material adverse effect on our business, financial condition, results of operations and cash flows.
The extent of the effects of the COVID-19 outbreak on our business, results of
operations, cash flows and growth prospects is highly uncertain and will
ultimately depend on future developments, most of which are outside of our
control. These include, but are not limited to:
the severity, extent and duration of the global pandemic and its impact on the
aircraft industry;
• actions taken by governments and municipalities to contain the disease
or treat its impact, including travel restrictions and bans, bans on
public gatherings, closures of non-essential businesses and aid and
economic stimulus efforts;
• the speed and extent of the recovery across the broader travel
ecosystem, including how long the public will continue to be concerned
about the pandemic and avoid aircraft travel; and
• any economic recession resulting from the pandemic.
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The pandemic may continue to expand in regions that have not yet been significantly affected by the COVID-19 outbreak or may return to regions that were previously heavily impacted by the pandemic, which could continue to affect our business. Also, existing restrictions in affected areas could be extended after the virus has been contained in order to avoid relapses, and regions that recover from the outbreak may suffer from a relapse and re-imposition of restrictions.
Our expectation is that our business operations will not improve until our customers are willing to produce aircraft at sufficient levels, which is dependent upon the public's willingness to use aircraft travel and sufficient OEM orders (without suspension) from airlines and the financial resources of airlines specifically and generally. This may not occur until well after the broader global economy begins to improve.
CARES ACT and United Kingdom Deferral Scheme
On
As of
The CARES Act allows net operating losses to be carried back to the previous
five years, when the federal tax rate was 35%. As of
As part of the
B737 Program
The B737 MAX program is a critical program to the Company. For the twelve months
ended
InMarch 2019 , the B737 MAX fleet was grounded in theU.S. and internationally following the 2018 and 2019 accidents involving two B737 MAX aircraft. To date, the fleet remains grounded and the recertification process is continuing. Due to the grounding and the impacts of COVID-19 on the aviation industry, the Company has experienced significant deteriorations in its B737 MAX production rates that have reduced the Company's revenues. A summary of the production rate changes is below. • OnApril 12, 2019 , Boeing and the Company executed a Memorandum of Agreement (the "2019 MOA") providing that the Company was to maintain its delivery rate of 52 shipsets per month with respect to the B737 MAX. Previously, the Company was expecting to increase production to a rate of 57 shipsets per month; • OnDecember 19, 2019 , Boeing directed the Company to stop all B737 MAX deliveries to Boeing effectiveJanuary 1, 2020 . Accordingly, Spirit suspended all B737 MAX production beginning onJanuary 1, 2020 ; • OnFebruary 6, 2020 , Boeing and Spirit entered into a Memorandum of Agreement (the "2020 MOA") largely superseding the 2019 MOA and providing for Spirit to deliver to Boeing 216 B737 MAX shipsets in 2020; • OnMay 4, 2020 , Boeing and the Company agreed that Spirit would deliver 125 B737 MAX shipsets to Boeing in 2020; and 55
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• OnJune 19, 2020 , Boeing directed Spirit to reduce its 2020 B737 production plan from 125 to 72 shipsets.
While we have taken actions to align our cost structure to the lower 2020 production rates, the benefit of such actions will be realized over time and the B737 MAX situation continues to present challenges to our liquidity. These challenges are exacerbated by the COVID-19 pandemic as other programs that mitigate the strain of the lower B737 MAX production rate are now suspended or producing at lower rates.
While recent news reports have indicated that the recertification flights for the B737 MAX have commenced, we are unable to determine definitively when Boeing will be able to secure regulatory approval for the B737 MAX. Based on Boeing's public statements, we have assumed that regulatory approval will enable Boeing to resume delivering B737 MAX aircraft to its customers in the fourth quarter of 2020. However, the civil aviation authorities control the timeline for recertification and resumption of deliveries and actual timing may be materially different. Further, we cannot predict the effect of the COVID-19 pandemic on this timeline. In the event of delays to this timeline and corresponding changes to our production rate, we may be required to take actions with longer-term impact, such as additional changes to our production plans, employment reductions and/or the expenditure of significant resources to support our supply chain and/or Boeing.
If Boeing is unable to return the B737 MAX to service in one or more jurisdictions, begin timely deliveries to customers, or if our customers' production levels across our programs are reduced beyond current expectations due to depressed demand relating to COVID-19 or otherwise, our liquidity position may worsen absent our ability to procure additional financing and we may trigger an event of default under our 2018 Credit Agreement, and our business, financial condition, results of operations and cash flows could be materially adversely impacted.
Impairment
Recoverability of Current and Noncurrent Assets
The Company's operations require management to make estimates, which involve a significant amount of judgment when completing recoverability and impairment tests of current and noncurrent assets. Factors that management estimates include, but are not limited to, program delivery schedules, changes to identified risks and opportunities, changes to estimated revenues and costs for the accounting contracts, any outstanding contractual matters, the economic lives of the assets, foreign currency exchange rates, tax rates, capital spending, and customers' financial condition. The ability for the Company to fully assess these factors is challenging and presents many risks and opportunities, as more fully described in Note 4, Changes in Estimates, to our condensed consolidated financial statements included in Part I of this Quarterly Report for more information.
The uncertainties associated with the duration of the COVID-19 pandemic increase
the difficulty in estimating the potential impact of these factors. Actual
results could differ from these estimates, which were based upon circumstances
that existed as of the date of the consolidated financial statements,
At
When performing the impairment assessment, we estimated the anticipated cash flows related to specific asset groupings and compared the forecasted cash flows with the respective net book value of the asset group. To the extent that forecasted cash flows exceeded the respective group net book value, no further impairment analysis was required. As a result of this assessment, we were not required to estimate the fair values of the assets, however, if the estimated future cash flows were to significantly change in the future, we would use management's best assumptions to assess an estimate of fair market value, which we believe would be consistent with what a market participant would use. The variability of these factors depends on a number of conditions, including uncertainty associated with COVID-19, and as a result our initial accounting assessment may change from period to period. Our current estimates reflect potential production rate reduction scenarios for our primary customers that are not permanent in nature as we assume there will be an economic recovery from the impact of COVID-19 and global passenger levels will ultimately
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return to pre-COVID 19 levels. If we had used other assumptions and estimates when tests of these assets were performed, impairment charges could have resulted. Furthermore, if management uses different assumptions or if different conditions exist in future periods, future impairment charges could result. The total future impairment charges and other asset write-offs we may be required to record could be material.
Additionally as of
Results of Operations
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The following table sets forth, for the periods indicated, certain of our
operating data:
Three Months Ended Six Months Ended
July 2, June 27, July 2, June 27,
2020 2019 2020 2019
($ in millions) ($ in millions)
Revenue $ 644.6 $ 2,016.1 $ 1,721.9 $ 3,983.9
Cost of sales 925.1 1,723.2 2,037.6 3,381.5
Gross (loss) profit (280.5 ) 292.9 (315.7 ) 602.4
Selling, general and administrative 49.0 56.4 126.4 120.0
Restructuring costs 6.3 - $ 48.9 -
Research and development 8.3 10.5 20.6 23.4
(Gain)/loss on disposal of assets $ 22.9 - $ 22.9 -
Operating (loss) income (367.0 ) 226.0 (534.5 ) 459.0
Interest expense and financing fee
amortization (48.6 ) (23.7 ) (80.8 ) (42.5 )
Other (expense) income, net (6.4 ) 8.6 (55.4 ) (2.4 )
(Loss) income before income taxes and equity
in net (loss) income of affiliate (422.0 ) 210.9 (670.7 ) 414.1
Income tax benefit (provision) 167.6 (42.9 ) 254.8 (83.0 )
(Loss) income before equity in net (loss)
income of affiliate (254.4 ) 168.0 (415.9 ) 331.1
Equity in net (loss) income of affiliate (1.5 ) - (3.0 ) -
Net (loss) income $ (255.9 ) $ 168.0 $ (418.9 ) $ 331.1 Comparative shipset deliveries by model are as follows:
Three Months Ended Six Months Ended
July 2, June 27, July 2, June 27,
Model 2020 2019 2020 2019
B737 19 147 37 299
B747 1 2 3 3
B767 5 8 11 16
B777 7 16 16 29
B787 22 42 62 84
Total Boeing 54 215 129 431
A220 8 10 23 18
A320 Family 69 172 257 350
A330 5 9 13 18
A350 13 30 39 58
A380 - - - 1
Total Airbus 95 221 332 445
Business and Regional Jets (1) 10 13 22 26
Total 159 449 483 902
For purposes of measuring production or shipset deliveries for Boeing aircraft in a given period, the term "shipset" refers to sets of structural fuselage components produced or delivered for one aircraft in such period. For purposes of measuring production or shipset deliveries for Airbus and Business/Regional Jet aircraft in a given period, the term "shipset" refers to all structural aircraft components produced or delivered for one aircraft in such period. For the purposes of measuring wing shipset deliveries, the term "shipset" refers to all wing components produced or delivered for one aircraft in such period. Other components that are part of
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the same aircraft shipsets could be produced or shipped in earlier or later accounting periods than the components used to measure production or shipset deliveries, which may result in slight variations in production or delivery quantities of the various shipset components in any given period.
Net revenues by prime customer are as follows:
Three Months Ended Six Months Ended
July 2, June 27, July 2, June 27,
Prime Customer 2020 2019 2020 2019
($ in millions) ($ in millions)
Boeing $ 370.0 $ 1,614.7 $ 1,046.1 $ 3,163.1
Airbus 128.0 320.1 415.1 649.9
Other 146.6 81.3 260.7 170.9
Total net revenues
Changes in Estimates
During the second quarter of 2020, we recognized unfavorable changes in
estimates of
We provided previous guidance which disclosed an estimated forecasted forward
loss in the quarter ended
During the same period in the prior year, we recognized total unfavorable
changes in estimates of
Three Months Ended
Revenue. Revenues for the three months ended
Total production deliveries to Boeing decreased to 54 shipsets during the second quarter of 2020, compared to 215 shipsets delivered in the same period of the prior year, primarily driven by decreased production on the B737 MAX, B787, and B777 programs. Total production deliveries to Airbus decreased to 95 shipsets during the second quarter of 2020, compared to 221 shipsets delivered in the same period of the prior year, primarily driven by decreased production of the A320 and A350 programs. Total production deliveries of business/regional jet wing and wing components decreased to 10 shipsets during the second quarter of 2020, compared to 13 shipsets delivered in the same period of the prior year. In total, production deliveries decreased to 159 shipsets during the second quarter of 2020, compared to 449 shipsets delivered in the same period of the prior year.
Gross (Loss) Profit. Gross Loss was
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of 2020, we recognized
SG&A and Research and Development. SG&A expense was
Restructuring Costs. Restructuring costs was
Operating (Loss) Income. Operating loss for the three months ended
Interest Expense and Financing Fee Amortization. Interest expense and financing
fee amortization for the three months ended
Other (Expense) Income, net. Other expense, net for the three months ended
Provision for Income Taxes. On
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earnings history, in conjunction with other positive and negative evidence, we have determined it is more likely than not that the benefits from the deferred tax assets will be realized and a valuation allowance is not appropriate at this time.
The income tax provision for the three months ended
The increase from the
The United Kingdom Finance Act 2020 was passed by the House of Commons on
Segments. The following table shows segment revenues and operating income for
the three months ended
Three Months Ended
July 2, June 27,
2020 2019
($ in millions)
Segment Revenues
Fuselage Systems $ 327.1 $ 1,096.8
Propulsion Systems 169.6 518.9
Wing Systems 122.5 398.5
All Other 25.4 1.9
$ 644.6 $ 2,016.1
Segment Operating (Loss) Income
Fuselage Systems $ (251.5 ) $ 135.8
Propulsion Systems (17.3 ) 97.7
Wing Systems (42.5 ) 57.4
All Other 8.0 -
(303.3 ) 290.9
SG&A (49.0 ) (56.4 )
Research and development (8.3 ) (10.5 )
Unallocated cost of sales (1) (6.4 ) 2.0
Total operating (loss) income $ (367.0 ) $ 226.0 (1) Includes
Fuselage Systems, Propulsion Systems, Wing Systems, and All Other represented
approximately 51%, 26%, 19% and 4%, respectively, of our net revenues for the
three months ended
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Fuselage Systems. Fuselage Systems segment net revenues for the three months
ended
Propulsion Systems. Propulsion Systems segment net revenues for the three months
ended
Wing Systems. Wing Systems segment net revenues for the three months ended
All Other. All Other segment net revenues consist of sundry sales of
miscellaneous services and natural gas revenues from the KIESC. In the three
months ended
Six Months Ended
Revenue. Revenues for the six months ended
Total production deliveries to Boeing decreased to 129 shipsets during the first half of 2020, compared to 431 shipsets delivered in the same period of the prior year, primarily driven by decreased production on the B737 MAX, B777, and B787 programs. Total production deliveries to Airbus decreased to 332 shipsets during the first half of 2020, compared to 445 shipsets delivered in the same period of the prior year, primarily driven by decreased production on the A320 and A350 programs, partially offset by increased A220 deliveries. Total production deliveries of business/regional jet wing and wing components decreased to 22 shipsets during the first half of 2020, compared to 26 shipsets delivered in the same period of the prior year. In total, production deliveries decreased to 483 shipsets during the first half of 2020, compared to 902 shipsets delivered in the same period of the prior year.
Gross (Loss) Profit. Gross Loss was
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excess capacity production costs of
SG&A and Research and Development. SG&A expense was
Restructuring Costs. Restructuring costs was $
Operating (Loss) Income. Operating loss for the six months ended
Interest Expense and Financing Fee Amortization. Interest expense and financing
fee amortization for the six months ended
Other (Expense) Income, net. Other expense, net for the six months ended
Provision for Income Taxes. On
Our reported tax rate includes two principal components: an expected annual tax rate and discrete items resulting in additional provisions or benefits that are recorded in the quarter that an event arises. Events or items that could give rise to discrete recognition include excess tax benefit in respect of share-based compensation, finalizing audit examinations for open tax years, statute of limitations expiration, or a change in tax law.
Deferred income tax assets and liabilities are recognized for future income tax consequences attributable to differences between the financial statement carrying amounts for existing asset and liabilities and their respective tax bases. A valuation allowance is recorded to reduce deferred income tax assets to an amount that in management's opinion will ultimately be realized. We have reviewed our material deferred tax assets to determine whether or not a valuation allowance was necessary. Based on the Company's earnings history, in conjunction with other positive and negative evidence, we have determined it is more likely than not that the benefits from the deferred tax assets will be realized and a valuation allowance is not appropriate at this time.
The income tax provision for the six months ended
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months ended
The increase from the
Segments. The following table shows segment revenues and operating income for
the six months ended
Six Months Ended
July 2, June 27,
2020 2019
($ in millions)
Segment Revenues
Fuselage Systems $ 878.6 $ 2,166.4
Propulsion Systems 394.8 1,004.6
Wing Systems 413.9 806.4
All Other 34.6 6.5
$ 1,721.9 $ 3,983.9
Segment Operating (Loss) Income
Fuselage Systems $ (337.9 ) $ 274.7
Propulsion Systems (22.6 ) 193.2
Wing Systems (28.9 ) 123.2
All Other 9.8 1.2
(379.6 ) 592.3
SG&A (126.4 ) (120.0 )
Research and development (20.6 ) (23.4 )
Unallocated cost of sales (1) (7.9 ) 10.1
Total operating (loss) income $ (534.5 ) $ 459.0 (1) Includes
Fuselage Systems, Propulsion Systems, Wing Systems, and All Other represented
approximately 51.0%, 23.0%, 24.0% and 2.0%, respectively, of our net revenues
for the six months ended
Fuselage Systems. Fuselage Systems segment net revenues for the six months ended
Propulsion Systems. Propulsion Systems segment net revenues for the six months
ended
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production volumes on B737 MAX, B777, and B787 programs. Propulsion Systems
segment operating margins were (6%) for the six months ended
Wing Systems. Wing Systems segment net revenues for the six months ended
All Other. All Other segment net revenues consist of sundry sales of
miscellaneous services and natural gas revenues from the
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our principal source of liquidity is operating cash flows from continuing operations. Our operating cash flows from continuing operations have been adversely impacted by the B737 MAX grounding (and related production rate changes) and the COVID-19 pandemic and we expect that adverse impact to continue for the remainder of 2020 and beyond. For purposes of assessing our liquidity needs in this section, we have assumed that Boeing would not further reduce the B737 MAX production rate (which naturally depends on the timely recertification of the B737 MAX and timely return to service and that other customers generally would not further reduce their production rates.
We expend significant capital as we undertake new programs, meet increased production rates on certain mature and maturing programs, and develop new technologies for the next generation of aircraft, which may not be funded by our customers. As part of our cost-reduction actions, we have reduced our capital expenditures. In addition, other significant factors that affect our overall management of liquidity include: debt service, redemptions of debt, the ability to attract long-term capital at satisfactory terms, research and development, capital expenditures, and merger and acquisition activities, such as the Asco and Bombardier aerostructures acquisitions. Historically, share repurchases and dividend payments have also been factors affecting our liquidity. Our share repurchase program is paused and we reduced our quarterly dividend to one penny per share.
In the three months ended
As of
We believe our cash on hand, cash flows generated from operations and availability under our 2018 Revolver, coupled with our ability to vary our cost structure quickly, will provide sufficient liquidity to address the challenges and opportunities of the current market and our global cash needs, including M&A activities, capital expenditures, debt service, and working capital, although we could experience significant fluctuations in our cash flows from period to period during the crisis. Our ability to dray
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or use funds drawn under the 2018 Revolver is limited due to the liquidity
covenant in the 2018 Credit Agreement, which requires us to maintain at least
The COVID-19 pandemic has created significant uncertainty in our industry. Aviation demand has deteriorated due to the pandemic and responsive government preventative measures. Our customers have reduced their production rates, which negatively impacts results of operations and cash flows. We are unable to predict the outcome of the pandemic and the resulting impact on the aviation industry and, accordingly, cannot predict the outcome on our operations. The Company has taken a number of actions to assist with managing the impacts of the COVID-19 pandemic, including those described earlier in this section.
Apart from the COVID-19 pandemic, the B737 MAX grounding creates significant
liquidity challenges for the Company. For the twelve months ended
If Boeing is unable to return the B737 MAX to service in one or more jurisdictions, begin timely deliveries to customers, if production levels by Boeing or Airbus are reduced beyond current expectations due to depressed demand relating to the COVID-19 pandemic or otherwise, or if Spirit has difficulties in managing its cost structure to take into account changes in production schedules, Spirit's liquidity position may worsen absent Spirit's ability to procure additional financing, Spirit may trigger an event of default or acceleration of indebtedness under its 2018 Credit Agreement (which may cause other debt to cross-accelerate or default), and Spirit's business, financial condition, results of operations and cash flows could be materially adversely impacted. The need to fund the Asco Acquisition and the Bombardier Acquisition and related expenses could also adversely affect our liquidity.
Furthermore, if the B737 MAX production rates and other production rates are insufficient to generate the cash the Company needs for working capital in the future or if production levels by Boeing or Airbus are reduced beyond current expectations due to depressed demand, the COVID-19 pandemic or otherwise, the Company may need to access the debt or equity markets for additional liquidity. To the extent the Company is unable to secure such additional liquidity the Company's operations and financial position could be materially adversely affected. The Company may not be able to obtain new debt or equity financing in light of the significant uncertainty relating to the B737 MAX or the impacts of the COVID-19 pandemic or otherwise.
The
The Company has two agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing and Airbus to third party financial institutions. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with the Company and they continue to allow Spirit to monetize the receivables prior to their payment date, subject to payment of a discount. Our ability to continue using such agreements is primarily dependent upon the strength of Boeing's and Airbus's financial condition. If any of these financial institutions involved with these arrangements experiences financial difficulties, becomes unwilling to support Boeing or Airbus due to a deterioration in their financial condition or otherwise, or is otherwise unable to honor the terms of the factoring arrangements, we may experience significant disruption and potential liquidity issues due to the failure of such arrangements, which could have an adverse impact upon our operating results, financial condition and cash flows.
With respect to the Asco Acquisition and Bombardier Acquisition, to the extent the Company does not have sufficient cash to pay the purchase price and is unable to obtain debt or equity financing or negotiate other arrangements, assuming all closing conditions are met, the Company will still be contractually obligated to close the acquisitions as there is no financing contingency
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in either acquisition. In addition, there may be unforeseen expenses in connection with the integration of the Asco's and Bombardier's businesses, and the costs of generating synergies from the acquisitions of the Asco and Bombardier businesses may be higher than expected.
Cash Flows
The following table provides a summary of our cash flows for the six months
ended
For the Six Months Ended
July 2, 2020 June 27, 2019
($ in millions)
Net cash (used in) provided by operating activities
(166.4 ) (77.8 )
Net cash provided by financing activities 333.5 131.6
Effect of exchange rate change on cash and cash
equivalents (7.7 ) (1.5 )
Net (decrease) increase in cash, cash equivalents and restricted cash for the period
(400.3 ) 524.0
Cash, cash equivalents, and restricted cash beginning of period
2,367.2 794.1
Cash, cash equivalents, and restricted cash, end of period
$ 1,966.9 $ 1,318.1
Six Months Ended
Operating Activities. For the six months ended
Investing Activities. For the six months ended
Financing Activities. For the six months ended
Pension and Other Post-Retirement Benefit Obligations
Our
Interest Rate Swaps
On
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During the third quarter of 2019 the Company entered into two interest rate swap
agreements with a combined notional value of
Changes in the fair value of cash flow hedges are recorded in Accumulated Other
Comprehensive Income ("AOCI") and recorded in earnings in the period in which
the hedged transaction occurs. The loss recognized in AOCI was
Debt and Other Financing Arrangements
As of
The carrying value of the Floating Rate Notes, 2023 Notes, and 2028 Notes was
The carrying value of the 2025 Notes and 2026 Notes was
See Note 15, Debt, to our condensed consolidated financial statements included in Part I of this Quarterly Report for more information.
Advance Payments
Advances on the B737 Program. The 2019 MOA included the terms and conditions for
an advance payment to be made from Boeing to Spirit in the amount of
Advances on the B787 Program. Boeing has made advance payments to Spirit under
the B787 Supply Agreement that are required to be repaid to Boeing by way of
offset against the purchase price for future shipset deliveries. As of
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