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SPR > SEC Filings for SPR > Form 10-Q on 5-Nov-2012All Recent SEC Filings




Quarterly Report

Item 2. Management's 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 unaudited condensed consolidated financial statements and the notes to the unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q (this "Quarterly Report"). The following section may include "forward-looking statements." Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "should," "expect," "anticipate," "intend," "estimate," "believe," "project," "continue," "plan," "forecast," or other similar words. These statements reflect management's current views with respect to future events and are subject to risks and uncertainties, both known and unknown, including, but not limited to, those described in the "Risk Factors" sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (our "2011 Form 10-K"), filed with the SEC on February 23, 2012 and our Quarterly Report on form 10-Q for the period ended March 29, 2012 (our "Q1 2012 Form 10-Q"), filed with the SEC on May 4, 2012. See also "Cautionary Statement Regarding Forward-Looking Statements." 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.

Recent Events

Due to Hurricane Sandy, which made landfall on the east Coast of the U.S. on October 29, 2012, some of our suppliers may experience disruptions. We do not expect these disruptions to have a material impact on our operations.

On October 25, 2012, we announced the recognition in the third quarter of 2012 of a $590.4 million forward loss charge related to six of our new development programs. As previously disclosed in our annual and quarterly reports, the Company faces many risks and challenges with these and other development programs. The charges by program are as follows:

    Boeing B787                $184.0 million (wing fixed and movable leading
                                edges, FLE and MLE)
    Gulfstream G650            $162.5 million (wing)
    Rolls Royce BR 725         $151.0 million (engine nacelles for the G650
    Gulfstream G280            $88.1 million (wing)
    747-8 Wing                 $2.4 million (wing)
    A350 Wing Non-Recurring    $2.4 million (wing)

On October 19, 2012, the Company reached an agreement with its insurers on a final settlement for all claims relating to the April 14, 2012 severe weather event. Under the terms of this settlement, the insurers agreed to pay the Company $234.9 million (including payments previously made) to resolve all property damage, clean-up and recovery costs related to the severe weather event as well as expenses incurred to make up for the interruptions of production and to reduce further disruptions. The Company expects to receive non-refundable payments of the settlement amount (less $105.0 million in cash advance payments already received during the second quarter of 2012) from its insurers prior to December 31, 2012.

On October 16, 2012, Spirit AeroSystems announced that Jon Lammers has been named Senior Vice President, General Counsel and Secretary.

On September 6, 2012, Spirit announced a reorganization to better align its structure to the changing needs of the business. Reporting to President and CEO Jeff Turner, the Spirit Executive Leadership team includes:

Mike King, Executive Vice President/Chief Operations Officer with responsibility for Supply Chain Management, Manufacturing and Operations Efficiency

John Pilla, Senior Vice President/General Manager of Propulsion and Wing segments with responsibility for Propulsion, Aftermarket, Spirit Europe and Spirit Malaysia

David Coleal, Senior Vice President/General Manager of Fuselage with responsibility for Fuselage, North Carolina, and Oklahoma

Sam Marnick, Senior Vice President/Chief Administration Officer with Quality, Operations Support, Human Resources and Corporate Administration under her purview

Phil Anderson, Senior Vice President/Chief Financial Officer with Information Technology under his purview

          Jon Lammers, Senior Vice President/Secretary

          David Walker, Senior Vice President/Chief Technology Officer,
Business Development and A350

          John Lewelling, Senior Vice President, Strategy

          Buck Buchanan, Senior Vice President, Advanced Projects

Table of Contents


We are one of the largest independent non-OEM (original equipment manufacturer) aircraft parts designers and manufacturers of commercial aerostructures in the world, based on annual revenues, as well as the largest independent supplier of aerostructures to Boeing. In addition, we are one of the largest independent suppliers of aerostructures to Airbus. Boeing and Airbus are the two largest aircraft OEMs in the world. Aerostructures are structural components, such as fuselages, propulsion systems and wing systems for commercial and military aircraft. For the three months ended September 27, 2012, we generated net revenues of $1,365.3 million and net loss of $134.4 million, and for the nine months ended September 27, 2012, we generated net revenues of $3,972.1 million and net loss of $25.9 million.

We are organized into three principal reporting segments: (1) Fuselage Systems, which includes forward, mid and rear fuselage sections, (2) Propulsion Systems, which includes nacelles, struts/pylons and engine structural components, and
(3) Wing Systems, which includes wings, wing components, flight control surfaces and other miscellaneous structural parts. All other activities fall within the All Other segment, principally made up of sundry sales of miscellaneous services, tooling contracts, and sales of natural gas through a tenancy-in-common with other companies that have operations in Wichita, Kansas. The Fuselage Systems segment manufactures products at our facilities in Wichita, Kansas and Kinston, North Carolina, with an assembly plant in Saint-Nazaire, France for the A350 XWB program. The Propulsion Systems segment manufactures products at our facilities in Wichita and Chanute, Kansas. The Wing Systems segment manufactures products at our facilities in Tulsa and McAlester, Oklahoma; Prestwick, Scotland; Subang, Malaysia; and Kinston, North Carolina. Fuselage Systems, Propulsion Systems, Wing Systems and All Other represented approximately 49%, 26%, 25% and less than 1%, respectively, of our net revenues for the three months ended September 27, 2012. Fuselage Systems, Propulsion Systems, Wing Systems and All Other represented approximately 48%, 27%, 25% and less than 1%, respectively, of our net revenues for the nine months ended September 27, 2012.

New Program Performance

We are currently performing work on several new programs, which are in various stages of development. Several of these programs entered flight testing in 2011, including the Gulfstream G280 and Gulfstream G650, which includes the Rolls-Royce BR725. The G280 and G650 aircraft received FAA Type Certification during the third quarter of 2012, though neither program achieved first customer delivery during that period. The Boeing B787-8 and Boeing B747-8 have each received FAA and JAA certifications, as well as EASA certification for entry into service, and each of these Boeing programs have made aircraft deliveries to the final customer. We are delivering revenue-generating production units on all of these programs. We have delivered six revenue-generating test articles on the Sikorsky CH-53K helicopter program, and we expect to deliver the final test article by the end of the first quarter of 2013.

During the third quarter of 2012, several key events occurred within some of our new programs which necessitated revisions to our contract estimates due to performance issues, cost overruns and cost reduction activities that have not materialized as quickly as we had expected. The Company has failed to achieve forecasted cost reductions on many of these programs and overran engineering design cost forecasts due to excessive re-design efforts. As a result of these and other events, for the nine months ended September 27, 2012, we have recorded aggregate forward loss charges of $184.0 million on the Boeing 787, $162.5 million on the Gulfstream G650, $151.0 million on the Rolls-Royce BR725, $98.8 million on the Gulfstream G280, $8.9 million on the Airbus A350 XWB non-recurring wing and $5.1 million on the Boeing 747-8 wing programs. Following is a summary of events that occurred during the third quarter of 2012 that resulted in revisions of estimates on certain programs.

Performance Issues-Tulsa Facility

The Company's Tulsa facility has significant work content on three of the development programs (B787, G280, G650). The multiple complex development programs at this facility have created various performance issues that have resulted in previous changes to our contract estimates on these development programs.

The performance issues at the Tulsa facility were magnified in the third quarter of 2012 when the Company implemented a recovery plan which would bring the Company current on the delivery schedule for its B787 wing components. The Company began implementing the recovery plan during late July 2012 which resulted in the addition of significant additional resources to meet delivery schedules. As the Company was implementing the recovery plan, it became clear during the third quarter estimation process that the remediation would have a significant impact on the future cost curves due to significant amounts of additional headcount and disruption.

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