AMENDMENT NO. 6 TO FORM S-1
As filed with the Securities and Exchange Commission on
November 17, 2006
Registration
No. 333-135486
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 6
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SPIRIT AEROSYSTEMS HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware |
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3728 |
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20-2436320 |
(State or Other Jurisdiction of
Incorporation or Organization) |
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(Primary Standard Industrial
Classification Code No.) |
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(I.R.S. Employer
Identification No.) |
3801 South Oliver
Wichita, Kansas 67210
(316) 526-9000
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
Jeffrey L. Turner
Chief Executive Officer
Spirit AeroSystems Holdings, Inc.
3801 South Oliver
Wichita, Kansas 67210
(316) 526-9000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies To:
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Joel I. Greenberg, Esq.
Mark S. Kingsley, Esq.
Kaye Scholer LLP
425 Park Avenue
New York, New York 10022
(212) 836-8000 |
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Gloria Farha Flentje, Esq.
General Counsel
Spirit AeroSystems, Inc.
3801 South Oliver
Wichita, Kansas 67210
(316) 526-9000 |
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William J. Whelan, III, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
(212) 474-1000 |
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration
Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
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Proposed Maximum |
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Proposed Maximum |
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Title of Each Class of |
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Amount to be |
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Offering Price Per |
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Aggregate Offering |
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Amount of |
Securities to be Registered |
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Registered |
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Unit |
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Price |
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Registration Fee(1) |
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Class A Common Stock, par value $0.01 per share(2)
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10,416,667 shares |
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$25.00 |
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$260,416,675(3) |
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$27,864.58 |
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Class A Common Stock, par value $0.01 per share(4)
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49,479,167 shares(5) |
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$25.00 |
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$1,236,979,175(3) |
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$132,356.77 |
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(1) |
Previously paid. |
(2) |
Shares to be sold by the registrant. |
(3) |
Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(a) of the Securities Act of 1933,
as amended. |
(4) |
Shares to be sold by the selling stockholders. |
(5) |
Includes 7,812,500 shares that the underwriters have the
option to purchase solely to cover over-allotments, if any. |
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
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SUBJECT TO COMPLETION, DATED
NOVEMBER 16, 2006
PROSPECTUS
52,083,334 Shares
Spirit AeroSystems Holdings, Inc.
Class A Common Stock
We are selling 10,416,667 shares of class A common
stock and the selling stockholders are selling
41,666,667 shares of class A common stock. We will not
receive any proceeds from the sale of the shares by the selling
stockholders.
The underwriters have an option to purchase a maximum of
7,812,500 additional shares of class A common stock
from the selling stockholders to cover over-allotments of
shares. The underwriters can exercise this right at any time
within 30 days from the date of this prospectus.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price of the common
stock is expected to be between $23.00 and $25.00 per
share. Our class A common stock has been approved for
listing on The New York Stock Exchange under the symbol
SPR, subject to official notice of issuance.
Investing in our class A common stock involves risks.
See Risk Factors on page 10.
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Proceeds | |
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AeroSystems | |
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Per Share
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Total
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Delivery of the shares of class A common stock will be made
on or
about ,
2006.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Credit Suisse |
Goldman, Sachs & Co. |
Morgan Stanley |
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Banc of America Securities LLC
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Citigroup |
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Cowen and Company |
Deutsche Bank Securities
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GMP Securities L.P. |
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Jefferies Quarterdeck |
Lehman Brothers
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Merrill Lynch & Co. |
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RBC Capital Markets |
Scotia Capital
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UBS Investment Bank |
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Westwind Partners |
The date of this prospectus
is ,
2006.
TABLE OF CONTENTS
You should rely only on the information contained in this
document or to which we have referred you. We have not
authorized anyone to provide you with information that is
different. This document may only be used where it is legal to
sell these securities. The information in this document may only
be accurate on the date of this document.
Dealer Prospectus Delivery Obligation
Until ,
all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers obligation to deliver a prospectus when acting as
an underwriter and with respect to unsold allotments or
subscriptions.
i
EXPLANATORY STATEMENT
Method of accounting for additional stock compensation
expenses
In conjunction with this offering, we and our board of directors
reassessed the fair market values under generally accepted
accounting principles ascribed for financial accounting purposes
to common stock purchased by management as well as restricted
stock awards issued to employees under our Executive Incentive,
Short Term Incentive and Long Term Incentive Plans and to
directors under our Director Stock Plan in fiscal 2005 and
through June 29, 2006. We adjusted the fair values ascribed
to these equity awards for financial accounting purposes to the
fair value of our underlying equity using appraisals and
valuations of the underlying net assets and other data necessary
to reasonably estimate such value on a per share basis at the
various grant dates. We then calculated additional stock
compensation expense necessary to be recognized in accordance
with Statement of Financial Accounting Standards, or SFAS,
No. 123(R), Share Based Payment, as a result of this
change in valuation. Accordingly, we have restated our financial
statements as of June 29, 2006 and December 29, 2005
and for the periods then ended to reflect the additional stock
compensation expense and related tax impact had these equity
awards been recorded at their currently estimated fair values.
We also recorded the entries that had previously remained as
unadjusted differences at December 29, 2005 resulting in a
discrete non-cash charge to pre-tax earnings of
$0.8 million for the period from inception
(February 7, 2005) through December 29, 2005 and a
non-cash increase to pre-tax earnings of $1.2 million for
the six-month period ending June 29, 2006. The fair market
value reassessment portion of the restatement resulted in an
additional non-cash charge to Selling, general and
administrative expense of $30.5 million, and a
corresponding increase in Net loss of $30.5 million for the
period from inception (February 7, 2005) through
December 29, 2005 and an additional non-cash charge to
Selling, general and administrative expense of
$19.0 million, an increase in Provision for income taxes of
$5.0 million and a reduction of Net income by
$24.0 million for the six-month period ending June 29,
2006. Additional information regarding the effect of the
restatement to reflect these changes is included in Note 2
to our restated consolidated financial statements included in
this prospectus.
Adjustments to reflect the stock split
On November 16, 2006, a 3-for-1 stock split occurred. This
split affected both classes of our common stock: class A
common stock and class B common stock. The post-split par
value of our shares has remained $0.01 per share. In this
prospectus, we have adjusted all common share and per common
share amounts in our restated consolidated financial statements
and restated interim consolidated financial statements and
related disclosures to reflect the stock split. We have also
adjusted all other share related disclosures throughout this
prospectus.
Restated Portions of Prospectus
We have restated portions of the following sections that were
previously presented in Amendment No. 1 to the registration
statement of which this prospectus forms a part that was filed
with the Securities and Exchange Commission on August 29,
2006. This list does not represent all items that have been
changed as we have made other content changes consistent with
the amendment process.
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Summary |
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Capitalization |
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Unaudited Pro Forma Consolidated Financial Information |
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Selected Consolidated Financial Information and Other Data |
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Managements Discussion and Analysis of Financial Condition
and Results of Operations |
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Business |
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Executive Compensation |
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Certain Relationships and Related Party Transactions |
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Consolidated Financial Statements and Footnotes |
ii
ABOUT THIS PROSPECTUS
Unless the context otherwise indicates or requires, as used in
this prospectus, references to we, us,
our or the company refer to Spirit
AeroSystems Holdings, Inc., its subsidiaries and predecessors.
References to Spirit refer only to our subsidiary,
Spirit AeroSystems, Inc., and references to Spirit
Holdings refer only to Spirit AeroSystems Holdings, Inc.
References to Boeing refer to The Boeing Company and
references to Airbus refer to Airbus S.A.S.
References to Onex entities refer to Onex Partners
LP, Onex Corporation and their respective partners and
affiliates that, after giving effect to this offering, will
beneficially own 98.4% of our class B common stock, and
Onex refers to Onex Corporation and its affiliates,
including Onex Partners LP. References to OEMs
refer to aircraft original equipment manufacturers.
References to revenues on a combined basis, assuming
the acquisition of the aerostructures division of BAE Systems
(Operations) Limited, or BAE Systems, occurred on
January 1, 2006, combine our historical revenues with the
historical revenues of the aerostructures division of BAE
Systems for the periods described. The historical revenues for
the aerostructures division of BAE Systems were represented to
us by BAE Systems, have been converted by us into U.S. dollars
at the average conversion rates for the period, are unaudited
and have not been reviewed by our independent registered public
accounting firm. The combined revenues may not be indicative of
our revenues if we had acquired the aerostructures division of
BAE Systems on January 1, 2006, nor of how we may perform
in future periods. Although this information is calculated and
presented on the basis of methodologies other than in accordance
with U.S. generally accepted accounting principles, we
present combined revenues because we believe this information is
useful to investors as an indicator of the magnitude of our
business and the relative significance of particular customers
on a going-forward basis.
Spirit Holdings was formed on February 7, 2005. However, it
did not commence operations until June 17, 2005, following
the acquisition of Boeing Wichita. The audited restated
consolidated financial statements of Spirit Holdings included in
this prospectus cover the period from February 7, 2005
(date of inception) through December 29, 2005. Throughout
this prospectus, we refer to Spirit Holdings results of
operations for the period from June 17, 2005 (date of
commencement of operations) through December 29, 2005,
which are substantially identical to Spirit Holdings
results of operations for the period from February 7, 2005
through December 29, 2005.
iii
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements.
Forward-looking statements give our current expectations or
forecasts of future events. Forward-looking statements generally
can be identified by the use of forward-looking terminology such
as may, will, expect,
intend, estimate,
anticipate, believe,
project, or continue, or other similar
words. These statements reflect managements current views
with respect to future events and are subject to risks and
uncertainties, both known and unknown. Our actual results may
vary materially from those anticipated in forward-looking
statements. We caution investors not to place undue reliance on
any forward-looking statements.
Important factors that could cause actual results to differ
materially from forward-looking statements include, but are not
limited to:
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our ability to continue to grow our business and execute our
growth strategy; |
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the build rates of certain Boeing aircraft including, but not
limited to, the B737 program, the B747 program, the B767 program
and the B777 program and build rates of the Airbus A320 and A380
programs; |
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our ability to enter into supply arrangements with additional
customers and to satisfy performance requirements under existing
supply contracts with Boeing and Airbus; |
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any adverse impact on Boeings production of aircraft
resulting from reduced orders by Boeings customers; |
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the success and timely progression of Boeings new B787
aircraft program, including receipt of necessary regulatory
approvals; |
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future levels of business in the aerospace and commercial
transport industries; |
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competition from original equipment manufacturers and other
aerostructures suppliers; |
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the effect of governmental laws, such as U.S. export
control laws, environmental laws and agency regulation, in the
U.S. and abroad; |
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the effect of new commercial and business aircraft development
programs, their timing and resource requirements that may be
placed on us; |
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the cost and availability of raw materials; |
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our ability to recruit and retain highly skilled employees and
our relationships with the unions representing many of our
employees; |
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spending by the United States and other governments on defense; |
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our continuing ability to operate successfully as a stand alone
company; |
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the outcome or impact of ongoing or future litigation and
regulatory actions; and |
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our exposure to potential product liability claims. |
These factors are not exhaustive, and new factors may emerge or
changes to the foregoing factors may occur that could impact our
business. Except to the extent required by law, we undertake no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
You should review carefully the sections captioned Risk
Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations
in this prospectus for a more complete discussion of these and
other factors that may affect our business.
iv
INDUSTRY AND MARKET DATA
The market data and other statistical information used
throughout this prospectus are based on independent industry
publications. Some data are also based on our good faith
estimates, which are derived from our review of internal
surveys, as well as independent industry publications,
government publications, reports by market research firms or
other published independent sources. Although we believe that
these sources are reliable, we have not independently verified
the information. None of the independent industry publications
used in this prospectus was prepared on our or our
affiliates behalf or at our expense.
v
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all of the
information you should consider before investing in our
class A common stock. You should read the entire prospectus
carefully, including the section describing the risks of
investing in our class A common stock under the caption
Risk Factors and our financial statements and
related notes included elsewhere in this prospectus before
making an investment decision. Some of the statements in this
summary constitute forward-looking statements. For more
information, please see Cautionary Statements Regarding
Forward-Looking Statements.
Our Company
Overview
We are the largest independent non-OEM designer and manufacturer
of aerostructures in the world. Aerostructures are structural
components such as fuselages, propulsion systems and wing
systems for commercial and military aircraft. Spirits
operations commenced on June 17, 2005 following the
acquisition of Boeings commercial aerostructures
manufacturing operations located in Wichita, Kansas, Tulsa,
Oklahoma and McAlester, Oklahoma, which we collectively refer to
as Boeing Wichita. We refer to this acquisition as the Boeing
Acquisition. On April 1, 2006, we became a supplier to
Airbus through our acquisition of the aerostructures division of
BAE Systems, or BAE Aerostructures, headquartered in Prestwick,
Scotland, which we refer to as the BAE Acquisition. Although
Spirit Holdings is a recently-formed company, its predecessor,
Boeing Wichita, had 75 years of operating history and
expertise in the commercial and military aerostructures
industry. For the nine months ended September 28,
2006, we generated revenues of approximately $2,356 million
and had net income of approximately $86 million. For the
three months ended September 28, 2006, we generated
revenues of approximately $830 million and net income of
approximately $34 million.
We are the largest independent supplier of aerostructures to
both Boeing and Airbus. We manufacture aerostructures for every
Boeing commercial aircraft currently in production, including
over 70% of the airframe content for the Boeing B737. We
were also awarded a contract that makes us the largest
aerostructures content supplier on the Boeing B787,
Boeings next generation twin aisle aircraft. Furthermore,
we believe we are the largest content supplier for the wing for
the Airbus A320 family and we are a significant supplier for
Airbus new A380. Sales related to large commercial
aircraft production, some of which may be used in military
applications, represented approximately 99% of our revenues for
the nine months ended September 28, 2006.
We derive our revenues primarily through long-term supply
agreements with both Boeing and Airbus. For the nine months
ended September 28, 2006, approximately 89% and
approximately 10% of our combined revenues (assuming the BAE
Acquisition occurred on January 1, 2006) were generated
from sales to Boeing and Airbus, respectively. We are currently
the sole-source supplier of 96% of the products we sell to
Boeing and Airbus, as measured by dollar value of the products
sold. We are a critical partner to our customers due to the
broad range of products we currently supply to them and our
leading design and manufacturing capabilities using both
metallic and composite materials. Under our supply agreements
with Boeing and Airbus, we supply essentially all of our
products for the life of the aircraft program (other than the
A380), including commercial derivative models. For the A380 we
have a long-term supply contract with Airbus that covers a fixed
number of product units.
We are organized into three principal reporting segments:
(1) Fuselage Systems, which include the forward, mid- and
rear fuselage sections, (2) Propulsion Systems, which
include nacelles (aerodynamic engine enclosures which enhance
propulsion installation efficiency, dampen engine noise and
provide thrust reversing capabilities), struts/pylons
(structures that attach engines to airplane wings) and engine
structural components and (3) Wing Systems, which include
wings, wing components and flight control
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surfaces. All other activities fall within the All Other
segment. Fuselage Systems, Propulsion Systems, Wing Systems and
All Other represented approximately 49%, 27%, 23% and 1%,
respectively, of our revenues for the quarter ended
September 28, 2006.
Industry Overview
Based on our research, the global market for aerostructures is
estimated to have totaled $24 billion in annual sales in
2004. Currently, OEMs outsource approximately half of the
aerostructures market to independent third parties such as
ourselves. We expect the outsourcing of the design, engineering
and manufacturing of aerostructures to increase as OEMs
increasingly focus operations on final assembly and support
services for their customers. The original equipment
aerostructures market can be divided by end market application
into three market sectors: (1) commercial (including
regional and business jets), (2) military and
(3) modifications, upgrades, repairs and spares. While we
serve all three market sectors, we primarily derive our current
revenues from the commercial market sector. We estimate that the
commercial sector represents approximately 61% of the total
aerostructures market, while the military sector represents
approximately 28% and the modifications, upgrades, repairs and
spares sector represents approximately 11%.
Demand for commercial aerostructures is directly correlated to
demand for new aircraft. New large commercial aircraft
deliveries by Boeing and Airbus totaled 668 in 2005, up from 605
in 2004 and 586 in 2003, which was the most recent cyclical
trough following the 1999 peak of 914 deliveries. Demand for
aircraft has rebounded since 2003, resulting in record orders in
2005 for 2,057 Boeing and Airbus aircraft, which are expected to
be delivered over the next several years. According to published
estimates by Boeing and Airbus, they expect to deliver a
combined total of approximately 825 commercial aircraft in
2006. As of September 30, 2006, Boeing and Airbus had a
combined backlog of 4,294 commercial aircraft, which has grown
from a combined backlog of 2,597 commercial aircraft as of
December 31, 2004.
Our Competitive Strengths
We believe our key competitive strengths include:
Leading Position in the Growing Commercial Aerostructures
Market. We are the largest independent non-OEM commercial
aerostructures manufacturer, with an estimated 19% market share
among all aerostructures suppliers. We are under contract to
provide aerostructure products for approximately 97% of the
aircraft that comprise Boeings and Airbus commercial
aircraft backlog as of September 30, 2006. The significant
aircraft order backlog and our strong relationships with Boeing
and Airbus should enable us to continue to profitably grow our
core commercial aerostructures business.
Participation on High Volume and Major Growth Platforms.
We derive a high proportion of our Boeing revenues from
Boeings high volume B737 program and a high proportion of
our Airbus revenues from the high volume A320 program. The B737
and A320 families are Boeings and Airbus best
selling commercial airplanes. We also have been awarded a
significant amount of work on the major new twin aisle programs
launched by Boeing and Airbus, the B787 and the A380.
Stable Base Business. We have entered into exclusive
long-term supply agreements with Boeing and Airbus, our two
largest customers, making us the exclusive supplier for most of
the business covered by these contracts. Under our supply
agreements with Boeing and Airbus, we supply essentially all of
our products for the life of the aircraft program (other than
the A380), including commercial derivative models. For the A380,
we have a long-term supply contract with Airbus that covers a
fixed number of units. We believe our long-term supply contracts
with our two largest customers provide us with a stable base
business upon which to build.
Strong Incumbent and Competitive Position. We have a
strong incumbent position on the products we currently supply to
Boeing and Airbus due not only to our long-term supply
agreements, but also to our
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long-standing relationships with Boeing and Airbus, as well as
to the high costs OEMs would incur to switch suppliers on
existing programs. We have strong, embedded relationships with
our primary customers as most of our senior management team are
former Boeing or Airbus executives.
We believe that OEMs incur significant costs to change
aerostructures suppliers once contracts are awarded. Such
changes after contract award require additional testing and
certification, which may create production delays and
significant costs for both the OEM and the new supplier. We also
believe it would be cost prohibitive for other suppliers to
duplicate our facilities and the over 20,000 major pieces of
equipment that we own or operate. The combined insurable
replacement value of all the buildings and equipment we own or
operate is over $5 billion, including approximately
$2.3 billion and approximately $1.7 billion for
buildings and equipment, respectively, that we own and
approximately $1.1 billion for other equipment used in the
operation of our business. As a result, we believe that so long
as we continue to meet our customers requirements, the
probability of their changing suppliers on our current statement
of work is quite low.
Industry Leading Technology, Design Capabilities and
Manufacturing Expertise. We possess industry-leading
engineering capabilities that include significant expertise in
structural design and technology, use of metallic and composite
materials, stress analysis, systems engineering and acoustics
technology. With approximately 800 degreed engineering and
technical employees (including over 200 degreed contract
engineers), we possess knowledge and manufacturing know-how that
would be difficult for other suppliers to replicate.
Competitive and Predictable Labor Cost Structure. In
connection with the Boeing Acquisition, we achieved
comprehensive cost reductions. The cornerstones to our cost
reductions were: (1) labor savings, (2) pension and
other benefit savings, (3) reduced corporate overhead, and
(4) operational efficiency improvements. At the time of the
acquisition, we reduced our workforce by 15% and entered into
new labor contracts with our unions that established wage levels
which are in-line with the local market. We also changed work
rules and significantly reduced the number of job categories,
resulting in greater flexibility in work assignments and
increased productivity. We were also able to reduce pension
costs, largely through a shift from a defined benefit plan to
more predictable defined contribution and union-sponsored plans,
and to reduce fringe benefits by increasing employee
contributions to health care plans and decreasing retiree
medical costs. In addition, we replaced corporate overhead
previously allocated to Boeing Wichita when it was a division of
Boeing with our own significantly lower overhead spending. As a
result of these initiatives, we achieved approximately
$200 million of annual recurring cost savings, assuming
annual deliveries remain constant at 2005 rates. Moreover, as a
result of our long-term collective bargaining agreements with
most of our labor unions, our labor costs should be fairly
predictable well into 2010.
We have also begun to implement a number of operational
efficiency improvements, including global sourcing to reduce
supplier costs and realignment of our business units. Since the
Boeing Acquisition, as a result of these efficiency initiatives,
we expect to achieve approximately $80 million of
additional average annual recurring cost savings, assuming
annual deliveries remain constant at 2005 rates.
Experienced Management Team with Significant Equity
Ownership. We have an experienced and proven management team
with an average of over 20 years of aerospace industry
experience. Our management team has successfully expanded our
business, reduced costs and established the stand alone
operations of our business. After giving effect to this
offering, members of our management team will hold common stock
equivalent to approximately 0.5% of our company on a fully
diluted basis.
3
Our Business Strategy
Our goal is to remain a leading aerostructures manufacturer and
to increase revenues while maximizing our profitability and
growth. Our strategy includes the following:
Support Increased Aircraft Deliveries. We value being the
largest independent aerostructures supplier to both Boeing and
Airbus and core to our business strategy is a determination to
meet or exceed their expectations under our existing supply
arrangements. We are constantly focused on improving our
manufacturing efficiency and maintaining our high standards of
quality and on-time delivery to meet these expectations. We are
also focused on supporting our customers increase in new
aircraft production and the introduction of key aircraft
programs such as the Boeing B787 and the Airbus A380. We are
adjusting our manufacturing processes, properties and facilities
to accommodate an increase in production and a shift in mix to a
higher ratio of larger aircraft, which generally have higher
dollar value content.
Win New Business from Existing and New Customers. We have
established a sales and marketing infrastructure to support our
efforts to win business from new and existing customers. We
believe that we are well positioned to win additional work from
Boeing and Airbus, given our strong relationships, our size,
design and build capabilities and our financial resources, which
are necessary to make proper investments. We believe that
opportunities for increased business from our customers will
arise on work that they currently produce internally but that
they might shift to an external supplier in the future and work
on new aircraft programs. As an independent company following
the Boeing Acquisition, we now have significant opportunities to
increase our sales to OEMs other than Boeing. We believe our
design, engineering and manufacturing capabilities are highly
attractive to potential new customers and provide a competitive
advantage in winning new aerostructures business. We have won
several significant contracts from non-Boeing customers in
competitive bid situations since the Boeing Acquisition.
Research and Development Investment in Next Generation
Technologies. We invest in direct research and development
for current programs to strengthen our relationships with our
customers and new programs to generate new business. As part of
our research and development effort, we work closely with OEMs
and integrate our engineering teams into their design processes.
We believe our close coordination with OEMs positions us to win
new business on new commercial and military platforms.
Provide New Value-Added Services to our Customers. We
believe we are one of the few independent suppliers that possess
the core competencies to not only manufacture, but also to
integrate and assemble complex system and structural components.
For example, we have been selected to assemble and integrate
avionics, electrical systems, hydraulics, wiring and other
components for the forward fuselage and pylons for the Boeing
B787. As a result, Boeing expects to be able to ultimately
assemble a B787 so that it is ready for test flying within three
days after it receives our shipset, as compared to 25 to
30 days for assembly of a B737. We believe our ability to
integrate complex components into aerostructures is a service
that greatly benefits our customers by reducing their flow time
and inventory holding costs.
Continued Improvement to our Low Cost Structure. Although
we achieved significant cost reductions at the time of
acquisition, we remain focused on further reducing costs. There
continue to be cost saving opportunities in our business and we
have identified and begun to implement them. We expect that most
of our future cost saving opportunities will arise from
increased productivity, continued outsourcing of non-core
activities, and improved procurement and sourcing through our
global sourcing initiatives. We believe our strategic sourcing
expertise should allow us to develop and manage low-cost supply
chains in Asia and Central Europe. Our goal is to continue to
increase our material sourcing from low-cost jurisdictions.
Pursue Strategic Acquisitions on an Opportunistic Basis.
The commercial aerostructures market is highly fragmented with
many small private businesses and divisions of larger public
companies. Given the market fragmentation, coupled with the
trend by OEMs to outsource work to Tier 1 manufacturers
that coordinate suppliers and integrate systems into airframes
that they manufacture, we believe our industry could experience
significant consolidation in the coming years. Although our main
focus is to grow our
4
business organically, we believe we are well positioned to
capture additional market share and diversify our current
business through opportunistic strategic acquisitions.
The Boeing Acquisition and Related Transactions
In December 2004 and February 2005, an investor group led by
Onex Partners LP and Onex Corporation formed Spirit and Spirit
Holdings, respectively, for the purpose of acquiring Boeing
Wichita. The Boeing Acquisition was completed on June 16,
2005. Prior to the acquisition, Boeing Wichita functioned as an
internal supplier of parts and assemblies for Boeings
airplane programs and had very few sales to third parties. See
The Transactions The Boeing Acquisition.
In connection with the Boeing Acquisition, we entered into a
long-term supply agreement under which we are Boeings
exclusive supplier for substantially all of the products and
services provided by Boeing Wichita to Boeing prior to the
Boeing Acquisition. Pricing for existing products on
in-production models is contractually set through May 2013, with
average prices decreasing at higher volume levels and increasing
at lower volume levels, thereby helping to protect our margins
if volume is reduced. We also entered into a long-term supply
agreement for Boeings new B787 platform covering the life
of this platform, including commercial derivatives. Under this
contract we will be Boeings exclusive supplier for the
forward fuselage, fixed and moveable leading wing edges and
struts for the B787. Pricing for these products on the B787-8
model is generally set through 2021, with prices decreasing as
cumulative production volume levels are achieved.
The BAE Acquisition
On April 1, 2006, through our wholly-owned subsidiary,
Spirit AeroSystems (Europe) Limited, or Spirit Europe, we
acquired BAE Aerostructures. Spirit Europe manufactures leading
and trailing wing edges and other wing components for commercial
aircraft programs for Airbus and Boeing and produces various
aerostructure components for certain Raytheon business jets. The
BAE Acquisition provides us with a foundation to increase future
sales to Airbus, as Spirit Europe is a key supplier of wing and
flight control surfaces for the A320 platform, Airbus core
single aisle program, and of wing components for the A380
platform, one of Airbus most important new programs and
the worlds largest commercial passenger aircraft.
Recent Developments
In connection with the issuance of our December 29, 2005
and June 29, 2006 financial statements during the third
quarter of 2006, we concluded that we had a material weakness in
our internal control over financial reporting as described below.
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We did not maintain effective controls over our determination of
the fair values ascribed for financial reporting purposes to
stock compensation awards granted to our employees and directors
through June 29, 2006 in accordance with SFAS
No. 123(R), Share Based Payment. Specifically, we
did not properly estimate the fair values of these awards in
determining the accuracy of our stock compensation expense under
SFAS No. 123(R). This control deficiency resulted in a
restatement of our financial results as of December 29,
2005 and June 29, 2006 and for the periods then ended to
adjust selling, general and administrative expenses, income
taxes and equity accounts as well as our earnings per share and
stock compensation financial statement disclosures. |
During the third quarter of 2006, we began to remediate this
material weakness. These remediation efforts included the
development of a valuation methodology and corresponding model
to determine the fair value of our underlying equity on a per
share basis at each of our equity award grant dates. In
addition, we have implemented additional corporate accounting
oversight, monitoring and review procedures to validate the fair
values and resulting stock compensation expense to be recorded
in accordance with SFAS No. 123(R). As a result, we believe
that this material weakness has been remediated.
5
Company Information
Spirit Holdings, formerly known as Mid-Western Aircraft Systems
Holdings, Inc., is a Delaware corporation that was formed on
February 7, 2005. Spirit Holdings is the parent company of
Spirit. Spirits predecessor, Boeing Wichita, had more than
75 years of operating history as a division of Boeing. Our
principal executive offices are located at 3801 South Oliver,
Wichita, Kansas 67210 and our telephone number at that address
is (316) 526-9000. Our website address is
www.spiritaero.com. Information contained on our
website is not part of this prospectus and is not incorporated
in this prospectus by reference.
Our Principal Equity Investor
Upon completion of this offering, Onex entities will
beneficially own an aggregate of approximately 58.3% of our
common stock and 92.1% of our combined voting power. See
Principal and Selling Stockholders.
Summary Risk Factors
Investing in our class A common stock involves
risks. You should refer to the section entitled Risk
Factors for a discussion of certain risks you should
consider before deciding whether to invest in our class A
common stock. Some of these risks are set forth below.
Sensitivity of Business to External Factors. Our business
is sensitive to aircraft orders by and deliveries to commercial
airlines, which are subject to general world safety and economic
conditions, including fuel prices, that affect the demand for
air transportation. Furthermore, the market in which we operate
is cyclical, which affects our business and operating results.
Dependence on Boeing and, to a Lesser Extent, Airbus. We
are dependent on Boeing and, to a lesser extent, Airbus, to
continue to demand our products. In particular, we are dependent
on Boeings demand for a single aircraft program, the B737,
which accounted for approximately 61% of our revenues for the
nine months ended September 28, 2006. Although we intend to
diversify our customer base, we expect that Boeing and, to a
lesser extent, Airbus, will continue to account for a
substantial portion of our sales for the foreseeable future.
Historical and Ongoing Relationship with Boeing. Our
historical and ongoing relationship with Boeing may be a
potential deterrent to potential and existing customers,
including Airbus. Even though we believe that we have sufficient
resources to service multiple OEMs, competitors of Boeing may
see our relationship with Boeing as creating a conflict of
interest, which would limit our ability to increase our customer
base.
Dependence Upon the Success of Boeings New B787
Program. We are dependent, in large part, on the success of
Boeings new B787 program. If there is not sufficient
demand for the B787 aircraft, or if there are technological
problems or other delays in the regulatory certification or
manufacturing and delivery schedule, our business, financial
condition and results of operations may be materially adversely
affected.
Very Competitive Business Environment. We face
competition from aircraft manufacturers choosing not to
outsource production of aerostructures as well as from third
party aerostructures suppliers, including companies with greater
financial resources than ours.
Fixed-Price Contracts. We have fixed-price contracts,
which may commit us to unfavorable terms. We bear the risk that
increased or unexpected costs may reduce our profit margins or
cause us to sustain losses on these contracts.
6
The Offering
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Class A common stock offered by us |
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10,416,667 shares |
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Class A common stock offered by the selling stockholders |
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41,666,667 shares |
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Common stock outstanding after this offering |
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52,083,334 shares of class A common stock and
75,671,517 shares of class B common stock |
|
Voting rights of class A
common stock |
|
Our class A common stock is entitled to one vote per share.
Our class B common stock, which is not being offered in
this offering but votes together with our class A common
stock as a single class, is entitled to ten votes per share
(reducing to one vote per share under certain limited
circumstances). Our class B common stock, which is
convertible into shares of our class A common stock on a
1-for-1 basis, is
identical to our class A common stock in all other respects. |
|
Use of proceeds |
|
We estimate that the net proceeds from the sale of shares of our
class A common stock in this offering will be approximately
$229 million. We will not receive any proceeds from the
sale of shares by the selling stockholders. |
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We intend to use the net proceeds from this offering to repay
approximately $100 million of debt under our senior secured
credit facility and to pay approximately $129 million of
the obligations which will become due upon the closing of the
offering under our Union Equity Participation Plan. An affiliate
of Credit Suisse Securities (USA) LLC, one of the
representatives of the underwriters, is a lender under, and will
receive a portion of the net proceeds used to repay debt under,
our senior secured credit facility. See Use of
Proceeds. |
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Dividend policy |
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We currently do not intend to pay cash dividends and, under
conditions in which our cash is below specified levels, are
prohibited from doing so under credit agreements governing our
credit facilities. |
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Risk factors |
|
See Risk Factors on page 10 of this prospectus
for a discussion of factors you should carefully consider before
deciding to invest in our class A common stock. |
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Proposed NYSE symbol |
|
SPR |
The number of shares of class A common stock being offered
in this offering represents 40.8% of our outstanding common
stock and 6.4% of our combined voting power, in each case after
giving effect to this offering. For more information on the
ownership of our common stock, see Principal and Selling
Stockholders.
Except as otherwise indicated, all of the information presented
in this prospectus assumes the following:
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no exercise by the underwriters of their option to purchase
additional shares; |
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the effectiveness of a
3-for-1 stock split of
our common stock that occurred on November 16, 2006; |
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the exclusion of approximately 5,006,829 shares of
class A common stock to be issued pursuant to our Union
Equity Participation Plan (approximately 5,020,496 shares
if the underwriters over-allotment option is exercised in
full) as a result of the closing of this offering (which shares
will be issued on or prior to March 15, 2007); |
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the exclusion of 6,942,330 shares issued to certain members
of our management and to certain directors of Spirit which are
subject to vesting requirements under our benefit plans; and |
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the exclusion of 860,224 Units of phantom stock issued pursuant
to our Supplemental Executive Retirement Plan. |
7
Summary Historical and Pro Forma Financial Data
Set forth below is a summary of certain of our historical
consolidated financial data for the periods and at the dates
indicated. Results for periods prior to and including
June 16, 2005 reflect data of our predecessor, Boeing
Wichita, or the Predecessor, for financial accounting purposes.
Results for periods beginning on or after June 17, 2005
reflect our financial data after the Boeing Acquisition.
Financial data as of and for the years ended December 31,
2003 (Predecessor) and December 31, 2004 (Predecessor), for
the period from January 1, 2005 through June 16, 2005
(Predecessor), as of June 16, 2005 (Predecessor), for the
period from June 17, 2005 through December 29, 2005
(Spirit Holdings), and as of December 29, 2005 (Spirit
Holdings) are derived from the restated audited consolidated
financial statements of the Predecessor or Spirit Holdings, as
applicable, included in this prospectus. Financial data as of
and for the nine months ended September 28, 2006 (Spirit
Holdings) are derived from the unaudited consolidated financial
statements of Spirit Holdings included in this prospectus which,
in the opinion of management, include all normal, recurring
adjustments necessary to state fairly the data included therein
in accordance with U.S. generally accepted accounting
principles, or GAAP, for interim financial information. Interim
results are not necessarily indicative of the results to be
expected for the entire fiscal year.
The Predecessors historical financial data for periods and
as of dates prior to the Boeing Acquisition are not comparable
with Spirit Holdings financial data for periods and as of
dates subsequent to the Boeing Acquisition. Prior to the Boeing
Acquisition, the Predecessor was a division of Boeing and was
not a separate legal entity. Historically, the Predecessor
functioned as an internal supplier of parts and assemblies to
Boeing airplane programs and had insignificant sales to third
parties. It operated as a cost center of Boeing, meaning that it
recognized the cost of products manufactured for Boeing
Commercial Airplanes, or BCA, programs but did not recognize any
corresponding revenues for those products. No intra-company
pricing was established for the parts and assemblies that the
Predecessor supplied to Boeing.
On the closing date of the Boeing Acquisition, Spirit entered
into exclusive supply agreements with Boeing pursuant to which
Spirit began to supply parts and assemblies to Boeing at pricing
established under those agreements, and began to operate as a
stand alone entity with revenues and its own accounting records.
In addition, prior to the Boeing Acquisition, certain costs were
allocated to the Predecessor which were not necessarily
representative of the costs the Predecessor would have incurred
for the corresponding functions had it been a stand alone
entity. At the time of the Boeing Acquisition significant cost
savings were realized through labor savings, pension and other
benefit savings, reduced corporate overhead and operational
improvements. As a result of these substantial changes which
occurred concurrently with the Boeing Acquisition, the
Predecessors historical financial data for periods and as
of dates prior to the Boeing Acquisition are not comparable with
Spirit Holdings financial data for periods and as of dates
subsequent to the Boeing Acquisition.
The summary pro forma consolidated financial information for the
period from June 17, 2005 through December 29, 2005,
and the nine month period ended September 28, 2006 reflect
the completion of this offering and the application of the
proceeds therefrom, assuming that the offering was consummated
on January 1, 2005. The unaudited pro forma consolidated
financial information is presented for informational purposes
only and does not purport to represent what our results of
operations would have been had the Boeing Acquisition and this
offering occurred on the dates indicated above or to project
results of operations for any future period.
You should read the summary consolidated financial data set
forth below in conjunction with Capitalization,
Unaudited Pro Forma Consolidated Financial Data,
Selected Consolidated Financial Information and Other
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
restated consolidated financial statements and related notes
contained elsewhere in this prospectus.
8
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Spirit Holdings | |
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Predecessor | |
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Pro Forma as Adjusted for | |
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this Offering | |
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Period | |
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Period from | |
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from | |
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June 17, | |
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Period from | |
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January 1, | |
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Nine Months | |
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2005 | |
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Nine Months | |
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June 17, | |
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2005 | |
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Fiscal Year Ended | |
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Ended | |
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through | |
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Ended | |
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2005 through | |
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through | |
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September 28, | |
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December 29, | |
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September 28, | |
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December 29, | |
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June 16, | |
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December 31, | |
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December 31, | |
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2006 | |
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2005(1) | |
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2006 | |
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2005 | |
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2005 | |
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2004 | |
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2003 | |
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(Unaudited) | |
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(Restated) | |
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(Dollars in millions) | |
Statement of Operations Data:
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Net sales/total cost transferred
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$ |
2,356 |
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$ |
1,208 |
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$ |
2,356 |
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$ |
1,208 |
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$ |
N/A |
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$ |
N/A |
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$ |
N/A |
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Costs of sales/products transferred
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|
|
1,927 |
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|
|
1,057 |
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1,927 |
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$ |
1,057 |
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|
|
|
1,164 |
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2,074 |
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|
2,064 |
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SG&A, R&D, other period costs(2)
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245 |
|
|
|
219 |
|
|
|
243 |
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$ |
218 |
|
|
|
|
91 |
|
|
|
173 |
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|
|
144 |
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Total costs and expenses
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2,172 |
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1,276 |
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2,170 |
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1,275 |
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1,254 |
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2,247 |
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2,208 |
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Operating income (loss)
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184 |
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(68 |
) |
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186 |
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$ |
(67 |
) |
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N/A |
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N/A |
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N/A |
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Interest expense and financing fee amortization
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(35 |
) |
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(25 |
) |
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(29 |
) |
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$ |
(21 |
) |
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|
N/A |
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|
N/A |
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N/A |
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Interest income
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21 |
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|
16 |
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|
21 |
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$ |
16 |
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N/A |
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N/A |
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N/A |
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Other income (loss), net
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4 |
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1 |
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4 |
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$ |
1 |
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N/A |
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N/A |
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N/A |
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Net income (loss) before taxes
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174 |
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(76 |
) |
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182 |
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$ |
(71 |
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N/A |
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N/A |
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N/A |
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Provision for income taxes
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(88 |
) |
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(14 |
) |
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(88 |
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$ |
(14 |
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N/A |
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N/A |
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N/A |
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Net income (loss)
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$ |
86 |
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$ |
(90 |
) |
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$ |
94 |
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$ |
(85 |
) |
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N/A |
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N/A |
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N/A |
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Basic weighted average number of common shares outstanding
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113.9 |
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113.5 |
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133.4 |
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132.6 |
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N/A |
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N/A |
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N/A |
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Basic net income (loss) per share applicable to common stock
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$ |
0.76 |
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$ |
(0.80 |
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$ |
0.70 |
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$ |
(0.64 |
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N/A |
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N/A |
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N/A |
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Diluted weighted average number of common shares outstanding
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121.8 |
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113.5 |
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139.8 |
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132.6 |
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N/A |
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N/A |
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N/A |
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Diluted net income (loss) per share applicable to common
stock
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$ |
0.71 |
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$ |
(0.80 |
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$ |
0.67 |
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$ |
(0.64 |
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N/A |
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N/A |
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|
N/A |
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Other Financial Data:
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Capital expenditures
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|
$ |
233 |
|
|
$ |
145 |
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$ |
233 |
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$ |
145 |
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|
$ |
48 |
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|
$ |
54 |
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$ |
43 |
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Depreciation and amortization
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$ |
37 |
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$ |
32 |
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$ |
37 |
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$ |
32 |
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$ |
40 |
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|
$ |
91 |
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|
$ |
97 |
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Balance Sheet Data (end of period)(3):
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|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
189 |
|
|
$ |
241 |
|
|
$ |
164 |
|
|
|
N/A |
|
|
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
4 |
|
Working capital(4)
|
|
$ |
615 |
|
|
$ |
436 |
|
|
$ |
615 |
|
|
|
N/A |
|
|
|
$ |
431 |
|
|
$ |
481 |
|
|
$ |
474 |
|
Total assets
|
|
$ |
2,335 |
|
|
$ |
1,657 |
|
|
$ |
2,307 |
|
|
|
N/A |
|
|
|
$ |
1,020 |
|
|
$ |
1,044 |
|
|
$ |
1,093 |
|
Total long-term debt
|
|
$ |
699 |
|
|
$ |
710 |
|
|
$ |
599 |
|
|
|
N/A |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Shareholders equity
|
|
$ |
471 |
|
|
$ |
326 |
|
|
$ |
422 |
|
|
|
N/A |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
(1) |
See Note 2 of the restated consolidated financial
statements for further information regarding the restatement. |
|
(2) |
Includes non-cash stock compensation expense of
$41 million, $35 million, $41 million,
$35 million, $22 million, $23 million and
$13 million for the respective periods starting with the
nine months ended September 28, 2006. |
|
(3) |
Each $1.00 increase or decrease in the assumed initial public
offering price of $24.00 per share, the midpoint of the range on
the cover of the prospectus, would increase or decrease, as
applicable, our pro forma cash and cash equivalents, working
capital, total assets and total stockholders equity by
approximately $10 million, assuming the number of shares offered
by us, as set forth on the cover page of this prospectus,
remains the same and after deducting the estimated underwriting
discounts and commissions payable by us. |
|
(4) |
Ending balance of accounts receivable, inventory and accounts
payable on net basis. |
9
RISK FACTORS
An investment in our class A common stock involves a high
degree of risk. You should carefully consider the factors
described below in addition to the other information set forth
in this prospectus before deciding whether to make an investment
in our class A common stock. Any of the following risks
could materially adversely affect our business, financial
condition or results of operations. In such case, you may lose
all or part of your original investment.
Risk Factors Related to our Business and Industry
Our commercial business is cyclical and sensitive to
commercial airlines profitability. The business of
commercial airlines is, in turn, affected by general economic
conditions and world safety considerations.
We compete in the aerostructures segment of the aerospace
industry. Our business is affected indirectly by the financial
condition of the commercial airlines and other economic factors,
including general economic conditions and world safety
considerations, that affect the demand for air transportation.
Specifically, our commercial business is dependent on the demand
from passenger airlines for the production of new aircraft.
Accordingly, demand for our commercial products is tied to the
worldwide airline industrys ability to finance the
purchase of new aircraft and the industrys forecasted
demand for seats, flights and routes. Similarly, the size and
age of the worldwide commercial aircraft fleet affects the
demand for new aircraft and, consequently, for our products.
Such factors, in conjunction with evolving economic conditions,
cause the market in which we operate to be cyclical to varying
degrees, thereby affecting our business and operating results.
During the past several years, softening of the global and
U.S. economies, reduced corporate travel spending, excess
capacity in the market for commercial air travel, changing
pricing models among airlines and significantly increased fuel,
security and insurance costs have resulted in many airlines
reporting, and continuing to forecast, significant net losses.
Moreover, during recent years, in addition to the generally soft
global and U.S. economies, the September 11, 2001
terrorist attacks, conflicts in Iraq and Afghanistan and
concerns relating to the transmission of SARS have contributed
to diminished demand for air travel. Many major U.S. air
carriers have parked or retired a portion of their fleets and
have reduced workforces and flights to mitigate their large
losses. From 2001 to 2003, numerous carriers rescheduled or
canceled orders for aircraft to be purchased from the major
aircraft manufacturers, including Boeing and Airbus. Any
protracted economic slump or future terrorist attacks, war or
health concerns, including the prospect of human transmission of
the Avian Flu Virus, could cause airlines to cancel or delay the
purchase of additional new aircraft. If demand for new aircraft
decreases, there would likely be a decrease in demand for our
commercial aircraft products and our business, financial
condition and results of operations could be materially
adversely affected.
Our business could be materially adversely affected if one
of our components causes an aircraft accident.
Our operations expose us to potential liabilities for personal
injury or death as a result of the failure of an aircraft
component that has been designed, manufactured or serviced by us
or our suppliers. While we believe that our liability insurance
is adequate to protect us from future product liability claims,
it may not be adequate. Also, we may not be able to maintain
insurance coverage in the future at an acceptable cost. Any such
liability not covered by insurance or for which third party
indemnification is not available could require us to dedicate a
substantial portion of our cash flows to make payments on such
liability, which could have a material adverse effect on our
business, financial condition and results of operations.
An accident caused by one of our components could also damage
our reputation for quality products. We believe our customers
consider safety and reliability as key criteria in selecting a
provider of aerostructures. If an accident were to be caused by
one of our components, or if we were otherwise to fail to
maintain a satisfactory record of safety and reliability, our
ability to retain and attract customers could be materially
adversely affected.
10
Because we depend on Boeing and, to a lesser extent,
Airbus, as our largest customers, our sales, cash flows from
operations and results of operations will be negatively affected
if either Boeing or Airbus reduces the number of products it
purchases from us or if either experiences business
difficulties.
Currently, Boeing is our largest customer and Airbus is our
second-largest customer. For the nine months ended
September 28, 2006, approximately 89% and approximately 10%
of our combined revenues (assuming the BAE Acquisition occurred
on January 1, 2006) were generated from sales to Boeing and
Airbus, respectively. Although we intend to diversify our
customer base by entering into supply arrangements with
additional customers, we cannot assure you that we will be
successful in doing so. Even if we are successful in retaining
new customers, we expect that Boeing and, to a lesser extent,
Airbus, will continue to account for a substantial portion of
our sales for the foreseeable future. Although we are a party to
various supply contracts with Boeing and Airbus which obligate
Boeing and Airbus to purchase all of their requirements for
certain products from us, if we breach certain obligations under
these supply agreements and Boeing or Airbus exercises its right
to terminate such agreements, our business will be materially
adversely affected. In addition, we have agreed to a limitation
on recoverable damages in the event Boeing wrongfully terminates
our main supply agreement with it with respect to any model of
airplane program, so if this occurs, we may not be able to
recover the full amount of our actual damages. Furthermore, if
Boeing or Airbus (1) experiences a decrease in requirements
for the products which we supply to it, (2) experiences a
major disruption in its business, such as a strike, work
stoppage or slowdown, a supply chain problem or a decrease in
orders from its customers or (3) files for bankruptcy
protection, our business, financial condition and results of
operations could be materially adversely affected.
Our largest customer, Boeing, operates in a very
competitive business environment.
Boeing operates in a highly competitive industry. Competition
from Airbus, Boeings main competitor, as well as from
regional jet makers, has intensified as these competitors expand
aircraft model offerings and competitively price their products.
As a result of this competitive environment, Boeing continues to
face pressure on product offerings and sale prices. While we do
have supply agreements with Airbus, we currently have
substantially more business with Boeing and thus any adverse
impact on Boeings production of aircraft resulting from
this competitive environment may have a material adverse impact
on our business, financial condition and results of operations.
Potential and existing customers, including Airbus, may
view our historical and ongoing relationship with Boeing as a
deterrent to providing us with future business.
We operate in a highly competitive industry and any of our other
potential or existing customers, including Airbus, may be
threatened by our historical and ongoing relationship with
Boeing. Prior to the Boeing Acquisition, Boeing Wichita
functioned as an internal supplier of parts and assemblies for
Boeings aircraft programs and had very few sales to third
parties. Other potential and existing customers, including
Airbus, may be deterred from using the same supplier that
previously produced aerostructures solely for Boeing. Although
we believe we have sufficient resources to service multiple
OEMs, competitors of Boeing may see a conflict of interest in
our providing both them and Boeing with the parts for their
different aircraft programs. If we are unable to successfully
develop our relationship with other customers and OEMs,
including Airbus, we may be unable to increase our customer
base. If there is not sufficient demand for our business, our
financial condition and results of operations could be
materially adversely affected.
Our business depends, in large part, on sales of
components for a single aircraft program, the B737.
For the nine months ended September 28, 2006,
approximately 61% of our revenues were generated from sales of
components to Boeing for the B737 aircraft. While we have
entered into long-term supply agreements with Boeing to continue
to provide components for the B737 for the life of the aircraft
program, including commercial and the military Multi-mission
Maritime Aircraft, or MMA, derivatives, Boeing does not have any
obligation to purchase components from us for any replacement
for the B737 that is not a commercial derivative model. In the
event Boeing develops a next generation single-aisle
11
aircraft program to replace the B737 which is not a commercial
derivative, we may not have the next generation technology,
engineering and manufacturing capability necessary to obtain
significant aerostructures supply business for such replacement
program, may not be able to provide components for such
replacement program at competitive prices or, for other reasons,
may not be engaged by Boeing to the extent of our involvement in
the B737 or at all. If we were unable to obtain significant
aerostructures supply business for the B737 replacement program,
our business, financial condition and results of operations
could be materially adversely affected.
Our business depends on the success of a new model
aircraft, the B787.
The success of our business will depend, in large part, on the
success of Boeings new B787 program. We have entered into
supply agreements with Boeing pursuant to which we will be a
Tier 1 supplier to the B787 program. We have made and will
continue to make a significant investment in this program before
the first commercial delivery of a B787 aircraft, which is
scheduled for 2008. If there is not sufficient demand for the
B787 aircraft, or if there are technological problems or
significant delays in the regulatory certification or
manufacturing and delivery schedule for such aircraft, our
business, financial condition and results of operations may be
materially adversely affected.
We incur risk associated with new programs.
New programs with new technologies typically carry risks
associated with design responsibility, development of new
production tools, hiring and training of qualified personnel,
increased capital and funding commitments, ability to meet
customer specifications, delivery schedules and unique
contractual requirements, supplier performance, ability of the
customer to meet its contractual obligations to us, and our
ability to accurately estimate costs associated with such
programs. In addition, any new aircraft program may not generate
sufficient demand or may experience technological problems or
significant delays in the regulatory certification or
manufacturing and delivery schedule. If we were unable to
perform our obligations under new programs to the
customers satisfaction, if we were unable to manufacture
products at our estimated costs or if a new program in which we
had made a significant investment experienced weak demand,
delays or technological problems, our business, financial
condition and results of operations could be materially
adversely affected.
In addition, beginning new work on existing programs also
carries risks associated with the transfer of technology,
knowledge and tooling.
Our operations depend on our ability to maintain
continuing, uninterrupted production at our manufacturing
facilities. Our production facilities are subject to physical
and other risks that could disrupt production.
Our manufacturing facilities could be damaged or disrupted by a
natural disaster, war, terrorist activity or sustained
mechanical failure. Although we have obtained property damage
and business interruption insurance, a major catastrophe, such
as a fire, flood, tornado or other natural disaster at any of
our sites, war or terrorist activities in any of the areas where
we conduct operations or the sustained mechanical failure of a
key piece of equipment could result in a prolonged interruption
of all or a substantial portion of our business. Any disruption
resulting from these events could cause significant delays in
shipments of products and the loss of sales and customers and we
may not have insurance to adequately compensate us for any of
these events. A large portion of our operations takes place at
one facility in Wichita, Kansas and any significant damage or
disruption to this facility in particular would materially
adversely affect our ability to service our customers.
We operate in a very competitive business
environment.
Competition in the aerostructures segment of the aerospace
industry is intense. Although we have entered into requirements
contracts with Boeing and Airbus under which we are their
exclusive supplier for
12
certain aircraft parts, in trying to expand our customer base
and the types of parts we make we will face substantial
competition from both OEMs and non-OEM aerostructures suppliers.
OEMs may choose not to outsource production of aerostructures
due to, among other things, their own direct labor and other
overhead considerations and capacity utilization at their own
facilities. Consequently, traditional factors affecting
competition, such as price and quality of service, may not be
significant determinants when OEMs decide whether to produce a
part in-house or to outsource.
Our principal competitors among aerostructures suppliers are
Alenia Aeronautica, Fuji Aerospace Technology Co., Ltd., GKN
Aerospace, The Goodrich Corporation, Kawasaki Precision
Machinery (U.S.A.), Inc., Mitsubishi Electric Corporation, Saab
AB, Snecma, Triumph Group, Inc. and Vought Aircraft Industries.
Some of our competitors have greater resources than we do and,
therefore, may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or devote
greater resources to the promotion and sale of their products
than we can. Providers of aerostructures have traditionally
competed on the basis of cost, technology, quality and service.
We believe that developing and maintaining a competitive
advantage will require continued investment in product
development, engineering, supply chain management and sales and
marketing, and we may not have enough resources to make such
investments. For these reasons, we may not be able to compete
successfully in this market or against such competitors, which
could have a material adverse effect on our business, financial
condition and results of operations.
High switching costs may substantially limit our ability
to obtain business that is currently under contract with other
suppliers.
Once a contract is awarded by an OEM to an aerostructures
supplier, the OEM and the supplier are typically required to
spend significant amounts of time and capital on design,
manufacture, testing and certification of tooling and other
equipment. For an OEM to change suppliers during the life of an
aircraft program, further testing and certification would be
necessary, and the OEM would be required either to move the
tooling and equipment used by the existing supplier for
performance under the existing contract, which may be expensive
and difficult (or impossible), or to manufacture new tooling and
equipment. Accordingly, any change of suppliers would likely
result in production delays and additional costs to both the OEM
and the new supplier. These high switching costs may make it
more difficult for us to bid competitively against existing
suppliers and less likely that an OEM will be willing to switch
suppliers during the life of an aircraft program, which could
materially adversely affect our ability to obtain new work on
existing aircraft programs.
Pre-Boeing Acquisition financial statements are not
comparable to post-Boeing Acquisition statements and, because of
our limited operating history, nothing in our financial
statements can show you how we would operate in a market
downturn.
Our historical financial statements prior to the Boeing
Acquisition are not comparable to our financial
statements subsequent to June 16, 2005. Historically,
Boeing Wichita was operated as a cost center of BCA and
recognized the cost of products manufactured for BCA programs
without recognizing any corresponding revenues for those
products. Accordingly, the financial statements with respect to
periods prior to the Boeing Acquisition and the pro forma
financial information included in this prospectus do not
represent the financial results that would have been achieved
had Boeing Wichita been operated as a stand alone entity during
those periods. Additionally, our financial statements are not
indicative of how we would operate through a market downturn.
Since the Boeing Acquisition on June 16, 2005, we have
operated in a market experiencing an upturn, with both Boeing
and Airbus posting record orders in 2005. Our financial results
from this limited history cannot give you any indication of our
ability to operate in a market experiencing significantly lower
demand for our products and the products of our customers. As
such, we cannot assure you that we will be able to successfully
operate in such a market.
13
Increases in labor costs, potential labor disputes and
work stoppages at our facilities or the facilities of our
suppliers or customers could materially adversely affect our
financial performance.
Our financial performance is affected by the availability of
qualified personnel and the cost of labor. A majority of our
workforce is represented by unions. If our workers were to
engage in a strike, work stoppage or other slowdown, we could
experience a significant disruption of our operations, which
could cause us to be unable to deliver products to our customers
on a timely basis and could result in a breach of our supply
agreements. This could result in a loss of business and an
increase in our operating expenses, which could have a material
adverse effect on our business, financial condition and results
of operations. In addition, our non-unionized labor force may
become subject to labor union organizing efforts, which could
cause us to incur additional labor costs and increase the
related risks that we now face.
We have agreed with Boeing to continue to operate substantial
manufacturing operations in Wichita, Kansas until at least
June 16, 2015. As a result, we may not be able to utilize
lower cost labor from other locations. This may prevent us from
being able to offer our products at prices which are competitive
in the marketplace and could have a material adverse effect on
our ability to generate new business.
In addition, many aircraft manufacturers, airlines and aerospace
suppliers have unionized work forces. In 2005, a labor strike by
unionized employees at Boeing, our largest customer, temporarily
halted commercial aircraft production by Boeing, which had a
significant short-term adverse impact on our operations.
Additional strikes, work stoppages or slowdowns experienced by
aircraft manufacturers, airlines or aerospace suppliers could
reduce our customers demand for additional aircraft
structures or prevent us from completing production of our
aircraft structures.
Our business may be materially adversely affected if we
lose our government, regulatory or industry approvals, if more
stringent government regulations are enacted or if industry
oversight is increased.
The Federal Aviation Administration, or FAA, prescribes
standards and qualification requirements for aerostructures,
including virtually all commercial airline and general aviation
products, and licenses component repair stations within the
United States. Comparable agencies, such as the Joint Aviation
Authorities, or JAA, in Europe, regulate these matters in other
countries. If we fail to qualify for or obtain a required
license for one of our products or services or lose a
qualification or license previously granted, the sale of the
subject product or service would be prohibited by law until such
license is obtained or renewed and our business, financial
condition and results of operations could be materially
adversely affected. In addition, designing new products to meet
existing regulatory requirements and retrofitting installed
products to comply with new regulatory requirements can be
expensive and time consuming.
From time to time, the FAA, the JAA or comparable agencies
propose new regulations or changes to existing regulations.
These changes or new regulations generally increase the costs of
compliance. To the extent the FAA, the JAA or comparable
agencies implement regulatory changes, we may incur significant
additional costs to achieve compliance.
In addition, certain aircraft repair activities we intend to
engage in may require the approval of the aircrafts OEM.
Our inability to obtain OEM approval could materially restrict
our ability to perform such aircraft repair activities.
We are subject to regulation of our technical data and
goods under U.S. export control laws.
As a manufacturer and exporter of defense and dual-use technical
data and commodities, we are subject to U.S. laws and
regulations governing international trade and exports, including
but not limited to the International Traffic in Arms
Regulations, administered by the U.S. Department of State,
and the Export Administration Regulations, administered by the
U.S. Department of Commerce. Collaborative agreements that
we may have with foreign persons, including manufacturers and
suppliers, are also subject to U.S. export control laws. In
addition, we are subject to trade sanctions against embargoed
countries, administered by the Office of Foreign Assets Control
within the U.S. Department of the Treasury.
14
A determination that we have failed to comply with one or more
of these export controls or trade sanctions could result in
civil or criminal penalties, including the imposition of fines
upon us as well as the denial of export privileges and debarment
from participation in U.S. government contracts.
Additionally, restrictions may be placed on the export of
technical data and goods in the future as a result of changing
geo-political conditions. Any one or more of such sanctions
could have a material adverse effect on our business, financial
condition and results of operations.
We are subject to environmental regulation and our ongoing
operations may expose us to environmental liabilities.
Our operations are subject to extensive regulation under
environmental, health and safety laws and regulations in the
United States and the United Kingdom. We may be subject to
potentially significant fines or penalties, including criminal
sanctions, if we fail to comply with these requirements. We have
made, and will continue to make, significant capital and other
expenditures in order to comply with these laws and regulations.
We cannot predict with certainty what environmental legislation
will be enacted in the future or how existing laws will be
administered or interpreted. Our operations involve the use of
large amounts of hazardous substances and generate many types of
wastes. Spills and releases of these materials may subject us to
clean-up liability. We cannot assure you that the aggregate
amount of future
clean-up costs and
other environmental liabilities will not be material.
Boeing, our predecessor at the Wichita facility, is under an
administrative consent order issued by the Kansas Department of
Health and Environment, or KDHE, to contain and clean-up
contaminated groundwater which underlies a majority of the site.
Pursuant to this order and its agreements with us, Boeing has a
long-term remediation plan in place, and treatment, containment
and remediation efforts are underway. If Boeing does not comply
with its obligations under the order and these agreements, we
may be required to undertake such efforts and make material
expenditures.
In connection with the BAE Acquisition, we acquired a
manufacturing facility in Prestwick, Scotland that is adjacent
to contaminated property retained by BAE Systems. The
contaminated property may be subject to a regulatory action
requiring remediation of the land. It is also possible that the
contamination may spread into the property we acquired. BAE
Systems has agreed to indemnify us for certain clean-up costs
related to existing pollution on the acquired property, existing
pollution that migrates from the acquired property to a third
partys property and any pollution that migrates to our
property from property retained by BAE Systems. If BAE Systems
does not comply with its obligations under the agreement, we may
be required to undertake such efforts and make material
expenditures.
In the future, contamination may be discovered at our facilities
or at off-site locations where we send waste. The remediation of
such newly-discovered contamination, or the enactment of new
laws or a stricter interpretation of existing laws, may require
us to make additional expenditures, some of which could be
material. See Business Environmental
Matters.
Significant consolidation in the aerospace industry could
make it difficult for us to obtain new business.
The aerospace industry has recently experienced consolidation
among suppliers. Suppliers have consolidated and formed
alliances to broaden their product and integrated system
offerings and achieve critical mass. This supplier consolidation
is in part attributable to aircraft manufacturers more
frequently awarding long-term sole-source or preferred supplier
contracts to the most capable suppliers, thus reducing the total
number of suppliers. If this consolidation were to accelerate,
it may become more difficult for us to be successful in
obtaining new customers.
We may be materially adversely affected by high fuel
prices.
Due to the competitive nature of the airline industry, airlines
are often unable to pass on increased fuel prices to customers
by increasing fares. Fluctuations in the global supply of crude
oil and the possibility of changes in government policy on jet
fuel production, transportation and marketing make it impossible
to predict the future availability of jet fuel. In the event
there is an outbreak or escalation of
15
hostilities or other conflicts or significant disruptions in oil
production or delivery in oil-producing areas or elsewhere,
there could be reductions in the production or importation of
crude oil and significant increases in the cost of fuel. If
there were major reductions in the availability of jet fuel or
significant increases in its cost, or if current high prices are
sustained for a significant period of time, the airline industry
and, as a result, our business, could be materially adversely
affected.
Interruptions in deliveries of components or raw materials
or increased prices for components or raw materials used in our
products could materially adversely affect our profitability,
margins and revenues.
Our dependency upon regular deliveries from particular suppliers
of components and raw materials means that interruptions or
stoppages in such deliveries could materially adversely affect
our operations until arrangements with alternate suppliers, to
the extent alternate suppliers exist, could be made. If any of
our suppliers were unable or refused to deliver materials to us
for an extended period of time, or if we were unable to
negotiate acceptable terms for the supply of materials with
these or alternative suppliers, our business could suffer. We
may not be able to find acceptable alternatives, and any such
alternatives could result in increased costs for us. Even if
acceptable alternatives are found, the process of locating and
securing such alternatives might be disruptive to our business
and might lead to termination of our supply agreements with our
customers.
In addition, our profitability is affected by the prices of the
components and raw materials, such as titanium, aluminum and
carbon fiber, used in the manufacture of our products. These
prices may fluctuate based on a number of factors beyond our
control, including world oil prices, changes in supply and
demand, general economic conditions, labor costs, competition,
import duties, tariffs, currency exchange rates and, in some
cases, government regulation. Although our supply agreements
with Boeing and Airbus allow us to pass on certain unusual
increases in component and raw material costs to Boeing and
Airbus in limited situations, we will not be fully compensated
for such increased costs.
Our business will suffer if certain key officers or
employees discontinue employment with us or if we are unable to
recruit and retain highly skilled staff.
The success of our business is highly dependent upon the skills,
experience and efforts of our President and Chief Executive
Officer, Jeffrey Turner, and certain of our other key officers
and employees. As the top executive officer of Boeing Wichita
for almost ten years prior to the Boeing Acquisition, Mr. Turner
gained extensive experience in running our business and
long-standing relationships with many high-level executives at
Boeing, our largest customer. We believe Mr. Turners
reputation in the aerospace industry and relationship with
Boeing are critical elements in maintaining and expanding our
business. The loss of Mr. Turner or other key personnel
could have a material adverse effect on our business, operating
results or financial condition. Our business also depends on our
ability to continue to recruit, train and retain skilled
employees, particularly skilled engineers. The market for these
resources is highly competitive. We may be unsuccessful in
attracting and retaining the engineers we need and, in such
event, our business could be materially adversely affected. The
loss of the services of any key personnel, or our inability to
hire new personnel with the requisite skills, could impair our
ability to provide products to our customers or manage our
business effectively.
We are subject to the requirements of the National
Industrial Security Program Operating Manual for our facility
security clearance, which is a prerequisite for our ability to
perform on classified contracts for the
U.S. government.
A DoD facility security clearance is required in order to be
awarded and perform on classified contracts for the DoD and
certain other agencies of the U.S. government. We currently
perform on several classified contracts, which generated no
revenues for the period from June 17, 2005 through
December 29, 2005 and the nine months ended
September 28, 2006 and which we expect will generate less
than 1% of our revenues for the fiscal year ended
December 31, 2006. Spirit has obtained clearance at the
secret level, and we are in the process of obtaining
such clearance for Spirit Holdings. Due to the fact that more
than 50% of our voting equity is owned by a
non-U.S. entity,
we will be required to operate in accordance
16
with the terms and requirements of our Special Security
Agreement, or SSA, with the DoD. If we were to violate the terms
and requirements of our SSA, the National Industrial Security
Program Operating Manual, or any other applicable
U.S. government industrial security regulations (which may
apply to us under the terms of our classified contracts), we
could lose our security clearance. We cannot assure you that we
will be able to maintain our security clearance. If for some
reason our security clearance is invalidated or terminated, we
may not be able to continue to perform our present classified
contracts and we would not be able to enter into new classified
contracts, which could adversely affect our revenues.
We derive a significant portion of our revenues from
direct and indirect sales outside the United States and are
subject to the risks of doing business in foreign
countries.
We derive a significant portion of our revenues from sales by
Boeing and Airbus to customers outside the United States. In
addition, for the nine months ended September 28,
2006, direct sales to our
non-U.S. customers
accounted for approximately 10% of our combined revenues
(assuming the BAE Acquisition occurred on January 1, 2006). We
expect that our and our customers international sales will
continue to account for a significant portion of our revenues
for the foreseeable future. As a result, we are subject to risks
of doing business internationally, including:
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changes in regulatory requirements; |
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domestic and foreign government policies, including requirements
to expend a portion of program funds locally and governmental
industrial cooperation requirements; |
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fluctuations in foreign currency exchange rates; |
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the complexity and necessity of using foreign representatives
and consultants; |
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uncertainties and restrictions concerning the availability of
funding credit or guarantees; |
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imposition of tariffs or embargoes, export controls and other
trade restrictions; |
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the difficulty of management and operation of an enterprise
spread over various countries; |
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compliance with a variety of foreign laws, as well as
U.S. laws affecting the activities of U.S. companies
abroad; and |
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economic and geopolitical developments and conditions, including
international hostilities, acts of terrorism and governmental
reactions, inflation, trade relationships and military and
political alliances. |
While these factors or the impact of these factors are difficult
to predict, adverse developments of any one or more of these
factors could materially adversely affect our business,
financial condition and results of operations in the future.
Our fixed-price contracts may commit us to unfavorable
terms.
We provide most of our products and services through long-term
contracts with Boeing and Airbus in which the pricing terms are
fixed based on certain production volumes. Accordingly, we bear
the risk that increased or unexpected costs may reduce our
profit margins or cause us to sustain losses on these contracts.
Other than certain increases in raw material costs which can be
passed on to Boeing and Airbus, we must fully absorb cost
overruns, notwithstanding the difficulty of estimating all of
the costs we will incur in performing these contracts and in
projecting the ultimate level of sales that we may achieve. Our
failure to anticipate technical problems, estimate delivery
reductions, estimate costs accurately or control costs during
performance of a fixed-price contract may reduce the
profitability of a contract or cause a loss.
This is particularly a risk in relation to products such as the
Boeing B787 for which we have not yet delivered production
articles and in respect of which our profitability at the
contracted price depends on our being able to achieve production
cost reductions as we gain production experience. Pricing for
the B787-8, the base model currently going into production, is
generally established through 2021, with prices decreasing as
cumulative volume levels are met over the life of the program.
When we negotiated the
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B787-8 pricing, we assumed that our development of new
technologies and capabilities would reduce our production costs
over the life of the B787 program, thus maintaining or improving
our margin on each B787 we produced. We cannot assure you that
our development of new technologies or capabilities will be
successful or that we will be able to reduce our B787 production
costs over the life of the program. Our failure to reduce
production costs as we have anticipated could result in
decreasing margins on the B787 during the life of the program.
Many of our other production cost estimates also contain pricing
terms which anticipate cost reductions over time. In addition,
although we have entered into these fixed price contracts with
Boeing and Airbus, they may nonetheless seek to re-negotiate
pricing with us in the future. Any such higher costs or
re-negotiations could materially adversely affect our
profitability, margins and revenues.
We identified material weaknesses in our internal control
over financial reporting.
We are not currently required to evaluate our internal control
over financial reporting in the same manner that is currently
required of certain public companies, nor have we performed such
an evaluation. Such an evaluation would include documentation of
internal control activities and procedures over financial
reporting, assessment of design effectiveness of such controls
and testing of operating effectiveness of such controls which
could result in the identification of material weaknesses in our
internal control over financial reporting.
Prior to the Boeing Acquisition, Boeing Wichita relied on
Boeings shared services group for certain business
processes associated with its financial reporting including
treasury, income tax accounting and external reporting. Since
the Boeing Acquisition, we have had to develop these and other
functional areas as a stand alone entity including the necessary
processes and internal control to prepare our financial
statements on a timely basis in accordance with U.S. GAAP.
Generally accepted auditing standards define a material weakness
as a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial
statements will not be prevented or detected. In connection with
our quarterly financial statements as of and for the three
months ended September 29, 2005, we concluded that we had
three material weaknesses in our internal control over financial
reporting as described below.
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We did not maintain effective internal control over the
quarterly closing and consolidation process, including the
account reconciliation and review process and accuracy of
certain accounts receivable transactions. Specifically, controls
over the reconciliation of the accounts receivable subsidiary
ledger to its associated general ledger balances, application of
certain cash payments from customers and the investigation and
resolution of customer payment discrepancies were ineffective to
appropriately record certain accounts receivable transactions.
This control deficiency resulted in adjustments to the accounts
receivable, revenue and cash accounts. If not remediated, this
deficiency could result in a material misstatement of accounts
receivable or related accounts. |
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We did not maintain effective controls over our income tax
provision and the related balance sheet accounts. Specifically,
controls over the accuracy of the income tax provision and
related deferred tax accounts as well as our related financial
statement disclosures in accordance with SFAS No. 109,
Accounting for Income Taxes, were ineffective to
appropriately apply SFAS No. 109 in evaluating our
required valuation allowance and establishing the tax basis of
the acquired assets and assumed liabilities of the Boeing
Acquisition. This control deficiency resulted in adjustments to
the deferred tax, valuation allowance and income tax provision
accounts as well as our related SFAS No. 109 financial
statement disclosures. |
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We did not maintain effective controls over the accuracy and
completeness of our interim financial statements of our Tulsa,
Oklahoma facility. Specifically, there were ineffective controls
over the reconciliation of certain general ledger accounts and
the aggregation and reporting of those accounts |
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into our financial statements which could have resulted in a
material misstatement in our financial statements. |
In connection with the issuance of our December 29, 2005
and June 29, 2006 financial statements during the third
quarter of 2006, we concluded that we had an additional material
weakness in our internal control over financial reporting as
described below.
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We did not maintain effective controls over our determination of
the fair values ascribed for financial reporting purposes to
stock compensation awards granted to our employees and directors
through June 29, 2006 in accordance with SFAS
No. 123(R), Share Based Payment. Specifically, we
did not properly estimate the fair values of these awards in
determining the accuracy of our stock compensation expense under
SFAS No. 123(R). This control deficiency resulted in a
restatement of our financial results as of December 29,
2005 and June 29, 2006 and for the periods then ended to
adjust selling, general and administrative expenses, income
taxes and equity accounts as well as our earnings per share and
stock compensation financial statement disclosures. |
Our efforts to remediate the aforementioned deficiencies in
internal control over financial reporting are described further
in Managements Discussion and Analysis of Financial
Condition and Results of Operations.
While we believe that these material weaknesses have been
remediated, we cannot be certain that additional material
weaknesses or significant deficiencies will not develop or be
identified. We are in the process of evaluating our internal
controls over the financial reporting processes of our recently
acquired foreign operations and will implement improvements
where we consider them to be necessary. Any failure to maintain
adequate internal control over financial reporting or to
implement required, new or improved controls, or difficulties
encountered in their implementation could cause us to report
material weaknesses or other deficiencies in our internal
control over financial reporting and could result in a more than
remote possibility of errors or misstatements in the restated
consolidated financial statements that would be material.
Beginning with our Annual Report on Form 10-K for fiscal
year 2007, pursuant to Section 404 of the Sarbanes-Oxley
Act, our management will be required to assess the effectiveness
of our internal control over financial reporting, and we will be
required to have our independent registered public accounting
firm audit managements assessment and the operating
effectiveness of our internal control over financial reporting.
If our management or our independent registered public
accounting firm were to conclude in their reports that our
internal control over financial reporting was not effective,
investors could lose confidence in our reported financial
information and the value of our stock could be adversely
impacted.
We face a potential class action lawsuit which could
result in substantial costs, diversion of managements
attention and resources and negative publicity.
Spirit, Boeing and Onex have been named as defendants in a
lawsuit by certain former employees of Boeing who assert several
claims and purport to bring the case as a class action and
collective action on behalf of all individuals who were employed
by Boeing (BCA) in Wichita, Kansas or Tulsa, Oklahoma
within two years prior to the date of the Boeing Acquisition and
who were terminated by or not hired by Spirit. The plaintiffs
seek damages and injunctive relief for age discrimination,
interference with ERISA rights, breach of contract and
retaliation. Plaintiffs seek an unspecified amount of
compensatory damages and more than $1.5 billion in punitive
damages. On November 15, 2006, the court granted the
plaintiffs motion for conditional class certification and
held that the plaintiffs may send notice of the collective
action to all former Boeing employees who were terminated by
Boeing on or after January 1, 2002, were 40 years of
age or older at the time of termination and were not hired by
Spirit. Pursuant to the Asset Purchase Agreement, we agreed to
indemnify Boeing for damages resulting from the employment
decisions that were made by us with respect to former employees
of Boeing Wichita which relate or allegedly relate to the
involvement of, or consultation with, employees of Boeing in
such employment decisions. The lawsuit could result in
substantial costs, divert managements attention and
resources from our operations
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and negatively affect our public image and reputation. An
unfavorable outcome or prolonged litigation related to these
matters could materially harm our business.
We have a very limited operating history as a stand alone
company and we may not be successful operating as a stand alone
company.
Prior to the Boeing Acquisition, Boeing Wichita was a division
of Boeing. Boeing Wichita relied on Boeing for many of its
internal functions, including, without limitation, accounting
and tax, payroll, technology support, benefit plan
administration and human resources. Although we have replaced
most of these services either through outsourcing or internal
sources, we may not be able to perform any or all of these
services in a cost-effective manner. In addition, while we
implement our plan to replace certain technology and systems
support services provided by Boeing, Boeing continues to provide
such services to us under a transition services agreement which
we entered into at the time of the Boeing Acquisition. We cannot
assure you that we will be able to successfully implement our
plan to replace the services that we continue to use and in
particular, our Enterprise Resource Planning System, upon
expiration of the transition services agreement, which will
expire in its entirety on June 15, 2007, unless otherwise
extended. As such, we cannot assure you that we will be
successful in operating Boeing Wichita as a stand alone company.
We do not own most of the intellectual property and
tooling used in our business.
Our business depends on using certain intellectual property and
tooling that we have rights to use under license grants from
Boeing. These licenses contain restrictions on our use of Boeing
intellectual property and tooling and may be terminated if we
default under certain of these restrictions. Our loss of license
rights to use Boeing intellectual property or tooling would
materially adversely affect our business. In addition, we must
honor our contractual commitments to our other customers related
to intellectual property and comply with infringement laws in
the use of intellectual property. In the event we obtain new
business from new or existing customers, we will need to pay
particular attention to these contractual commitments and any
other restrictions on our use of intellectual property to make
sure that we will not be using intellectual property improperly
in the performance of such new business. In the event we use any
such intellectual property improperly, we could be subject to an
infringement claim by the owner or licensee of such intellectual
property. See Business Our Relationship with
Boeing License of Intellectual Property.
In the future, our entry into new markets may require obtaining
additional license grants from Boeing and/or from other third
parties. If we are unable to negotiate additional license rights
on acceptable terms (or at all) from Boeing and/or other third
parties as the need arises, our ability to enter new markets may
be materially restricted. In addition, we may be subject to
restrictions in future licenses granted to us that may
materially restrict our use of third party intellectual property.
Our success depends in part on the success of our research
and development initiatives.
We spent approximately $85 million on research and
development during the nine months ended September 28,
2006. The significant capital we expend on our research and
development efforts may not create any new sales opportunities
or increases in productivity that are commensurate with the
level of resources invested.
We are in the process of developing specific technologies and
capabilities in pursuit of new business and in anticipation of
customers going forward with new programs, including the Boeing
B787 and other programs which have not yet been developed. For
the period from June 17, 2005 through December 29,
2005, we spent approximately $78 million on these
activities. Work in connection with the Boeing B787 consisted of
approximately 97% of our total development costs during such
period. If the Boeing B787 or any other such programs do not go
forward or are not successful, we may be unable to recover the
costs incurred in anticipation of such programs and our
profitability and revenues may be materially adversely affected.
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The BAE Acquisition and any future business combinations,
acquisitions or mergers expose us to risks, including the risk
that we may not be able to successfully integrate these
businesses or achieve expected operating synergies.
The BAE Acquisition involves risks, including difficulties in
integrating the operations and personnel of BAE Aerostructures
and the potential loss of key employees of BAE Aerostructures.
We may not be able to satisfactorily integrate the acquired
business in a manner and a timeframe that achieves the cost
savings and operating synergies that we expect.
In addition, we actively consider strategic transactions from
time to time. We evaluate acquisitions, joint ventures,
alliances or co-production programs as opportunities arise, and
we may be engaged in varying levels of negotiations with
potential competitors at any time. We may not be able to effect
transactions with strategic alliance, acquisition or
co-production program candidates on commercially reasonable
terms or at all. If we enter into these transactions, we also
may not realize the benefits we anticipate. In addition, we may
not be able to obtain additional financing for these
transactions.
The integration of companies that have previously been operated
separately involves a number of risks, including, but not
limited to:
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demands on management related to the increase in size after the
transaction; |
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the diversion of managements attention from the management
of daily operations to the integration of operations; |
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difficulties in the assimilation and retention of employees; |
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difficulties in the assimilation of different cultures and
practices, as well as in the assimilation of geographically
dispersed operations and personnel, who may speak different
languages; |
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difficulties combining operations that use different currencies
or operate under different legal structures; |
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difficulties in the integration of departments, systems
(including accounting systems), technologies, books and records
and procedures, as well as in maintaining uniform standards,
controls (including internal accounting controls), procedures
and policies; and |
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constraints (contractual or otherwise) limiting our ability to
consolidate, rationalize and/or leverage supplier arrangements
to achieve integration. |
Consummating any acquisitions, joint ventures, alliances or
co-production programs could result in the incurrence of
additional debt and related interest expense, as well as
unforeseen contingent liabilities.
Risk Factors Related to our Capital Structure
The interests of our controlling stockholder may conflict
with your interests.
Upon completion of this offering, the Onex entities will own
74,489,611 shares of our class B common stock. Our
class A common stock has one vote per share, while our
class B common stock has ten votes per share on all matters
to be voted on by our stockholders. After this offering, the
Onex entities will control approximately 92.1% of the combined
voting power of our outstanding common stock. Accordingly, and
for so long as the Onex entities continue to hold class B common
stock that represents at least 10% of the total number of shares
of common stock outstanding, Onex will exercise a controlling
influence over our business and affairs and will have the power
to determine all matters submitted to a vote of our
stockholders, including the election of directors and approval
of significant corporate transactions such as amendments to our
certificate of incorporation, mergers and the sale of all or
substantially all of our assets. Onex could cause corporate
actions to be taken even if the interests of Onex conflict with
the interests of our other stockholders. This concentration of
voting power could have the effect of deterring or preventing a
change in control of Spirit that might otherwise be beneficial
to our stockholders. Gerald W. Schwartz, the Chairman, President
and Chief Executive Officer of Onex Corporation, owns shares
representing a
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majority of the voting rights of the shares of Onex Corporation.
See Principal and Selling Stockholders and
Description of Capital Stock.
Our substantial indebtedness could materially adversely
affect our financial condition and our ability to operate our
business.
As a result of the Boeing Acquisition, we have a substantial
amount of debt and debt servicing requirements. As of
September 28, 2006, we had total debt of approximately
$723 million, including approximately $693 million of
borrowings under our senior secured credit facility and
approximately $30 million of capital lease obligations. In
addition to our debt, we have less than $1 million of
letters of credit outstanding. While we intend to use a portion
of the net proceeds of the offering to repay certain borrowings
under our senior secured credit facility, we expect there to be
approximately $593 million outstanding under this facility
following the application of the proceeds of the offering as
described in Use of Proceeds. In addition, subject
to restrictions in the credit agreement governing our senior
secured credit facility, we may incur additional debt.
Our substantial debt could have important consequences to you,
including the following:
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our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, debt service requirements or
other general corporate purposes may be impaired; |
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we must use a significant portion of our cash flow for payments
on our debt, which will reduce the funds available to us for
other purposes; |
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we are more vulnerable to economic downturns and adverse
industry conditions and our flexibility to plan for, or react
to, changes in our business or industry is more limited; |
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our ability to capitalize on business opportunities and to react
to competitive pressures, as compared to our competitors, may be
compromised due to our high level of debt; and |
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our ability to borrow additional funds or to refinance debt may
be limited. |
Servicing our debt will require a significant amount of
cash. Our ability to generate sufficient cash depends on
numerous factors beyond our control, and we may be unable to
generate sufficient cash flow to service our debt
obligations.
Our business may not generate sufficient cash flow from
operating activities. We may need to obtain new credit
arrangements and other sources of financing in order to meet our
current and future obligations and working capital requirements
and to fund our future capital expenditures. In addition, our
ability to make payments on and to refinance our debt and to
fund planned capital expenditures will depend on our ability to
generate cash in the future. We cannot assure you of our future
performance, which depends in part on general economic,
financial, competitive, legislative, regulatory and other
factors that are beyond our control, including those described
above under Risk Factors Related to our
Business and Industry. Lower net revenues generally will
reduce our cash flow.
If we are unable to generate sufficient cash flow to service our
debt and meet our other commitments, we may need to refinance
all or a portion of our debt, sell material assets or operations
or raise additional debt or equity capital. We cannot assure you
that we could effect any of these actions on a timely basis, on
commercially reasonable terms or at all, or that these actions
would be sufficient to meet our capital requirements. In
addition, the terms of our existing or future debt agreements
may restrict us from effecting certain or any of these
alternatives.
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Restrictive covenants in our senior secured credit
facility may restrict our ability to pursue our business
strategies.
Our senior secured credit facility limits our ability, among
other things, to:
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incur additional debt or issue our preferred stock; |
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pay dividends or make distributions to our stockholders; |
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repurchase or redeem our capital stock; |
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make investments; |
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incur liens; |
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enter into transactions with our stockholders and affiliates; |
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sell certain assets; |
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acquire the assets of, or merge or consolidate with, other
companies; and |
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incur restrictions on the ability of our subsidiaries to make
distributions or transfer assets to us. |
Our ability to comply with these covenants may be affected by
events beyond our control, and any material deviation from our
forecasts could require us to seek waivers or amendments of
covenants, alternative sources of financing or reductions in
expenditures. We cannot assure you that such waivers, amendments
or alternative financings could be obtained, or, if obtained,
would be on terms acceptable to us.
In addition, the credit agreement governing our senior secured
credit facility requires us to meet certain financial ratios and
restricts our ability to make capital expenditures or prepay
certain other debt. We may not be able to maintain these ratios,
and the restrictions could limit our ability to plan for or
react to market conditions or meet extraordinary capital needs
or otherwise restrict corporate activities.
If a breach of any covenant or restriction contained in our
credit agreement governing our senior secured credit facility
results in an event of default, the lenders thereunder could
discontinue lending, accelerate the related debt (which would
accelerate other debt) and declare all borrowings outstanding
thereunder to be due and payable. In addition, the lenders could
terminate any commitments they had made to supply us with
additional funds. In the event of an acceleration of our debt,
we may not have or be able to obtain sufficient funds to make
any accelerated debt payments, and we may not have sufficient
capital to perform our obligations under our supply agreements.
We may sell more equity and reduce your ownership in
Spirit Holdings.
Our business plan may require the investment of new capital,
which we may raise by issuing additional equity (including
equity interests which may have a preference over your shares of
class A common stock) or additional debt (including debt
securities and/or bank loans). However, this capital may not be
available at all, or when needed, or upon terms and conditions
favorable to us. The issuance of additional equity in Spirit
Holdings may result in significant dilution of your shares of
class A common stock. We may issue additional equity in
connection with or to finance subsequent acquisitions. Further,
our subsidiaries could issue securities in the future to persons
or entities (including our affiliates) other than us or another
subsidiary. This could materially adversely affect your
investment in us because it would dilute your indirect ownership
interest in our subsidiaries.
Spirit Holdings certificate of incorporation and
by-laws and our supply agreements with Boeing contain provisions
that could discourage another company from acquiring us and may
prevent attempts by our stockholders to replace or remove our
current management.
Provisions of Spirit Holdings certificate of incorporation
and by-laws may discourage, delay or prevent a merger or
acquisition that stockholders may consider favorable, including
transactions in which you might otherwise receive a premium for
your shares. In addition, these provisions may frustrate or
prevent
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any attempts by our stockholders to replace or remove our
current management by making it more difficult for stockholders
to replace or remove our current board of directors. These
provisions include:
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multi-vote shares of common stock, which are owned by the Onex
entities and management stockholders; |
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advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings; and |
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the authority of the board of directors to issue, without
stockholder approval, up to 10 million shares of preferred
stock with such terms as the board of directors may determine
and an additional 65,302,819 shares of class A common
stock (not including shares reserved for issuance upon
conversion of outstanding shares of class B common stock)
and an additional 67,386,153 shares of class B common
stock (not including shares issued but subject to vesting
requirements under our benefit plans). |
In addition, our supply agreements with Boeing include
provisions giving Boeing the ability to terminate the agreements
in the event any of certain disqualified persons acquire a
majority of Spirits direct or indirect voting power or all
or substantially all of Spirits assets. See
Description of Capital Stock, and
Business Our Relationship with Boeing.
Spirit Holdings is a controlled company within
the meaning of the New York Stock Exchange rules and, as a
result, will qualify for, and intends to rely on, exemptions
from certain corporate governance requirements.
Because the Onex entities will own more than 50% of the combined
voting power of our common stock after the completion of this
offering, we will be deemed a controlled company
under the rules of the New York Stock Exchange, or NYSE. As a
result, we will qualify for, and intend to rely upon, the
controlled company exception to the board of
directors and committee composition requirements under the rules
of the NYSE. Pursuant to this exception, we will be exempt from
rules that would otherwise require that Spirit Holdings
board of directors be comprised of a majority of
independent directors (as defined under the rules of
the NYSE), and that Spirit Holdings compensation committee
and corporate governance and nominating committee be comprised
solely of independent directors, so long as the Onex
entities continue to own more than 50% of the combined voting
power of our common stock. Spirit Holdings board of
directors consists of ten directors, five of whom qualify as
independent. In addition, Spirit Holdings
compensation and corporate governance and nominating committees
will not be comprised solely of independent
directors. See Management Executive
Officers and Directors and Committees of
the Board of Directors.
Risk Factors Related to this Offering
There is no existing market for our class A common
stock, and we do not know if one will develop to provide you
with adequate liquidity.
Prior to this offering, there has been no public market for our
class A common stock. An active trading market for our
class A common stock may not develop or be sustained after
the offering. The lack of a public market may impair the value
of your shares and your ability to sell your shares at any time
you wish to sell them.
Our stock price may be volatile, and you may not be able
to sell your shares at or above the offering price.
The initial public offering price for our shares of class A
common stock will be determined by negotiations between the
representatives of the underwriters and us. This price may not
reflect the market price of our class A common stock
following this offering. You may be unable to resell the
class A common stock you purchase at or above the initial
public offering price.
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The stock markets in general have experienced extreme
volatility, often unrelated to the operating performance of
particular companies. Broad market fluctuations may materially
adversely affect the trading price of our class A common
stock.
Price fluctuations in our class A common stock could result
from general market and economic conditions and a variety of
other factors, including:
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actual or anticipated fluctuations in our operating results; |
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changes in aerostructures pricing; |
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our competitors and customers announcements of
significant contracts, acquisitions or strategic investments; |
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changes in our growth rates or our competitors and
customers growth rates; |
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the timing or results of regulatory submissions or actions with
respect to our business; |
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our inability to raise additional capital; |
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conditions of the aerostructure industry or in the financial
markets or economic conditions in general; and |
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changes in stock market analyst recommendations regarding our
class A common stock, other comparable companies or the
aerospace industry generally. |
You will experience immediate and substantial dilution in
the net tangible book value of your class A common
stock.
Based on our actual book value, the value of the shares of
class A common stock you purchase in this offering
immediately will be less than the offering price you paid. This
reduction in the value of your equity is known as dilution. This
dilution occurs in large part because our initial investors paid
less than the initial public offering price when they purchased
their shares. If you purchase class A common stock in this
offering, you will incur immediate dilution of $19.57 per
share, based on an assumed initial public offering price of
$24.00 per share, the midpoint of the range on the cover of
this prospectus.
If a significant number of shares of our class A
common stock are sold into the market following this offering,
the market price of our class A common stock could
significantly decline, even if our business is doing
well.
Sales of a substantial number of shares of our class A
common stock in the public market after this offering could
materially adversely affect the prevailing market price of our
class A common stock.
Upon completion of this offering, we will have
52,083,334 shares of class A common stock and
75,671,517 shares of class B common stock outstanding.
Of these securities, the 52,083,334 shares of class A
common stock offered pursuant to this offering will be freely
tradable without restriction or further registration under
federal securities laws, except to the extent shares are
purchased in the offering by our affiliates. The
75,671,517 shares of class B common stock and any
class A common stock owned by our officers, directors and
affiliates, as that term is defined in the Securities Act of
1933, as amended, or the Securities Act, are restricted
securities under the Securities Act. Restricted securities
may not be sold in the public market unless the sale is
registered under the Securities Act or an exemption from
registration is available.
In connection with this offering, we, each of our directors and
executive officers and the Onex entities have entered into
lock-up agreements that
prevent the sale of shares of our common stock for up to
180 days after the date of this prospectus, subject to an
extension in certain circumstances as set forth in the section
entitled Underwriting. Following the expiration of
the lock-up period, the
Onex entities will have the right, subject to certain
conditions, to require us to register the sale of these shares
under the federal securities laws. If this right is exercised,
holders of all shares subject to a registration rights
25
agreement will be entitled to participate in such registration.
By exercising their registration rights, and selling a large
number of shares, these holders could cause the prevailing
market price of our class A common stock to decline.
Approximately 75,671,517 shares of our common stock will be
subject to a registration rights agreement upon completion of
this offering. See Shares Eligible for Future Sale
and Description of Capital Stock Registration
Agreement.
Between May 19, 2007 and July 31, 2007, approximately
75,671,517 shares of class A common stock issuable
upon conversion of class B common stock will become
eligible for sale in the public market, subject to the volume,
notice of sale, manner of sale and other restrictions of
Rule 144 promulgated under the Securities Act. Furthermore,
an additional 6,942,330 shares of our class B common
stock have been issued to members of our management pursuant to
our Executive Incentive Plan, Short Term Incentive Plan and Long
Term Incentive Plan, which shares will remain subject to vesting
requirements following the offering. Of this amount,
464,943 shares granted under our Short Term Incentive Plan
and Long Term Incentive Plan will vest on February 17, 2007
if the recipients of such shares continue to be employed by us
at that time. See Management Benefit
Plans Executive Incentive Plan,
Short Term Incentive Plan, and Long Term
Incentive Plan. If these vesting requirements are
satisfied, additional shares of class A common stock
issuable upon conversion of the class B common stock will
become eligible for sale in the public market one year following
the date on which the vesting requirements are satisfied,
subject to the volume, notice of sale, manner of sale and other
restrictions of Rule 144 promulgated under the Securities
Act or, if earlier, after the shares are registered under the
Securities Act.
In addition, under our Union Equity Participation Plan, as a
result of this offering, we anticipate issuing approximately
5,006,829 shares of class A common stock on or prior
to March 15, 2007 pursuant to a registration statement on
Form S-8. These
shares will become eligible for sale in the public market upon
issuance.
If a trading market develops for our class A common stock,
our employees, officers and directors may elect to sell shares
of our class A common stock issuable upon conversion of
their shares of our class B common stock in the market.
Sales of a substantial number of shares of our class A
common stock in the public market after this offering could
depress the market price of our class A common stock and
impair our ability to raise capital through the sale of
additional equity securities.
We do not intend to pay cash dividends.
We do not intend to pay cash dividends on our common stock. We
currently intend to retain all available funds and any future
earnings for use in the operation and expansion of our business
and do not anticipate paying any cash dividends in the
foreseeable future. In addition, the terms of our current, as
well as any future, financing agreements may preclude us from
paying any dividends. As a result, appreciation, if any, in the
market value of our common stock will be your sole source of
potential financial gain for the foreseeable future.
26
THE TRANSACTIONS
The Boeing Acquisition
In December 2004 and February 2005, an investor group led by
Onex Partners LP and Onex Corporation formed Spirit and Spirit
Holdings, respectively, for the purpose of acquiring Boeing
Wichita. On June 16, 2005, Spirit acquired Boeing Wichita
in a negotiated, arms-length transaction for a cash purchase
price of approximately $904 million and the assumption of
certain liabilities, pursuant to an asset purchase agreement,
dated as of February 22, 2005, between Spirit and Boeing,
or the Asset Purchase Agreement. Based on final working capital
and other factors specified in the Asset Purchase Agreement, a
purchase price adjustment of $19 million was paid to Spirit
in the fourth quarter of 2005. In connection with the Boeing
Acquisition, Boeing is required to make future payments to
Spirit in amounts of $45.5 million, $116.1 million and
$115.4 million in 2007, 2008 and 2009, respectively, in
payment for various tooling and capital assets built or
purchased by Spirit. Spirit will retain usage rights and custody
of these assets for their remaining useful lives without
compensation to Boeing. Boeing also contributed $30 million
to us to partially offset our costs of transition to a stand
alone company.
The Asset Purchase Agreement contains customary representations,
warranties and covenants. Pursuant to the Asset Purchase
Agreement, we are indemnified by Boeing, subject to specified
exceptions, for losses arising from, among other things:
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breaches by Boeing of its representations, warranties, covenants
and agreements contained in the Asset Purchase Agreement; |
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damages relating to separating the portion of Boeings
Wichita facilities not acquired by us from the portion acquired
by us; |
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damages relating to noncompliance with certain laws by Boeing
prior to closing; |
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liability for defective manufacture of products shipped by
Boeing prior to closing; |
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certain environmental liabilities, as more fully described under
Business Environmental Matters; and |
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tax liabilities for periods prior to closing. |
Claims for indemnification are subject to an aggregate
deductible equal to $10 million and may not exceed
$100 million, each subject to certain specified exceptions.
Most claims for indemnification must be made by
December 16, 2006; claims for taxes and certain ERISA
matters may be made until 30 days after the expiration of
the applicable statute of limitations; claims for matters
relating to the title of the assets sold to us in the Boeing
Acquisition may be made until June 16, 2012; and certain
representations, including those relating to broker or finder
fees and commissions, do not expire.
The Boeing Acquisition was financed through an equity investment
of $375 million and borrowings of a $700 million term
loan B under our senior secured credit facilities. See
The Related Financing Transactions.
Prior to the closing of the Boeing Acquisition, neither Spirit
nor Spirit Holdings had engaged in any business activities
except those incident to the acquisition of Boeing Wichita.
Prior to the completion of the Boeing Acquisition, Boeing
Wichita was a division of Boeing and was not a separate legal
entity. Historically, Boeing Wichita functioned as an internal
supplier of parts and assemblies to Boeing airplane programs and
had very few sales to third parties. It operated as a cost
center of Boeing, meaning that it recognized the cost of
products manufactured for BCA programs but did not recognize any
corresponding revenues for those products. No intra-company
pricing was established for the parts and assemblies that Boeing
Wichita supplied to Boeing. Revenues from sales to third parties
were insignificant prior to the Boeing Acquisition, consisting
of less than $100,000 in each year from 2001 through 2004 and in
the period from January 1, 2005 through June 16, 2005.
Pursuant to the Asset Purchase Agreement, on the closing date of
the Boeing Acquisition, Spirit and Boeing entered into a series
of agreements under which (1) Spirit has become
Boeings exclusive supplier of substantially all of the
parts and assemblies supplied to Boeing by Boeing Wichita as at
June 16, 2005
27
at pricing established under those agreements, (2) Spirit
will be Boeings exclusive supplier for the forward
fuselage, fixed and moveable leading wing edges and struts for
Boeings new B787 platform, at pricing set forth in the
relevant agreement and (3) Boeing has continued to provide
to Spirit (in most cases on a transitional basis) certain
technology and system support services historically provided to
Boeing Wichita by Boeing, at pricing established under those
agreements. See Business Our Relationship with
Boeing.
Prior to the Boeing Acquisition, certain Boeing Wichita
employees were represented by unions under Boeings labor
agreements. After the closing of the Boeing Acquisition, Spirit
employed most, but not all, of the employees of Boeing Wichita
on new terms and conditions of employment that were in most
cases established by collective bargaining between Spirit and
the relevant labor unions. Spirit also established certain
employee benefit and equity incentive plans in connection with
hiring Boeing Wichita employees. See
Management Benefit Plans.
Our Principal Equity Investor
Onex Partners LP is an approximately $1.7 billion private
equity fund established in 2003 by Onex Corporation. Onex
Partners LP provides committed capital for Onex-sponsored
acquisitions. Onex Corporation is a diversified company with
annual consolidated revenues of approximately $16.5 billion
and 136,000 employees. Onexs subordinate voting shares are
listed and traded on the Toronto Stock Exchange under the symbol
OCX. Onex is one of Canadas largest companies
with global operations in the service, manufacturing and
technology industries. Onex has extensive experience carving
divisions out of large, multinational corporations and
establishing them as stand alone enterprises. Other Onex
operating companies include Celestica Inc., Center for
Diagnostic Imaging, Inc., Cineplex Entertainment Limited
Partnership, ClientLogic Corporation, Cosmetic Essence, Inc.,
Emergency Medical Services Corporation, Radian Communication
Services Corporation and Skilled Healthcare Group, Inc.
The Related Financing Transactions
On June 16, 2005, Spirit Holdings, as parent guarantor,
Spirit, as a borrower, and Onex Wind Finance LP, an indirect
subsidiary of Spirit Holdings principal stockholder, or
Onex Wind, as an additional borrower, entered into a credit
agreement with Citicorp North America, Inc., as collateral
agent, administrative agent and documentation agent, the lenders
party thereto, Citigroup Global Markets Inc., as sole lead
arranger and book runner, The Bank of Nova Scotia and Royal Bank
of Canada, as co-arrangers and co-syndication agents, The Bank
of Nova Scotia, as issuing bank, and Export Development Canada
and Caisse de dépôt et placement du Québec, as
co-documentation agents. Pursuant to the terms of that credit
agreement, the lenders thereunder provided us with available
borrowings of $875 million of senior secured credit
facilities, comprised of a $175 million revolving credit
facility, or the Revolver, and a $700 million term
loan B, or the Term Loan B, and together with the
Revolver, the Senior Secured Credit Facilities. Proceeds from
the Term Loan B were used to consummate the Boeing
Acquisition and pay fees and expenses incurred in connection
therewith and for working capital. We did not borrow under the
Revolver at closing and as of October 31, 2006, we had not
borrowed under that facility, which may be used by us for
working capital and other general corporate purposes.
The obligations of the borrowers and guarantors under the Senior
Secured Credit Facilities are secured by a first priority
security interest in substantially all of the borrowers
and guarantors assets, including (1) all capital
stock of our direct and indirect domestic subsidiaries, as well
as 65% of the capital stock of our direct and indirect foreign
subsidiaries and (2) all other tangible and intangible
property and assets of the borrowers and guarantors. The Senior
Secured Credit Facilities contain standard covenants and
mandatory prepayment requirements (including in respect of the
net cash proceeds received by us from this offering), as well as
maximum total debt to an adjusted EBITDA, which is the amount of
our earnings before interest, taxes, depreciation and
amortization expenses and other specifically identified
exclusions, and minimum interest coverage covenants.
Our Senior Secured Credit Facilities have been amended since the
date of the Boeing Acquisition to, among other things,
facilitate Spirits and its subsidiaries receipt of
incentive arrangements under relevant Kansas statutes and
industrial revenue bond, or IRB, financing of equipment
acquisitions and to permit us to acquire BAE Aerostructures. We
intend to further amend the Senior Secured Credit Facilities in
28
connection with this offering. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
On June 16, 2005, Onex Wind, as borrower, and Spirit
Holdings, Spirit, Spirit AeroSystems Finance, Inc., 3101447 Nova
Scotia Company and Onex Wind Finance LLC, as guarantors, also
entered into a secured senior subordinated delayed draw term
loan credit agreement with The Boeing Company, as agent, and the
lenders party thereto. Pursuant to the terms of that credit
agreement, Boeing provided us with a $150 million senior
subordinated delayed draw facility, or the Senior Subordinated
Credit Facility, which remained unfunded at closing and has not
been funded. As part of the amendment to the Senior Secured
Credit Facilities to be entered into in connection with this
offering, we intend to obtain consent from our senior lenders to
terminate the Senior Subordinated Credit Facility upon
completion of this offering.
In connection with each of our Senior Secured Credit Facilities
and Senior Subordinated Credit Facility, we established a
structure under which Spirit borrows from an indirect subsidiary
of Onex Wind any amounts which it would otherwise borrow under
the Senior Secured Credit Facilities. See Certain
Relationships and Related Party Transactions Other
Related Party Transactions and Business Relationships.
This structure will be eliminated pursuant to the amendment to
the senior secured credit facility that will be entered into in
connection with this offering.
The BAE Acquisition
On April 1, 2006, through our wholly-owned subsidiary,
Spirit Europe, we acquired BAE Aerostructures in a negotiated,
arms-length transaction for a cash purchase price of
approximately $145.7 million and the assumption of certain
normal course liabilities (including accounts payable of
approximately $57.8 million) financed with available cash
balances. Spirit Europe manufactures leading and trailing wing
edges and other wing components for commercial aircraft programs
for Airbus and Boeing and produces various aerostructure
components for certain Raytheon business jets. The BAE
Acquisition provides us with a foundation to increase future
sales to Airbus, as Spirit Europe is a key supplier of wing and
flight control surfaces for the A320 platform, Airbus core
single aisle program, and of wing components for the A380
platform, one of Airbus most important new programs and
the worlds largest commercial passenger aircraft. Under
our supply agreements with Airbus, we supply most of our
products for the life of the aircraft program, including
commercial derivative models, with pricing determined through
2010. For the A380, we have a long-term supply contract with
Airbus that covers a fixed number of units.
29
USE OF PROCEEDS
We estimate that our net proceeds from the sale of
10,416,667 shares of class A common stock in this
offering will be approximately $229 million, based on an
assumed initial public offering price of $24.00 per share,
the midpoint of the range on the cover of this prospectus, after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us. Each $1.00 increase or decrease
in the assumed initial public offering price of $24.00 per
share, the midpoint of the range on the cover of the prospectus,
would increase or decrease, as applicable, the net proceeds to
us by approximately $10 million, assuming the number of
shares offered by us, as set forth on the cover of this
prospectus, remains the same and after deducting estimated
underwriting discounts and commissions payable by us. We will
not receive any of the proceeds from the sale of shares by the
selling stockholders.
We intend to use the net proceeds as follows:
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approximately $100 million to repay debt outstanding under
our Term Loan B under our senior secured credit facility;
and |
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the balance to pay a portion of the obligations which will
become due upon the closing of this offering under our Union
Equity Participation Plan. |
We will not receive any proceeds from the sale of shares by the
selling stockholders.
An affiliate of Credit Suisse Securities (USA) LLC, one of the
representatives of the underwriters, is a lender under, and will
receive a portion of the net proceeds used to repay debt under,
our senior secured credit facility.
Proceeds from the Term Loan B were used to consummate the
Boeing Acquisition and pay fees and expenses incurred in
connection therewith and for working capital.
The Term Loan B bears interest at a rate equal to the sum
of LIBOR plus the applicable margin (as defined below) or, at
our option, the alternate base rate, which will be the highest
of (x) the Citicorp North America, Inc. prime rate,
(y) the certificate of deposit rate, plus 0.50% and
(z) the federal funds rate plus 0.50%, plus the applicable
margin. The applicable margin is 2.25% per annum on the
portion of the Term Loan B that bears interest at LIBOR and
1.25% on the portion of the Term Loan B that bears interest
at the alternate base rate. The Term Loan B matures on
December 31, 2011.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources for additional information regarding our
outstanding debt.
30
DIVIDEND POLICY
We currently intend to retain any future earnings to support our
operations and to fund the development and growth of our
business. In addition, the payment of dividends by us to holders
of our common stock is limited by our credit facilities. Our
future dividend policy will depend on the requirements of
financing agreements to which we may be a party. We do not
intend to pay cash dividends on our common stock in the
foreseeable future. Any future determination to pay dividends
will be at the discretion of our board of directors and will
depend upon, among other factors, our results of operations,
financial condition, capital requirements and contractual
restrictions.
31
CAPITALIZATION
The following table sets forth as of September 28, 2006:
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our consolidated capitalization on an actual basis, |
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our consolidated capitalization on a pro forma basis to give
effect to the sale of 10,416,667 shares of class A
common stock by us in this offering at an assumed initial public
offering price of $24.00 per share, the midpoint of the range on
the cover of the prospectus, and the application of those
proceeds as described in Use of Proceeds. |
You should read this table together with our unaudited
consolidated pro forma financial information included elsewhere
in this prospectus. For additional information regarding our
outstanding debt, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
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As of September 28, 2006 | |
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Actual | |
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Pro Forma(1) | |
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(Dollars in millions) | |
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(Unaudited) | |
Long-term debt, including current portion:
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Revolving credit facility(2)
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$ |
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$ |
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Term loan
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693.0 |
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593.0 |
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Capital leases and other debt
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29.5 |
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29.5 |
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Total senior debt
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722.5 |
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622.5 |
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Subordinated secured delayed draw credit facility
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Total debt
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$ |
722.5 |
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$ |
622.5 |
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Shareholders equity
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Preferred stock, $0.01 par value per share,
10,000,000 shares authorized; nil shares issued and
outstanding
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Class A common stock, $0.01 par value per share,
200,000,000 shares authorized; nil shares issued and
outstanding, actual; 52,083,334 shares issued and
outstanding, as adjusted
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0.5 |
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Class B common stock, $0.01 par value per share,
150,000,000 shares authorized; 124,280,514 shares
issued and outstanding, actual; 82,613,847 shares issued
and outstanding, as adjusted
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1.2 |
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0.8 |
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Additional paid-in capital
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452.5 |
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681.4 |
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Accumulated other comprehensive income
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21.5 |
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21.5 |
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Accumulated deficit
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(4.1 |
) |
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|
(282.1 |
) |
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Total shareholders equity
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471.1 |
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422.1 |
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Total capitalization
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$ |
1,193.6 |
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$ |
1,044.6 |
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(1) |
Each $1.00 increase or decrease in the assumed initial public
offering price of $24.00 per share, the midpoint of the range on
the cover of the prospectus, would increase or decrease, as
applicable, the amount of pro forma additional
paid-in capital, total
stockholders equity and total capitalization by
approximately $10 million, assuming the number of shares
offered by us, as set forth on the cover of this prospectus,
remains the same and after deducting the estimated underwriting
discounts and commissions payable by us. |
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(2) |
The revolving credit facility provides for availability of
borrowings and issuances of letters of credit for up to
$175.0 million. As of September 28, 2006, we had
$175.0 million of availability under the revolving credit
facility, net of $0.3 million of letters of credit
outstanding. |
32
DILUTION
If you invest in our class A common stock, your interest
will be diluted immediately to the extent of the difference
between the public offering price per share of our class A
common stock and the pro forma net tangible book value per share
of our common stock after this offering.
As of September 28, 2006, our net tangible book value,
determined on a pro forma basis as described below, was
$418.2 million, or $3.36 per share of class A
common stock and class B common stock (together, our common
stock). Pro forma net tangible book value represents the amount
of our total assets (excluding intangible assets), less our
total liabilities, divided, in the case of net tangible book
value per share, by the pro forma number of shares outstanding
giving effect to the
3-for-1 stock split
that occured on November 16, 2006.
After giving effect to our sale of 10,416,667 shares of
class A common stock in this offering, based on an assumed
initial public offering price of $24.00 per share, the
midpoint of the range on the cover of this prospectus, and after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us, our adjusted pro forma net
tangible book value at September 28, 2006 would have been
approximately $596.7 million, or $4.43 per share of
our common stock. This represents an immediate increase in pro
forma net tangible book value of $1.07 per share to our
existing stockholders and an immediate net tangible book value
dilution of $19.57 per share to new investors purchasing
shares in this offering. The following table illustrates this
dilution:
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Assumed initial public offering price per share
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$ |
24.00 |
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Pro forma net tangible book value per share at
September 28, 2006
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$ |
3.36 |
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Increase in pro forma net tangible book value per share
attributable to new investors
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1.07 |
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Pro forma adjusted net tangible book value per share after this
offering
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4.43 |
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Dilution per share to new investors
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$ |
19.57 |
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The following table summarizes, as of September 28, 2006,
as adjusted to give effect to this offering, the differences
between the number of shares of our common stock purchased from
us, the total consideration paid to us and the average price per
share paid by our existing stockholders and by the new investors
purchasing class A common stock in this offering. The
calculation is based on an assumed initial public offering price
of $24.00 per share, the midpoint of the range on the cover
of this prospectus, before deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
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Shares Purchased | |
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Total Consideration | |
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Average Price | |
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Number | |
|
Percent | |
|
Amount | |
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Percent | |
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Per Share | |
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| |
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| |
Existing stockholders
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124,280,514 |
(1) |
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92.3 |
% |
|
$ |
380,302,267 |
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60.3 |
% |
|
$ |
3.06 |
|
New investors
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10,416,667 |
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7.7 |
% |
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$ |
250,000,008 |
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39.7 |
% |
|
$ |
24.00 |
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Total
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134,697,181 |
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|
100 |
% |
|
$ |
630,302,275 |
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|
$ |
100 |
% |
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(1) |
Includes 10,247,595 shares of class B common stock
subject to vesting requirements under our benefit plans of which
3,305,265 shares of class B common stock will vest on
the offering. |
If the underwriters exercise their over-allotment option in
full, our existing stockholders would own approximately 55.4% of
the total number of shares of our common stock outstanding after
this offering and would have paid approximately 60.3% of the
total consideration paid to us for shares of our common stock.
We may choose to raise additional capital due to market
conditions or strategic considerations even if we believe we
have sufficient funds for our current or future operating plans.
To the extent additional capital is raised through the sale of
equity or convertible debt securities, the issuance of these
securities could result in further dilution to our stockholders.
33
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial
statements present Spirit Holdings financial position and
results of operations adjusted for the Boeing Acquisition, the
sale of 10,416,667 shares of class A common stock
pursuant to this offering and the application of the proceeds
therefrom as described in Use of Proceeds. Boeing
Wichita is the predecessor entity of Spirit Holdings for the
periods prior to the Boeing Acquisition.
The unaudited pro forma consolidated financial statements
include:
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the pro forma consolidated balance sheet as of
September 28, 2006, assuming this offering occurred on
September 28, 2006 and the proceeds were applied as
described in Use of Proceeds; |
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the pro forma consolidated statement of operations for the nine
months ended September 28, 2006, assuming this offering
occurred on January 1, 2005 and the proceeds were applied
as described in Use of Proceeds; and |
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the pro forma consolidated statement of operations for the
fiscal year ended December 29, 2005 assuming the Boeing
Acquisition, this offering and the application of proceeds as
described in Use of Proceeds all occurred on
January 1, 2005. |
Prior to the completion of the Boeing Acquisition, Spirit was a
division of Boeing and was not a separate legal entity. No
intra-company pricing was established for the parts and
assemblies that Boeing Wichita supplied to Boeing, with all
transactions with Boeing conducted on a non-cash basis. As a
consequence, only minimal external revenues were recorded by
Boeing Wichita. Following the Boeing Acquisition, we adopted
contract accounting. Additionally, we reduced our labor, pension
and fringe benefit costs as a result of the Boeing Acquisition.
Results of operations have been adjusted to give effect to these
matters, as well as the financing costs of the Boeing
Acquisition and new depreciation and amortization rates which
reflect a preliminary valuation of the net assets acquired in
accordance with purchase accounting.
Finally, certain adjustments have been made to reflect Spirit
Holdings existence as a stand alone company, including
service fees payable to Onex, taxes and recalculation of
accreted income related to Spirits non-interest bearing
long-term receivable from Boeing in the aggregate amount of
$277 million due in 2007, 2008 and 2009 attributable to the
acquisition of title of various tooling and other capital assets.
The pro forma adjustments are described in detail in the notes
to the pro forma statements of operations and are based on
available information and assumptions that management believes
are reasonable. The pro forma statements of operations do not
purport to be indicative of our future results of operations or
results of operations that would have actually occurred had the
Boeing Acquisition and this offering been consummated on
January 1, 2005.
The unaudited pro forma consolidated financial data should be
read in conjunction with Selected Consolidated Historical
Financial Data, Use of Proceeds,
Capitalization, The Transactions,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
historical financial statements and related notes included
elsewhere in this prospectus.
34
Spirit AeroSystems Holdings, Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
September 28, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
|
|
|
|
Adjustment | |
|
|
|
|
|
|
for the | |
|
|
|
|
|
|
Offering | |
|
Pro Forma | |
|
|
September 28, 2006 | |
|
Transactions | |
|
September 28, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
(Dollars in millions) | |
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
189.0 |
|
|
$ |
(25.0 |
)(a) |
|
$ |
164.0 |
|
Accounts receivable net
|
|
|
215.7 |
|
|
|
|
|
|
|
215.7 |
|
Inventory net
|
|
|
731.7 |
|
|
|
|
|
|
|
731.7 |
|
Prepaids and other assets
|
|
|
17.4 |
|
|
|
|
|
|
|
17.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,153.8 |
|
|
|
(25.0 |
) |
|
|
1,128.8 |
|
Property, plant and equipment, net
|
|
|
716.7 |
|
|
|
|
|
|
|
716.7 |
|
Other assets
|
|
|
464.9 |
|
|
|
(3.8 |
)(b) |
|
|
461.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,335.4 |
|
|
$ |
(28.8 |
) |
|
$ |
2,306.6 |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$ |
501.0 |
|
|
$ |
|
|
|
$ |
501.0 |
|
Current maturities of debt
|
|
|
23.2 |
|
|
|
|
|
|
|
23.2 |
|
Income taxes
|
|
|
46.1 |
|
|
|
|
|
|
|
46.1 |
|
Stock issuance liability
|
|
|
|
|
|
|
120.2 |
(c) |
|
|
120.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
570.3 |
|
|
|
120.2 |
|
|
|
690.5 |
|
Long-term debt
|
|
|
699.3 |
|
|
|
(100.0 |
)(d) |
|
|
599.3 |
|
Advance payments
|
|
|
500.0 |
|
|
|
|
|
|
|
500.0 |
|
Other liabilities
|
|
|
94.7 |
|
|
|
|
|
|
|
94.7 |
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 350,000,000 shares authorized
|
|
|
1.2 |
|
|
|
0.1 |
(e) |
|
|
1.3 |
|
Additional paid-in capital
|
|
|
452.5 |
|
|
|
228.9 |
(e) |
|
|
681.4 |
|
Accumulated other comprehensive income
|
|
|
21.5 |
|
|
|
|
|
|
|
21.5 |
|
Accumulated deficit
|
|
|
(4.1 |
) |
|
|
(278.0 |
)(f) |
|
|
(282.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
471.1 |
|
|
|
(49.0 |
) |
|
|
422.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
2,335.4 |
|
|
$ |
(28.8 |
) |
|
$ |
2,306.6 |
|
|
|
|
|
|
|
|
|
|
|
35
Spirit AeroSystems Holdings, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of
Operations
For the Nine Months Ended September 28, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
|
|
|
|
Adjustment | |
|
Pro Forma | |
|
|
|
|
for the | |
|
Nine Months | |
|
|
Nine Months Ended | |
|
Offering | |
|
Ended | |
|
|
September 28, 2006 | |
|
Transactions(f) | |
|
September 28, 2006 | |
|
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
(Dollars in millions, except per share amounts) | |
Net sales
|
|
$ |
2,355.9 |
|
|
$ |
|
|
|
$ |
2,355.9 |
|
Cost of sales
|
|
|
1,926.7 |
|
|
|
|
|
|
|
1,926.7 |
|
Selling, general and administrative
|
|
|
160.0 |
|
|
|
(1.5 |
)(g) |
|
|
158.5 |
|
Research and development
|
|
|
85.1 |
|
|
|
|
|
|
|
85.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
2,171.8 |
|
|
|
(1.5 |
) |
|
|
2,170.3 |
|
Operating income
|
|
|
184.1 |
|
|
|
1.5 |
|
|
|
185.6 |
|
Interest expense and financing fee amortization
|
|
|
(34.8 |
) |
|
|
6.2 |
(d) |
|
|
(28.6 |
) |
Interest income
|
|
|
20.9 |
|
|
|
|
|
|
|
20.9 |
|
Other income, net
|
|
|
3.6 |
|
|
|
|
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
173.8 |
|
|
|
7.7 |
|
|
|
181.5 |
|
Provision for income taxes
|
|
|
(87.6 |
) |
|
|
|
(h) |
|
|
(87.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
86.2 |
|
|
$ |
7.7 |
|
|
$ |
93.9 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic
|
|
$ |
0.76 |
|
|
|
|
|
|
$ |
0.70 |
(i) |
Shares used in per share calculation, basic
|
|
|
113.9 |
|
|
|
|
|
|
|
133.4 |
|
Net income per share, diluted
|
|
$ |
0.71 |
|
|
|
|
|
|
$ |
0.67 |
(i) |
Shares used in per share calculation, diluted
|
|
|
121.7 |
|
|
|
|
|
|
|
139.8 |
|
|
|
|
(a) |
|
Cash and cash equivalents |
|
|
|
The pro forma adjustment to Cash and cash equivalents is
attributable to the following items: |
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
September 28, | |
|
|
2006 | |
|
|
| |
Net proceeds from offering
|
|
$ |
229.0 |
|
Cash portion of Union Equity Participation Plan payout
|
|
|
(150.0 |
) |
Prepayment of long-term debt
|
|
|
(100.0 |
) |
Termination of intercompany agreement with Onex Partners
Manager, L.P.
|
|
|
(4.0 |
) |
|
|
|
|
|
Total pro forma adjustment to Cash and cash equivalents
|
|
$ |
(25.0 |
) |
|
|
|
(b) |
|
The pro forma adjustment to Other assets reflects a write-off of
the imputed present value of Spirits proportionate share
of the subordinated delayed draw credit facility with Boeing for
$3.6 million less $1.4 million of accumulated
amortization. See Liquidity and Capital Resources.
This adjustment also includes a $1.6 million write-off of a
proportionate share of deferred financing fees associated with
the $100.0 million prepayment of
long-term debt. |
|
(c) |
|
The pro forma adjustment to Stock issuance liability represents
the value on the date of the offering of the stock portion of
the Union Equity Participation Plan payout (5,006,829 x $24.00)
that would be recorded as a liability until the date the shares
are actually issued which would be approximately four months
after the offering date. |
|
(d) |
|
The pro forma adjustment to Interest expense primarily reflects
a $6.0 million interest expense savings associated with the
repayment of approximately $100 million of Term Loan B
under the Senior |
36
|
|
|
|
|
Secured Credit Facilities (assuming interest at LIBOR plus
applicable margin, as described in Use of Proceeds
as well as the assumed interest rates used in calculating the
Pro forma Acquisition Adjustments). If interest rates were to
change by 0.125%, the total interest would increase (decrease)
by approximately $0.6 million for the nine months ended
September 28, 2006. In addition, the interest expense
adjustment reflects the elimination of the structure under which
Spirit borrows from an indirect subsidiary of Onex Wind, as
outlined in Certain Relationships and Related Party
Transactions Other Related Party Transactions and
Business Relationships. This adjustment also reflects
$0.2 million of deferred financing fees that have been
written off proportionate to the debt pre-payment. |
|
(e) |
|
The pro forma adjustment to Common stock and Additional paid-in
capital reflects the increase in shares from the offering
(10,416,667 shares issued or $0.1 million increase in
Common stock and $229.0 million in Additional paid-in
capital based on net proceeds of $21.98 per share). |
|
(f) |
|
Accumulated deficit |
The pro forma adjustments to Accumulated deficit are as follows:
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
September 28, 2006 | |
|
|
| |
Stock compensation charge for Union Equity Participation Plan
|
|
$ |
(270.2 |
) |
Termination of intercompany agreement with Onex Partners
Manager, L.P.
|
|
|
(4.0 |
) |
Writeoff of deferred financing fees proportionate to debt
prepayment
|
|
|
(1.6 |
) |
Writeoff of Boeing delayed draw credit facility (see discussion
in Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources)
|
|
|
(2.2 |
) |
|
|
|
|
|
Total pro forma adjustment to Accumulated deficit
|
|
$ |
(278.0 |
) |
|
|
|
|
|
As these adjustments are non-recurring in nature, they have not
been included in the Pro-Forma Consolidated Statement of
Operations. |
|
(g) |
|
The pro forma adjustment to Selling, general and administrative
represents service fee credits of $1.5 million that will
not be incurred by the Company after termination of the
outstanding intercompany agreement with Onex Partners Manager,
L.P. |
|
(h) |
|
As of September 28, 2006, the Company continued to have a
full valuation allowance of its deferred tax asset therefore the
pro forma adjustments would have no impact on Provision for
income taxes. |
|
(i) |
|
Included in the Net income (loss) per share calculation are the
10,416,667 shares from this offering and the
5,006,829 shares for the Union Equity Participation Plan,
both assumed to have been issued. |
Overview of Pro Forma Consolidated Statement of Operations
Adjustments for the Boeing Acquisition
The following unaudited pro forma consolidated statement of
operations data gives effect to adjustments that we believe are
(1) directly attributable to the Boeing Acquisition,
(2) expected to have a continuing impact on the business
and (3) factually supportable, as follows:
|
|
|
|
|
adjustments for revenues recorded as a stand alone business,
based on actual deliveries for the period prior to the Boeing
Acquisition with pricing as determined under our supply
agreements with Boeing, rather than as a captive division whose
costs are absorbed; |
|
|
|
adjustments to compensation and benefits as a result of new
union wage rates, incentive programs and benefit plans that
became effective at the time of the Boeing Acquisition; |
|
|
|
adjustments to interest, depreciation and amortization expense
resulting from the $700 million Term Loan B, valuation
of the assets under purchase accounting and the allocation of
negative goodwill; and |
37
|
|
|
|
|
adjustments for certain costs, including service fees payable to
Onex, taxes and the recalculation of accreted income related to
Spirits non-interest bearing long-term receivable from
Boeing in the aggregate amount of $277 million. |
The unaudited pro forma consolidated statement of operations is
based upon managements current estimate of, and good faith
assumptions regarding, the adjustments arising from the
transactions described above and is based upon currently
available information.
Pro forma adjustments for the Boeing Acquisition include the
effects of new contractual arrangements if the amounts are
factually supportable, directly attributable to the Boeing
Acquisition and expected to have a continuing impact on the
statement of operations. In accordance with
Regulation S-X,
the following unaudited pro forma consolidated statement of
operations data does not give effect to new distribution or cost
sharing agreements, agreements with management, or compensation
or benefit plans. In accordance with
Regulation S-X, we
also have not included any pro forma adjustments reflecting
efficiencies from the transaction, including
termination of employees, closure of plants and other
restructuring changes. The unaudited pro forma statement of
operations data is based on the historical financial statements
of Boeing Wichita for the period from January 1, 2005
through June 16, 2005, the historical financial statements
of Spirit Holdings for the period from February 7, 2005
through December 29, 2005, and other available information
and certain management assumptions. The unaudited pro forma
consolidated statement of operations data gives effect to the
Boeing Acquisition as if it had occurred on January 1, 2005.
38
SPIRIT AEROSYSTEMS HOLDINGS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spirit Holdings | |
|
|
|
|
Predecessor | |
|
|
|
|
|
Predecessor | |
|
Actual Results | |
|
|
|
|
Actual Results | |
|
|
|
|
|
Pro Forma | |
|
Period From | |
|
Spirit Holdings | |
|
|
Period From | |
|
|
|
Period From | |
|
February 7, 2005 | |
|
Pro Forma | |
|
|
January 1, 2005 | |
|
Pro Forma Adjustments | |
|
January 1, 2005 | |
|
through | |
|
Year Ended | |
|
|
through | |
|
| |
|
through | |
|
December 29, | |
|
December 29, | |
|
|
June 16, 2005 (I) | |
|
Acquisition (II) | |
|
Labor (III) | |
|
June 16, 2005 | |
|
2005(1)(2) | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(restated) | |
|
|
|
|
(Dollars in millions, except per share amounts) | |
Net sales(3)
|
|
$ |
|
|
|
$ |
1,165.3 |
|
|
$ |
|
|
|
$ |
1,165.3 |
|
|
$ |
1,207.6 |
|
|
$ |
2,372.9 |
|
Cost of sales (Spirit Holdings)/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products transferred (Predecessor) |
|
|
1,163.9 |
|
|
|
(141.3 |
) |
|
|
(31.4 |
) |
|
|
991.2 |
|
|
|
1,056.4 |
|
|
|
2,047.6 |
|
Provision of energy services, net
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
(0.2 |
) |
SG&A, R&D, other period costs(4)
|
|
|
90.7 |
|
|
|
97.9 |
|
|
|
|
|
|
|
188.6 |
|
|
|
219.0 |
|
|
|
407.6 |
|
Operating income (loss)
|
|
|
(1,254.4 |
) |
|
|
1,208.7 |
|
|
|
31.4 |
|
|
|
(14.3 |
) |
|
|
(67.8 |
) |
|
|
(82.1 |
) |
Interest expense and financing fee amortization
|
|
|
|
|
|
|
(19.9 |
) |
|
|
|
|
|
|
(19.9 |
) |
|
|
(25.5 |
) |
|
|
(45.4 |
) |
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.4 |
|
|
|
15.4 |
|
Other income, net
|
|
|
|
|
|
|
8.2 |
|
|
|
|
|
|
|
8.2 |
|
|
|
1.3 |
|
|
|
9.5 |
|
Provision for income taxes
|
|
|
|
|
|
|
(17.4 |
) |
|
|
|
|
|
|
(17.4 |
) |
|
|
(13.7 |
) |
|
|
(31.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(1,254.4 |
) |
|
$ |
1,179.6 |
|
|
$ |
31.4 |
|
|
$ |
(43.4 |
) |
|
$ |
(90.3 |
) |
|
$ |
(133.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
(0.80 |
) |
|
$ |
(1.01 |
) |
Shares used in per share calculation, basic
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
113.5 |
|
|
|
132.6 |
|
Net loss per share, diluted
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
(0.80 |
) |
|
$ |
(1.01 |
) |
Shares used in per share calculation, diluted
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
113.5 |
|
|
|
132.6 |
|
|
|
(1) |
Spirit Holdings was formed on February 7, 2005 as a holding
company of Spirit. Spirits operations commenced on
June 17, 2005, following the closing of the Boeing
Acquisition. |
|
(2) |
See Note 2 of our restated consolidated financial
statements for further information regarding the restatement. |
|
(3) |
For purposes of the Pro Forma Net Sales adjustment for the
period from January 1, 2005 through June 16, 2005,
sales were recorded upon the transfer of airplane units to
Boeing. After the Boeing Acquisition, we adopted the use of
contract accounting for profit recognition. The pro forma
statement of operations data presented for the period from
January 1, 2005 through June 16, 2005 does not include
an adjustment to convert Boeing Wichitas historical
accounting methodology to contract accounting. |
|
(4) |
Included in actual SG&A, R&D, other period costs is the
non-cash stock compensation charge of $22.1 million for the
period ended June 16, 2005 and $34.7 million for the
period from February 7, 2005 through December 29, 2005. |
See notes to the unaudited pro forma consolidated statement of
operations.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Adjustment for the | |
|
|
|
|
Spirit Holdings Pro | |
|
Offering Transactions Period | |
|
Pro Forma as Adjusted | |
|
|
Forma Year Ended | |
|
From January 1, 2005 through | |
|
Year Ended | |
|
|
December 29, 2005(a) | |
|
December 29, 2005(b) | |
|
December 29, 2005 | |
|
|
| |
|
| |
|
| |
Net sales
|
|
$ |
2,372.9 |
|
|
$ |
|
|
|
$ |
2,372.9 |
|
Cost of sales/products transferred
|
|
|
2,047.4 |
|
|
|
|
|
|
|
2,047.4 |
|
SG&A, R&D, other period costs
|
|
|
407.6 |
|
|
|
(2.0 |
)(c) |
|
|
405.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(82.1 |
) |
|
|
2.0 |
|
|
|
(80.1 |
) |
Interest expense and financing fee amortization
|
|
|
(45.4 |
) |
|
|
7.1 |
(d) |
|
|
(38.3 |
) |
Interest income
|
|
|
15.4 |
|
|
|
|
|
|
|
15.4 |
|
Other income, net
|
|
|
9.5 |
|
|
|
|
|
|
|
9.5 |
|
Provision for (recovery of) income taxes
|
|
|
(31.1 |
) |
|
|
|
|
|
|
(31.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(133.7 |
) |
|
$ |
9.1 |
|
|
$ |
(124.6 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic
|
|
$ |
(1.01 |
) |
|
|
|
|
|
$ |
(0.94 |
)(e) |
Shares used in per share calculation, basic
|
|
|
132.6 |
|
|
|
|
|
|
|
132.6 |
|
Net income (loss) per share, diluted
|
|
$ |
(1.01 |
) |
|
|
|
|
|
$ |
(0.94 |
)(e) |
Shares used in per share calculation, diluted
|
|
|
132.6 |
|
|
|
|
|
|
|
132.6 |
|
|
|
(a) |
Includes the Predecessor pro forma adjustments for the Boeing
Acquisition and Labor for the period from January 1, 2005
through June 16, 2005. |
|
|
(b) |
Costs associated with the offering that are excluded from the
pro forma income statement due to their non-recurring nature: |
|
|
|
|
|
|
Stock compensation charge for Union Equity Participation Plan
|
|
$ |
(270.2 |
) |
Termination of intercompany agreement with Onex Partners
Manager, L.P.
|
|
|
(4.0 |
) |
Writeoff of deferred financing fees proportionate to debt
prepayment
|
|
|
(2.0 |
) |
Writeoff of Boeing delayed draw credit facility (see discussion
in Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources)
|
|
|
(2.5 |
) |
|
|
|
|
|
Total non-recurring adjustments
|
|
$ |
(278.7 |
) |
|
|
(c) |
The pro forma adjustment to SG&A, R&D, other period
costs represents a service fee of $2.0 million for the
period ended December 29, 2005 that will not be incurred by
the Company after termination of the outstanding intercompany
agreement with Onex Partners Manager, L.P. |
|
|
(d) |
The pro forma adjustment to Interest expense reflects a $4.0
million interest expense savings associated with the repayment
of approximately $100 million of Term Loan B under the
Senior Secured Credit Facilities (assuming interest at LIBOR
plus applicable margin, as described in Use of
Proceeds). In addition, the interest expense adjustment
reflects the elimination of the structure under which Spirit
borrows from an indirect subsidiary of Onex Wind, as outlined in
Certain Relationships and Related Party
Transactions Other Related Party Transactions
and Business Relationships. This adjustment also reflects
$0.3 million of deferred financing fees that have been
written off proportionate to the debt prepayment. |
|
|
(e) |
Included in the Net income (loss) per share calculations are the
10,416,667 shares from this offering and the
5,006,829 shares for the Union Equity Participation Plan,
both assumed to have been issued. |
See notes to the unaudited pro forma consolidated statement of
operations.
40
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS DATA
Set forth below are notes that describe the assumptions
underlying the adjustments to the pro forma consolidated
statement of operations relating to the Boeing Acquisition.
(I) Presentation of Historical Audited Statement of
Operations Data for the Period from January 1, 2005 through
June 16, 2005
|
|
|
The historical financial data is presented to reflect the
operation of Boeing Wichita as a cost center of BCA, not a
separate legal entity. Historically, Boeing Wichita was an
internal supplier of parts and assemblies for the B737, B747,
B757, B767 and B777 airplane programs of BCA, with few sales to
third party customers. Boeing Wichita included the manufacturing
operations of BCA located in Wichita, Kansas; Tulsa, Oklahoma
and McAlester, Oklahoma along with certain shared assets and
operations of Boeings Shared Services Group. This
historical financial information reflects the actual financial
statements of Boeing Wichita. Certain amounts have been
allocated from Boeings consolidated financial statements. |
|
|
Pursuant to the Asset Purchase Agreement, Spirit acquired Boeing
Wichita (including the assumption of certain liabilities).
Boeing Wichita is the predecessor entity of Spirit Holdings for
the periods prior to the Boeing Acquisition. The historical
financial statements for the period from January 1, 2005
through June 16, 2005 present the associated historical
assets, liabilities and operating costs of Boeing Wichita. |
|
|
Since Boeing Wichita was operated as a cost center, costs
incurred and allocated to Boeing Wichita were absorbed by BCA
and revenues were not recorded in Boeing Wichitas
historical financial statements. Cost of products transferred
includes manufacturing labor, material and non-labor and site
overhead costs. Fringe benefit costs are allocated to the cost
of products transferred through the fringe rate as a percentage
of labor dollars. Fringe costs include elements such as
vacation, holiday, sick leave, medical, pension and
postretirement medical, as described in the notes to our
historical financial statements. Costs administered by Boeing
are not allocated to the cost of products transferred. |
|
|
Transactions with Boeing were conducted on a non-cash basis, and
generally involved performance under intra-company arrangements
between Boeing Wichita and Boeing. |
|
|
Certain costs were incurred by Boeing on behalf of Boeing
Wichita. To the extent practical, these costs were discretely
transferred to Boeing Wichita, but in some cases, an allocation
methodology was used to transfer the costs to Boeing Wichita.
Management believes that these allocations are reasonable, but
may not be indicative of costs that would have been incurred had
Boeing Wichita been operated on a stand alone basis. These costs
fall into the following three major categories and all such
costs have been included in Boeing Wichitas historical
financial statements. |
|
|
First, the historical financial statements include costs
directly related to the activities of Boeing Wichita, which were
incurred by Boeing and transferred to Boeing Wichita for
administrative purposes, including payroll, accounts payable,
travel and employee benefits such as pension costs, and medical
coverage. These costs are primarily included in cost of products
transferred and the balance is included in SG&A, R&D and
other period costs. |
|
|
Second, costs incurred by Boeing on behalf of Boeing Wichita
represented the purchase of parts from Boeing that are
incorporated into the products of Boeing Wichita. The cost of
these parts is treated the same as the cost of parts acquired
from third parties and is included in cost of products
transferred. |
|
|
Third, costs incurred by Boeing on behalf of Boeing Wichita are
either general and administrative or relate to support services
provided by Boeing for the benefit of Boeing Wichita. These
costs, except for those identified as general and
administrative, are included in cost of products transferred. |
41
(II) Boeing Acquisition
|
|
|
The Boeing Acquisition represents the impact of the following
items: |
|
|
(i) Net Sales. |
|
|
|
The adjustments to produce total net sales are outlined as
follows: |
|
|
|
|
|
|
|
|
1/1/2005- | |
|
|
6/16/2005 | |
|
|
| |
Program Revenue at Supply Agreement Prices(1)
|
|
$ |
1,073.3 |
|
Other Sales at Supply Agreement Prices(1)
|
|
|
47.4 |
|
B787 Revenue(1)
|
|
|
21.3 |
|
Spares Sales at Supply Agreement Prices(1)
|
|
|
33.7 |
|
Amortization of Intangibles and Depreciation of Tooling Related
to Exclusivity Agreement(2)
|
|
|
(10.4 |
) |
|
|
|
|
|
Total Revenue
|
|
$ |
1,165.3 |
|
|
|
|
|
|
|
(1) |
This adjustment reflects the application of the
contractually-determined pricing from our supply agreements with
Boeing to the actual products and services transferred to Boeing
during the period from January 1, 2005 through
June 16, 2005. See Business Our
Relationship with Boeing. |
|
(2) |
This adjustment reflects the reduction of revenue related to the
amortization of intangibles and tooling depreciation in
accordance with Emerging Issues Task Force, or EITF,
No. 01-3, Accounting in a Business Combination for
Deferred Revenue of an Acquiree and EITF No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(including a Reseller of the Vendors Products). |
|
|
|
(ii) Cost of Sales/ Costs of Products Transferred. |
|
|
|
The adjustments to cost of products transferred are as follows: |
|
|
|
|
|
|
|
|
1/1/2005- | |
|
|
6/16/2005 | |
|
|
| |
B787 Reclassification(1)
|
|
$ |
(56.2 |
) |
G&A Reclassification(2)
|
|
|
(38.3 |
) |
Capitalized Tooling(3)
|
|
|
(18.5 |
) |
Depreciation Expense(4)
|
|
|
(28.3 |
) |
|
|
|
|
|
Total
|
|
$ |
(141.3 |
) |
|
|
|
|
|
|
(1) |
Cost of products transferred has been reduced by
$56.2 million to reflect the reclassification of certain
B787-related cost of products transferred as SG&A to conform
to Spirits classification. Historically, Boeing Wichita
included these expenses in cost of products transferred. Spirit
classifies these expenses as SG&A. |
|
(2) |
Cost of products transferred has been reduced by
$38.3 million to eliminate costs associated with
accounting, human resources, payroll, security and other period
expenses that were historically recorded by Boeing Wichita as a
cost of products transferred. These costs were reclassified as
SG&A to conform to Spirits classification. |
|
(3) |
Cost of products transferred has been reduced by
$18.5 million to eliminate the costs associated with
tooling expenses. Historically, Boeing Wichita expensed certain
tooling assets. Spirit capitalized these tooling assets after
the closing of the Boeing Acquisition. |
|
(4) |
Cost of products transferred was reduced for depreciation
expense of $28.3 million due to the lower asset values
resulting from the Boeing Acquisition, including the recognition
and allocation of negative goodwill. |
42
|
|
|
(iii) SG&A, R&D and Other Period Costs. |
|
|
|
SG&A, R&D and other period costs are outlined as follows: |
|
|
|
|
|
|
|
|
1/1/2005- | |
|
|
6/16/2005 | |
|
|
| |
B787 Reclassification(1)
|
|
$ |
56.2 |
|
SG&A Reclassification(2)
|
|
|
38.3 |
|
Other(3)
|
|
|
3.4 |
|
|
|
|
|
|
Total
|
|
$ |
97.9 |
|
|
|
|
|
|
|
(1) |
SG&A has been increased by $56.2 million to reflect the
reclassification of certain B787-related cost of products
transferred as SG&A to conform to Spirits
classification of costs. Historically, Boeing Wichita included
these costs in cost of products transferred. Spirit classifies
these expenses as SG&A. |
|
(2) |
SG&A has been adjusted by $38.3 million to add costs
associated with accounting, human resources, payroll, security
and other period costs that were reclassified from costs of
products transferred to SG&A to conform to Spirits
classification of costs. |
|
(3) |
Other period costs were increased by $3.4 million,
including (a) amortization of favorable leasehold interest
and other identified intangibles resulting from the Boeing
Acquisition and (b) the Onex service fee ($2 million
on an annual basis, prorated for five and a half months). |
|
|
|
(iv) Interest Expense and Financing Fee
Amortization. The pro forma adjustments to interest expense
and financing fee amortization are based on the borrowings to
finance the Boeing Acquisition as presented below: |
|
|
|
|
|
|
|
1/1/2005- | |
|
|
6/16/2005 | |
|
|
| |
Term Loan B(1)
|
|
$ |
17.5 |
|
Amortization of Loan Fees(2)
|
|
|
2.4 |
|
|
|
|
|
Interest Expense and Financing Fee Amortization
|
|
$ |
19.9 |
|
|
|
|
|
|
|
(1) |
The Term Loan Bs interest rate was determined as
LIBOR plus 225 basis points. The following rates were used
for calculating the interest for the Term Loan B during the
months set forth below: |
|
|
|
|
|
|
|
Interest | |
|
|
Rate | |
|
|
| |
January 2005
|
|
|
5.00 |
% |
February 2005
|
|
|
5.17 |
% |
March 2005
|
|
|
5.37 |
% |
April 2005
|
|
|
5.46 |
% |
May 2005
|
|
|
5.59 |
% |
June 2005
|
|
|
5.68 |
% |
|
|
|
The effect of a 0.125% change in the interest rate on the Term
Loan B would increase or decrease annual pro forma interest
expense by $0.8 million. |
|
|
(2) |
Deferred financing amortization expense for the period from
January 1, 2005 through June 16, 2005 is based on
monthly amortization of deferred financing fees incurred due to
the debt borrowed to fund the Boeing Acquisition. |
|
|
|
(v) Other Income and Expense, Net. Other income and
expense, net has been adjusted to account for the estimated
accretion income related to Spirits non-interest bearing
long-term receivable from Boeing in the aggregate amount of
$277 million payable in 2007, 2008 and 2009 attributable to
the acquisition of title of various tooling and other capital
assets. |
43
|
|
|
(vi) Income Taxes. The pro forma tax adjustment of
$17.4 million to income taxes reflects the tax effect of
the pro forma adjustment to operating income. Tax expense was
based on the following assumptions: (1) all actual
temporary and permanent book versus tax differences as
recognized by Spirit Holdings in the post-Boeing Acquisition
period in 2005 were applied to the pre-Boeing Acquisition period
in 2005 and (2) 100% of the actual valuation allowance
recorded on net deferred tax assets utilized by Spirit in the
post-Boeing Acquisition period in 2005 was assumed to be
consistent with valuation allowance on net deferred tax assets
for the pre-Boeing Acquisition period in 2005. |
(III) Labor Costs
|
|
|
New union wage rates took effect upon, and pension, health and
welfare benefits, post-retirement and incentive plans were
adjusted as a result of, the Boeing Acquisition. The historical
costs incurred have been adjusted by $11.6 million as a
result of wage changes and $19.8 million as a result of
fringe rate changes. The wage reduction adjustment was
calculated using the average number of union employees as of
each of January 1, 2005 and June 16, 2005 and the
difference between the actual wage rates in effect as of each of
January 1, 2005 and June 30, 2005. |
|
|
Actual fringe rates as a percentage of labor incurred by us for
the period from June 17, 2005 through December 29,
2005 were applied to the lower base labor cost to calculate the
fringe rate adjustment. |
44
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth our selected consolidated
financial data for each of the periods indicated. The periods
prior to and including June 16, 2005 reflect data of our
Predecessor for financial accounting purposes. The periods
beginning June 17, 2005 reflect our financial data after
the Boeing Acquisition. Financial data for the year ended
December 31, 2001 (Predecessor), the year ended
December 31, 2002 (Predecessor), the year ended
December 31, 2003 (Predecessor), the year ended
December 31, 2004 (Predecessor), the period from
January 1, 2005 through June 16, 2005 (Predecessor)
and the period from June 17, 2005 through December 29,
2005 (Spirit Holdings) are derived from the audited consolidated
financial statements of Predecessor or the restated audited
consolidated financial statements of Spirit Holdings, as
applicable. The audited consolidated financial statements for
the year ended December 31, 2003 (Predecessor), the year
ended December 31, 2004 (Predecessor), the period from
January 1, 2005 through June 16, 2005 (Predecessor)
and the period from June 17, 2005 through December 29,
2005 (Spirit Holdings) are included in this prospectus.
Financial data as of and for the nine months ended
September 28, 2006 (Spirit Holdings) are derived from the
unaudited consolidated financial statements of Spirit Holdings,
included in this prospectus. Interim results are not necessarily
indicative of the results to be expected for the entire fiscal
year. You should read the information presented below in
conjunction with Capitalization,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our combined and
consolidated financial statements and related notes contained
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spirit Holdings | |
|
|
Predecessor | |
|
|
| |
|
|
| |
|
|
|
|
Period from | |
|
|
Period from | |
|
|
|
|
Nine Months | |
|
June 17, 2005 | |
|
|
January 1, | |
|
Fiscal Year Ended | |
|
|
Ended | |
|
through | |
|
|
2005 through | |
|
| |
|
|
September 28, | |
|
December 29, | |
|
|
June 16, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005(1) | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(restated) | |
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) | |
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
2,355.9 |
|
|
$ |
1,207.6 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Cost of sales
|
|
$ |
1,926.7 |
|
|
|
1,056.4 |
|
|
|
$ |
1,163.9 |
|
|
$ |
2,074.3 |
|
|
$ |
2,063.9 |
|
|
$ |
2,350.7 |
|
|
$ |
2,945.0 |
|
Selling, general & administrative expenses(2)
|
|
$ |
160.0 |
|
|
|
140.7 |
|
|
|
|
79.7 |
|
|
|
155.1 |
|
|
|
116.7 |
|
|
|
135.1 |
|
|
|
138.1 |
|
Research & development
|
|
$ |
85.1 |
|
|
|
78.3 |
|
|
|
|
11.0 |
|
|
|
18.1 |
|
|
|
17.3 |
|
|
|
18.5 |
|
|
|
21.9 |
|
Special charges(3)
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.3 |
|
|
|
|
|
|
|
49.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
184.1 |
|
|
|
(67.8 |
) |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Interest expense and financing fee amortization
|
|
$ |
(34.8 |
) |
|
|
(25.5 |
) |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Interest income
|
|
$ |
20.9 |
|
|
|
15.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
$ |
3.6 |
|
|
|
1.3 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$ |
173.8 |
|
|
|
(76.6 |
) |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Provision for income taxes
|
|
$ |
(87.6 |
) |
|
|
(13.7 |
) |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
86.2 |
|
|
$ |
(90.3 |
) |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic
|
|
$ |
0.76 |
|
|
$ |
(0.80 |
) |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Shares used in per share calculation, basic
|
|
|
113.9 |
|
|
|
113.5 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Net income (loss) per share, diluted
|
|
$ |
0.71 |
|
|
$ |
(0.80 |
) |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Shares used in per share calculation, diluted
|
|
|
121.7 |
|
|
|
113.5 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by (used in) operating activities
|
|
$ |
325.7 |
|
|
$ |
223.8 |
|
|
|
$ |
(1,177.8 |
) |
|
$ |
(2,164.9 |
) |
|
$ |
(2,081.8 |
) |
|
$ |
(2,281.8 |
) |
|
$ |
(3,034.3 |
) |
Cash flow used in investing activities
|
|
$ |
(365.7 |
) |
|
$ |
(1,030.3 |
) |
|
|
$ |
(48.2 |
) |
|
$ |
(54.4 |
) |
|
$ |
(43.3 |
) |
|
$ |
(50.4 |
) |
|
$ |
(61.3 |
) |
Cash flow provided by (used in) financing activities
|
|
$ |
(12.5 |
) |
|
$ |
1,047.8 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Capital expenditures
|
|
$ |
(233.4 |
) |
|
$ |
(144.6 |
) |
|
|
$ |
(48.2 |
) |
|
$ |
(54.4 |
) |
|
$ |
(43.3 |
) |
|
$ |
(50.4 |
) |
|
$ |
(61.3 |
) |
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spirit Holdings | |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Predecessor | |
|
|
As of | |
|
|
| |
|
|
| |
|
|
|
|
|
Nine Months | |
|
|
|
|
As of | |
|
|
Ended | |
|
|
|
|
| |
|
|
September 28, | |
|
December 29, | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005(1) | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(restated) | |
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & cash equivalents(4)
|
|
$ |
189.0 |
|
|
$ |
241.3 |
|
|
|
$ |
3.0 |
|
|
$ |
3.6 |
|
|
$ |
1.3 |
|
|
$ |
1.7 |
|
Accounts receivable, net
|
|
$ |
215.7 |
|
|
$ |
98.8 |
|
|
|
$ |
2.0 |
|
|
$ |
2.0 |
|
|
$ |
1.6 |
|
|
$ |
1.6 |
|
Inventories
|
|
$ |
731.7 |
|
|
$ |
510.7 |
|
|
|
$ |
524.6 |
|
|
$ |
529.4 |
|
|
$ |
535.1 |
|
|
$ |
683.9 |
|
Property, plant & equipment, net
|
|
$ |
716.7 |
|
|
$ |
518.8 |
|
|
|
$ |
511.0 |
|
|
$ |
555.3 |
|
|
$ |
611.8 |
|
|
$ |
667.1 |
|
Total assets
|
|
$ |
2,335.4 |
|
|
$ |
1,656.6 |
|
|
|
$ |
1,043.6 |
|
|
$ |
1,093.3 |
|
|
$ |
1,153.1 |
|
|
$ |
1,358.1 |
|
Total debt
|
|
$ |
722.5 |
|
|
$ |
721.6 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Long-term debt
|
|
$ |
699.3 |
|
|
$ |
710.0 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Shareholders equity
|
|
$ |
471.1 |
|
|
$ |
325.8 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
(1) |
See Note 2 of the restated consolidated financial
statements for further information regarding the restatement. |
|
(2) |
Includes non-cash stock compensation expenses of
$40.8 million, $34.7 million, $22.1 million,
$23.3 million, $12.9 million, $9.1 million and
$7.2 million for the respective periods starting with the
nine months ended September 28, 2006. |
|
(3) |
In 2001, a special charge was allocable to Boeing Wichita in
connection with the terrorist attacks of September 11,
2001. In 2003, a charge was allocable to Boeing Wichita in
connection with the close-out of the Boeing B757 program. |
|
(4) |
Prior to the Boeing Acquisition, the Predecessor was part of
Boeings cash management system, and consequently, had no
separate cash balance. Therefore, at December 31, 2004,
December 31, 2003, December 31, 2002 and
December 31, 2001, the Predecessor had negligible cash on
the balance sheet. |
46
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial
condition and results of operations in conjunction with the
audited restated consolidated financial statements, the notes to
the audited restated consolidated financial statements and the
Selected Consolidated Financial Information and Other
Data appearing elsewhere in this prospectus. This
discussion covers periods before and after the closing of the
Boeing Acquisition. The discussion and analysis of historical
periods prior to the Boeing Acquisition do not reflect the
impact of the Boeing Acquisition. In addition, this discussion
contains forward-looking statements that must be understood in
the context of numerous risks and uncertainties, including, but
not limited to, those described in the Risk Factors
section of this prospectus. See Cautionary Statements
Regarding Forward-Looking Statements. Our results may
differ materially from those anticipated in any forward-looking
statements.
Restatement
In conjunction with this offering, we and our board of directors
reassessed the fair market values ascribed for financial
accounting purposes to common stock purchased by management as
well as restricted stock awards issued to employees under our
Executive Incentive, Short Term Incentive and Long Term
Incentive Plans and to directors under our Director Stock Plan
in fiscal 2005 and through June 29, 2006. We adjusted the
fair values ascribed to these equity awards for financial
accounting purposes to the fair value of our underlying equity
using appraisals and valuations of the underlying net assets and
other data necessary to reasonably estimate such value on a per
share basis at the various grant dates. We then calculated
additional stock compensation expense necessary to be recognized
in accordance with SFAS No. 123(R) as a result of this
change in valuation. Accordingly, we have restated our financial
statements as of June 29, 2006 and December 29, 2005
and for the periods then ended to reflect the additional stock
compensation expense and related tax impact had these equity
awards been recorded at their currently estimated fair values.
We also recorded the entries that had previously remained as
unadjusted differences at December 29, 2005 resulting in a
discrete non-cash charge to pre-tax earnings of
$0.8 million for the period from inception
(February 7, 2005) through December 29, 2005 and a
non-cash increase to pre-tax earnings of $1.2 million for
the six-month period ending June 29, 2006. The fair market
value reassessment portion of the restatement resulted in an
additional non-cash charge to Selling, general and
administrative expense of $30.5 million, and a
corresponding increase in Net loss of $30.5 million for the
period from inception (February 7, 2005) through
December 29, 2005 and an additional non-cash charge to
Selling, general and administrative expense of
$19.0 million, an increase in Provision for income taxes of
$5.0 million and a reduction of Net income by
$24.0 million for the six-month period ending June 29,
2006. Additional information regarding the effect of the
restatement to reflect these changes is included in Note 2
to our restated consolidated financial statements included in
this prospectus.
The following table presents the estimated effect of the change
in valuation on stock compensation expense by year both
historically and for future periods for awards issued prior to
June 29, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from | |
|
|
|
Period from | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 17, 2005 | |
|
Period from | |
|
June 30, 2006 | |
|
|
|
|
|
|
through | |
|
December 30, | |
|
through | |
|
For the years ending December 31, | |
|
|
|
|
December 29, | |
|
2005 through | |
|
December 31, | |
|
| |
|
|
|
|
2005 | |
|
June 29, 2006 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
As previously reported(1)
|
|
$ |
4.2 |
|
|
$ |
7.3 |
|
|
$ |
7.1 |
|
|
$ |
4.1 |
|
|
$ |
2.5 |
|
|
$ |
1.3 |
|
|
$ |
0.4 |
|
|
$ |
|
|
|
$ |
26.9 |
|
As restated
|
|
|
34.7 |
|
|
|
26.3 |
|
|
|
28.0 |
|
|
|
25.5 |
|
|
|
14.6 |
|
|
|
8.0 |
|
|
|
2.9 |
|
|
|
0.2 |
|
|
|
140.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference
|
|
$ |
30.5 |
|
|
$ |
19.0 |
|
|
$ |
20.9 |
|
|
$ |
21.4 |
|
|
$ |
12.1 |
|
|
$ |
6.7 |
|
|
$ |
2.5 |
|
|
$ |
0.2 |
|
|
$ |
113.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
For the periods ending after June 29, 2006, the presented
figures represent the estimated future spread of the original
calculated fair values. The values presented for the period from
June 17, 2005 through December 29, 2005 and the period
from December 30, 2005 through June 29, 2006 are the
amounts that were previously presented in the statements of cash
flows. |
47
Overview
We are the largest independent
non-OEM designer and
manufacturer of aerostructures in the world. Aerostructures are
structural components, such as fuselages, propulsion systems and
wing systems for commercial, military and business jet aircraft.
We derive our revenues primarily through long-term supply
agreements with Boeing and Airbus. For the nine months ended
September 28, 2006, we generated net revenues of
approximately $2,356 million and net income of
approximately $86 million. For the three months ended
September 28, 2006, we generated revenues of approximately
$830 million and net income of approximately
$34 million.
We are organized into three principal reporting segments:
(1) Fuselage Systems, which include the forward, mid-and
rear fuselage sections, (2) Propulsion Systems, which
include nacelles, struts/pylons and engine structural components
and (3) Wing Systems, which include wings, wing components
and flight control surfaces. All other activities fall within
the All Other segment, principally made up of sundry sales of
miscellaneous services and sales of natural gas through a
tenancy-in-common with other Wichita companies. Fuselage
Systems, Propulsion Systems, Wing Systems and All Other
represented approximately 49%, 27%, 23% and 1%, respectively, of
our revenues for the quarter ended September 28, 2006.
Market Trends
The financial health of the commercial airline industry has a
direct and significant effect on our commercial aircraft
programs. The commercial airline industry is impacted by the
strength of the global economy and geo-political events around
the world. The commercial airline industry suffered after the
terrorist attacks of September 11, 2001 and the subsequent
downturn in the global economy, the SARS epidemic in 2002 and,
more recently, from rising fuel prices and the conflicts in the
Middle East. In the last two years, the industry has shown signs
of strengthening with increases in global revenue passenger
miles (RPMs) driven in large part by deregulation and economic
growth in Asia and the Middle East, although rising fuel prices,
conflicts in the Middle East, major U.S. airline financial
distress and the risk of additional terrorist activity have
tempered the recovery.
Both Boeing and Airbus experienced record airplane orders in
2005. As reported by Boeing and Airbus as of September 30,
2006, they had a combined backlog of 4,294 commercial aircraft,
which has grown from a backlog of 3,968 as of December 31,
2005. The current backlog represents approximately
5.2 years of production at expected 2006 delivery rates.
Many industry experts believe that the strength of commercial
orders will continue through the next several years, though they
are not expected to approach the 2005 record levels. As a
result, Boeing and Airbus have announced increased production
rates, including on the B737, B777 and A320 models, on which we
have significant work content. The following table sets forth
the historical deliveries of Boeing and Airbus and their
announced delivery expectations for 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Boeing
|
|
|
527 |
|
|
|
381 |
|
|
|
281 |
|
|
|
285 |
|
|
|
290 |
|
|
|
395 |
|
Airbus
|
|
|
325 |
|
|
|
303 |
|
|
|
305 |
|
|
|
320 |
|
|
|
378 |
|
|
|
430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
852 |
|
|
|
684 |
|
|
|
586 |
|
|
|
605 |
|
|
|
668 |
|
|
|
825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boeings deliveries decreased by approximately 28% in 2002
and by approximately another 26% in 2003. Boeings
deliveries rose slightly in each of 2004 and 2005 and are
expected to rise by approximately 36% in 2006. Airbus
experienced more stable delivery rates from 2001 through 2004.
Airbus deliveries then rose by approximately 18% in 2005 and are
expected to rise by approximately another 14% in 2006. Total
deliveries for Boeing and Airbus decreased by approximately 20%
and 14% in 2002 and 2003, respectively. Total deliveries
increased by approximately 3% and 10% in 2004 and 2005,
respectively, and are expected to grow by approximately an
additional 24% in 2006.
Although the commercial aerospace industry is in a cycle of
increased production, our business could be adversely affected
by significant changes in the U.S. or global economy.
Historically, aircraft travel, as measured by global RPMs,
generally correlates to economic conditions and a reduction in
aircraft travel
48
could result in a decrease in new orders, or even cancellation
of existing orders, for new or replacement aircraft, which in
turn could adversely affect our business. Part of our strategy
during this upturn is to work on diversifying our customer base
and reducing our fixed to variable cost ratio so we have
downside protection in this cyclical market.
In recent years, Boeing has announced the possibility of
terminating its B767 program. Although B767 orders and backlog
increased in 2005, Boeing could terminate the B767 program
unless commercial airlines order additional aircraft in
sufficient quantities to justify continued production or the
U.S. Air Force launches a tanker program using the B767 as
a platform. Boeing has announced that it is reasonably possible
that a decision to end production of the B767 program could be
made in 2007. Although we cannot predict the likelihood of
Boeing terminating production of the B767 program, we do not
believe that termination of the B767 program would have a
material impact on our results of operations, balance sheet or
cash flows as it does not comprise a significant portion of our
business.
The Boeing Acquisition and Related Transactions
In December 2004 and February 2005, an investor group led by
Onex Partners LP and Onex Corporation formed the companies of
Spirit and Spirit Holdings, respectively, for the purpose of
acquiring Boeing Wichita. On June 16, 2005, Spirit acquired
Boeing Wichita for a cash purchase price of approximately
$904 million and the assumption of certain liabilities,
pursuant to the Asset Purchase Agreement. Based on final working
capital and other factors specified in the Asset Purchase
Agreement, a purchase price adjustment of $19 million was
paid to Spirit in the fourth quarter of 2005. The acquisition
was financed through borrowings of a $700 million Term
Loan B under our Senior Secured Credit Facilities and an
equity investment of $375 million. Proceeds from the Term
Loan B were used to consummate the Boeing Acquisition and
pay fees and expenses incurred in connection therewith and for
working capital. Our senior secured credit facilities also
include a $175 million revolving credit facility, none of
which was borrowed at the closing date of the Boeing Acquisition
and $0.3 million of which is outstanding in the form of
letters of credit as of September 28, 2006. In connection
with the Boeing Acquisition, Boeing is required to make future
payments to Spirit in amounts of $45.5 million,
$116.1 million and $115.4 million in 2007, 2008 and
2009, respectively, in payment for various tooling and capital
assets built or purchased by Spirit. Spirit will retain
unimpeded usage rights and custody of these assets for their
remaining useful lives without compensation to Boeing. Boeing
also contributed $30 million to us to partially offset our
costs to transition to a stand alone company. The fair value of
the various assets acquired and liabilities assumed were
determined by management based on valuations performed by an
independent third party. The fair value of the net assets
acquired exceeded the total consideration for the acquisition by
approximately $739.1 million. The excess (negative
goodwill) was allocated on a pro rata basis to long-lived assets.
In connection with the Boeing Acquisition, we entered into a
long-term supply agreement under which we are Boeings
exclusive supplier for substantially all of the products and
services that Boeing Wichita provided to Boeing prior to the
Boeing Acquisition. The supply contract is a requirements
contract covering certain products such as fuselages, struts,
wing components and nacelles for Boeing B737, B747, B767 and
B777 commercial aircraft programs for the life of these
programs, including any commercial derivative models. Pricing
for existing products is contractually set through May 2013,
with average prices decreasing at higher volume levels and
increasing at lower volume levels. We also entered into a
long-term supply agreement for Boeings new B787 platform
covering the life of this platform, including commercial
derivatives. Under this contract, we will be Boeings
exclusive supplier for the forward fuselage, fixed and moveable
leading wing edges and struts for the B787. Pricing for these
products on the B787-8
model is generally set through 2021, with prices decreasing as
cumulative production volume levels are achieved over time.
Cost Savings
In connection with and since the Boeing Acquisition, Spirit was
able to achieve substantial cost reductions by renegotiating
labor contracts, reducing pension and fringe benefit costs and
utilizing strategic sourcing to lower the cost of procuring raw
materials and certain internal processes. Below are
49
managements estimates of the average annual cost savings
resulting from these agreements negotiated following the Boeing
Acquisition.
Direct Labor. We implemented two significant cost
reduction initiatives in conjunction with the Boeing Acquisition
that lowered our direct labor costs. We hired 1,300 fewer people
than the predecessor had employed, which translates into
approximately $112 million of annual savings. Pursuant to
the terms of the Asset Purchase Agreement, we did not incur
severance obligations to former Boeing employees that we did not
hire. We were able to operate with fewer people due to higher
productivity among our remaining employees, favorable contract
terms, new work rules and realignment of business units.
Additionally, new union contracts provided for wage reductions
of 10%, on average, for our direct labor force. Since the Boeing
Acquisition, new employees required to support increasing
production levels have been hired at lower starting wage rates.
The new union contracts and changing mix of pre- and post-Boeing
Acquisition employees have resulted in approximately
$65 million in annual cost savings, assuming a constant
level of employees. The new union agreements provide for an
escalation of labor costs by approximately $20 million per
year, assuming a constant level of employees.
Pension and Other Benefits (Fringe). Cost reduction
initiatives related to the Boeing Acquisition have also lowered
our pension and other benefits (fringe) costs. We were able
to achieve substantial cost reductions by switching employee
retirement plans from defined benefit plans to defined
contribution plans and raising the required employee medical
plan contribution percentage. The resulting cost savings lowered
our fringe rate as a percentage of labor by five percentage
points, which translates into approximately $27 million of
annual savings, assuming a constant level of employees.
Subsequently, as of January 2006, we recognized further fringe
benefits reductions based on the results of our first six months
of operations, lowering our fringe rate as a percentage of labor
by a further 10 percentage points, or approximately
$59 million, on an annual basis. The major contributors to
this reduction were lower negotiated medical premiums from third
party providers as a result of experience and plan redesign,
hiring of Boeing retirees who are covered under Boeings
retiree medical plan, lower paid time off due to changing
seniority levels, as described above, further pension/retirement
reductions and improved workers compensation claims experience.
As a result of the adjustments recorded in June 2006 to reflect
the final pension asset transfer discussed in Note 3 within
the notes to our restated consolidated financial statements
under the heading Acquisition of Spirit, we expect
to realize additional annual savings of approximately
$30 million in the form of higher pension income and lower
depreciation and amortization expense.
As a result of the revaluation of the fair values ascribed to
common stock purchased by and granted to management and others,
we have recognized incremental non-cash stock compensation
charges of $30.5 million and $19.0 million for the
period from inception (February 7, 2005) through
December 29, 2005 and the six month period ending
June 29, 2006, respectively. See Note 2 to our
restated consolidated financial statements for additional
details.
Strategic Sourcing. In addition to cost reduction
initiatives implemented in connection with the Boeing
Acquisition, strategic sourcing has created additional average
annual savings of approximately $23 million over the
current estimated production quantity. These savings are
comprised of approximately $7 million from lower cost
structures associated with services that were provided by Boeing
such as housekeeping and security and $16 million of direct
material savings.
Union Equity Participation Plan Compensation Expense
We have established a Union Equity Participation Plan pursuant
to which we will issue stock appreciation rights tied to the
value of our class B common stock for the benefit of
certain of our union-represented employees. See
Business Employees. Upon the
consummation of this offering, based on an assumed initial
public offering price of $24.00 per share, the midpoint of
the range on the cover of this prospectus, the stock
appreciation rights will entitle the employees to receive a
total of approximately $270.2 million, in cash and/or
shares of class A common stock at our discretion, resulting
in a compensation expense to us of $270.2 million in the
period in which this offering is consummated.
50
Recent Events
Acquisition of BAE Aerostructures. On April 1, 2006,
through our wholly-owned subsidiary, Spirit Europe, we acquired
BAE Aerostructures for a cash purchase price of approximately
$145.7 million and the assumption of certain normal course
liabilities (including accounts payable of approximately $57.8
million). Spirit Europe manufactures leading and trailing wing
edges and other wing components for commercial aircraft programs
for Airbus and Boeing and produces various aerostructure
components for certain Raytheon business jets. The BAE
Acquisition provides us with a foundation to increase future
sales to Airbus, as Spirit Europe is a key supplier of wing and
flight control surfaces for the A320 platform, Airbus core
single aisle program, and of wing components for the A380
platform, one of Airbus most important new programs and
the worlds largest commercial passenger aircraft. Under
our supply agreements with Airbus, we supply most of our
products for the life of the aircraft program, including
commercial derivative models, with pricing determined through
2010. For the A380, we have a long-term supply contract with
Airbus that covers a fixed number of units.
Boeing Strike. On September 2, 2005, Boeing
experienced a strike during collective bargaining discussions
with the International Association of Machinists and Aerospace
Workers, or the IAM. At the onset of the strike, Boeing
implemented a
ship-in-place plan for
all Spirit-produced major components. During the
ship-in-place period,
we continued production at a reduced rate, but did not
physically deliver any products to Boeing, other than
miscellaneous spares and small components. We recognized revenue
on these ship-in-place
units consistent with contractual terms. During this time
period, we worked with our employees to reduce work weeks
instead of implementing layoffs and furloughs. After Boeing
reached a three-year
agreement with the IAM on September 29, 2005, Spirit and
Boeing worked together to return production to normal rates by
January 2006. The reduced production rates during and for a
period of time after the strike reduced Spirits revenue by
an estimated $172 million for the six and one-half months
ended December 29, 2005 and negatively impacted our
revenue, income and cash flows for the first quarter of 2006.
Basis of Presentation
Since the Boeing Acquisition was effective on June 17,
2005, the financial statements and subsidiary detail for prior
periods relate to its predecessor, the Wichita Division of BCA,
which we refer to as Boeing Wichita or the Predecessor, and are
presented on a carve-out basis. As a result, we believe that
these financial statements for the Predecessor are not
comparable to the financial statements for Spirit Holdings for
periods following the Boeing Acquisition, as described under the
heading Pre-Boeing Acquisition Results are
Not Comparable to Post-Boeing Acquisition Results.
Prior to the Boeing Acquisition. Prior to the completion
of the Boeing Acquisition, the Predecessor was a division of
Boeing and was not a separate legal entity. Historically, the
Predecessor functioned as an internal supplier of parts and
assemblies to Boeing aircraft programs and had very few sales to
third parties. It operated as a cost center within Boeing,
meaning that it recognized its cost of products manufactured for
BCA programs, but did not recognize any corresponding revenues
for those products. No intra-company pricing was established for
the parts and assemblies that the Predecessor supplied to
Boeing. Revenues from sales to third parties were insignificant,
consisting of less than $100,000 in each year from 2001 through
2004, and in the period from January 1, 2005 through the
closing date of the Boeing Acquisition. As a cost center, the
division operated under intra-company arrangements with Boeing,
with all transactions with Boeing conducted on a non-cash basis.
The Predecessor accumulated incurred costs and assigned a
per-finished item value to the airplane programs as completed
items were delivered to Boeings Puget Sound facilities for
final assembly.
Certain amounts included in the Predecessors financial
statements have been allocated from BCA and/or Boeing. Spirit
believes that these allocations are reasonable, but not
necessarily indicative of costs that would have been incurred by
Boeing Wichita had it operated as a stand alone business for the
same periods.
51
Statements of cash flows have not been presented for the
Predecessor because it did not maintain cash accounts and
participated in Boeings centralized cash management
systems and Boeing funded all of its cash requirements.
The Predecessors financial statements include both the
Wichita and Tulsa/ McAlester sites. All intercompany balances
and transactions involving the consolidating entities have been
eliminated in consolidation.
Post Boeing Acquisition. Since the Boeing Acquisition,
Spirit has operated as a stand alone entity with its own
accounting records. The restated consolidated financial
statements include Spirit Holdings, Spirit and its other
subsidiaries in accordance with Accounting Research
Bulletin No. 51, SFAS No. 94 and Financial Accounting
Standards Board, or FASB, Interpretation No. 46(R). All
intercompany balances and transactions have been eliminated in
consolidation.
Critical Accounting Policies
The following discussion and analysis of our financial condition
and results of operations is based upon our restated
consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these
financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to inventories, income taxes,
financing obligations, warranties, pensions and other
postretirement benefits and contingencies and litigation. We
base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Management
believes that the quality and reasonableness of our most
critical policies enable the fair presentation of our financial
position and results of operations. However, we caution you that
the sensitivity of financial statements to these methods,
assumptions and estimates could create materially different
results under different conditions or using different
assumptions.
The following are the most critical accounting policies of
Spirit Holdings, which are those that require managements
most subjective and complex judgments, requiring the use of
estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.
|
|
|
Revenue and Profit Recognition |
A significant portion of Spirits revenues are recognized
under long-term, volume-based pricing contracts, requiring
delivery of products over several years. Spirit recognizes
revenue under the contract method of accounting and records
sales and profits on each contract in accordance with the
percentage-of-completion
method of accounting, using the units of delivery method. We
follow the requirements of Statement of Position 81-1
(SOP 81-1), Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (the
contract method of accounting), using the cumulative
catch-up method in
accounting for revisions in estimates. Under the cumulative
catch-up method, the
impact of revisions in estimates is recognized immediately when
changes in estimated contract profitability become known.
A profit rate is estimated based on the difference between total
revenues and total costs of a contract. Total revenues at any
given time include actual historical revenues up to that time
plus future estimated revenues. Total costs at any given time
include actual historical costs up to that time plus future
estimated costs. Estimated revenues include negotiated or
expected values for units delivered, estimates of probable
recoveries asserted against the customer for changes in
specifications, price adjustments for contract and volume
changes, and escalation. Costs include the estimated cost of
certain pre-production effort (including nonrecurring
engineering and planning subsequent to completion of final
design) plus the estimated cost of manufacturing a specified
number of production units. Estimates take into account
assumptions relative to future labor performance and rates, and
projections relative to material and overhead costs including
expected learning curve cost reductions over the
term of the contract. The specified number of production units
used to establish the profit margin is predicated upon
contractual
52
terms and market forecasts, and for Boeing contracts, is closely
aligned with Boeings disclosed accounting quantities. The
assumed timeframe/period is generally equal to the period
specified in the contract. If the contract is a life of
program contract, then such period is equal to the time
period covered by the estimated number of production units.
Estimated revenues and costs also take into account the expected
impact of specific contingencies that we believe are probable.
Estimates of revenue and cost for our contracts span a period of
multiple years and are based on a substantial number of
underlying assumptions. We believe that the underlying
assumptions are sufficiently reliable to provide a reasonable
estimate of the profit to be generated. However, due to the
significant length of time over which revenue streams will be
generated, the variability of the revenue and cost streams can
be significant if the assumptions change.
For revenues not recognized under the contract method of
accounting, we recognize revenues from the sale of products at
the point of passage of title, which is generally at the time of
shipment. Revenues earned from providing maintenance service are
recognized when the service is complete.
For hardware end items, the Predecessor recognized transferred
costs when the item was due on dock at Boeings major
assembly facility. Costs of products manufactured at the
Predecessors Wichita site were valued at discrete unit
cost, while costs of products manufactured at its Tulsa/
McAlester facility were valued based on the estimated average
cost for a Boeing-defined block of units. The cost of other work
(services, tooling, etc.) was measured at actual cost as the
costs were incurred by the Predecessor.
We treat the Boeing-owned tooling that we use in the performance
of our supply agreements with Boeing as having been obtained in
the Boeing Acquisition pursuant to the equivalent of a capital
lease and we take a charge against revenues for the amortization
of such tooling in accordance with EITF No. 01-3,
Accounting in a Business Combination for Deferred Revenue of
an Acquiree and EITF No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer (including a
Reseller of the Vendors Products).
Raw materials are stated at the lower of cost (on an actual or
average cost basis) or market which is consistent with the
Predecessors valuation of raw materials. Inventory costs
relating to long-term contracts are stated at the actual
production costs, including manufacturing and engineering
overhead incurred to date, reduced by amounts associated with
revenue recognized on units delivered.
Inventory costs on long-term contracts include certain
pre-production costs incurred once research and development
activity has ended and the product is ready for manufacture,
including applicable overhead, in accordance with
SOP 81-1. In
addition, inventory costs typically include higher learning
curve costs on new programs. These factors usually result in an
increase in inventory (referred to as
excess-over-average or deferred production
costs) during the early years of a contract. These costs
are deferred only to the extent the amount of actual or expected
excess-over-average is reasonably expected to be fully offset by
lower than average costs in future periods of a contract.
If we determine that in-process inventory plus estimated costs
to complete a specific contract exceeds the anticipated
remaining sales value of such contract, such excess is charged
to cost of sales in the period in which such determination is
made, thus reducing inventory to estimated realizable value.
Finished goods inventory is stated at its estimated average per
unit cost based on all units expected to be produced.
Income taxes are accounted for in accordance with
SFAS No. 109. Deferred income tax assets and
liabilities are recognized for future income tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. A valuation allowance is recorded to
reduce deferred income tax assets to an amount that, in the
opinion of management, will ultimately be realized. The effect
of changes in tax rates is recognized during the period in which
the rate change occurs.
53
We record an income tax expense or benefit based on the net
income earned or net loss incurred in each tax jurisdiction and
the tax rate applicable to that income or loss. In the ordinary
course of business, there are transactions for which the
ultimate tax outcome is uncertain. The final tax outcome of
these matters may be different than the estimates originally
made by management in determining the income tax provision. A
change to these estimates could impact the effective tax rate
and, subsequently, net income or net loss.
The Predecessor had no income taxes identified or allocated to
it (all income taxes were held at the Boeing corporate level).
|
|
|
Pensions and Other Post-Retirement Benefits |
We account for pensions and other post-retirement benefits in
accordance with SFAS No. 87, Employers
Accounting for Pensions and SFAS No. 106,
Employers Accounting for Postretirement Benefits Other
Than Pensions. Assumptions used in determining the benefit
obligations and the annual expense for our pension and
post-retirement benefits other than pensions are evaluated and
established in conjunction with an independent actuary.
We set the discount rate assumption annually for each of our
retirement-related benefit plans as of the measurement date,
based on a review of projected cash flows and long-term high
quality corporate bond yield curves. The discount rate
determined on each measurement date is used to calculate the
benefit obligation as of that date, and is also used to
calculate the net periodic benefit expense/(income) for the
upcoming plan year.
We derive assumed expected rate of return on pension assets from
the long-term expected returns based on the investment
allocation by class specified in our investment policy. The
expected return on plan assets determined on each measurement
date is used to calculate the net periodic benefit expense/
(income) for the upcoming plan year.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the post-retirement health care
plans. To determine the health care cost trend rates, we
consider national health trends and adjust for our specific plan
designs and locations.
The Predecessor participated in various pension and
post-retirement plans sponsored by Boeing which covered
substantially all of its employees. The costs of such plans were
not discretely identifiable to the Predecessor but were
allocated by Boeing to the Predecessor and included in the cost
of products transferred. The assets and obligations under these
plans were also not discretely identified to the Predecessor.
Upon inception we adopted SFAS No. 123(R) which generally
requires companies to measure the cost of employee and
non-employee services received in exchange for an award of
equity instruments based on the grant-date fair value and to
recognize this cost over the requisite service period or
immediately if there is no service period or other performance
requirements. Stock-based compensation represents a significant
accounting policy of ours which is further described in
Note 3 within the notes to our restated consolidated
financial statements included in this prospectus.
We have established various stock compensation plans which
include restricted share grants and stock purchase plans.
In determining the fair value of our restricted stock grants,
for purposes of determining the corresponding compensation
expense recorded in our financial statements, we originally
relied on the $3.33 per common share equity financing for
the Boeing Acquisition for those grants that occurred within
60 days following the transaction. For grants made or
earned later in 2005, we did not obtain contemporaneous
valuations by an unrelated valuation specialist, but instead
relied on an internal valuation as of December 29, 2005.
This internal valuation was prepared by management using the
mid-point of two current value methodologies the
market and income valuation approaches. We initially estimated
the
54
fair value of our common stock to be approximately $7.67 per
common share (stock split adjusted) at December 29, 2005.
We also initially used this valuation for stock issuances made
in February 2006. During the course of preparing our financial
statements for this offering, we adjusted the fair values of the
stock purchases by employees and the restricted stock grants
issued to our employees and directors and recorded the
corresponding compensation expense. Using appraisals and
valuations of the underlying net assets and other data necessary
to reasonably estimate such value, we calculated a range of
$9.72 to $21.62 per common share (stock split adjusted) for
those grants that occurred between June 17, 2005 and
July 31, 2006. As a result of these new valuations, the
Selling, general and administrative expense for the period from
June 17, 2005 through December 29, 2005 was increased
by $30.5 million to $34.7 million. For the first nine
months of 2006, the Company recognized a total of
$40.8 million of stock compensation expense. See
Note 2 to our restated consolidated financial statements.
There were 316,188 shares granted under the Executive
Incentive Plan during the third quarter of 2006 at an average
grant value of $21.56 per common share.
Purchase Accounting
Boeing Acquisition. We have accounted for the Boeing
Acquisition as a purchase in accordance with
SFAS No. 141, Business Combinations, and
recorded the assets acquired and liabilities assumed based upon
the estimated fair value of the consideration paid, which is
summarized in the following table.
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
Cash payment to Boeing
|
|
$ |
904 |
|
Direct costs of the acquisition
|
|
|
20 |
|
Less:
|
|
|
|
|
|
Consideration to be returned from Boeing for sale of capital
assets
|
|
|
(203 |
) |
|
Consideration to be returned from Boeing for transition costs
|
|
|
(30 |
) |
|
Working capital settlement
|
|
|
(19 |
) |
|
|
|
|
|
|
|
Total consideration
|
|
$ |
672 |
|
|
|
|
|
|
Direct costs of the acquisition include professional fees paid
to outside advisors for investment banking, legal, tax, due
diligence, appraisal and valuation services.
In connection with the Boeing Acquisition, Boeing is required to
make future non-interest bearing payments to Spirit in amounts
of $45.5 million, $116.1 million and
$115.4 million in 2007, 2008 and 2009, respectively, in
payment for various tooling and capital assets built or
purchased by Spirit. Spirit will retain usage rights and custody
of the assets for their remaining useful lives without
compensation to Boeing. Since Spirit retains the risks and
rewards of ownership to such assets, Spirit recorded such
amounts as consideration to be returned from Boeing at a net
present value of approximately $203.0 million. The initial
amount will be accreted as interest income until payments occur
and is recorded as a component of other assets. The accretion of
interest income was approximately $15.3 million and
approximately $9.7 million in the first nine months of 2006
and in fiscal 2005, respectively.
In connection with the Boeing Acquisition, Boeing also made
payments to us totaling $30 million through June 2006 for
Spirits costs of transition to a newly formed enterprise.
Since Spirit had no obligations under this arrangement, such
amounts were recorded as consideration to be returned from
Boeing. These payments were not discounted as they were realized
within one year of closing.
In accordance with the Asset Purchase Agreement, in fiscal 2005,
Boeing reimbursed Spirit approximately $19 million for the
contractually determined working capital settlement.
55
The fair value of the various assets acquired and liabilities
assumed were determined by management. The fair value of the net
assets acquired exceeded the total consideration for the
acquisition by approximately $739.1 million. The excess
(negative goodwill) was allocated on a pro rata basis to
long-lived assets and resulted in the purchase allocation noted
below:
Details of the purchase price allocation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value | |
|
Pro rata allocation | |
|
Book value, | |
|
|
June 16, | |
|
of excess of fair | |
|
June 16, | |
|
|
2005 | |
|
value over cost | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Cash
|
|
$ |
1.3 |
|
|
|
|
|
|
$ |
1.3 |
|
Accounts receivable
|
|
|
0.3 |
|
|
|
|
|
|
|
0.3 |
|
Inventories
|
|
|
479.2 |
|
|
|
|
|
|
|
479.2 |
|
Other current assets
|
|
|
0.3 |
|
|
|
|
|
|
|
0.3 |
|
Property, plant and equipment
|
|
|
902.3 |
|
|
$ |
(671.2 |
) |
|
|
231.1 |
|
Intangible assets
|
|
|
85.2 |
|
|
|
(67.9 |
) |
|
|
17.3 |
|
Other assets
|
|
|
6.8 |
|
|
|
|
|
|
|
6.8 |
|
Pension asset
|
|
|
101.2 |
|
|
|
|
|
|
|
101.2 |
|
Accounts payable and accrued liabilities
|
|
|
(130.2 |
) |
|
|
|
|
|
|
(130.2 |
) |
Pension and post-retirement liabilities
|
|
|
(35.0 |
) |
|
|
|
|
|
|
(35.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$ |
1,411.4 |
|
|
$ |
(739.1 |
) |
|
$ |
672.3 |
|
|
|
|
|
|
|
|
|
|
|
BAE Acquisition. We accounted for the BAE Acquisition as
a purchase in accordance with the provisions of
SFAS No. 141, Business Combinations, and
recorded the assets acquired and liabilities assumed based upon
the fair value of the consideration paid, which is summarized in
the following table:
|
|
|
|
|
Cash payment to BAE Systems
|
|
$ |
139.1 |
|
Direct costs of the acquisition
|
|
|
3.6 |
|
Working capital settlement
|
|
|
3.0 |
|
|
|
|
|
Total consideration
|
|
$ |
145.7 |
|
|
|
|
|
Direct costs of the acquisition are estimated, and include
professional fees paid to outside advisors for investment
banking, legal, tax, due diligence, appraisal and valuation
services. The above purchase price will be adjusted as direct
costs of the acquisition are finalized.
56
The fair value of the various assets acquired and liabilities
assumed was determined by management based on valuations
performed by an independent third party. The fair value of the
net assets acquired exceeded the total consideration for the
acquisition by approximately $22.4 million. The excess
(negative goodwill) was allocated on a pro rata basis to
long-lived assets and resulted in the preliminary purchase price
allocation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro rata | |
|
|
|
|
|
|
Allocation of | |
|
|
|
|
|
|
Excess of | |
|
|
|
|
Fair Value | |
|
Fair Value | |
|
Book Value | |
|
|
April 1, 2006 | |
|
Over Cost | |
|
April 1, 2006 | |
|
|
| |
|
| |
|
| |
Cash
|
|
$ |
0.3 |
|
|
$ |
|
|
|
$ |
0.3 |
|
Accounts receivable
|
|
|
61.3 |
|
|
|
|
|
|
|
61.3 |
|
Inventories
|
|
|
45.7 |
|
|
|
|
|
|
|
45.7 |
|
Other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
90.3 |
|
|
|
(15.4 |
) |
|
|
74.9 |
|
Intangible assets (customer relationships)
|
|
|
40.8 |
|
|
|
(7.0 |
) |
|
|
33.8 |
|
Currency hedge assets
|
|
|
11.1 |
|
|
|
|
|
|
|
11.1 |
|
Accounts payable and accrued liabilities
|
|
|
(57.8 |
) |
|
|
|
|
|
|
(57.8 |
) |
Pension liabilities
|
|
|
(19.1 |
) |
|
|
|
|
|
|
(19.1 |
) |
Warranty liabilities
|
|
|
(2.8 |
) |
|
|
|
|
|
|
(2.8 |
) |
Currency hedge liabilities
|
|
|
(1.7 |
) |
|
|
|
|
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$ |
168.1 |
|
|
$ |
(22.4 |
) |
|
$ |
145.7 |
|
|
|
|
|
|
|
|
|
|
|
We expect to finalize the purchase price allocation for Spirit
Europe prior to December 31, 2006 and do not expect
significant adjustments to the preliminary allocation noted
above.
New Accounting Standards
In May 2005, FASB issued SFAS No. 154, Accounting
Changes and Error Corrections a Replacement of APB
Opinion No. 20 and FASB Statement No. 3, effective
for accounting changes and correction of errors made in fiscal
years ending after December 15, 2005. SFAS No. 154
requires retrospective application of changes in accounting
principles to prior period financial statements, unless it is
impractical to determine the period-specific effects of the
cumulative effect of the change. We do not expect the adoption
of SFAS No. 154 to have a material impact on our
consolidated financial statements.
In February 2006, FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments,
which amends SFAS No. 133 and SFAS No. 140,
and improves the financial reporting of certain hybrid financial
instruments by requiring more consistent accounting that
eliminates exemptions and simplifies the accounting for those
instruments. SFAS No. 155 allows financial instruments
that have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host)
if the holder elects to account for the whole instrument on a
fair value basis. SFAS No. 155 is effective for all
financial instruments acquired or issued after the beginning of
an entitys first fiscal year that begins after
September 15, 2006. We have not issued or acquired the
hybrid instruments included in the scope of
SFAS No. 155 and do not expect the adoption of
SFAS No. 155 to have a material impact on our
financial condition, results of operations or cash flows.
In March 2006, FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets an amendment of
FASB Statement No. 140. SFAS No. 156 requires
that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable.
The statement permits, but does not require, the subsequent
measurement of servicing assets and servicing liabilities at
fair value. SFAS No. 156 is effective as of the
beginning of an entitys first fiscal year that begins
after September 15, 2006. We do not expect the adoption of
SFAS No. 156 to have a material impact on our
financial condition, results of operations or cash flows.
57
In June 2006, FASB issued FASB Interpretation No. 48,
or FIN 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109, effective for fiscal years beginning after
December 15, 2006. FIN 48 prescribes the minimum
recognition threshold a tax position must meet before being
recognized in the financial statements and provides guidance on
derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. The Company is reviewing the effect of the adoption
of FIN 48 and we have yet to determine the impact on our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and requires
enhanced disclosures about fair value measurements. SFAS
No. 157 requires companies to disclose the fair value of
their financial instruments according to a fair value hierarchy
as defined in the standard. Additionally, companies are required
to provide enhanced disclosure regarding financial instruments
in one of the categories (level 3), including a
reconciliation of the beginning and ending balances separately
for each major category of assets and liabilities. SFAS
No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. We believe that the adoption
of SFAS No. 157 will not have a material impact on our
consolidated financial statements.
On September 29, 2006, FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Post Retirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 123(R). The standard will require
us to:
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Recognize the funded status of our defined benefit plans in our
consolidated financial statements. |
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Recognize as a component of other compensation income any
actuarial gains and losses and prior service costs and credits
that arise during the period but are not immediately recognized
as components of net periodic benefit cost. |
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Measure defined benefit plan assets and obligations as of our
fiscal year end. |
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Disclose in the notes to the financial statements additional
information about certain effects on net periodic cost for the
subsequent fiscal year that arise from delayed recognition of
gains or losses, prior to service costs or credits, and
transition asset or obligation. |
The standard is effective for fiscal years ending after
December 15, 2006. We are evaluating the impact to our
liabilities for pension and post retirement benefits and other
comprehensive income (loss).
|
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Accounting Changes and Pronouncements |
Following the Boeing Acquisition, we adopted a number of
accounting policies, practices and conventions that differ from
the Predecessor, including but not limited to the following:
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change from discrete unit or block costing to the use of
long-term contract accounting; |
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reclassification of certain costs from cost of sales to selling,
general and administrative costs, or SG&A; |
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change from accelerated depreciation methods for most personal
property to straight line depreciation methods for all property,
plant and equipment; |
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implementation of accounting for new activities that were not
performed by or otherwise recognized by the Predecessor; and |
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establishment of a lower dollar threshold for capitalization of
internal use software. |
Other than the above changes associated with the transition of
Boeing Wichita to a stand alone business, there have been no
significant changes in our critical accounting policies during
the periods presented. Announced new SFAS or other
pronouncements with effective dates subsequent to the periods
presented are not expected to materially impact us.
58
Following the Boeing Acquisition, our first quarterly period
ended on the last Thursday of September and our fiscal year on
the last Thursday of December. Beginning in 2006, our fiscal
year will end on December 31.
Results of Operations
The Predecessors results were driven primarily by
Boeings commercial airplane demand and the resulting
production volume. A shipset is a full set of components
produced by us for one airplane, and may include fuselage
components, wing systems and propulsion systems. For purposes of
measuring production or deliveries for Boeing aircraft in a
given period, the term shipset refers to sets of
structural fuselage components produced or delivered in such
period. For purposes of measuring production or deliveries for
Airbus aircraft in a given period, the term shipset
refers to sets of wing components produced or delivered in such
period. Other components which are part of the same aircraft
shipsets could be produced or shipped in earlier or later
accounting periods than the components used to measure
production or deliveries, which may result in slight variations
in production or delivery quantities of the various shipset
components in any given period.
In 2003, the Predecessor produced 255 shipsets, increasing to
270 in 2004 and a combined 308 for Spirit and the Predecessor
for the entire year of 2005. Two hundred
eighty-nine shipsets
were delivered by Spirit in the first nine months of 2006, as
compared with 237 units delivered by Spirit and the
Predecessor in the nine months ended September 29,
2005.
Deliveries for the B737 increased from 169 shipsets in 2003
to 201 in 2004 and 233 in 2005. Two hundred twenty-five
B737 shipsets were delivered during the first nine months
of 2006, as compared to 177 for the nine months ended
September 29, 2005. Deliveries for the B777 were relatively
flat with 38 units delivered in 2003 and 37 in 2004, and
then increased to 49 in 2005.
Forty-six
B777 shipsets were delivered in the first nine months of
2006, as compared to 38 for the nine months ended
September 29, 2005. B747, B757 and B767 production
remained at comparatively low levels during the same periods,
with the B757 completing its production run in 2004.
The Predecessors
period-to-period cost
of sales also reflects changes in model mix, incremental cost
improvements, an increase in cost of material and a decrease in
labor content as the increase in deliveries over such periods
was led by the more material intensive B737 and
B777 models. Period costs for 2003 were reduced by a
significant one-time refund of state and local property and
sales taxes, and returned to normal levels in 2004. Period costs
include expenses such as SG&A and research and development
that are charged directly to expense and not capitalized in
inventory as a cost of production.
As a stand alone company, our cost of sales reflects a lower
cost structure, reclassification of some costs of sales to
SG&A and implementation of long term contract accounting.
Our higher period costs for the post-Boeing Acquisition period
of 2005 and the first nine months of 2006 as compared to those
of the Predecessor for the prior periods reflect new functions
required to establish a stand alone business, accounting
reclassifications and nonrecurring transition costs of
$35.8 million in 2005 and $21.5 million in the first
nine months of 2006.
59
The following table sets forth, for the periods indicated,
certain of our operating data:
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|
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|
|
|
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|
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|
|
|
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|
|
Spirit Holdings | |
|
|
Predecessor | |
|
|
| |
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| |
|
|
|
|
Period From | |
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|
|
|
|
|
|
|
February 7, | |
|
Period From | |
|
|
Period From | |
|
|
|
|
Nine Months | |
|
2005 | |
|
June 17, | |
|
|
January 1, 2005 | |
|
|
|
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Ended | |
|
Through | |
|
2005 through | |
|
|
through | |
|
Year Ended | |
|
Year Ended | |
|
|
September 28, | |
|
September 29, | |
|
December 29, | |
|
|
June 16, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2005 | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(restated) | |
|
|
|
|
|
|
|
|
|
(Dollars in millions) | |
Net sales
|
|
$ |
2,355.9 |
|
|
$ |
650.2 |
|
|
$ |
1,207.6 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Cost of sales (Spirit Holdings)/cost of products transferred
(Predecessor)
|
|
|
1,926.7 |
|
|
|
580.1 |
|
|
|
1,056.4 |
|
|
|
|
1,163.9 |
|
|
|
2,074.3 |
|
|
|
2,063.9 |
|
SG&A, R&D, other period costs(a)
|
|
|
245.1 |
|
|
|
98.9 |
|
|
|
219.0 |
|
|
|
|
90.7 |
|
|
|
173.2 |
|
|
|
144.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
184.1 |
|
|
$ |
(28.8 |
) |
|
$ |
(67.8 |
) |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Interest expense and financing fee amortization
|
|
|
(34.8 |
) |
|
|
(13.2 |
) |
|
|
(25.5 |
) |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Interest income
|
|
|
20.9 |
|
|
|
7.4 |
|
|
|
15.4 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Other income, net
|
|
|
3.6 |
|
|
|
2.2 |
|
|
|
1.3 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Provision for income taxes
|
|
|
(87.6 |
) |
|
|
(11.0 |
) |
|
|
(13.7 |
) |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
86.2 |
|
|
$ |
(43.4 |
) |
|
$ |
(90.3 |
) |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes non-cash stock compensation expense of
$41 million, $24 million, $35 million,
$22 million, $23 million and $13 million
respectively for the periods starting with the nine months ended
September 28, 2006. |
Pre-Boeing Acquisition Results are Not Comparable to
Post-Boeing Acquisition Results
Spirit Holdings historical financial statements prior to
the Boeing Acquisition are not comparable to its
financial statements subsequent to June 16, 2005. Prior to
the Boeing Acquisition, the Predecessor was a division of Boeing
and was not a separate legal entity. Historically, the
Predecessor functioned as an internal supplier of parts and
assemblies to Boeing airplane programs and had insignificant
sales to third parties. It operated as a cost center of Boeing,
meaning that it recognized the cost of products manufactured for
BCA programs but did not recognize any corresponding revenues
for those products. No intra-company pricing was established for
the parts and assemblies that the Predecessor supplied to Boeing.
On the closing date of the Boeing Acquisition, Spirit entered
into exclusive supply agreements with Boeing pursuant to which
Spirit began to supply parts and assemblies to Boeing at pricing
established under those agreements, and began to operate as a
stand alone entity with revenues and its own accounting records.
In addition, prior to the Boeing Acquisition, certain costs were
allocated to the Predecessor which were not necessarily
representative of the costs the Predecessor would have incurred
for the corresponding functions had it been a stand alone
entity. At the time of the Boeing Acquisition significant cost
savings were realized through labor savings, pension and other
benefit savings, reduced corporate overhead and operational
improvements. As a result of these substantial changes which
occurred concurrently with the Boeing Acquisition, the
Predecessors historical financials pre-Boeing Acquisition
are not comparable to Spirit Holdings financials
post-Boeing Acquisition.
60
|
|
|
Nine Months Ended September 28, 2006 as Compared to
Seven and One-Half Months Ended September 29, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven and One-Half | |
|
|
Nine Months Ended | |
|
Months Ended | |
|
|
September 28, 2006 | |
|
September 29, 2005 | |
|
|
| |
|
| |
|
|
(Dollars in millions) | |
Net revenues
|
|
$ |
2,355.9 |
|
|
$ |
650.2 |
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
1,926.7 |
|
|
|
580.1 |
|
Selling, general and administrative
|
|
|
160.0 |
|
|
|
63.1 |
|
Research and development
|
|
|
85.1 |
|
|
|
35.8 |
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
2,171.8 |
|
|
|
679.0 |
|
|
Operating income (loss)
|
|
|
184.1 |
|
|
|
(28.8 |
) |
Interest expense and financing fee amortization
|
|
|
(34.8 |
) |
|
|
(13.2 |
) |
Interest income
|
|
|
20.9 |
|
|
|
7.4 |
|
Other income, net
|
|
|
3.6 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
173.8 |
|
|
|
(32.4 |
) |
Income tax provision
|
|
|
(87.6 |
) |
|
|
(11.0 |
) |
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
86.2 |
|
|
$ |
(43.4 |
) |
|
|
|
|
|
|
|
Net Revenues. Net revenues for the nine months ended
September 28, 2006 cannot be compared to net revenues for
the seven and one-half months ended September 29, 2005 as
the current year contains nine months of operations compared to
three and one-half months of operations for the comparable
period of 2005 due to the fact that the operations of Spirit as
a standalone entity did not commence until June 17, 2005.
The 2006 amounts also include the results of Spirit Europe
beginning April 1, 2006, the date we acquired Spirit
Europe. Spirit delivered 289 shipsets to Boeing during the first
nine months of 2006, as compared with 84 shipsets delivered
during the seven and one-half months ended September 29,
2005. As discussed above under the heading
Recent Events, the strike experienced by
Boeing from September 2, 2005 through September 29,
2005 impacted delivery rates during the last six months of 2005
and the first quarter of 2006. Revenues attributable to Airbus,
through Spirit Europe, were approximately 7% of our total
revenues for the nine months ended September 28, 2006. We
expect sales of shipsets to Airbus to be approximately 10% of
total revenue on an annual basis. Fuselage Systems, Propulsion
Systems, Wing Systems and All Other represented approximately
50%, 28%, 21% and 1% respectively, of our net sales for the nine
months ended September 28, 2006. Revenues attributable to
Airbus are recorded within Wing Systems. We expect that the
value of Airbus deliveries will account for approximately 50% of
Wing Systems revenues annually.
The following table shows segment information for the nine
months ended September 28, 2006 as compared to seven and
one-half months ended September 29, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven and One-Half | |
|
|
Nine Months Ended | |
|
Months Ended | |
|
|
September 28, 2006(1) | |
|
September 29, 2005(2) | |
|
|
| |
|
| |
|
|
(Dollars in millions) | |
Segment Revenues
|
|
|
|
|
|
|
|
|
Fuselage Systems
|
|
$ |
1,174.1 |
|
|
$ |
349.8 |
|
Propulsion Systems
|
|
|
668.8 |
|
|
|
202.2 |
|
Wing Systems
|
|
|
491.3 |
|
|
|
85.0 |
|
All Other
|
|
|
21.7 |
|
|
|
13.2 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,355.9 |
|
|
$ |
650.2 |
|
|
|
|
|
|
|
|
|
|
(1) |
Revenues for Wing Systems include Spirit Europe after
April 1, 2006, the date we acquired BAE Aerostructures. |
|
(2) |
Includes only three and one-half months of operations and
excludes Spirit Europe. |
61
Comparative shipset deliveries by model are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spirit Holdings | |
|
Predecessor | |
|
|
| |
|
| |
|
|
|
|
Seven and One-Half | |
|
Five and One-Half | |
|
|
Nine Months Ended | |
|
Months Ended | |
|
Months Ended | |
Model |
|
September 28, 2006(1) | |
|
September 29, 2005(2) | |
|
June 16, 2005 | |
|
|
| |
|
| |
|
| |
B737
|
|
|
225 |
|
|
|
63 |
|
|
|
114 |
|
B747
|
|
|
9 |
|
|
|
5 |
|
|
|
8 |
|
B767
|
|
|
9 |
|
|
|
3 |
|
|
|
6 |
|
B777
|
|
|
46 |
|
|
|
13 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Boeing
|
|
|
289 |
|
|
|
84 |
|
|
|
153 |
|
A320
|
|
|
155 |
|
|
|
|
|
|
|
|
|
A330/340
|
|
|
50 |
|
|
|
|
|
|
|
|
|
A380
|
|
|
5 |
|
|
|
|
|
|
|
|
|
Raytheon Hawker 800XP
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Spirit
|
|
|
526 |
|
|
|
84 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Deliveries of the Airbus and Raytheon products began on
April 1, 2006 with the acquisition of BAE Aerostructures. |
|
(2) |
Spirit commenced operations on June 17, 2005. |
Cost of Sales. Cost of sales for 2006 cannot be compared
to cost of sales for 2005 as the current period contains nine
months of operations compared to three and one-half months of
operations for the comparable period of 2005. Cost of sales for
2006 also includes the results of Spirit Europe beginning
April 1, 2006, the date we acquired Spirit Europe. Cost of
sales as a percentage of net revenues was 82% and 89% for the
first nine months of 2006 and the seven and one-half months of
2005, respectively. The results for the first nine months of
2006 contained a favorable cumulative catch up adjustment of
approximately $46 million, resulting from revised contract
accounting estimates, primarily with respect to lower fringe
benefit costs and adjustments to reduce depreciation and
amortization expense as a result of the final pension asset
transfer from Boeing. The amount of the cumulative catch up
adjustment described above that was related to the final pension
asset transfer in the second quarter of 2006 was approximately
$21 million.
SG&A, Research and Development and Other Period Costs.
SG&A, research and development and other period costs
for 2006 cannot be compared to 2005 because the current period
contains nine months of operations compared to three and
one-half months of operations for the comparable period of 2005.
Expenses for 2006 also included Spirit Europe beginning
April 1, 2006, the date we acquired Spirit Europe.
SG&A, research and development as a percentage of net
revenues was 10% and 15% for the first nine months of 2006 and
the seven and one-half months of 2005, respectively. This
reduction in percentage of net revenues between periods was
driven by decreasing transition expenses as we near completion
of the transition from Boeing to Spirit and decreasing research
and development spending on the B787 program as production
nears. This decrease was also partially attributable to the
stock compensation charge incurred in 2005 related to the
revision of fair values assigned to stock purchases and grants
made in that year. This caused stock compensation expense to
increase to $24.2 million in the 2005 period.
Operating Income. Operating income for 2006 cannot be
compared to Operating income for 2005 as the 2006 period
contains nine months of operations compared to three and
one-half months of operations for the comparable period of 2005.
Operating income for 2006 also includes Spirit Europe results
beginning April 1, 2006, the date we acquired Spirit
Europe. Operating income for the nine months ended
September 28, 2006 included the favorable effect of the
cumulative catch up adjustment discussed above and
$40.8 million of stock compensation expense. Operating
income of $184.1 million (after unallocated corporate
expenses of $158.5 million) for the nine month period of
2006 included $68.3 million of B787 research and
development costs and $21.5 million of non-recurring
transition costs related to the Boeing Acquisition. Fuselage
Systems, Propulsion Systems, Wing Systems and All Other
represented approxi-
62
mately 61%, 29%, 9% and 1%, respectively, of our operating
income before unallocated corporate expenses for the nine months
ended September 28, 2006. Operating income (before
unallocated corporate expenses of $158.5 million) as a
percentage of sales was 18%, 15%, 6% and 15%, respectively, for
Fuselage Systems, Propulsion Systems, Wing Systems and All Other
for the first nine months of 2006.
The following table shows segment information for the nine month
period ended September 28, 2006 as compared to seven and
one-half months ended September 29, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven and One-Half | |
|
|
Nine Months Ended | |
|
Months Ended | |
|
|
September 28, 2006(1) | |
|
September 29, 2005(2) | |
|
|
| |
|
| |
|
|
(Dollars in millions) | |
Segment Operating Income
|
|
|
|
|
|
|
|
|
Fuselage Systems
|
|
$ |
208.3 |
|
|
$ |
12.0 |
|
Propulsion Systems
|
|
|
100.4 |
|
|
|
12.8 |
|
Wing Systems
|
|
|
30.6 |
|
|
|
12.5 |
|
All Other
|
|
|
3.3 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
Total Segment Operating Income
|
|
|
342.6 |
|
|
|
34.4 |
|
Unallocated Corporate Expenses
|
|
|
(158.5 |
) |
|
|
(63.2 |
) |
|
|
|
|
|
|
|
Operating Income
|
|
$ |
184.1 |
|
|
$ |
(28.8 |
) |
|
|
|
|
|
|
|
|
|
(1) |
Operating income for Wing Systems includes Spirit Europe after
April 1, 2006, the date we acquired BAE Aerostructures. |
|
(2) |
Includes only three and one-half months of operations and
excludes Spirit Europe. |
Interest Expense and Financing Fee Amortization. Interest
expense and financing fee amortization for 2006 cannot be
compared to Interest expense and financing fee amortization for
2005 as the current period contains nine months of expenses and
amortization compared to three and one-half months of expenses
and amortization for the comparable period of 2005. Interest
expense and financing fee amortization for the nine months ended
September 28, 2006 included primarily interest and fees
paid or accrued in connection with long-term debt and
$3.3 million in amortization of deferred financing costs.
Interest Income. Interest income for 2006 cannot be
compared to interest income for 2005 as the current period
contains nine months of interest income compared to three and
one-half months of interest income for the comparable period of
2005. Interest income for the nine months ended
September 28, 2006, consisted of $15.3 million of
accretion of the discounted long-term receivable from Boeing for
capital expense reimbursement pursuant to the Asset Purchase
Agreement and $5.6 million in interest income.
Provision for Income Tax. Provision for income tax for
2006 cannot be compared to provision for income tax for 2005 as
the current period contains nine months of operations compared
to the three and one-half months of operations for the
comparable period of 2005. The income tax provision for the nine
months ended September 28, 2006, consisted of
$87.1 million for federal income taxes and
$0.5 million for state taxes. During the nine month period
ended September 28, 2006, upon weighing available positive
and negative evidence, we have maintained the valuation
allowance established against 100% of our net deferred tax asset
as it was, at that time, considered more likely than not that we
would not have the ability to realize these assets as we have
not completed a full fiscal year of generating pre-tax income.
This affected our tax provision by deferring tax benefits until
such time as management determines under SFAS No. 109
that we have a sufficient earnings history, among other factors,
to recognize those benefits. Management reviews the need for a
valuation allowance on a quarterly basis. If we continue to
create and build on our positive earnings history, we anticipate
releasing approximately $80 million of the valuation
allowance, of which approximately $74 million will be a
credit to the income tax provision in the fourth quarter of 2006.
63
|
|
|
Year Ended December 29, 2005 as Compared to Year
Ended December 31, 2004 |
Since the Boeing Acquisition occurred in the middle of 2005,
financial results for the full calendar year 2005 and a
comparison of these results with any prior period would not be
meaningful.
Product Deliveries. Spirit and the Predecessor delivered
308 shipsets during 2005, as compared with 270 shipsets
delivered by the Predecessor in 2004, reflecting Boeings
increased production rates.
Comparative shipset deliveries by model are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Combined | |
|
Predecessor | |
|
|
| |
|
| |
|
|
Period From | |
|
Period From | |
|
|
January 1, 2005 to | |
|
January 1, 2004 to | |
Model |
|
December 29, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
B737
|
|
|
233 |
|
|
|
201 |
|
B747
|
|
|
15 |
|
|
|
13 |
|
B757
|
|
|
0 |
|
|
|
9 |
|
B767
|
|
|
11 |
|
|
|
10 |
|
B777
|
|
|
49 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
308 |
|
|
|
270 |
|
|
|
|
|
|
|
|
The most significant volume increases were on the B737 and B777
models. The B737 is less costly to produce and also generates
lower revenues per shipset than the other Boeing models for
which we provide parts. Boeing ended production of the B757 in
2004.
|
|
|
Period from June 17, 2005 through December 29,
2005 |
For the reasons discussed above, the Predecessors
historical financial statements for the periods prior to the
Boeing Acquisition are not comparable to Spirit Holdings
financial statements for periods subsequent to the Boeing
Acquisition, so a comparison of financial results for the period
from June 17, 2005 through December 29, 2005 with
those of any prior period would not be particularly meaningful.
Accordingly, we describe the results of operations for such
period below without comparison to any prior period.
Net Sales. Spirit Holdings $1,207.6 million of
net sales in the period from June 17, 2005 through
December 29, 2005 were driven primarily by sales of
shipsets for Boeing aircraft. During this period, Spirit
delivered 155 airplane units (expressed in terms of shipsets).
Revenues and deliveries were negatively impacted for this period
as a result of the Boeing strike which lasted 28 days.
Although Boeing continued to make payment for ship-in-place
units completed during the Boeing strike, and revenues were
recorded on such units consistent with contractual terms,
strike-driven changes to Boeings production schedule
reduced Spirits revenue by an estimated $172 million
for the six and one-half months ended December 29, 2005.
Fuselage Systems, Propulsion Systems, Wing Systems and All Other
represented approximately 53%, 31%, 14% and 2%, respectively, of
our net sales for the period.
The following table shows segment information for the period
ending December 29, 2005:
|
|
|
|
|
|
|
|
(Dollars in | |
|
|
millions) | |
|
|
| |
|
|
(restated) | |
Segment Revenues
|
|
|
|
|
Fuselage Systems
|
|
$ |
637.7 |
|
Propulsion Systems
|
|
|
372.2 |
|
Wing Systems
|
|
|
170.0 |
|
All Other
|
|
|
27.7 |
|
|
|
|
|
|
Total
|
|
$ |
1,207.6 |
|
|
|
|
|
64
Shipset deliveries by model are as follows:
|
|
|
|
|
|
|
|
Spirit Holdings | |
|
|
| |
|
|
Period From | |
|
|
June 17, 2005 through | |
Model |
|
December 29, 2005 | |
|
|
| |
B737
|
|
|
119 |
|
B747
|
|
|
7 |
|
B767
|
|
|
5 |
|
B777
|
|
|
24 |
|
|
|
|
|
|
Total
|
|
|
155 |
|
|
|
|
|
Cost of Sales. Spirit Holdings total cost of sales
for the period from June 17, 2005 through December 29,
2005 was $1,056.4 million, which includes costs related to
labor, material and allocable indirect costs, as well as Spirit
Holdings previously described stand alone cost structure
and effects of Spirit Holdings previously described
accounting policy for revenue and profit recognition.
SG&A. Spirits $140.7 million of SG&A
included $100.6 million in recurring costs of finance,
sales and marketing, human resources, legal and other SG&A
functions, plus $35.8 million in nonrecurring costs to
establish stand alone human resources and other functions,
recruit key executive personnel and transition computing systems
from Boeing or to segregate Spirit and Boeing applications. The
$100.6 million in recurring costs include
$34.7 million in non-cash stock compensation expense which
represents the difference between the fair value of stock
purchased by employees and the price paid by employees for the
stock, and the vested portion of the fair value of restricted
stock grants to employees and others pursuant to Spirits
stock compensation plans or other agreements. The amounts above
include the reclassification to SG&A of certain costs that
were inventoried by the Predecessor, and the elimination of cost
allocations made previously to the Predecessor by its parent for
SG&A support.
Research and Development. Spirits
$78.3 million in research and development consisted
primarily of $75.7 million incurred on the B787 program.
The predecessors research and development was for internal
manufacturing process development, most of which related to the
B787 program.
Interest Expense and Financing Fee Amortization.
Spirits $25.5 million in interest expense and
financing fee amortization consisted primarily of
$22.4 million in interest and fees paid or accrued in
connection with long-term debt and $2.6 million in
amortization of deferred financing costs. Since the
Predecessors parent handled all financing activities, no
significant interest expense and financing fee amortization was
recorded by the Predecessor.
Interest Income. Spirits interest income consisted
primarily of $9.7 million in accretion of the discounted
long-term receivable from Boeing for capital expense
reimbursement pursuant to the Asset Purchase Agreement and
$5.7 million in interest income. Since the
Predecessors parent handled all financing activities, no
significant interest income was recorded by the Predecessor.
Provision for income taxes. The $13.7 million income
tax provision consisted of $14.0 million for federal taxes
and $(0.3) million for state taxes. Since the Predecessors
parent filed a consolidated tax return for the entire parent
company with no income specifically identifiable to the
Predecessor, no income tax provision was recorded by the
Predecessor. During the period from inception through
December 29, 2005, upon weighing available positive and
negative evidence, including the fact that Spirit Holdings was a
new legal entity that had no earnings history, we established a
valuation allowance against 100% of our net deferred tax assets
as it was, at that time, considered more likely than not that we
would not have the ability to realize these assets. This
affected our tax provision by deferring tax benefits until such
time as management determines under SFAS No. 109 that
we have a sufficient earnings history, among other factors, to
recognize these benefits.
Operating Income (Loss). The operating loss of
$67.8 million (after unallocated corporate expenses of
$139.9 million) for the period included $75.7 million of
B787 research and development costs and
65
$35.8 million of non-recurring transition costs related to
the Boeing Acquisition. Fuselage Systems, Propulsion Systems,
Wing Systems and All Other represented approximately 61%, 34%,
7% and (2)%, respectively, of our operating income before
unallocated corporate expenses for the period. Operating income
(before unallocated corporate expenses of $139.9 million) as a
percentage of sales was 7%, 7%, 3% and (5)%, respectively, for
Fuselage Systems, Propulsion Systems, Wing Systems and All Other.
The following table shows segment information for the period
ending December 29, 2005:
|
|
|
|
|
|
|
|
(Dollars in | |
|
|
millions) | |
|
|
| |
|
|
(restated) | |
Segment Operating Income (loss)
|
|
|
|
|
Fuselage Systems
|
|
$ |
43.7 |
|
Propulsion Systems
|
|
|
24.5 |
|
Wing Systems
|
|
|
5.1 |
|
All Other
|
|
|
(1.2 |
) |
|
|
|
|
|
Total segment operating income
|
|
$ |
72.1 |
|
|
|
|
|
Unallocated corporate expenses
|
|
|
(139.9 |
) |
|
|
|
|
Operating loss
|
|
$ |
(67.8 |
) |
|
|
|
|
|
|
|
Period from January 1, 2005 through June 16,
2005 as Compared to Year Ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
Period From |
|
|
|
|
January 1, 2005 through |
|
Year Ended |
|
|
June 16, 2005 |
|
December 31, 2004 |
|
|
|
|
|
|
|
(Dollars in millions) |
Cost of products transferred
|
|
$ |
1,163.9 |
|
|
$ |
2,074.3 |
|
SG&A, R&D, other period costs
|
|
$ |
90.7 |
|
|
$ |
173.2 |
|
SG&A, R&D, other period costs as a percentage of cost of
products transferred
|
|
|
7.8 |
% |
|
|
8.3 |
% |
Cost of Products Transferred. The Predecessors cost
of products transferred decreased significantly from 2004 to
2005 driven by the fact that the Predecessor ceased operating as
the Predecessor five and one-half months through 2005 and began
operating as Spirit at the time of the Boeing Acquisition. As a
result, the Predecessor delivered significantly fewer units in
2005 as compared to 2004. On a per unit basis, the cost of
products transferred was relatively unchanged for the five and
one-half month period ended June 16, 2005 as compared to
the year ended December 31, 2004, reflecting similar
product mix and cost structures in both periods.
SG&A, Research and Development and Other Period
Costs. The Predecessors SG&A, research and
development and other period costs decreased significantly from
2004 to 2005 driven by the fact that the Predecessor ceased
operating as the Predecessor five and one-half months through
2005 and began operating as Spirit at the time of the Boeing
Acquisition.
|
|
|
Year Ended December 31, 2004 as Compared to Year
Ended December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
(Dollars in millions) |
Cost of products transferred
|
|
$ |
2,074.3 |
|
|
$ |
2,063.9 |
|
SG&A, R&D, other period costs
|
|
$ |
173.2 |
|
|
$ |
144.3 |
|
66
Cost of Products Transferred. The Predecessors
nominal increase in its cost of products transferred from 2003
to 2004 was driven primarily by increased volume, offset by the
impact of cost improvement initiatives and by changes in model
mix, as volume increased on the lower cost B737 and decreased on
other higher cost platforms. The Predecessor delivered
270 airplane units (expressed in terms of shipsets) during
2004, as compared with 255 in 2003.
Comparative shipset deliveries by model are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
| |
|
|
Period From | |
|
Period From | |
|
|
January 1, 2004 to | |
|
January 1, 2003 to | |
Model |
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
B737
|
|
|
201 |
|
|
|
169 |
|
B747
|
|
|
13 |
|
|
|
18 |
|
B757
|
|
|
9 |
|
|
|
14 |
|
B767
|
|
|
10 |
|
|
|
16 |
|
B777
|
|
|
37 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
270 |
|
|
|
255 |
|
|
|
|
|
|
|
|
SG&A, Research and Development and Other Period
Costs. The increase of SG&A, research and development
and other period costs for 2004 over 2003 reflects increased
2004 corporate allocations related to employee share based
compensation plans, increased 2004 BCA allocations related to
higher commercial general and administrative expenses, and
refunds of and reversals of Kansas tax accruals in 2003 due to a
favorable tax audit outcome.
Liquidity and Capital Resources
Liquidity, or access to cash, is an important factor in
determining our financial stability. The primary sources of our
liquidity include cash flow from operations, borrowing capacity
through our credit facilities and advance payments and
receivables from Boeing. Our liquidity requirements and working
capital needs depend on a number of factors, including delivery
rates under our contracts, the level of research and development
expenditures related to new programs (including the
B787 program as discussed below), capital expenditures,
growth and contractions in the business cycle, contributions to
our union-sponsored plans and interest and debt payments.
We expect that our working capital requirements will increase
significantly over the next two years as the B787 program
progresses toward FAA certification and we build inventory in
support of the program. Under our arrangement with Boeing, we
will not receive payment for B787 shipsets delivered to
Boeing prior to FAA certification. We anticipate that this will
lead to a short-term increase in our accounts receivable
balances as we expect to deliver shipsets beginning in mid-2007,
but do not expect Boeing to receive FAA certification of the
B787 until mid-2008. Accounts receivable balances associated
with the B787 program will return to normal levels after
FAA certification is received. In the aggregate, we expect total
working capital for the B787 program, including the net of
production inventory, engineering costs capitalized into
inventory, accounts receivable and accounts payable, to increase
by $850 million to $950 million between
September 28, 2006 and mid-2008 when the B787 is expected
to achieve FAA certification. We believe we can finance this
increase from our cash flow from operations and existing
financing sources.
Upon the consummation of this offering, based on an assumed
initial public offering price of $24.00 per share, the
midpoint of the range on the cover of this prospectus, the
eligible participants under our Union Equity Participation Plan
will be entitled to receive a total of approximately
$270.2 million pursuant to such plan. We currently
anticipate paying approximately 44.5% of such amount in shares
of class A common stock through the issuance of
approximately 5,006,829 shares, which we expect to issue on
or prior to March 15, 2007. The remainder will be paid in
cash, with approximately $129 million from the proceeds of
this offering and the remaining $21 million from available
cash.
67
Our ability to make scheduled payments of principal of, or to
pay the interest on, or to refinance, our indebtedness, or to
fund non-acquisition related capital expenditures and research
and development efforts, will depend on our ability to generate
cash in the future. This is subject, in part, to general
economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. Based on our current
levels of operations and absent any disruptive events,
management believes that internally generated funds, advance
payments and receivables from Boeing described below, and
borrowings available under our revolving loan facility should
provide sufficient resources to finance our operations,
non-acquisition related
capital expenditures, research and development efforts and
long-term indebtedness obligations through at least fiscal year
2007. We cannot assure you, however, that our business will
generate sufficient cash flow from operations or that future
borrowings will be available to us under our credit facilities
in an amount sufficient to enable us to pay our indebtedness or
to fund our other liquidity needs. If we cannot generate
sufficient cash flow, we may need to refinance all or a portion
of our indebtedness on or before maturity. Also, to the extent
we accelerate our growth plans, consummate acquisitions or have
lower than anticipated sales or increases in expenses, we may
also need to raise additional capital. In particular, increased
working capital needs occur whenever we consummate acquisitions
or experience strong incremental demand for our products. We
cannot assure you that we will be able to raise additional
capital on commercially reasonable terms or at all.
We may pursue strategic acquisitions on an opportunistic basis.
Our acquisition strategy may require substantial capital, and we
may not be able to raise any necessary funds on acceptable terms
or at all. If we incur additional debt to finance acquisitions,
our total interest expense will increase.
We currently have manufacturing capacity to produce shipsets at
the rates we have committed to our customers. Our capacity
utilization on the products we produced prior to the Boeing
Acquisition averages about 60%, while our capacity utilization
on the fuselages for the B737 and B777 are at close to 95% at
our current production rates. These capacity utilization rates
are based on five days per week, three shifts per day
operations. Significant capital expenditures may be required if
our customers request that we increase production rates for an
extended period of time. Our supply agreements typically have
maximum production rates. If a customer requests that we
increase production rates above these stated maximum levels,
additional negotiation would be required to determine whether we
or our customer would bear the cost of any capital expenditures,
tooling and nonrecurring engineering required as a result of
such production rate increase.
Cash. At September 28, 2006 and December 29,
2005 we had cash and cash equivalents of $189.0 million and
$241.3 million, respectively. On April 1, 2006, we
used approximately $145.7 million of cash to pay the
purchase price for the BAE Acquisition. Prior to the Boeing
Acquisition, the Predecessor was part of Boeings cash
management system, and consequently, had no separate cash
balance. Therefore, at December 31, 2004 and
December 31, 2003, the Predecessor had negligible cash on
the balance sheet.
Credit Facilities. In connection with the Boeing
Acquisition, Spirit and certain of its affiliates entered into
$875 million Senior Secured Credit Facilities with the
Citicorp North America, Inc. and a syndicate of other lenders,
consisting of a six and one-half year $700 million Term
Loan B and a five year $175 million Revolver. The Term
Loan B is repayable in quarterly installments of 1% of the
aggregate principal amount thereof for the first five and
one-half years, with the remaining balance due in the final
year, and was used to pay a portion of the consideration for the
Boeing Acquisition and certain fees and expenses incurred in
connection therewith and for working capital. We intend to use
approximately $100 million of this offering to prepay the
Term Loan B. The Revolver is available for general
corporate purposes of Spirit and its subsidiaries, and contains
a letter of credit subfacility. We have a conditional right
under the Senior Secured Credit Facilities to request new or
existing lenders to provide commitments to increase the Revolver
by an aggregate of $75 million. As of September 28,
2006, approximately $693 million was outstanding under the
Term Loan B, no amounts had been borrowed under the
Revolver and $0.3 million of letters of credit were
outstanding.
Borrowings under the Senior Secured Credit Facilities bear
interest at a rate equal to the sum of LIBOR plus the applicable
margin (as defined below) or, at our option, the alternate base
rate, which will
68
be the highest of (x) the Citicorp North America, Inc.
prime rate, (y) the certificate of deposit rate, plus 0.50%
and (z) the federal funds rate plus 0.50%, plus the
applicable margin. The applicable margin with respect to the
Term Loan B is 2.25% per annum in the case of such
portion of the Term Loan B that bears interest at LIBOR and
1.25% in the case of such portion of the Term Loan B that
bears interest at the alternate base rate. The applicable margin
with respect to borrowings under the Revolver is determined in
accordance with a performance grid based on our total leverage
ratio and ranges from 2.75% to 2.25% per annum in the case
of LIBOR advances and from 1.75% to 1.25% per annum in the
case of alternate base rate advances. We are also obligated to
pay a commitment fee of 0.50% per annum on the unused
portion of the revolver. See Quantitative and Qualitative
Disclosures About Market Risk Interest Rate
Risks.
The obligations under the Senior Secured Credit Facilities are
guaranteed by Spirit Holdings, Spirit AeroSystems Finance, Inc.,
each of Spirits direct and indirect domestic subsidiaries
(other than non-wholly-owned domestic subsidiaries that are
prohibited from providing such guarantees), Spirit (with respect
to the Term Loan B only) and the subsidiaries of Onex Wind
Finance LP, or Onex Wind, an indirect wholly-owned subsidiary of
Onex Corporation. All obligations under the new senior secured
credit facility and the guarantees are secured by a first
priority security interest in (1) all of the capital stock
of Spirit Holdings direct and indirect domestic
subsidiaries and 65% of the voting stock and 100% of the
non-voting stock of its foreign subsidiaries, (2) all of
the equity interests of Onex Winds subsidiaries and
(3) substantially all of Spirit Holdings, Onex
Winds and the guarantors other assets and properties.
The Senior Secured Credit Facilities contain customary
affirmative and negative covenants, including restrictions on
our ability to incur additional indebtedness, create liens on
our assets, engage in transactions with affiliates, make
investments, pay dividends, redeem stock and engage in mergers,
consolidations and sales of assets. The Senior Secured Credit
Facilities also contain financial covenants consisting of a
minimum interest expense coverage ratio, a maximum capital
expenditure amount and a maximum total leverage ratio. We were
in compliance with all such covenants as of September 28,
2006.
In connection with this offering, the Senior Secured Credit
Facilities are being amended to, among other things,
(1) eliminate the structure whereby Spirit borrows from an
indirect subsidiary of Onex Wind and reflect the release of Onex
Wind and its subsidiaries from all of their obligations under
the senior secured credit facility upon the assumption of the
same by Spirit, (2) refinance the existing term loans under
the Senior Secured Credit Facilities on substantially similar
terms, with certain changes including a reduction in the
applicable interest margin and an extension of the final
maturity date to September 30, 2013, (3) increase the
amount of the revolving commitments under the senior secured
credit facility from $175 million to $400 million,
(4) replace the existing financial covenants with a
covenant limiting the maximum total secured leverage ratio of
Spirit and its subsidiaries on a consolidated basis, and
(5) remove the mandatory prepayment requirements with
respect to proceeds of equity issuances.
In connection with the Boeing Acquisition, Spirit and certain of
its affiliates also entered into a $150 million
subordinated delayed draw credit facility with Boeing. We may
borrow under this credit facility until December 31, 2008,
and any such borrowings will mature in June 2013. No amounts
were borrowed under this credit facility as of
September 28, 2006. We intend to seek consent from our
senior lenders to terminate this credit facility upon completion
of this offering.
Investment in B787 Program. We have received and, over
the next several years, will receive cash from Boeing to fund
development in connection with the B787 program, capital
expenditures in connection with our other Boeing production work
and stand alone transition costs. We expect to invest
approximately $859 million on the B787 program for research
and development, capitalized pre-production costs and capital
expenditures, of which approximately $510 million had been
spent as of September 28, 2006.
The B787 Supply Agreement requires Boeing to make advance
payments to us for production articles in the aggregate amount
of $700 million. As of October 31, 2006,
$500 million had been received by us, and
an additional $100 million will be advanced to us in
each of the remainder of 2006 and 2007. We must repay these
advances, without interest, in the amount of a $1.4 million
offset against the purchase price of each of the first five
hundred B787 shipsets delivered to Boeing. In the event
that Boeing does not
69
take delivery of five hundred B787 shipsets, any advances
not then repaid will first be applied against any outstanding
B787 payments then due by Boeing to us, with any remaining
balance repaid at the rate of $84 million per year
beginning the month following our final delivery of a
B787 production shipset to Boeing.
Receivables from Boeing. Boeing is required to make
future payments to us in amounts of $45.5 million,
$116.1 million and $115.4 million in 2007, 2008 and
2009, respectively, in payment for various tooling and capital
assets built or purchased by us, although we will retain usage
rights and custody of these assets for their remaining useful
lives without compensation to Boeing. Boeing also contributed
$30 million to us to partially offset our costs to
transition to a stand alone company.
We accrued revenue for volume-based price increases retroactive
to June 17, 2005, which we were contractually entitled to
collect after June 1, 2006. Our supply agreement with
Boeing provides for prices to be established based on planned
production volumes for each period beginning June 1 through
May 31, with higher prices at lower volumes and lower
prices at higher volumes. These pre-established prices are the
basis for billing and payment for the entire year regardless of
actual volume, with any differences settled after the yearly
period has ended. The Boeing strike reduced volume for 2005 and
the first part of 2006 below planned levels, resulting in higher
average prices than had been established. Since we were
contractually entitled to payment at the higher prices after the
end of the first pricing year (approximately June 2006), we
accrued revenue for these volume-based price increases
retroactive to June 17, 2005. We collected this amount in
August 2006.
Tax Incentive Bonds. Both Spirit and the Predecessor
utilized IRBs issued by the City of Wichita to finance the
purchase and/or construction of real and personal property at
the Wichita site. Tax benefits associated with IRBs include a
provision for a ten-year property tax abatement and a sales tax
exemption from the Kansas Department of Revenue. Spirit and the
Predecessor, being both holders of the bonds and debtors
thereunder, offset the amounts on a consolidating basis. Each of
Spirit and the Predecessor also purchased the IRBs and therefore
is the bondholder as well as the borrower/lessee of the property
purchased with the IRB proceeds. The City of Wichita owns the
property purchased with the IRBs and leases it to Spirit (with
respect to the bonds issued in 2005) and to the Predecessor
(with respect to the bonds issued in 1996 through 2004). Upon
maturity or redemption of the bonds, title to the leased
property reverts to the lessee. The bonds issued in December
2005 mature in 2016 and the bonds issued in 1996 through 2004
mature 25 years following issuance.
Certain personal property assets of Boeing Wichita that were
subject to IRBs owned by Boeing prior to the Boeing Acquisition
continue to be subject to those IRBs. In connection with the
Boeing Acquisition, Boeing assigned its leasehold interest in
these assets and the related bonds to a special purpose trust
beneficially owned by Boeing, which subleases these assets to
Spirit. Pursuant to the terms of the sublease, as these assets
cease to qualify for the ten-year property tax abatement, the
special purpose trust will purchase the assets from the city of
Wichita, terminate the related leases, redeem the related bonds
and transfer the assets to Spirit.
The principal amount of the portion of the bonds subleased from
the special purpose trust is approximately $714 million.
The IRBs obtained by Spirit in 2005 have an aggregate amount of
$80 million.
We entered into an incentive agreement with the Kansas
Department of Commerce, pursuant to which the Kansas Development
Finance Authority will finance an eligible project by entering
into a debt structure with us consisting of a loan and the
issuance of bonds. The purpose of the program is to provide
incentives to us to invest in the State of Kansas. In return, we
receive a tax benefit in the form of a rebate of certain payroll
taxes from the Kansas Department of Revenue. Pursuant to offset
provisions in the debt instruments, there is no cash payment of
principal or interest upon payment or in respect of the bonds,
other than the tax benefit to us and the costs of issuance. We
offset the amount owed by us, as debtor, to Spirit AeroSystems
Finance, Inc., as bondholder, on a consolidated basis. The
instruments are in the amount of $80 million and expire in
December 2025.
Open Infrastructure Offering (OIO). On September 29,
2005, we entered into a five-year agreement with International
Business Machines Corporation, or IBM, and IBM Credit, LLC,
or IBM Credit. This
70
agreement includes the financing of the purchase of software
licenses with a value of $26.2 million payable in monthly
payments of $0.6 million for 48 months with an
interest rate of 7.8%. On July 18, 2006 this initial loan
was refinanced. This refinancing agreement increased the monthly
payment from $0.6 to $1.0 million and reduced the number of
payments by 15 months. During the third quarter of 2006
additional software was purchased totaling $7.9 million and
was financed with IBM Credit. These additional loans have a
combined monthly payment of $0.4 million and are for terms
of 24 and 36 months with effective interest rates of 3.7%
and 4.8%, respectively. Under the terms of the OIO Agreement, we
would be in default if our credit rating with Standard and
Poors for secured debt falls below BB-, which is our debt
rating as of the date of this prospectus. In the event that IBM
or IBM Credit determines that we are in default under the OIO
Agreement, we would be required to pay IBM any previously unpaid
monthly payments under the agreement and pay IBM Credit a
settlement charge. Additionally, if we do not make the required
payments to IBM or IBM Credit, as applicable, we could be
required to cease using and surrender all licensed program
materials financed by IBM Credit and destroy our copies of such
program materials. IBM has a security interest in any equipment
acquired through the lease agreement included in the OIO. As of
September 28, 2006, we had debt related to OIO of
$29.5 million.
Cash Flow
The Predecessors cash was provided by and managed at the
Boeing corporate level and, consequently, the Predecessor had no
separate cash balance. While certain cash flow information is
included in a note to the Predecessors historical
financial statements, such information is estimated using a
change in net working capital approach. The Predecessor did not
have any significant cash inflows, and therefore the
Predecessors cash flows are not comparable to
Spirits cash flows as a stand alone entity following the
Boeing Acquisition. The Predecessors cash flows from
operating activities are largely based on cost of products
transferred and period costs and the Predecessors cash
flows from investing activities are equivalent to capital
expenditures.
|
|
|
Nine Months Ended September 28, 2006 |
Operating Activities. Spirit had a net cash inflow of
$325.7 million in the first nine months of 2006 related to
operations. This was primarily due to receipt of a
$300 million advance payment from Boeing on the B787
program, earnings of $86.2 million, depreciation and
amortization of $30.3 million and a $142.0 million
increase in accounts payable (primarily as a result of increases
in inventory resulting from higher production rates), partially
offset by a $63.2 million increase in accounts receivable
and $171.5 million in inventory growth as a result of
higher production rates and build-up of inventory for the B787
contract.
Investing Activities. In the first nine months of 2006,
we invested $233.4 million in property, plant and
equipment, software and program tooling, most of which was
related to capital investments in preparation of the start of
B787 production. We also invested $145.4 million in the
acquisition of BAE Systems aerostructures business (net of
cash acquired).
Financing Activities. We had minimal cash flow from
financing activities in the first nine months of 2006 consisting
primarily of $10.2 million in payments on debt partially
offset by $1.1 million in executive stock investments.
|
|
|
Period from June 17, 2005 through December 29,
2005 |
Operating Activities. Spirit had cash flows related to
operating activities of $223.8 million in the six and
one-half months ended December 29, 2005. This was primarily
due to the receipt of $200.0 million in advance payments
from Boeing related to the B787 program, an increase of
$91.5 million in accounts payable driven by a combination
of increased production rates, higher research and development
expenses and higher capital expenditures, offset by the
operating loss, an increase of $88.4 million in accounts
receivable and an increase of $31.4 million in inventory.
The increase in accounts receivable was a result of Spirit
commencing external sales under contractual payment terms. The
increase in inventory reflects unbilled product development
activity on certain Boeing derivative models and the residual
impact of lower production rates during the Boeing strike.
71
Investing Activities. In the six and one-half months
ended December 29, 2005, we had cash outflows of
$1,030.3 million related to investing activities. This
reflects a cash payment of $885.7 million paid in
connection with the Boeing Acquisition and investment of
$144.6 million in property, plant and equipment, software
and program tooling. The investment in property, plant and
equipment was primarily related to capital investments in
preparation of the start of B787 production.
Financing Activities. We had cash flow from financing
activities of $1,047.8 million in the six and one-half
months ended December 29, 2005. This cash flow was
primarily driven by the issuance of $700.0 million in long
term debt in connection with the Boeing Acquisition and the
equity investment of $370.0 million in connection with the
Boeing Acquisition.
The following table summarizes our contractual cash obligations
as of December 29, 2005:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 and | |
|
|
Contractual Obligations |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 | |
|
After | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Principal Payment on Term Loan B(1)
|
|
$ |
7.0 |
|
|
$ |
7.0 |
|
|
$ |
7.0 |
|
|
$ |
7.0 |
|
|
$ |
7.0 |
|
|
$ |
661.5 |
|
|
$ |
|
|
|
$ |
696.5 |
|
Non-Cancelable Operating Lease Payments(2)
|
|
|
2.3 |
|
|
|
2.3 |
|
|
|
2.3 |
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
0.6 |
|
|
|
|
|
|
|
9.9 |
|
Non-Cancelable Capital Lease Payments(3)
|
|
|
6.3 |
|
|
|
6.4 |
|
|
|
6.9 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.1 |
|
Interest on Debt(4)
|
|
|
45.1 |
|
|
|
44.7 |
|
|
|
44.2 |
|
|
|
43.7 |
|
|
|
43.3 |
|
|
|
21.5 |
|
|
|
|
|
|
|
242.5 |
|
Purchase Obligations(5)
|
|
|
63.0 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73.8 |
|
Other Contractual Obligations(6)
|
|
|
2.0 |
|
|
|
2.5 |
|
|
|
3.0 |
|
|
|
3.0 |
|
|
|
3.0 |
|
|
|
3.0 |
|
|
|
4.5 |
|
|
|
21.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
125.7 |
|
|
$ |
73.7 |
|
|
$ |
63.4 |
|
|
$ |
60.4 |
|
|
$ |
54.5 |
|
|
$ |
686.6 |
|
|
$ |
4.5 |
|
|
$ |
1,068.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Does not include repayment of B787 advances to Boeing, which is
reflected in our balance sheet as a long-term liability. |
|
(2) |
Reflects our renewal of a building lease on July 1, 2006
for five years. |
|
(3) |
Treats the financing of software license purchases as a capital
lease. |
|
(4) |
Interest on our debt was calculated for all years using the
effective rate as of December 29, 2005 of 6.51%. |
|
(5) |
Purchase obligations represent property, plant and equipment
commitments at December 29, 2005. Although we also have
significant other purchase obligations, most commonly in the
form of purchase orders, the timing of these purchases is often
variable rather than specific and the payments made by our
customers in accordance with our long-term contracts, including
advance payments, substantially reimburse the payments due.
Accordingly, these obligations are not included in the table. |
|
(6) |
Represents service fees payable to Onex Partners Manager, L.P.,
a wholly-owned subsidiary of Onex, or Onex Manager, pursuant to
an agreement which we expect will terminate upon consummation of
this offering for a cost of $4 million. |
A Transition Services Agreement, or TSA, with Boeing is excluded
from Contractual Obligations shown above because it may be
terminated by Spirit with 30 days advance notice. The TSA
covers services to be supplied to Spirit by Boeing during a
transition period ending in 2007. The services supplied by
Boeing include computer systems and services, certain financial
transaction processing operations, and certain non-production
operations. Spirit pays Boeing approximately $3 million per
month for services under the TSA.
The following table summarizes our long-term debt obligations as
of September 28, 2006, after giving pro forma effect to the
offering:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 and | |
|
|
Contractual Obligations |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 | |
|
After | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Dollars in millions) | |
|
|
|
|
Principal Payment on Term Loan B
|
|
$ |
2.4 |
|
|
$ |
5.9 |
|
|
$ |
5.9 |
|
|
$ |
5.9 |
|
|
$ |
5.9 |
|
|
$ |
5.9 |
|
|
$ |
561.1 |
|
|
$ |
593.0 |
|
72
Our primary future cash needs will consist of working capital,
debt service, research and development and capital expenditures.
We expend significant capital on research and development during
the start up phase of new programs, to develop new technologies
for next generation aircraft and to improve the manufacturing
processes of aircraft already in production. Research and
development expenditures totaled approximately $85 million
and approximately $36 million for the nine months ended
September 28, 2006 and the seven and one-half months ended
September 29, 2005, respectively, approximately
$78 million for the period from June 17, 2005 through
December 29, 2005, and approximately $18 million and
approximately $17 million for the years ended
December 31, 2004 and 2003, respectively. We incur capital
expenditures for the purpose of maintaining production capacity
through replacement of existing equipment and facilities and,
from time to time, for facility expansion. Capital expenditures
totaled approximately $233 million and approximately
$55 million for the nine months ended September 28,
2006 and the seven and one-half months ended September 29,
2005, respectively, approximately $145 million for the
period from June 17, 2005 through December 29, 2005,
and approximately $54 million and approximately
$43 million for the years ended December 31, 2004 and
2003, respectively. The significant increases in research and
development and capital expenditures in the period from
June 17, 2005 through December 29, 2005 and the nine
months of 2006 are primarily attributable to increased spending
on the B787 program.
We may from time to time seek to retire our outstanding debt.
The amounts involved may be material. In addition, we may issue
additional debt if prevailing market conditions are favorable to
doing so and contractual restrictions permit us.
Off-Balance Sheet Arrangements
Other than operating leases disclosed in the notes to Spirit
Holdings financial statements included in this prospectus,
we have not entered into any off-balance sheet arrangements as
of September 28, 2006.
Tax
As indicated in Critical Accounting
Policies Income Tax in accordance with
SFAS No. 109, Accounting for Income Taxes and
SFAS No. 5, Accounting for Contingencies, we
establish reserves for certain tax contingencies when, despite
our view that the tax return positions are fully supportable, we
anticipate that certain positions may be challenged by the
various taxing authorities and it is probable that our positions
may not be fully sustained. The reserves are adjusted quarterly
to reflect changing facts and circumstances, such as the
progress of a tax audit, case law developments and new or
emerging legislation. We believe that the current tax reserves
are adequate and reflect the most probable outcome of known tax
contingencies. Any additional taxes will be determined only
after the completion of any future tax audits. The timing of
such payments cannot be determined, but we expect that they will
not be made within one year. Accordingly, the tax contingency
liability is included as a long term liability in our
consolidated balance sheet.
During the period from inception through December 29, 2005
and the nine month period ending September 28, 2006, upon
weighing available positive and negative evidence, including the
fact that Spirit Holdings was a new legal entity that had no
earnings history, we established a valuation allowance against
100% of our net deferred tax assets as it was, at that time,
considered more likely than not that we would not have the
ability to realize these assets. This affected our tax provision
by deferring tax benefits until such time as management
determines under SFAS No. 109 that we have a
sufficient earnings history, among other factors, to recognize
those benefits. Management reviews the need for a valuation
allowance on a quarterly basis. If we continue to create and
build on our positive earnings history, we anticipate releasing
approximately $80 million of the valuation allowance, of which
approximately $74 million will be a credit to the income
tax provision in the fourth quarter of 2006.
For income tax purposes, we are required to use the
percentage-of-completion (POC) method of accounting for our
long-term contracts. The tax POC method essentially defers
deductions for research and certain development costs incurred
in the early years of long-term programs. For the period from
inception through December 29, 2005, we reflected a net
loss on our financial statements driven in large part by B787
development costs. For tax purposes, such development costs are
deferred under the tax POC method and, accordingly, we generated
taxable income and a current period tax liability.
73
Repayment of B787 Advance Payments
The B787 Supply Agreement requires Boeing to make advance
payments to us for production articles in the aggregate amount
of $700 million, payable to us through 2007. We must then
repay this advance, without interest, in the amount of a
$1.4 million offset against the purchase price of each of
the first five hundred B787 shipsets delivered to Boeing.
In the event that Boeing does not take delivery of five hundred
B787 shipsets, any advances not then repaid will first be
applied against any outstanding B787 payments then due by
Boeing to us, with any remaining balance repaid at the rate of
$84 million per year beginning the year following our final
delivery of a B787 production shipset to Boeing.
Accordingly, the repayment liability is included as a long term
liability in our consolidated balance sheet.
Backlog
We estimate that, as of September 28, 2006, our revenues
associated with the Boeing, Airbus and Raytheon deliveries,
calculated based on contractual product prices and expected
delivery volumes, will be approximately $17.1 billion. This
is an increase of $3.1 billion over our corresponding
estimate as of the end of 2005 (after giving effect to the BAE
Acquisition), which reflects the strong orders at Boeing and
Airbus. Backlog is calculated based on the lower of the number
of units Spirit is under contract to produce and Boeing or
Airbus announced backlog, as applicable, in each case at
contract rates. Approximately 41% of the orders represented by
the backlog are within our contractual forward buy authorization
as of September 30, 2006 (after giving effect to the BAE
Acquisition), meaning that our customers will compensate us if
we purchase materials for such orders and they are subsequently
cancelled. The forward buy authorization as well as purchase
orders may be subject to cancellation or delay by the customer
prior to shipment, depending on contract terms. The level of
unfilled orders at any given date during the year will be
materially affected by the timing of our receipt of firm orders
and additional airplane orders, and the speed with which those
orders are filled. Accordingly, our backlog as of
September 30, 2006 may not necessarily represent the actual
amount of deliveries or sales for any future period.
Foreign Operations
We engage in business in various
non-U.S. markets.
As of April 1, 2006, we have a foreign subsidiary with two
facilities in the United Kingdom and a worldwide supplier base.
We purchase certain components and materials that we use in our
products from foreign suppliers and a portion of our products
will be sold directly to foreign customers, including Airbus, or
resold to foreign end-users (i.e. foreign airlines and
militaries).
Currency fluctuations, tariffs and similar import limitations,
price controls and labor regulations can affect our foreign
operations. Other potential limitations on our foreign
operations include expropriation, nationalization, restrictions
on foreign investments or their transfers and additional
political and economic risks. In addition, the transfer of funds
from foreign operations could be impaired by any restrictive
regulations that foreign governments could enact.
Sales to foreign customers are subject to numerous additional
risks, including the impact of foreign government regulations,
political uncertainties and differences in business practices.
There can be no assurance that foreign governments will not
adopt regulations or take other actions that would have a direct
or indirect adverse impact on our business or market
opportunities with such governments countries.
Furthermore, the political, cultural and economic climate
outside the United States may be unfavorable to our operations
and growth strategy.
For the nine months ended September 28, 2006, our revenues
from direct sales to
non-U.S. customers
were approximately $160.3 million, or approximately 7% of
total revenue for the same period. All of these sales occurred
during the period from April 1, 2006 through
September 28, 2006, following our acquisition of Spirit
Europe.
Inflation
A majority of our sales are conducted pursuant to long-term
contracts that set fixed unit prices, some of which provide for
price adjustment for inflation. In addition, we typically
consider expected inflation in determining proposed pricing when
we bid on new work. Although we have attempted to minimize the
74
effect of inflation on our business through these protections,
sustained or higher than anticipated increases in costs of labor
or materials could have a material adverse effect on our results
of operations.
Spirits contracts with suppliers currently provide for
fixed pricing in U.S. dollars; Spirit Europes supply
contracts are denominated in U.S. dollars, British pounds
sterling and Euros. In some cases our supplier arrangements
contain inflationary adjustment provisions based on accepted
industry indices, and we typically include an inflation
component in estimating our supply costs. As the metallic raw
material industry is experiencing significant demand pressure,
we expect that raw material market pricing will increase to a
level that may impact our costs, despite protections in our
existing supplier arrangements. We will continue to focus our
strategic cost reduction plans on mitigating the effects of this
cost increase on our operations.
Quantitative and Qualitative Disclosures About Market Risk
As a result of our operating and financing activities, we are
exposed to various market risks that may affect our consolidated
results of operations and financial position. These market risks
include fluctuations in interest rates, which impact the amount
of interest we must pay on our variable rate debt.
Other than the interest rate swaps described below, financial
instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash
investments and trade accounts receivable.
Accounts receivable include amounts billed and currently due
from customers, amounts earned but unbilled, particular
estimated contract changes, claims in negotiation that are
probable of recovery, and amounts retained by the customer
pending contract completion. For the nine months ended
September 28, 2006, approximately 92% of our revenues
(approximately 89% of our combined revenues assuming the BAE
Acquisition had occurred on January 1, 2006) were from
sales to Boeing. We continuously monitor collections and
payments from customers and maintain a provision for estimated
credit losses as deemed appropriate based upon historical
experience and any specific customer collection issues that have
been identified. While such credit losses have historically not
been material, we cannot guarantee that we will continue to
experience the same credit loss rates in the future.
We maintain cash and cash equivalents with various financial
institutions and perform periodic evaluations of the relative
credit standing of those financial institutions. We have not
experienced any losses in such accounts and believe that we are
not exposed to any significant credit risk on cash and cash
equivalents.
Some raw materials and operating supplies are subject to price
and supply fluctuations caused by market dynamics. Our strategic
sourcing initiatives are focused on mitigating the impact of
commodity price risk. We are party to collective raw material
sourcing contracts arranged through Boeing, Airbus and BAE
Systems. These collective sourcing contracts allow us to obtain
raw materials at pre-negotiated rates and help insulate us from
disruption associated with the unprecedented market demand
across the industry for metallic and composite raw materials. We
also have long-term supply agreements with a number of our major
parts suppliers. We, as well as our supply base, are
experiencing delays in the receipt of, and pricing increases
for, metallic raw materials (primarily aluminum and titanium)
due to unprecedented market demand across the industry. Based
upon discussions with customers and suppliers, we expect these
conditions to continue through at least 2012 as metallic raw
material supply adjusts to the industry upturn, market
conditions shift due to increased infrastructure demand in China
and Russia, and aluminum and titanium usage increases in a
widening range of global products. These market conditions began
to affect cost and production schedules in mid-2005, and may
have an impact on cash flows or results of operations in future
periods. We generally do not employ forward contracts or other
financial instruments to hedge commodity price risk, although we
are reviewing a full range of business options focused on
strategic risk management for all raw material commodities.
Any failure by our suppliers to provide acceptable raw
materials, components, kits or subassemblies could adversely
affect our production schedules and contract profitability. We
assess qualification of suppliers and continually monitor them
to control risk associated with such supply base reliance.
To a lesser extent, we also are exposed to fluctuations in the
prices of certain utilities and services, such as electricity,
natural gas, chemicals and freight. We utilize a range of
long-term agreements to minimize procurement expense and supply
risk in these areas.
75
Interest Rate Risks
After the effect of interest rate swaps, as of
September 28, 2006, after giving pro forma effect to this
offering, we had $500 million of total fixed rate debt and
$93.0 million of variable rate debt outstanding. Borrowings
under our senior secured credit facility bear interest that
varies with LIBOR. Interest rate changes generally do not affect
the market value of such debt, but do impact the amount of our
interest payments and, therefore, our future earnings and cash
flows, assuming other factors are held constant. Assuming other
variables remain constant, including levels of indebtedness, a
one percentage point increase in interest rates on our variable
debt would have an estimated impact on pre-tax earnings and cash
flows for the next twelve months of approximately
$2 million.
As required under our senior secured credit facility, in July
2005 we entered into
floating-to-fixed
interest rate swap agreements with notional amounts totaling
$500 million as follows:
|
|
|
|
|
an effective fixed interest rate of 6.59% from June 2005 to July
2008 on $100 million of the Term Loan B; |
|
|
|
an effective fixed interest rate of 6.65% from June 2005 to July
2009 on $300 million of the Term Loan B; and |
|
|
|
an effective fixed interest rate of 6.72% from June 2005 to July
2010 on $100 million of the Term Loan B. |
The purpose of entering into these swaps was to reduce our
exposure to variable interest rates. In accordance with
SFAS No. 133, the interest rate swaps are being
accounted for as cash flow hedges and the fair value of the swap
agreements is reported as an asset on the balance sheet. The
fair value of the interest rate swaps was a net asset of
approximately $8.4 million at September 28, 2006.
Foreign Exchange Risks
On April 1, 2006, in connection with the BAE Acquisition,
we acquired forward foreign currency exchange contracts
denominated in British pounds sterling with notional amounts
totaling approximately $94 million. The purpose of these
forward contracts is to allow Spirit Europe to reduce its
exposure to fluctuations of U.S. dollars.
As a result of the BAE Acquisition, we have sales, expenses,
assets and liabilities that are denominated in British pounds
sterling. Spirit Europes functional currency is the
British pound sterling. However, sales of Spirit Europes
products to Boeing and some procurement costs are denominated in
U.S. dollars. As a consequence, movements in exchange rates
could cause net sales and our expenses to fluctuate, affecting
our profitability and cash flows. We use foreign currency
forward contracts to reduce our exposure to currency exchange
rate fluctuations. The objective of these contracts is to
minimize the impact of currency exchange rate movements on our
operating results. We do not use these contracts for speculative
or trading purposes.
In addition, even when revenues and expenses are matched, we
must translate British pound sterling denominated results of
operations, assets and liabilities for our foreign subsidiaries
to U.S. dollars in our consolidated financial statements.
Consequently, increases and decreases in the value of the
U.S. dollar as compared to the British pound sterling will
affect our reported results of operations and the value of our
assets and liabilities on our consolidated balance sheet, even
if our results of operations or the value of those assets and
liabilities has not changed in its original currency. These
transactions could significantly affect the comparability of our
results between financial periods and/or result in significant
changes to the carrying value of our assets, liabilities and
shareholders equity.
In accordance with SFAS No. 133, the foreign exchange
contracts are being accounted for as cash flow hedges. The fair
value of the foreign exchange contracts was a net asset of
approximately $11.4 million at September 28, 2006.
Other than the interest rate swaps and foreign exchange
contracts, we have no other derivative financial instruments.
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Internal Control
Prior to the Boeing Acquisition, Boeing Wichita relied on
Boeings shared services group for certain business
processes associated with its financial reporting including
treasury, income tax accounting and external reporting. Since
the Boeing Acquisition, we have had to develop these and other
functional areas as a stand alone entity including the necessary
processes and internal control to prepare our financial
statements on a timely basis in accordance with U.S. GAAP. We
are in the process of evaluating our internal controls over the
financial reporting processes of our recently acquired foreign
operations and will implement improvements where we consider
them to be necessary.
Generally accepted auditing standards define a material weakness
as a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial
statements will not be prevented or detected. In connection with
our quarterly financial statements as of and for the three
months ended September 29, 2005, we concluded that we had
three material weaknesses in our internal control over financial
reporting as described below.
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We did not maintain effective internal control over the
quarterly closing and consolidation process, including the
account reconciliation and review process and accuracy of
certain accounts receivable transactions. Specifically, controls
over the reconciliation of the accounts receivable subsidiary
ledger to its associated general ledger balances, application of
certain cash payments from customers and the investigation and
resolution of customer payment discrepancies were ineffective to
appropriately record certain accounts receivable transactions.
This control deficiency resulted in adjustments to the accounts
receivable, revenue and cash accounts. If not remediated, this
deficiency would result in a material misstatement of accounts
receivable and related accounts. |
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We did not maintain effective controls over our income tax
provision and the related balance sheet accounts. Specifically,
controls over the accuracy of the income tax provision and
related deferred tax accounts as well as the Companys
related financial statement disclosures in accordance with
SFAS No. 109 were ineffective to appropriately apply
SFAS No. 109 in evaluating its required valuation
allowance and establishing the tax basis of the acquired assets
and assumed liabilities of the Boeing Acquisition. This control
deficiency resulted in adjustments to the deferred tax,
valuation allowance and income tax provision accounts as well as
our related SFAS No. 109 financial statement disclosures. |
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We did not maintain effective controls over the accuracy and
completeness of our interim financial statements of our Tulsa,
Oklahoma facility. Specifically, there were ineffective controls
over the reconciliation of certain general ledger accounts and
the aggregation and reporting of those accounts into our
financial statements which could have resulted in a material
misstatement in our financial statements. |
We have implemented many improvements in our internal control
and processes over financial reporting including specific
remediation efforts to address the aforementioned material
weaknesses. Our remediation is described below.
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During 2005 and the first quarter of 2006, we remediated the
material weakness associated with our quarterly closing and
reconciliation process and accounts receivable accounting by
strengthening supervisory reviews by management personnel and
implementing monthly procedures to reconcile our accounts
receivable subsidiary ledger to our associated general ledger
accounts. Additionally, we developed monitoring procedures to
identify customer payment discrepancies and implemented cash
application and collection activities to investigate and resolve
such discrepancies. This remediation required us to add
additional resources within our billing, cash application and
collection departments. |
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During 2005, we remediated the material weakness associated with
our income tax accounting in accordance with SFAS No. 109.
This remediation included hiring competent resources to staff a
tax department (including an experienced tax director),
developing a complete and accurate tax balance sheet and
performing periodic income tax provision, deferred tax and
valuation allowance estimates and supporting calculations.
Additionally, our tax and accounting departments periodically |
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review and evaluate our estimated effective income tax rate,
realizability of deferred tax assets, valuation allowance
requirements and the tax implications of significant and
non-recurring transactions to ensure complete and accurate
reporting and disclosures under SFAS No. 109. |
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During 2005, we remediated the material weakness associated with
the financial consolidation of our Tulsa, Oklahoma facility.
This remediation included expanding the capabilities of Tulsa
finance resources by training existing Tulsa staff and hiring
additional finance resources, developing and implementing
corporate oversight and monitoring procedures, performing
detailed account reconciliation and developing reporting
templates to ensure a complete and accurate consolidation of the
financial statements of the Tulsa facility into our consolidated
financial statements. |
As a result of the remediation efforts completed through the
quarter ended June 29, 2006, we believe that these material
weaknesses have been remediated.
In connection with the issuance of our December 29, 2005
and June 29, 2006 financial statements in the third quarter
of 2006, we concluded that we had an additional material
weakness in our internal control over financial reporting as
described below.
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We did not maintain effective controls over our determination of
the fair values ascribed for financial reporting purposes to
stock compensation awards granted to our employees and directors
through June 29, 2006 in accordance with SFAS
No. 123(R), Share Based Payment. Specifically, we
did not properly estimate the fair values of these awards in
determining the accuracy of our stock compensation expense under
SFAS No. 123(R). This control deficiency resulted in a
restatement of our financial results as of December 29,
2005 and June 29, 2006 and for the periods then ended to
adjust selling, general and administrative expenses, income
taxes and equity accounts as well as our earnings per share and
stock compensation financial statement disclosures. |
During the third quarter of 2006, we began to remediate the
material weakness associated with determining the fair value of
our stock compensation awards. These remediation efforts
included the development of a valuation methodology and
corresponding model to determine the fair value of our
underlying equity on a per share basis at each of our equity
award grant dates. In addition, we have implemented additional
corporate accounting oversight, monitoring and review procedures
to validate the fair values and resulting stock compensation
expense to be recorded in accordance with SFAS No. 123(R).
As a result, we believe that this material weakness has been
remediated.
Beginning with our Annual Report on
Form 10-K for
fiscal year 2007, pursuant to Section 404 of the
Sarbanes-Oxley Act, our
management will be required to assess the effectiveness of our
internal control over financial reporting, and we will be
required to have our independent registered public accounting
firm audit managements assessment of the operating
effectiveness of our internal control over financial reporting.
78
BUSINESS
Our Company
We are the largest independent non-OEM designer and manufacturer
of aerostructures in the world. Aerostructures are structural
components such as fuselages, propulsion systems and wing
systems for commercial and military aircraft. Spirit Holdings
was formed in February 2005 as a holding company of Spirit.
Spirits operations commenced on June 17, 2005
following the acquisition of Boeing Wichita. On April 1,
2006, we became a supplier to Airbus through our BAE
Acquisition. Although Spirit Holdings is a recently-formed
company, its predecessor, Boeing Wichita, had 75 years of
operating history and expertise in the commercial and military
aerostructures industry. For the nine months ended
September 28, 2006 we generated revenues of approximately
$2,356 million and had net income of approximately
$86 million. For the three months ended September 28,
2006, we generated revenues of approximately $830 million
and net income of approximately $34 million.
We are the largest independent supplier of aerostructures to
both Boeing and Airbus. We manufacture aerostructures for every
Boeing commercial aircraft currently in production, including
over 70% of the airframe content for the Boeing B737. As a
result of our unique capabilities both in process design and
composite materials, we were awarded a contract that makes us
the largest aerostructures content supplier on the Boeing B787,
Boeings next generation twin aisle aircraft. Furthermore,
we believe we are the largest content supplier for the wing for
the Airbus A320 family and we are a significant supplier for
Airbus new A380. Sales related to large commercial
aircraft production, some of which may be used in military
applications, represented approximately 99% of our revenues for
the nine months ended September 28, 2006.
We derive our revenues primarily through long-term supply
agreements with both Boeing and Airbus. For the nine months
ended September 28, 2006, approximately 89% and
approximately 10% of our combined revenues (assuming the BAE
Acquisition occurred on January 1, 2006) were generated
from sales to Boeing and Airbus, respectively. We are currently
the sole-source supplier of 96% of the products we sell to
Boeing and Airbus, as measured by dollar value of the products
sold. We are a critical partner to our customers due to the
broad range of products we currently supply to them and our
leading design and manufacturing capabilities using both
metallic and composite materials. Under our supply agreements
with Boeing and Airbus, we supply essentially all of our
products for the life of the aircraft program (other than A380),
including commercial derivative models. For the A380 we have a
long-term supply contract with Airbus that covers a fixed number
of product units at established prices.
We are organized into three principal reporting segments:
(1) Fuselage Systems, which include the forward, mid- and
rear fuselage sections, (2) Propulsion Systems, which
include nacelles, struts/pylons and engine structural components
and (3) Wing Systems, which include wings, wing components
and flight control surfaces. All other activities fall within
the All Other segment, principally made up of sundry sales of
miscellaneous services and sales of natural gas through a
tenancy-in-common with other Wichita companies. Fuselage
Systems, Propulsion Systems, Wing Systems and All Other
represented approximately 49%, 27%, 23% and 1%, respectively, of
our revenues for the quarter ended September 28, 2006.
Our History
In December 2004 and February 2005, an investor group led by
Onex Partners LP and Onex Corporation formed Spirit and Spirit
Holdings, respectively, for the purpose of acquiring Boeing
Wichita. The Boeing Acquisition was completed on June 16,
2005. Prior to the acquisition, Boeing Wichita functioned as an
internal supplier of parts and assemblies for Boeings
airplane programs and had very few sales to third parties.
In connection with the Boeing Acquisition, we entered into a
long-term supply agreement under which we are Boeings
exclusive supplier for substantially all of the products and
services provided by Boeing Wichita to Boeing prior to the
Boeing Acquisition. The supply contract is a requirements
contract covering certain products such as fuselages,
struts/pylons and nacelles for Boeing B737, B747, B767 and
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B777 commercial aircraft programs for the life of these
programs, including any commercial derivative models. Pricing
for existing products on in-production models is contractually
set through May 2013, with average prices decreasing at higher
volume levels and increasing at lower volume levels. We also
entered into a long-term supply agreement for Boeings new
B787 platform covering the life of this platform, including
commercial derivatives. Under this contract we will be
Boeings exclusive supplier for the forward fuselage, fixed
and moveable leading wing edges and struts for the B787. Pricing
for these products on the B787-8 model is generally set through
2021, with prices decreasing as cumulative production volume
levels are achieved.
On April 1, 2006, through our wholly-owned subsidiary,
Spirit Europe, we acquired BAE Aerostructures. Spirit Europe
manufactures leading and trailing wing edges and other wing
components for commercial aircraft programs for Airbus and
Boeing and produces various aerostructure components for certain
Raytheon business jets. The BAE Acquisition provides us with a
foundation to increase future sales to Airbus, as Spirit Europe
is a key supplier of wing and flight control surfaces for the
A320 platform, Airbus core single aisle program, and of
wing components for the A380 platform, one of Airbus most
important new programs and the worlds largest commercial
passenger aircraft. Under our supply agreements with Airbus, we
supply most of our products for the life of the aircraft
program, including commercial derivative models, with pricing
determined through 2010. For the A380, we have a long-term
supply contract with Airbus that covers a fixed number of units.
Our Industry
Based on our research the global market for aerostructures is
estimated to have totaled $24 billion in annual sales in
2004. Currently, aircraft OEMs outsource approximately half of
the aerostructures market to independent third parties such as
ourselves. We expect the outsourcing of the design, engineering
and manufacturing of aerostructures to increase as OEMs
increasingly focus operations on final assembly and support
services for their customers. The original equipment
aerostructures market can be divided by end market application
into three market sectors: (1) commercial (including
regional and business jets), (2) military and
(3) modifications, upgrades, repairs and spares. While we
serve all three market sectors, we primarily derive our current
revenues from the commercial market sector. We estimate that the
commercial sector represents approximately 61% of the total
aerostructures market, while the military sector represents
approximately 28% and the modifications, upgrades, repairs and
spares sector represents approximately 11%.
Demand for commercial aerostructures is directly correlated to
demand for new aircraft. Demand for new aircraft is a function
of several factors such as demand for commercial air transport
and freight capacity, financial health of aircraft operators,
and general economic conditions. New large commercial aircraft
deliveries by Boeing and Airbus totaled 668 in 2005, up from 605
in 2004 and 586 in 2003, which was the most recent cyclical
trough following the 1999 peak of 914 deliveries. Aircraft
orders and deliveries in 2002 and 2003 were adversely impacted
by economic recessionary conditions, the terrorist attacks of
September 11, 2001 and SARS outbreaks in 2002. Demand has
since rebounded, resulting in record orders in 2005 for 2,057
Boeing and Airbus aircraft, which are expected to be delivered
over the next several years. According to published estimates by
Boeing and Airbus, they expect to deliver a combined total of
approximately 825 commercial aircraft in 2006. As of
September 30, 2006, Boeing and Airbus had a combined
backlog of 4,294 commercial aircraft, which has grown from
a combined backlog of 2,597 as of December 31, 2004.
The business jet market segment is driven by corporate
profitability, worldwide economic growth and the extent to which
business jets are viewed as a viable alternative to commercial
air travel. Higher corporate profit rates coupled with emerging
business jet market growth are producing what we believe will be
a record business jet market in 2006, with projected deliveries
of approximately 900 aircraft, and we expect the industry
to remain relatively steady in the coming years. Based on our
research, we believe that over the next ten year period, over
10,000 business jets, worth approximately $141 billion in
sales, will be produced.
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The demand for regional jets, which seat 30-120 passengers, is
driven by airlines desire to match demand and supply more
closely on short routes, while maintaining or expanding their
geographical footprint. In the recent past, regional jet
manufacturers have benefited from bankruptcies of various
U.S. carriers because bankruptcies allow airlines to obtain
relaxation of certain requirements in pilots contracts and
therefore substitute smaller jets for larger aircraft. However,
because regional jets are less fuel efficient per seat than
larger aircraft, the current fuel price environment makes them
less economical to operate; 2004 and 2005 experienced lower
order intakes than 2003, and deliveries exceeded orders in both
years, reducing overall backlog.
The market for military aerostructures is dependent upon
government development and procurement of military aircraft,
which is affected by many factors, including force structure and
fleet requirements, the DoD and foreign defense budgets, the
political environment and public support for defense spending
and current and expected threats to U.S. and foreign national
security and related interests. Following the terrorist attacks
of September 11, 2001, the DoD aircraft procurement budget
rose to $20.9 billion in federal fiscal 2002, excluding
supplementals, from $18.8 billion in federal fiscal 2001,
and since 2002 has risen at a compounded annual growth rate of
4.85% to $25.3 billion in federal fiscal 2006.
Aircraft modifications, upgrades, repairs and spares are
intended to extend the useful life of in-service aircraft.
Modifications are structural changes that enable existing
aircraft to perform alternative missions. For example, certain
B747 models used for commercial transport service have been
modified to provide increased freight capacity by removing
seating and adding cargo doors and support structures for
increased weight loads. Upgrades represent the application of
new technology to increase performance characteristics. For
example, winglets are affixed to the tips of existing wings to
increase aerodynamics and fuel efficiencies. The market for
repairs and spares, otherwise referred to as the aftermarket,
encompasses both scheduled and event-driven maintenance of
existing aircraft structural components. Scheduled maintenance
is performed at regular intervals to ensure structural integrity
of aerostructures and drives demand for spares and repairs. New
components are also often required to replace components damaged
or impaired by corrosion, lightning strikes or ground-based
activities.
Our Competitive Strengths
We believe our key competitive strengths include:
Leading Position in the Growing Commercial Aerostructures
Market. We are the largest independent non-OEM commercial
aerostructures manufacturer, with an estimated 19% market share
among all aerostructures suppliers. We believe our market
position and significant scale favorably position us to
capitalize on the increased demand for large commercial
aircraft. As of September 30, 2006, Boeing and Airbus had a
combined backlog of 4,294 commercial aircraft, which has
grown from a backlog of 2,597 as of December 31, 2004. We
are under contract to provide aerostructure products for
approximately 97% of the aircraft that comprise this commercial
aircraft backlog. The significant aircraft order backlog and our
strong relationships with Boeing and Airbus should enable us to
continue to profitably grow our core commercial aerostructures
business.
Participation on High Volume and Major Growth Platforms.
We derive a high proportion of our Boeing revenues from
Boeings high volume B737 program and a high proportion of
our Airbus revenues from the high volume A320 program. The B737
and A320 families are Boeings and Airbus best
selling commercial airplanes. We also have been awarded a
significant amount of work on the major new twin aisle programs
launched by Boeing and Airbus, the B787 and the A380.
Stable Base Business. We have entered into exclusive
long-term supply agreements with Boeing and Airbus, our two
largest customers, making us the exclusive supplier for most of
the business covered by these contracts. Our supply agreements
with Boeing provide that we will continue to supply essentially
all of the products we currently supply to Boeing for the life
of the current aircraft programs, including commercial
derivative models. The principal supply agreements we have
entered into with Boeing make us Boeings exclusive source
for substantially all of the products covered by the agreements,
meaning that Boeing may not produce the products internally or
purchase them from other suppliers. In addition, for
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essentially all of our products currently sold to Boeing, our
product pricing is variable such that at lower annual volumes
the average prices are higher, thereby helping to protect our
margins if volume is reduced.
Under our supply agreements with Airbus, we supply most of our
products for the life of the aircraft program, including
commercial derivative models, with pricing determined through
2010. For the A380, we have a long-term supply contract with
Airbus that covers a fixed number of units. We are currently the
sole-source supplier for approximately 78% of the products, as
measured by dollar value, that we sell to Airbus. We believe our
long-term supply contracts with our two largest customers
provide us with a stable base business upon which to build.
Strong Incumbent and Competitive Position. We have a
strong incumbent position on the products we currently supply to
Boeing and Airbus due not only to our long-term supply
agreements, but also to our long-standing relationships with
Boeing and Airbus, as well as to the high costs OEMs would incur
to switch suppliers on existing programs. We have strong,
embedded relationships with our primary customers as most of our
senior management team are former Boeing or Airbus executives.
We believe our senior management team possesses inherent
knowledge of and relationships with Boeing and Airbus that may
not exist to a corresponding degree between other suppliers and
these two OEMs.
We believe that OEMs incur significant costs to change
aerostructures suppliers once contracts are awarded. Such
changes after contract award require additional testing and
certification, which may create production delays and
significant costs for both the OEM and the new supplier. We also
believe it would be cost prohibitive for other suppliers to
duplicate our facilities and the over 20,000 major pieces of
equipment that we own or operate. The combined insurable
replacement value of all the buildings and equipment we own or
operate is over $5 billion, including approximately
$2.3 billion and approximately $1.7 billion for
buildings and equipment, respectively, that we own and
approximately $1.1 billion for other equipment used in the
operation of our business. The insurable values represent the
estimated replacement cost of buildings and equipment used in
our operations and covered by property insurance, and exceeds
the fair value of assets acquired as determined for financial
reporting purposes. As a result, we believe that so long as we
continue to meet our customers requirements, the
probability of their changing suppliers on our current statement
of work is quite low.
Industry Leading Technology, Design Capabilities and
Manufacturing Expertise. Spirit Holdings predecessor,
Boeing Wichita, had over 75 years of experience designing
and manufacturing large-scale, complex aerostructures and we
possess industry-leading engineering capabilities that include
significant expertise in structural design and technology, use
of composite materials, stress analysis, systems engineering and
acoustics technology. With approximately 800 degreed engineering
and technical employees (including over 200 degreed contract
engineers), we possess knowledge and manufacturing know-how that
would be difficult for other suppliers to replicate. In addition
to our engineering expertise, we have strong manufacturing and
technological capabilities. Our manufacturing processes are
highly automated, delivering efficiency and quality, and we have
expertise in manufacturing aerostructures using both metallic
and composite materials. We have strong technical expertise in
bonding and metals fabrication, assembly, tooling and composite
manufacturing, including handling all composite material grades
and fabricating large scale complex contour composites. For
example, we currently manufacture the largest commercial
composite aerostructure, the Boeing B777 nacelle, and it is
in part because of this expertise that Boeing has selected us to
develop and supply the forward fuselage section for the Boeing
B787, one of the largest, most complex composite monostructures
currently designed for any commercial aircraft globally.
We believe our technological, engineering and manufacturing
capabilities separate us from many of our competitors and give
us a significant competitive advantage to grow our business and
increase our market share. The fact that we are the only
external supplier of forward fuselages for large commercial
aircraft demonstrates our industry leadership. The forward
fuselage is one of the most complex and technologically advanced
aerostructures on a commercial aircraft because it must satisfy
the aircrafts contour requirements, balance strength,
aerodynamics and weight, and house the cockpit and avionics.
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Given this complexity, the forward fuselage sells at a premium,
for approximately twice the value per pound of other fuselage
sections.
Competitive and Predictable Labor Cost Structure. In
connection with the Boeing Acquisition, we achieved
comprehensive cost reductions. The cornerstones to our cost
reductions were: (1) labor savings, (2) pension and
other benefit savings, (3) reduced corporate overhead, and
(4) operational efficiency improvements. At the time of the
acquisition, we reduced our workforce by 15% and entered into
new labor contracts with our unions that established wage levels
which are in-line with the local market. We also changed work
rules and significantly reduced the number of job categories,
resulting in greater flexibility in work assignments and
increased productivity. We were also able to reduce pension
costs, largely through a shift from a defined benefit plan to
more predictable defined contribution and union-sponsored plans,
and to reduce fringe benefits by increasing employee
contributions to health care plans and decreasing retiree
medical costs. In addition, we replaced corporate overhead
previously allocated to Boeing Wichita when it was a division of
Boeing with our own significantly lower overhead spending. As a
result of these initiatives, we achieved approximately
$200 million of annual recurring cost savings, assuming
annual deliveries remain constant at 2005 rates. Moreover, as a
result of our long-term collective bargaining agreements with
most of our labor unions, our labor costs should be fairly
predictable well into 2010.
We have also begun to implement a number of operational
efficiency improvements, including global sourcing to reduce
supplier costs and realignment of our business units. Since the
Boeing Acquisition, as a result of these efficiency initiatives,
we expect to achieve approximately $80 million of
additional average annual recurring cost savings, assuming
annual deliveries remain constant at 2005 rates. We believe
there continue to be significant cost savings opportunities
through our ongoing initiatives. We believe our competitive cost
structure has positioned us to win significant new business and
was a factor in three recent awards of significant contracts.
Experienced Management Team with Significant Equity
Ownership. We have an experienced and proven management team
with an average of over 20 years of aerospace industry
experience. Our management team has successfully expanded our
business, reduced costs and established the stand alone
operations of our business. After giving effect to this
offering, members of our management team will hold common stock
equivalent to approximately 0.5% of our company on a fully
diluted basis.
Our Strategy
Our goal is to remain a leading aerostructures manufacturer and
to increase revenues while maximizing our profitability and
growth. Our strategy includes the following:
Support Increased Aircraft Deliveries. We value being the
largest independent aerostructures supplier to both Boeing and
Airbus and core to our business strategy is a determination to
meet or exceed their expectations under our existing supply
arrangements. Our customers expect us to deliver high quality
products on schedule. We are constantly focused on improving our
manufacturing efficiency and maintaining our high standards of
quality and on-time delivery to meet these expectations. We are
also focused on supporting our customers increase in new
aircraft production and the introduction of key aircraft
programs such as the Boeing B787 and the Airbus A380. We are
adjusting our manufacturing processes, properties and facilities
to accommodate an increase in production and an expected shift
in mix. With the upturn in the commercial aerospace market, we
have begun to see delivery rates increase. In 2005, we delivered
308 Boeing shipsets (one shipset being a full set of components
produced by us for one airplane), as compared to 270 Boeing
shipsets in 2004. For the first nine months of 2006, we
delivered 289 Boeing shipsets, as compared to
237 Boeing shipsets for the nine months ended
September 29, 2005. Along with rising production rates, we
are also experiencing a mix change, with a higher ratio of
larger aircraft, which generally have higher dollar value
content. We believe we are well positioned to meet the increased
demand for our products by our customers.
Win New Business from Existing and New Customers. We
believe that we are well positioned to win additional work from
Boeing and Airbus, particularly work that they currently
insource but that they might
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shift to an external supplier in the future and work on new
aircraft programs. Based on our research, we believe that
outsourcing design, engineering and manufacturing of
aerostructures to suppliers increased from approximately 40% in
2003 to approximately 49% by year end in 2004 (adjusting for the
outsourcing by Boeing as a result of the Boeing Acquisition),
and we expect additional increases of outsourcing in the future.
In addition, opportunities for us to win significant new
business will typically arise when OEMs design new aircraft
programs such as the Boeing B787 or the Airbus A380, or a new
aircraft derivative, such as cargo versions of passenger
aircraft, larger or extended range versions of in-production
airplanes, and military versions of commercial airplanes.
Suppliers to aircraft OEMs must meet demanding quality and
reliability standards, and our record of meeting those standards
over decades with Boeing and Airbus is a key competitive
strength. We believe we are well positioned to increase our
statement of work from our customers given our strong
relationships, our size, design and build capabilities and our
financial resources, which are necessary to make proper
investments. Since inception, Spirit has bid on additional work
with existing customers in the large commercial aircraft,
business jet, rotorcraft and military sectors.
Prior to the Boeing Acquisition, Boeing Wichita was unable to
pursue non-Boeing OEM business. However, as an independent
company, we now have significant opportunities to increase our
sales to OEMs other than Boeing. We believe our design,
engineering and manufacturing capabilities are highly attractive
to potential new customers and provide a competitive advantage
in winning new aerostructures business. For example, we believe
we are well positioned to win new composite aerostructures
business from OEMs by leveraging our composite expertise
developed from the design and production of the Boeing B777
nacelle and the development of the Boeing B787 forward fuselage.
Based on our research, the composite aerostructures market is
currently estimated to have generated over $2 billion in
annual sales in 2004 with a projected annual growth rate of 11%
over the period from 2004 to 2009. Since inception, Spirit has
bid on supply contracts with new customers in the regional
aircraft, business jet, rotorcraft, military and engine
manufacturer sectors.
We have established a sales and marketing infrastructure to
support our efforts to win business from new and existing
customers. To win new business, we market our mix of engineering
expertise in the design and manufacture of aerostructures, our
advanced manufacturing capabilities with both composites and
metals, and our competitive cost structure. As a result of our
core capabilities, competitive cost position, and sales and
marketing efforts, we have won several significant contracts
from non-Boeing customers in competitive bid processes since the
Boeing Acquisition.
Research and Development Investment in Next Generation
Technologies. We invest in direct research and development
for current programs to strengthen our relationships with our
customers and new programs to generate new business. As part of
our research and development effort, we work closely with OEMs
and integrate our engineering teams into their design processes.
As a result of our close coordination with OEMs design
engineering teams and our research and development investments
in technology, engineering and manufacturing, we believe we are
well positioned to win new business on new commercial and
military platforms.
Provide New Value-Added Services to our Customers. We
believe we are one of the few independent suppliers that possess
the core competencies to not only manufacture, but also to
integrate and assemble complex system and structural components.
For example, we have been selected to assemble and integrate
avionics, electrical systems, hydraulics, wiring and other
components for the forward fuselage and pylons for the Boeing
B787. As a result, Boeing expects to be able to ultimately
assemble a B787 so that it is ready for test flying within three
days after it receives our shipset, as compared to 25 to
30 days for assembly of a B737. We believe our ability to
integrate complex components into aerostructures is a service
that greatly benefits our customers by reducing their flow time
and inventory holding costs. As a result of our ability to
integrate and assemble components from a diverse supplier base,
we believe we are integral to our customers supply chain.
Continued Improvement to our Low Cost Structure. Although
we achieved significant cost reductions at the time of
acquisition, we remain focused on further reducing costs. There
continue to be cost saving opportunities in our business and we
have identified and begun to implement them. We expect that most
84
of our future cost saving opportunities will arise from
increased productivity, continued outsourcing of non-core
activities, and improved procurement and sourcing through our
global sourcing initiatives. We believe our strategic sourcing
expertise should allow us to develop and manage low-cost supply
chains in Asia and Central Europe. Our goal is to continue to
increase our material sourcing from low-cost jurisdictions.
Pursue Strategic Acquisitions on an Opportunistic Basis.
The commercial aerostructures market is highly fragmented with
many small private businesses and divisions of larger public
companies. Given the market fragmentation, coupled with the
trend by OEMs to outsource work to Tier 1 manufacturers, we
believe our industry could experience significant consolidation
in the coming years. Although our main focus is to grow our
business organically, we believe we are well positioned to
capture additional market share and diversify our current
business through opportunistic strategic acquisitions.
Our Relationship with Boeing
Supply Agreement with Boeing
for Current Platforms
Overview. In connection with the Boeing Acquisition,
Spirit entered into long-term supply agreements under which it
is Boeings exclusive supplier for substantially all of the
products and services provided by Boeing Wichita to Boeing prior
to the closing of the Boeing Acquisition. The main supply
contract is primarily comprised of two separate agreements:
(1) the Special Business Provisions, or Sustaining SBP,
which sets forth the specific terms of the supply arrangement
with regard to Boeings B737, B747, B767 and B777 aircraft
and (2) the General Terms Agreement, or GTA, which sets
forth other general contractual provisions relating to our
various supply arrangements with Boeing, including provisions
relating to termination, events of default, assignment, ordering
procedures, inspections and quality controls. The summary below
describes provisions contained in both the Sustaining SBP and
the GTA as both agreements govern the main supply arrangement.
We refer below to the Sustaining SBP, the GTA and any related
purchase order or contract collectively as the Supply
Agreement. The following description of the Supply
Agreement summarizes the material portions of the agreement. The
Supply Agreement setting forth the principal terms and
conditions of our contractual relationship with Boeing is filed
as exhibits to the registration statement of which this
prospectus forms a part. The Supply Agreement is a requirements
contract which covers certain products, including fuselages,
struts/pylons and nacelles (including thrust reversers), as well
as tooling, for Boeing B737, B747, B767 and B777 commercial
aircraft programs for the life of these programs, including any
commercial derivative models. During the term of the Supply
Agreement and absent default by Spirit, Boeing is obligated to
purchase all of its requirements for products covered by the
Sustaining SBP from Spirit and prohibited from manufacturing
such products itself. Although Boeing is not required to
maintain a minimum production rate, Boeing is subject to a
maximum production rate above which it must negotiate with us
regarding responsibility for nonrecurring expenditures related
to a capacity increase.
Pricing. The Supply Agreement sets forth established
prices for recurring products through May 2013. Prices are
adjusted each year based on a quantity-based price adjustment
formula described in the Supply Agreement whereby average per
unit prices are higher at lower volumes and lower at higher
volumes. Prices are subject to adjustment for abnormal inflation
(above a specified level in any year) and for certain
production, schedule and other changes. See
Changes below.
Two years prior to the expiration of the established pricing
terms, Spirit will propose pricing for the following ten years
or another period agreed upon by the parties. Boeing and Spirit
are required to negotiate the pricing for such additional period
in good faith based on then-prevailing U.S. market
conditions for forward fuselages, B737 fuselages and B737/B777
struts and nacelles and based on then-prevailing global market
conditions for all other products. If the parties are unable to
agree upon pricing, then, until such dispute is resolved,
pricing will be determined according to the price as of the
expiration of the initial eight-year period, adjusted using the
then-existing quantity-based price adjustment formula and annual
escalation until such time as future pricing is agreed.
85
Prices for commercial derivative models are to be negotiated in
good faith by the parties based on then-prevailing market
conditions. If the parties cannot agree on price, then the
parties must engage in dispute resolution pursuant to
agreed-upon procedures.
Tooling. Under the Supply Agreement, Boeing owns all
tooling used in production or inspection of products covered by
the Sustaining SBP. Spirit is responsible for providing all new
tooling required to manufacture and deliver products under the
Supply Agreement, and Boeing acquires title to such tooling upon
payment. Since Boeing owns this tooling, Spirit may not sell,
lease, dispose of or encumber any of it. Spirit has the option
to purchase certain limited tooling.
Although Boeing owns the tooling, Spirit has the limited right
to use all tooling without charge to perform its obligations to
Boeing under the Supply Agreement and also to provide
aftermarket services in accordance with the rights granted to
Spirit under other related agreements, including royalty-bearing
license agreements. Boeing is entitled to use the tooling only
under limited circumstances. Spirit is responsible for
maintaining and insuring the tooling. Spirits rights to
use the tooling are subject to the termination provisions of the
Supply Agreement.
Changes. Upon written notification to Spirit, Boeing has
the right to make changes within the general scope of work
performed by Spirit under the Supply Agreement. If any such
change increases or decreases the cost or time required to
perform, Boeing and Spirit will negotiate an equitable
adjustment (based on rates, factors and methodology set forth in
the Supply Agreement) to the price or schedule to reflect the
change, except that Spirit will be responsible for absorbing the
cost of certain changes. The Supply Agreement also provides for
equitable adjustments to product prices in the event there are
order accelerations or decelerations, depending on lead times
identified in the Supply Agreement. In addition, the Supply
Agreement provides for equitable adjustments to recurring part
prices as well as the price of nonrecurring work upon the
satisfaction of certain conditions and upon certain minimum
dollar thresholds being met.
Raw Materials. Spirit is required to procure from Boeing
(or its designated service provider) certain raw materials used
in producing Boeing products, except that Spirit has the right
to procure such raw materials from other sources if it
reasonably believes that Boeing or its designated service
provider cannot support its requirements. Revisions to the raw
material pricing terms set forth in the Supply Agreement may
entitle Spirit to a price adjustment.
Third Party Pricing. Spirit may be permitted to purchase
supplies or subparts directly from Boeings subcontractors
under the terms of Boeings subcontracts. If Spirit does
so, a majority of the savings achieved as a result of purchasing
through the subcontracts will be applied towards price
reductions on the applicable Boeing products.
Nonrecurring Work Transfer. Following an event of default
(as described below), termination by Boeing of an airplane
program, expiration of the Supply Agreement or the termination
of the Supply Agreement by mutual agreement of the parties,
Spirit must transfer to Boeing all tooling and other
nonrecurring work relating to the affected program, or if the
entire Supply Agreement is cancelled, all tooling and other
nonrecurring work covered by the Supply Agreement.
Additional Spirit Costs. In the event that Boeing rejects
a product manufactured by Spirit, Boeing is entitled to repair
or rework such product, and Spirit is required to pay all
reasonable costs and expenses incurred by Boeing related
thereto. In addition, Spirit is required to reimburse Boeing for
costs expended in providing Spirit and/or Spirits
contractors technical or manufacturing assistance with respect
to Spirit nonperformance issues.
Termination for Convenience. Subject to the restrictions
prohibiting Boeing from manufacturing certain products supplied
by Spirit or purchasing such products from any other supplier,
Boeing may, at any time, terminate all or part of any order
under the Supply Agreement by written notice to Spirit. If
Boeing terminates all or part of an order, Spirit is entitled to
compensation for certain costs.
86
Termination of Airplane Program. If Boeing decides not to
initiate or continue production of a Boeing commercial aircraft
model B737, B747, B767 or B777 or commercial derivative because
it determines there is insufficient business basis for
proceeding, Boeing may terminate such model or derivative,
including any order therefor, by written notice to Spirit. In
the event of such a termination, Boeing will be liable to Spirit
for any orders issued prior to the date of the termination
notice and may also be liable for certain termination costs. In
addition, if Boeing terminates any such commercial aircraft
model within two years after the Boeing Acquisition, Spirit also
has the right to receive an inconvenience fee equal to
Boeings then-current net book value for the tooling in
support of the terminated commercial aircraft model, determined
without regard to any write-off or other adjustment by reason of
such termination.
Events of Default and Remedies. It is an event of
default under the Supply Agreement if Spirit:
|
|
|
(1) fails to deliver products as required by the Supply
Agreement; |
|
|
(2) fails to provide certain assurances of
performance required by the Supply Agreement; |
|
|
(3) breaches the provisions of the Supply Agreement
relating to intellectual property and proprietary information; |
|
|
(4) participates in the sale, purchase or manufacture of
airplane parts without the required approval of the FAA or
appropriate foreign regulatory agency; |
|
|
(5) defaults under certain requirements to maintain a
system of quality assurance; |
|
|
(6) fails to comply with other obligations under the Supply
Agreement (which breach continues for more than 10 days
after notice is received from Boeing); |
|
|
(7) is unable to pay its debts as they become due,
dissolves or declares bankruptcy; or |
|
|
(8) breaches the assignment provisions of the Supply
Agreement (which breach continues for more than 10 days
after notice is received from Boeing). |
If an event of default occurs, Boeing has the right to exercise
various remedies set forth in the Supply Agreement, including
the right to manufacture or to otherwise obtain substitute
products, cancel any or all outstanding orders under the Supply
Agreement, and/or terminate the Supply Agreement. Boeing is
limited, however, in its ability to cancel orders or terminate
the Supply Agreement for the defaults described in items (1),
(2) and (6) of the preceding paragraph. In such cases,
Boeing may not cancel orders unless the event of default is
material and has an operational or financial impact on Boeing
and may not terminate the Supply Agreement unless there are
repeated, material events of default and certain other criteria
are satisfied. In such case, Boeing may only terminate the
Supply Agreement with respect to the aircraft program affected
by the event of default. If two or more programs are affected by
the event of default, Boeing may terminate the entire Supply
Agreement. Boeing may also require Spirit to transfer tooling,
raw material,
work-in-process and
other inventory and certain intellectual property to Boeing in
return for reasonable compensation therefor.
Wrongful Termination. If Boeing wrongfully terminates an
order, Spirit is entitled to recover lost profits, in addition
to any amount Spirit would be entitled to recover for a
Termination for Convenience, as described above. If
Boeing wrongfully cancels or terminates the Sustaining SBP with
respect to a model of program airplane, then Spirit is entitled
to all remedies available at law or in equity, with monetary
damages not to exceed an agreed limit.
Excusable Delay. If delivery of any product is delayed by
circumstances beyond Spirits reasonable control, and
without Spirits or its suppliers or
subcontractors error or negligence (including, without
limitation, acts of God, war, terrorist acts, fires, floods,
epidemics, strikes, unusually severe weather, riots and acts of
government), or by any material act or failure to act by Boeing,
each being an excusable delay, then, subject to
certain exceptions, Spirits delivery obligations will be
extended. If delivery of any product is delayed by an excusable
delay for more than three months, Boeing may cancel all or part
of any order relating to the delayed products.
87
If delivery of any product constituting more than 25% of the
shipset value for one or more models of program airplanes is
delayed by an excusable delay for more than five months, Boeing
may cancel the Sustaining SBP as it applies to such models of
program airplanes, and neither party will have any liability to
the other, other than as described in the above paragraph under
the heading Events of Default and Remedies.
Suspension of Work. Boeing may at any time require Spirit
to stop work on any order for up to 120 days. During such
time, Boeing may either direct Spirit to resume work or cancel
the work covered by such stop work order. If Boeing directs
Spirit to resume work or the
120-day period expires,
Spirit must resume work, the delivery schedule affected by the
stop work order will be extended and Boeing must compensate
Spirit for its reasonable direct costs incurred as a result of
the stop work order.
Assignment. Spirit may not assign its rights under the
Supply Agreement other than with Boeings consent, which
Boeing may not unreasonably withhold unless the assignment is to
a disqualified person. A disqualified person is one:
(1) whose principal business is as an OEM of commercial
aircraft, space vehicles, satellites or defense systems;
(2) that Boeing reasonably believes will not be able to
perform its obligations under the Supply Agreement;
(3) that, after giving effect to the transaction, would be
a supplier of more than 40% by value of the major structural
components of any Boeing program then in production; or
(4) who is, or is an affiliate of, a commercial airplane
operator or is one of five named corporate groups. Sale of
majority voting power or of all or substantially all of
Spirits assets to a disqualified person is considered an
assignment.
B787 Supply Agreement with
Boeing
Overview. Spirit and Boeing also entered into a long-term
supply agreement for Boeings new B787 program, or the B787
Supply Agreement, which covers the life of the program and
commercial derivatives. The B787 Supply Agreement is a
requirements contract pursuant to which Spirit is Boeings
exclusive supplier for the forward fuselage, fixed and moveable
leading wing edges, struts and related tooling for the B787. The
B787 Supply Agreement does not provide for a minimum or maximum
rate of production, but does acknowledge that Spirit will equip
itself for a maximum rate of seven aircraft per month and will
negotiate with Boeing regarding an equitable price adjustment if
additional expenditures are required to increase the production
rate above that level. Spirit is constructing facilities capable
of producing ten airplanes per month. Additional capital
expenditures would be needed for tooling and equipment to
support a production rate above seven per month. Under the B787
Supply Agreement, Spirit also provides certain support,
development and re-design engineering services to Boeing at an
agreed hourly rate.
Pricing. Pricing for the
B787-8, the base model
currently going into production, is generally established
through 2021, with prices decreasing as cumulative volume levels
are met over the life of the program. Prices are subject to
adjustment for abnormal inflation (above a specified level in
any year) and for certain production, schedule and other
changes. Prices for future commercial derivatives such as the
B787-3,
B787-9 and
B787-10 will be
negotiated in good faith by the parties on principles consistent
with the terms of the B787 Supply Agreement as they relate to
the B787-8 model of the
B787.
Advance Payments. The B787 Supply Agreement requires
Boeing to make advance payments to Spirit for production
articles in the aggregate amount of $700 million. As of
October 31, 2006, $500 million had been received by
Spirit, and an additional $100 million will be advanced to
Spirit in each of the remainder of 2006 and 2007. Spirit must
repay these advances, without interest, in the amount of a
$1.4 million offset against the purchase price of each of
the first five hundred B787 shipsets delivered to Boeing. In the
event that Boeing does not take delivery of five hundred B787
shipsets, any advances not then repaid will first be applied
against any outstanding B787 payments then due by Boeing to
Spirit, with any remaining balance repaid at the rate of
$84 million per year beginning the month following
Spirits final delivery of a B787 production shipset to
Boeing.
Termination of Airplane Program. If Boeing decides not to
initiate or continue production of the B787 airplane program
because Boeing determines, after consultation with Spirit, that
there is an insufficient business basis for proceeding, Boeing
may terminate the B787 airplane program, including any
88
orders, by written notice to Spirit. In the event of such a
termination, Boeing will be liable to Spirit for costs incurred
in connection with any orders issued prior to the date of the
termination notice and may also be liable for certain
termination costs and for compensation for any tools, raw
materials or
work-in-process
requested by Boeing in connection with the termination.
Events of Default and Remedies. It is an event of
default under the B787 Supply Agreement if Spirit:
|
|
|
(1) fails to deliver products as required by the B787
Supply Agreement; |
|
|
(2) breaches the provisions of the B787 Supply Agreement
relating to intellectual property and proprietary information; |
|
|
(3) participates in the sale, purchase or manufacture of
airplane parts without the required approval of the FAA or
appropriate foreign regulatory agency; |
|
|
(4) defaults under certain requirements to maintain a
system of quality assurance; |
|
|
(5) fails to comply with other obligations under the B787
Supply Agreement (which breach continues for more than
15 days after notice is received from Boeing); |
|
|
(6) is unable to pay its debts as they become due,
dissolves or declares bankruptcy; |
|
|
(7) fails to comply with U.S. export control
laws; or |
|
|
(8) breaches the assignment provisions of the B787 Supply
Agreement (which breach continues for more than 10 days
after notice is received from Boeing). |
If an event of default occurs, Boeing has the right to exercise
various remedies set forth in the B787 Supply Agreement,
including the right to manufacture or to otherwise obtain
substitute products, cancel any or all outstanding orders under
the B787 Supply Agreement and/or terminate the B787 Supply
Agreement. Before terminating any order or the B787 Supply
Agreement, Boeing is required to work with Spirit to attempt to
agree on a satisfactory recovery plan. Boeing may also require
Spirit to transfer tooling, raw material,
work-in-process and
other inventory and certain intellectual property to Boeing in
return for reasonable compensation therefor.
Assignment. Spirit may not assign its rights under the
B787 Supply Agreement or any related order other than with
Boeings consent, which Boeing may not unreasonably
withhold unless the assignment is to a disqualified person. A
disqualified person is one: (1) whose principal business is
as an OEM of commercial aircraft, space vehicles, satellites or
defense systems; (2) that Boeing reasonably believes will
not be able to perform its obligations under the B787 Supply
Agreement; (3) that, after giving effect to the
transaction, would be a supplier of more than 40% by value of
the major structural components of any Boeing program then in
production; or (4) who is, or is an affiliate of, a
commercial airplane operator or is one of five named corporate
groups. Sale of majority voting power or of all or substantially
all of Spirits assets to a disqualified person is
considered an assignment.
License of Intellectual
Property
Supply Agreement. All technical work product and works of
authorship produced by or for Spirit with respect to any work
performed by or for Spirit pursuant to the Supply Agreement are
the exclusive property of Boeing. All inventions conceived by or
for Spirit with respect to any work performed by or for Spirit
pursuant to the Supply Agreement and any patents claiming such
inventions are the exclusive property of Spirit, except that
Boeing will own any such inventions that Boeing reasonably
believes are applicable to the B787 platform, and Boeing may
seek patent protection for such B787 inventions or hold them as
trade secrets, provided that, if Boeing does not seek patent
protection, Spirit may do so.
Except as Boeing otherwise agrees, Spirit may only use Boeing
proprietary information and materials (such as tangible and
intangible confidential, proprietary and/or trade secret
information and tooling) in the performance of its obligations
under the Supply Agreement. Spirit is prohibited from selling
products manufactured using Boeing proprietary information and
materials to any person other than Boeing without Boeings
authorization.
89
Spirit has granted to Boeing a license to Spirit proprietary
information and materials and software and related products for
use in connection with the testing, certification, use, sale or
support of a product covered by the Supply Agreement, or the
manufacture, testing, certification, use, sale or support of any
aircraft including and/or utilizing a product covered by the
Supply Agreement. Spirit has also granted to Boeing a license to
use Spirit intellectual property to the extent such intellectual
property interferes with Boeings use of products or
intellectual property belonging to Boeing under the Supply
Agreement.
In order to protect Boeing against Spirits default, Spirit
has granted to Boeing a license, exercisable on such default to
practice and/or use, and license for others to practice and/or
use on Boeings behalf, Spirits intellectual property
and tooling related to the development, production, maintenance
or repair of products in connection with making, using and
selling products. As a part of the foregoing license, Spirit
must, at the written request of and at no additional cost to
Boeing, promptly deliver to Boeing any such licensed property
considered by Boeing to be necessary to exercise Boeings
rights under the license.
B787 Supply Agreement. The B787 Supply Agreement
establishes three classifications for patented invention and
proprietary information: (1) intellectual property
developed by Spirit during activity under the B787 Supply
Agreement, or Spirit IP; (2) intellectual property
developed jointly by Boeing and Spirit during that activity, or
Joint IP; and (3) all other intellectual property developed
during activity under the B787 Supply Agreement, or Boeing IP.
Boeing may use Spirit IP for work on the B787 program and Spirit
may license it to third parties for work on such program. Spirit
may also not unreasonably withhold consent to the license of
such intellectual property to third parties for work on other
Boeing programs, provided that it may require a reasonable
royalty to be paid and, with respect to commercial airplane
programs, that Spirit has been offered an opportunity, to the
extent commercially feasible, to work on such programs.
Each party is free to use Joint IP in connection with work on
the B787 and other Boeing programs, but each must obtain the
consent of the other to use it for other purposes. If either
party wishes to license Joint IP to a third party for work on a
Boeing program other than the B787, then the other party may
require a reasonable royalty but may not unreasonably withhold
its consent, as long as (if the program in question is another
Boeing commercial airplane program) Spirit has been offered an
opportunity, to the extent commercially feasible, to perform
work for the particular program.
Spirit is entitled to use Boeing IP for the B787 program, and
may require Boeing to license it to subcontractors for the same
purpose.
Additional License From Boeing. Boeing has licensed
certain intellectual property rights to Spirit under a Hardware
Material Services General Terms Agreement, or HMSGTA, and four
initial Supplemental License Agreements, or SLAs, under the
HMSGTA. The HMSGTA and the initial SLAs grant Spirit licenses to
use Boeing intellectual property to manufacture listed parts for
the aftermarket and to perform maintenance, repair and overhaul,
or MRO, of aircraft and aircraft components for customers other
than Boeing. These agreements also permit Spirit to use know-how
obtained by Spirit personnel prior to the closing of the Boeing
Acquisition. Spirit also may obtain additional SLAs from Boeing
and those SLAs will also supersede the restrictions on
Spirits use of Boeings proprietary information and
materials described above.
Our Products
We are organized into three principal reporting segments:
(1) Fuselage Systems, which include the forward, mid-and
rear fuselage sections, (2) Propulsion Systems, which
include nacelles, struts/pylons and engine structural components
and (3) Wing Systems, which include wings, wing components
and flight control surfaces. All other activities fall within
the All Other segment, principally made up of sundry sales of
miscellaneous services and sales of natural gas through a
tenancy-in-common with other Wichita companies. Fuselage
Systems, Propulsion Systems, Wing Systems and All Other
represented approximately 49%, 27%, 23% and 1%, respectively, of
our revenues for the quarter ended September 28, 2006.
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Commercial Aircraft
Structures
We principally design, engineer and manufacture commercial
aircraft structures such as fuselages, nacelles (including
thrust reversers), struts/pylons, wings and wing assemblies and
flight control surfaces. We are the largest independent supplier
of aerostructures to both Boeing and Airbus. Sales related to
large commercial aircraft production, some of which may be used
in military applications, represent approximately 99% of our
combined revenues for the nine months ended September 28,
2006.
Our structural components, in particular the forward fuselage
and nacelles, are among the most complex and highly engineered
structural components and represent a significant percentage of
the costs of each aircraft. We are currently the sole source
supplier of 96% of the products we sell to Boeing and Airbus, as
measured by dollar value of products sold. We typically sell a
package of aerostructure components, referred to as a shipset,
to our customers.
The following table summarizes the major commercial (including
regional and business jets) programs that we currently have
under long-term contract by product and aircraft platform.
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Product |
|
Description |
|
Aircraft Platform |
|
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|
Fuselage Systems
|
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|
|
|
|
Forward Fuselage
|
|
Forward section of fuselage which houses flight deck, passenger
cabin and cargo area |
|
B737, B747, B767, B777, B787 |
|
Other Fuselage Sections
|
|
Mid-section and other sections of the fuselage and certain other
structural components, including floor beams |
|
B737, B747, B777,
Raytheon Hawker 800XP |
Propulsion Systems
|
|
|
|
|
|
Nacelles (including Thrust Reversers)
|
|
Aerodynamic structure surrounding engine |
|
B737, B747, B767, B777 |
|
Struts/Pylons
|
|
Structure that connects engine to the wing |
|
B737, B747, B767, B777, B787 |
Wing Systems
|
|
|
|
|
|
Flight Control Surfaces
|
|
Flaps and slats |
|
B737, B777, A320 family |
|
Empennages
|
|
Horizontal stabilizer and vertical fin spar assemblies |
|
B737, Raytheon Hawker 800XP |
|
Wing Structures
|
|
Wing framework which consists mainly of spars, ribs, fixed
leading edge, stringers, trailing edges and flap track beams |
|
B737, B747, B767, B777, B787, A320 family, A330, A340, A380 |
In addition, we have recently won contracts for two other
business jet packages on which we expect to commence deliveries
in 2009 and 2011, respectively.
91
Military Equipment
In addition to providing aerostructures to large commercial
aircraft, we also design, engineer and manufacture structural
components for military aircraft. We provide a significant
amount of content for the 737 Wedgetail and have also been
awarded a significant amount of work for the 737 MMA and
737 C40. The 737 Wedgetail, 737 MMA and 737 C40 are
commercial aircraft modified for military use. Other military
programs for which we provide products are KC-135, V-22 and
AWACs (E-3).
The following table summarizes the major military programs that
we currently have under long-term contract by product and
military platform.
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|
|
Product |
|
Description |
|
Military Platform |
|
|
|
|
|
Low Observables
|
|
Radar absorbent and translucent materials |
|
UCAS, Various |
Other Military
|
|
Fabrication, bonding and assembly in support of various platforms |
|
AWACS, AC-130U Gunship, V-22 and E-6 |
Other Military
|
|
Fabrication, testing, tooling, processing, engineering analysis,
training |
|
Various |
Aftermarket
Although we primarily manufacture aerostructures for OEMs, we
have a significant opportunity to increase our aftermarket sales
on the products we manufacture. We have developed a direct sales
and marketing channel for our aftermarket business. In September
2006, we entered into a five-year distribution agreement with
Aviall Services, Inc., or Aviall, a provider of global parts
distribution and supply chain services for the aerospace
industry and a wholly-owned subsidiary of Boeing, pursuant to
which Aviall will serve as our exclusive distributor of certain
aftermarket products worldwide, excluding the United States and
Canada. We have obtained parts manufacturing approvals from the
FAA for 7,000 parts which allows us to sell spare parts directly
to airlines and MRO organizations. In addition, all of our
U.S. facilities are FAA repair station certified and have
full technical capability to provide MRO services.
The following table summarizes our aftermarket products and
services.
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Product |
|
Description |
|
Aircraft Platform(1) |
|
|
|
|
|
Spares
|
|
Provides replacement parts and components support |
|
B737, B747, B767, B777, A320 |
Maintenance, Repair and Overhaul
|
|
FAA certified repair station that provides complete on-site
nacelle repair and overhaul; maintains global partnerships to
support MRO services |
|
B737, B777 |
|
|
(1) |
The company also has the opportunity to produce spares for
certain
out-of-production
aircraft and is under contract to provide spares for the B787
and A380. |
Sales and Marketing
We have recently hired a Senior Vice President of Sales and
Marketing, who focuses on building a broader customer base.
Additionally, we expect to benefit from his established
relationships with potential customers, as well as a deep
knowledge of the aerospace industry. In addition, our executive
officers and other key employees continue to build and maintain
relationships with industry leaders to stay abreast of
developing trends in the marketplace. Our marketing group
supports those efforts, analyzing potential
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growth opportunities in our target markets, as well as the OEMs
that we believe most strongly position us for success.
We have established a sales and marketing infrastructure to
support our efforts to reach new customers, expand our business
with existing customers and win new business in three sectors of
the aerostructures industry: (1) commercial (including
regional and business jets), (2) military and (3) the
aftermarket. Our sales and marketing unit is comprised of
approximately 12 employees. Our employees are organized by focus
areas: a marketing team that performs research and analysis on
market trends, sector strategies, customers and competitors, and
a sales team led by sales directors assigned to establish and
maintain relationships with each key customer. The sales and
marketing team provides support and works closely with
salespeople in the individual business units to ensure a
consistent, single message approach with customers.
Due to (1) our long-term contracts with Boeing and Airbus
on existing and new programs such as the B737, B787, A320 and
A380, (2) the OEMs desire to limit supplier
concentration, and (3) the industry practice of rarely
changing a third party aerostructures supplier once a program
has been implemented due to the high switching costs, we are
able to minimize our marketing efforts on these specific
programs. However, our marketing team continues to research and
analyze trends in new product development and our sales team
maintains regular contact with key Airbus and Boeing
decision-makers in order to sustain strong relationships with,
and position ourselves to win new business from, both companies.
Prior to the Boeing Acquisition, as an internal Boeing supplier,
we were unable to pursue non-Boeing OEM business. As an
independent company, we have significant opportunities to
increase our sales to other OEMs in the commercial, military and
business jet sectors. To win new customers, we market our mix of
engineering expertise in the design and manufacture of
aerostructures, our advanced manufacturing capabilities with
both composites and metals, and our competitive cost structure.
We have established a customer contact database to maximize our
interactions with existing and potential customers. We are also
actively working to build positive identity and name recognition
for the Spirit AeroStructures brand through advertising, trade
shows, sponsorships and Spirit customer events.
Prior to the Boeing Acquisition, we were dependent upon
Boeings Commercial Aviation Services organization to
provide entry into the aftermarket business. We are now able to
provide aftermarket support directly to airlines and are in the
process of developing the necessary expertise and customer
relationships within this sector of the business.
Customers
Our primary customers are aircraft OEMs. Boeing and Airbus are
our two largest customers, and we are the largest independent
aerostructures supplier to both companies. We entered into
long-term supply agreements with our customers to provide
aerostructure products to aircraft programs. Currently,
virtually all of the products we sell are under long-term
contracts with 96% of those products, as measured by dollar
value of product sold, supplied by us on a sole-sourced basis.
We have excellent relationships with our customers due to our
diverse product offering, leading design and manufacturing
capabilities using both metallic and composite materials, and
competitive pricing. One of our competitive advantages is our
strong relationships with our two largest customers.
Boeing. For the nine months ended September 28,
2006, approximately 92% of our revenues (approximately 89% of
our combined revenues assuming the BAE Acquisition had occurred
on January 1, 2006) were from sales to Boeing. We have a
strong relationship with Boeing given our 75 year history
as a Boeing division. Most of the senior management team are
former Boeing executives who have strong embedded relationships
with Boeing and continue to work closely with Boeing. As part of
the Boeing Acquisition, we entered into a long-term supply
agreement under which we are Boeings exclusive supplier
for substantially all of the products and services provided by
Boeing Wichita prior to the Boeing Acquisition for the life of
the programs. In addition, Boeing selected us to be the design
leader for the Boeing B787 forward fuselage based in part on our
strong expertise with composite technologies. We
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believe our strong relationship with Boeing is unmatched in the
industry and will allow us to continue to be an integral partner
with Boeing in the designing, engineering and manufacturing of
complex aerostructures.
Airbus. For the nine months ended September 28,
2006, approximately 10% of our combined revenues (assuming the
BAE Acquisition occurred on January 1, 2006) were from
sales to Airbus. As a result of the BAE Acquisition, we have
become the largest independent aerostructures supplier to
Airbus. Under our supply agreements with Airbus, we supply most
of our products for the life of the aircraft program, including
commercial derivative models, with pricing determined through
2010. For the A380, we have a long-term supply contract with
Airbus that covers a fixed number of units. We believe we can
leverage our relationship with Airbus and history of delivering
high quality products to further increase our sales to Airbus
and continue to partner with Airbus on new programs going
forward.
Manufacturing and Engineering
Manufacturing
Our expertise is in designing, engineering and manufacturing
large-scale, complex aerostructures. We maintain four
state-of-the-art
manufacturing facilities in Wichita, Kansas, Tulsa, Oklahoma,
McAlester, Oklahoma, and Prestwick, Scotland (acquired in April
2006). Following the Boeing Acquisition, we realigned our
manufacturing operations to reduce costs and improve efficiency.
We reduced our workforce by 15% while increasing productivity,
entered into new labor contracts with our unions that
established wage levels that are in-line with the local market,
changed work rules and significantly reduced the number of job
categories, resulting in greater manufacturing flexibility in
work assignments. Additionally, we are working to realign our
supply base to more fully utilize low cost, capable suppliers.
We continually strive to improve productivity and reduce costs.
Our manufacturing organization is organized through our four
principal reporting segments: (1) Fuselage Systems,
(2) Propulsion Systems, (3) Wing Systems and
(4) All Other, which includes miscellaneous products and
services, and two process centers: (1) fabrication
manufacturing and (2) tooling manufacturing. The business
units, process centers and support organizations work together
as one cohesive team with a view to maximizing performance and
efficiency throughout the manufacturing process. Our core
manufacturing competencies include:
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composites design and manufacturing processes; |
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leading mechanized and automated assembly and fastening
techniques; |
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large scale skin fabrication using both metallic and composite
materials; |
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chemical etching and metal bonding expertise; |
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monolithic structures technology; and |
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precision metal forming producing complex contoured shapes in
sheet metal and extruded aluminum. |
Our leading manufacturing expertise is supported by our
state-of-the-art
equipment. We have over 20,000 major pieces of equipment
installed in our customized manufacturing facilities. For
example, for the manufacture of the B787 composite forward
fuselage, we installed a 30-foot diameter by 70-foot long
autoclave which is one of the largest autoclaves in the world.
An autoclave is an enclosure device that generates controlled
internal heat and pressure conditions used to cure and bond
certain resins, and which we use in the manufacture of composite
structures. We intend to continue to make the appropriate
investments in our facilities in order to support and maintain
our industry-leading manufacturing expertise.
We have approximately 800 engineering and technical employees,
including over 200 degreed contract engineers. We also employ 22
technical fellows, who are experts in engineering and keep the
company on the cutting edge of technology by producing technical
solutions for new and existing products and
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processes; eight FAA designated engineering representatives, or
DERs, experienced engineers appointed by the FAA to approve
engineering data used for certification; and nine authorized
representatives, who possess the same qualifications and perform
the same certification functions as DERs, but with authority
from the Boeing Certification and Compliance organization. The
primary purpose of the engineering organization is to provide
continuous support for ongoing design, production and process
improvements. We possess a broad base of engineering skills in
metal and composite fabrication and assembly, chemical
processing and finishing, tooling design and development, and
quality and precision measurement technology, systems and
controls.
Our engineering organization is composed of several groups,
including (1) Structures Design and Drafting, which focuses
on production support, customer introductions,
design-for-manufacturing and major product derivatives,
(2) Structures Technology, which focuses on overall
structural integrity over the lifecycle of the airframe through
stress and durability analysis, damage tolerance analysis and
vibration testing, (3) Manufacturing Engineering,
responsible for applying lean manufacturing techniques,
interpreting design drawings and providing manufacturing
sequence work plans, and (4) Liaison, Lab and Materials,
Processes and Standards, which conducts research into defects
discovered by quality assurance through analytical chemistry,
metallurgical, static and dynamic testing and full-scale testing.
We believe our leading engineering capabilities are a key
strategic differentiating factor between us and certain of our
competitors.
We believe that world class research and development helps to
maintain our position as an advanced partner to OEMs new
product development teams. As a result, we spend a significant
amount of capital and resources on our research and development,
including approximately $85 million during the first nine
months of 2006. Through our key research, we aim to develop
unique intellectual property and technologies that will improve
our OEM customers products and, at the same time, position
us to win work on new products. Our development effort, which is
an ongoing process that helps us drive down production costs and
streamline manufacturing, is currently focused on preparing for
initial production of new products and improving manufacturing
processes on our current work.
Our research and development is geared toward the architectural
design of our principal products: fuselages, propulsion systems
and wing systems. We are currently focused on research in areas
such as advanced metallic joining, low cost composites, acoustic
attenuation, efficient structures, systems integration, advanced
design and analysis methods, and new material systems. We
collaborate with universities, research facilities and
technology partners in our research and development.
Suppliers and Materials
The principal raw materials used in our manufacturing operations
are aluminum, titanium, composites and stainless steel. We also
use purchased products such as machined parts, sheet metal
parts, non-metallic parts and assemblies. In addition, we
purchase assemblies and subassemblies from various manufacturers
which are used in the final aerostructure assembly.
Currently we have over 850 active suppliers with no one supplier
representing more than 4% of our cost of goods sold. We have
entered into long-term supply contracts with substantially all
of our suppliers. Our exposure to rising raw material prices is
somewhat limited due to such contracts under which we purchase
most of our raw materials based on fixed pricing or at reduced
rates through Boeings or Airbus high volume purchase
contracts.
Although we believe our material costs are competitive, we
continue to seek ways to further reduce these costs. We have
begun a global sourcing initiative to increase the amount of
material sourced from low cost countries in Asia and Central
Europe. Historically, Boeing Wichita and BAE Aerostructures
purchased certain parts from other Boeing or BAE Systems
facilities, respectively, since they operated as divisions of
Boeing and BAE Systems, respectively. We believe we can achieve
cost savings by reducing
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the amount of parts that we purchase from Boeing and BAE
Systems. Following the Boeing Acquisition, we have been free to
contract with third parties for, or to produce internally, the
parts historically supplied by Boeing. As our current supply
contracts with business units of BAE Systems expire over the
next several years, we expect to have similar opportunities with
respect to those parts that we continue to source from BAE
Systems.
Properties
The location, primary use, approximate square footage and
ownership status of our principal properties as of
October 31, 2006 are set forth below:
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Approximate | |
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Location |
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Primary Use |
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Square Footage | |
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Owned/Leased |
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United States
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Wichita, Kansas
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Main Manufacturing Facility/Offices/Warehouse |
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10.8 million |
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Owned*/Leased* |
Tulsa, Oklahoma
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Manufacturing Facility |
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1.6 million |
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Leased |
Tulsa, Oklahoma
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Offices/Warehouse |
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108,455 |
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Leased |
McAlester, Oklahoma
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Manufacturing Facility |
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135,000 |
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Owned |
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United Kingdom
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Prestwick, Scotland
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Manufacturing Facility |
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1.1 million |
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Owned |
Samlesbury, England
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Offices |
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15,919 |
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Leased |
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A portion of the Wichita facility is owned and a portion is
leased. |
Our physical assets consist of 13.6 million square feet of
building space located on 946 acres in six facilities. We
produce our fuselages, propulsion systems and wing systems from
our main manufacturing facility located in Wichita, Kansas and
we also produce wing systems in our manufacturing facilities in
Tulsa, Oklahoma and Prestwick, Scotland. In addition to these
three sites, we have a facility located in McAlester, Oklahoma
dedicated to supplying the Tulsa facility and office space in
Samlesbury, England, where a number of Spirit Europes
employees are located. The Wichita facilities are owned or
leased, the Tulsa facility is leased from the city of Tulsa and
the Tulsa Airports Improvement Trust, the Prestwick facility is
owned, the McAlester facility is owned, and the Samlesbury
facility is leased.
The Wichita facility, including the headquarters, comprises
616 acres, 6.0 million square feet of manufacturing
space, 1.3 million square feet of offices and
laboratories for the engineering and design group and
3.5 million square feet for support functions and
warehouses. A total of 821,000 square feet is currently
vacant (of which 194,000 square feet is being customized
for the B787). Additionally, a 127,000 square foot
expansion of our Composites Fuselage Facility to support the
B787 was completed in August 2006. The Wichita site has access
to transportation by rail, road and air. For air cargo, the
Wichita site has access to the runways of the McConnell Air
Force Base. We have renewed a lease as of July 1, 2006 for
135,000 square feet of manufacturing space at our Wichita,
Kansas facility for a five-year term. We have also acquired a
new 101,000 square foot lease adjacent to the plant for tool
storage.
The Tulsa facility consists of 1.6 million square feet of
building space set on 135 acres. The Tulsa plant is located
five miles from an international shipping port and is located
next to the Tulsa International Airport. In addition, we entered
into an eighteen month lease effective August 16, 2006 for
108,455 square feet of warehousing space located near our Tulsa
plant. The McAlester site, which manufactures parts and
sub-assemblies primarily for the Tulsa facility, consists of
135,000 square feet of building space on 92 acres.
The Prestwick facility consists of 1.1 million square feet
of building space, comprised of 0.7 million square feet of
manufacturing space, 0.2 million square feet of office
space, and 0.2 million square feet of office/support space.
This facility is set on 100 acres. The Prestwick plant is
located on the west coast of
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Scotland, approximately 33 miles south of Glasgow, within
close proximity to the motorway network that provides access
between England and continental Europe. It is also easily
accessible by air (at Prestwick International Airport) or by
sea. We lease a portion of our Prestwick facility to the
Regional Aircraft division of BAE Systems and certain other
tenants.
The Wichita and Tulsa manufacturing facilities have significant
scale in order to accommodate the very large structures that are
manufactured there, including entire fuselages. The three
U.S. facilities are in close proximity, with approximately
175 miles between Wichita and Tulsa and 90 miles
between Tulsa and McAlester. Currently, the three
U.S. facilities utilize approximately 90% of the available
building space. The Prestwick manufacturing facility currently
utilizes only 49% of the space; of the remaining space, 27% is
leased and 24% is vacant. The Samlesbury office space is located
in North Lancashire, England, approximately 195 miles south
of Prestwick.
Environmental Matters
Our operations and facilities are subject to various
environmental laws and regulations governing, among other
matters, the emission, discharge, handling and disposal of
hazardous materials, the investigation and remediation of
contaminated sites, and permits required in connection with our
operations. Our operations are designed, maintained and operated
to promote protection of human health and the environment.
Although we believe that our operations and facilities are in
material compliance with applicable environmental and worker
protection laws and regulations, management cannot provide
assurance that future changes in such laws, or in the nature of
our operations will not require us to make significant
additional expenditures to ensure continued compliance. Further,
we could incur substantial costs, including cleanup costs, fines
and sanctions, and third party property damage or personal
injury claims as a result of violations of or liabilities under
environmental laws, relevant common law or the environmental
permits required for our operations.
Under some environmental laws in the United States, a current or
previous owner or operator of a contaminated site may be held
liable for the entire cost of investigation, removal or
remediation of hazardous materials at such property, whether or
not the owner or operator knew of, or was responsible for, the
presence of such hazardous materials. Persons who arrange for
disposal or treatment of hazardous materials also may be liable
for the costs of investigation, removal or remediation of those
substances at a disposal or treatment site, regardless of
whether the affected site is owned or operated by them. Because
we own and/or operate a number of facilities that have a history
of industrial or commercial use and because we arrange for the
disposal of hazardous materials at many disposal sites, we may
and do incur costs for investigation, removal and remediation.
The Asset Purchase Agreement provides, with limited exceptions,
that Boeing is responsible for environmental liabilities
relating to conditions existing at the Wichita, Kansas and Tulsa
and McAlester, Oklahoma facilities at the time of the Boeing
Acquisition. For example, Boeing is subject to an administrative
consent order issued by the KDHE to contain and clean-up
contaminated groundwater which underlies a majority of the
Wichita site. Pursuant to the KDHE order, Boeing has a long-term
remediation plan in place, and containment and remediation
efforts are underway. We are responsible for any environmental
conditions that we cause at these facilities after the closing
of the Boeing Acquisition.
In the United Kingdom, remediation of contaminated land may be
compelled by the government in certain situations. If a property
is to be redeveloped, in its planning role, the local authority
may require remediation as a condition to issuing a permit. In
addition, in situations in which the contamination is causing
harm to human health or polluting the environment, the local
authority may use its environmental legislative powers to force
remediation so that the environmental standards are
suitable for use. If contamination is polluting the
property of a third party or causing loss, injury or damage, the
third party
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may file an action in common law based on negligence or nuisance
to recover the value of the loss, injury or damage sustained.
Prestwick Facility. BAE Systems indemnified us for any
clean-up costs for environmental liabilities caused by existing
pollution on the Prestwick facility, existing pollution that
migrates from the Prestwick facility to a third partys
property and any pollution that migrates to the Prestwick
facility from the property retained by BAE Systems. Subject to
certain exceptions, the indemnity extends until April 1,
2013 and is limited to £40 million. BAE Systems has
undertaken a solvent emission program. If the program does not
enable compliance with the European Solvent Emission Directive
currently in effect, BAE Systems may be required to install
additional abatement technology such as a thermal oxidizer.
Competition
Although we are the largest aerostructures supplier with a 19%
market share, the aerostructures market remains highly
fragmented. Competition in the aerostructures market is intense.
Our primary competition comes from either work performed by
internal divisions of OEMs or third-party aerostructures
suppliers.
Our principal competitors among OEMs may include Airbus S.A.S.,
Boeing, Dassault Aviation, Embraer Brazilian Aviation Co.,
Gulfstream Aerospace Co., Lockheed Martin Corp.,
Northrop Grumman Corporation, Raytheon Company and
Textron Inc. These OEMs may choose not to outsource
production of aerostructures due to, among other things, their
own direct labor and other overhead considerations and capacity
utilization at their own facilities. Consequently, traditional
factors affecting competition, such as price and quality of
service, may not be significant determinants when OEMs decide
whether to produce a part in-house or to outsource.
Our principal competitors among non-OEM aerostructures suppliers
are Alenia Aeronautica, Fuji Aerospace Technology Co., Ltd., GKN
Aerospace, The Goodrich Corporation, Kawasaki Precision
Machinery (U.S.A.), Inc., Mitsubishi Electric Corporation, Saab
AB, Snecma, Triumph Group, Inc. and Vought Aircraft Industries.
Our ability to compete for new aerostructures contracts depends
upon (1) our design, engineering and manufacturing
capabilities, (2) our underlying cost structure,
(3) our relationship with OEMs, and (4) our available
manufacturing capacity.
Employees
As of October 15, 2006, we had approximately 11,600
employees, including contract labor, located in our three
U.S. facilities. Approximately 81% of our
U.S. employees are represented by five unions. All of our
unions in the U.S. have entered into new collective
bargaining agreements since the time of the Boeing Acquisition,
with an average duration of five years. Our largest union is the
IAM which represents approximately 5,500 employees or 47% of the
workforce. This union contract is in effect through
June 25, 2010. The Society of Professional Engineering
Employees in Aerospace Wichita Technical and
Professional Unit represents approximately 2,200 employees or
19% of the workforce. The union contract is in effect through
July 11, 2011. The International Union, United Automobile,
Aerospace & Agricultural Implement Workers of America
(UAW), or UAW, represents approximately 900 employees or 8%
of the workforce. The union contract is in effect through
November 30, 2010. The Society of Professional Engineering
Employees in Aerospace Wichita Engineering Unit
represents approximately 590 employees or 5% of the workforce.
The union contract is in effect through July 11, 2009. The
International Brotherhood of Electrical Workers, or IBEW,
represents approximately 175 employees or 2% of the
workforce. The union contract is in effect through
September 17, 2010.
Under each of our U.S. collective bargaining agreements, we
are required to meet with collective bargaining agents for the
union three years after ratification of the agreement to discuss
the terms and conditions of the agreement. However, we have no
obligation to agree to any changes to the terms and conditions
of the agreement and employees have no right to strike in the
event we do not agree to any such changes.
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As of October 15, 2006, we had approximately 880 employees
located in our two U.K. facilities. Approximately 76% or
675 of our U.K. employees are represented by one union,
Amicus. We have entered into a labor agreement with Amicus,
which terms are generally negotiated on a yearly basis. Wages
are typically the subject of our negotiations, while the other
terms usually remain the same from year to year until both
parties agree to change them (either separately or in the
aggregate).
We consider our relationships with our employees to be
satisfactory.
Union Equity Participation Plan. We have established a
Union Equity Participation Plan pursuant to which we will issue
stock appreciation rights tied to the value of our class B
common stock for the benefit of certain of our employees
represented by the IAM, IBEW and UAW. The stock appreciation
rights will entitle certain of these employees to receive
proceeds, which may, at our option, be in the form of cash or
shares of our common stock, upon the occurrence of the first to
occur of certain events, including the consummation of this
offering. Generally, former Boeing employees represented by one
of these unions whom we hired effective on the first day
following the Boeing Acquisition and who were employed by us for
at least three consecutive months between the closing of the
Boeing Acquisition and December 31, 2005, or approximately
4,850 employees, may be eligible to receive a portion of the
proceeds of the stock appreciation rights to be paid to union
employees as a result of the consummation of this offering. Upon
the consummation of this offering, based on an assumed initial
public offering price of $24.00 per share, the midpoint of
the range on the cover of this prospectus, the stock
appreciation rights will entitle the employees to receive a
total of approximately $270.2 million, all or any portion
of which may be paid by us, at our option, in shares of
class A common stock, valued at the public offering price.
We currently anticipate paying approximately 44.5% of such
amount in shares of class A common stock, through the
issuance of approximately 5,006,829 shares, which we
expect to issue on or prior to March 15, 2007. The
remainder will be paid in cash from a portion of the proceeds of
this offering and available cash. The Union Equity Participation
Plan and any outstanding stock appreciation rights thereunder
will terminate following the consummation of this offering and
the payment of the proceeds of the stock appreciation rights to
the employees.
Backlog
For a description of our backlog, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Backlog.
Legal Proceedings
We are from time to time subject to, and are presently involved
in, litigation or other legal proceedings arising in the
ordinary course of business. In the opinion of management, we
are not engaged in any legal proceedings that we expect will
have, individually or in the aggregate, a material adverse
effect on our business, financial condition, cash flows, results
of operations or liquidity, other than as set forth below.
From time to time, in the ordinary course of business and like
others in the industry, we receive requests for information from
government agencies in connection with their regulatory or
investigational authority. Such requests can include subpoenas
or demand letters for documents to assist the government in
audits or investigations. We review such requests and notices
and take appropriate action. We have been subject to certain
requests for information and investigations in the past and
could be subject to such requests for information and
investigations in the future.
On December 19, 2005, an action entitled Perry Apsley
et al. v. The Boeing Company, Onex Corporation and Spirit
AeroSystems, Inc. was filed in the U.S. District Court
for the District of Kansas. The plaintiffs served us and the
other defendants in early March 2006. The plaintiffs assert
several claims and purport to bring the case as a class action
and collective action on behalf of all individuals who were
employed by Boeing (BCA) in Wichita, Kansas or Tulsa, Oklahoma
within two years prior to the date of the Boeing Acquisition and
who were terminated or not hired by Spirit. The plaintiffs seek
damages and injunctive relief for age discrimination,
interference with ERISA rights, breach of contract and
retaliation. Plaintiffs seek an unspecified amount of
compensatory damages and more than $1.5 billion in punitive
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damages. On November 15, 2006, the court granted the
plaintiffs motion for conditional class certification and
held that the plaintiffs may send notice of the collective
action to all former Boeing employees who were terminated by
Boeing on or after January 1, 2002, were 40 years of
age or older at the time of termination and were not hired by
Spirit. Pursuant to the Asset Purchase Agreement, we agreed to
indemnify Boeing for damages resulting from the employment
decisions that were made by us with respect to former employees
of Boeing Wichita which relate or allegedly relate to the
involvement of, or consultation with, employees of Boeing in
such employment decisions.
During the period from July 2005 through March 2006,
approximately 35 former Boeing employees who worked in Tulsa and
McAlester, Oklahoma filed discrimination complaints against
Spirit, Onex and Boeing with the Equal Employment Opportunity
Commission, or EEOC, in Oklahoma City, Oklahoma claiming age,
retaliation, disability and other types of discrimination as a
result of their not being hired by Spirit at the time of the
Boeing Acquisition. Spirit responded to the 35 individual
complaints. The EEOC has issued a notice of right to sue in 34
of the complaints and stated that it was unable to
conclude that the information establishes violations of the
statutes. It continues to investigate the remaining
complaint.
In December 2005, a federal grand jury sitting in Topeka, Kansas
issued subpoenas regarding the vapor degreasing equipment at our
Wichita, Kansas facility. The governments investigation
appears to focus on whether the degreasers were operating within
permit parameters and whether chemical wastes from the
degreasers were disposed of properly. The subpoenas cover a time
period both before and after our purchase of the Wichita, Kansas
facility. Subpoenas were issued to Boeing, Spirit and
individuals who were employed by Boeing prior to the Boeing
Acquisition but are now employed by us. We are in the process of
responding to the subpoena and are cooperating with the
governments investigation. At this time, we do not have
enough information to make any predictions about the outcome of
this matter.
Airbus has filed oppositions to six European patents originally
issued to or applied for by Boeing and acquired by Spirit in the
Boeing Acquisition. Airbus claims that the subject matter in
these patents is not patentable because of a lack of novelty and
a lack of inventive activity. Responses to three of the Airbus
oppositions have been filed. Spirits response to a fourth
opposition is due on November 19, 2006. After Spirit
responds, the European Patent Office, or EPO, will issue a
preliminary opinion. If the opinion does not resolve all issues,
then the parties will participate in oral proceedings before a
three member board of the EPO. The decision of the board is
appealable. The remaining two patents have gone before the three
panel board. In one case the patent was maintained without
amendments to the claims. On the second patent, the board
accepted the claims with limitation and Spirit has appealed.
Spirit is awaiting confirmation of whether Airbus has appealed
either decision.
Government Contracts
Companies engaged in supplying defense-related equipment and
services to U.S. government agencies, either directly or by
subcontract, are subject to business risks specific to the
defense industry. These risks include the ability of the
U.S. government to unilaterally: (1) suspend or debar
us from receiving new prime contracts or subcontracts;
(2) terminate existing contracts; (3) reduce the value
of existing contracts; (4) audit our contract-related costs
and fees, including allocated indirect costs; and
(5) control and potentially prohibit the export of our
products.
Most U.S. government contracts for which we subcontract can
be terminated by the U.S. government either for its
convenience or if the prime contractor defaults by failing to
perform under the contract. In addition, the prime contractor
typically has the right to terminate our subcontract for its
convenience or if we default by failing to perform under the
subcontract. Termination for convenience provisions generally
provide only for our recovery of costs incurred or committed,
settlement expenses and profit on the work completed prior to
termination. Termination for default provisions generally
provide for the subcontractor to be liable for excess costs
incurred by the prime contractor in procuring undelivered items
from another source.
100
Foreign Ownership, Control or Influence
Under the U.S. Governments National Industry Security
Program Operating Manual, or NISPOM, the U.S. government
will not award contracts to companies under foreign ownership,
control or influence, or FOCI, where DoD Facility Security
Clearances, or FSC, are required, unless certain
mitigation measures are put in place. The purpose of
the FOCI mitigation measures is to protect cleared
U.S. defense contractors against improper FOCI.
We have been cleared to the secret level under a
Special Security Agreement, or SSA, which is one of the
recognized FOCI mitigation measures under the NISPOM. As a
cleared entity, we must comply with the requirements of our SSA,
the NISPOM and any other applicable U.S. government
industrial security regulations (which could apply depending on
our contracts). Failure to follow the requirements of the SSA,
the NISPOM or any other applicable U.S. government
industrial security regulations could, among other things,
result in termination of our FSC, which in turn would preclude
us from being awarded classified contracts or, under certain
circumstances, performing on our existing classified contracts.
Governmental Regulations
The commercial aircraft component industry is highly regulated
by both the FAA in the United States, the JAA in Europe and
other agencies throughout the world. The military aircraft
component industry is governed by military quality
specifications. We, and the components we manufacture, are
required to be certified by one or more of these entities or
agencies, and, in some cases, by individual OEMs, in order to
engineer and service parts and components used in specific
aircraft models.
We must also satisfy the requirements of our customers,
including OEMs and airlines that are subject to FAA regulations,
and provide these customers with products and services that
comply with the government regulations applicable to commercial
flight operations. In addition, the FAA requires that various
maintenance routines be performed on aircraft components. We
believe that we currently satisfy or exceed these maintenance
standards in our repair and overhaul services. We also maintain
several FAA approved repair stations.
The technical data and components used in the manufacture and
production of our products, as well as many of the products and
technical data we export, either as individual items or as
components incorporated into aircraft, are subject to compliance
with U.S. export control laws. Collaborative agreements
that we may have with foreign persons, including manufacturers
or suppliers, are also subject to U.S. export control laws.
Our operations are also subject to a variety of worker and
community safety laws. The Occupational Safety and Health Act,
or OSHA, mandates general requirements for safe workplaces for
all employees. In addition, OSHA provides special procedures and
measures for the handling of certain hazardous and toxic
substances. Our management believes that our operations are in
material compliance with OSHAs health and safety
requirements.
101
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding the persons
who currently serve as executive officers and directors of
Spirit Holdings. Each director will hold office until our next
annual meeting of stockholders, at which directors will be
elected for a term of one year.
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Jeffrey L. Turner
|
|
|
55 |
|
|
Director, President and Chief Executive Officer |
Ulrich (Rick) Schmidt
|
|
|
57 |
|
|
Executive Vice President, Chief Financial Officer and Treasurer |
Ronald C. Brunton
|
|
|
58 |
|
|
Executive Vice President and Chief Operating Officer |
H. David Walker
|
|
|
55 |
|
|
Senior Vice President Sales and Marketing |
Gloria Farha Flentje
|
|
|
63 |
|
|
Vice President, General Counsel and Secretary |
Janet S. Nicolson
|
|
|
50 |
|
|
Senior Vice President, Human Resources |
John Lewelling
|
|
|
46 |
|
|
Senior Vice President, Strategy and Information Technology |
Richard Buchanan
|
|
|
56 |
|
|
Vice President/General Manager of Fuselage Structures/Systems
Business Unit |
Michael G. King
|
|
|
50 |
|
|
Vice President/General Manager of the Propulsion Structures and
Systems Business Unit |
Neil McManus
|
|
|
40 |
|
|
Vice President and Managing Director, Spirit AeroSystems
(Europe) Limited |
Donald R. Carlisle
|
|
|
53 |
|
|
Vice President/General Manager of Aerostructures Business Unit |
Ivor (Ike) Evans
|
|
|
64 |
|
|
Director |
Paul Fulchino
|
|
|
60 |
|
|
Director |
Richard Gephardt
|
|
|
65 |
|
|
Director |
Robert Johnson
|
|
|
59 |
|
|
Director |
Ronald Kadish
|
|
|
58 |
|
|
Director |
Cornelius (Connie Mack) McGillicuddy, III
|
|
|
66 |
|
|
Director |
Seth Mersky
|
|
|
47 |
|
|
Director |
Francis Raborn
|
|
|
62 |
|
|
Director |
Nigel Wright
|
|
|
43 |
|
|
Director |
Jeffrey L. Turner. Mr. Turner has been the
President and Chief Executive Officer of Spirit Holdings since
June 2006 and became a director of Spirit Holdings on
November 15, 2006. Since June 16, 2005, the date of
the Boeing Acquisition, he has also served in such capacities
for Spirit. Mr. Turner joined Boeing in 1973 and was
appointed Vice President General Manager in November
1995. Mr. Turner received his Bachelor of Science in
Mathematics and Computer Science and his M.S. in Engineering
Management Science, both from Wichita State University. He was
selected as a Boeing Sloan Fellow to the Massachusetts
Institute of Technologys (MIT) Sloan School of
Management where he earned a Masters Degree in Management.
102
Ulrich (Rick) Schmidt. Mr. Schmidt has been
the Executive Vice President, Chief Financial Officer and
Treasurer of Spirit Holdings since June 2006. He has also served
in such capacities for Spirit since August 2005. Previously,
Mr. Schmidt was the Executive Vice President and Chief
Financial Officer of the Goodrich Corporation from October 2000
until August 2005. Mr. Schmidt received his Bachelor of
Arts and Masters of Business from Michigan State University.
Ronald C. Brunton. Mr. Brunton became the
Executive Vice President and Chief Operating Officer of Spirit
Holdings on November 15, 2006. Since the date of the Boeing
Acquisition, he has served in this capacity for Spirit.
Mr. Brunton joined Boeing in 1983 and was appointed Vice
President of Manufacturing in December 2000. Mr. Brunton
received his Bachelor of Science in Mechanical Engineering and
equivalent undergraduate in Business from Wichita State
University.
H. David Walker. Mr. Walker became the Senior
Vice President of Sales/Marketing of Spirit Holdings on
November 15, 2006. Mr. Walker joined Spirit in
September 2005 in these same capacities. From 2003 through
September 2005, Mr. Walker was Vice President of Vought
Aircraft Industries. Mr. Walker served as the Vice
President/General Manager of The Aerostructures Corp. from 2002
until 2003 and served as Vice President of Programs and
Marketing from 1997 through 2002. Mr. Walker received his
BEME and MSME from Vanderbilt University.
Gloria Farha Flentje. Ms. Flentje became the
Vice President, General Counsel and Secretary of Spirit Holdings
on November 15, 2006. Since the date of the Boeing
Acquisition, she has served in these capacities for Spirit.
Prior to the Boeing Acquisition, she worked for Boeing as Chief
Legal Counsel for five years. Prior to joining Boeing, she was a
partner in the Wichita, Kansas law firm of Foulston &
Siefkin, L.L.P., where she represented numerous clients,
including Boeing, on employment and labor matters and school law
issues. Ms. Flentje graduated from the University of Kansas
with a Bachelor of Arts in Mathematics and International
Relations. She received her J.D. from Southern Illinois
University.
Janet S. Nicolson. Ms. Nicolson became the
Senior Vice President of Human Resources of Spirit Holdings on
November 15, 2006. Since the beginning of 2006, she has
served in this capacity for Spirit and is responsible for all
aspects of human resources and labor relations. Prior to joining
Spirit, Ms. Nicolson was a principal with Mercer Human
Resource Consulting, one of the largest global Human Resources
consulting firms, from January 2001 to December 2005. From 1998
to 2001, she served as Vice President Human Resources with
Allied Worldwide, a global logistics and transportation company.
Her corporate human resources experience includes executive and
leadership positions with diverse organizations such as PepsiCo,
SIRVA, North American Van Lines, Norfolk Southern Corporation
and United Technologies. She holds a Bachelor of Science degree
in Business from Concordia University and a Masters degree
in Human Resources from Pennsylvania State University.
John Lewelling. Mr. Lewelling became the
Senior Vice President, Strategy and Information Technology of
Spirit Holdings on November 15, 2006. Since February 2006,
he has served in this capacity for Spirit. Prior to joining
Spirit, Mr. Lewelling was the Chief Operating Officer of
GVW Holdings from 2004 to 2006. Mr. Lewelling was a
Managing Director with AlixPartners from 2002 to 2003. Prior to
that, he was a Partner with AT Kearney from 1999 to 2002.
Mr. Lewelling received his Bachelor of Science degree in
Materials and Logistics Management with a dual focus in
Industrial Engineering and Business from Michigan State
University.
Richard Buchanan. Mr. Buchanan became the
Vice President/General Manager of Fuselage Structures/Systems
Business Unit of Spirit Holdings on November 15, 2006.
Since the date of the Boeing Acquisition, he has served in this
capacity for Spirit. Prior to the Boeing Acquisition, he was
employed by Boeing for more than 20 years, all of which
were spent at Boeing Wichita. During his tenure with Boeing,
Mr. Buchanan held the positions of Director for
SubAssembly/ Lot Time, Director for Light Structures, and the
Director and Leader of B737 Structures Value Chain.
Mr. Buchanan is a graduate of Friends University with a
Bachelor of Science degree in Human Resource Management.
Michael G. King. Mr. King became the Vice
President/General Manager of the Propulsion Structures and
Systems Business Unit of Spirit Holdings on November 15,
2006. Since the date of the
103
Boeing Acquisition, he has served in this capacity for Spirit.
Prior to the Boeing Acquisition, Mr. King worked for Boeing
for 24 years, from 1980 until 2005. From 1996 until 2002,
he worked at Boeings Machining Fabrication Manufacturing
Business Unit with responsibility for production of complex
machined detail parts and assemblies for all commercial airplane
models. In 2002, Mr. King became the director of the Strut,
Nacelle and Composite Responsibility Center at Boeing.
Mr. King earned an Associate of Arts degree from Butler
County Community College. He completed his Bachelor of Science
in Manufacturing Technology through Southwestern College and
received a Mini-MBA through Wichita State University.
Neil McManus. Mr. McManus is the Vice
President and Managing Director of Spirit AeroSystems (Europe)
Limited. Since the date of the BAE Acquisition, he has served in
that capacity for Spirit Europe. Mr. McManus joined BAE
Aerostructures in 1986 and was appointed Managing
Director Aerostructures in January 2003.
Mr. McManus was educated at Loughborough University of
Science and Technology, where he received his Bachelor of
Science Honors Degree in Engineering Manufacturing and a diploma
in Industrial Studies.
Donald R. Carlisle. Mr. Carlisle became the
Vice President/General Manager of the AeroStructures Business
Unit of Spirit Holdings on November 15, 2006. Since the
date of the Boeing Acquisition, he has served in this capacity
for Spirit and is responsible for the design and manufacture of
major aerostructure products for commercial and military
aerospace programs. Mr. Carlisle served as Managing
Director of Boeings Tulsa and McAlester, Oklahoma plants
from 2002 until the Boeing Acquisition. Prior to that
assignment, he was managing director of Boeings Tulsa
Division with responsibility for plants in Tennessee, Arkansas
and Oklahoma. Mr. Carlisle has over 30 years of
leadership experience in a wide range of aerospace business
assignments with Cessna, Martin Marietta, Rockwell International
and Boeing including production engineering, operations, product
and business development, program management and sales and
marketing for both government and commercial programs.