SPIRIT AEROSYSTEMS HOLDINGS, INC. Unless the context otherwise indicates or requires, as used in this Quarterly Report on Form 10-Q (this "Quarterly Report"), references to "we," "us," "our," and the "Company" refer toSpirit AeroSystems Holdings, Inc. and its consolidated subsidiaries. References to "Spirit" refer only to our subsidiary,Spirit AeroSystems, Inc. , and references to "Holdings" refer only toSpirit AeroSystems Holdings, Inc.
COVID-19
During the six months endedJune 30, 2022 , the COVID-19 pandemic continued to have a significant negative impact on the aviation industry, our customers, and our business globally. Due to the uncertain nature of current conditions around the world, and the capability of conditions to evolve rapidly, we are unable to predict accurately the impact that COVID-19 will have on our business going forward, including for the reasons stated in our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 Form 10-K"). Our expectation is that our business operations will not improve until our customers are willing to produce aircraft at sufficient levels, which is dependent upon the public's willingness to use aircraft travel, sufficient OEM orders (without suspension) from airlines and the financial resources of airlines, other companies and individuals.
Global Economic Events
Global economic conditions may impact our results of operations.Russia's February 2022 invasion ofUkraine , the resultant sanctions and other measures imposed by theU.S. and other governments, and other related impacts have resulted in economic and political uncertainty and risks. In response to the Russian invasion ofUkraine , and the associatedU.S. sanctions, the Company has suspended all sanctioned activities relating toRussia , primarily consisting of sales and service activities. Due to these sanctions and the results of additional assessment of the related assets and liabilities in the second quarter of 2022, we recorded an aggregate loss of$28.1 million related to adjustments of certain assets and liabilities associated with sanctioned Russian business activities. The charges are included on the Condensed Consolidated Statements of Operations for the three-month and six-month periods endedJune 30, 2022 . The prospective impacts to revenues, net income, net assets, cash flow from operations, and the Company's Consolidated Financial Position are not material, however, a significant expansion of economic disruption or escalation of the conflict could have a material adverse effect on orders from our customers and/or our results of operations. Energy, freight, raw material and other costs have been impacted by, and may continue to be impacted by, the conflict. Our associated estimates of such costs, where applicable, use the most recent information available. We continue to monitor and evaluate related risks and uncertainties, including the items discussed in Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
B737 Program
The B737 MAX program is a critical program to the Company. For the twelve months endedDecember 31, 2021 , 2020 and 2019 approximately 35%, 19%, and 53% of our net revenues, respectively, were generated from sales of components to Boeing for the B737 aircraft. While we have entered into long-term supply agreements with Boeing to continue to provide components for the B737 for the life of the aircraft program, including commercial and military P-8 derivatives, Boeing does not have any obligation to purchase components from us for any replacement for the B737 that is not a commercial derivative model as defined by the Special Business Provisions and the General Terms Agreement (collectively, the "Sustaining Agreement") between Spirit and Boeing. The Sustaining Agreement is a requirements contract and Boeing can reduce the purchase volume at any time. InMarch 2019 , the B737 MAX fleet was grounded in theU.S. and internationally following the 2018 and 2019 accidents involving two B737 MAX aircraft. OnNovember 18, 2020 , theFAA issued an order rescinding the grounding of the B737 MAX and published an Airworthiness Directive specifying design changes to be made before the aircraft returned to service. Boeing's deliveries of the B737 MAX resumed in the fourth quarter of 2020. SinceNovember 2020 , regulators fromBrazil ,Canada , the EU,U.K. ,India , and other countries have taken similar actions to unground the B737 MAX and permit return to service. TheCivil Aviation Administration of China , which is the most significant country remaining to allow the B737 MAX to return to service, issued an airworthiness directive inDecember 2021 , directing corrective actions necessary to allow for return to service. During the six months endedJune 30, 2022 , Boeing continued to announce orders for the B737 MAX, and air carriers generally continued resuming flights on the aircraft.
We expect that ongoing demand challenges from the B737 MAX grounding will continue to be exacerbated by the COVID-19 pandemic because other programs that mitigate the strain of the lower B737 MAX production rate have continued
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to be suspended or are producing at lower rates. We expect air travel demand
will continue to improve from 2021 levels as COVID-19 vaccinations are
administered globally. The overall pace of any recovery of air travel demand
will depend on availability, speed and acceptance of vaccinations, the
occurrence and spread of continued COVID-19 mutations, effectiveness of vaccines
on new strains of the COVID-19 virus, government travel restrictions and
availability and speed of test results. We expect that domestic air travel
demand will continue to improve in the near term with international air travel
demand continuing to lag behind. As a result, we expect that the B737 MAX and
other narrowbody production rates will recover to pre-pandemic levels before
widebody production rates. For additional information, see the "Risk Factors"
section of our 2021 Form 10-K.
The 737 MAX 7 and MAX 10 models are currently going through Federal Aviation
Administration (FAA ) certification activities. If our customer is unable to
achieve certification of these models or the entry into service is inconsistent
with current assumptions, future revenues, earnings and cash flows are likely to
be adversely impacted.
B787 Program
In the year ended December 31, 2020 , production rate decreases from our customer
on the B787 program resulted in incremental forward loss charges of $192.5
million . During the year ended December 31, 2021 , the combination of further
production rate decreases from our customer and estimated costs of rework and
engineering changes resulted in incremental forward loss charges of $153.5
million . For the three and six months ended June 30, 2022 , our estimates for
further production rate decreases and build schedule changes, supply chain
costs, and other costs, including costs of rework, drove additional forward
losses of $30.9 million and $44.3 million on the program, respectively. Changes
to the scope of quality issues and any associated rework may increase or
decrease the total estimated loss provision. Additionally, production rate
changes, changes in cost assessments, or claims could result in additional
incremental forward loss charges. See also Note 20, Commitments, Contingencies
and Guarantees.
Results of Operations
The following table sets forth, for the periods indicated, certain of our
operating data:
Three Months Ended Six Months Ended
June 30, July 1, June 30, July 1,
2022 2021 2022 2021
($ in millions) ($ in millions)
Revenue $ 1,257.9 $ 1,002.1 $ 2,432.6 $ 1,902.9
Cost of sales 1,277.5 1,014.4 2,417.4 1,973.2
Gross profit (loss) (19.6) (12.3) 15.2 (70.3)
Selling, general and administrative 70.2 66.9 134.7 124.5
Restructuring costs - 5.2 0.2 7.3
Research and development 14.9 13.3 27.2 21.5
Operating loss (104.7) (97.7) (146.9) (223.6)
Interest expense and financing fee amortization (55.1) (59.1) (114.0) (118.9)
Other income (expense), net 34.6 31.1 72.3 43.9
Loss before income taxes and equity in net loss of affiliate
(125.2) (125.7) (188.6) (298.6)
Income tax benefit (expense) 3.5 (9.0) 14.5 (7.3)
Loss before equity in net loss of affiliate (121.7) (134.7) (174.1) (305.9)
Equity in net loss of affiliate (0.5) (0.6) (0.9) (1.0)
Net loss $ (122.2) $ (135.3) $ (175.0) $ (306.9)
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Comparative shipset deliveries by model are as follows:
Three Months Ended Six Months Ended
June 30, July 1, June 30, July 1,
Model 2022 2021 2022 2021
B737 71 35 131 64
B747 - 2 1 3
B767 8 9 16 19
B777 6 6 11 11
B787 4 11 7 26
Total Boeing 89 63 166 123
A220(1) 16 15 34 27
A320 Family 147 96 302 226
A330 6 4 12 9
A350 11 11 26 23
Total Airbus 180 126 374 285
Total Business and Regional Jets
(2) 49 46 99 89
Total 318 235 639 497
(1) Beginning in 2022, A220 deliveries reflect the number of wing end item
deliveries instead of pylon end item deliveries, as previously reported. A220
deliveries for the three and six months ended July 1, 2021 have been updated to
reflect wing units.
(2) Business and regional jet numbers for the three and six months ended July 1,
2021 incorporate changes resulting from alignment of shipset reporting from
acquired businesses.
For purposes of measuring production or shipset deliveries for Boeing aircraft
in a given period, the term "shipset" refers to sets of structural fuselage
components produced or delivered for one aircraft in such period. For purposes
of measuring production or shipset deliveries for Airbus A220 aircraft in a
given period, the term "shipset" refers to sets of structural wing components
produced or delivered for one aircraft in such period. For purposes of measuring
production or shipset deliveries for all other Airbus and Business/Regional Jet
aircraft in a given period, the term "shipset" refers to all structural aircraft
components produced or delivered for one aircraft in such period. Other
components that are part of the same aircraft shipsets could be produced or
shipped in earlier or later accounting periods than the components used to
measure production or shipset deliveries, which may result in slight variations
in production or delivery quantities of the various shipset components in any
given period.
Net revenues by prime customer are as follows:
Three Months Ended Six Months Ended
June 30, July 1, June 30, July 1,
Prime Customer 2022 2021 2022 2021
($ in millions) ($ in millions)
Boeing $ 762.2 $ 561.8 $ 1,409.4 $ 1,029.7
Airbus 281.1 244.6 585.0 476.2
Other 214.6 195.7 438.2 397.0
Total net revenues $ 1,257.9 $ 1,002.1 $ 2,432.6 $ 1,902.9 Changes in Estimates
During the second quarter of 2022, we recognized unfavorable changes in estimates of$71.7 million , which included net forward loss charges of$63.7 million , and unfavorable cumulative catch-up adjustments related to periods prior to the second quarter of 2022 of$8.0 million . The forward losses in the second quarter relate primarily to increased estimates for production rate decreases and build schedule changes, supply chain costs, and other costs on the B787 program, and anticipated production recovery costs related to the bankruptcy of a supplier and associated failure to deliver key parts on the A220 wing program. Forward loss charges were also recorded on the A350 program driven by production schedule changes, increased labor costs, and increased non-recurring engineering and tooling costs. The forward loss charges for the second quarter of 2022 also include, to a lesser extent than the aforementioned B787, A220, and A350 programs impacts, increased cost projections on the RB3070, B747, B767, Bombardier Challenger 650, and Bell V280 programs, and a partial offset related to the release of a previously recorded forward loss provision that was impacted by the suspension of activities inRussia noted above. The unfavorable cumulative catch-up adjustments primarily relate to the B737 and A320 programs. Increased cost estimates on the 38 -------------------------------------------------------------------------------- Table of Contents B737 program were driven by production schedule changes, parts shortages, and increased supply chain costs. The A320 program unfavorable cumulative catch-up adjustment was driven by production cost overruns experienced and estimates of the impact of production schedule changes, increased material cost, increased freight cost, and increased labor and overhead cost.
During the same period in the prior year, we recognized total unfavorable
changes in estimates of
Three Months Ended
Revenue. Net revenue for the three months endedJune 30, 2022 was$1,257.9 million , an increase of$255.8 million , or 25.5%, compared to net revenue of$1,002.1 million for the same period in the prior year. The increase in revenue was primarily driven by increased production on the B737 program in the current period. The variance also includes the impact of decreased production revenues on the B787, B747 and B767 programs, which was largely offset by increased B777 program revenue on strut and nacelle end items, increased A320 and A220 program revenue, greater Bombardier business jet revenue, Airbus non-recurring revenue, and increased revenue from aftermarket sales as compared to the prior year period. Approximately 83% and 80% of Spirit's net revenues for the second quarter of 2022 and 2021, respectively, came from our two largest customers, Boeing and Airbus. Total deliveries to Boeing increased to 89 shipsets during the second quarter of 2022, compared to 63 shipsets delivered in the same period of the prior year, primarily driven by increased production on the B737 program. Total deliveries to Airbus increased to 180 shipsets during the second quarter of 2022, compared to 126 shipsets delivered in the same period of the prior year, primarily driven by increased production on the A320 program. Deliveries for business/regional jet components increased to 49 shipsets during the second quarter of 2022, compared to 46 shipsets delivered in the same period of the prior year, driven by increased deliveries on our Bombardier business jet programs. In total, deliveries increased to 318 shipsets during the second quarter of 2022, compared to 235 shipsets delivered in the same period of the prior year. Gross (Loss) Profit. Gross loss was($19.6) million for the three months endedJune 30, 2022 , compared to Gross loss of($12.3) million for the same period in the prior year. As noted above, we recorded a charge of$28.1 million in the second quarter of 2022 in relation to the suspension of activities related to customers inRussia due to the Russian invasion ofUkraine , and the associated sanctions. The increased loss from the prior year period includes the impact of the charge and also reflects increased profit on the B737 program production volume increase over the prior year period and lower forward losses relative to the prior year period on the B787 and A350 production programs, partially offset by margin deterioration on the A320, A220, RB3070, Bombardier business jet, and A350 non-recurring programs versus the prior year period. In the second quarter of 2022, we recognized$44.9 million of excess capacity production costs driven by production schedule changes on B737 MAX, A220 and A320 programs and no net workforce adjustments as a result of COVID-19, compared to prior year excess capacity cost of$47.5 million and abnormal costs related to workforce adjustments, net of theU.S. employee retention credit andU.K. government subsidies, of$2.4 million . In the second quarter of 2022, we recognized$8.0 million of unfavorable cumulative catch-up adjustments related to periods prior to the second quarter of 2022, and$63.7 million of net forward loss charges. As mentioned in the Changes in Estimates section above, the forward losses recorded in the second quarter of 2022 were driven by increased estimates for production rate decreases and build schedule changes, supply chain costs, and other costs, including costs of rework on the B787 program, and anticipated production recovery costs related to the bankruptcy of a supplier and associated failure to deliver key parts on the Company's A220 wing program. In the second quarter of 2021, we recorded$9.9 million of favorable cumulative catch-up adjustments related to periods prior to the second quarter of 2021, and$52.2 million of net forward loss charges primarily related to engineering analysis and the estimated cost of rework on the B787 program. The second quarter of 2021 also included additional forward loss charges on the A350 program related to changes to the production schedule and estimated quality improvement costs, and the B767 program due to cost performance. SG&A and Research and Development. Increased labor and administrative activity, relative to the prior year period, for the three months endedJune 30, 2022 , drove SG&A expense$3.3 million higher compared to the same period in the prior year. Greater research and development activity drove expense$1.6 million higher for the three months endedJune 30, 2022 , as compared to the same period in the prior year. Restructuring Costs. Restructuring costs for cost-alignment and headcount reductions as a result of B737 MAX grounding and COVID-19 decreased$5.2 million for the three months endedJune 30, 2022 , as compared to the same period in the prior year. There were no restructuring costs recorded in the current period, and the variance reflects the cost-alignment and headcount reduction activity seen in the prior year period. Operating (Loss) Income. Operating loss for the three months endedJune 30, 2022 was$104.7 million , an increased loss of$7 million , compared to operating loss of$97.7 million for the same period in the prior year. The variance reflects the increased gross loss on sales and changes to restructuring costs, SG&A costs, and research and development costs mentioned above. 39 -------------------------------------------------------------------------------- Table of Contents Interest Expense and Financing Fee Amortization. Interest expense and financing fee amortization for the three months endedJune 30, 2022 decreased$4 million compared to the same period in the prior year, driven by lower interest expense on the repayable investment agreement with BEIS which was in place in the prior year period but fully settled during the current period. See also Note 21 Other Income (Expense), Net. Additionally, the three months endedJune 30, 2022 includes$49.5 million of interest and fees paid or accrued in connection with long-term debt and$1.9 million in amortization of deferred financing costs and original issue discount, compared to$47.7 million of interest and fees paid or accrued in connection with long-term debt and$2.2 million in amortization of deferred financing costs and original issue discount for the same period in the prior year. See also Note 15 Debt. Other (Expense) Income, net. Other income, net for the three months endedJune 30, 2022 was$34.6 million , compared to other income of$31.1 million for the same period in the prior year. The increase in other income reflects a gain in the current period on the settlement of the repayable investment agreement with BEIS (see Note 21 Other Income (Expense), Net) and relatively higher foreign currency gains in the current year period, partially offset by losses in the current period related to settlement of hedged foreign currency exchange contracts (see Note 14 Derivative and Hedging Activities), relatively lower pension income, increased excise tax related to a pension plan assets reversion in the current period (see Note 16 Pension and Other Post-Retirement Benefits), and increased loss on sale of receivables as compared to the prior year period (see Note 5 Accounts Receivable and Allowance for Credit Losses). Provision for Income Taxes. Our reported tax rate includes two principal components: an expected annual tax rate and discrete items resulting in additional provisions or benefits that are recorded in the quarter that an event arises. Events or items that could give rise to discrete recognition include excess tax benefit in respect of share-based compensation, finalizing audit examinations for open tax years, statute of limitations expiration, or a change in tax law. Deferred income tax assets and liabilities are recognized for future income tax consequences attributable to differences between the financial statement carrying amounts for existing asset and liabilities and their respective tax bases. A valuation allowance is recorded to reduce deferred income tax assets to an amount that in management's opinion will ultimately be realized. We have reviewed our material deferred tax assets to determine whether or not a valuation allowance was necessary. Based on evaluation of both the positive and negative evidence available, management determined that it was necessary to continue to maintain a valuation allowance against nearly all of its netU.S. andU.K. deferred tax assets as ofJune 30, 2022 . The net valuation allowance was decreased by$23.7 million in theU.S. and increased by$14.7 million in theU.K. for the three months endedJune 30, 2022 . The income tax provision for the three months endedJune 30, 2022 includes($11.3) million for federal taxes,$4.4 million for state taxes and$3.4 million for foreign taxes. The income tax provision for the three months endedJuly 1, 2021 includes($13.5) million for federal taxes,$20.0 million for state taxes and$2.5 million for foreign taxes. The effective tax rate for the three months endedJune 30, 2022 is 2.74% as compared to (7.19%) for the same period in 2021. As we are reporting a pre-tax loss for the three months endedJune 30, 2022 , an increase in the effective tax rate results in an increase of income tax benefits while a decrease in the rate results in a reduction of income tax benefits. The decrease from theU.S. statutory tax rate (resulting in less tax benefit, given the loss) is attributable primarily to the valuation allowance, partially offset by state and R&D credits generated, net of valuation allowance.
Segments. The following table shows segment revenues and operating income for
the three months ended
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Three Months Ended
June 30, July 1,
2022 2021
($ in millions)
Segment Revenues
Commercial $ 1,031.1 $ 803.6
Defense & Space 146.4 141.8
Aftermarket 80.4 56.7
$ 1,257.9 $ 1,002.1
Segment Operating Income (Loss)
Commercial $ (45.1) $ (44.7)
Defense & Space 13.7 12.4
Aftermarket 11.8 14.8
$ (19.6) $ (17.5)
SG&A (70.2) (66.9)
Research and development (14.9) (13.3)
Total operating loss $ (104.7) $ (97.7)
Commercial segment, Defense & Space segment, and Aftermarket segment represented
approximately 82%, 12%, and 6%, respectively, of our net revenues for the three
months ended June 30, 2022 and approximately 80%, 14%, and 6%, respectively, of
our net revenues for the three months ended July 1, 2021 .
Commercial segment. Commercial segment net revenues for the three months ended
June 30, 2022 were $1,031.1 million , an increase of $227.5 million , or 28%,
compared to the same period in the prior year. The increase in revenues was
primarily driven by increased production on the B737 program in the current
period. The variance also includes the impact of decreased production revenues
on the B787, B747 and B767 programs, which was partially offset by increased
B777 program revenue on strut and nacelle end items, increased A320 and A220
program revenue, greater Bombardier business jet revenue, and increased Airbus
non-recurring revenue as compared to the prior year period.
Commercial segment operating margins were (4%) for the three months ended
June 30, 2022 , compared to (6%) for the same period in the prior year. The
margin for the three months ended June 30, 2022 includes the impact of $23.9
million of the total charge, mentioned above, in relation to the suspension of
activities related to customers in Russia due to the Russian invasion of
Ukraine , and the associated sanctions. An offsetting increase in margin was
driven by lower excess capacity costs, workforce adjustment costs, and
restructuring costs in the current period. The incremental margin impact of the
greater volume of B737 program sales and lower forward losses relative to the
prior year period on the B787 and A350 production programs was largely offset by
margin deterioration on the A320, A220, RB3070, B767, Bombardier business jet,
and A350 non-recurring programs versus the prior year period. In the second
quarter of 2022, the segment recorded unfavorable cumulative catch-up
adjustments of $7.9 million and net forward loss charges of $59.4 million . In
comparison, during the second quarter of 2021, the segment recorded favorable
cumulative catch-up adjustments of $10.5 million and net forward loss charges of
$51.2 million . For the three months ended June 30, 2022 , the Commercial segment
includes $43.1 million of excess capacity production costs, no net workforce
adjustments as a result of COVID-19, and no net restructuring and other costs,
compared with excess capacity costs of $45.5 million , net workforce reductions
of $2.4 million , and restructuring costs of $4.9 million for the same period in
the prior year.
Defense & Space segment. Defense & Space segment net revenues for the three
months ended June 30, 2022 were $146.4 million , an increase of $4.6 million , or
3%, compared to the same period in the prior year. The variance from the prior
year period includes lower KC-46 Tanker production and classified program
revenue, increased Boeing P-8 production revenue, increased Sikorsky CH-53K
revenue, and greater sales of high-temperature materials and composites from our
Fiber Materials Inc. subsidiary versus the prior year period.
Defense & Space segment operating margins for the second quarter were flat year
over year. Segment operating margins were 9% for the three months ended June 30,
2022 , compared to 9% for the same period in the prior year. For the three months
ended June 30, 2022 the Defense & Space segment includes $1.8 million of excess
capacity production costs, compared with excess capacity costs of $2.0 million ,
and restructuring costs of $0.2 million for the same period in the prior year.
The segment
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recorded unfavorable cumulative catch-up adjustments of $0.1 million for the
three months ended June 30, 2022 . The segment recorded net forward loss charges
of $4.3 million for the three months ended June 30, 2022 , primarily on the KC-46
Tanker program, and to a lesser extent the Bell V280 program. In comparison,
during the same period of the prior year, the segment recorded unfavorable
cumulative catch-up adjustments of $0.6 million and net forward loss charges of
$1.0 million .
Aftermarket. Aftermarket segment net revenues for the three months ended
June 30, 2022 were $80.4 million , an increase of $23.7 million , or 42%, compared
to the same period in the prior year. The increase reflects greater spare part
sales and increased maintenance, repair, and overhaul (MRO) sales activity
compared to the same period in the prior year. Aftermarket segment operating
margins were 15% for the three months ended June 30, 2022 , compared to 26% for
the same period in the prior year. The margin for the three months ended
June 30, 2022 includes the impact of $4.2 million of the total charge, mentioned
above, in relation to the suspension of activities related to customers in
Russia due to the Russian invasion of Ukraine , and the associated sanctions. The
decrease in margin also reflects relatively lower margins on spare parts sales
in the current period, partially offset by greater margins on MRO work as
compared to the same period in the prior year. For the three months ended
June 30, 2022 the Aftermarket segment includes no net restructuring and other
costs, compared with restructuring costs of $0.1 million for the same period in
the prior year.
Six Months Ended
Revenue. Net revenue for the six months endedJune 30, 2022 was$2,432.6 million , an increase of$529.7 million , or 27.8%, compared to net revenue of$1,902.9 million for the same period in the prior year. The increase in revenue was primarily driven by increased production on the B737 program in the current period. The variance also includes the impact of decreased production revenues on the B787, B747 and B767 programs, which was largely offset by increased B777 program revenue on strut and nacelle end items, increased A320 and A220 program revenue, greater Bombardier business jet revenue, Airbus non-recurring revenue, and increased revenue from aftermarket sales and defense business as compared to the prior year period. Approximately 82% and 79% of Spirit's net revenues for the six months endedJune 30, 2022 andJuly 1, 2021 , respectively, came from our two largest customers, Boeing and Airbus. Total deliveries to Boeing increased to 166 shipsets during the six months endedJune 30, 2022 , compared to 123 shipsets delivered in the same period of the prior year, primarily driven by increased B737 deliveries. Total deliveries to Airbus increased to 374 shipsets during the six months endedJune 30, 2022 , compared to 285 shipsets delivered in the same period of the prior year, primarily driven by more A320 and A220 deliveries in the current year period. Deliveries for business/regional jet components increased to 99 shipsets during the six months endedJune 30, 2022 , compared to 89 shipsets delivered in the same period of the prior year. In total, deliveries increased to 639 shipsets during the six months endedJune 30, 2022 , compared to 497 shipsets delivered in the same period of the prior year. Gross (Loss) Profit. Gross profit was$15.2 million for the six months endedJune 30, 2022 , compared to gross loss of($70.3) million for the same period in the prior year. As noted above, we recorded a charge of$28.1 million in the second quarter of 2022 in relation to the suspension of activities related to customers inRussia due to the Russian invasion ofUkraine , and the associated sanctions. The increase in profit from the prior year period includes the impact of the charge, offset by lower excess capacity costs driven by increased production during the current year period on B737 MAX, A220 and A320 programs, increased profit on the B737 program production volume increase over the prior year period and lower forward losses relative to the prior year period on the B787 and A350 production programs. The gross profit change from the prior year period was also impacted margin deterioration on the A320, A220, RB3070, Bombardier business jet, and A350 non-recurring programs versus the prior year period, and includes the impact of recognition of$32.6 million of the Aviation Manufacturing Jobs Protection Program award, which was awarded in the second half of 2021 and was amortized as a reduction to cost of sales through the applicable production period that included the first three months of the current year, and higher COVID related costs in the current year period. In the six months endedJune 30, 2022 , we recognized$94.7 million of excess capacity production costs driven by production schedule changes on B737 MAX, A220 and A320 programs, and$9.5 million of net workforce adjustments as a result of COVID-19, compared to prior year excess capacity cost of$115.1 million and abnormal costs related to workforce adjustments of$4.5 million . In the six months endedJune 30, 2022 , we recognized$24.4 million of unfavorable cumulative catch-up adjustments related to periods prior to the six months endedJune 30, 2022 , and$87.5 million of net forward loss charges. The forward losses recorded in the period were driven by increased estimates for production rate decreases and build schedule changes, supply chain costs, and other costs, including costs of rework on the B787 program, increased costs of quality and production rate decreases on the A350 Program, and anticipated production recovery costs related to the bankruptcy of a supplier and associated failure to deliver key parts on the A220 wing program. In the six months endedJuly 1, 2021 , we recorded$0.1 million of favorable cumulative catch-up adjustments related to periods prior to the six months endedJuly 1, 2021 , and$124.6 million of net forward loss charges on B787, B747, B767, and A350 programs. 42 -------------------------------------------------------------------------------- Table of Contents SG&A and Research and Development. SG&A expense was$10.2 million higher for the six months endedJune 30, 2022 , compared to the same period in the prior year. The variance was driven by increased labor, site support, and other administrative activity, as compared to the prior year period. Greater research and development activity drove research and development expense$5.7 million higher for the six months endedJune 30, 2022 , as compared to the same period in the prior year. Restructuring Costs. Restructuring costs of$0.2 million for cost-alignment and headcount reductions as a result of B737 MAX grounding and COVID-19 impacts decreased$7.1 million for the six months endedJune 30, 2022 , compared to the same period in the prior year. The variance reflects the relatively higher cost-alignment and headcount reduction activity seen in the prior year period. Operating (Loss) Income. Operating loss for the six months endedJune 30, 2022 was($146.9) million , an improvement of$76.7 million , compared to operating loss of($223.6) million for the same period in the prior year. The improvement reflects the increased gross profit and changes to restructuring costs, SG&A costs, and research and development costs mentioned above. Interest Expense and Financing Fee Amortization. Interest expense and financing fee amortization for the six months endedJune 30, 2022 decreased$4.9 million compared to the same period in the prior year, driven by lower interest expense on the repayable investment agreement with BEIS which was in place in the prior year period but fully settled during the current period (see Note 21 Other Income (Expense), Net). The six months endedJune 30, 2022 includes$97.6 million of interest and fees paid or accrued in connection with long-term debt and$3.8 million in amortization of deferred financing costs and original issue discount, compared to$96.3 million of interest and fees paid or accrued in connection with long-term debt and$4.6 million in amortization of deferred financing costs and original issue discount for the same period in the prior year. See also Note 15 Debt. Other (Expense) Income, net. Other income, net for the six months endedJune 30, 2022 was$72.3 million , compared to a net income of$43.9 million for the same period in the prior year. The increase in other income reflects a gain in the current period on the settlement of the repayable investment agreement with BEIS (see Note 21 Other Income (Expense), Net) and relatively higher foreign currency gains in the current year period, partially offset by losses in the current period related to settlement of hedged foreign currency exchange contracts (see Note 14 Derivative and Hedging Activities), relatively lower pension income, increased excise tax related to a pension plan assets reversion in the current period (see Note 16 Pension and Other Post-Retirement Benefits), and increased loss on sale of receivables as compared to the prior year period (see Note 5 Accounts Receivable and Allowance for Credit Losses). Provision for Income Taxes. Our reported tax rate includes two principal components: an expected annual tax rate and discrete items resulting in additional provisions or benefits that are recorded in the quarter that an event arises. Events or items that could give rise to discrete recognition include excess tax benefit in respect of share-based compensation, finalizing audit examinations for open tax years, statute of limitations expiration, or a change in tax law. Deferred income tax assets and liabilities are recognized for future income tax consequences attributable to differences between the financial statement carrying amounts for existing asset and liabilities and their respective tax bases. A valuation allowance is recorded to reduce deferred income tax assets to an amount that in management's opinion will ultimately be realized. We have reviewed our material deferred tax assets to determine whether or not a valuation allowance was necessary. Based on evaluation of both the positive and negative evidence available, management determined that it was necessary to continue to maintain a valuation allowance against nearly all of its netU.S. andU.K. deferred tax assets as ofJune 30, 2022 . The net valuation allowance was increased by$43.5 million in theU.S. and increased by$4.3 million in theU.K. for the six months endedJune 30, 2022 . The income tax provision for the six months endedJune 30, 2022 includes($5.3) million for federal taxes,($2.1) million for state taxes and($7.1) million for foreign taxes. The income tax provision for the six months endedJuly 1, 2021 includes($12.3) million for federal taxes,$18.7 million for state taxes and$0.9 million for foreign taxes. The effective tax rate for the six months endedJune 30, 2022 is 7.67% as compared to (2.44%) for the same period in 2021. As we are reporting a pre-tax loss for the six months endedJune 30, 2022 , an increase in the effective tax rate results in an increase of income tax benefits while a decrease in the rate results in a reduction of income tax benefits. The increase from the prior year tax rate (resulting in incremental tax benefit, given the loss) is attributable primarily to the release of valuation allowance on projected net operating loss (NOL) utilization in theU.K. The decrease from theU.S. statutory tax rate (resulting in less tax benefit, given the loss) is attributable primarily to the valuation allowance, partially offset by state and R&D credits generated, net of valuation allowance. 43 -------------------------------------------------------------------------------- Table of Contents Segments. The following table shows segment revenues and operating income for the six months endedJune 30, 2022 andJuly 1, 2021 : Six Months Ended June 30, July 1, 2022 2021 ($ in millions) Segment Revenues Commercial$ 1,969.5 $ 1,499.7 Defense & Space 304.9 295.2 Aftermarket 158.2 108.0$ 2,432.6 $ 1,902.9 Segment Operating Income (Loss) Commercial$ (48.5) $ (127.6) Defense & Space 33.7 24.4 Aftermarket 29.8 25.6$ 15.0 $ (77.6) SG&A (134.7) (124.5) Research and development (27.2) (21.5) Total operating loss$ (146.9) $ (223.6) Commercial segment, Defense & Space segment, and Aftermarket segment represented approximately 81%, 13%, and 7%, respectively, of our net revenues for the six months endedJune 30, 2022 and approximately 79%, 15%, and 6% respectively, of our net revenues for the six months endedJuly 1, 2021 . Commercial segment. Commercial segment net revenues for the six months endedJune 30, 2022 were$1,969.5 million , an increase of$469.8 million , or 31%, compared to the same period in the prior year. The increase in revenues was primarily driven by increased production on the B737 program in the current period. The variance also includes the impact of decreased production revenues on the B787 and B747 programs, which was partially offset by increased B777 program revenue on strut and nacelle end items, increased A320 and A220 program revenue, greater Bombardier business jet revenue, and increased Airbus A350 and non-recurring revenue as compared to the prior year period. Commercial segment operating margins were (2%) for the six months endedJune 30, 2022 , compared to (9%) for the same period in the prior year. The margin for the six months endedJune 30, 2022 includes the impact of$23.9 million of the charge, mentioned above, in relation to the suspension of activities related to customers inRussia due to the Russian invasion ofUkraine , and the associated sanctions. The increase in margin, compared to the same period in the prior year, was driven by lower excess capacity costs and restructuring costs in the current period. The incremental margin impact of the greater volume of B737 program sales and lower forward losses relative to the prior year period on the B787 and A350 production programs was partially offset by margin deterioration on the A320, A220, RB3070, B767, Bombardier business jet, and A350 non-recurring programs versus the prior year period. For the six months endedJune 30, 2022 , the Commercial segment includes$89.9 million of excess capacity production costs,$9.5 million of net workforce adjustments as a result of COVID-19, and($25.5) million , net, of restructuring and other costs, including partial offset related to the Aviation Manufacturing Jobs Protection Program grant of($28.4) million . compared with excess capacity costs of$108.6 million , net workforce reductions of$4.5 million , and restructuring costs of$6.0 million for the same period in the prior year. For the six months endedJune 30, 2022 , the segment recorded unfavorable cumulative catch-up adjustments of$25.2 million and net forward loss charges of$85.2 million . In comparison, for the six months endedJuly 1, 2021 , the segment recorded unfavorable cumulative catch-up adjustments of$0.4 million and net forward loss charges of$118.8 million . Defense & Space. Defense & Space segment net revenues for the six months endedJune 30, 2022 were$304.9 million , an increase of$9.7 million , or 3%, compared to the same period in the prior year. The increase from the prior year period includes lower KC-46 Tanker production revenue, increased Boeing P-8 production revenue, increased Sikorsky CH-53K revenue, and greater sales of high-temperature materials and composites from ourFiber Materials Inc. subsidiary versus the prior year period. 44 -------------------------------------------------------------------------------- Table of Contents Defense & Space segment operating margins were 11% for the six months endedJune 30, 2022 , compared to 8% for the same period in the prior year. The increase in operating income margin for the segment was driven largely by lower excess capacity production costs, lower restructuring costs, and current year recognition of the Aviation Manufacturing Jobs Protection Program grant. The variance also includes the impact of comparatively lower forward loss charges in the current year period, primarily on the KC-46 Tanker program. For the six months endedJune 30, 2022 , the Defense & Space segment includes$4.8 million of excess capacity production costs and($2.3) million , net, of restructuring and other costs, including partial offset related to the Aviation Manufacturing Jobs Protection Program grant of($2.3) million , compared with excess capacity costs of$6.5 million and restructuring costs of$1.1 million for the same period in the prior year. The segment recorded favorable cumulative catch-up adjustments of$0.8 million and net forward loss charges of$2.3 million for the six months endedJune 30, 2022 . In comparison, during the same period of the prior year, the segment recorded favorable cumulative catch-up adjustments of$0.5 million and net forward loss charges of$5.8 million . Aftermarket. Aftermarket segment net revenues for the six months endedJune 30, 2022 were$158.2 million , an increase of$50.2 million , or 46%, compared to the same period in the prior year. The increase reflects greater spare part sales and increased maintenance, repair, and overhaul (MRO) sales activity compared to the same period in the prior year. Aftermarket segment operating margins were 19% for the six months endedJune 30, 2022 , compared to 24% for the same period in the prior year. The margin for the six months endedJune 30, 2022 includes the impact of$4.2 million of the charge, mentioned above, in relation to the suspension of activities related to customers inRussia due to the Russian invasion ofUkraine , and the associated sanctions. For the six months endedJune 30, 2022 , the Aftermarket segment includes($1.9) million , net, of restructuring and other costs, including partial offset related to the Aviation Manufacturing Jobs Protection Program grant of($1.9) million , compared with restructuring costs of$0.2 million for the same period in the prior year.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our principal source of liquidity is operating cash flows from continuing operations. Our operating cash flows from continuing operations have been adversely impacted by the B737 MAX grounding and the COVID-19 pandemic (and resulting production rate changes associated with both events) and we expect that adverse impact to continue for the remainder of 2022 and beyond. For purposes of assessing our liquidity needs in this section, we have assumed that Boeing would not further reduce the B737 MAX production rate and that other customers generally would not further reduce their production rates. As ofJune 30, 2022 , our debt balance was$3,772.5 million . As ofJune 30, 2022 , we had$770.2 million of cash and cash equivalents on the Condensed Consolidated Balance Sheet, which reflects a decrease of$708.4 million from the cash and cash equivalents balance of$1,478.6 million as ofDecember 31, 2021 . In connection with the Company's acquisition of select assets of Bombardier aerostructures and aftermarket services businesses onOctober 30, 2020 , the Company acquired certain liabilities as previously disclosed including financial payment obligation under a repayable investment agreement with theU.K.'s Department for Business, Energy and Industrial Strategy . The repayable investment obligation, which was denominated in GBP, was included on the Company's Consolidated Balance Sheet as ofDecember 31, 2021 , as$41.7 million recorded to other current liabilities and$301.9 million recorded to Other non-current liabilities. InJanuary 2022 , the Company made repayments of$25.6 million to theUK's Department for Business Energy and Industrial Strategy for units sold, including interest, in respect to the agreement. InApril 2022 , the deed of release settled the remaining outstanding repayment obligation in exchange for a payment of$292.8 million . The portion of the payments related to interest expense and the portion of the payments related to principal repayment are included in net cash used in operating activities and net cash used in financing activities, respectively, on the Company's Condensed Consolidated Statement of Cash Flows for the period endedJune 30, 2022 . During the year endedDecember 31, 2021 , theDepartment of Transportation approved our grant claim of$75.5 million filed under the Aviation Manufacturing Jobs Protection Program, a component of the American Rescue Plan Act of 2021. As ofJune 30, 2022 , we have received the full amount approved of$75.5 million . See also Note 5, Accounts Receivable and Allowance for Credit Losses. We have agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing, Airbus, and Rolls-Royce to third-party financial institutions. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with us, and they continue to allow us to monetize the receivables prior to their payment date, subject to payment of a discount. Our ability to continue using such agreements is primarily dependent upon the strength of Boeing's, Airbus's, and Rolls-Royce's financial condition. If any of these financial institutions involved with these arrangements experiences financial difficulties, becomes unwilling to support Boeing, Airbus, or Rolls-Royce due to a deterioration in their financial condition or otherwise, or is otherwise unable to honor the terms of the factoring arrangements, we may experience significant disruption and potential liquidity issues, which could have an adverse impact upon our operating 45 -------------------------------------------------------------------------------- Table of Contents results, financial condition and cash flows. For the six months endedJune 30, 2022 ,$1,309.6 million of accounts receivable were sold via these arrangements. Based on current operating trends, we believe our cash on hand and cash flows generated from operations, together with other potential sources of liquidity and our ability to vary our cost structure quickly, will provide sufficient liquidity for the next twelve months and for the foreseeable future beyond the next twelve months. Nevertheless, we could experience significant fluctuations in our cash flows from period to period, particularly during the current aviation industry crisis. We use our cash for many activities, including operations, M&A integration activities, capital expenditures, debt service, and working capital. While we may be able to modify, defer or eliminate some of these uses to manage our cash consumption, other uses are relatively fixed and are difficult to modify in the short-term. As ofJune 30, 2022 , we were in compliance with all applicable covenants in the agreements governing our indebtedness. Cash Flows
The following table provides a summary of our cash flows for the six months
ended
For the Six Months Ended
June
30, 2022
($ in millions)
Net cash used in operating activities$ (331.7) $ (197.7) Net cash used in investing activities (47.4) (72.2) Net cash used in financing activities (321.8) (332.0) Effect of exchange rate change on cash and cash equivalents (7.6) (2.1)
Net decrease in cash, cash equivalents and restricted cash for the period
(708.5) (604.0)
Cash, cash equivalents, and restricted cash beginning of period 1,498.4
1,893.1
Cash, cash equivalents, and restricted cash, end of period
Six Months Ended
Operating Activities. For the six months endedJune 30, 2022 , we had a net cash outflow of$331.7 million from operating activities, an increase in net outflow of$134 million compared to a net cash outflow of$197.7 million for the same period in the prior year. The increase in net cash outflow primarily represents working capital growth associated with increased production activities as compared to the prior year. The cash outflows from working capital growth offset the impact of comparatively greater earnings and the pension asset reversion to cash discussed in Note 16 Pension and Other Post-Retirement Benefits. The variance to the prior year period also includes cash repayments of$61.5 million made in the current year of the advance payment received from Boeing on the B737 program, and the interest payment associated with the settlement of the repayable investment agreement between the Company and theU.K.'s Department for Business, Energy and Industrial Strategy . See also Note 12 Advance Payments and Note 21 Other Income (Expense), Net.
Investing Activities. For the six months ended
Financing Activities. For the six months endedJune 30, 2022 , we had a net cash outflow of$321.8 million for financing activities, a decrease in outflow of$10.2 million , compared to a net cash outflow of$332.0 million for the same period in the prior year. The decreased cash outflow was primarily driven by the differences between the$289.5 million current year principal repayment of the repayable investment agreement between the Company and theU.K.'s Department for Business, Energy and Industrial Strategy , and the prior year redemption of the$300.0 million principal amount of the$300 million aggregate principal amount of Senior Floating Rate Notes due 2021. During the six months endedJune 30, 2022 , we paid a dividend of$2.2 million to our stockholders of record, compared to a dividend of$2.2 million paid in the same period in the prior year. There were no repurchases of Common Stock under our share repurchase program during either the six months endedJune 30, 2022 orJuly 1, 2021 . 46 -------------------------------------------------------------------------------- Table of Contents Pension and Other Post-Retirement Benefit Obligations As disclosed in the Company's 2021 Form 10-K, effectiveOctober 1, 2021 , we spun off a portion of the existing Pension Value Plan ("PVP A"), called PVP B. As part of the PVP B plan termination process, a lump sum offering was provided during 2021 for PVP B participants and the final asset distribution was completed in the first quarter of 2022. AtJune 30, 2022 , a pension reversion asset of$70.3 million is recorded on the Restricted plan assets line item on the Condensed Consolidated Balance Sheets. Restricted plan assets are expected to be reduced over the next seven years as they are distributed to employees under a qualified compensation and benefit program. Separately, during the three and six months endedJune 30, 2022 , we withdrew$34.0 million of cash from PVP B, which represented an excess plan assets reversion. This transaction was accounted for as a negative contribution, and is included on the Pension plans employer contributions line item on the Condensed Consolidated Statements of Cash Flows for the six months endedJune 30, 2022 . Excise tax of$6.8 million related to the reversion of excess plan assets was separately recorded to the Other income (expense), net line item on the Condensed Consolidated Statements of Operations for the three and six months endedJune 30, 2022 . See also Note 21 Other Income (Expense), Net. OurU.S. pension plan remained fully funded atJune 30, 2022 . Our plan investments are broadly diversified and we do not anticipate a near-term requirement to make cash contributions to ourU.S. pension plan. See Note 16, Pension and Other Post-Retirement Benefits, for more information on the Company's pension plans. Other than the reversion of excess plan assets noted above, which was accounted for as a negative contribution, the Company's expected contributions for the current year have not significantly changed from those described in the Company's 2021 Form 10-K. The Shorts' Pension is in a deficit position and there is a risk that additional contributions will be required to fund the deficit from the trustees or theU.K. Pension Regulator as described under Part I, Item 1A. "Risk Factors" of our 2021 Form 10-K.
Derivatives Accounted for as Hedges
Cash Flow Hedges - Foreign Currency Forward Contract
The Company has entered into a series of currency forward contracts, each designated as a cash flow hedge upon the date of execution, for the purpose of reducing the variability of cash flows and hedging against the foreign currency exposure for forecasted payroll, pension and vendor disbursements that are expected to be made in the British pound sterling at our operations located inBelfast, Northern Ireland . The hedging program implemented is intended to reduce foreign currency exposure, and the associated forward currency contracts hedge forecasted transactions throughMarch 2023 . Changes in the fair value of cash flow hedges are recorded in AOCI and recorded in earnings in the period in which the hedged transaction settles. The loss recognized in AOCI was$17.0 million for the six months endedJune 30, 2022 . Within the next 12 months, the Company expects to recognize a loss of$13.3 million in earnings related to the foreign currency forward contracts. As ofJune 30, 2022 , the maximum term of the hedged forecasted transaction was 9 months.
Derivatives Not Accounted for as Hedges
During the six months endedJune 30, 2022 , the Company entered into foreign currency forward contracts in the amount of$291.5 million to minimize the risk of currency exchange rate movements on the Company's planned settlement of the repayable investment agreement between the Company and theU.K.'s Department for Business, Energy and Industrial Strategy . During the six-month period endedJune 30, 2022 , these foreign currency forward contracts were settled and new contracts were entered into in the amount of$293.7 million , which were also settled during the period. The Company did not designate these forward contracts as hedges or apply hedge accounting to the forward contracts. For the six months endedJune 30, 2022 , the Company recorded a net gain of$1.6 million to other income on the Condensed Consolidated Statements of Operations related to the foreign currency forward contracts.
See Note 14, Derivative and Hedging Activities, to our condensed consolidated financial statements included in Part I of this Quarterly Report for more information.
Debt and Other Financing Arrangements
As of
As of
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As of
See Note 15, Debt, to our condensed consolidated financial statements included in Part I of this Quarterly Report for more information.
Information Regarding Guarantors of Spirit's Notes Registered Under the Securities Act of 1933
Spirit's 2026 Notes are guaranteed by Spirit NC and the Company, and Spirit's 2023 Notes and 2028 Notes are guaranteed by the Company. None of Spirit's notes are guaranteed by Spirit's or the Company's other domestic subsidiaries or any foreign subsidiaries (together, the "non-guarantor subsidiaries"). The Company consolidates each of Spirit and Spirit NC in its consolidated financial statements. Spirit and Spirit NC are both 100 percent-owned and controlled by the Company. The Company's guarantees of Spirit's indebtedness are full and unconditional, except that the guarantees may be automatically released and relieved upon satisfaction of the requirements for legal defeasance or covenant defeasance under the applicable indenture being met. The Company's guarantees are also subject to a standard limitation which provides that the maximum amount guaranteed by the Company will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws. The guarantees of the Company and Spirit NC with respect to Spirit's 2026 Notes are made on a joint and several basis. The guarantee of Spirit NC is not full and unconditional because Spirit NC can be automatically released and relieved of its obligations under certain circumstances, including if it no longer guarantees Spirit's credit facility. Like the Company's guarantees, the guarantee of Spirit NC is subject to a standard limitation which provides that the maximum amount guaranteed by Spirit NC will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws. All of the existing guarantees by the Company and Spirit NC rank equally in right of payment with all of the guarantors' existing and future senior indebtedness. The secured indebtedness of the Company and Spirit NC (including guarantees of Spirit's existing and future secured indebtedness) will be effectively senior to guarantees of any unsecured indebtedness to the extent of the value of the assets securing such indebtedness. Future guarantees of subordinated indebtedness will rank junior to any existing and future senior indebtedness of the guarantors. The guarantees are structurally junior to any debt or obligations of non-guarantor subsidiaries, including all debt or obligations of subsidiaries that are released from their guarantees of the notes. As ofJune 30, 2022 , indebtedness of our non-guarantor subsidiaries included$205.2 million of outstanding borrowings under intercompany agreements with guarantor subsidiaries and$18.2 million of finance leases of our non-guarantor subsidiaries. Based on our understanding of Rule 3-10 of Regulation S-X ("Rule 3-10"), we believe that the Company's guarantees of Spirit's indebtedness comply with the conditions set forth in Rule 3-10, which enable us to present summarized financial information for the Company, Spirit and Spirit NC, which is a consolidated guarantor subsidiary, in accordance with Rule 13-01 of Regulation S-X. The summarized financial information excludes information regarding the non-guarantor subsidiaries. In accordance with Rule 3-10, separate financial statements of the guarantor subsidiaries have not been presented. The following tables include summarized financial information of Spirit, Holdings, and Spirit NC (together, the "obligor group"). Investments in and equity in the earnings of the Company's other subsidiaries (the "Non-Guarantor Subsidiaries"), which are not a member of the obligor group, have been excluded. The summarized financial information of the obligor group is presented on a combined basis for Spirit and Holdings, and separately for Spirit NC, with intercompany balances and transactions between entities in the obligor group eliminated. The obligor group's amounts due from, amounts due to and transactions with Non-Guarantor Subsidiaries have been presented in separate line items, if they are material. There are no non-controlling interest in any of the obligor group entities. Summarized Statements of Income Six months ended June 30, 2022 ($ millions) Holdings and Spirit Spirit NC Net Sales to unrelated parties $ 1,819.6 $ - Net Sales to Non-Guarantor Subsidiaries 11.0 15.5 Gross loss on sales to unrelated parties 76.1 - Gross loss on sales to Non-Guarantor Subsidiaries (3.1) (1.3) (Loss) Income from continuing operations (142.7) (3.6) Net (loss) income $ (142.7) $ (3.6) 48
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Summarized Balance Sheets Holdings and Spirit Spirit NC
December 31, December 31,
($ millions) June 30, 2022 2021 June 30, 2022 2021
Assets
Cash and cash equivalents $ 658.3 $ 1,291.2 $ - $ -
Receivables due from Non-Guarantor
Subsidiaries 66.9 51.7 16.6 19.1
Receivables due from unrelated parties 291.4 262.3 - -
Contract assets 445.8 400.5 - -
Inventory, net 805.7 804.9 126.0 139.0
Other current assets - - - -
Total current assets $ 2,268.1 $ 2,810.6 $ 142.6 $ 158.1
Loan receivable from Non-Guarantor
Subsidiaries 205.2 107.2 - -
Property, plant and equipment, net 1,520.9 1,591.2 224.1 242.6
Pension assets, net 478.4 505.9 - -
Other non-current assets 291.1 313.3 5.5 5.8
Total non-current assets $ 2,495.6 $ 2,517.6 $ 229.6 $ 248.4
Liabilities
Accounts payable to Non-Guarantor
Subsidiaries $ 118.1 $ 86.3 $ 12.0 $ 10.5
Accounts payable to unrelated parties 579.4 516.3 20.7 22.3
Accrued expenses 274.9 279.5 1.5 0.6
Current portion of long-term debt 341.4 42.9 1.1 1.1
Other current liabilities 365.4 487.9 0.5 0.6
Total current liabilities $ 1,679.2 $ 1,412.9 $ 35.8 $ 35.1
Long-term debt 3,406.9 3,721.5 5.0 5.5
Contract liabilities, long-term 276.2 289.1 - -
Forward loss provision, long-term 221.6 283.0 - -
Other non-current liabilities 513.2 565.9 5.0 5.2
Total non-current liabilities $ 4,417.9 $ 4,859.5 $ 10.0 $ 10.7 Supply Chain Financing Applicable to Suppliers
We have provided our suppliers with access to a supply chain financing program through a facility with a third-party financing institution. This program was primarily entered into as a result of seeking payment term extensions with suppliers, and the program allows suppliers to monetize the receivables prior to their payment date, subject to payment of a discount. Our suppliers' ability to continue using such agreements is primarily dependent upon the strength of our financial condition. While our suppliers' access to this supply chain financing program could be curtailed if our credit ratings are downgraded, we do not expect that changes in the availability of supply chain financing to our suppliers will have a significant impact on our liquidity. The balance of payables to suppliers who elected to participate in the supply chain financing program included in our accounts payable balance as ofJune 30, 2022 was$95.7 million . The balance as ofJuly 1, 2021 was$55.5 million . Payables to suppliers who elected to participate in the supply chain financing program increased by$36.8 million over the six-month period endedJune 30, 2022 . Payables to suppliers who elected to participate in the supply chain financing program did not significantly increase or decrease over the six-month period endedJuly 1, 2021 . The changes in each period primarily reflect purchases from suppliers related to production during the applicable period in relation to the immediately preceding period and not any changes in the availability of supply chain financing.
Advance Payments
Advances on the B787 Program. Boeing has made advance payments to Spirit under the B787 Supply Agreement that are required to be repaid to Boeing by way of offset against the purchase price for future shipset deliveries. As ofJune 30, 2022 , the amount of advance payments received by us from Boeing under the B787 Supply Agreement and not yet repaid was approximately$211.2 million . Advances on the B737 Program. In an effort to minimize the disruption to Spirit's operations and its supply chain, Spirit and Boeing entered into a Memorandum of Agreement onApril 12, 2019 (the "2019 MOA"), which included the terms and conditions for an advance payment to be made from Boeing to Spirit in the amount of$123 million , which was received during the third quarter of 2019. The parties entered into another memorandum of agreement onFebruary 6, 2020 (the "2020 MOA"), which extended the repayment date of the$123 million advance received by Spirit under the 2019 MOA to 2022. The 2020 49 -------------------------------------------------------------------------------- Table of Contents MOA also required Boeing to pay$225 million to Spirit in the first quarter of 2020, consisting of (i)$70 million in support of Spirit's inventory and production stabilization, of which$10 million was repaid by Spirit in 2021, and (ii)$155 million as an incremental pre-payment for costs and shipset deliveries over the next two years. OnFebruary 9, 2021 , Spirit signed a letter of agreement under which Boeing paid$38.5 million to Spirit in the first quarter of 2021, which consisted of (i)$68.5 million as additional pre-payment for the costs and shipset deliveries less the (ii)$30 million credit owed to Boeing for rate-based pricing premium. During the six-month period endedJune 30, 2022 ,$61.5 million of the advance payment was repaid. As ofJune 30, 2022 , the amount of advance payments received from Boeing and not yet repaid was$61.5 million . Other. The Advance payments, short-term line item on the Condensed Consolidated Balance Sheet for the period endedJune 30, 2022 includes$18.9 million related to payment received from an Aftermarket segment customer for contracted work that was impacted by the sanctions imposed by theU.S. and other governments onRussia following its invasion ofUkraine . CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS You should read the discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and the notes to the unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report"). The section may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements reflect our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "aim," "anticipate," "believe," "could," "continue," "estimate," "expect," "forecast," "goal," "intend," "may," "might," "objective," "plan," "predict," "project," "should," "target," "will," "would," and other similar words, or phrases, or the negative thereof, unless the context requires otherwise. These statements reflect management's current views with respect to future events and are subject to risks and uncertainties, both known and unknown, including, but not limited to, those described in the "Risk Factors" section of our Annual Report on Form 10-K 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:
•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; •demand for our products and services and the general effect of economic or geopolitical conditions (includingRussia's invasion ofUkraine and the resultant sanctions being imposed in response to the conflict), or other events, such as pandemics, in the industries and markets in which we operate in theU.S. and globally; •the timing and conditions surrounding the full worldwide return to service (including receiving the remaining regulatory approvals) of the B737 MAX, future demand for the aircraft, and any residual impacts of the B737 MAX grounding on production rates for the aircraft; •our reliance on The Boeing Company ("Boeing") and Airbus Group SE and its affiliates (collectively, "Airbus") for a significant portion of our revenues; •the business condition and liquidity of our customers and their ability to satisfy their contractual obligations to the Company; •the certainty of our backlog, including the ability of customers to cancel or delay orders prior to shipment on short notice, and the potential impact of regulatory approvals of existing and derivative models; •our ability to accurately estimate and manage performance, cost, margins, and revenue under our contracts, and the potential for additional forward losses on new and maturing programs; •our accounting estimates for revenue and costs for our contracts and potential changes to those estimates; •our ability to continue to grow and diversify our business, execute our growth strategy, and secure replacement programs, including our ability to enter into profitable supply arrangements with additional customers; •the outcome of product warranty or defective product claims and the impact settlement of such claims may have on our accounting assumptions; •our dependence on our suppliers, as well as the cost and availability of raw materials and purchased components, including increases in energy, freight, and other raw material costs as a result of the sanctions being imposed in response toRussia's invasion ofUkraine ; •our ability and our suppliers' ability to meet stringent delivery (including quality and timeliness) standards and accommodate changes in the build rates of aircraft, including the ability to staff appropriately for anticipated production volume increases; 50 -------------------------------------------------------------------------------- Table of Contents •our ability to maintain continuing, uninterrupted production at our manufacturing facilities and our suppliers' facilities; •competitive conditions in the markets in which we operate, including in-sourcing by commercial aerospace original equipment manufacturers; •our ability to successfully negotiate, or re-negotiate, future pricing under our supply agreements with Boeing, Airbus and other customers; •our ability to effectively integrate the acquisition of select assets of Bombardier along with other acquisitions that we pursue, and generate synergies and other cost savings therefrom, while avoiding unexpected costs, charges, expenses, and adverse changes to business relationships and business disruptions; •the possibility that our cash flows may not be adequate for our additional capital needs; •any reduction in our credit ratings; •our ability to access the capital markets to fund our liquidity needs, and the costs and terms of any additional financing; •our ability to avoid or recover from cyber or other security attacks and other operations disruptions; •legislative or regulatory actions, both domestic and foreign, impacting our operations, including the effect of changes in tax laws and rates and our ability to accurately calculate and estimate the effect of such changes; •our ability to recruit and retain a critical mass of highly skilled employees; •our relationships with the unions representing many of our employees, including our ability to successfully negotiate new agreements, and avoid labor disputes and work stoppages with respect to our union employees; •spending by theU.S. and other governments on defense; •pension plan assumptions and future contributions; •the effectiveness of our internal control over financial reporting; •the outcome or impact of ongoing or future litigation, arbitration, claims, and regulatory actions or investigations, including our exposure to potential product liability and warranty claims; •adequacy of our insurance coverage; •our ability to continue selling certain receivables through our supplier financing programs; and •the risks of doing business internationally, including fluctuations in foreign currency exchange rates, impositions of tariffs or embargoes, trade restrictions, compliance with foreign laws, and domestic and foreign government policies. These factors are not exhaustive and it is not possible for us to predict all factors that could cause actual results to differ materially from those reflected in our forward-looking statements. These factors speak only as of the date hereof, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. As with any projection or forecast, these statements are inherently susceptible to uncertainty and changes in circumstances. Except to the extent required by law, we undertake no obligation to, and expressly disclaim any obligation to, publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should review carefully the section captioned "Risk Factors" in our most recent Annual Report on Form 10-K for a more complete discussion of these and other factors that may affect our business. 51
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