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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 Form 10-Q
 (Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 26, 2019
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                    to                 
 
Commission File Number 001-33160
 Spirit AeroSystems Holdings, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-2436320
(State or other jurisdiction of
 incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
3801 South Oliver
Wichita, Kansas 67210
(Address of principal executive offices and zip code)
 
Registrant’s telephone number, including area code:
(316) 526-9000
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading symbol
Name of each exchange on which registered
Class A common stock, par value $0.01 per share
SPR
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
Emerging Growth Company
 
 
 
 
If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No x
As of October 24, 2019, the registrant had 103,517,451 shares of class A common stock, $0.01 par value per share, outstanding.
 

1

Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Page
 
 
 
 


2

Table of Contents


PART 1. FINANCIAL INFORMATION
 
Item 1. Financial Statements (unaudited)
 
Spirit AeroSystems Holdings, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
 
 
For the Three
 Months Ended
 
For the Nine
Months Ended
 
September 26,
2019
 
September 27,
2018
 
September 26,
2019
 
September 27,
2018
 
($ in millions, except per share data)
Revenue
$
1,919.9

 
$
1,813.7

 
$
5,903.8

 
$
5,386.7

Operating costs and expenses
 

 
 

 
 
 
 
Cost of sales
1,647.6

 
1,543.1

 
5,029.1

 
4,601.3

Selling, general and administrative
53.6

 
37.3

 
173.6

 
154.5

Research and development
12.6

 
10.8

 
36.0

 
31.3

Total operating costs and expenses
1,713.8

 
1,591.2

 
5,238.7

 
4,787.1

Operating income
206.1

 
222.5

 
665.1

 
599.6

Interest expense and financing fee amortization
(23.6
)
 
(24.2
)
 
(66.1
)
 
(60.3
)
Other (expense) income, net
(9.5
)
 
7.4

 
(11.9
)
 
(0.8
)
Income before income taxes and equity in net income of affiliate
173.0

 
205.7

 
587.1

 
538.5

Income tax provision
(41.7
)
 
(36.9
)
 
(124.7
)
 
(99.7
)
Income before equity in net income of affiliate
131.3

 
168.8

 
462.4

 
438.8

Equity in net income of affiliate

 

 

 
0.6

Net income
$
131.3

 
$
168.8

 
$
462.4

 
$
439.4

Earnings per share
 

 
 

 
 
 
 
Basic
$
1.27

 
$
1.61

 
$
4.46

 
$
4.02

Diluted
$
1.26

 
$
1.59

 
$
4.41

 
$
3.98

 
See notes to condensed consolidated financial statements (unaudited)

3

Table of Contents

Spirit AeroSystems Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
 
 
For the Three
Months Ended
 
For the Nine
Months Ended
 
September 26,
2019
 
September 27,
2018
 
September 26,
2019
 
September 27,
2018
 
($ in millions)
Net income
$
131.3

 
$
168.8

 
$
462.4

 
$
439.4

Changes in other comprehensive gain (loss), net of tax:
 

 
 

 
 
 
 
Pension, SERP, and Retiree medical adjustments, net of tax effect of $(11.4) and $0.1 for the three months ended, respectively, and $(11.2) and $0.3 for the nine months ended, respectively
36.9

 
(0.6
)
 
36.2

 
(1.8
)
Unrealized foreign exchange loss on intercompany loan, net of tax effect of $0.2 and zero for the three months ended, respectively, and $0.3 and $0.3 for the nine months ended, respectively
(1.1
)
 

 
(1.3
)
 
(1.3
)
Unrealized loss on interest rate swaps, net of tax effect of $(0.3) for the three and nine months ended
(1.5
)
 

 
(1.5
)
 

Foreign currency translation adjustments
$
(12.8
)
 
$

 
$
(16.7
)
 
$
(13.4
)
Total other comprehensive gain (loss)
21.5

 
(0.6
)
 
16.7

 
(16.5
)
Total comprehensive income
$
152.8

 
$
168.2

 
$
479.1

 
$
422.9

 
See notes to condensed consolidated financial statements (unaudited)

4

Table of Contents

Spirit AeroSystems Holdings, Inc.
Condensed Consolidated Balance Sheets
(unaudited) 
 
September 26, 2019
 
December 31, 2018
 
($ in millions)
Assets
 

 
 

Cash and cash equivalents
$
1,477.3

 
$
773.6

Restricted cash
0.3

 
0.3

Accounts receivable, net
708.6

 
545.1

Contract assets, short-term
579.0

 
469.4

Inventory, net
1,015.2

 
1,012.6

Other current assets
58.3

 
48.3

Total current assets
3,838.7

 
2,849.3

Property, plant and equipment, net
2,199.8

 
2,167.6

Right of use assets
49.7

 

Contract assets, long-term
9.7

 
54.1

Pension assets
385.3

 
326.7

Other assets
218.4

 
288.2

Total assets
$
6,701.6

 
$
5,685.9

Liabilities
 

 
 

Accounts payable
$
1,140.5

 
$
902.6

Accrued expenses
319.8

 
313.1

Profit sharing
55.9

 
68.3

Current portion of long-term debt
37.6

 
31.4

Operating lease liabilities, short-term
6.2

 

Advance payments, short-term
19.8

 
2.2

Contract liabilities, short-term
170.5

 
157.9

Forward loss provision, short-term
37.2

 
12.4

Deferred revenue and other deferred credits, short-term
17.2

 
20.0

Deferred grant income liability - current
5.6

 
16.0

Other current liabilities
55.4

 
58.2

Total current liabilities
1,865.7

 
1,582.1

Long-term debt
2,132.2

 
1,864.0

Operating lease liabilities, long-term
43.6

 

Advance payments, long-term
335.1

 
231.9

Pension/OPEB obligation
32.6

 
34.6

Contract liabilities, long-term
340.4

 
369.8

Forward loss provision, long-term
161.9

 
170.6

Deferred revenue and other deferred credits
32.4

 
31.2

Deferred grant income liability - non-current
28.0

 
28.0

Other liabilities
112.7

 
135.6

Stockholders' Equity
 

 
 

Preferred stock, par value $0.01, 10,000,000 shares authorized, no shares issued

 

Common stock, Class A par value $0.01, 200,000,000 shares authorized, 104,888,051 and 105,461,817 shares issued and outstanding, respectively
1.0

 
1.1

Additional paid-in capital
1,113.4

 
1,100.9

Accumulated other comprehensive loss
(188.1
)
 
(196.6
)
Retained earnings
3,146.2

 
2,713.2

Treasury stock, at cost (41,515,847 and 40,719,438 shares, respectively)
(2,456.0
)
 
(2,381.0
)
Total stockholders’ equity
1,616.5

 
1,237.6

Noncontrolling interest
0.5

 
0.5

Total equity
1,617.0

 
1,238.1

Total liabilities and equity
$
6,701.6

 
$
5,685.9

 See notes to condensed consolidated financial statements (unaudited)

5

Table of Contents

Spirit AeroSystems Holdings, Inc. 
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
 
 
 
 
 
 
Shares
 
Amount
 
 
 
Total
 
($ in millions, except share data)
Balance — December 31, 2018
105,461,817

 
$
1.1

 
$
1,100.9

 
$
(2,381.0
)
 
$
(196.6
)
 
$
2,713.2

 
$
1,237.6

Net income

 

 

 

 

 
331.1

 
331.1

Adoption of ASU 2018-02

 

 

 

 
(8.3
)
 
8.3

 

Dividends Declared(a)

 

 

 

 

 
(25.3
)
 
(25.3
)
Employee equity awards
392,933

 

 
15.1

 

 

 

 
15.1

Stock forfeitures
(97,154
)
 

 

 

 

 

 

Net shares settled
(126,808
)
 

 
(11.8
)
 

 

 

 
(11.8
)
ESPP shares issued
14,617

 

 
1.3

 
 
 
 
 
 
 
1.3

SERP shares issued
6,214

 

 

 

 

 

 

Treasury shares
(796,409
)
 
(0.1
)
 

 
(75.0
)
 

 

 
(75.1
)
Other comprehensive loss

 

 

 

 
(4.7
)
 

 
(4.7
)
Balance — June 27, 2019
104,855,210

 
$
1.0

 
$
1,105.5

 
$
(2,456.0
)
 
$
(209.6
)
 
$
3,027.3

 
$
1,468.2

Net income

 

 

 

 

 
131.3

 
131.3

Dividends Declared(a)

 

 

 

 

 
(12.4
)
 
(12.4
)
Employee equity awards
37,841

 

 
8.2

 

 

 

 
8.2

Stock forfeitures
(2,568
)
 

 

 

 

 

 

Net shares settled
(2,432
)
 

 
(0.3
)
 

 

 

 
(0.3
)
Other comprehensive gain

 

 

 

 
21.5

 

 
21.5

Balance — September 26, 2019
104,888,051

 
$
1.0

 
$
1,113.4

 
$
(2,456.0
)
 
$
(188.1
)
 
$
3,146.2

 
$
1,616.5

 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
 
 
 
 
 
 
Shares
 
Amount
 
 
 
Total
 
($ in millions, except share data)
Balance — December 31, 2017
114,447,605

 
$
1.1

 
$
1,086.9

 
$
(1,580.9
)
 
$
(128.5
)
 
$
2,422.4

 
$
1,801.0

Net income

 

 

 

 

 
270.6

 
270.6

Adoption of ASC 606

 

 

 

 

 
(276.3
)
 
(276.3
)
Dividends Declared(a)

 

 

 

 

 
(24.2
)
 
(24.2
)
Employee equity awards
412,247

 

 
13.6

 

 

 

 
13.6

Stock forfeitures
(41,135
)
 

 

 

 

 

 

Net shares settled
(173,799
)
 

 
(15.4
)
 

 

 

 
(15.4
)
Treasury shares
(8,157,287
)
 

 
(108.6
)
 
(691.4
)
 

 

 
(800.0
)
Other comprehensive loss

 

 

 

 
(15.9
)
 

 
(15.9
)
Balance — June 28, 2018
106,498,050

 
$
1.1

 
$
977.3

 
$
(2,272.3
)
 
$
(144.4
)
 
$
2,392.5

 
$
954.2

Net income

 
$

 
$

 
$

 
$

 
$
168.8

 
$
168.8

Dividends Declared(a)

 

 

 

 

 
(12.6
)
 
(12.6
)
Employee equity awards
1,409

 

 
6.3

 

 

 

 
6.3

Stock forfeitures
(3,378
)
 

 

 

 

 

 

Net shares settled
(2,155
)
 

 
(0.2
)
 

 

 

 
(0.2
)
Other comprehensive loss

 

 

 

 
(0.6
)
 

 
(0.6
)
Balance — September 27, 2018
106,493,926

 
$
1.1

 
$
983.4

 
$
(2,272.3
)
 
$
(145.0
)
 
$
2,548.7

 
$
1,115.9


(a) Cash dividends declared per common share were $0.12 for the three months ended September 26, 2019, June 27, 2019, and March 28, 2019. Cash dividends declared per common share were $0.12 for the three months ended September 27, 2018 and June 28, 2018, and $0.10 for the three months ended March 29, 2018.

6

Table of Contents

Spirit AeroSystems Holdings, Inc. 
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
For the Nine Months Ended
 
September 26, 2019

September 27, 2018
Operating activities
($ in millions)
Net income
$
462.4

 
$
439.4

Adjustments to reconcile net income to net cash provided by operating activities
 

 
 
Depreciation expense
186.9

 
171.3

Amortization expense
0.1

 
0.4

Amortization of deferred financing fees
2.6

 
17.3

Accretion of customer supply agreement
3.3

 
3.0

Employee stock compensation expense
22.6

 
19.9

Loss from derivative instruments
8.1

 
3.4

Gain from foreign currency transactions
17.2

 
0.8

Loss on disposition of assets
0.7

 
1.7

Deferred taxes
29.4

 
(37.8
)
Pension and other post-retirement benefits, net
(9.7
)
 
(25.1
)
Grant liability amortization
(13.8
)
 
(15.9
)
Equity in net income of affiliate

 
(0.6
)
Forward loss provision
(7.5
)
 
(134.0
)
Changes in assets and liabilities
 
 
 
Accounts receivable
(167.8
)
 
(122.3
)
Inventory, net
(3.3
)
 
26.7

Contract assets
(67.5
)
 
(50.4
)
Accounts payable and accrued liabilities
149.3

 
279.9

Profit sharing/deferred compensation
(12.2
)
 
(67.4
)
Advance payments
120.8

 
(73.2
)
Income taxes receivable/payable
4.9

 
(28.3
)
Contract liabilities
(16.7
)
 
188.0

Deferred revenue and other deferred credits
6.2

 
(1.1
)
Other
2.6

 
(28.3
)
Net cash provided by operating activities
718.6

 
567.4

Investing activities
 

 
 

Purchase of property, plant and equipment
(118.8
)
 
(170.9
)
Other
0.1

 
2.8

Net cash used in investing activities
(118.7
)
 
(168.1
)
Financing activities
 

 
 

Proceeds from issuance of debt
250.0

 
1,300.0

Proceeds from revolving credit facility
100.0

 

Principal payments of debt
(8.5
)
 
(4.9
)
Payments on term loan
(5.2
)
 
(256.3
)
Payments on revolving credit facility
(100.0
)
 

Payments on bonds

 
(300.0
)
Taxes paid related to net share settlement awards
(12.1
)
 
(15.5
)
Proceeds from issuance of ESPP stock
1.3

 

Debt issuance and financing costs

 
(23.2
)
Purchase of treasury stock
(75.0
)
 
(805.8
)
Dividends paid
(37.8
)
 
(35.4
)
Other
0.8

 

Net cash provided by (used in) financing activities
113.5

 
(141.1
)
Effect of exchange rate changes on cash and cash equivalents
(13.5
)
 
0.2

Net increase in cash, cash equivalents, and restricted cash for the period
699.9

 
258.4

Cash, cash equivalents, and restricted cash, beginning of period
794.1

 
445.5

Cash, cash equivalents, and restricted cash, end of period
$
1,494.0

 
$
703.9


7

Table of Contents

Reconciliation of Cash, Cash Equivalents, and Restricted Cash:
 
 
 
 
For the Nine Months Ended
 
September 26, 2019
 
September 27, 2018
Cash and cash equivalents, beginning of the period
$
773.6

 
$
423.3

Restricted cash, short-term, beginning of the period
0.3

 
2.2

Restricted cash, long-term, beginning of the period
20.2

 
20.0

Cash, cash equivalents, and restricted cash, beginning of the period
$
794.1

 
$
445.5

 
 
 
 
Cash and cash equivalents, end of the period
$
1,477.3

 
$
683.4

Restricted cash, short-term, end of the period
0.3

 
0.3

Restricted cash, long-term, end of the period
16.4

 
20.2

Cash, cash equivalents, and restricted cash, end of the period
$
1,494.0

 
$
703.9

See notes to condensed consolidated financial statements (unaudited)

8

Table of Contents
Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, and RM in millions other than per share amounts)



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

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

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

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments and elimination of intercompany balances and transactions) considered necessary to fairly present the results of operations for the interim period. The results of operations for the nine months ended September 26, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

In connection with the preparation of the condensed consolidated financial statements, the Company evaluated subsequent events through the date the financial statements were issued. The interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 8, 2019 (the “2018 Form 10-K”).

2.  Adoption of New Accounting Standards

Adoption of ASU 2016-02

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). This update requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018. The Company adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective transition approach, with the cumulative effect of the initial application recognized at the date of adoption. Under this effective date method, financial results reported prior to the first quarter of 2019 are unchanged. The Company also chose to adopt the package of practical expedients.

The Company has reviewed all of its current active leases and has implemented the necessary processes and systems to comply with the requirements of ASU 2016-02. Upon adoption of ASU 2016-02, the Company recognized a Right of Use (“ROU”) asset on its books for the net present value of all of its active leases with terms greater than 12 months, with an offsetting lease liability. The ROU asset and corresponding lease liability will be amortized over the course of the lease term, which includes all options that the Company expects it will exercise.

The Consolidated Balance Sheet impact of the adoption of ASU 2016-02 was an increase to both assets and liabilities of $52.7. The adoption of ASU 2016-02 did not have any material impact to net income or cash flows.

Adoption of ASU 2018-02

In February 2018, the FASB issued ASU No. 2018-02 (“ASU 2018-02”), Income Statement - Reporting Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Cuts

9

Table of Contents
Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, and RM in millions other than per share amounts)


and Jobs Act of 2017 (the “TCJA”) from accumulated other comprehensive income into retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. As a result of the adoption of ASU 2018-02 in the first quarter of 2019, the Company reclassified $8.3 from accumulated other comprehensive income into retained earnings on the condensed consolidated balance sheet.


3.  New Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. Certain disclosures in ASU 2018-13 are required to be applied on a retrospective basis and others on a prospective basis. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit losses (Topic 326) (“ASU 2016-13”), which requires the immediate recognition of management's estimates of current expected credit losses. ASU 2016-13 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2019. Early adoption is permitted after fiscal years beginning December 15, 2018. The Company does not expect the adoption of this standard to have a material effect to the Company's consolidated financial statements.

4.  Changes in Estimates

The Company has a periodic forecasting process in which management assesses the progress and performance of the Company’s programs. This process requires management to review each program’s progress by evaluating the program schedule, changes to identified risks and opportunities, changes to estimated revenues and costs for the accounting contracts (and options if applicable), and any outstanding contract matters. Risks and opportunities include but are not limited to management’s judgment about the cost associated with the Company’s ability to achieve the schedule, technical requirements (e.g., a newly-developed product versus a mature product), and any other program requirements. Due to the span of years it may take to completely satisfy the performance obligations for the accounting contracts (and options, if any) and the scope and nature of the work required to be performed on those contracts, the estimation of total revenue and costs is subject to many variables and, accordingly, is subject to change based upon judgment. When adjustments in estimated total consideration or estimated total cost are required, any changes from prior estimates for fully satisfied performance obligations are recognized in the current period as a cumulative catch-up adjustment for the inception-to-date effect of such changes. Cumulative catch-up adjustments are driven by several factors including production efficiencies, assumed rate of production, the rate of overhead absorption, changes to scope of work, and contract modifications. The quarterly and year-to-date forward losses relate primarily to negative changes in estimates on the B787 program due to Boeing's publicly announced rate reduction from 14 aircraft per month to 12 aircraft per month on October 23, 2019 .

Changes in estimates are summarized below:

10

Table of Contents
Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, and RM in millions other than per share amounts)



 
 
For the Three Months Ended
 
For the Nine Months Ended
Changes in Estimates
 
September 26, 2019

September 27, 2018
 
September 26, 2019

September 27, 2018
(Unfavorable) Favorable Cumulative Catch-up Adjustment by Segment
 
 
 
 
 
 
 
 
Fuselage
 
$
(14.4
)
 
$
(12.0
)
 
$
(2.0
)
 
$
(3.0
)
Propulsion
 
1.8

 
(2.4
)
 
(1.5
)
 
0.9

Wing
 
(0.4
)
 
1.4

 
1.7

 
0.9

Total (Unfavorable) Favorable Cumulative Catch-up Adjustment
 
$
(13.0
)
 
$
(13.0
)
 
$
(1.8
)
 
$
(1.2
)
 
 
 
 
 
 
 
 
 
Changes in Estimates on Loss Programs (Forward Loss) by Segment
 
 
 
 
 
 
 
 
Fuselage
 
$
(18.8
)
 
$

 
$
(13.8
)
 
$
(1.5
)
Propulsion
 
(4.0
)
 
(0.8
)
 
(3.1
)
 

Wing
 
(6.0
)
 
0.3

 
(4.9
)
 
(0.2
)
Total Changes in Estimates (Forward Loss) on Loss Programs
 
$
(28.8
)
 
$
(0.5
)
 
$
(21.8
)
 
$
(1.7
)
 
 
 
 
 
 
 
 
 
Total Change in Estimate
 
$
(41.8
)
 
$
(13.5
)
 
$
(23.6
)
 
$
(2.9
)
EPS Impact (diluted per share based upon statutory rates)
 
$
(0.31
)
 
$
(0.10
)
 
$
(0.18
)
 
$
(0.02
)


5.  Accounts Receivable, net
 
Accounts receivable represent the Company’s unconditional rights to consideration, subject to the payment terms of the contract, for which only the passage of time is required before payment. Unbilled receivables are reflected under contract assets on the balance sheet. The Company determines an allowance for doubtful accounts based on a review of outstanding receivables that are charged off against the allowance after the potential for recovery is considered remote.

Accounts receivable, net consists of the following:
 
September 26,
2019
 
December 31,
2018
Trade receivables
$
680.3

 
$
527.9

Other
29.2

 
17.9

Less: allowance for doubtful accounts
(0.9
)
 
(0.7
)
Accounts receivable, net
$
708.6

 
$
545.1


The Company has entered into agreements (the “Receivable Sales Agreements”) to sell, on a revolving basis, certain trade accounts receivable balances to a third party financial institution. Transfers under these agreements are accounted for as sales of receivables resulting in the receivables being de-recognized from the balance sheet. The Receivable Sales Agreements provide for the continuing sale of certain receivables on a revolving basis until terminated by any involved party. The receivables under the Receivable Sales Agreements are sold without recourse to the third party financial institution. During 2019, $4,378.3 of accounts receivable have been sold via these arrangements. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on sale of receivables is $18.7 for the nine months ended September 26, 2019 and is included in Other income and expense. See Note 21, Other Income (Expense), Net.

6.  Contract Assets and Contract Liabilities

Contract assets primarily represent revenues recognized for performance obligations that have been satisfied but for which amounts have not been billed. Contract assets, current are those that are expected to be billed to our customer within 12 months. Contract assets, long-term are those that are expected to be billed to our customer over periods greater than 12 months. No impairments to contract assets were recorded for the period ended September 26, 2019.

11

Table of Contents
Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, and RM in millions other than per share amounts)



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

 
December 31, 2018

September 26, 2019

Change

Contract assets
$
523.5

$
588.7

$
65.2

Contract liabilities
(527.7
)
(510.9
)
16.8

Net contract assets (liabilities)
$
(4.2
)
$
77.8

$
82.0



The increase in contract assets reflects the net impact of additional revenue recognized in excess of billed revenues during the period. The decrease in contract liabilities reflects the net impact of less deferred revenue recorded in excess of revenue recognized during the period. For the period ended September 26, 2019, the Company recognized $109.7 of revenue that was included in the contract liability balance at the beginning of the period.

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

The following tables show disaggregated revenues for the three and nine months ended September 26, 2019 and September 27, 2018:

 
 
For the Three
 Months Ended
 
For the Nine
Months Ended
Revenue
 
September 26,
2019
September 27,
2018
 
September 26,
2019
September 27,
2018
Contracts with performance obligations satisfied over time
 
$
1,466.9

$
1,456.7

 
$
4,491.8

$
4,212.6

Contracts with performance obligations satisfied at a point in time
 
453.0

357.0

 
1,412.0

1,174.1

Total Revenue
 
$
1,919.9

$
1,813.7

 
$
5,903.8

$
5,386.7


The following table disaggregates revenue by major customer:
 
 
For the Three
 Months Ended
 
For the Nine
Months Ended
Customer
 
September 26,
2019
September 27,
2018
 
September 26,
2019
September 27,
2018
Boeing
 
$
1,542.0

$
1,465.5

 
$
4,705.1

$
4,262.2

Airbus
 
284.1

263.8

 
934.0

869.0

Other
 
93.8

84.4

 
264.7

255.5

Total Revenue
 
$
1,919.9

$
1,813.7

 
$
5,903.8

$
5,386.7


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

12

Table of Contents
Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, and RM in millions other than per share amounts)


 
 
For the Three
 Months Ended
 
For the Nine
Months Ended
Location
 
September 26, 2019
September 27, 2018
 
September 26, 2019
September 27, 2018
United States
 
$
1,620.6

$
1,534.0

 
$
4,935.8

$
4,460.8

International
 
 
 
 
 
 
United Kingdom
 
177.4

184.4

 
577.6

574.1

Other
 
121.9

95.3

 
390.4

351.8

Total International
 
299.3

279.7

 
968.0

925.9

Total Revenue
 
$
1,919.9

$
1,813.7

 
$
5,903.8

$
5,386.7



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

 
Remaining in 2019

2020

2021

2022 and After

Unsatisfied performance obligations
$
1,728.6

$
6,344.5

$
5,933.8

$
1,002.7



8.  Inventory

Inventory consists of raw materials used in the production process, work-in-process, which is direct material, direct labor, overhead and purchases, and capitalized preproduction costs. Raw materials are stated at lower of cost (principally on an actual or average cost basis) or net realizable value. Capitalized pre-production costs include certain contract costs, including applicable overhead, incurred before a product is manufactured on a recurring basis. These costs are typically amortized over a period that is consistent with the satisfaction of the underlying performance obligations to which these relate.

 
September 26,
2019
 
December 31,
2018
Raw materials
$
242.4

 
$
240.4

Work-in-process(1)
731.9

 
727.8

Finished goods
11.0

 
7.1

Product inventory
985.3

 
975.3

Capitalized pre-production
29.9

 
37.3

Total inventory, net
$
1,015.2

 
$
1,012.6



(1)
Work-in-process inventory includes direct labor, direct material, overhead and purchases on contracts for which revenue is recognized at a point in time as well as sub-assembly parts that have not been issued to production on contracts for which revenue is recognized using the input method. For the periods ended September 26, 2019 and December 31, 2018, work-in-process inventory includes $149.0 and $151.6, respectively, of costs incurred in anticipation of specific contracts and no impairments were recorded in the period.

Product inventory, summarized in the table above, is shown net of valuation reserves of $36.3 and $55.2 as of September 26, 2019 and December 31, 2018, respectively.


9.  Property, Plant and Equipment, net
 
Property, plant and equipment, net consists of the following: 
 

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Table of Contents
Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, and RM in millions other than per share amounts)


 
September 26,
2019
 
December 31,
2018
Land
$
14.7

 
$
15.0

Buildings (including improvements)
905.0

 
822.7

Machinery and equipment
1,888.8

 
1,697.0

Tooling
1,047.1

 
1,032.3

Capitalized software
275.5

 
269.2

Construction-in-progress
144.8

 
227.8

Total
4,275.9

 
4,064.0

Less: accumulated depreciation
(2,076.1
)
 
(1,896.4
)
Property, plant and equipment, net
$
2,199.8

 
$
2,167.6



Repair and maintenance costs are expensed as incurred. The Company recognized repair and maintenance costs of $32.9 and $31.3 for the three months ended September 26, 2019 and September 27, 2018, respectively, and $102.7 and $99.0 for the nine months ended September 26, 2019 and September 27, 2018, respectively.
 
The Company capitalizes certain costs, such as software coding, installation, and testing, that are incurred to purchase or to create and implement internal-use computer software.  Depreciation expense related to capitalized software was $4.3 and $4.1 for the three months ended September 26, 2019 and September 27, 2018, respectively, and $13.3 and $12.7 for the nine months ended September 26, 2019 and September 27, 2018, respectively.
 
The Company reviews capital and amortizing intangible assets (long-lived assets) for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company evaluated its long-lived assets at its locations and determined no impairment was necessary for the period ended September 26, 2019.

10. Leases
The Company determines if an arrangement is a lease at the inception of a signed agreement. Operating leases are included in ROU assets (long-term), short-term operating lease liabilities, and long-term operating lease liabilities on the Company’s consolidated balance sheet. Finance leases are included in Property, Plant and Equipment, current maturities of long-term debt, and long-term debt.
ROU assets represent the right of the Company to use an underlying asset for the length of the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
To determine the present value of lease payments, the Company uses its estimated incremental borrowing rate or the implicit rate, if readily determinable. The estimated incremental borrowing rate is based on information available at the lease commencement date, including any recent debt issuances and publicly available data for instruments with similar characteristics. The ROU asset also includes any lease payments made and excludes lease incentives.
The Company's lease terms may include options to extend or terminate the lease and, when it is reasonably certain that an option will be exercised, those options are included in the net present value calculation. Leases with a term of 12 months or less, which are primarily related to automobiles and manufacturing equipment, are not recorded on the balance sheet. The aggregate amount of lease cost for leases with a term of 12 months or less is not material.
The Company has lease agreements that include lease and non-lease components, which are generally accounted for separately. For certain leases (primarily related to IT equipment), the Company does account for the lease and non-lease components as a single lease component. A portfolio approach is applied to effectively account for the ROU assets and liabilities for those specific leases referenced above. The Company does not have any material leases containing variable lease payments or residual value guarantees. The Company also does not have any material subleases.
The Company currently has operating and finance leases for items such as manufacturing facilities, corporate offices, manufacturing equipment, transportation equipment, and vehicles. The Company's active leases have remaining lease terms that range between less than one year to 18 years, some of which include options to extend the leases for up to 30 years, and some of which include options to terminate the leases within one year.

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Table of Contents
Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, and RM in millions other than per share amounts)


Comparable information presented in the financial statements for periods prior to January 1, 2019 represent legacy GAAP treatment of leases. For more information on the effective date and transition approach for implementation, see Note 2, Adoption of New Accounting Standards.
For the three months ended September 26, 2019, total net lease cost was $6.0. This was comprised of $2.4 of operating lease costs, $2.9 amortization of assets related to finance leases, and $0.7 interest on finance lease liabilities. For the nine months ended September 26, 2019, total net lease cost was $15.5. This was comprised of $6.7 of operating lease costs, $7.1 amortization of assets related to finance leases, and $1.7 interest on finance lease liabilities.

Supplemental cash flow information related to leases was as follows:
 
For the Three Months Ended
For the Nine Months Ended
 
September 26, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
$
2.4

$
6.7

Operating cash flows from finance leases
$
0.8

$
1.7

Financing cash flows from finance leases
$
3.4

$
7.2

 
 
 
ROU assets obtained in exchange for lease obligations:
 
 
Operating leases
$
0.9

$
1.6

Finance leases
$

$

Supplemental balance sheet information related to leases:
 
September 26, 2019
Finance leases:
 
Property and equipment, gross
$
90.2

Accumulated amortization
(17.5
)
Property and equipment, net
$
72.7


The weighted average remaining lease term as of September 26, 2019 for operating and finance leases was 10.31 years and 7.35 years, respectively. The weighted average discount rate as of September 26, 2019 for operating and finance leases was 5.6% and 4.5%, respectively. See Note 15, Debt, for current and non-current finance lease obligations.

As of September 26, 2019, remaining maturities of lease liabilities were as follows:
 
2019

2020

2021

2022

2023

2024 and thereafter

Total Lease Payments

Less: Imputed Interest
Total Lease Obligations

Operating Leases
$
2.3

$
8.6

$
7.3

$
7.0

$
5.9

$
35.2

$
66.3

$
(16.5
)
$
49.8

Financing Leases
$
3.8

$
15.2

$
14.9

$
11.4

$
9.5

$
28.6

$
83.4

$
(11.9
)
$
71.5


As of September 26, 2019, the Company had additional operating and financing lease commitments that have not yet commenced of approximately $2.6 and $151.8 for manufacturing equipment and facilities which are in various phases of construction or customization for the Company's ultimate use, with lease terms between 3 and 15 years. The Company's involvement in the construction and design process for these assets is generally limited to project management.


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Table of Contents
Spirit AeroSystems Holdings, Inc. 
Notes to the Condensed Consolidated Financial Statements (unaudited)
($, €, and RM in millions other than per share amounts)


11.  Other Assets
 
Other assets are summarized as follows:
 
 
September 26,
2019
 
December 31,
2018
Intangible assets