Attached files
file | filename |
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EX-10.1 - EX-10.1 - VOUGHT AIRCRAFT INDUSTRIES INC | d70023exv10w1.htm |
EX-32.2 - EX-32.2 - VOUGHT AIRCRAFT INDUSTRIES INC | d70023exv32w2.htm |
EX-31.2 - EX-32.1 - VOUGHT AIRCRAFT INDUSTRIES INC | d70023exv31w2.htm |
EX-31.1 - EX-31.1 - VOUGHT AIRCRAFT INDUSTRIES INC | d70023exv31w1.htm |
EX-32.1 - EX-32.1 - VOUGHT AIRCRAFT INDUSTRIES INC | d70023exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 27, 2009
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 333-112528
Vought Aircraft Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 75-2884072 | |
(State of Incorporation) | (I.R.S. Employer Identification Number) | |
201 East John Carpenter Freeway, Tower 1, Suite 900 | ||
Irving, Texas | 75062 | |
(Address of Principal executive offices) | (Zip Code) |
(972) 946-2011
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by checkmark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the registrants common stock, $0.01 par value per share,
at November 10, 2009 was 24,818,806.
TABLE OF CONTENTS
2
Table of Contents
Cautionary Statement Regarding Forward Looking Statements
Some of the statements made in this Quarterly Report on Form 10-Q are forward-looking statements.
These forward looking statements are based upon our current expectations and projections about
future events. When used in this quarterly report, the words believe, anticipate, intend,
estimate, expect, should, may and similar expressions, or the negative of such words and
expressions, are intended to identify forward-looking statements, although not all forward-looking
statements contain such words or expressions. The forward-looking statements in this quarterly
report are primarily located in the material set forth under the heading Managements Discussion
and Analysis of Financial Condition and Results of Operations, but are found in other locations as
well. These forward-looking statements generally relate to our plans, objectives and expectations
for future operations and are based upon managements current estimates and projections of future
results or trends. Although we believe that our plans and objectives reflected in or suggested by
these forward-looking statements are reasonable, we may not achieve these plans or objectives. You
should read this quarterly report completely and with the understanding that actual future results
may be materially different from what we expect. We will not update forward-looking statements even
though our situation may change in the future.
Specific factors that might cause actual results to differ from our expectations include, but are
not limited to:
| global and domestic financial market and economic conditions; | ||
| market risks related to the refinancing of our indebtedness; | ||
| competition; | ||
| operating risks and the amounts and timing of revenues and expenses; | ||
| project delays or cancellations; | ||
| product liability claims; | ||
| global and domestic market or business conditions and fluctuations in demand for our products and services; | ||
| the impact of recent and future federal and state regulatory proceedings and changes, including changes in environmental and other laws and regulations to which we are subject, as well as changes in the application of existing laws and regulations; | ||
| political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States and internationally; | ||
| the effect of and changes in economic conditions in the areas in which we operate; | ||
| returns on pension assets and impacts of future discount rate changes on pension obligations; | ||
| environmental constraints on operations and environmental liabilities arising out of past or present operations; | ||
| current and future litigation; | ||
| the direct or indirect impact on our companys business resulting from terrorist incidents or responses to such incidents, including the effect on the availability of and premiums on insurance; and | ||
| weather and other natural phenomena. |
3
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
Vought Aircraft Industries, Inc.
Consolidated Balance Sheets
(dollars in millions, except par value per share ) (unaudited)
September 27, | December 31, | |||||||
2009 | 2008 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 150.4 | $ | 86.7 | ||||
Restricted cash |
43.7 | | ||||||
Trade and other receivables |
127.1 | 138.5 | ||||||
Inventories |
479.0 | 311.8 | ||||||
Assets related to discontinued operations |
| 460.7 | ||||||
Other current assets |
5.6 | 4.7 | ||||||
Total current assets |
805.8 | 1,002.4 | ||||||
Property, plant and equipment, net |
272.8 | 279.2 | ||||||
Goodwill |
404.8 | 404.8 | ||||||
Identifiable intangible assets, net |
22.1 | 27.2 | ||||||
Debt origination costs, net and other assets |
6.2 | 14.0 | ||||||
Total assets |
$ | 1,511.7 | $ | 1,727.6 | ||||
Liabilities and stockholders equity (deficit) |
||||||||
Current liabilities: |
||||||||
Accounts payable, trade |
$ | 126.4 | $ | 148.5 | ||||
Accrued and other liabilities |
81.8 | 57.5 | ||||||
Accrued payroll and employee benefits |
46.9 | 48.1 | ||||||
Accrued post-retirement benefits-current |
42.2 | 42.0 | ||||||
Accrued pension-current |
0.6 | 0.3 | ||||||
Current portion of long-term bank debt |
5.9 | 5.9 | ||||||
Liabilities related to discontinued operations |
| 156.7 | ||||||
Accrued contract liabilities |
112.4 | 141.1 | ||||||
Total current liabilities |
416.2 | 600.1 | ||||||
Long-term liabilities: |
||||||||
Accrued post-retirement benefits |
368.5 | 405.3 | ||||||
Accrued pension |
658.1 | 710.7 | ||||||
Long-term bank debt, net of current portion |
316.6 | 594.0 | ||||||
Long-term bond debt |
270.0 | 270.0 | ||||||
Other non-current liabilities |
79.0 | 81.6 | ||||||
Total liabilities |
2,108.4 | 2,661.7 | ||||||
Stockholders equity (deficit): |
||||||||
Common stock, par value $.01 per share;
50,000,000 shares authorized, 24,818,806 and
24,798,382 issued and outstanding at
September 27, 2009 and December 31, 2008,
respectively |
0.3 | 0.3 | ||||||
Additional paid-in capital |
422.2 | 420.5 | ||||||
Shares held in rabbi trust |
(1.6 | ) | (1.6 | ) | ||||
Accumulated deficit |
(220.7 | ) | (501.3 | ) | ||||
Accumulated other comprehensive loss |
(796.9 | ) | (852.0 | ) | ||||
Total stockholders equity (deficit) |
$ | (596.7 | ) | $ | (934.1 | ) | ||
Total liabilities and stockholders equity (deficit) |
$ | 1,511.7 | $ | 1,727.6 | ||||
See accompanying notes
4
Table of Contents
Vought Aircraft Industries, Inc.
Consolidated Statements of Operations
(unaudited, in millions)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 27, | September 28, | September 27, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue |
$ | 446.7 | $ | 477.3 | $ | 1,322.3 | $ | 1,362.0 | ||||||||
Costs and expenses |
||||||||||||||||
Cost of sales |
376.0 | 407.1 | 1,109.5 | 1,089.1 | ||||||||||||
Selling, general and
administrative expenses |
30.2 | 34.9 | 101.2 | 126.1 | ||||||||||||
Total costs and expenses |
406.2 | 442.0 | 1,210.7 | 1,215.2 | ||||||||||||
Operating income |
40.5 | 35.3 | 111.6 | 146.8 | ||||||||||||
Other income (expense) |
||||||||||||||||
Interest income |
0.2 | 1.3 | 0.6 | 2.3 | ||||||||||||
Other gain (loss) |
| 1.6 | | 48.7 | ||||||||||||
Equity in loss of joint venture |
| | | (0.6 | ) | |||||||||||
Interest expense |
(20.6 | ) | (17.4 | ) | (44.5 | ) | (49.6 | ) | ||||||||
Income before income taxes |
20.1 | 20.8 | 67.7 | 147.6 | ||||||||||||
Income tax expense |
0.9 | 0.2 | 0.9 | 0.2 | ||||||||||||
Income from continuing operations |
19.2 | 20.6 | 66.8 | 147.4 | ||||||||||||
Income (loss) from discontinued
operations,
net of tax |
219.4 | (5.0 | ) | 213.8 | (23.8 | ) | ||||||||||
Net income |
$ | 238.6 | $ | 15.6 | $ | 280.6 | $ | 123.6 | ||||||||
See accompanying notes
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Table of Contents
Vought Aircraft Industries, Inc.
Consolidated Statements of Cash Flows
(unaudited, in millions)
Nine Months Ended | ||||||||
September 27, | September 28, | |||||||
2009 | 2008 | |||||||
Operating activities |
||||||||
Net income |
$ | 280.6 | $ | 123.6 | ||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
55.7 | 50.1 | ||||||
Stock compensation expense |
1.2 | 2.2 | ||||||
Equity in losses of joint venture |
| 0.6 | ||||||
(Gain) Loss from asset disposals |
41.7 | (50.1 | ) | |||||
Changes in current assets and liabilities: |
||||||||
Trade and other receivables |
1.8 | (81.6 | ) | |||||
Inventories |
(169.6 | ) | (32.2 | ) | ||||
Other current assets |
(0.9 | ) | 0.4 | |||||
Accounts payable, trade |
(28.4 | ) | (36.8 | ) | ||||
Accrued payroll and employee benefits |
(0.6 | ) | (0.4 | ) | ||||
Accrued and other liabilities |
24.9 | (10.0 | ) | |||||
Accrued contract liabilities |
(41.3 | ) | (33.0 | ) | ||||
Other assets and liabilitieslong-term |
(35.8 | ) | (79.8 | ) | ||||
Net cash provided by (used in) operating activities |
129.3 | (147.0 | ) | |||||
Investing activities |
||||||||
Capital expenditures |
(28.2 | ) | (41.7 | ) | ||||
Proceeds from sale of assets |
289.2 | 55.0 | ||||||
Net cash provided by (used in) investing activities |
261.0 | 13.3 | ||||||
Financing activities |
||||||||
Proceeds from short-term bank debt |
135.0 | 153.0 | ||||||
Payments on short-term bank debt |
(135.0 | ) | (153.0 | ) | ||||
Proceeds from long-term bank debt |
75.0 | 184.6 | ||||||
Payments on long-term bank debt |
(357.9 | ) | (2.0 | ) | ||||
Changes in restricted cash |
(43.7 | ) | | |||||
Proceeds from sale of common stock |
| 0.1 | ||||||
Net cash provided by (used in) financing activities |
(326.6 | ) | 182.7 | |||||
Net increase (decrease) in cash and cash equivalents |
63.7 | 49.0 | ||||||
Cash and cash equivalents at beginning of period |
86.7 | 75.6 | ||||||
Cash and cash equivalents at end of period |
$ | 150.4 | $ | 124.6 | ||||
See accompanying notes
6
Table of Contents
Vought Aircraft Industries, Inc.
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
Period Ending September 27, 2009
Note 1 Organization and Basis of Presentation
Vought Aircraft Industries, Inc. (Vought) and its wholly owned subsidiaries, VAC Industries,
Inc., Vought Commercial Aircraft Company and Contour Aerospace Corporation (Contour) are herein
referred to collectively as we or the Company. We are a leading global manufacturer of
aerostructure products for commercial, military and business jet aircraft. We have a long history
of developing and manufacturing a wide range of complex aerostructures such as fuselages, wing and
tail assemblies, engine nacelles, flight control surfaces, as well as helicopter cabins. Our
diverse and long-standing customer base consists of leading aerospace original equipment
manufacturers, or OEMs, including Airbus, Bell Helicopter, Boeing, Cessna, Gulfstream, Hawker
Beechcraft, Lockheed Martin, Northrop Grumman and Sikorsky, as well as the U.S. Air Force.
Our heritage as an aircraft manufacturer extends to the company founded in 1917 by aviation
pioneer Chance Milton Vought. From 1994 to 2000, we operated as Northrop Grummans commercial
aircraft division. Vought was formed in 2000 in connection with The Carlyle Groups acquisition of
Northrop Grummans aerostructures business. In July 2003,
we purchased The Aerostructures Corporation,
with manufacturing sites in Nashville, Tennessee; Brea, California; and Everett, Washington. We are
a Delaware corporation with our principal executive offices located at 201 East John Carpenter
Freeway, Tower 1, Suite 900, Irving, TX 75062, and we perform production work at sites throughout
the United States, including California, Texas, Georgia, Tennessee, Florida and Washington.
The accompanying interim unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States for
interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles. In the opinion of management, the accompanying interim
unaudited condensed consolidated financial statements contain all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the results of operations
for interim periods. The results of operations for the three and nine month periods ended
September 27, 2009 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2009. These interim unaudited condensed consolidated financial statements
should be read in conjunction with the financial statements and the notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2008, filed with the U.S. Securities and
Exchange Commission (SEC) on March 13, 2009.
As a result of the sale of the assets and operations of our 787 business conducted at North
Charleston, South Carolina (787 business) on July 30, 2009, the balances and activities of the
787 business have been segregated and reported as discontinued operations for all periods
presented except with respect to the Consolidated Statements of Cash Flows. For further details,
see Note 3 Discontinued Operations.
It is our practice to close our books and records based on a thirteen-week quarter, which can
lead to different period end dates for comparative purposes. The interim financial statements and
tables of financial information included herein are labeled based on that convention. This
practice only affects interim periods, as our fiscal year ends on December 31.
The consolidated balance sheet at December 31, 2008 presented herein has been derived from the
audited consolidated financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete financial
statements.
7
Table of Contents
Note 2-Recent Accounting Pronouncements
In December 2007, the FASB issued an accounting standard that provides revised guidance on how
acquirors recognize and measure the consideration transferred, identifiable assets acquired,
liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination.
This standard also expands required disclosures surrounding the nature and financial effects of
business combinations. We adopted the guidance of this accounting standard, currently included in
the Business Combinations Topic of the Accounting Standards Codification (ASC) on January 1, 2009.
We considered the provisions of this accounting standard with respect to the sale of our 787
business (as discussed in Note 3 Discontinued Operations).
FASB issued an accounting standard that requires enhanced disclosures about the plan assets of
a companys defined benefit pension and other postretirement plans. The enhanced disclosures are
intended to provide users of financial statements with a greater understanding of: (1) how
investment allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies; (2) the major categories of plan assets;
(3) the inputs and valuation techniques used to measure the fair value of plan assets; (4) the
effect of fair value measurements using significant unobservable inputs (Level 3) on changes in
plan assets for the period; and (5) significant concentrations of risk within plan assets. We
adopted the provisions of this accounting standard on January 1, 2009 and will provide the required
enhanced disclosures for our pension plan assets in our 2009 annual report on Form 10-K.
In May 2009, the FASB issued an accounting standard that requires an entity to recognize in
the financial statements the effects of all subsequent events that provide additional evidence
about conditions that existed at the date of the balance sheet. For nonrecognized subsequent
events that must be disclosed to keep the financial statements from being misleading, an entity is
required to disclose the nature of the event as well as an estimate of its financial effect, or a
statement that such an estimate cannot be made. In addition, this accounting standard requires an
entity to disclose the date through which subsequent events have been evaluated. We adopted this
accounting standard for our fiscal period ending June 28, 2009 and we have evaluated subsequent
events through the date of issuance of our interim, unaudited, condensed consolidated financial
statements on November 10, 2009. No material subsequent events have occurred since September 27,
2009.
In June 2009, the FASB issued an accounting standard that establishes the FASB Accounting
Standards CodificationÔ (the Codification) as the source of authoritative U.S. generally
accepted accounting principles (US GAAP). We adopted this accounting standard for our fiscal
period ending September 27, 2009.
Following the Codification, the FASB will not issue new standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (ASUs), which will serve to update the Codification, provide background
information about the accounting guidance and provide the basis for conclusions on the changes to
the Codification. GAAP is not intended to be changed as a result of the Codification, but it will
change the way the accounting guidance is organized and presented. As a result, these changes have
a significant impact on how we reference GAAP in our financial statements and in our accounting
policies for financial statements issued for interim and annual periods ending after September 15,
2009.
In this quarterly report, the Company has begun the process of implementing the statement by
removing references to FASB statement numbers in the footnotes that follow and explaining the
adherence to authoritative accounting guidance in plain English, where appropriate.
8
Table of Contents
Note 3- Discontinued Operations
On July 6, 2009, we entered into an agreement to sell the assets and operations of our 787
business conducted at North Charleston, South Carolina to Boeing Commercial Airplanes Charleston
South Carolina, Inc., a wholly owned subsidiary of The Boeing Company. The transaction was
completed on July 30, 2009. Concurrent with the closing of the transaction, we entered into an
agreement terminating the existing 787 supply agreement releasing claims and resolving rights and
obligations, including obligations incurred or created as a result of ordinary course performance
of the 787 supply agreement. Going forward, under a newly negotiated contract, we will manufacture
certain components for the 787 program as well as provide engineering services to Boeing pursuant
to an engineering services agreement. We also will provide certain transition services to Boeing
pursuant to a transition services agreement. The transition services provided to Boeing are
temporary and non-production related and thus not deemed direct cash flows of the 787 business.
The transition services are included as a component of continuing operations and are expected to be
completed in the next 12-18 months.
We received total cash proceeds of approximately $590 million as consideration for the
transaction, of which approximately $9.3 million was used to pay costs associated with the
transaction. The cash proceeds were allocated based on the estimated relative fair value of each
component of the transaction. As a result of that allocation, we have recorded a $39.8 million
loss on the sale of the 787 business and revenue of $291.4 million related to the settlement of
contractual matters incurred in the ordinary course of business as
income from discontinued operations in the three and nine month
periods ended September 27, 2009. The following table represents
the assets of the 787 business as of July 30, 2009 and December 31, 2008. The balances as of
December 31, 2008 have been reclassified to the assets related to discontinued operations and
liabilities related to discontinued operations captions in our December 31, 2008 Consolidated
Balance Sheet.
July 30, | December 31, | |||||||
2009 | 2008 | |||||||
($ in millions) | ||||||||
Trade and other receivables |
$ | 9.7 | $ | 0.1 | ||||
Inventories |
135.0 | 132.6 | ||||||
Property, plant and equipment, net |
197.5 | 205.1 | ||||||
Goodwill (allocated) |
122.9 | 122.9 | ||||||
$ | 465.1 | $ | 460.7 | |||||
Accounts payable |
22.2 | 28.5 | ||||||
Accrued and other liabilities |
5.8 | 6.2 | ||||||
Accrued payroll and employee benefits |
1.2 | 0.6 | ||||||
Accrued contract liabilities |
47.7 | 60.3 | ||||||
Other non-current liabilities |
59.2 | 61.1 | ||||||
$ | 136.1 | $ | 156.7 | |||||
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We also reclassified the results of operations related to our 787 Business to the income
(loss) from discontinued operations, net of tax caption in our Consolidated Statements of
Operations for all periods presented. The following table summarizes the components of income
(loss) from discontinued operations, net of tax:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, | September 28, | September 27, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
($ in millions) | ($ in millions) | |||||||||||||||
Revenue |
$ | 297.6 | $ | | $ | 316.2 | $ | 21.4 | ||||||||
Cost of sales |
(22.6 | ) | | (41.2 | ) | (21.4 | ) | |||||||||
Selling, general and
administrative expenses |
(0.4 | ) | (5.0 | ) | (6.0 | ) | (23.8 | ) | ||||||||
Loss on sale of 787 business |
(39.8 | ) | | (39.8 | ) | | ||||||||||
Income tax expense |
(15.4 | ) | | (15.4 | ) | | ||||||||||
Income (loss) from
discontinued operations,
net of tax |
$ | 219.4 | $ | (5.0 | ) | $ | 213.8 | $ | (23.8 | ) | ||||||
Note 4 Inventories
Costs included in inventory consist of all direct production costs, manufacturing and
engineering overhead, production tooling costs and certain general and administrative expenses.
Inventories consisted of the following:
September 27, | December 31, | |||||||
2009 | 2008 | |||||||
(in millions) | ||||||||
Production costs of contracts in process |
$ | 724.9 | $ | 553.2 | ||||
Finished goods |
3.0 | 2.9 | ||||||
Less: unliquidated progress payments |
(248.9 | ) | (244.3 | ) | ||||
Total inventories |
$ | 479.0 | $ | 311.8 | ||||
The increase in our inventory balance from December 31, 2008 to September 27, 2009 primarily
relates to our investment to support the ramp-up of 747-8 production.
Our inventory balance as of December 31, 2008 was impacted by the release of purchase
accounting reserves of $22.6 million for the Boeing 747 program to reflect the updated timeline for
the completion of the deliveries for the 747-400 model. They were released from inventory and
accrued contract liabilities to income through the Cost of Sales caption in our Consolidated
Statement of Operations, increasing our reported income for the first quarter of 2008.
Additionally, we accelerated the useful life of an intangible asset associated with the 747 program
for the same reason. Refer to Note 5 Goodwill and Intangible Assets for disclosure of the impact
of the change in useful life.
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Note 5 Goodwill and Intangible Assets
Goodwill is tested for impairment, at least annually, in accordance with the provisions of the
Intangibles Goodwill and Other topic of the ASC. Under this topic, the first step of the
goodwill impairment test used to identify potential impairment compares the fair value of a
reporting unit with its carrying value. We have concluded that the Company is a single reporting
unit. Accordingly, all assets and liabilities are used to determine our carrying value. In
connection with the sale of our 787 business on July 30, 2009 (discussed in Note 3 -
Discontinued Operations), a portion of our goodwill balance was
allocated to that business based on the relative fair value of its assets. Subsequently, we
performed an interim impairment test of our remaining Goodwill balance and determined the balance
is not impaired. The following table represents a summary of the change in the Goodwill balance as
a result of the aforementioned allocation:
(in millions) | ||||
Goodwill prior to allocation |
$ | 527.7 | ||
Allocation to 787 business |
122.9 | |||
Goodwill after allocation |
$ | 404.8 | ||
We use an independent valuation firm to assist in the estimation of enterprise fair value
using standard valuation techniques such as discounted cash flow, market multiples and comparable
transactions. The discounted cash flow fair value estimates are based on managements projected
future cash flows and the estimated weighted average cost of capital. The estimated weighted
average cost of capital is based on the risk-free interest rate and other factors such as equity
risk premiums and the ratio of total debt and equity capital.
We must make assumptions regarding estimated future cash flows and other factors used by
the independent valuation firm to determine the fair value. If these estimates or the related
assumptions change, we may be required to record non-cash impairment charges for goodwill in the
future.
Identifiable intangible assets consisted of the following:
September 27, | December 31, | |||||||
2009 | 2008 | |||||||
(in millions) | ||||||||
Programs and contracts |
$ | 137.3 | $ | 137.3 | ||||
Less: accumulated amortization |
(115.2 | ) | (110.1 | ) | ||||
Identifiable intangible assets, net |
$ | 22.1 | $ | 27.2 | ||||
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During the nine month period ended September 28, 2008, we made a change to the estimated
useful life of an intangible asset associated with our 747 program to reflect a change in the
estimated period during which the remaining deliveries of the 747-400 model would be made. This
change in estimate resulted in an additional $1.2 million recorded to selling, general and
administrative expenses during the nine month period ended September 28, 2008. Including this
change, scheduled remaining amortization of identifiable intangible assets as of September 27, 2009
is as follows:
(in millions) | ||||
2009 |
$ | 1.7 | ||
2010 |
4.8 | |||
2011 |
2.1 | |||
2012 |
2.1 | |||
2013 |
2.1 | |||
Thereafter |
9.3 | |||
Total remaining amortization of identifiable intangible
assets |
$ | 22.1 | ||
12
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Note 6 Pension and Other Post-retirement Benefits
The components of net periodic benefit cost for our pension plans and other post-retirement
benefit plans were as follows:
Pension Benefits | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, | September 28, | September 27, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Components of net periodic benefit cost
(income): |
||||||||||||||||
Service cost |
$ | 4.9 | $ | 4.1 | $ | 13.6 | $ | 13.6 | ||||||||
Interest cost |
28.9 | 29.0 | 86.3 | 83.8 | ||||||||||||
Expected return on plan assets |
(31.5 | ) | (31.0 | ) | (94.2 | ) | (93.1 | ) | ||||||||
Amortization of net (gain) loss |
11.0 | 10.4 | 32.2 | 24.2 | ||||||||||||
Amortization of prior service cost |
3.1 | 3.0 | 9.3 | 8.9 | ||||||||||||
Prior service costs recognized -
curtailment |
| | 1.8 | | ||||||||||||
Plan settlement or curtailment (gain) loss |
| 0.2 | 4.6 | 0.2 | ||||||||||||
Special termination benefits |
0.5 | | 0.5 | | ||||||||||||
Net periodic benefit cost |
$ | 16.9 | $ | 15.7 | $ | 54.1 | $ | 37.6 | ||||||||
Defined contribution plans cost |
$ | 5.1 | $ | 4.5 | $ | 14.7 | $ | 13.8 | ||||||||
Other Post-retirement Benefits | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, | September 28, | September 27, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Components of net periodic benefit
cost (income): |
||||||||||||||||
Service cost |
$ | 0.6 | $ | 1.3 | $ | 2.5 | $ | 3.8 | ||||||||
Interest cost |
5.5 | 7.2 | 18.2 | 22.1 | ||||||||||||
Amortization of net (gain) loss |
0.7 | (1.2 | ) | 1.4 | 1.5 | |||||||||||
Amortization of prior service cost |
(6.5 | ) | (5.9 | ) | (19.0 | ) | (15.1 | ) | ||||||||
Prior service costs recognized -
curtailment |
| | (0.2 | ) | | |||||||||||
Plan settlement or curtailment
(gain) loss |
| | 3.4 | | ||||||||||||
Special termination benefits |
0.2 | | 0.2 | | ||||||||||||
Net periodic benefit cost |
$ | 0.5 | $ | 1.4 | $ | 6.5 | $ | 12.3 | ||||||||
We periodically experience events or take actions that affect our benefit plans. Some of these
events or actions require remeasurements and result in special charges. The following summarizes
the key events that affect our net periodic benefit cost and obligations:
| During February and April of 2008, two of our union represented groups ratified new collective bargaining agreements. Those agreements each provide for a freeze in pension benefit accruals, effective December 31, 2008, for bargaining unit employees who, as of December 31, 2007, had less than 16 years of bargaining unit seniority. Employees subject to the pension freeze and any employees hired on or after March 1, 2008 for the first group and April 1, 2008 for the second group, receive a defined contribution benefit. The agreements provided for a one-time retirement incentive program offered to eligible employees during 2008. The agreements also provide for certain modifications to the retiree medical benefits for bargaining unit retirees and eliminated retiree medical coverage for any bargaining unit employees hired on or after January 1, 2008. |
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| In September 2008, we announced amendments to medical plans for two groups of non-represented, current retirees. Effective January 1, 2009, medical coverage for participants in those two groups is eliminated at age 65 and replaced with a fixed monthly stipend. | ||
| The aforementioned changes in 2008 led to remeasurement of affected plans assets and obligations as of March 31, 2008, which resulted in a $14.9 million increase in unfunded liability for the affected pension plans and a $44.1 million decrease in liability for the affected OPEB plans. These impacts were recorded in the nine month period ended September 28, 2008. | ||
| During January of 2009, the IAM-represented employees at our Nashville facility ratified a new collective bargaining agreement. That agreement provides for certain benefit changes, including a freeze in pension benefit accruals, effective June 30, 2009, for bargaining unit employees who, as of that date, had less than 16 years of bargaining unit seniority. Employees subject to the pension freeze, and any bargaining unit employees hired on or after September 29, 2008, receive a defined contribution benefit. The agreement provides for a one-time company paid retirement incentive program offered to eligible employees during 2009 and certain modifications to retiree medical benefits for bargaining unit retirees. These changes led to a remeasurement of the affected plans assets and obligations as of January 31, 2009, which increased our unfunded liability for the pension plan by $1.5 million, decreased our liability for the OPEB plan by $32.7 million and led to the immediate recognition of $9.6 million of net non-recurring charges due to a curtailment. | ||
| In September 2009, we announced amendments to medical plans for groups of non-represented, current retirees. Effective January 1, 2010, medical coverage for participants in two groups is eliminated at age 65 and replaced with a fixed monthly stipend. We estimate that those changes will not have a material impact on our obligations under our other post-retirement benefit plans. |
Due to the actions taken by the U.S. Treasury Department earlier in 2009 expanding the
permissible yield curves that can be used for the discount rate, our required pension contributions
for the fiscal year ended December 31, 2009 total $78.8 million, as compared to $84.7 million, as
disclosed in our 2008 annual report on Form 10-K.
Note 7- Commitments
Warranty Reserve. We have established a reserve to provide for the estimated future cost of
warranties on our delivered products. We periodically review the reserve and adjustments are made
accordingly. A provision for warranties on products delivered is made on the basis of our
historical experience and specific warranty issues. Warranties cover such factors as
non-conformance to specifications and defects in material and workmanship. The majority of our
agreements include a three-year warranty, although certain programs have warranties up to 20 years.
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During the year ended December 31, 2008, we increased our provisions for warranty by $9.5
million. Of that increase, $8.2 million was attributable to specific warranty issues identified
during 2008. The following table is a roll-forward of amounts accrued for warranty reserve
included in Current and Long-term liabilities:
Warranty | ||||
Reserve | ||||
($ in millions) | ||||
Balance at December 31, 2007 |
$ | 7.2 | ||
Warranty costs incurred |
(0.6 | ) | ||
Provisions for warranties |
9.5 | |||
Balance at December 31, 2008 |
$ | 16.1 | ||
Warranty costs incurred |
(1.4 | ) | ||
Provisions for warranties |
0.5 | |||
Balance at September 27, 2009 |
$ | 15.2 | ||
Consolidated Balance Sheet classification |
||||
Accrued and other liabilities |
1.4 | |||
Other non-current liabilities |
13.8 |
Note 8- Environmental Contingencies
We accrue environmental liabilities when we determine we are responsible for remediation
costs, it is probable that a liability has been incurred and such liability amounts are reasonably
estimable. When only a range of amounts is estimated and no amount within the range is more
probable than another, the minimum amount in the range is recorded in other current and non-current
liabilities.
The acquisition agreement between Northrop Grumman Corporation and Vought transferred certain
pre-existing (as of July 24, 2000) environmental liabilities to us. We are liable for the first
$7.5 million and 20% of the amount between $7.5 million and $30.0 million for environmental costs
incurred relating to pre-existing matters as of July 24, 2000. Pre-existing environmental
liabilities exceeding our $12.0 million liability limit remain the responsibility of Northrop
Grumman Corporation under the terms of
the acquisition agreement, to the extent they are identified within 10 years from the
acquisition date. Thereafter, to the extent environmental remediation is required for hazardous
materials including asbestos, urea formaldehyde foam insulation or lead-based paints, used as
construction materials in, on, or otherwise affixed to structures or improvements on property
acquired from Northrop Grumman Corporation, we would be responsible. We have no material
outstanding or unasserted asbestos, urea formaldehyde foam insulation or lead-based paint
liabilities, including on property acquired from Northrop Grumman Corporation.
We acquired the Nashville, Tennessee facility from Textron Inc. in 1996. In connection with
that acquisition, Textron agreed to indemnify us for up to $60.0 million against any pre-closing
environmental liabilities with regard to claims made within ten years of the date on which the
facility was acquired, including with respect to a solid waste landfill located onsite that was
closed pursuant to a plan approved by the Tennessee Division of Solid Waste Management. Although
that indemnity was originally scheduled to expire in August 2006, we believe that the agreement may
continue to provide indemnification for certain pre-closing environmental liabilities incurred
beyond that expiration date. While there are no currently pending environmental claims relating to
the Nashville facility, there is no assurance that environmental claims will not arise in the
future, or that such claims will be subject to indemnification.
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The following is a roll-forward of amounts accrued for environmental liabilities included in
Current and Long-term liabilities:
Environmental | ||||
Liability | ||||
($ in millions) | ||||
Balance at December 31, 2007 |
$ | 3.8 | ||
Environmental costs incurred |
(0.6 | ) | ||
Balance at December 31, 2008 |
3.2 | |||
Environmental costs incurred |
(0.4 | ) | ||
Balance at September 27, 2009 |
$ | 2.8 | ||
Consolidated Balance Sheet classification |
||||
Accrued and other liabilities |
0.5 | |||
Other non-current liabilities |
2.3 |
Note 9- Other Non-Current Liabilities
Other non-current liabilities consisted of the following:
September 27, | December 31, | |||||||
2009 | 2008 | |||||||
(in millions) | ||||||||
Deferred income from the sale of
Hawthorne facility (a) |
$ | 12.6 | $ | 11.6 | ||||
State of Texas grant monies (b) |
32.9 | 35.0 | ||||||
Accrued workers compensation |
15.7 | 14.9 | ||||||
Accrued warranties |
13.8 | 15.6 | ||||||
Other |
4.0 | 4.5 | ||||||
Total other non-current liabilities |
$ | 79.0 | $ | 81.6 | ||||
(a) | In July 2005, we sold our Hawthorne facility and concurrently signed an agreement to lease back a certain portion of the facility from July 2005 to December 2010, with two additional five-year renewal options. Due to certain contractual obligations, which required our continuing involvement in the facility, this transaction was initially recorded as a financing transaction and not as a sale. The cash received in July 2005 of $52.6 million was recorded as a deferred liability on our balance sheet in other non-current liabilities. | |
During the fiscal year ended December 31, 2008, we increased the deferred liability balance for a $3.0 million refund from escrow. Additionally, we determined that certain contractual obligations related to the portion of the facility which we have vacated were completed and we recognized $44.0 million of the deferred income balance. We also wrote off the fixed assets related to this portion of the facility resulting in a $1.6 million gain that was recorded in our Consolidated Statement of Operations for the three month period ended September 28, 2008. The $12.6 million liability related to the portion of the Hawthorne facility that we continue to lease will remain on our balance sheet until the related contractual obligations are fulfilled or the obligations expire. | ||
(b) | We reclassified $2.1 million related to the Texas grant to the Accrued and Other Liabilities caption in our Consolidated Balance Sheet due to a potential repayment of grant funds in 2010 based on the agreement. The amount of liability reclassified is an estimate of amounts that may be due in 2010. |
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Note 10- Income Taxes
The Income Taxes topic of the ASC prescribes a more-likely-than-not threshold for financial
statement recognition and measurement of a tax position taken or expected to be taken in an income
tax return. This interpretation also provides guidance on derecognition of income tax assets and
liabilities, classification of current and deferred income tax assets and liabilities, accounting
for interest and penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures. We filed an automatic change of accounting method request in
the 2008 federal income tax return to amend an uncertain tax position. After giving effect to this
adjustment, our unrecognized tax benefit position as of September 27, 2009 was $1.6 million. A
similar adjustment has been recorded to reflect the revised deferred tax assets. Due to the
valuation allowance on the net deferred tax asset, there was no P&L impact associated with the
change in the recorded unrecognized tax position during the period.
During the nine month periods ended September 27, 2009 and September 28, 2008, we incurred a
$0.9 million and $0.2 million expense, respectively, related to the alternative minimum tax
(AMT), which arose because of a limitation on the amount of net operating losses available to
offset projected taxable income. Other than AMT, we have not recorded a federal income tax
provision for any period
presented because the amount provided for federal income taxes are offset by reductions in our
valuation allowance.
Tax incurred from the sale of the 787 business reported as discontinued operations totaled
$15.4 million, of which $9.1 related to federal income tax and $6.3 related to state income tax.
During the nine month period ended September 27, 2008, we utilized approximately $508.6 in federal
net operating loss carryforwards of which $453.4 million related to the sale of the 787 business.
We have $104.6 million of remaining federal net operating loss carryforwards that expire in 2028.
We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.
We are subject to examination by the Internal Revenue Service in the U.S. federal tax jurisdiction
for the 2000-2008 tax years. We are also subject to examination in various state jurisdictions for
the 2000-2008 tax years, none of which were individually material. State tax liabilities will be
adjusted to account for changes in federal taxable income, as well as any adjustments in subsequent
years, as those years are ultimately resolved with the IRS.
Note 11 Stockholders Equity
As of September 27, 2009, we maintained a stock option plan and an incentive award plan under
which we have issued share-based awards to our employees and our directors.
2001 Stock Option Plan
During 2001, we adopted the Amended and Restated 2001 Stock Option Plan of Vought
Aircraft Industries, Inc., under which 1,500,000 shares of common stock were reserved for issuance
for the purpose of providing incentives to employees and directors (the 2001 Stock Option Plan).
Options granted under the plan generally vest within 10 years, but were subject to accelerated
vesting based on the ability to meet company performance targets. The incentive options granted to
our employees are intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code. At September 27, 2009, options granted and outstanding from the 2001 Stock
Option Plan to employees and directors amounted to 520,200 shares of which 456,360 are vested and
exercisable.
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A summary of stock option activity for the nine month period ended September 27, 2009 is as
follows:
Weighted | ||||||||||||
Average | ||||||||||||
Weighted | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Term | |||||||||||
Options | Price | (in Years) | ||||||||||
Outstanding at December 31, 2008 |
547,100 | $ | 15.35 | |||||||||
Granted |
| | ||||||||||
Forfeited or expired |
(26,900 | ) | 11.16 | |||||||||
Exercised |
| | ||||||||||
Outstanding at September 27, 2009 |
520,200 | $ | 15.56 | 2.9 | ||||||||
Vested or expected to vest (a) |
520,200 | $ | 15.56 | 2.9 | ||||||||
Exercisable at September 27, 2009 |
456,360 | $ | 14.91 | 2.9 | ||||||||
(a) | Represents outstanding options reduced by expected forfeitures. Expected forfeitures assumed for this plan were zero. |
Shares Held in Rabbi Trust
A rabbi trust is a grantor trust, typically established to fund deferred compensation for
management. In 2000, we established a rabbi trust in connection with certain income deferrals made
at that time by a number of our then-executives. Shares of company stock were contributed to the
rabbi trust in order to fund the obligations to those executives in connection with those
deferrals. Our stock held in the trust is recorded at historical cost, and the corresponding
deferred compensation liability is recorded at the current fair value of our common stock. Common
stock held in the rabbi trust is classified in equity as Shares held in rabbi trust. During the
three month period ended September 27, 2009, no activity occurred in the rabbi trust account and
158,322 shares remain held in the rabbi trust.
2006 Incentive Plan
During 2006, we adopted the Vought Aircraft Industries, Inc. 2006 Incentive Award Plan
(the 2006 Incentive Plan), under which 2,000,000 shares of common stock are reserved for issuance
for the purposes of providing awards to employees and directors. Since inception, these awards
have been issued in the form of stock appreciation rights (SARs), restricted stock units (RSUs)
and restricted shares.
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Stock Appreciation Rights (SARs)
A summary of SARs activity for the nine month period ended September 27, 2009 is as follows:
Weighted | ||||||||||||
Average | ||||||||||||
Weighted | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Term | |||||||||||
SARs | Price | (in Years) | ||||||||||
Outstanding at December 31, 2008 |
908,450 | $ | 10.00 | 7.9 | ||||||||
Granted |
| | ||||||||||
Forfeited or expired |
(41,047 | ) | 10.00 | |||||||||
Exercised |
(15,563 | ) | 10.00 | |||||||||
Outstanding at September 27, 2009 |
851,840 | $ | 10.00 | 7.2 | ||||||||
Vested or expected to vest (a) |
738,685 | 10.00 | ||||||||||
Exercisable at September 27, 2009 |
588,562 | 10.00 | 7.2 |
(a) | Represents outstanding SARs reduced by expected forfeitures. |
During the nine month period ended September 27, 2009, the exercise of SARs resulted in the
issuance of 1,614 shares of common stock.
Restricted Stock Units (RSUs)
RSUs are awards of stock units that can be converted into common stock. In general,
the awards are eligible to vest over a four-year period if certain performance goals are met. No
RSUs will vest if the performance goals are not met. Certain awards, granted to the CEO and CFO,
vest on the first occurrence of a change in control or a date specified by the agreement.
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A summary of RSUs activity for the nine months ended September 27, 2009 is as follows:
Grant-date | ||||||||
RSUs | Fair-Value | |||||||
Outstanding at December 31, 2008 |
622,925 | $ | 10.65 | |||||
Granted |
7,500 | 9.76 | ||||||
Forfeited or expired |
(16,820 | ) | 15.35 | |||||
Exercised |
| | ||||||
Outstanding at September 27, 2009 |
613,605 | $ | 10.51 | |||||
Vested or expected to vest (a) |
553,140 | |||||||
Vested at September 27, 2009 |
196,394 | $ | 11.89 |
(a) | Represents outstanding RSUs reduced by expected forfeitures. |
Restricted Shares
During the nine month period ended September 27, 2009, we granted 18,810 restricted
shares to outside directors as compensation for their services. These restricted shares vested
during 2009. The restricted shares were valued based on the estimated fair value of our common
stock on the date of issuance.
Note 12 Stock-Based Compensation
As described in Note 11 Stockholders Equity, we maintain a stock option plan and an
incentive award plan under which we have issued equity-based awards to our employees and our
directors. During 2009 and 2008, in accordance with the Compensation Stock Compensation topic of
the ASC, we recognized total compensation expense for all awards as follows:
Stock Compensation Expense | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, | September 28, | September 27, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Stock Options |
$ | | $ | | $ | | $ | | ||||||||
Rabbi Trust |
| | (0.5 | ) | | |||||||||||
Stock appreciation rights (SARs) |
0.1 | 0.2 | 0.3 | 0.6 | ||||||||||||
Restricted stock units (RSUs) |
0.3 | 0.5 | 0.9 | 1.4 | ||||||||||||
Restricted shares |
0.1 | 0.1 | 0.2 | 0.2 | ||||||||||||
Stock compensation expense, gross |
0.5 | 0.8 | 0.9 | 2.2 | ||||||||||||
Change in forfeiture estimate |
| | 0.3 | | ||||||||||||
Stock compensation expense, net |
$ | 0.5 | $ | 0.8 | $ | 1.2 | $ | 2.2 | ||||||||
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The terms and assumptions used in calculating stock compensation expense for each category of
equity-based awards are included below.
Stock Options
Stock options have been granted for a fixed number of shares to employees and directors with
an exercise price equal to no less than the fair value of the shares at the date of grant. No
stock options have been granted since 2005. Under the modified prospective method of the
Compensation Stock Compensation topic of the ASC, we were required to value our stock options
under the fair value method and expense these amounts over the stock options remaining vesting
period. The fair value of each option
is estimated on the date of grant using the Black-Scholes option-pricing model. No additional
stock options have been granted since our application of the modified prospective method. The
amount of stock compensation expense recorded for stock options during the three and nine month
periods ended September 27, 2009 and September 28, 2008 was immaterial.
Shares Held in Rabbi Trust
During the nine month period ended September 27, 2009, we reversed previously recorded stock
compensation expense, included in general and administrative expense, to reflect the impact of an
estimated decrease in the fair value of our common stock. This decrease in value resulted in an
increase to our accrued payroll and employee benefits line item on our balance sheet.
Stock Appreciation Rights (SARs)
SARs have been granted to employees and directors with an exercise price equal to no less
than the fair value of the shares at the date of grant. The fair value of each SAR is estimated on
the date of grant using the Black-Scholes valuation model and based on a number of assumptions
including expected term, volatility and interest rates. Because we do not have publicly traded
equity or reliable historical data to estimate the expected term of the SARs, we used a temporary
simplified method to estimate our expected term. Based on the guidance of the Compensation -
Stock Compensation topic of the ASC, expected volatility was derived from an index of historical
volatilities from several companies that conduct business in the aerospace industry. The risk free
interest rate is based on the U.S. treasury yield curve on the date of grant for the expected term
of the option. Our estimated forfeiture rate was 26% as of September 28, 2008 but was adjusted to
22% during the three month period ended June 28, 2009. We continued to utilize a 22% forfeiture
rate during the three month period ended September 27, 2009
No SARs were granted during the nine month periods ended September 27, 2009 and September 28,
2008. As of September 27, 2009, we had $0.1 million of unrecognized compensation expense remaining
as a result of the grants made in prior years.
Restricted Stock Units (RSUs)
The value of each RSU awarded is based on the estimated fair value of our common stock on the
date of issuance in accordance with the Compensation Stock Compensation topic of the ASC.
Because we do not have publicly traded equity, we use an independent third party valuation firm to
compute the fair market value of our common stock. Our estimated forfeiture rate was 26% as of
September 28, 2008 but was adjusted to 22% during the three month period ended June 28, 2009. We
continued to utilize a 22% forfeiture rate during the three month period ended September 27, 2009.
However, no forfeiture rate was used in our calculation of the grants to the CEO and CFO that vest
upon the first occurrence of a change in control or a date specified in the agreement, due to our
assumption that they will remain employed until the vesting of these awards. As of September 27,
2009, we had $0.9 million of unrecognized compensation expense remaining.
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Restricted Shares
The
restricted shares granted during the nine month period ended
September 27, 2009 vested during 2009. Those shares were valued based on the estimated fair value of our
common stock on the date of issuance.
Note 13 Investment in Joint Venture
In April 2005, we entered into a joint venture agreement with Alenia North America (Alenia),
a subsidiary of Finmeccanica SpA, to form a limited liability company called Global Aeronautica,
LLC
(Global Aeronautica), which integrates major components of the fuselage and performs related
testing activities for the Boeing 787 program. We and Alenia, each had a 50% interest in Global
Aeronautica.
On June 10, 2008, we sold our equity interest in Global Aeronautica to Boeing for $55.0
million in cash and as a result, recorded a $47.1 million gain on the sale during the fiscal year
ended December 31, 2008. Our results of operations are no longer impacted by this joint venture.
Note 14 Long-Term Debt
Our total outstanding long-term debt as of September 27, 2009 was $592.5 million which
included $322.5 million incurred under our senior credit facilities and $270.0 million of 8% Senior
Notes due 2011 (Senior Notes). The $322.5 million balance under our senior credit facilities
reflected on the Consolidated Balance Sheet includes $325.2 million in outstanding term loans, net
of $2.7 million of unamortized original issue discount. The following paragraphs include further
details on the components of the Long-term debt balances in our Consolidated Balance Sheet.
On July 2, 2003, we issued $270.0 million of Senior Notes with interest payable on January 15
and July 15 of each year, beginning January 15, 2004. We may redeem the notes in full or in part
by paying premiums specified in the indenture governing our outstanding Senior Notes. The notes
are senior unsecured obligations guaranteed by all of our existing and future domestic
subsidiaries. The fair value of our Senior Notes was approximately $267.3 million and $183.6
million as of September 27, 2009 and December 31, 2008, respectively, based on quoted market
prices.
We entered into $650.0 million of senior credit facilities pursuant to a credit agreement
dated December 22, 2004 (Credit Agreement). Upon issuance, our senior credit facilities were
comprised of a $150.0 million six year revolving loan (Revolver), a $75.0 million synthetic
letter of credit facility and a $425.0 million seven year term loan B. Initially, the seven year
term loan B amortized at $1.0 million per quarter with a final payment at the maturity date of
December 22, 2011.
On May 6, 2008, we borrowed an additional $200.0 million of term loans pursuant to our
existing senior credit facilities (the Incremental Facility). We received net proceeds of
approximately $184.6 million from the Incremental Facility net of a $10.0 million original issue
discount and $5.4 million of debt origination costs, to be used for general corporate purposes.
The interest rates per annum applicable to the Incremental Facility were, at our option, the ABR or
Eurodollar Base Rate plus, in each case, an applicable margin equal to 3.00% for ABR loans and
4.00% for Eurodollar Base Rate loans, subject to a Eurodollar Base Rate floor of 3.50%. During the
three month period ended September 27, 2009, we paid down $355.0 million of outstanding term loans
including a portion of the Incremental Facility. Additionally, we expensed $5.7 million of debt
issuance costs and original issue discount related to the pay down of the Incremental Facility.
Our effective interest rates on the Incremental Facility for the three and nine month periods ended
September 28, 2009 were 38.4% and 15.2%, respectively. However, excluding the impact of $5.7
million of debt issuance costs and original issue discount, the effective interest rates were 12.3%
and 10.5% for the three and nine month periods ended September 28, 2009, respectively.
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Except for amortization and interest rate, the terms of the Incremental Facility, upon
issuance, including mandatory prepayments, representations and warranties, covenants and events of
default, were the same as those applicable to the existing term loans under our senior credit
facilities and all references to our senior credit facilities included the Incremental Facility.
The term loans under the Incremental Facility were initially repayable in equal quarterly
installments of $470,000, with the balance due on December 22, 2011.
On January 31, 2009, under the terms of our credit agreement, we exercised our option to
convert $25.0 million of the synthetic letter of credit facility to a term loan. The $25.0 million
term loan is subject
to the same terms and conditions as the outstanding term loans made as of December 2004. As a
result, our limit under the synthetic letter of credit facility was reduced to $50.0 million.
On July 30, 2009 we entered into an Amendment to our Credit Agreement (Amendment) which
modified the Credit Agreement to allow the sale of our 787 business (discussed in Note 3 -
Discontinued Operations) and provided for use of cash proceeds from the transaction to (i) pay down
$355.0 million of term loans outstanding and (ii) repay outstanding amounts on our revolver of
$135.0 million and to permanently reduce revolving commitments under the Credit Agreement to $100.0
million. The Amendment converted the synthetic letter of credit facility under the Credit
Agreement into additional term loan of $50.0 million, a portion of which is used as cash collateral
for letters of credit previously issued under the synthetic letter of credit facility. As of
September 27, 2009, the cash restricted as collateral for outstanding letters of credit was $43.7
million. The Amendment increased the interest rate on all loans to London Interbank Offering Rate
(LIBOR) plus a margin of 4.00%, with a minimum LIBOR floor of 3.50%.
Under the terms of the senior credit facility, we are required to prepay or refinance any
amounts outstanding of our $270.0 million Senior Notes by the last business day of 2010 or we must
repay the aggregate amount of loans outstanding at that time under the senior credit facility
unless a lender waives such prepayment (so long as a majority of our lenders (voting on a class
basis) agree to such waiver). We may not be able to refinance the Senior Notes on commercially
reasonable terms or at all. This risk could impair our ability to fund our operations, limit our
ability to expand our business or increase our interest expense, which could have a material
adverse effect on our financial results.
In August 2009, Barclays Bank PLC replaced Lehman Commercial Paper, Inc. as the
administrative and collateral agent under our existing senior credit facilities.
Note 15- Related Party Transactions
A management agreement between us and our controlling stockholder, The Carlyle Group, requires
us to pay an annual fee of $2.0 million for various management services. We incurred fees of $0.5
million and $1.5 million pursuant to this management agreement for the three and nine month periods
ended September 27, 2009 and September 28, 2008, respectively. The Carlyle Group also serves, in
return for additional fees, as our financial advisor for mergers, acquisitions, dispositions and
other strategic and financial activities. In connection with the sale of our 787 business
(discussed in Note 3 Discontinued Operations), we have paid approximately $3.0 million to The
Carlyle Group during the three months ended September 27, 2009.
23
Table of Contents
Since 2002, we have had an ongoing commercial relationship with Wesco Aircraft Hardware Corp.
(Wesco), a distributor of aerospace hardware and provider of inventory management services. Wesco
currently provides aerospace hardware to us pursuant to long-term contracts. On September 29,
2006, The Carlyle Group acquired a majority stake in Wesco, and as a result, we are both now under
common control of The Carlyle Group through its affiliated funds. In addition, four of our
directors, Messrs. Squier, Clare, Palmer and Jumper, also serve on the board of directors of Wesco.
The Carlyle Group may indirectly benefit from their economic interest in Wesco from its contractual
relationships with us. The total amount paid to Wesco pursuant to our contracts with Wesco for the
three month periods ended September 27, 2009 and September 28, 2008 was approximately $8.0 million
and $6.0 million,
respectively. Approximately, $19.8 million and $21.1 million was paid to Wesco pursuant to
our contracts with Wesco for the nine month periods ended September 27, 2009 and September 28,
2008.
As a result of a competitive procurement, in September 2009, we entered into an agreement with
Wesco on a long-term contract to provide hardware requirements for various programs. That
agreement extends through November 2014 with an estimated contract value of approximately $175.0
million.
In connection with the sale of our 787 business (discussed in Note 3 Discontinued
Operations), two of our agreements with Wesco were assigned to a subsidiary of Boeing.
Approximately $3.2 million and $4.3 million was paid to Wesco under those agreements for the nine
month periods ending September 27, 2009 and September 28, 2008, respectively.
We also have an ongoing commercial relationship with Gardner Group Ltd (Gardner Group), a
supplier of metallic aerostructure details, equipment and engine components to the global aviation
industry. Gardner Group currently provides aerospace parts to us. The most recent agreement with
the Gardner Group was entered into on November 5, 2007. On November 3, 2008, The Carlyle Group
acquired a majority equity interest in the Gardner Group, and as a result, the Gardner Group and
our company are both now under common control of The Carlyle Group through its affiliated funds.
The Carlyle Group may indirectly benefit from their economic interest in Gardner Group from its
contractual relationships with us. The total amount paid to Gardner Group pursuant to our
contracts with Gardner Group for the three and nine month periods ended September 27, 2009 was $0.7
million and $1.1 million, respectively.
Note 16- Guarantor Subsidiaries
The 8% Senior Notes due 2011 are fully and unconditionally and jointly and severally
guaranteed, on a senior unsecured basis, by our 100% owned subsidiaries. In accordance with
criteria established under Rule 3-10(f) of Regulation S-X under the Securities Act of 1933, as
amended (the Securities Act), summarized financial information of Vought and its guarantor
subsidiaries is presented below:
24
Table of Contents
Vought Aircraft Industries, Inc.
Consolidating Balance Sheet
September 27, 2009
(dollars in millions, except par value per share) (Unaudited)
Consolidating Balance Sheet
September 27, 2009
(dollars in millions, except par value per share) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Total | |||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 150.3 | $ | 0.1 | $ | | $ | 150.4 | ||||||||
Restricted cash |
43.7 | | | 43.7 | ||||||||||||
Trade and other receivables |
119.5 | 7.6 | | 127.1 | ||||||||||||
Intercompany receivable |
20.9 | 8.3 | (29.2 | ) | | |||||||||||
Inventories |
462.1 | 16.9 | | 479.0 | ||||||||||||
Other current assets |
5.0 | 0.6 | | 5.6 | ||||||||||||
Total current assets |
801.5 | 33.5 | (29.2 | ) | 805.8 | |||||||||||
Property, plant and equipment, net |
263.9 | 8.9 | | 272.8 | ||||||||||||
Goodwill |
341.1 | 63.7 | | 404.8 | ||||||||||||
Identifiable intangible assets, net |
22.1 | | | 22.1 | ||||||||||||
Debt origination costs, net and other
assets |
6.1 | 0.1 | | 6.2 | ||||||||||||
Investment in affiliated company |
78.3 | | (78.3 | ) | | |||||||||||
Total assets |
$ | 1,513.0 | $ | 106.2 | $ | (107.5 | ) | $ | 1,511.7 | |||||||
Liabilities and stockholders equity
(deficit) |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable, trade |
$ | 122.0 | 4.4 | | $ | 126.4 | ||||||||||
Intercompany payable |
8.3 | 20.9 | (29.2 | ) | | |||||||||||
Accrued and other liabilities |
80.6 | 1.2 | | 81.8 | ||||||||||||
Accrued payroll and employee benefits |
45.5 | 1.4 | | 46.9 | ||||||||||||
Accrued post-retirement benefits-current |
42.2 | | | 42.2 | ||||||||||||
Accrued pension-current |
0.6 | | | 0.6 | ||||||||||||
Current portion of long-term bank debt |
5.9 | | | 5.9 | ||||||||||||
Accrued contract liabilities |
112.4 | | | 112.4 | ||||||||||||
Total current liabilities |
417.5 | 27.9 | (29.2 | ) | 416.2 | |||||||||||
Long-term liabilities: |
||||||||||||||||
Accrued post-retirement benefits |
368.5 | | | 368.5 | ||||||||||||
Accrued pension |
658.1 | | | 658.1 | ||||||||||||
Long-term bank debt, net of current
portion |
316.6 | | | 316.6 | ||||||||||||
Long-term bond debt |
270.0 | | | 270.0 | ||||||||||||
Other non-current liabilities |
79.0 | | | 79.0 | ||||||||||||
Total liabilities |
2,109.7 | 27.9 | (29.2 | ) | 2,108.4 | |||||||||||
Stockholders equity (deficit): |
||||||||||||||||
Common stock, par value $.01 per share;
50,000,000 shares authorized,
24,818,806 issued and outstanding at
September 27, 2009 |
0.3 | | | 0.3 | ||||||||||||
Additional paid-in capital |
422.2 | 80.3 | (80.3 | ) | 422.2 | |||||||||||
Shares held in rabbi trust |
(1.6 | ) | | | (1.6 | ) | ||||||||||
Accumulated deficit |
(220.7 | ) | (2.0 | ) | 2.0 | (220.7 | ) | |||||||||
Accumulated other comprehensive loss |
(796.9 | ) | | | (796.9 | ) | ||||||||||
Total stockholders equity (deficit) |
$ | (596.7 | ) | $ | 78.3 | $ | (78.3 | ) | $ | (596.7 | ) | |||||
Total liabilities and stockholders equity
(deficit) |
$ | 1,513.0 | $ | 106.2 | $ | (107.5 | ) | $ | 1,511.7 | |||||||
25
Table of Contents
Vought Aircraft Industries, Inc.
Consolidating Balance Sheet
December 31, 2008
($ in millions, except share amounts) (unaudited)
Consolidating Balance Sheet
December 31, 2008
($ in millions, except share amounts) (unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Total | |||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 86.6 | $ | 0.1 | $ | | $ | 86.7 | ||||||||
Trade and other receivables |
131.1 | 7.4 | | 138.5 | ||||||||||||
Intercompany receivable |
21.1 | 8.3 | (29.4 | ) | | |||||||||||
Inventories |
297.7 | 14.1 | | 311.8 | ||||||||||||
Assets related to discontinued operations |
460.7 | 460.7 | ||||||||||||||
Other current assets |
4.2 | 0.5 | | 4.7 | ||||||||||||
Total current assets |
1,001.4 | 30.4 | (29.4 | ) | 1,002.4 | |||||||||||
Property, plant and equipment, net |
271.2 | 8.0 | | 279.2 | ||||||||||||
Goodwill |
341.1 | 63.7 | | 404.8 | ||||||||||||
Identifiable intangible assets, net |
27.2 | | | 27.2 | ||||||||||||
Debt origination costs, net and other
assets |
12.9 | 1.1 | | 14.0 | ||||||||||||
Investment in affiliated company |
76.4 | | (76.4 | ) | | |||||||||||
Total assets |
$ | 1,730.2 | $ | 103.2 | $ | (105.8 | ) | $ | 1,727.6 | |||||||
Liabilities and stockholders equity
(deficit) |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable, trade |
$ | 144.5 | $ | 4.0 | $ | | $ | 148.5 | ||||||||
Intercompany payable |
8.3 | 21.1 | (29.4 | ) | | |||||||||||
Accrued and other liabilities |
57.4 | 0.1 | | 57.5 | ||||||||||||
Accrued payroll and employee benefits |
46.5 | 1.6 | | 48.1 | ||||||||||||
Accrued post-retirement benefits-current |
42.0 | | | 42.0 | ||||||||||||
Accrued pension-current |
0.3 | | | 0.3 | ||||||||||||
Current portion of long-term bank debt |
5.9 | | | 5.9 | ||||||||||||
Liabilities related to discontinued
operations |
156.7 | 156.7 | ||||||||||||||
Accrued contract liabilities |
141.1 | | | 141.1 | ||||||||||||
Total current liabilities |
602.7 | 26.8 | (29.4 | ) | 600.1 | |||||||||||
Long-term liabilities: |
||||||||||||||||
Accrued post-retirement benefits |
405.3 | | | 405.3 | ||||||||||||
Accrued pension |
710.7 | | | 710.7 | ||||||||||||
Long-term bank debt, net of current
portion |
594.0 | | | 594.0 | ||||||||||||
Long-term bond debt |
270.0 | | | 270.0 | ||||||||||||
Other non-current liabilities |
81.6 | | | 81.6 | ||||||||||||
Total liabilities |
2,664.3 | 26.8 | (29.4 | ) | 2,661.7 | |||||||||||
Stockholders equity (deficit): |
||||||||||||||||
Common stock, par value $.01 per share;
50,000,000 shares authorized, 24,798,382
issued and outstanding at December 31,
2008 |
0.3 | | | 0.3 | ||||||||||||
Additional paid-in capital |
420.5 | 80.3 | (80.3 | ) | 420.5 | |||||||||||
Shares held in rabbi trust |
(1.6 | ) | | | (1.6 | ) | ||||||||||
Accumulated deficit |
(501.3 | ) | (3.9 | ) | 3.9 | (501.3 | ) | |||||||||
Accumulated other comprehensive loss |
(852.0 | ) | | | (852.0 | ) | ||||||||||
Total stockholders equity (deficit) |
$ | (934.1 | ) | $ | 76.4 | $ | (76.4 | ) | $ | (934.1 | ) | |||||
Total liabilities and stockholders equity
(deficit) |
$ | 1,730.2 | $ | 103.2 | $ | (105.8 | ) | $ | 1,727.6 | |||||||
26
Table of Contents
Vought Aircraft Industries, Inc.
Consolidating Statement of Operations
Three Months Ended September 27, 2009
(in millions) (Unaudited)
Consolidating Statement of Operations
Three Months Ended September 27, 2009
(in millions) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Totals | |||||||||||||
Revenue |
$ | 431.4 | $ | 18.0 | $ | (2.7 | ) | $ | 446.7 | |||||||
Costs and expenses |
||||||||||||||||
Cost of sales |
363.0 | 15.7 | (2.7 | ) | 376.0 | |||||||||||
Selling, general and
administrative expenses |
28.8 | 1.4 | | 30.2 | ||||||||||||
Total costs and expenses |
391.8 | 17.1 | (2.7 | ) | 406.2 | |||||||||||
Operating income |
39.6 | 0.9 | | 40.5 | ||||||||||||
Other income (expense) |
||||||||||||||||
Interest income |
0.2 | | | 0.2 | ||||||||||||
Other gain |
| | | | ||||||||||||
Interest expense |
(20.6 | ) | | | (20.6 | ) | ||||||||||
Equity in income (loss) of
consolidated subsidiaries |
0.9 | | (0.9 | ) | | |||||||||||
Income (loss) before income taxes |
20.1 | 0.9 | (0.9 | ) | 20.1 | |||||||||||
Income tax expense |
0.9 | | | 0.9 | ||||||||||||
Income (loss) from continuing
operations |
19.2 | 0.9 | (0.9 | ) | 19.2 | |||||||||||
Income (loss) from discontinued
operations,
net of tax |
219.4 | | | 219.4 | ||||||||||||
Net income (loss) |
$ | 238.6 | $ | 0.9 | $ | (0.9 | ) | $ | 238.6 | |||||||
Vought Aircraft Industries, Inc.
Consolidating Statement of Operations
Three Months Ended September 28, 2008
(in millions) (Unaudited)
Consolidating Statement of Operations
Three Months Ended September 28, 2008
(in millions) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Totals | |||||||||||||
Revenue |
$ | 466.7 | $ | 15.4 | $ | (4.8 | ) | $ | 477.3 | |||||||
Costs and expenses |
||||||||||||||||
Cost of sales |
398.1 | 13.8 | (4.8 | ) | 407.1 | |||||||||||
Selling, general and
administrative expenses |
33.5 | 1.4 | | 34.9 | ||||||||||||
Total costs and expenses |
431.6 | 15.2 | (4.8 | ) | 442.0 | |||||||||||
Operating income (loss) |
35.1 | 0.2 | | 35.3 | ||||||||||||
Other income (expense) |
||||||||||||||||
Interest income |
1.3 | | | 1.3 | ||||||||||||
Other gain (loss) |
1.6 | | | 1.6 | ||||||||||||
Interest expense |
(17.4 | ) | | | (17.4 | ) | ||||||||||
Equity in income (loss) of
consolidated subsidiaries |
0.2 | | (0.2 | ) | | |||||||||||
Income (loss) before income taxes |
20.8 | 0.2 | (0.2 | ) | 20.8 | |||||||||||
Income taxes |
0.2 | | | 0.2 | ||||||||||||
Income (loss) from continuing
operations |
20.6 | 0.2 | (0.2 | ) | 20.6 | |||||||||||
Income (loss) from discontinued
operations,
net of tax |
(5.0 | ) | | | (5.0 | ) | ||||||||||
Net income (loss) |
$ | 15.6 | $ | 0.2 | $ | (0.2 | ) | $ | 15.6 | |||||||
27
Table of Contents
Vought Aircraft Industries, Inc.
Consolidating Statement of Operations
Nine Months Ended September 27, 2009
(in millions) (Unaudited)
Consolidating Statement of Operations
Nine Months Ended September 27, 2009
(in millions) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Totals | |||||||||||||
Revenue |
$ | 1,278.8 | $ | 53.7 | $ | (10.2 | ) | $ | 1,322.3 | |||||||
Costs and expenses |
||||||||||||||||
Cost of sales |
1,071.8 | 47.9 | (10.2 | ) | 1,109.5 | |||||||||||
Selling, general and
administrative expenses |
97.3 | 3.9 | | 101.2 | ||||||||||||
Total costs and expenses |
1,169.1 | 51.8 | (10.2 | ) | 1,210.7 | |||||||||||
Operating income |
109.7 | 1.9 | | 111.6 | ||||||||||||
Other income (expense) |
||||||||||||||||
Interest income |
0.6 | | | 0.6 | ||||||||||||
Other gain |
| | | | ||||||||||||
Interest expense |
(44.5 | ) | | | (44.5 | ) | ||||||||||
Equity in income (loss) of
consolidated subsidiaries |
1.9 | | (1.9 | ) | | |||||||||||
Income (loss) before income taxes |
67.7 | 1.9 | (1.9 | ) | 67.7 | |||||||||||
Income tax expense |
0.9 | | | 0.9 | ||||||||||||
Income (loss) from continuing
operations |
66.8 | 1.9 | (1.9 | ) | 66.8 | |||||||||||
Income (loss) from discontinued
operations,
net of tax |
213.8 | | | 213.8 | ||||||||||||
Net income (loss) |
$ | 280.6 | $ | 1.9 | $ | (1.9 | ) | $ | 280.6 | |||||||
Vought Aircraft Industries, Inc.
Consolidating Statement of Operations
Nine Months Ended September 28, 2008
(in millions) (Unaudited)
Consolidating Statement of Operations
Nine Months Ended September 28, 2008
(in millions) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Totals | |||||||||||||
Revenue |
$ | 1,325.4 | $ | 52.5 | $ | (15.9 | ) | $ | 1,362.0 | |||||||
Costs and expenses |
||||||||||||||||
Cost of sales |
1,058.9 | 46.1 | (15.9 | ) | 1,089.1 | |||||||||||
Selling, general and
administrative expenses |
121.8 | 4.3 | 126.1 | |||||||||||||
Total costs and expenses |
1,180.7 | 50.4 | (15.9 | ) | 1,215.2 | |||||||||||
Operating income (loss) |
144.7 | 2.1 | | 146.8 | ||||||||||||
Other income (expense) |
||||||||||||||||
Interest income |
2.3 | | | 2.3 | ||||||||||||
Other loss |
48.7 | | | 48.7 | ||||||||||||
Equity in loss of joint venture |
(0.6 | ) | | | (0.6 | ) | ||||||||||
Interest expense |
(49.6 | ) | | | (49.6 | ) | ||||||||||
Equity in income (loss) of
consolidated subsidiaries |
2.1 | | (2.1 | ) | | |||||||||||
Income (loss) before income taxes |
147.6 | 2.1 | (2.1 | ) | 147.6 | |||||||||||
Income taxes |
0.2 | | | 0.2 | ||||||||||||
Income (loss) from continuing
operations |
147.4 | 2.1 | (2.1 | ) | 147.4 | |||||||||||
Income (loss) from discontinued
operations,
net of tax |
(23.8 | ) | | | (23.8 | ) | ||||||||||
Net income (loss) |
$ | 123.6 | $ | 2.1 | $ | (2.1 | ) | $ | 123.6 | |||||||
28
Table of Contents
Vought Aircraft Industries, Inc.
Consolidating Cash Flow Statement
Nine Months Ended September 27, 2009
(in millions) (Unaudited)
Consolidating Cash Flow Statement
Nine Months Ended September 27, 2009
(in millions) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Total | |||||||||||||
Operating activities |
||||||||||||||||
Net income (loss) |
$ | 280.6 | $ | 1.9 | $ | (1.9 | ) | $ | 280.6 | |||||||
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
||||||||||||||||
Depreciation and amortization |
54.5 | 1.2 | | 55.7 | ||||||||||||
Stock compensation expense |
1.2 | | | 1.2 | ||||||||||||
(Gain)/Loss from asset disposals |
41.7 | | | 41.7 | ||||||||||||
Income from investments in consolidated
subsidiaries |
(1.9 | ) | | 1.9 | | |||||||||||
Changes in current assets and liabilities: |
||||||||||||||||
Trade and other receivables |
2.0 | (0.2 | ) | | 1.8 | |||||||||||
Intercompany accounts receivable |
0.2 | | (0.2 | ) | | |||||||||||
Inventories |
(166.8 | ) | (2.8 | ) | | (169.6 | ) | |||||||||
Other current assets |
(0.8 | ) | (0.1 | ) | | (0.9 | ) | |||||||||
Accounts payable, trade |
(28.8 | ) | 0.4 | | (28.4 | ) | ||||||||||
Intercompany accounts payable |
| (0.2 | ) | 0.2 | | |||||||||||
Accrued payroll and employee benefits |
(0.4 | ) | (0.2 | ) | | (0.6 | ) | |||||||||
Accrued and other liabilities |
23.8 | 1.1 | | 24.9 | ||||||||||||
Accrued contract liabilities |
(41.3 | ) | | | (41.3 | ) | ||||||||||
Other assets and liabilitieslong-term |
(36.8 | ) | 1.0 | | (35.8 | ) | ||||||||||
Net cash provided by (used in) operating activities |
127.2 | 2.1 | | 129.3 | ||||||||||||
Investing activities |
||||||||||||||||
Capital expenditures |
(26.1 | ) | (2.1 | ) | | (28.2 | ) | |||||||||
Proceeds from sale of assets |
289.2 | | | 289.2 | ||||||||||||
Net cash provided by (used in) investing activities |
263.1 | (2.1 | ) | | 261.0 | |||||||||||
Financing activities |
||||||||||||||||
Proceeds from short-term bank debt |
135.0 | | | 135.0 | ||||||||||||
Payments on short-term bank debt |
(135.0 | ) | | | (135.0 | ) | ||||||||||
Proceeds from long-term bank debt |
75.0 | | | 75.0 | ||||||||||||
Payments on long-term bank debt |
(357.9 | ) | | | (357.9 | ) | ||||||||||
Changes in restricted cash |
(43.7 | ) | | | (43.7 | ) | ||||||||||
Net cash provided by (used in) financing activities |
(326.6 | ) | | | (326.6 | ) | ||||||||||
Net increase in cash and cash equivalents |
63.7 | | | 63.7 | ||||||||||||
Cash and cash equivalents at beginning of period |
86.6 | 0.1 | | 86.7 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 150.3 | $ | 0.1 | $ | | $ | 150.4 | ||||||||
29
Table of Contents
Vought Aircraft Industries, Inc.
Consolidating Cash Flow Statement
Nine Months Ended September 28, 2008
(in millions) (Unaudited)
Consolidating Cash Flow Statement
Nine Months Ended September 28, 2008
(in millions) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Total | |||||||||||||
Operating activities |
||||||||||||||||
Net income (loss) |
$ | 123.6 | $ | 2.1 | $ | (2.1 | ) | $ | 123.6 | |||||||
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
||||||||||||||||
Depreciation and amortization |
48.9 | 1.2 | | 50.1 | ||||||||||||
Stock compensation expense |
2.2 | | | 2.2 | ||||||||||||
Equity in losses of joint venture |
0.6 | | | 0.6 | ||||||||||||
(Gain)/Loss from asset disposals |
(50.1 | ) | | | (50.1 | ) | ||||||||||
Income from investments in consolidated
subsidiaries |
(2.1 | ) | | 2.1 | | |||||||||||
Changes in current assets and liabilities: |
||||||||||||||||
Trade and other receivables |
(81.4 | ) | (0.2 | ) | | (81.6 | ) | |||||||||
Intercompany accounts receivable |
0.8 | (1.2 | ) | 0.4 | | |||||||||||
Inventories |
(32.4 | ) | 0.2 | | (32.2 | ) | ||||||||||
Other current assets |
0.5 | (0.1 | ) | | 0.4 | |||||||||||
Accounts payable, trade |
(36.2 | ) | (0.6 | ) | | (36.8 | ) | |||||||||
Intercompany accounts payable |
1.2 | (0.8 | ) | (0.4 | ) | | ||||||||||
Accrued payroll and employee benefits |
(0.8 | ) | 0.4 | | (0.4 | ) | ||||||||||
Accrued and other liabilities |
(9.8 | ) | (0.2 | ) | | (10.0 | ) | |||||||||
Accrued contract liabilities |
(33.0 | ) | | | (33.0 | ) | ||||||||||
Other assets and liabilitieslong-term |
(79.8 | ) | | | (79.8 | ) | ||||||||||
Net cash provided by (used in) operating activities |
(147.8 | ) | 0.8 | | (147.0 | ) | ||||||||||
Investing activities |
||||||||||||||||
Capital expenditures |
(40.5 | ) | (1.2 | ) | | (41.7 | ) | |||||||||
Proceeds from sale of joint venture |
55.0 | | | 55.0 | ||||||||||||
Net cash provided by (used in) investing activities |
14.5 | (1.2 | ) | | 13.3 | |||||||||||
Financing activities |
||||||||||||||||
Proceeds from short-term bank debt |
153.0 | | | 153.0 | ||||||||||||
Payments on short-term bank debt |
(153.0 | ) | | | (153.0 | ) | ||||||||||
Proceeds from Incremental Facility |
184.6 | | | 184.6 | ||||||||||||
Payments on long-term bank debt |
(2.0 | ) | | | (2.0 | ) | ||||||||||
Proceeds from sale of common stock |
0.1 | | | 0.1 | ||||||||||||
Net cash provided by (used in) financing activities |
182.7 | | | 182.7 | ||||||||||||
Net increase
(decrease) in cash and cash equivalents |
49.4 | (0.4 | ) | | 49.0 | |||||||||||
Cash and cash equivalents at beginning of period |
75.1 | 0.5 | | 75.6 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 124.5 | $ | 0.1 | $ | | $ | 124.6 | ||||||||
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Note 17- Fair Value Measurements
The Fair Value Measurements and Disclosures topic of the ASC, defines fair value, provides
guidance for measuring fair value and requires certain disclosures. In accordance with this
guidance, we utilize a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels. The following is a brief description of those
three levels:
| Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. | ||
| Level 2: Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. | ||
| Level 3: Unobservable inputs that reflect the reporting entitys own assumptions. |
As of September 27, 2009, we had $150.1 million of short term investments, primarily money
market funds, reflected at cost, which approximates fair value, in our cash and cash equivalents
balance on our Consolidated Balance Sheet. The fair value determination of this asset involves
Level 2 inputs.
Our deferred compensation liability to former executives is based on the most recently
obtained fair value of our common stock. As of September 27, 2009, the fair value determination of
the $1.4 million deferred compensation liability involves Level 3 inputs. The value of this
liability has declined by $0.5 million since December 31, 2008.
Note 18- Comprehensive Income (Loss)
Comprehensive income (loss) consisted of the following:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 27, | September 28, | September 27, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Income from continuing operations |
$ | 19.2 | $ | 20.6 | $ | 66.8 | $ | 147.4 | ||||||||
Comprehensive income (loss), net of tax |
||||||||||||||||
Pension |
14.1 | 13.6 | 40.0 | 18.4 | ||||||||||||
OPEB |
(5.8 | ) | (7.1 | ) | 15.1 | 30.5 | ||||||||||
Total comprehensive income from
continuing operations |
27.5 | 27.1 | 121.9 | 196.3 | ||||||||||||
Income (loss) from discontinuing
operations, net of tax |
219.4 | (5.0 | ) | 213.8 | (23.8 | ) | ||||||||||
Total comprehensive income, net of tax |
$ | 246.9 | $ | 22.1 | $ | 335.7 | $ | 172.5 | ||||||||
Note 19- Fixed Assets
During the three month period ended June 28, 2009, we capitalized approximately $5.6 million
of interest costs related to our assets-under-construction balance that were expensed in fiscal
periods prior to 2009 in error. We also recorded a corresponding $1.9 million adjustment to
increase depreciation expense, which was recorded to cost of sales during the three month period
ended June 28, 2009. The total impact on net income from these adjustments was approximately $3.7
million. The capitalization also increased our Fixed Assets, net balance by $3.7 million.
Additionally, during the nine month period ended September 27, 2009, we have capitalized interest
costs of $0.8 million related to our current assets-under-construction balance.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion and analysis of our results of operations, financial
condition and liquidity in conjunction with our interim unaudited condensed consolidated financial
statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. Some of
the information contained in this discussion and analysis including information with respect to our
plans and strategies for our business, statements regarding the industry outlook, our expectations
regarding the future performance of our business, and the other non-historical statements contained
herein are forward-looking statements. See Cautionary Statement Regarding Forward-Looking
Statements. You should also review the Risk Factors section of this Quarterly Report on Form
10-Q and our Annual Report on Form 10-K for the year ended December 31, 2008 for a discussion of
important factors that could cause actual results to differ materially from the results described
herein or implied by such forward-looking statements.
Overview
We are a leading global manufacturer and developer of aerostructures serving commercial,
military and business jet aircraft. Our products are used on many of the largest and longest
running programs in the aerospace industry. We generate approximately 50% of our revenues from the
commercial aircraft market but are also diversified across the military and business jet markets,
which provide the balance of our revenues.
Our customer base consists of leading aerospace original equipment manufacturers or OEMs,
including Airbus, Boeing, Cessna, Gulfstream, Hawker Beechcraft, Lockheed Martin, Northrop Grumman
and Sikorsky, as well as the U.S. Air Force. We generate over 80% of our revenues from our three
largest customers, Airbus, Boeing and Gulfstream.
Although the majority of our revenues are generated by sales in the U.S. market, we generate
approximately 12% of our revenue from sales outside of the United States.
Most of our revenues are generated under long-term contracts. Our customers typically place
orders well in advance of required deliveries, which gives us considerable visibility with respect
to our future revenues. These advance orders also generally create a significant backlog for us,
which was approximately $2.6 billion at September 27, 2009. Our calculation of backlog includes
only firm orders for commercial and business jet programs and funded orders for government
programs, which causes our backlog to be substantially lower than the estimated aggregate dollar
value of our contracts and may not be comparable to others in the industry.
For our commercial and business jet programs, changes in the economic environment and the
financial condition of airlines may cause our customers to increase or decrease deliveries,
adjusting firm orders that would affect our backlog. We have received updated delivery schedules
from several of our customers who are slowing production rates in 2009 and beyond. Also, to the
extent the current global financial crisis continues or worsens, overall demand for our commercial
and business aircraft products could continue to decline notwithstanding the growth over the past
three years. For our military aircraft programs, the Department of Defense and other government
agencies have the right to terminate both our contracts and/or our customers contracts either for
default or, if the government deems it to be in its best interest, for convenience.
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The market for our commercial, military and business jet programs has historically been
cyclical. While the commercial, military and business jet markets experienced a period of
increased production over the past few years, as discussed below, unprecedented global market and
economic conditions have been challenging with tighter credit conditions and recessions in most
major economies expected to continue throughout 2009. The cost and availability of credit has been
and may continue to be adversely affected by illiquid credit markets and wider credit spreads.
Concern about the stability of the markets generally and the strength of counterparties
specifically has led many lenders and institutional investors to reduce, and in some cases, cease
to provide credit to businesses and consumers. These factors have led to a decrease in spending by
businesses and consumers alike, and could continue to have an adverse affect on the demand for our
aerostructures by both our commercial customers and the U.S. government. Additionally, continued
turbulence in the U.S. and international markets and economies and prolonged declines in business
and consumer spending could adversely affect our liquidity and financial condition, including our
ability to refinance maturing liabilities and access the capital markets to meet liquidity needs
and the liquidity and financial condition of our customers.
Commercial Aircraft. Sales to the commercial aircraft market are affected by the financial
health of the commercial airline industry, passenger and cargo air traffic, the introduction of new
aircraft models,
and the availability and profile of used aircraft. Beginning in 2009, we have begun receiving
reduced delivery rates from our customers. We expect those reduced delivery rates to continue
through at least the end of 2010.
Military Aircraft. U.S. national defense spending and procurement funding decisions, global
geopolitical conditions, and current operational use of the existing military aircraft fleet drive
sales in the military aircraft market. We believe that the demand for our rotorcraft programs,
which are some of the key equipment being used in military operations, will experience some
pressure during the next several years. Historically, the majority of our military revenues and a
significant portion of our total revenue have been generated from our C-17 program. We currently
have a contract from Boeing that would support C-17 production through April 2011. The Presidents
proposed 2010 budget does not include funding for the procurement of new C-17 aircraft although
Congress has proposed adding funding for additional aircraft. If Congress does not approve the
funding for additional C-17 aircraft, our business could be adversely impacted.
Business Jet Aircraft. Sales to the business jet aircraft market are driven by long-term
economic expansion, the increasing inconvenience of commercial airline travel, growing
international acceptance and demand for business jet travel, fractional ownership of business jets
and the introduction of new business jet models. Beginning in 2009 in response to macro-economic
conditions, we have begun receiving reduced delivery rates from our OEMs and were notified of the
suspension of the Cessna Citation Columbus Model 850 program. We expect those reduced delivery
rates to continue through at least the end of 2010. However, as a major supplier to the
top-selling G350, G450, G500 and G550 and Citation X, we still believe we are well positioned to
operate in key segments of the business jet market when macro-economic conditions improve.
On July 6, 2009, we entered into an agreement to sell the assets and operations of our 787
business conducted at North Charleston, South Carolina to Boeing Commercial Airplanes Charleston
South Carolina, Inc., a wholly owned subsidiary of The Boeing Company. The transaction was
completed on July 30, 2009. Concurrent with the closing of the transaction, we entered into an
agreement terminating the existing 787 supply agreement releasing claims and resolving rights and
obligations, including obligations incurred or created as a result of ordinary course performance
of the 787 supply agreement. Going forward, under a newly negotiated contract, we will manufacture
certain components for the 787 program as well as provide engineering services to Boeing pursuant
to an engineering services agreement. We also will provide certain transition services to Boeing
pursuant to a transition services agreement and perform new work scope on the Boeing 737 and 777
aircraft pursuant to a long-term supply agreement.
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Basis of Presentation
The following provides a brief description of some of the items that appear in our financial
statements and general factors that impact these items. It is our practice to close our books and
records based on a thirteen-week quarter, which can lead to different period end dates for
comparative purposes. The interim financial statements and tables of financial information
included herein are labeled based on that convention. This practice only affects interim periods,
as our fiscal years end on December 31.
Revenue and Profit Recognition. We record revenue and profit for our long-term contracts using
a percentage of completion method with, depending on the contract, either cost-to-cost or
units-of-delivery as our basis to measure progress toward completing the contract.
| Under the cost-to-cost method, progress toward completion is measured as the ratio of total costs incurred to our estimate of total costs at completion. We recognize costs as incurred. Profit is determined based on our estimated profit margin on the contract multiplied by our progress toward completion. Revenue represents the sum of our costs and profit on the contract for the period. | ||
| Under the units-of-delivery method, revenue on a contract is recorded as the units are delivered and accepted during the period at an amount equal to the contractual selling price of those units. The costs recorded on a contract under the units-of-delivery method are equal to the total costs at completion divided by the total units to be delivered. As our contracts can span multiple years, we often segment the contracts into production lots for the purposes of accumulating and allocating cost. Profit is recognized as the difference between revenue for the units delivered and the estimated costs for the units delivered. |
Amounts representing contract change orders or claims are only included in revenue when such
change orders or claims have been settled with our customer and to the extent that units have been
delivered. Additionally, some of our contracts may contain terms or provisions, such as price
re-determination, requests for equitable adjustments or price escalation, which are included in our
estimate of contract value when the amounts can be reliably estimated and their realization is
reasonably assured.
The impact of revisions in estimates is recognized on the cumulative catch-up basis in the
period in which such revisions are made. Changes in our estimates of contract value or profit can
impact revenue and/or cost of sales. For example, in the case of a customer settlement of a pending
change order or claim, we may recognize additional revenue and/or margin depending on the
production lots stage of completion. Provisions for anticipated losses on contracts are recorded
in the period in which they become evident (forward losses).
For
a further discussion of our revenue recognition policy, see Critical Accounting
Policies and Estimates Revenue and Profit Recognition.
Cost of sales. Cost of sales includes direct production costs such as labor (including fringe
benefits), material costs, manufacturing and engineering overhead and production tooling costs.
Examples of costs included in overhead are costs related to quality assurance, information
technology, indirect labor and fringe benefits, depreciation and amortization and other support
costs such as supplies and utilities.
Selling, general and administrative expenses. Selling, general and administrative expenses
include expenses for executive management, program management, business management, human
resources, accounting, treasury, and legal. The major cost elements of selling, general and
administrative expenses include salary and wages, fringe benefits, stock compensation expense,
travel and supplies. In addition, these expenses include period expenses for non-recurring program
development, such as research and development and other non-recurring activities, as well as costs
that are not reimbursed under U.S. Government contract terms.
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Interest expense, net. Interest expense, net reflects interest income and expense, and
includes the amortization of capitalized debt origination costs and the amortization of the
original issue discount on an additional $200.0 million of term loans we borrowed pursuant to our
existing senior credit facilities (Incremental Facility).
Other income (loss). Other income (loss) represents miscellaneous items unrelated to our core
operations.
Equity in loss of joint venture. Equity in loss of joint venture reflected our share of the
loss from Global Aeronautica, a joint venture in which we formerly participated. As a result of
the sale of our equity interest in Global Aeronautica in 2008, our results of operations are no
longer impacted by this joint venture.
Income tax benefit (expense). Income tax benefit (expense) represents federal income tax
provided on our net book income from continuing operations. For a further discussion of our income
tax provision, please see Note 10 Income Taxes.
Income (loss) from discontinued operations, net of tax. Income (loss) from discontinued
operations, net of tax represents the revenue and expenses associated with our 787 business
conducted at North Charleston, South Carolina that was sold to Boeing Commercial Airplanes
Charleston South Carolina, Inc., a wholly owned subsidiary of The Boeing Company on July 30, 2009.
Our gain on the sale of this business is also reflected as income (loss) from discontinued
operations, net of tax. See Note 3 Discontinued Operations in the notes to the interim unaudited
condensed consolidated financial statements included in Item 1.
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Results of Operations
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||||||
September 27, 2009 | September 28, 2008 | $ Change | September 27, 2009 | September 28, 2008 | $ Change | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||
Commercial |
$ | 226.3 | $ | 248.7 | $ | (22.4 | ) | $ | 642.5 | $ | 679.9 | $ | (37.4 | ) | ||||||||||
Military |
168.3 | 144.8 | 23.5 | 476.1 | 440.2 | 35.9 | ||||||||||||||||||
Business Jet |
52.1 | 83.8 | (31.7 | ) | 203.7 | 241.9 | (38.2 | ) | ||||||||||||||||
Total revenue |
$ | 446.7 | $ | 477.3 | $ | (30.6 | ) | $ | 1,322.3 | $ | 1,362.0 | $ | (39.7 | ) | ||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of sales |
376.0 | 407.1 | (31.1 | ) | 1,109.5 | 1,089.1 | 20.4 | |||||||||||||||||
Selling, general
and administrative |
30.2 | 34.9 | (4.7 | ) | 101.2 | 126.1 | (24.9 | ) | ||||||||||||||||
Total costs and expenses |
$ | 406.2 | $ | 442.0 | $ | (35.8 | ) | $ | 1,210.7 | $ | 1,215.2 | $ | (4.5 | ) | ||||||||||
Operating income |
40.5 | 35.3 | 5.2 | 111.6 | 146.8 | (35.2 | ) | |||||||||||||||||
Interest expense, net |
(20.4 | ) | (16.1 | ) | (4.3 | ) | (43.9 | ) | (47.3 | ) | 3.4 | |||||||||||||
Other gain/(loss) |
| 1.6 | (1.6 | ) | | 48.7 | (48.7 | ) | ||||||||||||||||
Equity in loss of joint
venture |
| | | | (0.6 | ) | 0.6 | |||||||||||||||||
Income tax expense |
(0.9 | ) | (0.2 | ) | (0.7 | ) | (0.9 | ) | (0.2 | ) | (0.7 | ) | ||||||||||||
Income from continuing
operations |
$ | 19.2 | $ | 20.6 | $ | (1.4 | ) | $ | 66.8 | $ | 147.4 | $ | (80.6 | ) | ||||||||||
Income (loss) from
discontinued
operations, net of tax |
219.4 | (5.0 | ) | 224.4 | 213.8 | (23.8 | ) | 237.6 | ||||||||||||||||
Net income |
$ | 238.6 | $ | 15.6 | $ | 223.0 | $ | 280.6 | $ | 123.6 | $ | 157.0 | ||||||||||||
Comparison of Results of Operations for the Three Months Ended September 27, 2009 and September 28,
2008
Revenues. Revenue for the three months ended September 27, 2009 was $446.7 million, a decrease of
$30.6 million, or 6%, compared with the same period in the prior year. When comparing the third
quarter of 2009 with the same period in the prior year:
| Commercial revenue decreased $22.4 million, or 9%, primarily due to a $20.4 million decrease in sales resulting from the completion of one of our Airbus programs in the second quarter of 2009. | ||
| Military revenue increased $23.5 million, or 16% mainly due increased deliveries for the V-22 and C-130 programs as well as higher spares deliveries for C-17. | ||
| Business Jet revenue decreased $31.7 million, or 38%, primarily due to reduced delivery rates directed by our customers. |
Operating income. Operating income from continuing operations for the three months ended September
27, 2009 was $40.5 million, an increase of $5.2 million, or 15%, compared with $35.3 million for
the comparable period in the prior year. This increase was largely due to completion of the
amortization of the intangible asset related to the 747-400 program in 2008.
Interest expense, net. Interest expense, net for the three month period ended September 27, 2009
was $20.4 million, an increase of $4.3 million, or 27%, compared with $16.1 million for the same
period in the prior year. Interest expense increased primarily due to the acceleration of $7.1
million of debt origination costs from the pay down of $355.0 million term loans outstanding
resulting from the 787 transaction partially offset by a reduction in the effective interest rate
on our variable rate indebtedness excluding the acceleration.
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Income (loss) from discontinued operations, net of tax. Income from discontinued operations, net
of tax for the three month period ended September 27, 2009 was $219.4 million primarily due to the
previously announced 787 transaction recorded during the period. This transaction included $275.0
million of income recognized for the resolution of 787 contractual issues as well as a $39.8
million loss on the sale of our 787 business.
Comparison of Results of Operations for the Nine Months Ended September 27, 2009 and September 28,
2008
Revenues. Revenue for the nine months ended September 27, 2009 was $1,322.3 million, a decrease of
$39.7 million, or 3%, compared with the same period in the prior year. When comparing the nine
months ended September 27, 2009 with the same period in the prior year:
| Commercial revenue decreased $37.4 million, or 6%, primarily due to a $42.5 million decrease in sales resulting from the completion of one of our Airbus programs in the second quarter of 2009 | ||
| Military revenue increased $35.9 million, or 8%, primarily due to increased deliveries on the V-22 program, C-130 program and spares deliveries for the C-17 program. | ||
| Business Jet revenue decreased $38.2 million, or 16%, primarily due to reduced delivery rates directed by our customers. |
Operating income. Operating income for the nine months ended September 27, 2009 was $111.6
million, a decrease of $35.2 million, or 24%, compared with $146.8 million for the same period in
the prior year. There were several unusual items that contributed to the decrease including the
absence in 2009 of the one-time release of $22.6 million of purchase accounting reserves for the
747 program reflecting the updated timeline for the completion of the deliveries for the 747-400
model. Also, non-recurring costs of $9.6 million were recorded during the period reflecting the
impact of the pension and other post-retirement benefits curtailment resulting from the 2009
collective bargaining agreement with the International Association of Machinists at our Nashville,
Tennessee facility. In addition to these items, overall program margins were lower due to the cost
pressures mentioned above as well as lower margins recognized on non-recurring sales.
Interest expense, net. Interest expense, net for the nine month period ended September 27, 2009
was $43.9 million, a decrease of $3.4 million, or 7%, compared with $47.3 million for the same
period in the prior year. Interest expense decreased primarily due to the adjustment during the
second quarter of 2009 to capitalize approximately $5.6 million of interest costs to appropriately
reflect the book value of Property, Plant and Equipment included in our assets-under-construction
balance in fiscal periods prior to 2009. The remainder of the decrease resulted from a reduction
in the effective interest rate on our variable rate indebtedness partially offset by the
acceleration of $7.1 million of debt origination costs from the pay down of $355.0 million term
loans outstanding resulting from the 787 transaction.
Other gain (loss). Other gain for the nine month period ended September 28, 2008 primarily
reflected the $47.1 million gain from the sale of our equity interest in our Global Aeronautica
joint venture. We did not have a similar transaction during the nine month period ended September
27, 2009.
Income (loss) from discontinued operations, net of tax. Income from discontinued operations, net
of tax for the nine month period ended September 27, 2009 was $213.8 million primarily due to the
previously announced 787 transaction recorded during the period. This transaction included $275.0
million of income recognized for the resolution of 787 contractual issues as well as a $39.8
million loss on the sale of our 787 business.
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Critical Accounting Policies
Our financial statements have been prepared in conformity with US GAAP. The preparation of the
financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingencies at the date of the financial
statements as well as the reported amounts of revenues and expenses during the reporting period.
Estimates have been prepared on the basis of the most current and best available information.
Actual results could differ materially from those estimates.
Revenue Recognition
The majority of our sales are made pursuant to written contractual arrangements or
''contracts to design, develop and manufacture aerostructures to the specifications of the
customer under firm fixed price contracts. These contracts are within the scope of the Revenue -
Construction-Type and Production-Type Contracts topic of the ASC and revenue and costs on contracts
are recognized using percentage-of-completion methods of accounting. Accounting for the revenue
and profit on a contract requires estimates of (1) the contract value or total contract revenue,
(2) the total costs at completion, which is equal to the sum of the actual incurred costs to date
on the contract and the estimated costs to complete the contracts scope of work and (3) the
measurement of progress towards completion. Depending on the contract, we measure progress toward
completion using either the cost-to-cost method or the units-of-delivery method.
| Under the cost-to-cost method, progress toward completion is measured as the ratio of total costs incurred to our estimate of total costs at completion. We recognize costs as incurred. Profit is determined based on our estimated profit margin on the contract multiplied by our progress toward completion. Revenue represents the sum of our costs and profit on the contract for the period. | ||
| Under the units-of-delivery method, revenue on a contract is recorded as the units are delivered and accepted during the period at an amount equal to the contractual selling price of those units. The costs recorded on a contract under the units-of-delivery method are equal to the total costs at completion divided by the total units to be delivered. As our contracts can span multiple years, we often segment the contracts into production lots for the purposes of accumulating and allocating cost. Profit is recognized as the difference between revenue for the units delivered and the estimated costs for the units delivered. |
Adjustments to original estimates for a contracts revenues, estimated costs at completion and
estimated total profit are often required as work progresses under a contract, as experience is
gained and as more information is obtained, even though the scope of work required under the
contract may not change, or if contract modifications occur. These estimates are also sensitive to
the assumed rate of production. Generally, the longer it takes to complete the contract quantity,
the more relative overhead that contract will absorb. The impact of revisions in cost estimates is
recognized on a cumulative catch-up basis in the period in which the revisions are made.
Provisions for anticipated losses on contracts are recorded in the period in which they become
evident (''forward losses) and are first offset against costs that are included in inventory,
with any remaining amount reflected in accrued contract liabilities in accordance with the
Construction and Production-Type Contracts topic. Revisions in contract estimates, if significant,
can materially affect our results of operations and cash flows, as well as our valuation of
inventory. Furthermore, certain contracts are combined or segmented for revenue recognition in
accordance with the Construction and Production-Type Contracts topic.
Advance payments and progress payments received on contracts-in-process are first offset
against related contract costs that are included in inventory, with any remaining amount reflected
in current liabilities.
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Accrued contract liabilities consisted of the following:
September 27, | December 31, | |||||||
2009 | 2008 | |||||||
(in millions) | ||||||||
Advances and progress billings |
$ | 96.0 | $ | 126.8 | ||||
Forward loss |
6.7 | 6.4 | ||||||
Other |
9.7 | 7.9 | ||||||
Total accrued contract liabilities |
$ | 112.4 | $ | 141.1 | ||||
Goodwill
Goodwill is tested for impairment, at least annually, in accordance with the provisions of the
Intangibles Goodwill and Other topic of the ASC. Under this topic, the first step of the
goodwill impairment test used to identify potential impairment compares the fair value of a
reporting unit with its carrying value. We have concluded that the Company is a single reporting
unit. Accordingly, all assets and liabilities are used to determine our carrying value. In
connection with the sale of our 787 business on July 30, 2009 (discussed in Note 3 -
Discontinued Operations), $122.9 million of our goodwill balance was allocated to that business
based on the relative fair value of its assets. Subsequently, we performed an interim impairment
test of our remaining Goodwill balance and determined the balance is not impaired.
For this testing we use an independent valuation firm to assist in the estimation of
enterprise fair value using standard valuation techniques such as discounted cash flow, market
multiples and comparable transactions. The discounted cash flow fair value estimates are based on
managements projected future cash flows and the estimated weighted average cost of capital. The
estimated weighted average cost of capital is based on the risk-free interest rate and other
factors such as equity risk premiums and the ratio of total debt and equity capital.
We must make assumptions regarding estimated future cash flows and other factors used by
the independent valuation firm to determine the fair value. If these estimates or the related
assumptions change, we may be required to record non-cash impairment charges for goodwill in the
future.
Post-Retirement Plans
The liabilities and net periodic cost of our pension and other post-retirement plans are
determined using methodologies that involve several actuarial assumptions, the most significant of
which are the discount rate, the expected long-term rate of asset return, the assumed average rate
of compensation increase and rate of growth for medical costs. The actuarial assumptions used to
calculate these costs are reviewed annually or when a remeasurement is necessary. Assumptions are
based upon managements best estimates, after consulting with outside investment advisors and
actuaries, as of the measurement date.
The assumed discount rate utilized is based on a point in time estimate as of our December 31
annual measurement date or as of remeasurement dates as needed. This rate is determined based upon
on a review of yield rates associated with long-term, high quality corporate bonds as of the
measurement date and use of models that discount projected benefit payments using the spot rates
developed from the yields on selected long-term, high quality corporate bonds.
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The assumed expected long-term rate of return on assets is the weighted average rate of
earnings expected on the funds invested or to be invested to provide for the benefits included in
the projected benefit obligation (''PBO). The expected average long-term rate of return on assets
is based principally on the counsel of our outside investment advisors and was projected at 8.5%.
This rate is based on actual historical returns and anticipated long-term performance of individual
asset classes with consideration given to the related investment strategy. This rate is utilized
principally in calculating the expected return on plan assets component of the annual pension
expense. To the extent the actual rate of return on assets realized over the course of a year
differs from the assumed rate, that years annual pension expense is not affected. The gain or loss
reduces or increases future pension expense over the average remaining service period of active
plan participants expected to receive benefits.
The assumed average rate of compensation increase represents the average annual compensation
increase expected over the remaining employment periods for the participating employees. This rate
is estimated to be 4% and is utilized principally in calculating the PBO and annual pension
expense. In addition to our defined benefit pension plans, we provide certain healthcare and life
insurance benefits for certain eligible retired employees. Such benefits were unfunded as of
December 31, 2008 and September 27, 2009. Employees achieve eligibility to participate in these
contributory plans upon retirement from active service if they meet specified age and years of
service requirements. Election to participate for some employees must be made at the date of
retirement. Qualifying dependents at the date of retirement are also eligible for medical
coverage. Current plan documents reserve our right to amend or terminate the plans at any time,
subject to applicable collective bargaining requirements for represented employees.
From time to time, we have made changes to the benefits provided to various groups of plan
participants. Premiums charged to most retirees for medical coverage prior to age 65 are based on
years of service and are adjusted annually for changes in the cost of the plans as determined by an
independent actuary. In addition to this medical inflation cost-sharing feature, the plans also
have provisions for deductibles, co-payments, coinsurance percentages, out-of-pocket limits,
schedules of reasonable fees, preferred provider networks, coordination of benefits with other
plans, and a Medicare carve-out.
In accordance with the Compensation Retirement Benefits topic of the ASC we recognized the
funded status of our benefit obligation in our statement of financial position as of December 31,
2008. This funded status was remeasured for some plans as of January 31, 2009. The funded status
was measured as the difference between the fair value of the plans assets and the PBO or
accumulated postretirement benefit obligation of the plan. For more information on the impact of
this remeasurement, see Note 6 Pension and Other Post-retirement Benefits.
Recent Accounting Pronouncements
In December 2007, the FASB issued an accounting standard that provides revised guidance on how
acquirors recognize and measure the consideration transferred, identifiable assets acquired,
liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination.
This standard also expands required disclosures surrounding the nature and financial effects of
business combinations. We adopted the guidance of this accounting standard, currently included in
the Business Combinations Topic of the ASC on January 1, 2009. We considered the provisions of
this accounting standard with respect to the sale of our 787 business (as discussed in Note 3 -
Discontinued Operations).
FASB issued an accounting standard that requires enhanced disclosures about the plan assets of
a companys defined benefit pension and other postretirement plans. The enhanced disclosures are
intended to provide users of financial statements with a greater understanding of: (1) how
investment allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies; (2) the major categories of plan assets;
(3) the inputs and valuation techniques used to measure the fair value of plan assets; (4) the
effect of fair value measurements using significant unobservable inputs (Level 3) on changes in
plan assets for the period; and (5) significant concentrations of risk within plan assets. We
adopted the provisions of this accounting standard on January 1, 2009 and will provide the required
enhanced disclosures for our pension plan assets in our 2009 annual report on Form 10-K.
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In May 2009, the FASB issued an accounting standard that requires an entity to recognize in
the financial statements the effects of all subsequent events that provide additional evidence
about conditions that existed at the date of the balance sheet. For nonrecognized subsequent
events that must be disclosed to keep the financial statements from being misleading, an entity is
required to disclose the nature of the event as well as an estimate of its financial effect, or a
statement that such an estimate cannot be made. In addition, this accounting standard requires an
entity to disclose the date through which subsequent events have been evaluated. We adopted this
accounting standard for our fiscal period ending June 28, 2009 and we have evaluated subsequent
events through the date of issuance of our interim, unaudited, condensed consolidated financial
statements on November 10, 2009. No material subsequent events have occurred since September 27,
2009.
In June 2009, the FASB issued an accounting standard that establishes the FASB Accounting
Standards CodificationÔ (the Codification) as the source of authoritative U.S. generally
accepted accounting principles (US GAAP). We adopted this accounting standard for our fiscal
period ending September 27, 2009.
Following the Codification, the FASB will not issue new standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (ASUs), which will serve to update the Codification, provide background
information about the accounting guidance and provide the basis for conclusions on the changes to
the Codification. GAAP is not intended to be changed as a result of the Codification, but it will
change the way the accounting guidance is organized and presented. As a result, these changes have
a significant impact on how we reference GAAP in our financial statements and in our accounting
policies for financial statements issued for interim and annual periods ending after September 15,
2009.
In this quarterly report, the Company has begun the process of implementing the statement by
removing references to FASB statement numbers in the footnotes that follow and explaining the
adherence to authoritative accounting guidance in plain English, where appropriate.
Liquidity and Capital Resources
Liquidity is an important factor in determining our financial stability. We are committed to
maintaining adequate liquidity. The primary sources of our liquidity include cash flow from
operations, borrowing capacity through our credit facility and the long-term capital markets and
negotiated advances and progress payments from our customers. Our liquidity requirements and
working capital needs depend on a number of factors, including the level of delivery rates under
our contracts, the level of developmental expenditures related to new programs, growth and
contractions in the business cycles, contributions to our pension plans as well as interest and
debt payments. Our liquidity requirements fluctuate from period to period as a result of changes in
the rate and amount of our investments in our programs, changes in delivery rates under existing
contracts and production associated with new contracts.
For certain aircraft programs, milestone or advance payments from customers finance working
capital, which helps to improve our liquidity. In addition, we may, in the ordinary course of
business, settle outstanding claims or other contractual matters with customers or suppliers or we
may receive payments for change orders not previously negotiated. Settlement of such matters can
have a significant impact on our results of operations and cash flows.
We believe that cash flow from operations and cash and cash equivalents on hand will provide
adequate funds for our ongoing working capital expenditures, pension contributions and near term
debt service obligations allowing us to meet our current contractual commitments for at least the
next twelve months.
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Our pension plan funding obligations also impact our liquidity and capital resources. In our
annual report on Form 10-K for the fiscal year ended December 31, 2008, we provided estimates of
our pension plan contributions for 2009 2013. Our future pension contributions are primarily
driven by the funded level of our plans as of December 31 of each fiscal year. One of the primary
factors used in determining our liability under our plans for the purpose of those funding
requirements is the discount rate. Due to the actions earlier this year by the U.S. Treasury
Department expanding the permissible yield curves that can be used for the discount rate, our
projected required pension contributions are now expected to be lower than we reported in our 2008
annual report on Form 10-K.
The table below includes our previous projected pension funding requirements disclosed in our
annual report on Form 10-K for the fiscal year ended December 31, 2008 and our updated expected
future pension funding requirements, reflecting the U.S. Treasury Departments changes.
Updated to | ||||||||
reflect | ||||||||
As previously | Treasury | |||||||
reported in the | Department | |||||||
10-K | changes | |||||||
(in Millions) | ||||||||
Projected contributions |
||||||||
2009 |
84.7 | 78.8 | ||||||
2010 |
165.8 | 98.1 | ||||||
2011 |
191.7 | 217.1 | ||||||
2012 |
174.7 | 166.8 | ||||||
2013 |
151.6 | 153.8 | ||||||
Total 2009-2013 |
$ | 768.5 | $ | 714.6 | ||||
Macro-economic conditions, the corporate bond rates and the fluctuations in the fair value of
our plan assets as a result of the volatility in global financial markets will continue to impact
our required contributions in future periods.
Our ability to refinance our indebtedness or obtain additional sources of financing will be
affected by economic conditions and financial, business and other factors, some of which are beyond
our control.
As of September 27, 2009, our total outstanding long-term debt was approximately $592.5
million. This amount includes $270.0 million of 8% Senior Notes due 2011 (Senior Notes) and
$325.2 million of term loans outstanding under our senior credit facilities. Additionally, we had
$41.3 million in outstanding letters of credit.
On July 30, 2009 we entered into an Amendment to our Credit Agreement (Amendment) which
modified the Credit Agreement to allow the sale of our 787 business (discussed in Note 3 -
Discontinued Operations) and provided for use of cash proceeds from the transaction to (i) pay down
$355.0 million of term loans outstanding and (ii) repay outstanding amounts on our revolver of
$135.0 million and to permanently reduce revolving commitments under the Credit Agreement to $100.0
million. The Amendment converted the synthetic letter of credit facility under the Credit
Agreement into additional term loan of $50.0 million, a portion of which is used as cash collateral
for letters of credit previously issued under the synthetic letter of credit facility. As of
September 27, 2009, the cash restricted as collateral for outstanding letters of credit was $43.7
million. The Amendment increased the interest rate on all loans to London Interbank Offering Rate
(LIBOR) plus a margin of 4.00%, with a minimum LIBOR floor of 3.50%.
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Our outstanding term loans, including amounts under the Incremental Facility, are repayable in
equal quarterly installments of approximately $1.5 million with the balance due on December 22,
2011. Our revolving commitments are scheduled to expire on December 22, 2010. The Amendment
incorporated an extension provision that allows us to extend our revolving commitments with lenders
who agree to such extension to a date to be agreed. We are also obligated to pay an annual
commitment fee on the unused portion of our revolver of 0.5% or less, based on our leverage ratio.
Under the terms of the senior credit facility, we are required to prepay or refinance any
amounts outstanding of our $270.0 million Senior Notes by the last business day of 2010 or we must
repay the aggregate amount of loans outstanding at that time under the senior credit facility
unless a lender waives
such prepayment (so long as a majority of our lenders (voting on a class basis) agree to such
waiver). We may not be able to refinance the Senior Notes on commercially reasonable terms or at
all. This risk could impair our ability to fund our operations, limit our ability to expand our
business or increase our interest expense, which could have a material adverse effect on our
financial results.
Credit Agreements and Debt Covenants. The indenture governing our Senior Notes and our credit
agreement contain customary affirmative and negative covenants for facilities of this type,
including limitations on our indebtedness, liens, investments, distributions, mergers and
acquisitions, dispositions of assets, subordinated debt and transactions with affiliates. The
credit agreement also requires that we maintain certain financial covenants including a leverage
ratio, the requirement to maintain minimum interest coverage ratios, as defined in the agreement,
and a limitation on our capital spending levels. The indenture governing our Senior Notes also
contains various restrictive covenants, including the incurrence of additional indebtedness unless
the debt is otherwise permitted under the indenture. As of September 27, 2009, we were in
compliance with the covenants in the indenture and our credit agreement.
Our senior credit facilities (including our Incremental Facility) are material to our
financial condition and results of operations because those facilities are our primary source of
liquidity for working capital. The indenture governing our outstanding Senior Notes is material to
our financial condition because it governs a significant portion of our long-term capitalization
while restricting our ability to conduct our business.
Our senior credit facilities use Adjusted EBITDA to determine our compliance with two
financial maintenance covenants. See Non-GAAP Financial Measures below for a discussion of
Adjusted EBITDA and reconciliation of that non-GAAP financial measure to net cash provided by (used
in) operating activities. We are required not to permit our consolidated total leverage ratio, or
the ratio of funded indebtedness (net of cash) at the end of each quarter to Adjusted EBITDA for
the twelve months ending on the last day of that quarter, to exceed 4.00:1.00 for fiscal periods
ending during 2009, 3.75:1.00 for fiscal periods during 2010 and 3.50:1.00 for fiscal periods
thereafter. We also are required not to permit our consolidated net interest coverage ratio, or the
ratio of Adjusted EBITDA for the twelve months ending on the last day of a quarter to our
consolidated net interest expense for the twelve months ending on the same day, to be less than
3.50:1.00 for fiscal periods ending during 2009 and for fiscal periods thereafter. Each of these
covenants is tested quarterly, and our failure to comply could result in a default and,
potentially, an event of default under our senior credit facilities. If not cured or waived, an
event of default could result in acceleration of this indebtedness. Our credit facilities also use
Adjusted EBITDA to determine the interest rates on our borrowings, which are based on the
consolidated total leverage ratio described above. Changes in our leverage ratio may result in
increases or decreases in the interest rate margin applicable to loans under our senior credit
facilities. Accordingly, a change in our Adjusted EBITDA could increase or decrease our cost of
funds. The actual results of the total leverage ratio and net interest coverage ratio for the nine
month period ended September 27, 2009 were 1.63:1.00 and 4.79:1.00, respectively.
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The indenture governing our outstanding Senior Notes contains a covenant that restricts our
ability to incur additional indebtedness unless, among other things, we can comply with a fixed
charge coverage ratio. We may incur additional indebtedness only if, after giving pro forma effect
to that incurrence, our ratio of Adjusted EBITDA to total consolidated debt less cash on hand for
the four fiscal quarters ending as of the most recent date for which internal financial statements
are available meet certain levels or we have availability to incur such indebtedness under certain
baskets in the indenture. Accordingly, Adjusted EBITDA is a key factor in determining how much
additional indebtedness we may be able to incur from time to time to operate our business.
Non-GAAP Financial Measures. Periodically we disclose to investors Adjusted EBITDA, which is a
non-GAAP financial measure that our management uses to assess our compliance with the covenants in
our senior credit agreement, our ongoing ability to meet our obligations and manage our levels
of indebtedness. Adjusted EBITDA is calculated in accordance with our senior credit agreement and
includes adjustments that are material to our operations but that our management does not consider
reflective of our ongoing core operations. Pursuant to our senior credit agreement, Adjusted EBITDA
is calculated by making adjustments to our net income (loss) to eliminate the effect of our (1)
income tax expense, (2) net interest expense, (3) any amortization or write-off of debt discount
and debt issuance costs and commissions, discounts and other fees and charges associated with
indebtedness, (4) depreciation and amortization expense, (5) any extraordinary, unusual or
non-recurring expenses or gains/losses (including gains/losses on sales of assets outside of the
ordinary course of business, non-recurring expenses associated with the 787 program and certain
expenses associated with our facilities consolidation efforts) net of any extraordinary, unusual or
non-recurring income or gains, (6) any other non-cash charges, expenses or losses, restructuring
and integration costs, (7) stock-option based compensation expenses and (8) all fees and expenses
paid pursuant to our Management Agreement with Carlyle. See Note 15 Related Party Transactions.
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Adjusted EBITDA for the three month period ended September 27, 2009 was $58.6 million, an
increase of $3.7 million from the same period in the prior year. Adjusted EBITDA for the nine
month period ended September 27, 2009 was $185.1 million, a decrease of $20.1 million from the same
period in the prior year. The following table is a reconciliation of the non-GAAP measure from our
cash flows from operations:
Reconciliation of Non-GAAP Measure Adjusted EBITDA
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 27, | September 28, | September 27, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net cash provided by (used in) operating activities |
$ | 224.4 | $ | (109.3 | ) | $ | 129.3 | $ | (147.0 | ) | ||||||
Interest expense, net |
20.5 | 16.1 | 43.9 | 47.3 | ||||||||||||
Income tax expense (benefit) |
0.9 | 0.2 | 0.9 | 0.2 | ||||||||||||
Stock compensation expense |
(0.5 | ) | (0.8 | ) | (1.2 | ) | (2.2 | ) | ||||||||
Equity in losses of joint venture |
| | | (0.6 | ) | |||||||||||
Gain (loss) from asset sales and other losses |
(39.8 | ) | 1.6 | (41.7 | ) | 50.1 | ||||||||||
Non-cash interest expense |
(8.4 | ) | (1.8 | ) | (12.1 | ) | (4.1 | ) | ||||||||
787 tooling amortization |
0.3 | | 1.1 | 0.8 | ||||||||||||
Changes in operating assets and liabilities |
74.7 | 141.4 | 249.9 | 273.4 | ||||||||||||
EBITDA |
$ | 272.1 | $ | 47.4 | $ | 370.1 | $ | 217.9 | ||||||||
Investment
in Boeing 787 and sale of 787 business (1) |
(216.9 | ) | 6.0 | (213.8 | ) | 28.0 | ||||||||||
Unusual charges & other non-recurring program costs (2) |
4.0 | 1.7 | 14.6 | 5.7 | ||||||||||||
(Gain) Loss on disposal of property, plant and equipment (3) |
| (1.5 | ) | 1.9 | (50.1 | ) | ||||||||||
Pension & OPEB curtailment and non-cash expense (4) |
| | 9.6 | | ||||||||||||
Other (5) |
(0.6 | ) | 1.3 | 2.7 | 3.7 | |||||||||||
Adjusted EBITDA |
$ | 58.6 | $ | 54.9 | $ | 185.1 | $ | 205.2 | ||||||||
(1) | Investment in Boeing 787 and sale of 787 businessThe Boeing 787 program, described elsewhere in this quarterly report, required substantial start-up costs in prior periods as we built a new facility in South Carolina and invested in new manufacturing technologies dedicated to the program. These start-up investment costs were expensed in our financial statements over several periods due to their magnitude and timing. As a result of the sale of our 787 business to Boeing, we settled outstanding contractual matters with Boeing and recognized a loss on the sale of the related assets and liabilities of the business. Our credit agreement excludes all gains or losses recognized on the sale of assets and it excludes our significant start-up investment in the Boeing 787 program because it represented an unusual significant investment in a major new program that was not indicative of ongoing core operations. Accordingly, the impact of the settlement of contractual matters, loss on the sale of the assets and liabilities and the investment that was expensed during the period was excluded from the calculation of Adjusted EBITDA. Also included is our loss in our joint venture with Global Aeronautica. Our share of Global Aeronauticas net loss was $0.6 million for the nine month period ended September 28, 2008, respectively. On June 10, 2008, we sold our equity interest in Global Aeronautica to Boeing and as a result our adjusted EBITDA calculations for the periods presented above were not impacted by this joint venture. For more information, please refer to Note 13 Investment in Joint Venture to our interim unaudited condensed consolidated financial statements. | |
(2) | Unusual charges and other non-recurring program costsOur senior credit agreement excludes our expenses for unusual events in our operations and non-recurring costs that are not indicative of ongoing core operating performance, and accordingly the charges that have been expensed during the period are added back to Adjusted EBITDA. |
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For the three month periods ended September 27, 2009 and September 28, 2008, we incurred $1.3 million and $1.7 million, respectively, of non-recurring costs primarily related to a facilities rationalization initiative. For the nine month periods ended September 27, 2009 and September 28, 2008, we incurred $8.2 million and $5.7 million, respectively, of non-recurring costs primarily related to a facilities rationalization initiative. | ||
Additionally, for the nine month period ended September 27, 2009, we reversed $(0.5) million in non-recurring program costs related to the strike at our Nashville, Tennessee facility because the actual strike-related costs incurred on those programs were lower than the original estimates. During the nine month period ended September 27, 2009, we also recognized $1.8 million of non-recurring costs related to the suspension of the Cessna Citation Columbus Model 850 business jet program. | ||
During the three and nine month periods ended September 27, 2009, we recognized $2.7 million and $5.1 million, respectively, of non-recurring costs related to Information Systems implementation initiatives. | ||
(3) | (Gain) Loss on disposal of property, plant and equipment (PP&E) and other assets On occasion, where the asset is no longer needed for our business and ceases to offer sufficient value or utility to justify our retention of the asset, we choose to sell PP&E at a loss. These losses reduce our results of operations for the period in which the asset was sold. Similarly, in some cases, we sell assets at an amount in excess of book value. Our credit agreement provides that those gains and losses are reflected as an adjustment in calculating Adjusted EBITDA. | |
(4) | Pension and other post-retirement benefits curtailment and non-cash expense related to the Compensation Retirement Benefits topic of the ASCThe credit agreement allows us to remove non-cash benefit expenses, so to the extent that the recorded expense exceeds the cash contributions to the plan it is reflected as an adjustment in calculating Adjusted EBITDA. During the nine month period ended September 27, 2009, we recognized $9.6 million curtailment resulting from the new IAM collective bargaining agreement. For more information, please refer to Note 6 Pension and Other Post-Retirement Benefits to our interim unaudited condensed consolidated financial statements. | |
(5) | OtherIncludes non-cash stock expense and related party management fees. Our credit agreement provides that these expenses are reflected as an adjustment in calculating Adjusted EBITDA. |
We believe that each of the adjustments made in order to calculate Adjusted EBITDA is
meaningful to investors because it gives them the ability to assess our compliance with the
covenants in our senior credit agreement, our ongoing ability to meet our obligations and manage
our levels of indebtedness.
The use of Adjusted EBITDA as an analytical tool has limitations and you should not consider
it in isolation, or as a substitute for analysis of our results of operations as reported in
accordance with US GAAP. Some of these limitations are:
| it does not reflect our cash expenditures, or future requirements, for all contractual commitments; | ||
| it does not reflect our significant interest expense, or the cash requirements necessary to service our indebtedness; | ||
| it does not reflect cash requirements for the payment of income taxes when due; | ||
| it does not reflect working capital requirements; | ||
| although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; and |
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| it does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, but may nonetheless have a material impact on our results of operations. |
Because of these limitations, Adjusted EBITDA should not be considered as a measure of
discretionary cash available to us to invest in the growth of our business or as an alternative to
net income or cash flow from operations determined in accordance with US GAAP. Management
compensates for these limitations by not viewing Adjusted EBITDA in isolation, and specifically by
using other US GAAP measures, such as cash flow provided by (used in) operating activities and
capital expenditures, to measure our liquidity. Our calculation of Adjusted EBITDA may not be
comparable to the calculation of similarly titled measures reported by other companies.
Cash Flow Summary
For the Nine Months Ended | ||||||||||||
September 27, | September 28, | |||||||||||
2009 | 2008 | Change | ||||||||||
(in millions) | ||||||||||||
Net income (loss) |
$ | 280.6 | $ | 123.6 | $ | 157.0 | ||||||
Non-cash items |
98.6 | 2.8 | 95.8 | |||||||||
Changes in working capital |
(249.9 | ) | (273.4 | ) | 23.5 | |||||||
Net cash provided by (used in) operating activities |
129.3 | (147.0 | ) | 276.3 | ||||||||
Net cash provided by (used in) investing activities |
261.0 | 13.3 | 247.7 | |||||||||
Net cash provided by (used in) financing activities |
(326.6 | ) | 182.7 | (509.3 | ) | |||||||
Net increase (decrease) in cash and cash
equivalents |
63.7 | 49.0 | 14.7 | |||||||||
Cash and cash equivalents at beginning of period |
86.7 | 75.6 | 11.1 | |||||||||
Cash and cash equivalents at end of period |
$ | 150.4 | $ | 124.6 | $ | 25.8 | ||||||
Net cash provided by operating activities for the nine month period ended September 27, 2009
was $129.3 million, an increase of $276.3 million compared to cash used of $147.0 million for the
same period in 2008. This change primarily resulted from the settlement of contractual matters
related to the 787 program partially offset by increased cash requirements for the 747-8 program.
Net cash provided by investing activities for the nine months ended September 27, 2009 was
$261.0 million, an increase of $247.7 million compared to net cash provided by investing activities
of $13.3 million for the same period in 2008. The change is primarily due to the $289.2 million,
net of fees, of proceeds received for the sale of the 787 business and $13.5 million fewer capital
expenditures in 2009 offset by the $55.0 million of proceeds from the sale of our equity interest
in Global Aeronautica to Boeing in 2008.
Net cash used in financing activities for the nine months ended September 27, 2009 was $326.6
million, a change of $509.3 million compared with cash provided of $182.7 million for the same
period in 2008. This change primarily resulted from the difference between our $184.6 million in
net proceeds from the Incremental Facility in 2008 offset by the use of $355.0 million of proceeds
from the sale of the 787 business to pay down outstanding term loans, the conversion of the
$75.0 million of the synthetic letter of credit facility to a term loan and the restriction of
$43.7 million as collateral for outstanding letters of credit in 2009.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements as of September 27, 2009.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a result of our operating and financing activities, we are exposed to various market risks
that may affect our consolidated results of operations and financial position. These market risks
include fluctuations in interest rates, which impacts the amount of interest we must pay on our
variable-rate debt and our calculation of our liability for our defined benefit plans. Other than
the interest rate swaps described below, financial instruments that potentially subject us to
significant concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
Trade accounts receivable include amounts billed and currently due from customers, amounts
currently due but, not yet billed, certain estimated contract changes, claims in negotiation that
are probable of recovery, and amounts retained by the customer pending contract completion. We
continuously monitor collections and payments from customers. Based upon experience and any
specific customer collection issues that have been identified, we record a provision for estimated
credit losses, as deemed appropriate.
While such credit losses have historically been within our expectations, we cannot guarantee
that we will continue to experience the same credit loss rates in the future.
We maintain cash and cash equivalents with various financial institutions and perform periodic
evaluations of the relative credit standing of those financial institutions. We have not
experienced any losses in such accounts and believe that we are not exposed to any significant
credit risk on cash and cash equivalents.
Some raw materials and operating supplies are subject to price and supply fluctuations caused
by market dynamics. Our strategic sourcing initiatives seek to find ways of mitigating the
inflationary pressures of the marketplace. In recent years, these inflationary pressures have
affected the market for raw materials. However, we believe that raw material prices will remain
stable through the remainder of 2009 and experience increases that are in line with inflation as
the global economy recovers.
Over the past few years, we have experienced price increases due to increased infrastructure
demand in China and Russia as well as the growing economy generally. Although, the current global
economic crisis has lessened that pressure, price increases may resume in 2010 and beyond as
economic conditions improve. Additionally, we generally do not employ forward contracts or other
financial instruments to hedge commodity price risk.
Our suppliers failure to provide acceptable raw materials, components, kits and subassemblies
could adversely affect our production schedules and contract profitability. We maintain a
qualification and performance surveillance system to control risk associated with such supply base
reliance. We utilize a range of long-term agreements and strategic aggregated sourcing to
optimize procurement expense and supply risk related to our raw materials.
Interest Rate Risks
From time to time, we may enter into interest rate swap agreements or other financial
instruments in the normal course of business for purposes other than trading. These financial
instruments are used to mitigate interest rate or other risks, although to some extent they expose
us to market risks and credit risks.
We control the credit risks associated with these instruments through the evaluation of the
creditworthiness of the counter parties. In the event that a counter party fails to meet the terms
of a contract or agreement then our exposure is limited to the current value, at that time, of the
interest rate differential, not the full notional or contract amount. We have no such agreements
currently outstanding. In the past, we have entered into interest rate swap agreements to reduce
the impact of changes in interest rates on its floating rate debt. Under these agreements, we
exchanged floating rate interest payments for fixed rate payments periodically over the term of the
swap agreements. We currently have no such agreements outstanding; however, in the future we may
choose to manage market risk with respect to interest rates by entering into new hedge agreements.
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Management performs a sensitivity analysis to determine how market interest rate changes will
affect the fair value of any market risk sensitive hedge positions and all other debt that we will
bear. Such an analysis is inherently limited in that it represents a singular, hypothetical set of
assumptions. Actual market movements may vary significantly from our assumptions. Fair value
sensitivity is not necessarily indicative of the ultimate cash flow or earnings effect we would
recognize from the assumed market interest rate movements. We are exposed to cash flow risk due to
changes in interest rates with respect to the entire $325.2 million of long-term, variable rate
debt outstanding under our senior credit facilities at September 27, 2009. A one-percentage point
increase in interest rates on our long-term variable-rate indebtedness would decrease our annual
pre-tax income by approximately $3.3 million for the year ending December 31, 2009. All of our
remaining debt is at fixed rates; therefore, changes in market interest rates under these
instruments would not significantly impact our cash flows or results of operations.
Foreign Currency Risks
We are subject to limited risks associated with foreign currency exchange rates due to our
contracted business with foreign customers and suppliers. As purchase prices and payment terms
under the relevant contracts are denominated in U.S. dollars, our exposure to losses directly
associated with changes in foreign currency exchange rates is not material. However, if the value
of the U.S. dollar declines in relation to foreign currencies, our foreign suppliers would
experience exchange-rate related losses and seek to renegotiate the terms of their respective
contracts, which could have a significant impact to our margins and results of operations.
Utility Price Risks
We have exposure to utility price risks as a result of volatility in the cost and supply of
energy and in natural gas prices. To minimize this risk, we have entered into fixed price contracts
at certain of our manufacturing locations for a portion of their energy usage for periods of up to
three years. Although these contracts would reduce the risk to us during the contract period,
future volatility in the supply and pricing of energy and natural gas could have an impact on our
consolidated results of operations. A 1% increase (decrease) in our monthly average utility costs
would increase (decrease) our cost of sales by approximately $0.3 million for the year.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Our Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter
ended September 27, 2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
In the normal course of business, we are party to various lawsuits, legal proceedings and
claims arising out of our business. We cannot predict the outcome of these lawsuits, legal
proceedings and claims with certainty. Nevertheless, we believe that the outcome of these
proceedings, even if determined adversely, would not have a material adverse effect on our
business, financial condition or results of operations.
ITEM 1A. | RISK FACTORS |
There have been no material changes in our risk factors from those disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2008.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the nine month period ended September 27, 2009, we issued an aggregate of 18,810 shares
of our common stock or less than 1% of the aggregate amount of common stock outstanding, to our
members of our Board of Directors in reliance on Section 4(2) of the Securities Act.
During the nine month period ended September 27, 2009, we issued an aggregate of 1,614 shares
of our common stock in connection with the exercise of SARs originally granted to our employees in
accordance with Rule 701 of the Securities Act.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
ITEM 5. | OTHER INFORMATION |
None.
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ITEM 6. | EXHIBITS |
(a) Exhibits
(10.1)*
|
Asset Purchase Agreement between Vought Aircraft Industries, Inc. and Boeing Commercial Airplanes Charleston South Carolina, Inc. (formerly known as BCACSC, Inc.), a wholly owned subsidiary of The Boeing Company, dated July 6, 2009. | |
(31.1)*
|
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
(31.2)*
|
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
(32.1)*
|
Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. | |
(32.2)*
|
Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
* | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Vought Aircraft Industries, Inc.
|
||||
November 10, 2009
|
/s/ KEITH HOWE
|
|||
November 10, 2009
|
/s/ MARK JOLLY
|
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