CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 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 ("Quarterly Report"). The following section may include "forward-looking statements." Forward-looking statements reflect our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "aim," "anticipate," "believe," "could," "continue," "estimate," "expect," "forecast," "goal," "intend," "may," "might," "objective," "plan," "predict," "project," "should," "target," "will," "would," and other similar words, or phrases, or the negative thereof, unless the context requires otherwise. These statements reflect management's current views with respect to future events and are subject to risks and uncertainties, both known and unknown, including, but not limited to, those described in the "Risk Factors" section of our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Our actual results may vary materially from those anticipated in forward-looking statements. We caution investors not to place undue reliance on any forward-looking statements.
Important factors that could cause actual results to differ materially from those reflected in such forward-looking statements and that should be considered in evaluating our outlook include, but are not limited to, the following:
1)the timing and conditions surrounding the return to service of the B737 MAX, future demand for the aircraft, and any residual impacts of the grounding on production rates for the aircraft; 2)our reliance on Boeing for a significant portion of our revenues; 3)our ability to continue to grow our business and execute our growth strategy including our ability to enter into profitable supply arrangements with additional customers; 4)the business condition and liquidity of Boeing, Airbus and other customers and their ability to satisfy their contractual obligations to the Company; 5)demand for our products and services and the effect of economic or geopolitical conditions, or other events, such as pandemics, in the industries and markets in which we operate in theU.S. and globally; 6)the impact of the COVID-19 pandemic on our business and operations, including on the demand for our and our customers' products and services, on trade and transport restrictions, on the global aerospace supply chain, on our ability to retain the skilled work force necessary for production and development and generally on our ability to effectively manage the impacts of the COVID-19 pandemic on our business operations; 7)the certainty of our backlog, including the ability of customers to cancel or delay orders prior to shipment; 8)our ability to accurately estimate and manage performance, cost, margins, and revenue under our contracts, and the potential for additional forward losses on new and maturing programs; 9)our ability and our suppliers' ability to accommodate, and the cost of accommodating, changes in the build rates of certain aircraft; 10)competitive conditions in the markets in which we operate, including in-sourcing by commercial aerospace original equipment manufacturers; 11)our ability to successfully negotiate, or re-negotiate, future pricing under our supply agreements with Boeing, Airbus and other customers; 12)our ability to effectively assess, manage, and integrate the acquisition of select assets of Bombardier along with other acquisitions that we pursue, and generate synergies and other cost savings therefrom, while avoiding unexpected costs, charges, expenses, and adverse changes to business relationships and business disruptions; 13)the possibility that our cash flows may not be adequate for our additional capital needs; 14)our ability to avoid or recover from cyber-based or other security attacks and other operations disruptions; 15)legislative or regulatory actions, both domestic and foreign, impacting our operations; 16)the effect of changes in tax laws and rates including as a result of the 2020U.S. presidential election and our ability to accurately calculate and estimate the effect of such changes; 17)any reduction in our credit ratings; 18)our dependence on our suppliers, as well as the cost and availability of raw materials and purchased components; 19)our ability to recruit and retain a critical mass of highly skilled employees; 20)our relationships with the unions representing many of our employees, including our ability to avoid labor disputes and work stoppages with respect to our union employees; 21)spending by theU.S. and other governments on defense; 22)pension plan assumptions and future contributions; and 23)the effectiveness of our internal control over financial reporting; and any difficulties or delays that could affect the Company's ability to effectively implement the remediation plan, in whole or in part, to address the material weakness identified in the Company's internal control over financial reporting, as described in Item 9A. "Controls and Procedures" of the Annual Report on Form 10-K for the year endedDecember 31, 2019 ; 49 -------------------------------------------------------------------------------- Table of Contents 24)the outcome or impact of ongoing or future litigation, claims, and regulatory actions, including our exposure to potential product liability and warranty claims; 25)our ability to continue selling certain receivables through our supplier financing programs; 26)our ability to access the capital markets to fund our liquidity needs, and the costs and terms of any additional financing; 27)any regulatory or legal action arising from the review of our accounting processes; 28)potential impacts on the Company and the jurisdictions it operates relating to the 2020 U.S. presidential election, including potential changes to theDepartment of Defense budgets and spending; and 29)the risks of doing business internationally, including fluctuations in foreign currency exchange rates, impositions of tariffs or embargoes (including recent contemplated actions by theWorld Trade Organization and any retaliatory actions from other jurisdictions), trade restrictions, compliance with foreign laws, and domestic and foreign government policies. These factors are not exhaustive and it is not possible for us to predict all factors that could cause actual results to differ materially from those reflected in our forward-looking statements. These factors speak only as of the date hereof, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. As with any projection or forecast, these statements are inherently susceptible to uncertainty and changes in circumstances. Except to the extent required by law, we undertake no obligation to, and expressly disclaim any obligation to, publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should review carefully the section captioned "Risk Factors" in our most recent Annual Report on Form 10-K and under Part II, Item 1A, "Risk Factors" in Form 10-Q for the first and second quarters of 2020 and hereunder for a more complete discussion of these and other factors that may affect our business. COVID-19 During the three months endedOctober 1, 2020 , the COVID-19 pandemic has continued to have a significant negative impact on the aviation industry, our customers, and our business globally. In response to the pandemic, we and our customers have implemented production suspensions and our customers have adjusted production rates. Our customers may reduce or alter production rates again if circumstances require. A description of our customers' rates are below. We expect the pandemic and its effects to continue to have a significant negative impact on our business for the duration of the pandemic and during the subsequent economic recovery, which could be an extended period of time. In response to the COVID-19 pandemic, we have enacted our crisis management and response process as part of our enterprise risk management program to help us navigate the challenges we face due to the COVID-19 pandemic. Actions that we have taken include the following (certain capitalized terms are defined further below): •Deployed global teams to monitor the situation and recommend appropriate actions; •Implemented travel restrictions for our employees; •Implemented social-distancing standards throughout the workplace and mandated mask use; •Initiated consistent and ongoing cleaning of high-touch areas; •Conducted deep cleaning and sanitization of work spaces potentially exposed to the virus; •Established processes aligned withCDC guidelines to work with any exposed individual on the necessary quarantine period and the process to return to work; and •Implemented working from home to minimize potential exposure to the virus.
Spirit has taken several actions to reduce costs, increase liquidity and strengthen our financial position in light of the economic impact of the COVID-19 pandemic, and the B737 MAX impact (further described below), including the following:
•Reduced pay for all executives by 20 percent until further notice; •Reduced 2020-2021 term non-employee director compensation by 15 percent; •Reduced planned capital expenditures and operating expenses; •Suspended share repurchase program; •Reduced quarterly dividends to one penny per share; •Initiated multiple production worker furloughs; •Reduced pay for allU.S. based, salaried employees and implemented a correlating four-day work week which remains in place for salaried workforce at itsWichita, Kansas facility until further notice; •Reduced ~6,600 employees globally including voluntary packages; 50 -------------------------------------------------------------------------------- Table of Contents •Amended and eventually terminated our 2018 Credit Agreement and put into place current Credit Agreement for$400 million ; •Issued$1.2 billion in Second Lien 2025 Notes and$500 million in First Lien 2025 Notes; and •Elected to defer the payment of$21.4 million in employer payroll taxes incurred throughOctober 1, 2020 , as provided by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), of which 50% is required to be deposited byDecember 2021 and the remaining 50% byDecember 2022 and accrued a pre-tax benefit related to the Employee Retention Credit related to paid employee furloughs of approximately$13.6 million . In addition, as ofOctober 1, 2020 the Company has recorded a deferral of$29.4 million of VAT payments untilMarch 2022 under theUnited Kingdom deferral scheme.
If OEM production rates decline in the future or the expected pandemic recovery timeline lengthens, Spirit will evaluate further cost reduction actions, including additional workforce actions.
Our customers, including Boeing and Airbus, have significantly reduced their overall production rates as a result of the COVID-19 pandemic and, in the case of Boeing, the B737 MAX grounding, described below. A discussion of current rates is set forth below:
Boeing Production Volumes
As of
•B737 MAX, including P-8, of 72 shipsets for 2020, increasing to 31 airplanes per month ("APM") in 2022; • B787 average production volume of 10 APM in 2020, decreasing to 6 APM in 2021 and 2022; • B777/777X average production volume of 3.6 APM in 2020, decreasing to 1.8 APM in 2021; • B767 current and future production volume of 3 APM; and • B747 current production volume of 0.5 APM and ending production in 2022. The Company is attempting to calibrate its cost structure to the lower production volumes and manage the impact of excess production capacity across our sites. The Company's strategy to recalibrate its cost structure is likely to lead to a consolidation of sites where excess capacity exists.
Airbus Production Volumes
As of
•Single-aisle average production volume of 40 APM; •A350 average production volume of 3.5 APM in 2020, increasing to 5 APM end of 2021; and •A330 average production volume of 2 APM. Due to the uncertain and rapidly evolving nature of current conditions around the world, we are unable to predict accurately the impact that COVID-19 will have on our business going forward, including: •whether there will be additional production suspensions or production rate reductions relating to the COVID-19 pandemic and the resulting impact on our financial performance, liquidity and our cash flows; •if we will have significant employee absenteeism due to fear of COVID-19 infection; •if we may experience lawsuits or regulatory actions due to COVID-19 spread in the workplace; •reputational risk we may experience due to COVID-19 spread in the workplace; •the effect of significant salary cuts across our workforce, which may result in critical employee departures; •the impact remote working arrangements, salary reductions, and shortened work weeks for salaried employees will have on the health and productivity of management and our employees, and our ability to maintain our financial reporting processes and related controls and manage the complex accounting issues presented by the COVID-19 pandemic such as excess cost accounting, impairment analysis and business combination controls; •the impact on the Company's vendors and outsourced business processes and their process and controls documentation; •the impact on our suppliers, including whether they will be able to meet our future needs; •the impact on our contracts with our customers and suppliers, including force majeure provisions; •our ability to withstand and recover from any cyberattacks as a result of a remote working environment, and potential reputational impacts or loss of customer contracts as a result of such cyberattacks; 51 -------------------------------------------------------------------------------- Table of Contents •the impact on our ability to successfully integrate the Bombardier Acquisition; •the impact on the public's demand and ability to pay for future airline travel, whether or not vaccines or effective treatments for COVID-19 become available; and •the impact of Government health and protection policies to future air traffic demand.
Any of these items or all of these items may occur, which individually or in the aggregate may have a material adverse effect on our business, financial condition, results of operations and cash flows.
The extent of the effects of the COVID-19 outbreak on our business, results of operations, cash flows and growth prospects is highly uncertain and will ultimately depend on future developments, most of which are outside of our control. These include, but are not limited to:
•the severity, extent and duration of the global pandemic and its impact on the aircraft industry; •the availability of a vaccine or cure that mitigates the effect of the virus; •actions taken by governments and municipalities to contain the disease or treat its impact, including travel restrictions and bans, bans on public gatherings, closures of non-essential businesses and aid and economic stimulus efforts; •the speed and extent of the recovery across the broader travel ecosystem, including how long the public will continue to be concerned about the pandemic and avoid aircraft travel; and •any economic recession resulting from the pandemic. The pandemic may continue to expand in regions that have not yet been significantly affected by the COVID-19 outbreak or may return to regions that were previously heavily impacted by the pandemic, which could continue to affect our business. Also, existing restrictions in affected areas could be extended after the virus has been contained in order to avoid relapses, and regions that recover from the outbreak may suffer from a relapse and re-imposition of restrictions. Our expectation is that our business operations will not improve until our customers are willing to produce aircraft at sufficient levels, which is dependent upon the public's willingness to use aircraft travel and sufficient OEM orders (without suspension) from airlines and the financial resources of airlines specifically and generally. This may not occur until well after the broader global economy begins to improve.
CARES Act and United Kingdom Deferral Scheme
OnMarch 27, 2020 , the CARES Act was enacted inthe United States . The CARES Act, among other things, provides certain changes to tax laws, which may impact the Company's results of operations, financial position and cash flows. The Company is currently implementing certain provisions of the CARES Act, such as deferring employer payroll taxes and utilizing the ability to carry back and deduct losses to offset prior income in previously filed tax returns. As ofOctober 1, 2020 , the Company has deferred$21.4 million of employer payroll taxes, as allowed by the CARES Act, of which 50% are required to be deposited byDecember 2021 and the remaining 50% byDecember 2022 and accrued a pre-tax benefit related to the Employee Retention Credit related to paid employee furloughs of approximately$13.6 million . In addition, as ofOctober 1, 2020 , the Company has recorded a deferral of$29.4 million of VAT payments untilMarch 2022 under theUnited Kingdom deferral scheme. The CARES Act allows net operating losses to be carried back to the previous five years, when the federal tax rate was 35%. As ofOctober 1, 2020 , the Company anticipates it will report a net operating loss when it files its fiscal year 2020 tax return. Management will continue to monitor potential legislation as well as dynamic market conditions which may materially alter the anticipated value of this net operating loss. As part of theU.S. government's response to COVID-19, to support the health of the defense industrial base, theDepartment of Defense allocated certain funds to our prime customers to expand statements of work. Such allocation includes$80 million that was set aside for an expansion of the Company work scope in connection with the Company's critical work on Defense programs. Defense Production Act Title III contracts support the defense industrial base and use funds authorized and appropriated under the CARES Act.
B737 Program
The B737 MAX program is a critical program to the Company. For the twelve months endedDecember 31, 2019 , approximately 53% of our net revenues were generated from sales of components to Boeing for the B737 MAX aircraft. While 52 -------------------------------------------------------------------------------- Table of Contents 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 P-8 derivatives, Boeing does not have any obligation to purchase components from us for any replacement for the B737 that is not a commercial derivative model as defined by the Sustaining Agreement. The contract is a requirements contract and Boeing can reduce the purchase volume at any time. InMarch 2019 , the B737 MAX fleet was grounded in theU.S. and internationally following the 2018 and 2019 accidents involving two B737 MAX aircraft. To date, the fleet remains grounded and the recertification process is continuing. Due to the grounding and the impacts of COVID-19 on the aviation industry, the Company has experienced significant deteriorations in its B737 MAX production rates that have reduced the Company's revenues. A summary of the production rate changes is below. •OnApril 12, 2019 , Boeing and the Company executed a Memorandum of Agreement (the "2019 MOA") providing that the Company was to maintain its delivery rate of 52 shipsets per month with respect to the B737 MAX. Previously, the Company was expecting to increase production to a rate of 57 shipsets per month in 2019; •OnDecember 19, 2019 , Boeing directed the Company to stop all B737 MAX deliveries to Boeing effectiveJanuary 1, 2020 . Accordingly, Spirit suspended all B737 MAX production beginning onJanuary 1, 2020 ; •OnFebruary 6, 2020 , Boeing and Spirit entered into a Memorandum of Agreement (the "2020 MOA") largely superseding the 2019 MOA and providing for Spirit to deliver to Boeing 216 B737 MAX shipsets in 2020; •OnMay 4, 2020 , Boeing and the Company agreed that Spirit would deliver 125 B737 MAX shipsets to Boeing in 2020; and •OnJune 19, 2020 , Boeing directed Spirit to reduce its 2020 B737 production plan from 125 to 72 shipsets. While we have taken actions to align our cost structure to the lower 2020 production rates, the benefit of such actions will be realized over time and the B737 MAX situation continues to present challenges to our liquidity. These challenges are exacerbated by the COVID-19 pandemic as other programs that mitigate the strain of the lower B737 MAX production rate are now suspended or producing at lower rates. While recent news reports have indicated that the recertification process for the B737 MAX continues, we are unable to determine definitively when Boeing will be able to secure regulatory approval for the B737 MAX. Based on public information, we have assumed that regulatory approval will enable Boeing to resume delivering B737 MAX aircraft to its customers in the fourth quarter of 2020. However, the civil aviation authorities control the timeline for recertification and resumption of deliveries and actual timing may be materially different. Further, we cannot predict the effect of the COVID-19 pandemic on this timeline. In the event of delays to this timeline and corresponding changes to our production rate, we may be required to take actions with longer-term impact, such as additional changes to our production plans, employment reductions and/or the expenditure of significant resources to support our supply chain and/or Boeing. If Boeing is unable to return the B737 MAX to service in one or more jurisdictions, begin timely deliveries to customers, or if our customers' production levels across our programs are reduced beyond current expectations due to depressed demand relating to COVID-19 or otherwise, our liquidity position may worsen absent our ability to procure additional financing, our ability to comply with the terms of our existing indebtedness may be negatively impacted and our business, financial condition, results of operations and cash flows could be materially adversely impacted.
Impairment Recoverability of Current and Noncurrent Assets
The Company's operations require management to make estimates, which involve a significant amount of judgment when completing recoverability and impairment tests of current and noncurrent assets. Factors that management estimates include, but are not limited to, program delivery schedules, changes to identified risks and opportunities, changes to estimated revenues and costs for the accounting contracts, any outstanding contractual matters, the economic lives of the assets, foreign currency exchange rates, tax rates, capital spending, and customers' financial condition. The ability for the Company to fully assess these factors is challenging and presents many risks and opportunities, as more fully described in Note 4, Changes in Estimates, to our condensed consolidated financial statements included in Part I of this Quarterly Report for more information. The uncertainties associated with the duration of the COVID-19 pandemic increase the difficulty in estimating the potential impact of these factors. Actual results could differ from these estimates, which were based upon circumstances that existed as of the date of the consolidated financial statements,October 1, 2020 . Subsequent to this date, it is reasonably possible that changes to the global economic situation and to public securities markets as a consequence of the COVID-19 pandemic could alter estimates as a result of the financial circumstances of the markets in which the Company operates, the price of the Company's publicly traded equity in comparison to the Company's carrying value, and the health of the global economy. Such changes to estimates could potentially result in impacts that would be material to the consolidated financial statements, particularly with 53
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Table of Contents respect to the fair value of the Company's reporting units in relation to potential goodwill impairment and the fair value of long-lived assets in relation to potential impairment.
AtOctober 1, 2020 , the net book value of long-lived assets was$2,147.4 million and the balance of intangible assets was$29.5 million . For the period endedOctober 1, 2020 , there were no events which would require the Company to update its impairment analysis. As ofOctober 1, 2020 , the balance of goodwill was$78.4 million .Goodwill primarily represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the acquisition ofFiber Materials Inc. ("FMI") in the first quarter of 2020.Goodwill is primarily assigned to two reporting units, our fuselage systems reporting unit which is aligned with our Fuselage Systems Segment, and our propulsion systems reporting unit which is aligned to our Propulsion Systems Segment. The Company assesses goodwill for impairment annually or more frequently if events or circumstances indicate that the fair value of a reporting unit that includes goodwill may be lower than its carrying value. For the period endedOctober 1, 2020 , there were no triggering events which would require the Company to update its goodwill impairment analysis. As discussed above, due to the inherent uncertainties of the current operating environment, we will continue to evaluate our reporting units for events or circumstances that indicate that their fair values may be lower than their carrying values, however, as ofOctober 1, 2020 , management believes that there is sufficient excess fair value for each of the reporting units such that no material amount of goodwill is at risk of failing future quantitative impairment tests.
Bombardier Acquisition
OnOctober 31, 2019 , Spirit and SpiritUK , wholly owned subsidiaries of the Company, entered into a definitive agreement (the "Bombardier Purchase Agreement") with Bombardier Inc.,Bombardier Aerospace UK Limited ,Bombardier Finance Inc. andBombardier Services Corporation (collectively, the "Bombardier Sellers") pursuant to which SpiritUK agreed to acquire the outstanding equity ofShort Brothers plc ("Shorts") and Bombardier Aerospace NorthAfrica SAS ("BANA"), and Spirit agreed to acquire substantially all the assets of the maintenance, repair and overhaul business inDallas, Texas (collectively, the "Bombardier Acquired Business") and assume certain liabilities of Shorts and BANA (the "Bombardier Acquisition"). OnOctober 26, 2020 , Spirit, SpiritUK and the Bombardier Sellers entered into an amendment to the Bombardier Purchase Agreement (the "Amendment"). The Amendment reduced the net proceeds purchase price payable to the Bombardier Sellers from$500 million to$275 million . Spirit will continue to make a special contribution of £100 million (approximately$130 million ) to the Shorts pension scheme ("Shorts Pension") on the first anniversary of closing. OnOctober 30, 2020 , Spirit and SpiritUK closed the Bombardier Acquisition and assumed certain liabilities including the net pension liabilities of the Shorts Pension and Shorts' financial payment obligations under a repayable investment agreement with theUnited Kingdom's Department for Business, Energy and Industrial Strategy . The acquired business involves aerostructures and fabrication manufacturing and maintenance, repairs and overhaul ("MRO") services. The backlog of work includes long-term contracts on Airbus programs, along with Bombardier business jets. The acquisition is in line with the Company's growth strategy of increasing Airbus content, growing the Company's aftermarket business, and developing a low-cost country footprint. Under the original Bombardier Purchase Agreement, the Pension Contribution was to be made at Closing. Subsequently, in exchange for a parent guarantee by Spirit of up to £112.4 million (approximately$146.0 million ), the parties changed the date on which the payment will be made to-one year after closing (October 30, 2021 ). The Shorts Pension is in a deficit position and there is a risk that additional contributions will be required to fund the deficit or from the trustees theUK Pension Regulator as described under Part II, Item 1A. "Risk Factors." Asco Acquisition OnMay 1, 2018 , the Company and its wholly-owned subsidiarySpirit AeroSystems Belgium Holdings BVBA ("Spirit Belgium") entered into a definitive agreement (as amended, the "Asco Purchase Agreement") with certain private sellers (the "Sellers") providing for the purchase by Spirit Belgium of all of the issued and outstanding equity ofS.R.I.F. N.V. , the parent company ofAsco Industries N.V. , subject to certain customary closing adjustments, including foreign currency adjustments. OnSeptember 25, 2020 , the Company, Spirit Belgium and the Sellers entered into an amendment to the Asco Purchase Agreement (the "Termination Agreement") pursuant to which the parties agreed to terminate the Asco Purchase Agreement, including all schedules and annexes thereto (other than certain confidentiality agreements) (collectively with the Asco Purchase 54 -------------------------------------------------------------------------------- Table of Contents Agreement, the "Transaction Documents"), effective as ofSeptember 25, 2020 . Under the Termination Agreement, the parties also agreed to release each other from any and all claims, rights of action, howsoever arising, of every kind and nature, in connection with, arising out of, based upon or related to, directly or indirectly, the Transaction Documents, including any breach, non-performance, action or failure to act under the Transaction Documents.
Results of Operations
The following table sets forth, for the periods indicated, certain of our operating data: Three Months Ended Nine Months Ended October 1, September 26, October 1, September 26, 2020 2019 2020 2019 ($ in millions) ($ in millions) Revenue$ 806.3 $ 1,919.9 $ 2,528.2 $ 5,903.8 Cost of sales 903.4 1,647.6 2,941.0 5,029.1 Gross (loss) profit (97.1) 272.3 (412.8) 874.7 Selling, general and administrative 52.8 53.6 179.2 173.6 Restructuring costs 19.5 -$ 68.4 - Research and development 7.5 12.6 28.1 36.0 Loss on disposal of assets $ - -$ 22.9 - Operating (loss) income (176.9) 206.1 (711.4) 665.1 Interest expense and financing fee amortization (53.0) (23.6) (133.8) (66.1) Other (expense) income, net (10.0) (9.5) (65.4) (11.9)
(Loss) income before income taxes and equity in net (loss) income of affiliate
(239.9) 173.0 (910.6) 587.1 Income tax benefit (provision) 85.2 (41.7) 340.0 (124.7)
(Loss) income before equity in net (loss) income of affiliate
(154.7) 131.3 (570.6) 462.4 Equity in net (loss) income of affiliate (0.8) - (3.8) - Net (loss) income$ (155.5) $ 131.3 $ (574.4) $ 462.4
Comparative shipset deliveries by model are as follows:
Three Months Ended Nine Months Ended October 1, September 26, October 1, September 26, Model 2020 2019 2020 2019 B737 15 154 52 453 B747 1 2 4 5 B767 9 9 20 25 B777 14 15 30 44 B787 30 40 92 124 Total Boeing 69 220 198 651 A220 9 8 32 26 A320 Family 108 160 365 510 A330 4 9 17 27 A350 12 23 51 81 A380 - - - 1 Total Airbus 133 200 465 645 Business and Regional Jets (1) 4 17 26 43 Total 206 437 689 1,339 55
-------------------------------------------------------------------------------- Table of Contents For purposes of measuring production or shipset deliveries for Boeing aircraft in a given period, the term "shipset" refers to sets of structural fuselage components produced or delivered for one aircraft in such period. For purposes of measuring production or shipset deliveries for Airbus and Business/Regional Jet aircraft in a given period, the term "shipset" refers to all structural aircraft components produced or delivered for one aircraft in such period. For the purposes of measuring wing shipset deliveries, the term "shipset" refers to all wing components produced or delivered for one aircraft in such period. Other components that are part of the same aircraft shipsets could be produced or shipped in earlier or later accounting periods than the components used to measure production or shipset deliveries, which may result in slight variations in production or delivery quantities of the various shipset components in any given period.
Net revenues by prime customer are as follows:
Three Months Ended Nine Months Ended October 1, September 26, October 1, September 26, Prime Customer 2020 2019 2020 2019 ($ in millions) ($ in millions) Boeing$ 493.8 $ 1,542.0 $ 1,539.9 $ 4,705.1 Airbus 160.1 284.1 575.3 934.0 Other 152.4 93.8 413.0 264.7 Total net revenues$ 806.3 $ 1,919.9 $ 2,528.2 $ 5,903.8 Changes in Estimates During the third quarter of 2020, we recognized unfavorable changes in estimates of$123.8 million , which included net forward charges of$128.4 million , and favorable cumulative catch-up adjustments related to periods prior to the third quarter of 2020 of$4.6 million . We provided previous guidance which disclosed an estimated forecasted forward loss in the third quarter endedOctober 1, 2020 on the B787 program of$25-$35 million and the A350 program of$13-$20 million based upon data available as ofJuly 2, 2020 . Throughout the quarter endedOctober 1, 2020 , the demand for wide body aircraft continued to evolve as a result of uncertainty regarding timing of resolution of the global pandemic. We evaluated additional schedule and production demand information received from our customers, market and analyst data including forecasted demand for wide body aircraft, and as a result, adjusted the expected results on the B787 and A350 programs to include a lower rate of production for a longer duration compared to its previous forecast. This resulted in incremental fixed cost absorption on the B787 and A350 programs and as a result, the forward loss recognized was$64.7 million on the B787 program and$44.9 million on the A350 program for the quarter endedOctober 1, 2020 . During the same period in the prior year, we recognized total unfavorable changes in estimates of$41.8 million , which included unfavorable changes in estimates on loss programs of$28.8 million , and unfavorable cumulative catch-up adjustments related to periods prior to the third quarter of 2019 of$13.0 million .
Three Months Ended
Revenue. Revenues for the three months endedOctober 1, 2020 were$806.3 million , a decrease of$1,113.6 million , or 58.0%, compared to net revenues of$1,919.9 million for the same period in the prior year. Lower revenues were recorded for all segments during the third quarter of 2020 compared to the same period in the prior year. The decrease in revenues was primarily due to B737 MAX grounding and lower production activity on B787, B777, A350, and A320 due to COVID-19, partially offset by increased Defense activity. Approximately 81% of Spirit's net revenues for the third quarter of 2020 came from our two largest customers, Boeing and Airbus. Total production deliveries to Boeing decreased to 69 shipsets during the third quarter of 2020, compared to 220 shipsets delivered in the same period of the prior year, primarily driven by decreased production on the B737 MAX and B787 programs. Total production deliveries to Airbus decreased to 133 shipsets during the third quarter of 2020, compared to 200 shipsets delivered in the same period of the prior year, primarily driven by decreased production on the A320 and A350 programs. Total production deliveries of business/regional jet wing and wing components decreased to 4 shipsets during the third quarter of 2020, compared to 17 shipsets delivered in the same period of the prior year. In total, production deliveries decreased to 206 shipsets during the third quarter of 2020, compared to 437 shipsets delivered in the same period of the prior year. Gross (Loss) Profit. Gross Loss was($97.1) million for the three months endedOctober 1, 2020 , compared to Gross Profit of$272.3 million for the same period in the prior year. This decrease was primarily driven by decreased margins recognized on 56 -------------------------------------------------------------------------------- Table of Contents the B737 MAX and B777 programs, additional forward losses on B787 and A350 programs due to reduced production rates, excess capacity production costs of$72.6 million due to temporary production schedule changes on B737 MAX and A320 programs, and temporary workforce favorable adjustments of$10.9 million due to COVID-19, net of theU.S. employee retention credit andU.K. government subsidies. In the third quarter of 2020, we recognized$4.6 million of favorable cumulative catch-up adjustments related to periods prior to the third quarter of 2020, and$128.4 million of net forward loss charges related to the B787, B747, B767 A350, and BR725 programs. In the third quarter of 2019, we recorded$13.0 million of unfavorable cumulative catch-up adjustments related to periods prior to the third quarter of 2019, and$28.8 million of net forward loss charges. SG&A and Research and Development. SG&A expense was$0.8 million lower for the three months endedOctober 1, 2020 , compared to the same period in the prior year. Research and development expense was$5.1 million lower for the three months endedOctober 1, 2020 , compared to the same period in the prior year. Restructuring Costs. Restructuring costs were$19.5 million higher for the three months endedOctober 1, 2020 , compared to the same period in the prior year for cost-alignment and headcount reductions as a result of B737 MAX grounding and COVID-19 impacts. Operating (Loss) Income. Operating loss for the three months endedOctober 1, 2020 was($176.9) million , a decrease of$383 million , compared to operating income of$206.1 million for the same period in the prior year. The decrease was primarily driven by the production schedule changes on B737 MAX, B787, B777, A350 and A320 programs. Spirit recognized lower margin driven by significantly less deliveries as a result of B737 MAX grounding and COVID-19 impacts, excess capacity production costs of$72.6 million , temporary workforce favorable adjustment of$10.9 million due to COVID-19 net ofU.S. employee retention credit andU.K. government subsidies, and restructuring expenses of$19.5 million for cost-alignment and headcount reductions. Further, Spirit recognized a non-cash expense of$2.6 million resulting from the Company's Voluntary Retirement Program (the "VRP"). In addition to the expenses described above, Spirit recognized forward loss charges of$128.4 million in the third quarter of 2020 related to the B787, B747, B767, A350, and BR725 programs. Interest Expense and Financing Fee Amortization. Interest expense and financing fee amortization for the three months endedOctober 1, 2020 includes$41.0 million of interest and fees paid or accrued in connection with long-term debt and$4.4 million in amortization of deferred financing costs and original issue discount, compared to$19.9 million of interest and fees paid or accrued in connection with long-term debt and$0.9 million in amortization of deferred financing costs and original issue discount for the same period in the prior year.
Other (Expense) Income, net. Other expense, net for the three months ended
Provision for Income Taxes. OnMarch 27, 2020 ,President Trump signed intoU.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting theU.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, net operating loss ("NOL") carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of earnings before interest, taxes, depreciation and amortization. The anticipated impacts of the CARES Act have been incorporated into our results and are reflected in the effective tax rate outlined below Our reported tax rate includes two principal components: an expected annual tax rate and discrete items resulting in additional provisions or benefits that are recorded in the quarter that an event arises. Events or items that could give rise to discrete recognition include excess tax benefit in respect of share-based compensation, finalizing audit examinations for open tax years, statute of limitations expiration, or a change in tax law. Deferred income tax assets and liabilities are recognized for future income tax consequences attributable to differences between the financial statement carrying amounts for existing asset and liabilities and their respective tax bases. A valuation allowance is recorded to reduce deferred income tax assets to an amount that in management's opinion will ultimately be realized. We have reviewed our material deferred tax assets to determine whether or not a valuation allowance was necessary. Based on the Company's earnings history, in conjunction with other positive and negative evidence, we have determined it is more likely than not that the benefits from the deferred tax assets will be realized and a valuation allowance is not appropriate at 57 -------------------------------------------------------------------------------- Table of Contents this time. We will continue to regularly assess the potential for realization of our net deferred tax assets in future periods. Changes in future earnings projections, among other factors, may cause us to record a valuation allowance against some or all of our net deferred tax assets, which may materially impact our income tax expense in the period we determine that these factors have changed. The income tax benefit for the three months endedOctober 1, 2020 includes($78.3) million for federal taxes,($5.3) million for state taxes and($1.6) million for foreign taxes. The income tax benefit for the three months endedSeptember 26, 2019 includes$39.5 million for federal taxes,($2.7) million for state taxes and$4.9 million for foreign taxes. The effective tax rate for the three months endedOctober 1, 2020 was 35.5% as compared to 24.1% for the same period in 2019. As we are reporting a pre-tax loss for the three months endedOctober 1, 2020 , increases to tax expense result in a decrease to our effective tax rate and decreases to tax expense result in an increase to our effective tax rate. The increase to our effective tax rate is primarily due to the benefits generated related to the carryback of our 2020 estimated income tax loss as permitted by the CARES Act, to state credits generated, offset by reduction in the GILTI tax. The increase from theU.S. statutory tax rate (resulting in incremental tax benefit) is attributable primarily to the impact of the resulting permanent benefit related to the carryback of our 2020 estimated tax loss, offset by foreign tax rates lower than theU.S. rate. The United Kingdom Finance Act 2020 was passed by the House of Commons onJuly 2, 2020 and received Royal Assent onJuly 22, 2020 . As a result of the enactment of this tax law change, we have a re-measurement related to our deferred tax liabilities in the third quarter of 2020 resulting in less than$1 million of income tax expense.
Segments. The following table shows segment revenues and operating income for
the three months ended
Three Months Ended October 1, September 26, 2020 2019 ($ in millions) Segment Revenues Fuselage Systems$ 421.1 $ 1,005.3 Propulsion Systems 170.8 520.9 Wing Systems 168.3 391.0 All Other 46.1 2.7$ 806.3 $ 1,919.9 Segment Operating (Loss) Income Fuselage Systems$ (96.7) $ 105.8 Propulsion Systems (15.6) 111.7 Wing Systems (23.2) 53.9 All Other 19.1 1.3 (116.4) 272.7 SG&A (52.8) (53.6) Research and development (7.5) (12.6) Unallocated cost of sales (1) (0.2) (0.4) Total operating (loss) income$ (176.9) $ 206.1
(1) Includes
Fuselage Systems Segment, Propulsion Systems Segment, Wing System Segment, and All Other represented approximately 52%, 21%, 21% and 6%, respectively, of our net revenues for the three months endedOctober 1, 2020 . 58 -------------------------------------------------------------------------------- Table of Contents Fuselage Systems. Fuselage Systems Segment net revenues for the three months endedOctober 1, 2020 were$421.1 million , a decrease of$584.2 million , or 58%, compared to the same period in the prior year. The decrease in revenue was primarily due to lower production volumes on B737 MAX, B787, B777, and A350 programs partially offset by increased Defense activity. Fuselage Systems Segment operating margins were (23%) for the three months endedOctober 1, 2020 , compared to 11% for the same period in the prior year, primarily due to lower margins recognized on the B737 MAX program due to significantly less deliveries, forward losses on B787 and A350 programs, excess capacity production costs of$42.0 million , temporary workforce favorable impact of$7.4 million due to COVID-19 net ofU.S. employee retention credit, and restructuring costs of$6.6 million for cost alignment and headcount reductions. In the third quarter of 2020, the segment recorded favorable cumulative catch-up adjustments of$8.8 million and net forward loss charges of$92.0 million . In comparison, during the third quarter of 2019, the segment recorded unfavorable cumulative catch-up adjustments of$14.4 million and net forward loss charges of$18.8 million . Propulsion Systems. Propulsion Systems Segment net revenues for the three months endedOctober 1, 2020 were$170.8 million , a decrease of$350.1 million , or 67%, compared to the same period in the prior year. The decrease was primarily due to lower production volumes on B737 MAX, B777, and B787 programs. Propulsion Systems Segment operating margins were (9%) for the three months endedOctober 1, 2020 , compared to 21% for the same period in the prior year. This decrease was primarily driven by lower margins due to significantly less deliveries on the B737 MAX, and B777 programs, forward loss on B787 program, excess capacity production costs of$17.5 million , and temporary workforce favorable impact of$2.9 million due to COVID-19 net ofU.S. employee retention credit, and restructuring costs of$3.8 million for cost alignment and headcount reductions. The segment recorded unfavorable cumulative catch-up adjustments of$4.6 million and net forward loss charges of$14.9 million for the three months endedOctober 1, 2020 . In comparison, during the same period of the prior year, the segment recorded favorable cumulative catch-up adjustments of$1.8 million and net forward loss charges of$4.0 million . Wing Systems. Wing Systems Segment net revenues for the three months endedOctober 1, 2020 were$168.3 million , a decrease of$222.7 million , or 57%, compared to the same period in the prior year. The decrease was primarily due to lower production volumes on B737 MAX, B777, B787, A320, and A350 programs. Wing Systems Segment operating margins were (14%) for the three months endedOctober 1, 2020 , compared to 14% for the same period in the prior year, primarily driven by lower margins due to significantly fewer deliveries on the B737 MAX, forward losses on B787 and A350 programs, excess capacity cost of$13.1 million , temporary workforce favorable impact of$0.6 million due to COVID-19 net ofU.S employee retention credit andU.K. government subsidies, and restructuring costs of$9.1 million for cost alignment and headcount reductions. In the third quarter of 2020, the segment recorded favorable cumulative catch-up adjustments of$0.4 million and net forward loss charges of$21.5 million . In comparison, during the third quarter of 2019, the segment recorded unfavorable cumulative catch-up adjustments of$0.4 million and$6.0 million of net forward loss charges. All Other. All Other segment net revenues consist of sundry sales of miscellaneous services and natural gas revenues from theKansas Industrial Energy Supply Company ("KIESC"). In the three months endedOctober 1, 2020 , all Other segment net revenues were$46.1 million , an increase of$43.4 million compared to the same period in the prior year, primarily due to non-recurring revenue.
Nine Months Ended
Revenue. Revenues for the nine months endedOctober 1, 2020 were$2,528.2 million , a decrease of$3,375.6 million , or 57.2%, compared to net revenues of$5,903.8 million for the same period in the prior year. The decrease in revenues was primarily due to decreased production activity on the B737 MAX, B777, B787, A350 and A320, partially offset by increased Defense activity. Approximately 83.7% of Spirit's net revenues for the period came from our two largest customers, Boeing and Airbus. Total production deliveries to Boeing decreased to 198 shipsets through third quarter of 2020, compared to 651 shipsets delivered in the same period of the prior year, primarily driven by decreased production on the B737 MAX, B777, B767 and B787 programs. Total production deliveries to Airbus decreased to 465 shipsets through third quarter of 2020, compared to 645 shipsets delivered in the same period of the prior year, primarily driven by decreased production on the A320, A330 and A350 programs, partially offset by increased A220 deliveries. Total production deliveries of business/regional jet wing and wing components decreased to 26 shipsets through third quarter of 2020, compared to 43 shipsets delivered in the same period of the prior year. In total, production deliveries decreased to 689 shipsets through third quarter of 2020, compared to 1,339 shipsets delivered in the same period of the prior year. Gross (Loss) Profit. Gross Loss was($412.8) million for the nine months endedOctober 1, 2020 , compared to Gross Profit of$874.7 million for the same period in the prior year. This decrease was primarily driven by decreased margins recognized on the B737 MAX, B777, and A320 programs, forward loss charges on B787 and A350 programs due to reduced 59 -------------------------------------------------------------------------------- Table of Contents production rates, excess capacity production costs of$228.8 million , and temporary workforce adjustment costs of$33.8 million due to COVID-19, net of theU.S employee retention credit andU.K. government subsidies. Through the third quarter of 2020, we recognized$30.6 million of unfavorable cumulative catch-up adjustments related to periods prior to the third quarter of 2020, and$342.2 million of net forward loss charges related to B787, B747, B767, A350 and BR725 programs. Through the third quarter of 2019, we recorded$1.8 million of unfavorable cumulative catch-up adjustments related to periods prior to the third quarter of 2019, and$21.8 million of net forward loss charges. SG&A and Research and Development. SG&A expense was$5.6 million higher for the nine months endedOctober 1, 2020 , compared to the same period in the prior year mainly acquisition costs related to Asco and Bombardier. Research and development expense was$7.9 million lower for the nine months endedOctober 1, 2020 , compared to the same period in the prior year. Restructuring Costs. Restructuring costs were $$68.4 million higher for the nine months endedOctober 1, 2020 compared to the same period in the prior year for cost-alignment and headcount reductions related to B737 MAX grounding and COVID-19 impacts. Operating (Loss) Income. Operating loss for the nine months endedOctober 1, 2020 was($711.4) million , a decrease of$1,376.5 million , compared to operating income of$665.1 million for the same period in the prior year. The decrease was primarily driven by decreased margins on B737 MAX, B777, B787, A350 and A320 programs, excess capacity production costs of$228.8 million , and temporary workforce adjustment costs of$33.8 million due to COVID-19, net of theU.S. employee retention credit andU.K. government subsidies. Spirit also recognized restructuring expenses of$68.4 million for cost-alignment and headcount reductions, and$22.9 million loss from disposition of assets. Further, Spirit recognized a non-cash expense of$86.4 million resulting from the VRP. In addition to the expenses described above, Spirit recognized net forward loss charges of$342.2 million for the nine months endedOctober 1, 2020 related to B787, B747, B767, A350 and BR725 programs. Interest Expense and Financing Fee Amortization. Interest expense and financing fee amortization for the nine months endedOctober 1, 2020 includes$108.8 million of interest and fees paid or accrued in connection with long-term debt and$9.8 million in amortization of deferred financing costs and original issue discount, compared to$57.4 million of interest and fees paid or accrued in connection with long-term debt and$2.7 million in amortization of deferred financing costs and original issue discount for the same period in the prior year. Other (Expense) Income, net. Other expense, net for the nine months endedOctober 1, 2020 was($65.4) million , compared to($11.9) million for the same period in the prior year. Other expense, net through the third quarter of 2020 was primarily driven by the VRP. Provision for Income Taxes. OnMarch 27, 2020 ,President Trump signed intoU.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting theU.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, net operating loss carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of earnings before interest, taxes, depreciation and amortization. The anticipated impacts of the CARES Act have been incorporated into our results and are reflected in the effective tax rate outlined below. Our reported tax rate includes two principal components: an expected annual tax rate and discrete items resulting in additional provisions or benefits that are recorded in the quarter that an event arises. Events or items that could give rise to discrete recognition include excess tax benefit in respect of share-based compensation, finalizing audit examinations for open tax years, statute of limitations expiration, or a change in tax law. Deferred income tax assets and liabilities are recognized for future income tax consequences attributable to differences between the financial statement carrying amounts for existing asset and liabilities and their respective tax bases. A valuation allowance is recorded to reduce deferred income tax assets to an amount that in management's opinion will ultimately be realized. We have reviewed our material deferred tax assets to determine whether or not a valuation allowance was necessary. Based on the Company's earnings history, in conjunction with other positive and negative evidence, we have determined it is more likely than not that the benefits from the deferred tax assets will be realized and a valuation allowance is not appropriate at this time. We will continue to regularly assess the potential for realization of our net deferred tax assets in future periods. 60 -------------------------------------------------------------------------------- Table of Contents Changes in future earnings projections, among other factors, may cause us to record a valuation allowance against some or all of our net deferred tax assets, which may materially impact our income tax expense in the period we determine that these factors have changed. The income tax benefit for the nine months endedOctober 1, 2020 includes($282.7) million for federal taxes,($55.9) million for state taxes and($1.4) million for foreign taxes. The income tax benefit for the nine months endedSeptember 26, 2019 includes$112.7 million for federal taxes,($2.8) million for state taxes and$14.7 million for foreign taxes. The effective tax rate for the nine months endedOctober 1, 2020 was 37.3% as compared to 21.2% for the same period in 2019. As we are reporting a pre-tax loss for the nine months endedOctober 1, 2020 , increases to tax expense result in a decrease to our effective tax rate and decreases to tax expense result in an increase to our effective tax rate. The increase to our effective tax rate is primarily due to the benefits generated related to the carryback of our 2020 estimated income tax loss as permitted by the CARES Act, the re-measurement of deferred taxes under the CARES Act, increases in state tax credits, and increases in the benefit from foreign rate differences.
The increase from the
Segments. The following table shows segment revenues and operating income for
the nine months ended
Nine Months Ended October 1, September 26, 2020 2019 ($ in millions) Segment Revenues Fuselage Systems$ 1,299.7 $ 3,171.7 Propulsion Systems 565.6 1,525.5 Wing Systems 582.2 1,197.4 All Other 80.7 9.2$ 2,528.2 $ 5,903.8 Segment Operating (Loss) Income Fuselage Systems$ (434.6) $ 380.5 Propulsion Systems (38.2) 304.9 Wing Systems (52.1) 177.1 All Other 28.9 2.5 (496.0) 865.0 SG&A (179.2) (173.6) Research and development (28.1) (36.0) Unallocated cost of sales (1) (8.1) 9.7 Total operating (loss) income$ (711.4) $ 665.1
(1) Includes
Fuselage Systems Segment, Propulsion Systems Segment, Wing Systems Segment, and All Other represented approximately 51.4%, 22.4%, 23.0% and 3.2%, respectively, of our net revenues for the nine months endedOctober 1, 2020 . Fuselage Systems. Fuselage Systems Segment net revenues for the nine months endedOctober 1, 2020 were$1,299.7 million , a decrease of$1,872 million , or 59.0%, compared to the same period in the prior year. The decrease in revenue was primarily due to lower production volumes on B737 MAX, B777, B787 and A350 programs partially offset by increased activity on defense. Fuselage Systems Segment operating margins were (33%) for the nine months endedOctober 1, 2020 , compared to 12% for the same period in the prior year, primarily due to lower margins recognized on the B737 MAX program due to grounding, less deliveries on B777 program, forward losses on B787, A350 and B767 programs, excess capacity 61 -------------------------------------------------------------------------------- Table of Contents production costs of$143.8 million , temporary workforce reductions of$19.1 million due to COVID-19 net ofU.S. employee retention credit, restructuring costs of$39.1 million for cost alignment and headcount reductions, and$22.5 million loss from disposition of assets. Through the third quarter of 2020, the segment recorded unfavorable cumulative catch-up adjustments of$18.9 million and net forward loss charges of$260.3 million . In comparison, during the same period of 2019, the segment recorded unfavorable cumulative catch-up adjustments of$2 million and net forward charges of$13.8 million . Propulsion Systems. Propulsion Systems Segment net revenues for the nine months endedOctober 1, 2020 were$565.6 million , a decrease of$959.9 million , or 62.9%, compared to the same period in the prior year. The decrease was primarily due to lower production volumes on B737 MAX, B777, B787 and BR725 programs. Propulsion Systems Segment operating margins were (7%) for the nine months endedOctober 1, 2020 , compared to 20% for the same period in the prior year. This decrease was primarily driven by lower margins due to significantly less deliveries on the B737 MAX program due to grounding, less deliveries on B777 program, forward loss on B787 program, excess capacity costs of$50.8 million , temporary workforce reductions of$7.3 million due to COVID-19 net ofU.S employee retention credit, restructuring costs of$14.2 million for cost alignment and headcount reductions. The segment recorded unfavorable cumulative catch-up adjustments of$8.6 million and net forward loss charges of$34.2 million for the nine months endedOctober 1, 2020 . In comparison, during the same period of the prior year, the segment recorded unfavorable cumulative catch-up adjustments of$1.5 million and net forward loss charges of$3.1 million . Wing Systems. Wing Systems Segment net revenues for the nine months endedOctober 1, 2020 were$582.2 million , a decrease of$615.2 million , or 51.4%, compared to the same period in the prior year. The decrease was primarily due to lower production volumes on B737 MAX, B777, B787, A320 and A350 programs. Wing Systems Segment operating margins were (9%) for the nine months endedOctober 1, 2020 , compared to 15% for the same period in the prior year, primarily due to lower margins recognized on the B737 MAX and A320 program due to less deliveries, forward losses on B787 and A350 programs, excess capacity costs of$34.2 million , temporary workforce reductions of$7.4 million due to COVID-19 net ofU.S employee retention credit andU.K. government subsidies, restructuring costs of$15.1 million for cost alignment and headcount reductions, and$0.4 million loss from the disposition of assets. Through the third quarter of 2020, the segment recorded unfavorable cumulative catch-up adjustments of$3.1 million and net forward loss charges of$47.7 million . In comparison, through the third quarter of 2019, the segment recorded favorable cumulative catch-up adjustments of$1.7 million and$4.9 million of net forward loss charges. All Other. All Other segment net revenues consist of sundry sales of miscellaneous services and natural gas revenues from KIESC, a tenancy in common with otherWichita companies established to purchase natural gas where we are a major participant. In the nine months endedOctober 1, 2020 , all Other segment net revenues were$80.7 million , an increase of$71.5 million compared to the same period in the prior year, primarily due to non-recurring programs.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our principal source of liquidity is operating cash flows from continuing operations. Our operating cash flows from continuing operations have been adversely impacted by the B737 MAX grounding and the COVID-19 pandemic (and resulting production rate changes associated with both events) and we expect that adverse impact to continue for the remainder of 2020 and beyond. For purposes of assessing our liquidity needs in this section, we have assumed that Boeing would not further reduce the B737 MAX production rate (which naturally depends on the timely recertification of the B737 MAX and timely return to service) and that other customers generally would not further reduce their production rates. We expend significant capital as we undertake new programs, meet increased production rates on certain mature and maturing programs, and develop new technologies for the next generation of aircraft, which may not be funded by our customers. As part of our cost-reduction actions, we have reduced our capital expenditures. In addition, other significant factors that affect our overall management of liquidity include: debt service, redemptions or repayment of debt or incentive obligations, the ability to attract long-term capital at satisfactory terms, research and development, capital expenditures, and merger and acquisition activities, such as the Bombardier aerostructures acquisitions. Historically, share repurchases and dividend payments have also been factors affecting our liquidity. Our share repurchase program is paused and we reduced our quarterly dividend to one penny per share. In the three months endedOctober 1, 2020 , we issued the Second Lien 2025 Notes with a principal amount of$1.2 billion and, as ofOctober 1, 2020 , our debt balance is$2,994.5 million . As ofOctober 1, 2020 , we had$1,441.3 million of cash and cash equivalents on the balance sheet, which reflects a decrease of$505.8 million from the cash and cash equivalents balance of$1,947.1 million as ofJuly 2, 2020 . 62
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We believe our cash on hand and cash flows generated from operations coupled with our ability to vary our cost structure quickly, will provide sufficient liquidity to address the challenges and opportunities of the current market and our global cash needs, including M&A integration activities, capital expenditures, debt service, and working capital, although we could experience significant fluctuations in our cash flows from period to period during the crisis. As ofOctober 1, 2020 , we were in compliance with all applicable covenants under our 2018 Credit Agreement, as amended. The 2018 Credit Agreement was terminated onOctober 5, 2020 . The COVID-19 pandemic has created significant uncertainty in our industry. Aviation demand has deteriorated due to the pandemic and responsive government preventative measures. Our customers have reduced their production rates, which negatively impacts results of operations and cash flows. We are unable to predict the outcome of the pandemic and the resulting impact on the aviation industry and, accordingly, cannot predict the outcome on our operations. The Company has taken a number of actions to assist with managing the impacts of the COVID-19 pandemic, including those described earlier in this section. Apart from the COVID-19 pandemic, the B737 MAX grounding creates significant liquidity challenges for the Company. For the twelve months endedDecember 31, 2019 , approximately 53% of our net revenues were generated from sales of components to Boeing for the B737 aircraft. Spirit's production plan for the B737 MAX in 2020, at 72 total shipsets to be delivered to Boeing, is significantly less than its production rate of 606 shipsets in 2019. Further, the COVID-19 pandemic may delay the recertification timeline for the B737 MAX and/or cause Boeing to further lower the current production rate. While Spirit has taken significant actions to curb costs and preserve liquidity, the B737 MAX grounding combined with the COVID-19 pandemic significantly challenges Spirit's liquidity. If Boeing is unable to return the B737 MAX to service in one or more jurisdictions, begin timely deliveries to customers, if production levels by Boeing or Airbus are reduced beyond current expectations due to depressed demand relating to the COVID-19 pandemic or otherwise, or if Spirit has difficulties in managing its cost structure to take into account changes in production schedules, Spirit's liquidity position may worsen absent Spirit's ability to procure additional financing, and Spirit's business, financial condition, results of operations and cash flows could be materially adversely impacted. Furthermore, if the B737 MAX production rates and other production rates are insufficient to generate the cash the Company needs for working capital in the future or if production levels by Boeing or Airbus are reduced beyond current expectations due to depressed demand, the COVID-19 pandemic or otherwise, the Company may need to access the debt or equity markets for additional liquidity. To the extent the Company is unable to secure such additional liquidity the Company's operations and financial position could be materially adversely affected. The Company may not be able to obtain new debt or equity financing in light of the significant uncertainty relating to the B737 MAX or the impacts of the COVID-19 pandemic or otherwise. The Company has two agreements to sell, on a revolving basis, certain trade accounts receivable balances with Boeing and Airbus to third party financial institutions. These programs were primarily entered into as a result of Boeing and Airbus seeking payment term extensions with the Company and they continue to allow Spirit to monetize the receivables prior to their payment date, subject to payment of a discount. Our ability to continue using such agreements is primarily dependent upon the strength of Boeing's and Airbus's financial condition. If any of these financial institutions involved with these arrangements experiences financial difficulties, becomes unwilling to support Boeing or Airbus due to a deterioration in their financial condition or otherwise, or is otherwise unable to honor the terms of the factoring arrangements, we may experience significant disruption and potential liquidity issues due to the failure of such arrangements, which could have an adverse impact upon our operating results, financial condition and cash flows. 63
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Cash Flows
The following table provides a summary of our cash flows for the nine months
ended
For the Nine Months Ended
September 26 ,October 1, 2020 2019
($ in millions)
Net cash (used in) provided by operating activities$ (612.8) $ 718.6 Net cash used in investing activities (183.4) (118.7) Net cash (used in) provided by financing activities (105.6) 113.5 Effect of exchange rate change on cash and cash equivalents (3.3) (13.5)
Net (decrease) increase in cash, cash equivalents and restricted cash for the period
(905.1) 699.9
Cash, cash equivalents, and restricted cash beginning of period 2,367.2
794.1
Cash, cash equivalents, and restricted cash, end of period
Nine Months Ended
Operating Activities. For the nine months endedOctober 1, 2020 , we had a net cash outflow of$612.8 million from operating activities, an increase in outflow of$1,331.4 million compared to a net cash inflow of$718.6 million for the same period in the prior year. The increase in net cash outflow is primarily due to negative impacts of working capital requirements driven by supplier payments made and reduction of cash inflow from operating activities following the rate reduction due to B737 MAX grounding and COVID-19 pandemic. This was offset by the cash payments of$215 million received from Boeing as part of the 2020 MOA. Investing Activities. For the nine months endedOctober 1, 2020 , we had a net cash outflow of$183.4 million for investing activities, an increase in outflow of$64.7 million compared to a net cash outflow of$118.7 million for the same period in the prior year. The increase in cash outflow is primarily due to the FMI acquisition. Financing Activities. For the nine months endedOctober 1, 2020 , we had a net cash outflow of$105.6 million for financing activities, an increase in outflow of$219.1 million , compared to a net cash inflow of$113.5 million for the same period in the prior year primarily driven by the payment of the 2018 Revolver in second quarter 2020, repayment of the 2018 Term Loan and D2018 DDTL in third quarter 2020, partially offset by the proceeds from the issuance of the Second Lien 2025 Notes. There was a cash inflow due to a the 2018 DDTL of$250 million during the first quarter of 2019. During the nine months endedOctober 1, 2020 , there were no repurchases of Common Stock under our share repurchase program, compared to 796,409 shares repurchased for$75 million during the same period in the prior year. Additionally, during the nine months endedOctober 1, 2020 , we paid a dividend of$14.4 million to our stockholders of record, compared to a dividend of$37.8 million paid in the same period in the prior year.
Pension and Other Post-Retirement Benefit Obligations
OurU.S. pension plan remained fully funded atOctober 1, 2020 , and we anticipate non-cash pension income for 2020 to remain at or near the same level as 2019. Our plan investments are broadly diversified and we do not anticipate a near-term requirement to make cash contributions to ourU.S. pension plan. See Note 16, Pension and Other Post-Retirement Benefits, for more information on the Company's pension plans. OnOctober 30, 2020 , Spirit and SpiritUK closed the Bombardier Acquisition and assumed certain liabilities including the net pension liabilities of the Shorts Pension. Under the original Bombardier Purchase Agreement, the Pension Contribution was to be made at Closing. Subsequently, in exchange for a parent guarantee by Spirit of up to £112.4 million (approximately$146.0 million ), the parties changed the date on which the payment will be made to one year after closing (October 30, 2021 ). The Shorts Pension is in a deficit position and there is a risk that additional contributions will be required to fund the deficit from the trustees or theUK Pension Regulator as described under Part II, Item 1A. "Risk Factors." 64
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Interest Rate Swaps
OnMarch 15, 2017 , the Company entered into an interest rate swap agreement, with an effective date ofMarch 31, 2017 . The swap has a notional value of$250.0 million and fix the variable portion of the Company's floating rate debt at 1.815%. The swap expired inMarch 2020 .
Cash Flow Hedges
During the third quarter of 2019, the Company entered into two interest rate swap agreements with a combined notional value of$450.0 . As ofOctober 1, 2020 , the Company has one swap agreement with a notional value of$150.0 . These derivatives have been designated as cash flow hedges by the Company. The fair value of these hedges was a liability of$1.7 as ofOctober 1, 2020 , which is recorded in the other current liabilities line item on the Condensed Consolidated Balance Sheet. Changes in the fair value of cash flow hedges are recorded in AOCI and recorded in earnings in the period in which the hedged transaction occurs. The loss recognized in AOCI was$0.0 and$14.2 million for the three and nine months endedOctober 1, 2020 , respectively. For the three and nine months endedOctober 1, 2020 , a loss of$1.6 million and$3.0 million was reclassified from AOCI to earnings, and included in the interest expense line item on the Condensed Consolidated Statement of Operations, and in operating activities on the Condensed Consolidated Statement of Cash Flows. For the three and nine months endedOctober 1, 2020 a loss of$10.4 million was reclassified from AOCI to earnings resulting from the termination of a swap agreement, and included in the other income line item on the Condensed Consolidated Statement of Operations, and in operating activities on the Condensed Consolidated Statement of Cash Flows. Within the next 12 months, the Company expects to recognize a loss of$1.7 million in earnings related to these hedged contracts. As ofOctober 1, 2020 , the maximum term of hedged forecasted transactions was 9 months.
Debt and Other Financing Arrangements
On
The carrying value of the Floating Rate Notes, 2023 Notes, and 2028 Notes was
The carrying value of the Second Lien 2025 Notes and 2026 Notes was
See Note 15, Debt, to our condensed consolidated financial statements included in Part I of this Quarterly Report for more information.
Supply Chain Financing Applicable to Suppliers
The Company has also provided its suppliers with access to a supply chain financing program through a facility with a third party financing institution. This program was primarily entered into as a result of Spirit and its subsidiaries seeking payment term extensions with suppliers and the program allows suppliers to monetize the receivables prior to their payment date, subject to payment of a discount. Our suppliers' ability to continue using such agreements is primarily dependent upon the strength of our financial condition. While our suppliers' access to this supply chain financing program could be curtailed if our credit ratings are downgraded, we do not believe that changes in the availability of supply chain financing to our suppliers will have a significant impact on our liquidity. The balance of payables to suppliers who elected to participate in supply chain financing program that is included in our accounts payable balance as ofOctober 1, 2020 is$41.4 million . The balance as ofSeptember 26, 2019 was$149.4 million . Payables to suppliers who elected to participate in the supply chain financing program decreased by$95.9 million for the nine months endedOctober 1, 2020 and increased by$99.2 million for the same period in the prior year. The decrease for the nine months endedOctober 1, 2020 was primarily due to reduced production on certain programs and associated decreases in purchases from suppliers and not due to any changes in the availability of supply chain financing. The increase for the nine months endedSeptember 26, 2019 reflects a combination of higher purchases, an extension of payment terms with certain suppliers and increased utilization of our supply chain financing programs. 65 -------------------------------------------------------------------------------- Table of Contents Advance Payments Advances on the B737 Program. The 2019 MOA included the terms and conditions for an advance payment to be made from Boeing to Spirit in the amount of$123.0 million , which was received during the third quarter of 2019. The 2020 MOA extended the repayment date of the$123.0 million advance received by Spirit under the 2019 MOA to 2022. The 2020 MOA also required Boeing to pay$225 million to Spirit in the first quarter of 2020, consisting of (i)$70 million in support of Spirit's inventory and production stabilization, of which$10 million will be repaid by Spirit in 2021, and (ii)$155 million as an incremental pre-payment for costs and shipset deliveries over the next two years. Advances on the B787 Program. Boeing has made advance payments to Spirit under the B787 Supply Agreement that are required to be repaid to Boeing by way of offset against the purchase price for future shipset deliveries. As ofOctober 1, 2020 , the amount of advance payments received by us from Boeing under the B787 Supply Agreement and not yet repaid was approximately$212 million . 66
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