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Spirit AeroSystems Holdings, Inc. (“Holdings” or the “Company”) provides manufacturing and design expertise in a wide range of fuselage, propulsion, and wing products and services for aircraft original equipment manufacturers (“OEM”) and operators through its subsidiary, Spirit AeroSystems, Inc. (“Spirit”). The Company's headquarters are in Wichita, Kansas, with manufacturing and assembly facilities in Tulsa and McAlester, Oklahoma; Prestwick, Scotland; Wichita, Kansas; Kinston, North Carolina; Subang, Malaysia; Saint-Nazaire, France; San Antonio, Texas; and Biddeford, Maine.

The accompanying unaudited interim condensed consolidated financial statements include the Company’s financial statements and the financial statements of its majority-owned or controlled subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the instructions to Form 10-Q and Article 10 of Regulation S-X.  The Company’s fiscal quarters are 13 weeks in length. Since the Company’s fiscal year ends on December 31, the number of days in the Company’s first and fourth quarters varies slightly from year to year. All intercompany balances and transactions have been eliminated in consolidation.

As part of the monthly consolidation process, the Company’s international entities that have functional currencies other than the U.S. dollar are translated to U.S. dollars using the end-of-month translation rate for balance sheet accounts and average period currency translation rates for revenue and income accounts. The U.K. and Malaysian subsidiaries use the British pound as their functional currency. All other foreign subsidiaries and branches use the U.S. dollar as their functional currency.

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments and elimination of intercompany balances and transactions) considered necessary to fairly present the results of operations for the interim period. The results of operations for the six months ended July 2, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

In connection with the preparation of the condensed consolidated financial statements, the Company evaluated subsequent events through the date the financial statements were issued. The interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2020 (the “2019 Form 10-K”).

The Company's significant accounting policies are described in Note 3, Summary of Significant Accounting Policies to our consolidated financial statements in the 2019 Form 10-K. The single update to the significant accounting policies described in the 2019 Form 10-K is related to the impact of adopting ASU No. 2016-13, Financial Instruments - Credit losses (Topic 326) (“ASU 2016-13”) and is described in detail in Note 2, Adoption of New Accounting Standards, and Note 5, Accounts Receivable and Allowance for Credit Losses.

Recent Developments

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

•	On April 12, 2019, Boeing and the Company executed a Memorandum of Agreement (the “2019 MOA”) providing that the Company was to maintain its delivery rate of 52 shipsets per month with respect to the B737 MAX. Previously, the Company was expecting to increase production to a rate of 57 shipsets per month;

•	On December 19, 2019, Boeing directed the Company to stop all B737 MAX deliveries to Boeing effective January 1, 2020. Accordingly, Spirit suspended all B737 MAX production beginning on January 1, 2020;

•	On February 6, 2020, Boeing and Spirit entered into a Memorandum of Agreement (the “2020 MOA”) largely superseding the 2019 MOA and providing for Spirit to deliver to Boeing 216 B737 MAX shipsets in 2020;

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•	On May 4, 2020, Boeing and the Company agreed that Spirit would deliver 125 B737 MAX shipsets to Boeing in 2020; and

•	On June 19, 2020, Boeing directed Spirit to reduce its 2020 B737 production plan from 125 to 72 shipsets.

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

The Company has taken several actions to reduce costs, increase liquidity and strengthen its financial position in light of the economic impact of the COVID-19 pandemic, and the B737 MAX grounding and related production changes including the following:

•	Reduced pay for all U.S.-based executives by 20 percent until further notice;

•	Reduced 2020-2021 term non-employee director compensation by 15 percent;

•	Reduced planned capital expenditures and operating expenses;

•	Suspended its share repurchase program;

•	Reduced quarterly dividends to one penny per share;

•	Initiated multiple production worker furloughs;

•	Implemented a four-day work week for its salaried workforce at its Wichita, Kansas facility until further notice;

•	Reduced ~5,500 employees globally including voluntary retirement;

•	Amended our 2018 Credit Agreement for covenant relief;

•	Issued $1.2 billion in senior secured second-lien notes in April 2020; and

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Elected to defer the payment of $15.9 in employer payroll taxes incurred through July 2, 2020, as provided by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), of which 50% is required to be deposited by December 2021 and the remaining 50% by December 2022. In addition, as of July 2, 2020 the Company has recorded a deferral of $28.5 of VAT payments until March 2021 under the United Kingdom deferral scheme.

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

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

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

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

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022, and an entity may elect to apply ASU 2020-04 for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. An entity may elect to apply ASU 2020-04 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

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

The Company has a periodic forecasting process in which management assesses the progress and performance of the Company’s programs. This process requires management to review each program’s progress by evaluating the program schedule, changes to identified risks and opportunities, changes to estimated revenues and costs for the accounting contracts (and options if applicable), and any outstanding contract matters. Risks and opportunities include but are not limited to management’s judgment about the cost associated with the Company’s ability to achieve the schedule, technical requirements (e.g., a newly-developed product versus a mature product), and any other program requirements. Due to the span of years it may take to completely satisfy the performance obligations for the accounting contracts (and options, if any) and the scope and nature of the work required to be performed on those contracts, the estimation of total revenue and costs is subject to many variables and, accordingly, is subject to change based upon judgment. When adjustments in estimated total consideration or estimated total cost are required, any changes from prior estimates for fully satisfied performance obligations are recognized in the current period as a cumulative catch-up adjustment for the inception-to-date effect of such changes. Cumulative catch-up adjustments are driven by several factors including production efficiencies, assumed rate of production, the rate of overhead absorption, changes to scope of work, and contract modifications. The year-to-date forward losses relate primarily to negative changes in estimates on the B787 and A350 programs due to disruption related to production rate reductions and the global pandemic. The Company provided previous guidance which disclosed an estimated forecasted forward loss in the quarter ended July 2, 2020 on the B787 program of $70-$90 and the A350 program of $15-$20 (this was based upon data which became available after the first quarter balance sheet date of April 2, 2020). Throughout the quarter ended July 2, 2020 the dynamics of demand for wide body aircraft continued to evolve from the facts and assumptions available to the Company at the time the second quarter Form 10Q was filed as a result of uncertainty regarding timing of the resolution of the global pandemic and the ultimate impact upon the aviation and travel industries. As such, throughout the second

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

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

Changes in estimates are summarized below:

		For the Three Months Ended								For the Six Months Ended
Changes in Estimates		July 2, 2020				June 27, 2019				July 2, 2020				June 27, 2019
(Unfavorable) Favorable Cumulative Catch-up Adjustment by Segment
Fuselage		$	(31.1	)		$	(8.3	)		$	(24.6	)		$	(5.3	)
Propulsion		(5.1		)		(6.6		)		(5.6		)		(3.5		)
Wing		(1.6		)		1.7				(3.3		)		1.7
Other		0.1				$	—			$	—			$	—
Total (Unfavorable) Favorable Cumulative Catch-up Adjustment		$	(37.7	)		$	(13.2	)		$	(33.5	)		$	(7.1	)
Changes in Estimates on Loss Programs (Forward Loss) by Segment
Fuselage		$	(155.1	)		$	1.3			$	(168.3	)		$	5.0
Propulsion		(16.2		)		0.4				(19.3		)		0.9
Wing		(22.8		)		0.6				(26.2		)		1.1
Total Changes in Estimates (Forward Loss) on Loss Programs		$	(194.1	)		$	2.3			$	(213.8	)		$	7.0
Total Change in Estimate		$	(231.8	)		$	(10.9	)		$	(247.3	)		$	(0.1	)
EPS Impact (diluted per share based upon 2020 forecasted effective tax rate)		$	(1.45	)		$	(0.08	)		$	(1.55	)		$	—

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Accounts Receivable, net

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

Accounts receivable, net consists of the following:

	July 2, 2020				December 31, 2019
Trade receivables	$	282.0			$	515.2
Other	26.1				32.6
Less: allowance for doubtful accounts	(2.1		)		(1.4		)
Accounts receivable, net	$	306.0			$	546.4

The Company has two agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing and Airbus to third party financial institutions. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with the Company and they continue to allow Spirit to monetize the receivables prior to their payment date, subject to payment of a discount. No guarantees are delivered under the agreements. Our ability to continue using such agreements is primarily dependent upon the strength of Boeing’s and Airbus’s financial condition. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being derecognized from the Company's balance sheet. For the six months ended July 2, 2020, $1,089.2 of accounts receivable have been sold via these arrangements. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on sale of receivables is $4.7 for the six months ended July 2, 2020 and is included in Other income and expense. See Note 21, Other (Expense) Income, Net.

Allowance for Credit Losses

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

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

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

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The changes to the allowance for credit losses and related credit loss expense reported for the current period were solely based on the results of the CECL model. For the three months ended July 2, 2020, continued worsening economic conditions related to the COVID-19 pandemic influenced management’s current estimate of expected credit losses. In particular, trade accounts receivables from certain suppliers are now included in the historical loss rate method CECL model at a higher loss-rate than previously estimated. This change did not have a material impact on reported results for the three or six month periods ended July 2, 2020. Other than this change, there have been no significant changes in the factors that influenced management’s current estimate of expected credit losses, nor changes to the Company’s accounting policies or CECL methodology. The beginning balances, current period activity, and ending balances of the allocation for credit losses on accounts receivable and contract assets were not material.

Contract assets primarily represent revenues recognized for performance obligations that have been satisfied but for which amounts have not been billed. Contract assets, current are those that are expected to be billed to our customer within 12 months. Contract assets, long-term are those that are expected to be billed to our customer over periods greater than 12 months. No impairments to contract assets were recorded for the period ended July 2, 2020 or the period ended June 27, 2019. See also Note 5, Accounts Receivable and Allowance for Credit Losses.

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

	July 2, 2020			December 31, 2019			Change
Contract assets	$	326.5		$	534.7		$	(208.2	)
Contract liabilities	(511.2		)	(514.6		)	3.4
Net contract assets (liabilities)	$	(184.7	)	$	20.1		$	(204.8	)

For the period ended July 2, 2020, the decrease in contract assets reflects the net impact of less overtime revenue recognition in relation to billed revenues during the period. The decrease in contract liabilities reflects the net impact of less deferred revenues recorded in excess of revenue recognized during the period. The Company recognized $61.2 of revenue that was included in the contract liability balance at the beginning of the period.

	June 27, 2019			December 31, 2018			Change
Contract assets	$	624.6		$	523.5		$	101.1
Contract liabilities	(522.1		)	(527.7		)	5.6
Net contract assets (liabilities)	$	102.5		$	(4.2	)	$	106.7

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

Disaggregation of Revenue

The Company disaggregates revenue based on the method of measuring satisfaction of the performance obligation either over time or at a point in time, based upon the location where products and services are transferred to the customer, and based upon major customer. The Company’s principal operating segments and related revenue are noted in Note 22, Segment Information.

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

		For the Three Months Ended							For the Six Months Ended
Revenue		July 2, 2020			June 27, 2019				July 2, 2020			June 27, 2019
Contracts with performance obligations satisfied over time		$	395.4		$	1,542.0			$	1,001.3		$	3,024.9
Contracts with performance obligations satisfied at a point in time		249.2			474.1				720.6			959.0
Total Revenue		$	644.6		$	2,016.1			$	1,721.9		$	3,983.9

The following table disaggregates revenue by major customer:

		For the Three Months Ended							For the Six Months Ended
Customer		July 2, 2020			June 27, 2019				July 2, 2020			June 27, 2019
Boeing		$	370.0		$	1,614.7			$	1,046.1		$	3,163.1
Airbus		128.0			320.1				415.1			649.9
Other		146.6			81.3				260.7			170.9
Total Revenue		$	644.6		$	2,016.1			$	1,721.9		$	3,983.9

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

		For the Three Months Ended							For the Six Months Ended
Location		July 2, 2020			June 27, 2019				July 2, 2020			June 27, 2019
United States		$	511.9		$	1,686.8			$	1,294.4		$	3,315.7
International
United Kingdom		70.5			191.2				254.5			399.7
Other		62.2			138.1				173.0			268.5
Total International		132.7			329.3				427.5			668.2
Total Revenue		$	644.6		$	2,016.1			$	1,721.9		$	3,983.9

Remaining Performance Obligations

Unsatisfied, or partially unsatisfied, performance obligations that are expected to be recognized in the future are noted in the table below. The Company expects options to be exercised in addition to the amounts presented below:

	Remaining in 2020			2021			2022			2023 and After
Unsatisfied performance obligations	$	1,251.4		$	2,970.1		$	3,668.8		$	4,583.8

Inventory consists of raw materials used in the production process, work-in-process, which is direct material, direct labor, overhead and purchases, and capitalized preproduction costs. Raw materials are stated at lower of cost (principally on an actual

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or average cost basis) or net realizable value. Capitalized pre-production costs include certain contract costs, including applicable overhead, incurred before a product is manufactured on a recurring basis. These costs are typically amortized over a period that is consistent with the satisfaction of the underlying performance obligations to which these relate.

	July 2, 2020				December 31, 2019
Raw materials	$	314.1			$	253.1
Work-in-process(1)	869.4				822.8
Finished goods	15.4				14.5
Product inventory	1,198.9				1,090.4
Capitalized pre-production	27.0				28.4
Total inventory, net	$	1,225.9			$	1,118.8

(1)

Work-in-process inventory includes direct labor, direct material, overhead, and purchases on contracts for which revenue is recognized at a point in time as well as sub-assembly parts that have not been issued to production on contracts for which revenue is recognized using the input method. For the periods ended July 2, 2020 and December 31, 2019, work-in-process inventory includes $181.0 and $157.2, respectively, of costs incurred in anticipation of specific contracts and no impairments were recorded in the period.

Product inventory, summarized in the table above, is shown net of valuation reserves of $51.0 and $39.0 as of July 2, 2020 and December 31, 2019, respectively.

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

 

Property, plant and equipment, net consists of the following: 

 

	July 2, 2020				December 31, 2019
Land	$	17.2			$	15.9
Buildings (including improvements)	930.7				924.0
Machinery and equipment	1,966.0				1,941.5
Tooling	1,019.3				1,047.4
Capitalized software	277.4				277.8
Construction-in-progress	182.1				192.8
Total	4,392.7				4,399.4
Less: accumulated depreciation	(2,212.0		)		(2,127.7		)
Property, plant and equipment, net	$	2,180.7			$	2,271.7

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

 

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The Company capitalizes certain costs, such as software coding, installation, and testing, that are incurred to purchase or to create and implement internal-use computer software.  Depreciation expense related to capitalized software was $4.2 and $4.7 for the three months ended July 2, 2020 and June 27, 2019, respectively, and $8.5 and $9.0 for the six month ended July 2, 2020 and June 27, 2019, respectively.

 

The Company reviews capital and amortizing intangible assets (long-lived assets) for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  During the three month period ended July 2, 2020, the Company disposed of long-lived assets with a net book value of $19.2 and $3.7 related to production decreases, process-related changes and quality improvement initiatives on the B787 and A350 programs, respectively. By segment, the disposal charge consist of $22.5 and $0.4 related to the Fuselage System and Wing System, respectively, and is included as a separate line item of the operating loss in the Condensed Consolidated Statements of Operation for the three and six months ended as of July 2, 2020. Additionally, for the period ended July 2, 2020, the Company determined that the economic uncertainty caused by the COVID-19 pandemic was a trigger for an impairment review of long-lived assets. After conducting such review, we determined that there was no impairment of the remaining long-lived assets as of July 2, 2020.

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

ROU assets represent the right of the Company to use an underlying asset for the length of the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

To determine the present value of lease payments, the Company uses its estimated incremental borrowing rate or the implicit rate, if readily determinable. The estimated incremental borrowing rate is based on information available at the lease commencement date, including any recent debt issuances and publicly available data for instruments with similar characteristics. The ROU asset also includes any lease payments made and excludes lease incentives.

The Company's lease terms may include options to extend or terminate the lease and, when it is reasonably certain that an option will be exercised, those options are included in the net present value calculation. Leases with a term of 12 months or less, which are primarily related to automobiles and manufacturing equipment, are not recorded on the balance sheet. The aggregate amount of lease cost for leases with a term of 12 months or less is not material.

The Company has lease agreements that include lease and non-lease components, which are generally accounted for separately. For certain leases (primarily related to IT equipment), the Company does account for the lease and non-lease components as a single lease component. A portfolio approach is applied to effectively account for the ROU assets and liabilities for those specific leases referenced above. The Company does not have any material leases containing variable lease payments or residual value guarantees. The Company also does not have any material subleases.

The Company currently has operating and finance leases for items such as manufacturing facilities, corporate offices, manufacturing equipment, transportation equipment, and vehicles. The Company's active leases have remaining lease terms that range between less than one year to 18 years, some of which include options to extend the leases for up to 30 years, and some of which include options to terminate the leases within one year.

Components of lease expense:

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	For the Three Months Ended								For the Six Months Ended
	July 2, 2020				June 27, 2019				July 2, 2020				June 27, 2019
Operating lease cost	$	2.2			$	2.2			$	4.4			$	4.4
Finance lease cost:
Amortization of assets	4.4				2.4				10.3				4.2
Interest on lease liabilities	1.5				0.5				3.1				0.9
Total net lease cost	$	8.1			$	5.1			$	17.8			$	9.5

Supplemental cash flow information related to leases was as follows:

	For the Three Months Ended								For the Six Months Ended
	July 2, 2020				June 27, 2019				July 2, 2020				June 27, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2.2			$	2.1			$	4.4			$	4.3
Operating cash flows from finance leases	$	1.5			$	0.5			$	3.1			$	0.9
Financing cash flows from finance leases	$	7.0			$	2.0			$	13.7			$	3.8
ROU assets obtained in exchange for lease obligations:
Operating leases	$	—			$	0.6			$	0.2			$	0.7

Supplemental balance sheet information related to leases:

	July 2, 2020			December 31, 2019
Finance leases:
Property and equipment, gross	$	207.2		$	165.5
Accumulated amortization	(33.8		)	(23.5		)
Property and equipment, net	$	173.4		$	142.0

The weighted average remaining lease term as of July 2, 2020 for operating and finance leases was 10.0 years and 6.0 years, respectively. The weighted average discount rate as of July 2, 2020 for operating and finance leases was 5.6% and 4.2%, respectively. The weighted average remaining lease term as of December 31, 2019 for operating and finance leases was 10.2 years and 6.5 years, respectively. The weighted average discount rate as of December 31, 2019 for operating and finance leases was 5.6% and 4.3%, respectively. See Note 15, Debt, for current and non-current finance lease obligations. There has not been a significant impact on lease terms, costs, cash flows, or balance sheet values, including any impairment of lease assets, as a result of the COVID-19 pandemic.

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

	2020			2021			2022			2023			2024			2025 and thereafter			Total Lease Payments			Less: Imputed Interest			Total Lease Obligations
Operating Leases	$	4.2		$	7.4		$	7.2		$	6.1		$	5.6		$	30.2		$	60.7		$	(14.7	)	$	46.0
Financing Leases	$	17.1		$	34.0		$	30.2		$	25.8		$	20.0		$	36.9		$	164.0		$	(19.4	)	$	144.6

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Other Assets are summarized as follows:

	July 2, 2020				December 31, 2019
Deferred financing
Deferred financing costs	46.7				41.7
Less: Accumulated amortization - deferred financing costs	(39.0		)		(36.9		)
Deferred financing costs, net	7.7				4.8
Other
Long term income tax receivable (1)	197.1				—
Supply agreements (2)	11.3				11.5
Equity in net assets of affiliates	4.7				7.7
Restricted cash - collateral requirements	19.5				16.4
Other	38.1				36.4
Total	$	278.4			$	76.8

(1)	Increase in income tax receivable not expected to be received within 12 months and is an increase over the prior year as a result of the carryback provisions included in the CARES Act.

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

Goodwill is summarized as follows:

	July 2, 2020				December 31, 2019
Goodwill - United Kingdom	2.3				2.4
Goodwill - United States(1)	76.0				—
Total	$	78.3			$	2.4

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

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

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

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

Intangible assets are summarized as follows:

	July 2, 2020				December 31, 2019
Intangible assets
Patents	$	2.0			$	2.0
Favorable leasehold interests	2.8				2.8
Developed technology asset(1)	30.0				—
Total intangible assets	34.8				4.8
Less: Accumulated amortization - patents	(2.0		)		(1.9		)
Accumulated amortization - favorable leasehold interest	(1.7		)		(1.7		)
Accumulated amortization - developed technology asset	(1.0		)		—
Intangible assets, net	30.1				1.2

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

The amortization for each of the five succeeding years relating to intangible assets currently recorded in the condensed consolidated balance sheet and the weighted average amortization is estimated to be the following as of July 2, 2020:

Year	Patents		Favorable leasehold interest		Developed Technology		Total
remaining in 2020	—		0.1		1.0		1.1
2021	—		0.1		2.0		2.1
2022	—		0.1		2.0		2.1
2023	—		0.1		2.0		2.1
2024	—		0.1		2.0		2.1
2025	—		0.1		2.0		2.1
Weighted average amortization period	—		9.0		14.5		14.3

 

Advances on the B787 Program.  Boeing has made advance payments to Spirit under the B787 Special Business Provisions and General Terms Agreement (collectively, the “B787 Supply Agreement”) that are required to be repaid to Boeing by way of offset against the purchase price for future shipset deliveries. Advance repayments were initially scheduled to be spread evenly over the remainder of the first 1,000 B787 shipsets delivered to Boeing. On April 8, 2014, the Company signed a memorandum of agreement with Boeing that suspended advance repayments related to the B787 program for a period of twelve months beginning April 1, 2014. Repayment recommenced on April 1, 2015, and any repayments that otherwise would have become due during such twelve-month period will offset the purchase price for shipsets 1,001 through 1,120. On December 21, 2018, the Company signed a memorandum of agreement with Boeing that again suspended the advance repayments beginning with line unit 818. The advance repayments will resume at a lower rate of $0.45 per shipset at line number 1135 and continue through line number 1605.

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

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

 

The FASB’s authoritative guidance on fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance discloses three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market.

Level 2                      Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Observable inputs, such as current and forward interest rates and foreign exchange rates, are used in determining the fair value of the interest rate swaps and foreign currency hedge contracts.

 

Level 3                      Unobservable inputs that are supported by little or no market activity and are significant to the fair value of assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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

 

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	July 2, 2020								December 31, 2019
	Carrying Amount				Fair Value				Carrying Amount				Fair Value
2018 Term Loan (including current portion)	$	426.7			$	401.6		(2)	$	438.5			$	440.1		(2)
2018 Revolver	—				—			(2)	800.0				800.0			(2)
Senior unsecured floating rate notes due 2021	299.4				282.1			(1)	299.1				298.4			(1)
Senior unsecured notes due 2023	298.6				253.6			(1)	298.3				307.2			(1)
Senior secured notes due 2026	298.0				272.9			(1)	297.8				305.6			(1)
Senior unsecured notes due 2028	694.3				564.2			(1)	694.1				734.4			(1)
Senior secured notes due 2025	1,183.3				1,188.6			(1)	$	—			$	—
Total	$	3,200.3			$	2,963.0			$	2,827.8			$	2,885.7

(1)	Level 1 Fair Value hierarchy

(2)	Level 2 Fair Value hierarchy

 

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

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

Derivatives Not Accounted for as Hedges

Interest Rate Swaps

     

On March 15, 2017, the Company entered into an interest rate swap agreement, with an effective date of March 31, 2017. The swap has a notional value of $250.0 and fix the variable portion of the Company’s floating rate debt at 1.815%. The swap expired in March 2020.

Derivatives Accounted for as Hedges

Cash Flow Hedges

During the third quarter of 2019, the Company entered into two interest rate swap agreements with a combined notional value of $450.0. These derivatives have been designated as cash flow hedges by the Company. The fair value of these hedges was a liability of $13.7 as of July 2, 2020, $6.5 of which is recorded in the other current liabilities line item on the condensed consolidated balance sheet. The remaining $7.2 is recorded in the other non-current liabilities line item on the condensed consolidated balance sheet.

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

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

 

Total debt shown on the balance sheet is comprised of the following: 

	July 2, 2020							December 31, 2019
	Current			Noncurrent				Current			Noncurrent
2018 Term Loan	$	22.7		$	404.0			$	22.8		$	415.7
2018 Revolver	—			—				—			800.0
Senior unsecured floating rate notes due 2021	299.4			—				—			299.1
Senior unsecured notes due 2023	—			298.6				—			298.3
Senior secured notes due 2026	—			298.0				—			297.8
Senior unsecured notes due 2028	—			694.3				—			694.1
Senior secured notes due 2025	—			1,183.3				—			—
Present value of finance lease obligations	28.9			115.7				25.8			121.3
Other	1.8			56.7				1.6			57.8
Total	$	352.8		$	3,050.6			$	50.2		$	2,984.1

2018 Credit Agreement

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

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

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

Under the 2018 Credit Agreement, the pricing table and tiers are as follows.

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

The February 2020 Amendment

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

The primary purpose for entering into the February 2020 Amendment was to obtain covenant relief with respect to expected breaches of the total leverage ratio and interest coverage ratios under the 2018 Credit Agreement. Given the production suspension beginning on January 1, 2020 and lower 2020 production rate for the B737 MAX, absent a waiver or an amendment of the 2018 Credit Agreement, the Company was expected to breach the total leverage ratio beginning with the first fiscal quarter of 2020 and continuing into 2021. The February 2020 Amendment waived or modified the testing of the ratios set forth in the 2018 Credit Agreement until the commencement of the second fiscal quarter of 2021 (the “Reversion Date”) and put the following financial ratios and tests in place for such time period:

•

Senior Secured Leverage Ratio: Commencing with the first fiscal quarter of 2020, the ratio of senior secured debt to consolidated EBITDA over the last twelve months shall not, as of the end of the applicable fiscal quarter, be greater than: (i) 3.00:1.00, with respect to the first fiscal quarter of 2020; (ii) 4.25:1.00, with respect to the second fiscal quarter of 2020; (iii) 5.50:1.00, with respect to the third fiscal quarter of 2020; (iv) 5.00:1.00, with respect to the fourth fiscal quarter of 2020; and (v) 3.00:1.00, with respect to the first fiscal quarter of 2021.

•	Interest Coverage Ratio: Commencing with the first fiscal quarter of 2020, the interest coverage ratio as of the end of the applicable fiscal quarter shall not be less than: (i) 4.00:1.00, with respect to the first fiscal quarter of 2020; (ii) 3.75:1.00,

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with respect to the second fiscal quarter of 2020; (iii) 2.50:1.00, with respect to the third fiscal quarter of 2020; (iv) 2.25:1.00, with respect to the fourth fiscal quarter of 2020; and (v) 3.75:1.00, with respect to the first fiscal quarter of 2021.

•

Minimum Liquidity: As of the end of each fiscal month, commencing with the first fiscal month after entering into the 2020 Amendment, the Company shall have minimum liquidity of not less than: (i) $1,000 through, and including, the last fiscal month ending in the third fiscal quarter of 2020; (ii) $850, as of the end of each fiscal month ending in the fourth fiscal quarter of 2020; and (iii) $750, as of the end of each fiscal month ending in the first fiscal quarter of 2021; provided, however, that if the Company receives proceeds of at least $750 from the issuance of indebtedness before the Reversion Date, the minimum liquidity requirement shall remain at $1,000. Liquidity includes cash and cash equivalents and amounts available to be drawn under the 2018 Revolver and the 2020 DDTL.

The February 2020 Amendment provided that, upon the Reversion Date, the ratios will revert back to the ratios in the 2018 Credit Agreement except that the total leverage ratio will be 4.00:1.00, with respect to the second fiscal quarter of 2021, returning to 3.50:1:00 thereafter. The Senior Secured Leverage Ratio and minimum liquidity covenants will no longer be applicable following the Reversion Date.

The February 2020 Amendment added Spirit AeroSystems North Carolina, Inc. as an additional guarantor (“Spirit NC”) and provides for the grant of security interests to the lenders under the 2018 Credit Agreement with respect to certain real property and personal property, including certain equity interests, owned by Spirit, as borrower, and the Guarantors (as defined below), which include the Company and Spirit NC. Such guarantee and security interests will be released, at the option of Spirit, so long as no default or event of default shall exist at the time thereof, or immediately after giving effect thereto, if (A) (I) the issuer credit rating of Spirit is “BBB-” or higher as determined by S&P, and (II) the corporate family rating of Spirit is “Baa3” or higher as determined by Moody’s, or (B) S&P and Moody’s have each confirmed, in a writing in form and substance reasonably satisfactory to the administrative agent, that (I) the issuer credit rating of Spirit will be “BBB-” or higher as determined by S&P, and (II) the corporate family rating of Spirit will be “Baa3” or higher as determined by Moody’s, in each case of the foregoing clauses (B)(I) and (B)(II), after giving effect to the release of the security (the date of such release, the “Security Release Date”).

The February 2020 Amendment also added increased restrictions on our ability to incur additional indebtedness, consolidate or merge, make acquisitions and other investments (although the Asco Acquisition and the Bombardier Acquisition (each as defined below) are expressly permitted thereunder), guarantee obligations of third parties, make loans or advances, declare or pay certain dividends or distributions on our stock, redeem or repurchase shares of our stock, or pledge assets. The February 2020 Amendment provides that a number of these increased restrictions will no longer apply following the Security Release Date. The accordion feature to increase the 2018 Revolver commitments and/or institute one or more additional term loans will not be available to Spirit during the period between the effective date of the February 2020 Amendment and the Security Release Date.

Spirit’s obligations under the 2018 Credit Agreement may be accelerated upon an event of default, which includes non-payment of principal or interest, material breach of a representation or warranty, breach of a covenant, cross-default to material indebtedness, material judgments, ERISA events, change in control, bankruptcy and invalidity of the guarantee of Spirit’s obligations under the Credit Agreement made by the Company. The February 2020 Amendment added new events of default for validity, perfection and priority of liens and the public announcement by Boeing of the termination or permanent cessation of the B737 MAX program that will no longer apply following the Security Release Date.

Under the February 2020 Amendment, the pricing table and tiers were updated to reflect the below. The pricing table was further updated under the April 2020 Amendment and the July 2020 Amendment (each as described below).

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

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April 2020 Amendment

On April 13, 2020, Spirit, the Company, and Spirit NC entered into a further amendment to the 2018 Credit Agreement (the “April 2020 Amendment”). The April 2020 Amendment became effective upon April 17, 2020, when Spirit issued the 2025 Notes. As a result of the issuance of the 2025 Notes and the effectiveness of the April 2020 Amendment, the commitments under the 2020 DDTL were canceled in full and the facility was terminated.

The primary purpose for entering into the April 2020 Amendment was to permit Spirit to issue the 2025 Notes and provide covenant flexibility for future capital raises and to take into account market conditions. The April 2020 Amendment waived or modified the testing of the ratios set forth in the 2018 Credit Agreement, as amended, by the February 2020 Amendment, and put the following financial ratios and tests in place:

•

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

•

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

•

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

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

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

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

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

Each of the 2018 Revolver, the 2018 Term Loan and the 2018 DDTL continues to mature on July 12, 2023, and, following the effectiveness of the April 2020 Amendment, will bear interest at a rate, at Spirit’s option, ranging between LIBOR plus 3.125% and LIBOR plus 4.125% (or between base rate plus 2.125% and base rate plus 3.125%, as applicable) based on Spirit’s senior unsecured ratings provided by S&P and/or Moody’s as reflected in the pricing table below:

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Pricing Tier	Credit Rating (S&P/Moody's)		Revolving Commitment Fee		Applicable Rate For LIBOR Loans and Letter of Credit Fees		Applicable Rate for Base Rate Loans
I	Greater than or equal to BBB+ / Baa1		0.250%		3.125%		2.125%
II	BBB / Baa2		0.275%		3.250%		2.250%
III	BBB- / Baa3		0.325%		3.375%		2.375%
IV	BB+ / Ba1		0.425%		3.625%		2.625%
V	BB / Ba2		0.500%		3.875%		2.875%
VI	Less than or equal to BB- / Ba3		0.625%		4.125%		3.125%

Upon the Security Release Date, the following pricing table and tiers will take effect:

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

July 2020 Amendment

On July 31, 2020, Spirit, the Company, and Spirit NC entered into a further amendment to the 2018 Credit Agreement (the “July 2020 Amendment”).

The primary purpose for entering into the July 2020 Amendment was to obtain covenant relief with respect to expected breaches of the first lien leverage and interest coverage ratios under the 2018 Credit Agreement. Given Boeing’s reduction of Spirit’s 2020 B737 MAX production plan to 72 shipsets, absent a waiver or an amendment of the 2018 Credit Agreement, the Company was expected to breach the first lien leverage ratio beginning with the fourth fiscal quarter of 2020 and continuing into 2021 and the interest coverage ratio beginning with the fourth fiscal quarter of 2020 and continuing into 2022. The July 2020 Amendment waived or modified the financial ratios and tests as follows:

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

•

Interest Coverage Ratio: The interest coverage ratio shall not be tested in the fourth fiscal quarter of 2020 and the first fiscal quarter of 2021 and shall not, as of the end of the applicable fiscal quarter, be less than: (i) 1.25:1.00, with respect to the third fiscal quarter of 2020; (ii) 1.15:1.00, with respect to the second fiscal quarter of 2021; (iii) 1.35:1.00, with respect to the third fiscal quarter of 2021; (iv) 1.50:1.00, with respect to the fourth fiscal quarter of 2021; (v) 2.00:1.00, with respect to the first fiscal quarter of 2022; (vi) 2.75:1.00, with respect to the second fiscal quarter of 2022; (vii) 3.25:1.00 with respect to the third fiscal quarter of 2022; (viii) 3.75:1.00 with respect to the fourth fiscal quarter of 2022; and (ix) 4.00:1.00 thereafter.

•	Total Leverage Ratio: The ratio of indebtedness to consolidated EBITDA over the last twelve months shall not be tested in the first fiscal quarter of 2022 and shall not, as of the end of the applicable fiscal quarter, be greater than (i) 6.00:1:00,

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with respect to the second fiscal quarter of 2022; (ii) 5.50:1.00, with respect to the third fiscal quarter of 2022; (iii) 4.50:1.00, with respect to the fourth fiscal quarter of 2022; and (iv) 3.50:1.00 thereafter.

•	Minimum Liquidity: As of the end of each fiscal month, until the end of the ninth fiscal month of 2022, the Company shall have minimum liquidity of not less than $750.

Except as described above, the financial ratios remain the same as those set forth in the April 2020 Amendment.

As a condition to the covenant relief, the Company reduced the size of the 2018 Revolver by $300 to $500 and, on July 31, 2020, used $100 of cash on hand to prepay the 2018 Term Loan and 2018 DDTL on a pro rata basis.

The July 2020 Amendment updated the COVID-19-related carve-out to the representation that no material adverse effect has occurred on the Company’s operations, business, assets, properties, liabilities, or financial condition (among other items) since a specified date, providing that the impacts of the COVID-19 pandemic on the business, operations and/or financial condition of the Company occurring prior to June 30, 2021 that were publicly disclosed or disclosed to the Administrative Agent prior to the effectiveness of the July 2020 Amendment will be disregarded when considering whether a material adverse effect has occurred when that representation is made.  In addition, the July 2020 Amendment added two new mandatory prepayment requirements, providing that (a) if either the Asco Acquisition or the Bombardier Acquisition does not close or is terminated, or the consideration for either acquisition is reduced by an amount above a specified threshold, 75% of the unspent cash will be required to prepay the loans under the 2018 Credit Agreement, and (b) if the Company raises additional equity, 75% of the net proceeds will be required to prepay the loans under the 2018 Credit Agreement.

The July 2020 Amendment added a new event of default that would be triggered if the Floating Rate Notes (as defined below) remain outstanding and the 2018 Term Loan and the 2018 DDTL have not been repaid by the date that is 91 calendar days prior to the maturity date of the Floating Rate Notes.

Each of the 2018 Revolver, the 2018 Term Loan and the 2018 DDTL continues to mature on July 12, 2023, and, following the effectiveness of the July 2020 Amendment and prior to the Security Release Date, will bear interest at a rate, at Spirit’s option, ranging between LIBOR plus 3.375% and LIBOR plus 4.875% (or between base rate plus 2.375% and base rate plus 3.875%, as applicable) based on Spirit’s issuer credit rating or corporate family rating (as applicable) provided by S&P and/or Moody’s as reflected in the pricing table below:

Pricing Tier	Credit Rating (S&P/Moody's)		Revolving Commitment Fee		Applicable Rate For LIBOR Loans and Letter of Credit Fees		Applicable Rate for Base Rate Loans
I	≥ BBB- / Baa3		0.325%		3.375%		2.375%
II	BB+ / Ba1		0.425%		3.625%		2.625%
III	BB / Ba2		0.500%		3.875%		2.875%
IV	BB- / Ba3		0.625%		4.125%		3.125%
V	B+ / B1		0.675%		4.500%		3.500%
VI	≤ B / B2		0.725%		4.875%		3.875%

As of July 2, 2020, the outstanding balance of the 2018 Term Loan and 2018 DDTL was $428.3 and the carrying value was $426.7.

As of December 31, 2019 the outstanding balance on the 2018 Revolver was $800.0 and the carrying amount was $800.0. The Company repaid the outstanding balance of the 2018 Revolver on April 30, 2020.

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

Senior Notes

2025 Notes

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On April 17, 2020, Spirit entered into an Indenture (the “2025 Notes Indenture”), by and among Spirit, the Company and Spirit NC, as guarantors (together with the Company, the “Guarantors”), and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent, in connection with Spirit’s offering of $1,200 aggregate principal amount of its 7.500% Senior Secured Second Lien Notes due 2025 (the “2025 Notes”).

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

The 2025 Notes mature on April 15, 2025 and bear interest at a rate of 7.500% per year payable semiannually in cash in arrears on April 15 and October 15 of each year. The first interest payment date is October 15, 2020. As of July 2, 2020, the outstanding balance of the 2025 Notes was $1,200.0 and the carrying value was $1,183.3.

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

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

Floating Rate, 2023, and 2028 Notes

On May 30, 2018, Spirit entered into an Indenture (the “2018 Indenture”) by and among Spirit, the Company and The Bank of New York Mellon Trust Company, N.A., as trustee in connection with Spirit’s offering of $300.0 aggregate principal amount of its Senior Floating Rate Notes due 2021 (the “Floating Rate Notes”), $300.0 aggregate principal amount of its 3.950% Senior Notes due 2023 (the “2023 Notes”) and $700.0 aggregate principal amount of its 4.600% Senior Notes due 2028 (the “2028 Notes” and, together with the Floating Rate Notes and the 2023 Notes, the “2018 Notes”). The Company guaranteed Spirit’s obligations under the 2018 Notes on a senior unsecured basis.

The Floating Rate Notes bear interest at a rate per annum equal to three-month LIBOR, as determined in the case of the initial interest period, on May 25, 2018, and thereafter at the beginning of each quarterly period as described herein, plus 80 basis points and mature on June 15, 2021. Interest on the Floating Rate Notes is payable on March 15, June 15, September 15 and December 15 of each year, beginning on September 15, 2018. The 2023 Notes bear interest at a rate of 3.950% per annum and mature on June 15, 2023. The 2028 Notes bear interest at a rate of 4.600% per annum and mature on June 15, 2028. Interest on the 2023 Notes and 2028 Notes is payable on June 15 and December 15 of each year, beginning on December 15, 2018. The outstanding balance of the Floating Rate Notes, 2023 Notes, and 2028 Notes was $300.0, $300.0, and $700.0 as of July 2, 2020, respectively. The carrying value of the Floating Rate Notes, 2023 Notes, and 2028 Notes was $299.4, $298.6, and $694.3 as of July 2, 2020, respectively.

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

2026 Notes

In June 2016, the Company issued $300.0 in aggregate principal amount of 3.850% Senior Notes due June 15, 2026 (the “2026 Notes”) with interest payable, in cash in arrears, on June 15 and December 15 of each year, beginning December 15, 2016. As of July 2, 2020, the outstanding balance of the 2026 Notes was $300.0 and the carrying value was $298.0. The Company and Spirit NC guarantee Spirit's obligations under the 2026 Notes on a senior secured basis.

       

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

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

 

		Defined Benefit Plans
		For the Three  Months Ended								For the Six  Months Ended
Components of Net Periodic Pension Expense/(Income)		July 2, 2020				June 27, 2019				July 2, 2020				June 27, 2019
Service cost		$	0.3			$	0.3			$	0.5			$	0.6
Interest cost		6.7				10.0				14.7				20.1
Expected return on plan assets		(15.6		)		(16.7		)		(32.9		)		(33.3		)
Amortization of net loss		0.2				(0.1		)		0.2				0.3
Curtailment loss (gain) (2)		0.9				—				33.9				—
Settlement loss (gain) (3)		5.1				—				5.1				—
Special termination benefits (1)		8.3				15.2				33.0				15.2
Net periodic pension expense (income)		$	5.9			$	8.7			$	54.5			$	2.9

		Other Benefits
		For the Three Months Ended								For the Six Months Ended
Components of Other Benefit Expense		July 2, 2020				June 27, 2019				July 2, 2020				June 27, 2019
Service cost		$	0.1			$	0.2			$	0.4			$	0.5
Interest cost		0.3				0.3				0.5				0.6
Amortization of prior service cost		(0.2		)		(0.2		)		(0.4		)		(0.4		)
Amortization of net gain		(0.4		)		(0.6		)		(0.9		)		(1.2		)
Curtailment (gain) loss (2)		0.1				—				(0.2		)		—
Special termination benefits (1)		$	0.2			$	—			$	12.0			$	—
Net periodic other benefit expense (income)		$	0.1			$	(0.3	)		$	11.4			$	(0.5	)

(1) Special termination benefits for the three and six months ending July 2, 2020 is a combination of pension value plan and postretirement medical plan changes offset by a reduction in the Company's net benefit obligation. For the three months and six months ending July 2, 2020 special termination benefits, curtailment accounting, and the remeasurement of the pension assets and obligations resulted in a $(85.2) and $31.5 impact to OCI, respectively. For the three months and six months ending July 2, 2020, retiree medical resulted in a ($2.0) and $2.3 impact to OCI, respectively. This impact is included in the Company’s condensed consolidated statements of comprehensive (loss) income. The Company expects to record additional charges related to settlement accounting in subsequent 2020 quarters tied to cash payments made.

(2) The Company's Voluntary Retirement Program ("VRP") resulted in an estimated 16% and 12 % reduction in future working lifetime for the pension value plan and postretirement medical plan resulting in a curtailment accounting charge of $0.7 and $33.7 for the three and six months ended July 2, 2020, respectively and is included in other (expense) income in the Company's condensed consolidated statements of operations.

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(3) Under ASC 715, settlement accounting is triggered when the total lump sums paid during the fiscal year exceed the combined service cost and interest cost component. Because the lump sums paid to date as part of the VRP exceed the estimated service cost and interest cost, the Company recognized a settlement loss of $5.1 for the three months and six months ended July 2, 2020. The weighted average discount rate for the pension benefit obligation, as a result of remeasurement triggered by settlement accounting, changed to 2.56%.

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

Employer Contributions

 

The Company expects to contribute zero dollars to the U.S. qualified pension plan and a combined total of approximately $9.5 for the Supplemental Executive Retirement Plan (“SERP”) and post-retirement medical plans in 2020.  The Company’s projected contributions to the U.K. pension plan for 2020 are $1.7. The entire amount contributed can vary based on exchange rate fluctuations.

 

Holdings has established the stockholder-approved 2014 Omnibus Incentive Plan, as amended (the “Omnibus Plan”) to grant cash and equity awards of Class A Common Stock, par value $0.01 per share (the “Common Stock”), to certain individuals. The Company’s Omnibus Plan was amended in October 2019 to allow for participants to make tax elections with respect to their equity awards.

The Company recognized a net total of $1.0 and $7.4 of stock compensation expense for the three months ended July 2, 2020 and June 27, 2019, respectively, and a net total of $10.8 and $15.1 of stock compensation expense for the six months ended July 2, 2020 and June 27, 2019, respectively.

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

•	60% of the award consisted of time-based, service-condition restricted Common Stock that vests in equal installments over a three-year period (the “RS Award”). Values for these awards are based on the value of Common Stock on the grant date;

•	20% of the award consisted of performance-based, market-condition restricted Common Stock that vests on the three-year anniversary of the grant date contingent upon TSR compared to the Company’s peers (the “TSR Award”). Values for these awards are initially measured on the grant date using estimated payout levels derived from a Monte Carlo valuation model; and

•

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

During the six months ended July 2, 2020, 493,820 shares, 198,980 shares, and 176,815 shares of Common Stock with aggregate grant date fair values of $20.5, $6.2 and $9.3 were granted as RS Awards, TSR Awards, and FCF Percentage Awards under the Company’s LTIP. During the six months ended July 2, 2020, 38,249 shares of Common Stock with aggregate grant date fair values of $2.5 were granted and vested as a result of a union ratification bonus. The Board of Directors were granted 64,750 shares of Common Stock with an aggregate grant date value of $1.3 and vested 12,877 shares of Common Stock with an aggregate grant date value of $1.1 for the six months ended July 2, 2020. Additionally, 464,697 shares of Common Stock with an aggregate grant date fair value of $31.5 under the LTIP vested during the six months ended July 2, 2020.

    

The process for calculating the Company’s income tax expense involves estimating actual current taxes due plus assessing temporary differences arising from differing treatment for tax and accounting purposes that are recorded as deferred tax assets and

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liabilities. Deferred tax assets are periodically evaluated to determine their recoverability. We have reviewed our material deferred tax assets to determine whether or not a valuation allowance was necessary. Based on the Company’s earnings history, in conjunction with other positive and negative evidence, we have determined it is more likely than not that the benefits from the deferred tax assets will be realized and therefore, a valuation allowance is not appropriate at this time. The total net deferred tax asset at July 2, 2020, and December 31, 2019, was $154.6 and $98.2, respectively. The difference is primarily due to the creation of deductible temporary differences and utilization of taxable temporary differences within the current year.

The Company files income tax returns in all jurisdictions in which it operates. The Company establishes reserves to provide for additional income taxes that may be due upon audit. These reserves are established based on management’s assessment as to the potential exposure attributable to permanent tax adjustments and associated interest. All tax reserves are analyzed quarterly and adjustments made as events occur that warrant modification.

In general, the Company records income tax expense each quarter based on its estimate as to the full year’s effective tax rate. Certain items, however, are given discrete period treatment and the tax effects for such items are therefore reported in the quarter that an event arises. Events or items that may give rise to discrete recognition include excess tax benefits with respect to share-based compensation, finalizing amounts in income tax returns filed, finalizing audit examinations for open tax years and expiration of statutes of limitations, and changes in tax law. For the three months ending April 2, 2020, the amount of income tax benefit that would have been recognized under the expected annual effective tax rate would have exceeded the tax benefit we expected to realize for the full year. Due to this, the loss was limited by the year to date tax benefit that would have been recognized if the year to date loss were the full year anticipated loss (“Loss Limitation Rule”). Due to changes in our forecasted tax expense for the full year, we are no longer required to use the Loss Limitation Rule for the quarter ended July 2, 2020 or for the remainder of 2020.

  

The 38.0% effective tax rate for the six months ended July 2, 2020 differs from the 20.0% effective tax rate for the same period of 2019 primarily due to the benefit generated related to the carryback of our 2020 estimated income tax loss as permitted by the CARES Act and the benefit related to the re-measurement of deferred taxes due to the CARES Act resulting in increases to the tax rate. Additionally, the benefit generated by state tax credits and foreign rate differences resulted in net increases to the tax rate. As the Company is currently reporting a pre-tax loss for the six months ended July 2, 2020, increases to tax expense result in a decrease to the effective tax rate and decreases to tax expense result in an increase to the effective tax rate.

As of July 2, 2020, the Company has deferred $15.9 million of employer payroll taxes, as allowed by the CARES Act, of which 50% are required to be deposited by December 2021 and the remaining 50% by December 2022. In addition, as of July 2, 2020 the Company has recorded a deferral of $28.5 million of VAT payments until March 2021 under the United Kingdom deferral scheme. 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 July 2, 2020 the Company anticipates it will report a net operating loss when it files its fiscal year 2020 tax return. Management will continue to monitor potential legislation as well as dynamic market conditions which may materially alter the anticipated value of this net operating loss.

 

The Company's federal audit is complete under the CAP program for the 2018 tax year. The Company will continue to participate in the CAP program for the 2019 and 2020 tax years. The CAP program’s objective is to resolve issues in a timely, contemporaneous manner and eliminate the need for a lengthy post-filing examination.  There are no open audits in the Company’s foreign jurisdictions.

 

Earnings per Share Calculation

 

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

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

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During the six month period ended July 2, 2020, the Company repurchased no shares of its Common Stock. The total authorization amount remaining under the current share repurchase program is approximately $925.0. Share repurchases are currently on hold pending the outcome of the B737 MAX grounding and the COVID-19 pandemic. The February 2020 Amendment to the 2018 Credit Agreement imposes additional restrictions on the Company’s ability to repurchase shares.

The following table sets forth the computation of basic and diluted earnings per share:

	For the Three Months Ended
	July 2, 2020											June 27, 2019
	Income				Shares			Per Share Amount				Income				Shares			Per Share Amount
Basic EPS
(Loss) income available to common stockholders	$	(255.9	)		103.9			$	(2.46	)		$	167.9			103.4			$	1.62
Income allocated to participating securities	—				—							0.1				0.1
Net (loss) income	$	(255.9	)									$	168.0
Diluted potential common shares																1.0
Diluted EPS
Net (loss) income	$	(255.9	)		103.9			$	(2.46	)		$	168.0			104.5			$	1.61

	For the Six Months Ended
	July 2, 2020											June 27, 2019
	Income				Shares			Per Share Amount				Income				Shares			Per Share Amount
Basic EPS
(Loss) income available to common stockholders	$	(418.9	)		103.8			$	(4.04	)		$	330.9			103.7			$	3.19
Income allocated to participating securities	—				—							0.2				0.1
Net (loss) income	$	(418.9	)									$	331.1
Diluted potential common shares																1.0
Diluted EPS
Net (loss) income	$	(418.9	)		103.8			$	(4.04	)		$	331.1			104.8			$	3.16

Included in the outstanding Common Stock were 1.7 and 1.4 of issued but unvested shares at July 2, 2020 and June 27, 2019, respectively, which are excluded from the basic EPS calculation.

 

Accumulated Other Comprehensive Loss

 

Accumulated Other Comprehensive Loss is summarized by component as follows:

 

	As of				As of
	July 2, 2020				December 31, 2019
Pension	$	(77.3	)		$	(53.1	)
Interest swaps	(10.4		)		(0.6		)
SERP/Retiree medical	14.2				17.1
Foreign currency impact on long term intercompany loan	(15.7		)		(13.1		)
Currency translation adjustment	(92.1		)		(59.5		)
Total accumulated other comprehensive loss	$	(181.3	)		$	(109.2	)

 

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Amortization or curtailment cost recognition of the pension plans’ net gain/(loss) reclassified from accumulated other comprehensive loss and realized into costs of sales and selling, general and administrative on the consolidated statements of operations was $0.3 and $0.4 for the three months ended July 2, 2020 and June 27, 2019, respectively, and $1.3 and $0.8 for the six months ended July 2, 2020 and June 27, 2019, respectively.

Rights Plan 

On April 22, 2020, the Company’s Board of Directors declared a dividend of one right (a “Right”) for each outstanding share of Common Stock held of record at the close of business on May 1, 2020 (the “Record Time”), and adopted a stockholder rights plan, as set forth in the Stockholder Protection Rights Agreement, dated as of April 22, 2020 (the “Rights Agreement”), between the Company and Computershare Inc., as Rights Agent. The Rights will be payable upon the later of the Record Time and the certification by the New York Stock Exchange to the Securities and Exchange Commission that the Rights have been approved for listing and registration.

Generally, the Rights may cause substantial dilution to a person or group that acquires 10% (or 20% in the case of a passive institutional investor) or more of the Common Stock unless the Rights are first redeemed or the Rights Agreement is terminated by the Board. While the Rights will not prevent a takeover of the Company, they may discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. Nevertheless, the Rights will not interfere with a Board-approved transaction that is in the best interests of the Company and its stockholders because the Rights can be redeemed, or the Rights Agreement terminated, on or prior to the consummation of such a transaction. Prior to exercise, the Rights do not confer voting or dividend rights.

 

Litigation

 

From time to time, the Company is subject to, and is presently involved in, litigation, legal proceedings, or other claims arising in the ordinary course of business. While the final outcome of these matters cannot be predicted with certainty, considering, among other things, the meritorious legal defenses available, the Company believes that, on a basis of information presently available, none of these items, when finally resolved, will have a material adverse effect on the Company’s long-term financial position or liquidity.

On February 10, 2020, February 24, 2020, and March 24, 2020, three separate private securities class action lawsuits were filed against the Company in the U.S. District Court for the Northern District of Oklahoma, its Chief Executive Officer, Tom Gentile III, former chief financial officer, Jose Garcia, and former controller (principal accounting officer), John Gilson. On April 20, 2020, the Class Actions were consolidated by the court (the “Consolidated Class Action”), and on July 20, 2020, the plaintiffs filed a Consolidated Class Action Complaint which added Shawn Campbell, the Company’s former Vice President for the 737NG and 737 Max program, as a defendant. Allegations in the Consolidated Class Action include (i) violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, (ii) violations of Section 20(a) of the Exchange Act against the individual defendants, and (iii) violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder against the Company and Messrs. Gentile, Garcia and Gilson.

On June 11, 2020, a shareholder derivative lawsuit (the “Derivative Action”) was filed against the Company (as nominal defendant), all members of the Company’s Board of Directors, and Messrs. Garcia and Gilson. Allegations in the Derivative Action include (i) breach of fiduciary duty, (ii) abuse of control, and (iii) gross mismanagement.

The facts underlying the Consolidated Class Action and Derivative Action relate to the accounting process compliance independent review (the “Accounting Review”) discussed in the Company’s January 30, 2020 press release and described under Management's Discussion and Analysis of Financial Condition and Results of Operations - Accounting Review of the 2019 Form 10-K and its resulting conclusions.  The Company voluntarily reported to the SEC the determination that, with respect to the third quarter of 2019, the Company did not comply with its established accounting processes related to potential third quarter contingent liabilities received after the quarter-end.  On March 24, 2020, the Staff of the SEC Enforcement Division informed the Company

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that it had determined to close its inquiry without recommending any enforcement action against Spirit.  In addition, the facts underlying the Consolidated Class Action and Derivative Action relate to the Company’s disclosures regarding the B737 MAX grounding and Spirit’s production rate (and related matters) after the grounding. The Company and individual defendants deny the allegations in the Consolidated Class Action and the Derivative Action.

From time to time, in the ordinary course of business and similar to others in the industry, the Company receives requests for information from government agencies in connection with their regulatory or investigational authority. Such requests can include subpoenas or demand letters for documents to assist the government in audits or investigations. The Company reviews such requests and notices and takes appropriate action. Additionally, the Company is subject to federal and state requirements for protection of the environment, including those for disposal of hazardous waste and remediation of contaminated sites. As a result, the Company is required to participate in certain government investigations regarding environmental remediation actions.

Customer and Vendor Claims

From time to time the Company receives, or is subject to, customer and vendor claims arising in the ordinary course of business, including, but not limited to, those related to product quality and late delivery. The Company accrues for matters when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we take into consideration multiple factors including without limitation our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of an unfavorable outcome, and the severity of any potential loss. Any accruals deemed necessary are reevaluated at least quarterly and updated as matters progress over time. For additional information, please Part II, Item 1A. “Risk Factors.”

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

Guarantees

 

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

Restricted Cash - Collateral Requirements

The Company was required to maintain $19.5 and $16.4 of restricted cash as of July 2, 2020 and December 31, 2019, respectively, related to certain collateral requirements for obligations under its workers’ compensation programs. The restricted cash is included in “Other assets” in the Company’s condensed consolidated balance sheets.

 

Indemnification

 

The Company has entered into customary indemnification agreements with its non-employee directors, and its bylaws and certain executive employment agreements include indemnification and advancement provisions. Pursuant to the terms of the bylaws and, with respect to Jose Garcia, his employment agreement, the Company is providing Messrs. Garcia and Gilson advancement of defense costs and provisional indemnity with respect to the three private securities class action lawsuits discussed above. Under the bylaws and any applicable agreements, the Company agrees to indemnify each of these individuals against claims arising out of events or occurrences related to that individual’s service as the Company’s agent or the agent of any of its subsidiaries to the fullest extent legally permitted.

The Company has agreed to indemnify parties for specified liabilities incurred, or that may be incurred, in connection with transactions they have entered into with the Company. The Company is unable to assess the potential number of future claims that may be asserted under these indemnities, nor the amounts thereof (if any). As a result, the Company cannot estimate the maximum potential amount of future payments under these indemnities and therefore, no liability has been recorded.

Service and Product Warranties and Extraordinary Rework

 

Provisions for estimated expenses related to service and product warranties and certain extraordinary rework are evaluated on a quarterly basis. These costs are accrued and are recorded to unallocated cost of goods sold. These estimates are established

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using historical information on the nature, frequency, and average cost of warranty claims, including the experience of industry peers. In the case of new development products or new customers, Spirit considers other factors including the experience of other entities in the same business and management judgment, among others. Service warranty and extraordinary rework is reported in current liabilities and other liabilities on the balance sheet.

The warranty balance presented in the table below includes unresolved warranty claims that are in dispute in regards to their value as well as their contractual liability. The Company estimated the total costs related to some of these claims, however, there is significant uncertainty surrounding the disposition of these disputed claims and as such, the ultimate determination of the provision’s adequacy requires significant management judgment. The amount of the specific provisions recorded against disputed warranty claims was $8.1 as of July 2, 2020 and December 31, 2019. These specific provisions represent the Company’s best estimate of probable warranty claims. Should the Company incur higher than expected warranty costs and/or discover new or additional information related to these warranty provisions, the Company may incur additional charges that exceed these recorded provisions. The Company utilized available information to make appropriate assessments, however, the Company recognizes that data on actual claims experience is of limited duration and therefore, claims projections are subject to significant judgment. The amount of the reasonably possible disputed warranty claims in excess of the specific warranty provision was $12.1 as of July 2, 2020 and December 31, 2019.

The following is a roll forward of the service warranty and extraordinary rework balance at July 2, 2020:

 

Balance, December 31, 2019	$	64.7
Charges to costs and expenses	2.9
Payouts	(1.0		)
Exchange rate	(0.2		)
Balance, July 2, 2020	$	66.4

 

 

Other (expense) income, net is summarized as follows:

 

	For the Three  Months Ended								For the Six  Months Ended
	July 2, 2020				June 27, 2019				July 2, 2020				June 27, 2019
Kansas Development Finance Authority bond	$	0.6			$	0.8			$	1.7			$	2.0
Rental and miscellaneous income	—				—				0.1				0.2
Interest income	1.2				3.0				8.1				6.2
Foreign currency (losses) gains (1)	(0.6		)		10.0				4.8				8.0
(Loss) gain on foreign currency contract and interest rate swaps	—				(2.4		)		0.1				(17.8		)
Litigation settlement	—				13.5				—				13.5
Loss on sale of accounts receivable	(1.6		)		(7.6		)		(4.7		)		(12.3		)
Pension loss (2)	(5.8		)		(8.7		)		(65.4		)		(2.2		)
ASC 326 credit loss reserve	$	(0.2	)		$	—			$	—			$	—
Other	$	—			$	—			$	(0.1	)		$	—
Total	$	(6.4	)		$	8.6			$	(55.4	)		$	(2.4	)

(1) Foreign currency gains and losses are due to the impact of movement in foreign currency exchange rates on long-term contractual rights/obligations, as well as cash and both trade and intercompany receivables/payables that are denominated in a currency other than the entity’s functional currency.

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The Company operates in three principal segments: Fuselage Systems, Propulsion Systems, and Wing Systems. Revenue from Boeing represents a substantial portion of the Company's revenues in all segments. Wing Systems also includes significant revenues from Airbus. Approximately 77% of the Company's net revenues for the three months ended July 2, 2020 came from the Company's two largest customers, Boeing and Airbus. All other activities fall within the All Other segment, principally made up of non-recurring contracts, sundry sales of miscellaneous services, tooling contracts and sales of natural gas through a tenancy-in-common with other companies that have operations in Wichita, Kansas. The Company's primary profitability measure to review a segment’s operating performance is segment operating income before corporate selling, general and administrative expenses, research and development, and unallocated cost of sales.

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

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

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

The Company’s Wing Systems segment includes development, production and marketing of wings and wing components (including flight control surfaces), and other miscellaneous structural parts primarily to aircraft OEMs, as well as related spares and MRO services. These activities take place at the Company’s facilities in Kinston, North Carolina; Tulsa and McAlester, Oklahoma; San Antonio, Texas; Prestwick, Scotland; and Subang, Malaysia.

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

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

The following table shows segment revenues and operating income for the three months and six months ended July 2, 2020 and June 27, 2019:

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	Three Months Ended							Six Months Ended
	July 2, 2020				June 27, 2019			July 2, 2020				June 27, 2019
Segment Revenues
Fuselage Systems	$	327.1			$	1,096.8		$	878.6			$	2,166.4
Propulsion Systems	169.6				518.9			394.8				1,004.6
Wing Systems	122.5				398.5			413.9				806.4
All Other	25.4				1.9			34.6				6.5
	$	644.6			$	2,016.1		$	1,721.9			$	3,983.9
Segment Operating Income (Loss)
Fuselage Systems(1)	$	(251.5	)		$	135.8		$	(337.9	)		$	274.7
Propulsion Systems(2)	(17.3		)		97.7			(22.6		)		193.2
Wing Systems(3)	(42.5		)		57.4			(28.9		)		123.2
All Other	8.0				—			9.8				1.2
	$	(303.3	)		$	290.9		$	(379.6	)		$	592.3
SG&A	(49.0		)		(56.4		)	(126.4		)		(120.0		)
Research and development	(8.3		)		(10.5		)	(20.6		)		(23.4		)
Unallocated cost of sales	(6.4		)		2.0			(7.9		)		10.1
Total operating income	$	(367.0	)		$	226.0		$	(534.5	)		$	459.0

(1) The three and six months ended July 2, 2020 includes excess capacity production costs of $50.6 and $101.8, respectively, related to the temporary B737 MAX production schedule changes, abnormal costs of $11.2 and $26.5, respectively, for temporary workforce adjustments as a result of COVID-19 production pause, $2.4 and $32.5, respectively, of restructuring costs, and $22.5 from loss on the disposition of assets.

(2) The three and six months ended July 2, 2020 includes excess capacity production costs of $17.5 and $33.3, respectively, related to the temporary B737 MAX production schedule changes, abnormal costs of $4.0 and $10.2, respectively, for temporary workforce adjustments as a result of COVID-19 production pause, and $1.6 and $10.4, respectively, of restructuring costs.

(3) The three and six months ended July 2, 2020 includes excess capacity production costs of $14.7 and $21.1, respectively, related to the temporary B737 MAX and A320 production schedule changes, abnormal costs of $4.1 and $8.0, respectively, for temporary workforce adjustments as a result of COVID-19, net of U.K government subsidies, $2.3 and $6.0, respectively, of restructuring costs, and $0.4 from loss on the disposition of assets.

23.  Restructuring Costs

 

In March 2019, the B737 MAX fleet was grounded in the U.S. and internationally following the 2018 and 2019 accidents involving two B737 MAX aircraft. At the time, the Company was producing B737 aircraft at a rate of 52 aircraft per month and was expected to increase production to 57 aircraft per month in mid-2019. On April 12, 2019, Boeing and the Company entered into the 2019 MOA relating to the Company's production of aircraft with respect to the B737 program. Under the 2019 MOA, the Company was to maintain its delivery rate of 52 shipsets per month with respect to the B737 program following Boeing’s announced temporary adjustment in the production rate from 52 to 42 aircraft per month. The 2019 MOA established that all excess shipments (B737 shipsets in excess of Boeing’s rate) would be deemed to be delivered to Boeing “FOB” at the Company's facilities, which would trigger Boeing’s payment obligations for the excess shipsets. On December 19, 2019, the Company was directed by Boeing to stop all B737 MAX deliveries to Boeing effective January 1, 2020, due to Boeing’s announced temporary suspension of B737 MAX production. Accordingly, the Company suspended all B737 MAX production beginning on January 1, 2020. On February 6, 2020, Boeing and the Company entered into the 2020 MOA providing for delivery to Boeing of 216 B737 MAX shipsets in 2020, which represented less than half of the Company’s B737 MAX annualized production rate in 2019. As a result, in the first quarter of 2020, the Company took actions to align costs to the expected 2020 production levels (restructuring activity). On May 4, 2020, Boeing and the Company agreed that Spirit would deliver 125 B737 MAX shipsets to Boeing in 2020. On June 22, 2020,

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Boeing directed the Company to reduce its 2020 B737 production plan (applicable to MAX and P-8 shipsets) from 125 to 72 shipsets, which includes 37 shipsets to be produced and delivered over the balance of the year and 35 shipsets that have already been delivered to Boeing as of June 19, 2020.

On April 8, 2020, the Company received a supplier letter from Airbus, which reduced production rates across all programs as a result of significant disruption to global travel caused by the COVID-19 pandemic.

•	Single-aisle average production volume of 40 APM

•	A350 average production volume of 6 APM

•	A330 average production volume of 2 APM

During the three months ended July 2, 2020, the COVID-19 pandemic has continued to have a significant negative impact on the aviation industry and further impacted the Company’s global business. In response, during the three months ended July 2, 2020, the Company implemented production suspensions and adjusted production rates, including additional restructuring activity to further align costs. The Company’s planned restructuring activities are documented in a restructuring plan that is approved and controlled by management. These planned activities to align costs to expected production levels materially affected the scope of operations and manner in which business is conducted by the Company.

Restructuring costs under the plan, which are presented separately as a component of operating loss on the consolidated statement of operations, are related to involuntary workforce reductions and the VRP. The total restructuring costs of $48.9 for the six months ended July 2, 2020 includes $36.4 related to involuntary workforce reductions and $12.5 related to VRP.

The total restructuring costs related to involuntary workforce reductions of $36.4 for the six months ended July 2, 2020 includes $31.5, which was the total amount incurred for the involuntary termination benefits of approximately 3,200 employees in the first quarter, plus an additional $4.9 that was added during the three months ended July 2, 2020, representing the total amount expected to be incurred for the involuntary termination benefits of approximately 1,450 additional employees in response to further COVID-19 impacts, as noted above. The $36.4 total represents the full cost of the involuntary workforce restructuring activities included in the plan through July 2, 2020. Of the $36.4 total for the six months ended July 2, 2020, $33.2 was paid during the six-month period ended July 2, 2020 and the remaining $3.2 is recorded in the accrued expenses line item on the balance sheet as of July 2, 2020.

The total restructuring costs related to the VRP of $12.5 for the six months ended July 2, 2020 represents the total costs expected to be incurred for the voluntary retirement packages of 207 employees through April 2, 2020 of $11.1, plus an additional $1.4 for the voluntary retirement packages of an additional 27 employees during the three months ended July 2, 2020. The cost related to packages under the VRP are generally accrued and charged to earnings when the employee accepts the offer. Of the $12.5 total for the six months ended July 2, 2020, $11.1 was paid during the six-month period ended July 2, 2020 and the remaining $1.4 is recorded in the accrued expenses line item on the consolidated balance sheet as of July 2, 2020.

24.  Acquisitions

FMI

On January 10, 2020, Spirit completed the acquisition of 100% of the outstanding equity of Fiber Materials Inc. (FMI). The acquisition-date fair value of consideration transferred was $121.6, which included cash payment to the seller, payment of closing indebtedness, and payment of selling expenses.

Acquiring FMI aligns with the Company's strategic growth objectives to diversify its customer base and expand the current defense business. Founded in 1969 and headquartered in Biddeford, ME, FMI is an industry-leader in the design and manufacture of complex composite solutions that are primarily used in aerospace applications. Over the past 50 years, FMI has developed a portfolio related to its high temperature composites. FMI's main operations focus on multidirectional reinforced composites that enable high-temperature applications such as thermal protection systems, re-entry vehicle nose tips, and rocket motor throats and nozzles. Their unique capabilities have positioned them as a leader in 3D woven carbon-carbon high-temperature materials for hypersonic missiles, which the Department of Defense has identified as a national priority.

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The acquisition was funded from cash on hand. The Company incurred $1.5 in acquisition-related costs. Acquisition-related expenses were $0.0 and $0.5 for the three and six months ended July 2, 2020, respectively, and are included in SG&A on the condensed consolidated statement of operations.

The purchase price has been allocated among assets acquired and liabilities assumed at fair value based on information currently available, with the excess purchase price recorded as goodwill. The Company’s allocation of the purchase price is subject to change on receipt of additional information, including, but not limited to, the finalization of the underlying cash flows used to determine the intangible asset valuations and the Company’s review of FMI’s accounting practices that could potentially result in an adjustment to goodwill or the respective segment allocation of the total goodwill. The Company expects to have sufficient information available to resolve these items before December 31, 2020. The Company has recorded purchase accounting entries on a preliminary basis as follows:

At January 10, 2020
Cash and cash equivalents	$	3.5
Accounts receivable	5.3
Inventory	1.9
Contract Assets, short-term	5.6
Prepaid and other current assets	0.5
Equipment and leasehold improvements	12.3
Intangible assets	30.0
Goodwill	76.0
Other noncurrent assets	0.2
Total assets acquired	$	135.3
Accounts payable and accrued liabilities	1.8
Income Tax Payable	1.4
Contract liabilities, short-term	2.2
Accrued payroll and employee benefits	0.6
Other current liabilities	0.2
Deferred income taxes, non-current	7.5
Other noncurrent liabilities	0.2
Total liabilities assumed	13.9
Net assets acquired	$	121.4

The intangible assets included above consist of the following: 

	Amount			Amortization Period
				(in years)
Developed technology asset	$	30.0		15
Total intangible assets	$	30.0		15

FMI has developed proprietary know-how over the past 50 years related to its densification and weaving processes. FMI's densification and weaving processes are used to develop specialized composites which can withstand high temperatures and meet the structural requirements set forth by FMI's customers. FMI has developed proprietary designs for 3D and 4D weaving of uncrimped carbon fibers. The densification process utilizes proprietary formulas of heat, pressure, materials, and time to create high density composite solutions at scale. FMI's developed technology results in high strength to weight composites with unmatched density, stability, and heat resistance, which are essential for the mission critical markets it serves. This developed technology is the primary driver of FMI's longstanding, competitive advantage in the markets.

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FMI is typically engaged with government agencies through purchase orders and does not have any life of program commitments from customers. As a result of FMI’s existing developed technology and incumbent position on previous purchase orders, FMI is positioned to capture future government programs. As such, the developed technology and contract assets were subsumed into one consolidated intangible asset (collectively referred to as the developed technology asset).

The developed technology intangible asset is deemed to be the primary revenue-generating identifiable intangible asset acquired in the Transaction. The multi-period excess earnings method ("MPEEM") was used as the approach for estimating the fair value of the developed technology intangible asset which utilizes significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. The principle behind this method is that the value of the intangible asset is equal to the present value of the after-tax cash flows attributable to the intangible asset only. The analysis included assumptions for projections of revenues and expenses, contributory asset charges, discount rates, and a tax impacts.

The goodwill amount of $76.0 recognized is attributable primarily to expected revenue synergies generated by the integration of our products and technologies with those of FMI and intangible assets that do not qualify for separate recognition, such as the assembled workforce of FMI. None of the goodwill is expected to be deductible for income tax purposes. The goodwill is allocated $42.9 to the Fuselage Systems Segment and $33.1 to the Propulsion Systems Segment. This allocation was based upon the fair value of the projected earnings as of the acquisition date. As of July 2, 2020, the recognized goodwill was adjusted from $76.2 to $76.0 resulting from settlement of net working capital in second quarter of 2020. See Note 11, Other Assets, Goodwill, and Intangible Assets for more information on goodwill.

The fair value of accounts receivables acquired is $5.3, which approximates the gross contractual amount. The Company expects substantially all amounts to be collectible. Prior to the acquisition, the Company did not have a preexisting relationship with FMI.

The Company’s consolidated income statement from the acquisition date to the period ending July 2, 2020 includes revenue and earnings of FMI of $25.8 and $2.6, respectively. The following summary, prepared on a pro forma basis, presents the unaudited consolidated results of operations for the six months ended July 2, 2020 and June 27, 2019, as if the acquisition of FMI had been completed as of the beginning of fiscal 2019, after including in fiscal 2019 any post-acquisition adjustments directly attributable to the acquisition, and after including the impact of adjustments such as amortization of intangible assets, and interest expense on related borrowings and, in each case, the related income tax effects. These amounts have been calculated after substantively applying the Company’s accounting policies. This pro forma presentation does not include any impact of transaction synergies. The pro forma results are not necessarily indicative of our results of operations had the Company owned FMI for the entire periods presented.

	For the Three Months Ended							For the Six Months Ended
	July 2, 2020			June 27, 2019				July 2, 2020				June 27, 2019
Revenue - as reported	$	644.6		$	2,016.1			$	1,721.9			$	3,983.9
Revenue - pro forma	644.6			2,023.8				1,722.7				3,999.4
Net (loss) income - as reported	$	(255.9	)	$	168.0			$	(418.9	)		$	331.1
Net (loss) income - pro forma	(255.9		)	169.2				(418.8		)		332.1
Earnings Per Share - Diluted - as reported	$	(2.46	)	1.61				$	(4.04	)		3.16
Earnings Per Share - Diluted - pro forma	(2.46		)	1.62				(4.03		)		3.17

Asco

On May 1, 2018, the Company and its wholly-owned subsidiary Spirit AeroSystems Belgium Holdings BVBA (“Spirit Belgium”) entered into a definitive agreement (as amended, the “Asco Purchase Agreement”) with certain private sellers pursuant to which Spirit Belgium will purchase all of the issued and outstanding equity of S.R.I.F. N.V., the parent company of Asco Industries N.V. (“Asco”), a leading supplier of high lift wing structures, mechanical assemblies and major functional components to major OEMs and Tier I suppliers in the global commercial aerospace and military markets subject to certain customary closing adjustments, including foreign currency adjustments (the “Asco Acquisition”). The Asco Purchase Agreement is subject to

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customary closing conditions, including regulatory approvals. On October 28, 2019, the Company and Spirit Belgium entered into an agreement to amend and restate (the “Asco Amendment”) the Asco Purchase Agreement. The Asco Amendment incorporates amendments to the Purchase Agreement agreed among the Parties to date, and reduces the purchase price for the Asco Acquisition from $604 to $420. In addition, the Asco Amendment reduces the Sellers’ indemnification obligations under the Asco Purchase Agreement to $80 (except with respect to damages resulting or arising from the termination of certain commercial agreements), and removes the closing condition precedent that a “Material Adverse Change” in Asco’s business has not occurred since May 1, 2018.

On January 29, 2020, Asco and Spirit entered into an amendment to the Asco Purchase Agreement extending the date upon which the Asco Purchase Agreement will automatically terminate in the event that conditions to the Asco Acquisition are not satisfied or waived is extended from April 4, 2020, to October 1, 2020. In addition, the Amendment changed the closing date for the Acquisition to the last business day of the month that all conditions precedent are satisfied or waived (provided certain notice requirements are met) or as the parties agree.

Acquisition-related expenses were $6.4 and $2.5 for the three months ended July 2, 2020 and June 27, 2019, respectively, and $17.4 and $5.3 for the six months ended July 2, 2020 and June 27, 2019, respectively, and are included in selling, general and administrative costs on the condensed and consolidated statement of operations.

Bombardier

On October 31, 2019, Spirit and Spirit AeroSystems Global Holdings Limited (“Spirit UK”), wholly owned subsidiaries of the Company, entered into a definitive agreement (the “Bombardier Purchase Agreement”) with Bombardier Inc., Bombardier Aerospace UK Limited, Bombardier Finance Inc. and Bombardier Services Corporation (collectively, the “Bombardier Sellers”) pursuant to which, subject to the satisfaction or waiver of certain conditions, Spirit UK will acquire the outstanding equity of Short Brothers plc (“Shorts”) and Bombardier Aerospace North Africa SAS, and Spirit will acquire substantially all the assets of the maintenance, repair and overhaul business in Dallas, Texas (collectively, the “Bombardier Acquired Business”) for cash consideration of $500 (the “Bombardier Acquisition”).

The Company agreed to procure payment of a special contribution of £100 (approximately $130) to the Shorts pension scheme after closing and has reached a tentative agreement to delay payment of the special contribution to 2021.

The Bombardier Acquisition is subject to certain consents, regulatory approvals and customary closing conditions. Closing conditions include, but are not limited to, (i) the absence of certain legal impediments to the consummation of the Bombardier Acquisition, (ii) the receipt of specified third party consents and approvals, including consents from Airbus SE and its subsidiaries, (iii) the receipt of applicable regulatory approvals, and (iv) the absence of a material adverse change to the Bombardier Acquired Business. The date on which the Bombardier Acquisition will automatically terminate in the event that the conditions are not satisfied or waived is October 31, 2020. The Purchase Agreement contains customary representations, warranties and covenants among the parties, including, among others, certain covenants by the Sellers regarding the operation of the Bombardier Acquired Business during the interim period between the execution of the Purchase Agreement and the consummation of the Bombardier Acquisition. The Bombardier Acquisition is not conditioned upon the Company’s receipt of debt financing.

 

The Floating Rate Notes, 2023 Notes, and 2028 Notes (collectively, the "Unsecured Notes") are fully and unconditionally guaranteed on a senior unsecured basis by Holdings. The 2026 Notes are fully and unconditionally guaranteed on a secured senior and second lien basis by Holdings and Spirit NC. The 2025 Notes are fully and unconditionally guaranteed on a secured second lien basis by Holdings and Spirit NC. Together, the Floating Rate Notes, 2023 Notes, 2025 Notes, 2026 Notes, and 2028 Notes shall be referred to as the “Existing Notes.”

The following condensed consolidating financial information, which has been prepared in accordance with the requirements for presentation of Rule 3-10(d) of Regulation S-X promulgated under the Securities Act, presents the condensed consolidating financial information separately for:

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(i)	Holdings, as the parent guarantor of the Existing Notes, as further detailed in Note 15, Debt;

(ii)	Spirit, as issuer of the Existing Notes;

(iii)	Spirit NC, as a guarantor of the 2026 Notes on a secured senior and second lien basis and 2025 Notes on a secured second lien basis;

(iv)	The Company’s other subsidiaries (the “Non-Guarantor Subsidiaries”), on a combined basis;

(v)	Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Holdings, Spirit NC, and the Non-Guarantor Subsidiaries, (b) eliminate the investments in the Company’s subsidiaries, and (c) record consolidating entries; and

(vi)	Holdings and its subsidiaries on a consolidated basis.

Condensed Consolidating Statements of Operations

For the Three Months Ended July 2, 2020

	Holdings				Spirit				Spirit NC				Non-Guarantor Subsidiaries				Consolidating Adjustments				Total
Revenue	$	—			$	577.4			$	56.3			$	95.2			$	(84.3	)		$	644.6
Operating costs and expenses
Cost of sales	—				853.7				54.2				101.5				(84.3		)		925.1
Selling, general and administrative	5.0				39.6				0.5				3.9				—				49.0
Restructuring cost	—				4.5				0.4				1.4				—				6.3
Research and development	—				7.0				0.1				1.2				—				8.3
Loss on Disposal of Assets	—				19.2				3.7				—				—				22.9
Total operating costs and expenses	5.0				924.0				58.9				108.0				(84.3		)		1,011.6
Operating (loss) income	(5.0		)		(346.6		)		(2.6		)		(12.8		)		—				(367.0		)
Interest expense and financing fee amortization	—				(48.6		)		—				(0.6		)		0.6				(48.6		)
Other (expense) income, net	—				(4.5		)		—				(1.3		)		(0.6		)		(6.4		)
(Loss) income before income taxes and equity in net (loss) income of affiliate and subsidiaries	(5.0		)		(399.7		)		(2.6		)		(14.7		)		—				(422.0		)
Income tax benefit (provision)	2.0				161.5				0.6				3.5				—				167.6
(Loss) income before equity in net (loss) income of affiliate and subsidiaries	(3.0		)		(238.2		)		(2.0		)		(11.2		)		—				(254.4		)
Equity in net (loss) income of affiliate	—				—				—				(1.5		)		—				(1.5		)
Equity in net (loss) income of subsidiaries	(252.9		)		(14.7		)		—				—				267.6				—
Net (loss) income	(255.9		)		(252.9		)		(2.0		)		(12.7		)		267.6				(255.9		)
Other comprehensive (loss) income	69.6				69.6				—				3.2				(72.8		)		69.6
Comprehensive (loss) income	$	(186.3	)		$	(183.3	)		$	(2.0	)		$	(9.5	)		$	194.8			$	(186.3	)

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Condensed Consolidating Statements of Operations

For the Three Months Ended June 27, 2019

 

	Holdings				Spirit				Spirit NC				Non-Guarantor Subsidiaries				Consolidating Adjustments				Total
Revenue	$	—			$	1,833.9			129.5				$	244.7			$	(192.0	)		$	2,016.1
Operating costs and expenses
Cost of sales	—				1,580.6				125.5				209.1				(192.0		)		1,723.2
Selling, general and administrative	4.7				46.6				0.7				4.4				—				56.4
Research and development	—				8.9				0.2				1.4				—				10.5
Total operating costs and expenses	4.7				1,636.1				126.4				214.9				(192.0		)		1,790.1
Operating income (loss)	(4.7		)		197.8				3.1				29.8				—				226.0
Interest expense and financing fee amortization	—				(23.6		)		—				(1.0		)		0.9				(23.7		)
Other income (expense), net	—				6.8				—				2.7				(0.9		)		8.6
Income (loss) before income taxes and equity in net income of affiliate and subsidiaries	(4.7		)		181.0				3.1				31.5				—				210.9
Income tax (provision) benefit	1.0				(38.5		)		(0.7		)		(4.7		)		—				(42.9		)
Income (loss) before equity in net income of affiliate and subsidiaries	(3.7		)		142.5				2.4				26.8				—				168.0
Equity in net income of affiliate	—				—				—				—				—				—
Equity in net income (loss) of subsidiaries	171.7				29.2				—				—				(200.9		)		—
Net income	168.0				171.7				2.4				26.8				(200.9		)		168.0
Other comprehensive income (loss)	(14.7		)		(14.7		)		—				(14.4		)		29.1				(14.7		)
Comprehensive income (loss)	$	153.3			$	157.0			$	2.4			$	12.4			$	(171.8	)		$	153.3

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Condensed Consolidating Statements of Operations

For the Six Months Ended July 2, 2020

	Holdings				Spirit				Spirit NC				Non-Guarantor Subsidiaries				Consolidating Adjustments				Total
Revenue	$	—			$	1,476.7			$	167.5			$	326.0			$	(248.3	)		$	1,721.9
Operating costs and expenses
Cost of sales	—				1,816.4				161.6				307.9				(248.3		)		2,037.6
Selling, general and administrative	8.5				107.7				1.3				8.9				—				126.4
Restructuring cost	—				47.2				0.4				1.3				—				48.9
Research and development	—				18.7				0.2				1.7				—				20.6
Loss on Disposal of Assets	—				19.2				3.7				—				—				22.9
Total operating costs and expenses	8.5				2,009.2				167.2				319.8				(248.3		)		2,256.4
Operating (loss) income	(8.5		)		(532.5		)		0.3				6.2				—				(534.5		)
Interest expense and financing fee amortization	—				(80.7		)		—				(1.5		)		1.4				(80.8		)
Other (expense) income, net	—				(58.8		)		—				4.8				(1.4		)		(55.4		)
(Loss) income before income taxes and equity in net (loss) income of affiliate and subsidiaries	(8.5		)		(672.0		)		0.3				9.5				—				(670.7		)
Income tax benefit (provision)	3.2				251.8				(0.1		)		(0.1		)		—				254.8
(Loss) income before equity in net (loss) income of affiliate and subsidiaries	(5.3		)		(420.2		)		0.2				9.4				—				(415.9		)
Equity in net (loss) income of affiliate	—				—				—				(3.0		)		—				(3.0		)
Equity in net (loss) income of subsidiaries	(413.6		)		6.6				—				—				407.0				—
Net (loss) income	(418.9		)		(413.6		)		0.2				6.4				407.0				(418.9		)
Other comprehensive (loss) income	(72.1		)		(72.1		)		—				(35.2		)		107.3				(72.1		)
Comprehensive (loss) income	$	(491.0	)		$	(485.7	)		$	0.2			$	(28.8	)		$	514.3			$	(491.0	)

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Condensed Consolidating Statements of Operations

For the Six Months Ended June 27, 2019

 

	Holdings				Spirit				Spirit NC				Non-Guarantor Subsidiaries				Consolidating Adjustments				Total
Revenue	$	—			$	3,599.1			245.9				$	501.5			$	(362.6	)		$	3,983.9
Operating costs and expenses
Cost of sales	—				3,080.9				238.3				424.9				(362.6		)		3,381.5
Selling, general and administrative	7.0				103.1				1.6				8.3				—				120.0
Research and development	—				20.3				0.6				2.5				—				23.4
Total operating costs and expenses	7.0				3,204.3				240.5				435.7				(362.6		)		3,524.9
Operating income (loss)	(7.0		)		394.8				5.4				65.8				—				459.0
Interest expense and financing fee amortization	—				(42.4		)		—				(2.0		)		1.9				(42.5		)
Other (expense) income, net	—				(1.6		)		—				1.1				(1.9		)		(2.4		)
Income (loss) before income taxes and equity in net income of affiliate and subsidiaries	(7.0		)		350.8				5.4				64.9				—				414.1
Income tax (provision) benefit	1.5				(73.2		)		(1.3		)		(10.0		)		—				(83.0		)
Income (loss) before equity in net income of affiliate and subsidiaries	(5.5		)		277.6				4.1				54.9				—				331.1
Equity in net income of affiliate	—				—				—				—				—				—
Equity in net income of subsidiaries	336.6				59.0				—				—				(395.6		)		—
Net income	331.1				336.6				4.1				54.9				(395.6		)		331.1
Other comprehensive (loss) income	(4.7		)		(4.7		)		—				(4.0		)		8.7				(4.7		)
Comprehensive income (loss)	$	326.4			$	331.9			$	4.1			$	50.9			$	(386.9	)		$	326.4

 

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Condensed Consolidating Balance Sheet

July 2, 2020

 

	Holdings				Spirit				Spirit NC				Non-Guarantor Subsidiaries				Consolidating Adjustments				Total
Assets
Cash and cash equivalents	$	—			$	1,721.8			$	—			$	225.3			$	—			$	1,947.1
Restricted cash	—				0.3				—				—				—				0.3
Accounts receivable, net	—				490.1				57.0				121.4				(362.5		)		306.0
Contract assets, short-term	—				269.2				—				52.4				—				321.6
Inventory, net	—				856.6				161.2				208.1				—				1,225.9
Other current assets	—				92.5				—				6.8				—				99.3
Total current assets	—				3,430.5				218.2				614.0				(362.5		)		3,900.2
Property, plant and equipment, net	—				1,714.7				282.3				183.7				—				2,180.7
Right of use assets	—				38.5				7.2				0.2				—				45.9
Contract assets, long-term	—				4.9				—				—				—				4.9
Pension assets, net	—				338.5				—				24.1				—				362.6
Deferred income taxes	—				162.0				—				0.2				—				162.2
Goodwill	—				76.0				—				2.3				—				78.3
Intangible assets, net	—				30.1				—				—				—				30.1
Investment in subsidiary	1,269.5				809.6				—				—				(2,079.1		)		—
Other assets	—				352.5				—				112.7				(186.8		)		278.4
Total assets	$	1,269.5			$	6,957.3			$	507.7			$	937.2			$	(2,628.4	)		$	7,043.3
Liabilities
Accounts payable	$	—			$	516.3			$	234.6			$	123.6			$	(362.5	)		$	512.0
Accrued expenses	—				203.4				1.4				40.6				—				245.4
Profit sharing	—				20.9				—				3.2				—				24.1
Current portion of long-term debt	—				350.9				0.2				1.7				—				352.8
Operating lease liabilities, short-term	—				5.0				0.6				—				—				5.6
Advance payments, short-term	—				16.2				—				—				—				16.2
Contract liabilities, short-term	—				121.8				—				—				—				121.8
Forward loss provision, long-term	—				108.2				—				0.6				—				108.8
Deferred revenue and other deferred credits, short-term	—				12.7				—				0.3				—				13.0
Other current liabilities	—				31.3				—				9.7				—				41.0
Total current liabilities	—				1,386.7				236.8				179.7				(362.5		)		1,440.7
Long-term debt	—				3,041.5				0.8				94.5				(86.2		)		3,050.6
Operating lease liabilities, long-term	—				33.7				6.6				0.1				—				40.4
Advance payments, long-term	—				328.8				—				—				—				328.8
Pension/OPEB obligation	—				48.1				—				—				—				48.1
Contract liabilities, long-term	—				389.4				—				—				—				389.4
Forward loss provision, long-term	—				287.5				—				—				—				287.5
Deferred grant income liability - non-current	—				9.0				—				18.1				—				27.1
Deferred revenue and other deferred credits	—				32.4				—				5.3				—				37.7
Deferred income taxes	—				—				—				7.6				—				7.6
Other liabilities	—				210.6				—				5.9				(100.6		)		115.9
Total equity	1,269.5				1,189.6				263.5				626.0				(2,079.1		)		1,269.5
Total liabilities and stockholders’ equity	$	1,269.5			$	6,957.3			$	507.7			$	937.2			$	(2,628.4	)		$	7,043.3

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Condensed Consolidating Balance Sheet

December 31, 2019

	Holdings				Spirit				Spirit NC				Non-Guarantor Subsidiaries				Consolidating Adjustments				Total
Assets
Cash and cash equivalents	$	—			$	2,193.3			$	—			$	157.2			$	—			$	2,350.5
Restricted cash	—				0.3				—				—				—				0.3
Accounts receivable, net	—				565.4				50.5				250.7				(320.2		)		546.4
Inventory, net	—				786.8				136.8				195.2				—				1,118.8
Contract assets, short-term	—				458.8				—				69.5				—				528.3
Other current assets	—				93.5				—				5.2				—				98.7
Total current assets	—				4,098.1				187.3				677.8				(320.2		)		4,643.0
Property, plant and equipment, net	—				1,773.0				306.3				192.4				—				2,271.7
Right of use assets	—				41.2				7.5				0.2				—				48.9
Contract assets, long-term	—				6.4				—				—				—				6.4
Pension assets, net	—				424.2				—				24.9				—				449.1
Deferred income taxes	—				106.3				—				0.2				—				106.5
Goodwill	—				—				—				2.4				—				2.4
Intangible assets, net	—				1.2				—				—				—				1.2
Investment in subsidiary	1,761.9				838.4				—				—				(2,600.3		)		—
Other assets	—				147.6				—				116.0				(186.8		)		76.8
Total assets	$	1,761.9			$	7,436.4			$	501.1			$	1,013.9			$	(3,107.3	)		$	7,606.0
Liabilities
Accounts payable	$	—			$	977.1			$	226.3			$	175.1			$	(320.2	)		$	1,058.3
Accrued expenses	—				210.0				0.8				29.4				—				240.2
Profit sharing	—				76.9				—				7.6				—				84.5
Current portion of long-term debt	—				48.4				0.2				1.6				—				50.2
Operating lease liabilities, short-term	—				5.3				0.6				0.1				—				6.0
Advance payments, short-term	—				21.6				—				—				—				21.6
Contract liabilities, short-term	—				158.3				—				—				—				158.3
Forward loss provision, long-term	—				83.9				—				—				—				83.9
Deferred revenue and other deferred credits, short-term	—				14.5				—				0.3				—				14.8
Other current liabilities	—				29.3				2.1				11.5				—				42.9
Total current liabilities	—				1,625.3				230.0				225.6				(320.2		)		1,760.7
Long-term debt	—				2,974.7				0.9				94.7				(86.2		)		2,984.1
Operating lease liabilities, long-term	—				36.0				6.9				0.1				—				43.0
Advance payments, long-term	—				333.3				—				—				—				333.3
Pension/OPEB obligation	—				35.7				—				—				—				35.7
Contract liabilities, long-term	—				356.3				—				—				—				356.3
Forward loss provision, long-term	—				163.5				—				—				—				163.5
Deferred grant income liability - non-current	—				9.2				—				19.8				—				29.0
Deferred revenue and other deferred credits	—				30.4				—				4.0				—				34.4
Deferred income taxes	—				—				—				8.3				—				8.3
Other liabilities	—				190.1				—				6.3				(100.6		)		95.8
Total equity	1,761.9				1,681.9				263.3				655.1				(2,600.3		)		1,761.9
Total liabilities and stockholders’ equity	$	1,761.9			$	7,436.4			$	501.1			$	1,013.9			$	(3,107.3	)		$	7,606.0

 

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Condensed Consolidating Statements of Cash Flows

For the Six Months Ended July 2, 2020

 

	Holdings				Spirit				Spirit NC				Non-Guarantor Subsidiaries				Consolidating Adjustments				Total
Operating activities
Net cash used in operating activities	$	—			$	(620.8	)		$	(19.1	)		$	80.2							$	(559.7	)
Investing activities
Purchase of property, plant and equipment	—				(39.7		)		(1.1		)		(10.4		)						(51.2		)
Acquisition, net of cash acquired	—				(117.9		)		—				—								(117.9		)
Other	—				0.3				—				2.4								2.7
Net cash used in investing activities	—				(157.3		)		(1.1		)		(8.0		)		—				(166.4		)
Financing activities
Proceeds from issuance of debt	—				1,200.0				—				—								1,200.0
Customer financing	—				10.0				—				—				—				10.0
Principal payments of debt	—				(13.9		)		(0.1		)		(0.8		)		—				(14.8		)
Payments on term loan	—				(11.4		)		—				—				—				(11.4		)
Payments on revolving credit facility	—				(800.0		)		—				—				—				(800.0		)
Proceeds (payments) from intercompany debt	—				(25.2		)		20.3				4.9								—
Taxes paid related to net share settlement of awards	—				(13.8		)		—				—				—				(13.8		)
Proceeds (payments) from subsidiary for purchase of treasury stock	(0.1		)		0.1				—				—				—				—
Purchase of treasury stock	0.1				—				—				—				—				0.1
Proceeds (payments) from subsidiary for dividends paid	13.4				(13.4		)		—				—				—				—
Dividends paid	(13.4		)		—				—				—				—				(13.4		)
Proceeds from issuance of ESPP stock	—				1.3				—				—				—				1.3
Debt issuance costs	—				(24.5		)		—				—				—				(24.5		)
Net cash provided by (used in) financing activities	—				309.2				20.2				4.1				—				333.5
Effect of exchange rate changes on cash and cash equivalents	—				0.5				—				(8.2		)		—				(7.7		)
Net decrease in cash and cash equivalents for the period	—				(468.4		)		—				68.1				—				(400.3		)
Cash, cash equivalents, and restricted cash, beginning of period	—				2,210.0				—				157.2				—				2,367.2
Cash, cash equivalents, and restricted cash, end of period	$	—			$	1,741.6			$	—			$	225.3			$	—			$	1,966.9

 

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Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 27, 2019

	Holdings				Spirit				Spirit NC				Non-Guarantor Subsidiaries				Consolidating Adjustments				Total
Operating activities
Net cash provided by operating activities	$	—			$	279.1			$	5.1			$	187.5			$	—			$	471.7
Investing activities
Purchase of property, plant and equipment	—				(63.1		)		(5.0		)		(9.8		)		—				(77.9		)
Other	—				0.1				—				—				—				0.1
Net cash used in investing activities	—				(63.0		)		(5.0		)		(9.8		)		—				(77.8		)
Financing activities
Proceeds from issuance of debt	—				250.0				—				—				—				250.0
Proceeds from revolving credit facility	—				100.0				—				—				—				100.0
Principal payments of debt	—				(4.5		)		(0.1		)		(0.3		)		—				(4.9		)
Payments on term loan	—				(2.6		)		—				—				—				(2.6		)
Payments on revolving credit facility	—				(100.0		)		—				—				—				(100.0		)
Proceeds (payments) from intercompany debt	—				60.4				—				(60.4		)		—				—
Taxes paid related to net share settlement of awards	—				(11.8		)		—				—				—				(11.8		)
Proceeds (payments) from subsidiary for dividends paid	25.4				(25.2		)		—				(0.2		)		—				—
Dividends paid	(25.4		)		—				—				—				—				(25.4		)
Proceeds (payments) from subsidiary for purchase of treasury stock	75.0				(75.0		)		—				—				—				—
Purchase of treasury stock	(75.0		)		—				—				—				—				(75.0		)
Proceeds from issuance of ESPP stock	—				1.3				—				—				—				1.3
Net cash provided by (used in) financing activities	—				192.6				(0.1		)		(60.9		)		—				131.6
Effect of exchange rate changes on cash and cash equivalents	—				—				—				(1.5		)		—				(1.5		)
Net increase (decrease) in cash and cash equivalents for the period	—				408.7				—				115.3				—				524.0
Cash, cash equivalents, and restricted cash, beginning of period	—				725.5				—				68.6				—				794.1
Cash, cash equivalents, and restricted cash, end of period	—				1,134.2				—				183.9				—				1,318.1

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July 2020 Amendment

On July 31, 2020, Spirit, the Company, and Spirit NC entered into the July 2020 Amendment to the 2018 Credit Agreement. For more information, see Note 15, Debt.

Boeing Production Volumes

The Company is currently evaluating the potential impact to the B787 program based on Boeing's announcement on July 29, 2020 that production volumes on the B787 will decrease to 6 APM beginning in 2021. The Company’s preliminary assessment is that it expects to incur an incremental forward loss of approximately $25 to $35 in the third quarter of 2020. The estimated incremental forward loss is the anticipated impact of an assumed production rate of 6APM during 2021, returning to a production rate of 7APM in 2022 and beyond. Additionally, Boeing announced that the combined production rate on the 777/777X program would decrease to 2 APM beginning in 2021. The production volume decrease on the 777/777X program will impact other commercial programs across the Company, and may result in additional forward losses on other programs.

Airbus Production Volumes

The Company is currently evaluating the potential impact to the A350 program, and based on its preliminary assessment expects to incur an incremental forward loss of approximately $13 to $20 in the third quarter of 2020. The estimated incremental forward loss is a result of the management’s judgment regarding specific production rates, the timing and duration of the production rate decreases, and the Company’s actions it may take to recalibrate its cost structure in response to lower production volumes. This estimate is based upon evolving discussions with the Company’s customer after July 2, 2020 and the amount of forward loss the Company will incur in the third quarter of 2020 may be materially different than the range indicated above.

Additional Workforce Actions

On July 17, 2020, Spirit announced various employment reduction actions in light of customer production reductions. Such actions included a voluntary layoff program that was offered to union represented, non-represented, and executives employees across the Company's U.S. sites. The Company's work on defense programs is expected to continue uninterrupted.

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 U.S. and other governments on defense;

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.

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•	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.

•	reduced pay for all U.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 $1.2 billion in 2025 Notes; and

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elected to defer the payment of $15.9 million in employer payroll taxes incurred through July 2, 2020, as provided by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), of which 50% is required to be deposited by December 2021 and the remaining 50% by December 2022. In addition, as of July 2, 2020 the Company has recorded a deferral of $28.5 million of VAT payments until March 2021 under the United Kingdom deferral scheme.

•	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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•	Single-aisle average production volume of 40 APM

•	A350 average production volume of 6 APM

•	A330 average production volume of 2 APM

•	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;

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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.

•	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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•	On April 12, 2019, Boeing and the Company executed a Memorandum of Agreement (the “2019 MOA”) providing that the Company was to maintain its delivery rate of 52 shipsets per month with respect to the B737 MAX. Previously, the Company was expecting to increase production to a rate of 57 shipsets per month;

•	On December 19, 2019, Boeing directed the Company to stop all B737 MAX deliveries to Boeing effective January 1, 2020. Accordingly, Spirit suspended all B737 MAX production beginning on January 1, 2020;

•	On February 6, 2020, Boeing and Spirit entered into a Memorandum of Agreement (the “2020 MOA”) largely superseding the 2019 MOA and providing for Spirit to deliver to Boeing 216 B737 MAX shipsets in 2020;

•	On May 4, 2020, Boeing and the Company agreed that Spirit would deliver 125 B737 MAX shipsets to Boeing in 2020; and

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•	On June 19, 2020, Boeing directed Spirit to reduce its 2020 B737 production plan from 125 to 72 shipsets.

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•	whether there will be additional production suspensions 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 infection or 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;

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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 compliance practices and procedures, 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;

•	potential failure or reduced capacity of third parties on which the Company relies, including suppliers, lenders, and other business partners, to meet the Company’s obligations and needs;

•	the impact on our contracts with our customers and suppliers, including force majeure provisions;

•	the impacts on the financial markets and the availability and cost of credit to the Company;

•	our customers’ ability to pay for our products and services;

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•	our ability to withstand and recover from any cyberattacks or operation interruptions as a result of a remote working environment, and potential reputational impacts or loss of customer contracts as a result of such cyberattacks and interruptions; and

•	the impact on demand for the Company's products, and the public’s demand and ability to pay for future airline travel, whether or not vaccines or effective treatments for COVID-19 become available.

•	the severity, extent, and duration of the 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 industry, 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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