Spirit AeroSystems(SPR) - 2021 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for Spirit AeroSystems Holdings, Inc., including statements of operations, comprehensive loss, balance sheets, changes in stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, significant events, and financial performance for the periods ended September 30, 2021, and October 1, 2020 Condensed Consolidated Statements of Operations The company reported a net loss of $113.6 million for the three months ended September 30, 2021, an improvement from a $155.5 million net loss in the prior year. For the nine months, the net loss was $420.5 million, also an improvement from $574.4 million in the prior year, driven by increased revenue and reduced operating losses Condensed Consolidated Statements of Operations | Metric | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Revenue | 980.0 | 806.3 | 2,882.9 | 2,528.2 |\n| Operating Loss | (156.6) | (176.9) | (380.2) | (711.4) |\n| Net Loss | (113.6) | (155.5) | (420.5) | (574.4) |\n| Basic Loss per Share | (1.09) | (1.50) | (4.04) | (5.53) |\n| Diluted Loss per Share | (1.09) | (1.50) | (4.04) | (5.53) | Condensed Consolidated Statements of Comprehensive (Loss) Income The company reported a total comprehensive loss of $124.8 million for the three months ended September 30, 2021, and $429.7 million for the nine months ended September 30, 2021, including net loss and other comprehensive income/loss components such as pension adjustments, foreign exchange gains/losses, and unrealized losses on hedges Condensed Consolidated Statements of Comprehensive (Loss) Income | Metric | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Net Loss | (113.6) | (155.5) | (420.5) | (574.4) |\n| Total Other Comprehensive (Loss) Gain | (11.2) | 51.7 | (9.2) | (20.4) |\n| Total Comprehensive Loss | (124.8) | (103.8) | (429.7) | (594.8) | Condensed Consolidated Balance Sheets As of September 30, 2021, total assets decreased to $7,740.8 million from $8,383.9 million at December 31, 2020, primarily due to a decrease in cash and cash equivalents, while total liabilities also decreased and total stockholders' equity saw a significant reduction from $856.5 million to $424.3 million Condensed Consolidated Balance Sheets | Metric | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | |:---|:---|:---|\n| Cash and cash equivalents | 1,430.6 | 1,873.3 |\n| Total current assets | 3,816.3 | 4,485.0 |\n| Total assets | 7,740.8 | 8,383.9 |\n| Total current liabilities | 1,850.5 | 1,709.4 |\n| Long-term debt | 3,546.7 | 3,532.9 |\n| Total liabilities and equity | 7,740.8 | 8,383.9 |\n| Total stockholders' equity | 424.3 | 856.5 | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased from $856.5 million at December 31, 2020, to $424.3 million at September 30, 2021, primarily due to net losses and other comprehensive losses, partially offset by employee equity awards Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric | Balance Dec 31, 2020 ($M) | Balance Sep 30, 2021 ($M) | |:---|:---|:---|\n| Total Stockholders' Equity | 856.5 | 424.3 |\n| Net Loss (9 months) | (306.9) (Jul 1, 2021) / (113.6) (Sep 30, 2021) | (420.5) (Total for 9 months) |\n| Dividends Declared (9 months) | (2.2) (Jul 1, 2021) / (1.0) (Sep 30, 2021) | (3.2) (Total for 9 months) |\n| Employee Equity Awards (9 months) | 13.3 (Jul 1, 2021) / 6.3 (Sep 30, 2021) | 19.6 (Total for 9 months) |\n| Other Comprehensive (Loss) Gain (9 months) | 2.0 (Jul 1, 2021) / (11.2) (Sep 30, 2021) | (9.2) (Total for 9 months) | - Cash dividends declared per common share were $0.01 for the three months ended September 30, 2021 and October 1, 2020, and $0.03 for the nine months ended September 30, 2021 and October 1, 2020[17] Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, net cash provided by operating activities significantly improved to $13.3 million from a net cash outflow of $612.8 million in the prior year, while investing activities used $106.4 million and financing activities used $345.8 million, primarily due to debt redemption Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|\n| Net cash provided by (used in) operating activities | 13.3 | (612.8) |\n| Net cash used in investing activities | (106.4) | (183.4) |\n| Net cash used in financing activities | (345.8) | (105.6) |\n| Net decrease in cash, cash equivalents, and restricted cash | (442.7) | (905.1) |\n| Cash, cash equivalents, and restricted cash, end of period | 1,450.4 | 1,462.1 | Notes to the Condensed Consolidated Financial Statements The notes provide critical context and detailed breakdowns for the financial statements, covering organizational structure, significant accounting policies, the ongoing impact of COVID-19 and the B737 MAX program, changes in estimates, and specifics on various financial accounts and transactions 1. Organization, Basis of Interim Presentation and Recent Developments This section outlines the company's core business of manufacturing and design for aircraft OEMs, its global operational footprint, and the basis for preparing its unaudited interim financial statements, also highlighting the significant negative impact of the COVID-19 pandemic on the aviation industry and the company's operations, as well as the status of the B737 MAX program's return to service - Spirit AeroSystems Holdings, Inc. provides manufacturing and design expertise in fuselage, propulsion, and wing products and services for aircraft OEMs and operators globally[24] - The COVID-19 pandemic continued to have a significant negative effect on the aviation industry and the Company's business during the three and nine months ended September 30, 2021, with uncertainty remaining regarding its duration and full impact[30] - The B737 MAX resumed deliveries in Q4 2020 after the FAA rescinded its grounding order, with regulators in several countries ungrounding the aircraft, but China remains a significant country not to allow its return to service[33] - As a federal contractor, the Company implemented mandatory COVID-19 vaccination rules for all U.S. employees by December 8, 2021, following President Biden's executive order[32] 2. Adoption of New Accounting Standards The company adopted ASU No. 2019-12 (Simplifying the Accounting for Income Taxes) and ASU No. 2020-09 (Financial Disclosures about Guarantors and Issuers of Guaranteed Securities) during the period, neither of which had a material impact on its financial position or results of operations - Adoption of ASU No. 2019-12 (Simplifying the Accounting for Income Taxes) did not materially impact financial position or results of operations[34] - Adoption of ASU No. 2020-09 (Financial Disclosures about Guarantors and Issuers of Guaranteed Securities) had no impact on financial position or results of operations[35] 3. New Accounting Pronouncements The company is currently evaluating the potential impact of ASU No. 2020-04 (Reference Rate Reform) on its consolidated financial statements, which provides temporary optional guidance for accounting for reference rate reform - The Company is evaluating the potential impact of ASU No. 2020-04 (Reference Rate Reform) on its consolidated financial statements[36] 4. Changes in Estimates During the third quarter of 2021, the company recognized $73.2 million in unfavorable changes in estimates, primarily due to net forward loss charges of $70.4 million on the B787 and A350 programs, and unfavorable cumulative catch-up adjustments of $2.8 million on the B737 program and non-recurring programs - Unfavorable changes in estimates totaled $73.2 million for the three months ended September 30, 2021, including $70.4 million in net forward loss charges and $2.8 million in unfavorable cumulative catch-up adjustments[41] - Forward losses in Q3 2021 were primarily driven by the B787 program due to reduced production volumes and fixed overhead absorption, and an additional loss on the A350 program due to production schedule changes[41] Changes in Estimates | Changes in Estimates | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Total (Unfavorable) Favorable Cumulative Catch-up Adjustment | (2.8) | 4.6 | (2.5) | (30.6) |\n| Total Changes in Estimates (Forward Loss) on Loss Programs | (70.4) | (128.4) | (195.0) | (342.2) |\n| Total Changes in Estimates | (73.2) | (123.8) | (197.5) | (372.8) |\n| EPS Impact (diluted) | (0.69) | (0.77) | (1.86) | (2.33) | 5. Accounts Receivable and Allowance for Credit Losses Net accounts receivable increased to $527.6 million as of September 30, 2021, from $484.4 million at December 31, 2020, including $37.7 million related to a grant claim under the Aviation Manufacturing Jobs Protection Program, and the company sold $1,487.7 million of accounts receivable through factoring arrangements for the nine months ended September 30, 2021 Accounts Receivable and Allowance for Credit Losses | Metric | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | |:---|:---|:---|\n| Trade receivables | 475.0 | 458.9 |\n| Other | 59.2 | 31.1 |\n| Less: allowance for credit losses | (6.6) | (5.6) |\n| Accounts receivable, net | 527.6 | 484.4 | - Other receivables as of September 30, 2021, include $37.7 million from the Department of Transportation's Aviation Manufacturing Jobs Protection Program grant[45] - For the nine months ended September 30, 2021, $1,487.7 million of accounts receivable from Boeing, Airbus, and Rolls-Royce were sold through factoring arrangements, resulting in a net loss on sale of $4.8 million[46] 6. Contract Assets and Contract Liabilities Net contract assets (liabilities) shifted from a net liability of $96.8 million at December 31, 2020, to a net asset of $21.4 million at September 30, 2021, reflecting an increase in contract assets due to more over-time revenue recognition and a decrease in contract liabilities from less deferred revenue Contract Assets and Contract Liabilities | Metric | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | Change ($M) | |:---|:---|:---|:---|\n| Contract assets | 411.0 | 372.8 | 38.2 |\n| Contract liabilities | (389.6) | (469.6) | 80.0 |\n| Net contract assets (liabilities) | 21.4 | (96.8) | 118.2 | - The increase in contract assets reflects more over-time revenue recognition relative to billed revenues, while the decrease in contract liabilities reflects less deferred revenue recorded in excess of revenue recognized[51] - The Company recognized $156.1 million of revenue that was included in the contract liability balance at the beginning of the period ended September 30, 2021[51] 7. Revenue Disaggregation and Outstanding Performance Obligations Total revenue for the nine months ended September 30, 2021, increased to $2,882.9 million, with 75.9% recognized over time, and Boeing and Airbus remained the largest customers, contributing 55.3% and 23.9% of total revenue, respectively, while remaining performance obligations totaled $11,787.8 million, with a significant portion expected after 2024 Revenue Disaggregation and Outstanding Performance Obligations | Revenue Type | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Contracts with performance obligations satisfied over time | 774.9 | 510.6 | 2,187.3 | 1,511.9 |\n| Contracts with performance obligations satisfied at a point in time | 205.1 | 295.7 | 695.6 | 1,016.3 |\n| Total Revenue | 980.0 | 806.3 | 2,882.9 | 2,528.2 | Revenue Disaggregation and Outstanding Performance Obligations | Customer | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Boeing | 566.1 | 493.8 | 1,595.8 | 1,539.9 |\n| Airbus | 211.6 | 160.1 | 687.8 | 575.3 |\n| Other | 202.3 | 152.4 | 599.3 | 413.0 |\n| Total Revenue | 980.0 | 806.3 | 2,882.9 | 2,528.2 | Revenue Disaggregation and Outstanding Performance Obligations | Unsatisfied Performance Obligations | Amount ($M) | |:---|:---|\n| Remaining in 2021 | 887.7 |\n| 2022 | 3,396.8 |\n| 2023 | 4,146.5 |\n| 2024 and After | 3,353.3 |\n| Total | 11,787.8 | 8. Inventory Total inventory, net, decreased to $1,325.7 million at September 30, 2021, from $1,422.3 million at December 31, 2020, primarily due to reductions in raw materials and work-in-process, and the company expensed $172.2 million in excess capacity production costs and $7.1 million in abnormal costs related to workforce adjustments for the nine months ended September 30, 2021 Inventory | Inventory Component | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | |:---|:---|:---|\n| Raw materials | 306.8 | 337.3 |\n| Work-in-process | 937.6 | 1,000.6 |\n| Finished goods | 54.4 | 58.1 |\n| Product inventory | 1,298.8 | 1,396.0 |\n| Capitalized pre-production | 26.9 | 26.3 |\n| Total inventory, net | 1,325.7 | 1,422.3 | - Cost of sales for the nine months ended September 30, 2021, includes $172.2 million for excess capacity production costs and $7.1 million for abnormal costs related to workforce adjustments due to COVID-19[62] 9. Property, Plant and Equipment, net Net property, plant, and equipment decreased to $2,406.9 million at September 30, 2021, from $2,503.8 million at December 31, 2020, and the company incurred $102.7 million in repair and maintenance costs and $11.4 million in capitalized software depreciation for the nine months ended September 30, 2021 Property, Plant and Equipment, net | Asset Category | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | |:---|:---|:---|\n| Land | 30.7 | 30.8 |\n| Buildings | 1,210.7 | 1,166.7 |\n| Machinery and equipment | 2,214.1 | 2,120.5 |\n| Tooling | 1,047.8 | 1,036.1 |\n| Capitalized software | 292.0 | 282.5 |\n| Construction-in-progress | 185.6 | 220.0 |\n| Total | 4,980.9 | 4,856.6 |\n| Less: accumulated depreciation | (2,574.0) | (2,352.8) |\n| Property, plant and equipment, net | 2,406.9 | 2,503.8 | - Repair and maintenance costs were $102.7 million for the nine months ended September 30, 2021, and depreciation expense related to capitalized software was $11.4 million for the same period[63][64] 10. Leases The company's total net lease cost for the nine months ended September 30, 2021, was $33.2 million, with operating lease liabilities and finance lease obligations totaling $88.8 million and $175.4 million, respectively, as of September 30, 2021, and weighted average remaining lease terms of 35.7 years for operating leases and 5.1 years for finance leases Leases | Lease Cost Component | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Operating lease cost | 3.3 | 2.2 | 8.3 | 6.6 |\n| Finance lease cost: Amortization of assets | 7.2 | 5.7 | 19.6 | 16.0 |\n| Finance lease cost: Interest on lease liabilities | 1.8 | 1.6 | 5.3 | 4.7 |\n| Total net lease cost | 12.3 | 9.5 | 33.2 | 27.3 | Leases | Lease Liabilities (Sep 30, 2021) | Total Lease Payments ($M) | Less: Imputed Interest ($M) | Total Lease Obligations ($M) | |:---|:---|:---|:---|\n| Operating Leases | 226.0 | (137.2) | 88.8 |\n| Financing Leases | 196.7 | (21.3) | 175.4 | - As of September 30, 2021, the weighted average remaining lease term for operating leases was 35.7 years and for finance leases was 5.1 years[76] 11. Other Assets, Goodwill, and Intangible Assets Total other current assets decreased significantly to $121.1 million at September 30, 2021, from $336.3 million at December 31, 2020, primarily due to a reduction in income tax receivable, while goodwill increased to $623.6 million, mainly from the Bombardier Acquisition and Applied Aerodynamics acquisition, and intangible assets, net, remained stable at $216.2 million Other Assets, Goodwill, and Intangible Assets | Other Current Assets | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | |:---|:---|:---|\n| Prepaid expenses | 28.0 | 16.3 |\n| Income tax receivable | 88.0 | 315.3 |\n| Other assets - short-term | 5.1 | 4.7 |\n| Total other current assets | 121.1 | 336.3 | Other Assets, Goodwill, and Intangible Assets | Goodwill by Segment (Sep 30, 2021) | Balance at Dec 31, 2020 ($M) | Acquisitions ($M) | Adjustments/Other ($M) | Balance at Sep 30, 2021 ($M) | |:---|:---|:---|:---|:---|\n| Fuselage Systems | 42.9 | — | 134.9 | 177.8 |\n| Propulsion Systems | 33.1 | — | 382.0 | 415.1 |\n| Wing Systems | 2.5 | — | 10.1 | 12.6 |\n| Not Allocated | 486.8 | 18.1 | (486.8) | 18.1 |\n| Total | 565.3 | 18.1 | 40.2 | 623.6 | Other Assets, Goodwill, and Intangible Assets | Intangible Assets | Sep 30, 2021 ($M) | Dec 31, 2020 ($M) | |:---|:---|:---|\n| Patents | 2.0 | 2.0 |\n| Favorable leasehold interests | 2.8 | 2.8 |\n| Developed technology asset | 92.0 | 94.0 |\n| Customer relationships intangible asset | 137.2 | 124.1 |\n| Total intangible assets | 234.0 | 222.9 |\n| Intangible assets, net | 216.2 | 215.2 | 12. Advance Payments As of September 30, 2021, the company had $212.1 million in advance payments from Boeing for the B787 program and $125.6 million for the B737 program that had not yet been repaid, with repayments for the B787 program suspended and resuming at a lower rate, while B737 advances were extended and included additional prepayments from Boeing - As of September 30, 2021, $212.1 million in advance payments from Boeing for the B787 program remained unrepaid[91] - As of September 30, 2021, $125.6 million in advance payments from Boeing for the B737 program remained unrepaid, following extensions and additional prepayments[92] 13. Fair Value Measurements The estimated fair value of the company's long-term debt was $3,486.7 million as of September 30, 2021, compared to a carrying amount of $3,362.7 million, with most debt instruments classified as Level 1 or Level 2 in the fair value hierarchy Fair Value Measurements | Debt Instrument | Sep 30, 2021 Carrying Amount ($M) | Sep 30, 2021 Fair Value ($M) | Dec 31, 2020 Carrying Amount ($M) | Dec 31, 2020 Fair Value ($M) | |:---|:---|:---|:---|:---|\n| Senior secured term loan B | 388.5 | 389.5 | 389.6 | 395.0 |\n| Floating rate notes | — | — | 299.7 | 297.5 |\n| Senior notes due 2023 | 299.2 | 304.5 | 298.8 | 293.8 |\n| Senior secured first lien notes due 2025 | 494.9 | 524.4 | 493.9 | 521.2 |\n| Senior secured second lien notes due 2025 | 1,186.6 | 1,257.6 | 1,184.2 | 1,279.1 |\n| Senior notes due 2026 | 298.4 | 318.8 | 298.1 | 313.9 |\n| Senior notes due 2028 | 695.1 | 691.9 | 694.6 | 689.2 |\n| Total | 3,362.7 | 3,486.7 | 3,658.9 | 3,789.7 | 14. Derivative and Hedging Activities The company terminated its $150 million interest rate swap agreement in February 2021, resulting in a reclassified loss of $0.7 million from AOCI to earnings for the nine months ended September 30, 2021, and also entered into foreign currency forward contracts with a notional amount of $280.3 million to hedge British Pound exposure, recognizing a loss of $5.5 million in AOCI for the same period - The Company terminated its $150 million notional interest rate swap agreement on February 24, 2021, resulting in a $0.7 million loss reclassified from AOCI to earnings for the nine months ended September 30, 2021[98][99] Derivative and Hedging Activities | Derivative Type | Notional Amount Sep 30, 2021 ($M) | Notional Amount Dec 31, 2020 ($M) | Other Liabilities Sep 30, 2021 ($M) | |:---|:---|:---|:---|\n| Foreign currency exchange contracts | 280.3 | — | 5.6 | - For the nine months ended September 30, 2021, a loss of $5.5 million related to foreign currency exchange contracts was recognized in AOCI[102] 15. Debt Total debt, including current and noncurrent portions, was $3,594.5 million at September 30, 2021, with the company redeeming $300.0 million in Floating Rate Notes in February 2021, and key debt instruments including a $400.0 million senior secured term loan B, $500.0 million First Lien 2025 Notes, $300.0 million 2026 Notes, $1,200.0 million Second Lien 2025 Notes, $300.0 million 2023 Notes, and $700.0 million 2028 Notes, all while remaining in compliance with debt covenants Debt | Debt Instrument | Sep 30, 2021 Current ($M) | Sep 30, 2021 Noncurrent ($M) | Dec 31, 2020 Current ($M) | Dec 31, 2020 Noncurrent ($M) | |:---|:---|:---|:---|:---|\n| Senior secured term loan B | 3.9 | 384.6 | 3.9 | 385.7 |\n| Floating rate notes | — | — | 299.7 | — |\n| Senior notes due 2023 | — | 299.2 | — | 298.8 |\n| Senior secured first lien notes due 2025 | — | 494.9 | — | 493.9 |\n| Senior secured second lien notes due 2025 | — | 1,186.6 | — | 1,184.2 |\n| Senior notes due 2026 | — | 298.4 | — | 298.1 |\n| Senior notes due 2028 | — | 695.1 | — | 694.6 |\n| Present value of finance lease obligations | 42.6 | 132.8 | 35.3 | 121.5 |\n| Other | 1.3 | 55.1 | 1.8 | 56.1 |\n| Total | 47.8 | 3,546.7 | 340.7 | 3,532.9 | - Spirit redeemed the outstanding $300.0 million principal amount of Floating Rate Notes on February 24, 2021[122] - As of September 30, 2021, the Company was in compliance with all covenants in its Credit Agreement and indentures governing its notes[109][124] 16. Pension and Other Post-Retirement Benefits The company recognized net periodic pension income of $74.0 million for the three months and $103.9 million for the nine months ended September 30, 2021, primarily due to a $61.0 million curtailment gain from the closure of the Shorts Pension plan to future accruals, with employer contributions for 2021 projected to be $10.2 million for U.S. SERP/medical plans and $182.6 million for U.K. Shorts Pension schemes Pension and Other Post-Retirement Benefits | Component of Net Periodic Pension Expense (Income) | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Service cost | 11.2 | 0.2 | 32.9 | 0.7 |\n| Interest cost | 15.8 | 5.4 | 43.3 | 20.1 |\n| Expected return on plan assets | (40.0) | (16.6) | (119.0) | (49.5) |\n| Curtailment loss (gain) | (61.0) | — | (61.0) | 33.9 |\n| Net periodic pension expense (income) | (74.0) | (8.4) | (103.9) | 46.1 | - The closure of the Shorts Pension to future accrual of benefits resulted in a curtailment gain of $61.0 million for the three and nine months ended September 30, 2021[126] - Projected employer contributions for 2021 include $10.2 million for U.S. SERP and post-retirement medical plans, $1.9 million for the U.K. pension plan, and $182.6 million for Shorts Pension schemes[129] 17. Stock Compensation The company recognized $19.6 million in stock compensation expense for the nine months ended September 30, 2021, during which 557,851 time-based RSUs, 30,024 time-based RSAs, 161,954 performance-based RSUs, and 29,514 restricted Common Stock shares were granted Stock Compensation | Metric | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Stock compensation expense | 6.2 | 6.2 | 19.6 | 17.1 | - During the nine months ended September 30, 2021, the company granted 557,851 time-based RSUs, 30,024 time-based RSAs, 161,954 performance-based RSUs, and 29,514 restricted Common Stock shares to employees and directors[132][133][134] 18. Income Taxes The company recorded an incremental valuation allowance of $122.5 million against U.S. deferred tax assets and $70.7 million against U.K. deferred tax assets for the nine months ended September 30, 2021, resulting in a net U.S. deferred tax liability of $13.7 million and a net U.K. deferred tax liability of $10.9 million, with the effective tax rate for the nine months ended September 30, 2021, being 0.15%, significantly lower than 37.3% in the prior year, primarily due to these valuation allowances - An incremental valuation allowance of $122.5 million was recorded for U.S. deferred tax assets for the nine months ended September 30, 2021, bringing the total to $272.5 million and resulting in a net U.S. deferred tax liability of $13.7 million[139] - An incremental valuation allowance of $70.7 million was recorded for U.K. deferred tax assets for the nine months ended September 30, 2021, bringing the total to $261.5 million and resulting in a net U.K. deferred tax liability of $10.9 million[140] - The effective tax rate for the nine months ended September 30, 2021, was 0.15%, a significant decrease from 37.3% in the prior year, primarily due to the valuation allowances[144] 19. Equity The company reported basic and diluted loss per share of $1.09 for the three months and $4.04 for the nine months ended September 30, 2021, with common shares excluded from diluted EPS calculations due to net losses making their effect antidilutive, and the total authorization remaining under the share repurchase program is $925.0 million, but repurchases are currently on hold Equity | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Oct 1, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Oct 1, 2020 | |:---|:---|:---|:---|:---|\n| Basic Loss per Share | (1.09) | (1.50) | (4.04) | (5.53) |\n| Diluted Loss per Share | (1.09) | (1.50) | (4.04) | (5.53) |\n| Weighted-average shares outstanding (Basic, in millions) | 104.3 | 103.9 | 104.2 | 103.8 | - Common shares were excluded from diluted EPS calculations for the three and nine months ended September 30, 2021 and October 1, 2020, because the company incurred a net loss, making their effect antidilutive[153][154] - The remaining authorization under the share repurchase program is $925.0 million, but repurchases are currently on hold due to the B737 MAX grounding and COVID-19 impacts, and restrictions from the Credit Agreement[150] 20. Commitments, Contingencies and Guarantees The company is involved in several legal proceedings, including a consolidated class action and derivative lawsuits related to accounting process compliance and B737 MAX disclosures, with a $44.7 million liability recognized for a ruling in favor of a former CEO, and faces potential claims related to B787 rework, with an inability to reasonably estimate the amount at this time, while service warranty and extraordinary rework balance was $73.7 million as of September 30, 2021 - The company is a nominal defendant in consolidated class action and shareholder derivative lawsuits related to accounting process compliance and B737 MAX disclosures[156][157][160] - A $44.7 million liability was recognized as of September 30, 2021, following a U.S. District Court ruling in favor of the company's former Chief Executive Officer for withheld benefits[161] - The company cannot reasonably estimate potential claims related to B787 rework due to uncertainties regarding claim receipt, outcome, factual/commercial issues, and novel legal issues[167] Commitments, Contingencies and Guarantees | Service Warranty and Extraordinary Rework | Amount ($M) | |:---|:---|\n| Balance, December 31, 2020 | 76.9 |\n| Charges to costs and expenses | 10.1 |\n| Payouts | (13.1) |\n| Exchange rate | (0.2) |\n| Balance, September 30, 2021 | 73.7 | 21. Other Income (Expense), Net Other income, net, significantly increased to $94.8 million for the three months and $138.7 million for the nine months ended September 30, 2021, compared to net expenses in the prior year, primarily driven by higher pension income, including a curtailment gain from the Shorts Pension closure, and foreign currency gains Other Income (Expense), Net | Other Income (Expense) Component | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Foreign currency (losses) gains | 11.3 | (3.4) | 3.8 | 1.4 |\n| Loss on sale of accounts receivable | (1.8) | (2.0) | (4.8) | (6.7) |\n| Pension income (loss) | 84.8 | 9.0 | 137.3 | (56.4) |\n| Total Other Income (Expense), Net | 94.8 | (10.0) | 138.7 | (65.4) | - Pension income for the three and nine months ended September 30, 2021, includes $74.2 million and $105.3 million, respectively, related to pension plans, including a $61.0 million curtailment gain from the Shorts Pension closure[179] 22. Segment Information The company operates in three principal segments: Fuselage Systems, Propulsion Systems, and Wing Systems, with Boeing and Airbus being major customers, and for the nine months ended September 30, 2021, Fuselage Systems generated $1,410.5 million in revenue with an operating loss of $145.5 million, Propulsion Systems generated $716.2 million in revenue with an operating income of $66.8 million, and Wing Systems generated $725.9 million in revenue with an operating loss of $50.9 million - The company's principal operating segments are Fuselage Systems, Propulsion Systems, and Wing Systems, with Boeing and Airbus representing approximately 79% of net revenues for the three months ended September 30, 2021[178] Segment Information | Segment | 3 Months Ended Sep 30, 2021 Revenue ($M) | 3 Months Ended Oct 1, 2020 Revenue ($M) | 9 Months Ended Sep 30, 2021 Revenue ($M) | 9 Months Ended Oct 1, 2020 Revenue ($M) | |:---|:---|:---|:---|:---|\n| Fuselage Systems | 481.2 | 421.1 | 1,410.5 | 1,299.7 |\n| Propulsion Systems | 247.8 | 170.8 | 716.2 | 565.6 |\n| Wing Systems | 243.0 | 168.3 | 725.9 | 582.2 |\n| All Other | 8.0 | 46.1 | 30.3 | 80.7 |\n| Total | 980.0 | 806.3 | 2,882.9 | 2,528.2 | Segment Information | Segment | 3 Months Ended Sep 30, 2021 Operating Income (Loss) ($M) | 3 Months Ended Oct 1, 2020 Operating Income (Loss) ($M) | 9 Months Ended Sep 30, 2021 Operating Income (Loss) ($M) | 9 Months Ended Oct 1, 2020 Operating Income (Loss) ($M) | |:---|:---|:---|:---|:---|\n| Fuselage Systems | (53.9) | (96.7) | (145.5) | (434.6) |\n| Propulsion Systems | 21.9 | (15.6) | 66.8 | (38.2) |\n| Wing Systems | (15.8) | (23.2) | (50.9) | (52.1) |\n| All Other | 2.4 | 19.1 | 5.1 | 28.9 |\n| Total Segment Operating Income (Loss) | (45.4) | (116.4) | (124.5) | (496.0) | 23. Restructuring Costs Restructuring costs decreased significantly to $0.8 million for the three months and $8.1 million for the nine months ended September 30, 2021, compared to $19.5 million and $68.4 million in the prior year, respectively, primarily related to site closures and workforce reductions aimed at aligning costs with reduced production levels due to the COVID-19 pandemic and B737 MAX grounding Restructuring Costs | Restructuring Costs | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Total restructuring costs | 0.8 | 19.5 | 8.1 | 68.4 | - Restructuring costs for the three and nine months ended September 30, 2021, largely include costs related to McAlester and San Antonio site closures[193] - In the prior year, restructuring costs were primarily comprised of involuntary workforce reductions and a Voluntary Retirement Program (VRP)[193] 24. Acquisitions The company acquired Applied Aerodynamics for $29.6 million in Q3 2021, resulting in $18.1 million in goodwill, while the Bombardier Acquisition, completed in Q4 2020, involved a total enterprise value of $895 million, including $275 million cash and assumed liabilities, and resulted in $527.0 million in goodwill, with the purchase price allocation for Bombardier finalized, with adjustments to intangible assets and forward loss liabilities - During Q3 2021, the Company acquired Applied Aerodynamics, Inc. for $29.6 million, resulting in $18.1 million of goodwill and $6.2 million of intangible assets[196] - The Bombardier Acquisition, completed on October 30, 2020, had a total enterprise value of $895 million, including $275 million cash consideration and assumed net pension liabilities of approximately $316 million[203] - The final purchase price allocation for the Bombardier Acquisition resulted in $527.0 million in goodwill, $62.0 million in developed technology, and $131.0 million in customer relationships[208][209] Acquisitions | Pro-forma Results (9 Months Ended Oct 1, 2020) | As Reported ($M) | Pro-forma ($M) | |:---|:---|:---|\n| Revenue | 2,528.2 | 3,041.3 |\n| Net (loss) income | (574.4) | (632.7) |\n| Earnings Per Share - Diluted | (5.53) | (6.10) | 25. Subsequent Events Effective October 1, 2021, the company implemented a new organizational structure with three primary business divisions: Commercial, Defense & Space, and Aftermarket, and additionally, a $44.7 million liability was recognized as of September 30, 2021, following a court ruling in favor of a former CEO - A new organizational structure with Commercial, Defense & Space, and Aftermarket divisions became effective October 1, 2021, with financial performance to be reported under these segments starting Q4 2021[216] - A $44.7 million liability was recognized as of September 30, 2021, due to a court ruling in favor of the company's former Chief Executive Officer regarding withheld benefits[217] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and operational results, highlighting the ongoing impacts of COVID-19 and the B737 MAX program, changes in estimates, and a detailed comparison of financial results for the three and nine months ended September 30, 2021, versus the prior year, also covering liquidity, capital resources, and forward-looking statements COVID-19 Impact and Outlook The COVID-19 pandemic continues to significantly impact the aviation industry and the company's business, leading to reduced production rates from customers, and while signs of recovery were observed, the duration and full impact remain uncertain, with the company receiving a $75.5 million grant under the Aviation Manufacturing Jobs Protection Program and implementing mandatory vaccination rules for U.S. employees - The COVID-19 pandemic continues to have a significant negative effect on aviation demand, the company's business, and the industry, leading to decreased production rates from customers[220] - The company received a $75.5 million grant under the Aviation Manufacturing Jobs Protection Program, with $37.8 million received as of September 30, 2021[220] - Mandatory COVID-19 vaccination rules for U.S. federal contractors, effective December 8, 2021, may result in attrition of critically skilled labor and difficulty securing future labor needs[223] B737 Program Update The B737 MAX program is critical, historically generating over 50% of net revenues, with deliveries resuming in Q4 2020 and most regulators ungrounding the aircraft except China, and ongoing demand challenges from the grounding are exacerbated by COVID-19, with narrowbody production rates expected to recover before widebody rates - The B737 MAX program is critical, accounting for approximately 56%, 53%, and 19% of net revenues in 2018, 2019, and 2020, respectively[224] - B737 MAX deliveries resumed in Q4 2020 after the FAA rescinded the grounding order, with most international regulators following suit, except China[225] - Ongoing demand challenges from the B737 MAX grounding are exacerbated by the COVID-19 pandemic, with narrowbody production rates expected to recover before widebody rates[226] B787 Program Update Boeing's B787 production rate changes led to an incremental forward loss charge of $192.5 million in 2020, with further assessments of rework and reduced production volumes resulting in additional forward loss charges of $29.3 million in Q1 2021, $46.4 million in Q2 2021, and $45.5 million in Q3 2021 - Boeing's B787 production rate changes to 5 aircraft per month resulted in an incremental forward loss charge of $192.5 million for the year ended December 31, 2020[227] - The company recorded incremental forward loss charges of $29.3 million in Q1 2021, $46.4 million in Q2 2021, and $45.5 million in Q3 2021 for the B787 program, driven by rework and reduced production volumes[228] Recoverability and Impairment Tests of Current and Noncurrent Assets Management's estimates for asset recoverability and impairment are highly judgmental, influenced by program schedules, costs, and market conditions, especially given COVID-19 uncertainties, and as of September 30, 2021, no events required an update to impairment analyses for long-lived assets ($2,406.9 million net book value) or goodwill ($623.6 million) - Estimates for asset recoverability and impairment tests involve significant judgment due to variables like program delivery schedules, costs, and market conditions, with increased difficulty due to COVID-19 uncertainties[230][231] - As of September 30, 2021, the net book value of long-lived assets was $2,406.9 million, and the balance of intangible assets was $216.2 million, with no events requiring an update to impairment analysis for these assets[232] - Goodwill balance was $623.6 million as of September 30, 2021, primarily from the FMI, Bombardier, and Applied acquisitions, with no events requiring an update to goodwill impairment analysis[233][234] Change to Organizational Structure Effective October 1, 2021, the company adopted a new organizational structure with three primary business divisions: Commercial, Defense & Space, and Aftermarket, and financial performance will be reported based on these new segments starting with the 2021 fiscal year-end results - A new organizational structure, effective October 1, 2021, established three primary business divisions: Commercial, Defense & Space, and Aftermarket[235] - The company intends to report financial performance based on these new segments starting with the 2021 fiscal year-end results[235] Results of Operations Overview For the three months ended September 30, 2021, revenue increased by 21.5% to $980.0 million, and the operating loss improved to $156.6 million from $176.9 million in the prior year, while for the nine months, revenue increased by 14.0% to $2,882.9 million, and the operating loss improved to $380.2 million from $711.4 million Results of Operations Overview | Metric | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Revenue | 980.0 | 806.3 | 2,882.9 | 2,528.2 |\n| Gross loss | (56.2) | (97.1) | (126.5) | (412.8) |\n| Operating loss | (156.6) | (176.9) | (380.2) | (711.4) |\n| Net loss | (113.6) | (155.5) | (420.5) | (574.4) | Results of Operations Overview | Shipset Deliveries | 3 Months Ended Sep 30, 2021 | 3 Months Ended Oct 1, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Oct 1, 2020 | |:---|:---|:---|:---|:---|\n| B737 | 47 | 15 | 111 | 52 |\n| B787 | 5 | 30 | 31 | 92 |\n| A320 Family | 105 | 108 | 331 | 365 |\n| Total Boeing | 68 | 69 | 191 | 198 |\n| Total Airbus | 132 | 133 | 417 | 465 |\n| Total Business and Regional Jets | 50 | 4 | 139 | 26 |\n| Total | 250 | 206 | 747 | 689 | Results of Operations Overview | Prime Customer Revenue | 3 Months Ended Sep 30, 2021 ($M) | 3 Months Ended Oct 1, 2020 ($M) | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|:---|:---|\n| Boeing | 566.1 | 493.8 | 1,595.8 | 1,539.9 |\n| Airbus | 211.6 | 160.1 | 687.8 | 575.3 |\n| Other | 202.3 | 152.4 | 599.3 | 413.0 |\n| Total net revenues | 980.0 | 806.3 | 2,882.9 | 2,528.2 | Three Months Ended September 30, 2021 as Compared to Three Months Ended October 1, 2020 For the three months ended September 30, 2021, revenue increased by 21.5% to $980.0 million, driven by higher B737 production and incremental revenue from acquired programs, while gross loss decreased by $40.9 million due to lower forward losses and higher B737 production, operating loss improved by $20.3 million, and other income, net, increased significantly due to pension income and foreign currency gains Revenue Net revenue increased by $173.7 million (21.5%) to $980.0 million, driven by higher B737 production and incremental revenue from A220 wing and Bombardier programs, with total deliveries increasing to 250 shipsets from 206 in the prior year - Net revenue for the three months ended September 30, 2021, increased by $173.7 million (21.5%) to $980.0 million, driven by higher B737 production and incremental revenue from acquired A220 wing and Bombardier programs[243] - Total shipset deliveries increased to 250 in Q3 2021 from 206 in Q3 2020, with business/regional jet deliveries significantly increasing to 50 from 4[244] Gross (Loss) Profit Gross loss decreased by $40.9 million to ($56.2 million) from ($97.1 million), primarily due to lower forward losses on B787 and A350 programs and higher B737 program production rates, partially offset by $11.0 million in warranty expense and $57.1 million in excess capacity production costs - Gross loss decreased to ($56.2 million) from ($97.1 million), driven by lower forward losses on B787 and A350 programs and higher B737 program production rates[245] - The period included $11.0 million of warranty expense, $57.1 million of excess capacity production costs, and $2.8 million of unfavorable cumulative catch-up adjustments[245] SG&A and Research and Development SG&A expense increased by $34.0 million, and research and development expense increased by $5.3 million, primarily due to a charge related to the former CEO's ruling and incremental expenses from the recently acquired Belfast site - SG&A expense increased by $34.0 million, and research and development expense increased by $5.3 million, primarily due to a charge related to the former CEO's ruling and incremental expenses from the Belfast site[246] Restructuring Costs Restructuring costs decreased by $18.7 million to $0.8 million, reflecting lower cost-alignment and headcount reduction activities compared to the prior year, primarily related to McAlester site closure - Restructuring costs decreased by $18.7 million to $0.8 million, reflecting lower cost-alignment and headcount reduction activity, primarily related to the McAlester site closure[247] Operating (Loss) Income Operating loss improved by $20.3 million to ($156.6 million), reflecting the decreased gross loss on sales and changes in restructuring, SG&A, and R&D costs - Operating loss improved by $20.3 million to ($156.6 million), driven by decreased gross loss on sales and changes in restructuring, SG&A, and research and development costs[248] Interest Expense and Financing Fee Amortization Interest expense and financing fee amortization increased by $5.8 million, primarily due to interest expense recognized on the repayable investment agreement with the UK Government (BEIS) - Interest expense and financing fee amortization increased by $5.8 million, primarily due to interest expense on the repayable investment agreement with the UK Government (BEIS)[249] Other (Expense) Income, net Other income, net, increased significantly to $94.8 million from a net expense of $10.0 million, mainly due to increased net pension income (including a curtailment gain from Shorts Pension closure) and higher foreign currency gains - Other income, net, increased to $94.8 million from a net expense of $10.0 million, primarily due to increased net pension income (including a curtailment gain from Shorts Pension closure) and foreign currency gains[250] Provision for Income Taxes The effective tax rate for the three months ended September 30, 2021, was 6.6%, compared to 35.5% in the prior year, with this decrease primarily attributable to the impact of valuation allowances recognized on U.S. and U.K. deferred tax assets, as the company reported a pre-tax loss - The effective tax rate for the three months ended September 30, 2021, was 6.6%, compared to 35.5% in the prior year, primarily due to valuation allowances on U.S. and U.K. deferred tax assets[253][254] - The net valuation allowance increased by $38.1 million in the U.S. and $10.1 million in the U.K. for the three months ended September 30, 2021[252] Segments (Fuselage, Propulsion, Wing, All Other) Fuselage Systems revenue increased by 14% to $481.2 million, with operating margins improving to (11%) due to lower forward losses, Propulsion Systems revenue increased by 45% to $247.8 million, with operating margins improving to 9% due to increased B737 MAX sales, Wing Systems revenue increased by 44% to $243.0 million, with operating margins improving to (7%) due to lower forward losses and increased B737 program profit, and All Other segment revenue decreased by $38.1 million Segments (Fuselage, Propulsion, Wing, All Other) | Segment | 3 Months Ended Sep 30, 2021 Revenue ($M) | 3 Months Ended Oct 1, 2020 Revenue ($M) | 3 Months Ended Sep 30, 2021 Operating Margin (%) | 3 Months Ended Oct 1, 2020 Operating Margin (%) | |:---|:---|:---|:---|:---|\n| Fuselage Systems | 481.2 | 421.1 | (11%) | (23%) |\n| Propulsion Systems | 247.8 | 170.8 | 9% | (9%) |\n| Wing Systems | 243.0 | 168.3 | (7%) | (14%) |\n| All Other | 8.0 | 46.1 | N/A | N/A | - Fuselage Systems operating margins improved due to lower forward losses on B787 and A350 programs and a prior year forward loss on the B767 program[260] - Propulsion Systems operating margins improved due to increased profit and margins on B737 program sales, lower excess capacity costs, and decreased forward losses on B787 and BR725 programs[262] Nine Months Ended September 30, 2021 as Compared to Nine Months Ended October 1, 2020 For the nine months ended September 30, 2021, net revenue increased by 14.0% to $2,882.9 million, driven by higher B737 production and acquired programs, gross loss significantly decreased by $286.3 million, and operating loss improved by $331.2 million, while other income, net, saw a substantial increase due to pension income, and the effective tax rate was significantly impacted by valuation allowances Revenue Net revenue increased by $354.7 million (14.0%) to $2,882.9 million, driven by higher B737 production, incremental revenue from acquired A220 wing and Bombardier programs, and increased aftermarket sales, with total shipset deliveries increasing to 747 from 689 - Net revenue for the nine months ended September 30, 2021, increased by $354.7 million (14.0%) to $2,882.9 million, driven by higher B737 production and incremental revenue from acquired A220 wing and Bombardier programs[265] - Total shipset deliveries increased to 747 in the nine months ended September 30, 2021, from 689 in the prior year, with business/regional jet deliveries increasing to 139 from 26[266] Gross (Loss) Profit Gross loss decreased by $286.3 million to ($126.5 million) from ($412.8 million), reflecting greater profit from higher B737 production rates, lower forward losses on B787 and A350 programs, and reduced excess capacity and abnormal production costs, with the period including $195.0 million in net forward loss charges - Gross loss decreased to ($126.5 million) from ($412.8 million), driven by higher B737 production rates, lower forward losses on B787 and A350 programs, and reduced excess capacity and abnormal production costs[267] - The period included $172.2 million of excess capacity production costs, $7.1 million of net workforce adjustments, and $195.0 million of net forward loss charges[268] SG&A and Research and Development SG&A expense increased by $32.1 million, primarily due to the charge related to the former CEO's ruling and incremental expenses from the Belfast site, and research and development expense increased by $6.2 million - SG&A expense increased by $32.1 million, primarily due to the charge related to the former CEO's ruling and incremental expenses from the Belfast site[269] - Research and development expense increased by $6.2 million for the nine months ended September 30, 2021[269] Restructuring Costs Restructuring costs decreased by $60.3 million to $8.1 million, reflecting lower cost-alignment and headcount reduction activities compared to the prior year, primarily related to McAlester and San Antonio site closures - Restructuring costs decreased by $60.3 million to $8.1 million, reflecting lower cost-alignment and headcount reduction activity, primarily related to McAlester and San Antonio site closures[270] Operating (Loss) Income Operating loss improved by $331.2 million to ($380.2 million), reflecting decreased gross loss on sales and reductions in restructuring costs, with the prior year also including $22.9 million in loss on disposal charges - Operating loss improved by $331.2 million to ($380.2 million), driven by decreased gross loss on sales and reductions in restructuring costs[271] - The prior year included $22.9 million in loss on disposal charges related to long-lived assets on the B787 and A350 programs[271] Interest Expense and Financing Fee Amortization Interest expense and financing fee amortization increased by $43.9 million, primarily due to interest expense recognized on the repayable investment agreement with the UK Government (BEIS) - Interest expense and financing fee amortization increased by $43.9 million, primarily due to interest expense on the repayable investment agreement with the UK Government (BEIS)[272] Other (Expense) Income, net Other income, net, increased significantly to $138.7 million from a net expense of $65.4 million, primarily due to net pension income in the current year (including a curtailment gain from Shorts Pension closure) contrasting with a net pension loss in the prior year - Other income, net, increased to $138.7 million from a net expense of $65.4 million, primarily due to net pension income (including a curtailment gain from Shorts Pension closure) in the current period, contrasting with a net pension loss in the prior year[273] Provision for Income Taxes The effective tax rate for the nine months ended September 30, 2021, was 0.15%, significantly lower than 37.3% in the prior year, with this decrease primarily due to the impact of valuation allowances recognized against U.S. and U.K. deferred tax assets, as the company reported a pre-tax loss - The effective tax rate for the nine months ended September 30, 2021, was 0.15%, compared to 37.3% in the prior year, primarily due to valuation allowances on U.S. and U.K. deferred tax assets[276][277] - The net valuation allowance increased by $122.5 million in the U.S. and $70.7 million in the U.K. for the nine months ended September 30, 2021[275] Segments (Fuselage, Propulsion, Wing, All Other) Fuselage Systems revenue increased by 9% to $1,410.5 million, with operating margins improving to (10%) due to lower forward losses and higher B737 production, Propulsion Systems revenue increased by 27% to $716.2 million, with operating margins improving to 9% due to increased B737 MAX profit, Wing Systems revenue increased by 25% to $725.9 million, with operating margins remaining relatively flat at (7%), and All Other segment revenue decreased by $50.4 million Segments (Fuselage, Propulsion, Wing, All Other) | Segment | 9 Months Ended Sep 30, 2021 Revenue ($M) | 9 Months Ended Oct 1, 2020 Revenue ($M) | 9 Months Ended Sep 30, 2021 Operating Margin (%) | 9 Months Ended Oct 1, 2020 Operating Margin (%) | |:---|:---|:---|:---|:---|\n| Fuselage Systems | 1,410.5 | 1,299.7 | (10%) | (33%) |\n| Propulsion Systems | 716.2 | 565.6 | 9% | (7%) |\n| Wing Systems | 725.9 | 582.2 | (7%) | (9%) |\n| All Other | 30.3 | 80.7 | N/A | N/A | - Fuselage Systems operating margins improved due to lower forward losses on B787 and A350 programs and greater profit from higher B737 program production rates[282] - Propulsion Systems operating margins improved due to increased profit on the B737 MAX program, lower forward losses on B787 and BR725 programs, and reduced restructuring and excess capacity costs[283] Liquidity and Capital Resources The company's liquidity is adversely affected by the B737 MAX grounding and COVID-19, and as of September 30, 2021, it had $1,430.6 million in cash and cash equivalents and $3,594.5 million in debt, with management believing current cash and operating cash flows, along with other liquidity sources, will be sufficient for the next twelve months and foreseeable future, and the company received $227.9 million of a $300 million federal income tax refund and sold $1,487.7 million of accounts receivable through factoring arrangements - Liquidity is adversely affected by the B737 MAX grounding and COVID-19 pandemic, with continued uncertainty regarding recovery[286] - As of September 30, 2021, the company had $1,430.6 million in cash and cash equivalents and a total debt balance of $3,594.5 million[287] - The company received $227.9 million of a $300 million federal income tax refund in Q3 2021 and sold $1,487.7 million of accounts receivable through factoring arrangements for the nine months ended September 30, 2021[289][290] Cash Flows For the nine months ended September 30, 2021, net cash provided by operating activities was $13.3 million, a significant improvement from a $612.8 million outflow in the prior year, driven by improved operating income and working capital, while investing activities used $106.4 million, and financing activities used $345.8 million, primarily due to debt redemption Cash Flows | Cash Flow Activity | 9 Months Ended Sep 30, 2021 ($M) | 9 Months Ended Oct 1, 2020 ($M) | |:---|:---|:---|\n| Net cash provided by (used in) operating activities | 13.3 | (612.8) |\n| Net cash used in investing activities | (106.4) | (183.4) |\n| Net cash used in financing activities | (345.8) | (105.6) |\n| Net decrease in cash, cash equivalents and restricted cash | (442.7) | (905.1) |\n| Cash, cash equivalents, and restricted cash, end of period | 1,450.4 | 1,462.1 | - The $626.1 million increase in net cash inflow from operating activities was primarily due to improved operating income, working capital, and the income tax refund received[294] - The increased cash outflow from financing activities was primarily driven by the redemption of $300 million in Senior Floating Rate Notes in the current period[296] Pension and Other Post-Retirement Benefit Obligations The U.S. pension plan remained fully funded, with no anticipated cash contributions in 2021, and the Shorts Pension plan was closed to future benefit accruals effective December 10, 2021, resulting in a $61.0 million curtailment gain, with projected contributions for 2021 including $10.2 million for U.S. SERP/medical plans and $182.6 million for U.K. Shorts Pension schemes - The U.S. pension plan remained fully funded at September 30, 2021, with no anticipated cash contributions for 2021[297] - The Shorts Pension plan was closed to future benefit accruals effective December 10, 2021, resulting in a $61.0 million curtailment gain for the three and nine months ended September 30, 2021[298] - Projected contributions for 2021 include $10.2 million for U.S. SERP/medical plans and $182.6 million for U.K. Shorts Pension schemes[299] Derivatives Accounted for as Hedges The company terminated its $150 million interest rate swap agreement in February 2021, reclassifying a $0.7 million loss from AOCI to earnings, and also entered into foreign currency forward contracts with a notional amount of $280.3 million to hedge British Pound exposure, recognizing a $5.5 million loss in AOCI for the nine months ended September 30, 2021 - The $150 million interest rate swap agreement was terminated on February 24, 2021, resulting in a $0.7 million loss reclas