UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended September 26, 2004

Or

For the transition period from               to

Commission File Number 333-112528

Vought Aircraft Industries, Inc.

(972)-946-2011
(Registrant’s 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 o No x

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, at November 8, 2004 was 25,015,552.

TABLE OF CONTENTS

PART 1. FINANCIAL INFORMATION

See accompanying notes

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Vought Aircraft Industries, Inc.

See accompanying notes

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Vought Aircraft Industries, Inc.

See accompanying notes

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VOUGHT AIRCRAFT INDUSTRIES, INC.
Notes to Consolidated Financial Statements

(Unaudited)

September 26, 2004

Note 1 – Organization and Basis of Presentation

     Vought Aircraft Industries, Inc. and its wholly owned subsidiaries are herein referred to as the “Company” or “Vought”. The Company is one of the world’s largest independent providers of commercial and military aerostructures. The majority of the Company’s products are sold to The Boeing Company (“Boeing”), Airbus S.A.S. (“Airbus”), Gulfstream Aerospace Corp., a General Dynamics Company (“Gulfstream”), and for military contracts, ultimately to the U.S. Government. The Corporate office is in Dallas, Texas and production work is performed at sites in Hawthorne and Brea, California, Everett, Washington, Dallas and Grand Prairie, Texas, Milledgeville, Georgia, Nashville, Tennessee, and Stuart, Florida.

     We implemented a corporate reorganization of our Aerostructures subsidiary effective on January 1, 2004. Pursuant to the reorganization, Aerostructures incorporated a new subsidiary, named Contour Aerospace Corporation, a Delaware corporation (''Contour’’). Then, Aerostructures contributed (i) its Everett, Washington facility, that builds fuselage skins, spars, stringers, pylons and machined components, and (ii) its Brea, California facility, that builds wing skins, spars, stringers, chords and ribs, to Contour. Contemporaneous with the contribution of these assets and operations to Contour, Aerostructures merged with and into Vought Aircraft Industries, Inc., so that the remaining operating assets of Aerostructures are integrated with the ongoing operations of Vought. As a result of the reorganization, beginning in 2004, Aerostructures does not exist as a separate corporate entity and Contour is a direct subsidiary of Vought. Under the 8% Senior Notes due 2011, Contour is a guarantor on a fully and unconditionally and jointly and severally on a senior unsecured basis.

     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 the interim periods. The results of operations for the three and nine months ended September 26, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in Vought’s registration statement on Form S-4, as amended, filed with the Securities and Exchange Commission (the “SEC”) on June 15, 2004.

Note 2 – Stock-Based Compensation

     The Company grants stock options for a fixed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants using the intrinsic value method. The following schedule reflects the impact on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock Based Compensation, to stock based employee compensation:

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     The effects of applying SFAS No. 123 in the pro forma disclosure may not be indicative of future amounts as options vest over several years and additional option grants are expected.

     During the first quarter of 2003, the Company recorded non-cash stock compensation charges of $11.1 million, included in general and administrative expense, to reflect the impact of an estimated increase in the fair value of the Company’s common stock, related to non-recourse notes previously issued to officers for stock purchases, increased deferred compensation liability for the Company’s rabbi trust and the modification of stock options in connection with executive retirements.

Note 3 – New Accounting Pronouncements

     On December 8, 2003, the President signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”). The Act introduces a prescription drug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy to employers who sponsor retiree health care benefit plans that provide a prescription drug plan that is at least actuarially equivalent to Medicare Part D. In January 2004, the FASB issued a Staff Position (“FSP”) that allows companies to defer recognition of the impact that the Act might have on the benefit obligations they provide their retirees, pending the issuance of specific guidance on the accounting for the federal subsidy introduced by the Act. The Company deferred recognition of the impact of the Act as permitted by the FSP at December 31, 2003. As a result of the first quarter restructuring, the deferral election expired. The Company has included the estimated effects of this pronouncement in its accumulated postretirement benefit obligation (“APBO”) at September 26, 2004. See Note 8 – Pension and other Postemployment Benefits for further discussion of the adoption of this pronouncement.

Note 4 – Restructuring

     On February 26, 2004, Vought announced plans to consolidate portions of its manufacturing operations to Dallas, Texas. The plans include renovating and modernizing the Dallas facilities, closing the facilities in Nashville and Stuart over the next 18 to 36 months and moving their operations to Dallas and reducing the size of the Hawthorne facility. In support of this restructuring, Vought received a $35 million grant from the Texas Enterprise Fund in April 2004 and is in the process of working with several other state and local agencies. By accepting this grant, the Company is obligated to add a set number of jobs in Texas over the next 6 years with a prorated penalty (not to exceed the amount of the grant) assessed at the end of 2009 if that goal is not reached. When completed, this project is expected to reduce the Company’s occupied square footage by more than three million square feet, reduce operating costs and increase productivity. As part of this plan, the Company will incur charges at Nashville and Stuart for employee termination benefits and relocation costs, certain pension costs, consolidation of excess facilities and various other closure costs. The final expected completion date of closing the Stuart and Nashville facilities is December 31, 2005 and December 31, 2006, respectively.

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     As a result of the closure of the Stuart and Nashville facilities, the Company offered relocation or termination benefits (voluntary and involuntary) to the approximately 1,300 employees at these facilities. The Company recorded a liability in the amount of $5.4 million associated with the severance termination benefits during the first quarter of fiscal 2004. Additionally, the Company estimates total costs of approximately $2.8 million associated with the non-union employee retention termination benefits and is recognizing this liability ratably over the employees’ retention period. At September 26, 2004, a liability for the retention termination benefits has been recorded in the amount of approximately $700,000.

     As part of the restructuring plan, the Company negotiated termination benefit agreements with union employees at the Nashville location. As a result of the union negotiations, certain retention termination benefits were agreed to which are estimated to be approximately $4.7 million. In April 2004, the Company began recognizing this liability ratably over the employee retention period. At September 26, 2004, a liability for retention termination benefits for union employees has been recorded in the amount of approximately $900,000.

     The following table is a roll-forward of the amounts accrued for the restructuring liabilities discussed above as of September 26, 2004.

     See Note 8 – Pension and Other Post-employment Benefits for further discussion of the effects of the restructuring on the pension and other post-employment benefits at the Nashville and Stuart facilities.

     Approximately 425 out of the 1,300 employees at these locations have elected to relocate to Dallas. The Company currently estimates that the relocation costs associated with these transfers will be approximately $11.3 million and will be recognized as incurred over 34 months.

     Since the announcement for the closures of the Stuart and Nashville facilities, the Company has been evaluating the fixed assets associated with these facilities and developing a plan for moving these assets to Dallas or for selling or abandoning the assets once the facilities are vacated. For the Nashville facility, the Company has performed an initial assessment of the recoverability for those assets that will not be moved and has determined that, at present, no impairment has taken place. Nonetheless, an impairment charge for these assets could be necessary in future periods. Related to the shutdown of the Nashville facility, the Company has accelerated depreciation over the remaining periods of those assets that will not be transferred to Dallas. The Company estimates that approximately $21.6 million of depreciation will be accelerated over the remaining life of these assets so that they will be fully depreciated by the end of fiscal 2006 when production has ceased at this facility. As of September 26, 2004, increased depreciation for these assets is $9.9 million. Substantially all of the fixed assets from the Stuart facility are expected to be moved and utilized after the plant closes. The Company is in the process of evaluating the lease for the Stuart facility and a potential buyout of the remaining lease term after the facility has been exited. If an agreement is reached, the Company will record any liability

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associated with the buyout at the time an agreement is reached and the liability becomes measurable. The Company currently has $1.6 million in net book value of leasehold improvements at Stuart. As a result of the closure, the Company has accelerated the depreciation on these items so they will be fully depreciated by the end of 2005. The increased depreciation for these assets was $1.3 million during the first three quarters of fiscal 2004.

     The Company is currently in the process of reviewing final qualified proposals to buy the Hawthorne facility which the Company would lease back through 2005, after which, the Company plans to reduce the total square footage under the lease, with the lease extending to approximately 2010.

     The Dallas facility is currently a Naval Weapons Industrial Reserve Plant, which is owned by the Navy. As part of the restructure plan, options are being considered that could change the ownership structure of the plant.

     The restructuring and other related charges are recorded to program costs. In accordance with SOP 81-1, the total additional costs associated with the planned facility closures for relocation, termination and retention benefits, and pension and other post-employment benefits (“OPEB”) were considered in the Company’s estimated costs at completion for contracts at each site. As a result of including the estimated restructuring costs in each facility’s contracts, the Company recorded a charge to cost of sales in the amount of $40.9 million for the nine months ended September 26, 2004, which is reflective of increased forward losses as a result of these costs at the Stuart and Dallas facilities and reduced profit margins or increased forward losses on contracts in process at the Nashville facility.

     During 2001, the Company finalized and approved a restructuring plan designed to reduce the Company’s infrastructure costs by closing its Perry, Georgia facility and relocating the facility’s production effort to the Stuart, Florida site. At December 31, 2001, the Company had accrued $12.6 million related to costs on non-cancelable lease payments and maintenance, after the anticipated closure date for the Perry facility. The closure of Perry was completed at the beginning of the third quarter of 2002. Subsequent to the closure, the Company recorded $4.5 million of lease payments and maintenance against the accrual. The remaining non-cancelable lease payments and maintenance, extend to 2007. Additionally during 2002, the Company relocated 165 employees from the Perry facility to the Stuart facility. The following is a rollforward of amounts accrued for restructuring at the Perry site:

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Note 5 – Inventories

     Inventories consisted of the following:

Note 6 – Goodwill and Intangible Assets

     With the adoption of SFAS No. 142, amortization of Goodwill ceased effective January 1, 2002 and is now subject to annual impairment tests in accordance with the standard. The Company completed its annual impairment analysis based primarily on the discounted future cash flow method and determined that there was no impairment to goodwill as of December 31, 2003.

     Intangible assets consisted of the following:

     Scheduled remaining amortization of identifiable intangible assets is as follows as of September 26, 2004:

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Note 7 – Long-Term Debt

     On July 24, 2000, the Company entered into a senior credit and guaranty agreement that included $525 million of term loan facilities and a $90 million revolving credit facility. The revolving credit facility expires on June 30, 2006. No borrowings have been made under the revolving credit facility. Total long-term bank debt was $295.9 million September 26, 2004 and December 31, 2003.

     On July 2, 2003, Vought issued $270.0 million of 8% Senior Notes due 2011 with interest payable on January 15 and July 15 of each year, beginning January 15, 2004. The notes may be redeemed in full or in part prior to maturity on July 15, 2007, by paying a make-whole premium. Additionally, prior to July 15, 2006, Vought may redeem up to 35% of the notes from the proceeds of certain equity offerings. The notes are senior unsecured obligations guaranteed by all of Vought’s existing and future domestic subsidiaries. In connection with the offering of the notes, Vought entered into an amendment to their senior secured credit facility. As part of the transaction, Vought prepaid $60.0 million of term loans including the retirement of Tranche A and obtained an amendment to its revolving credit facility, which increased the availability of the revolving credit facility by $60.0 million to a revolving credit facility of $150.0 million, reduced by $51.4 million of outstanding letters of credit.

     At September 26, 2004 and December 31, 2003, the fair value of the Company’s long-term bank debt, based on current interest rates, approximated its carrying value.

Note 8 – Pension and Other Post-employment Benefits

     The components of net periodic benefit cost for the Company’s pension plans and other postretirement benefit plans were as follows:

     The Company has determined that obtaining by-component information for the comparable periods of 2003 net periodic benefit cost would be impracticable. For the first nine months of 2003, the net periodic benefit cost and the defined contribution plan costs were $16.7 million and $4.8 million, respectively. There were no special termination benefits or plan curtailments in the first nine months of 2003.

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     The Company has determined that obtaining by-component information for the comparable periods of 2003 net periodic benefit cost would be impracticable. For the first nine months of 2003, the net periodic benefit cost was $32.8 million. There were no special termination benefits or plan curtailments in the first nine months of 2003.

     As a result of the Company’s announcement on February 26, 2004 of its plans to consolidate much of its manufacturing operations in Dallas, the Company recorded liabilities for pension and postretirement benefit plan curtailments and recognition of prior service cost of $11.2 million and special termination benefits of $1.9 million in the first quarter. The special termination benefits related to its affected nonrepresented employees that received and accepted transfer or completion opportunities in March 2004. Represented employees accepted similar offers through a certified vote on April 20, 2004. As a result of that vote, the Company recorded an additional liability of $8.6 million in the second quarter.

     On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 “(the Act)” was signed into law. The Act introduces a prescription drug benefit under Medicare “(Medicare Part D)”, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As of March 28, 2004, the Company recognized the effects of the Act in the measure of its accumulated postretirement benefit obligation “(APBO)” for certain retiree groups in accordance with FASB Staff Position No. FAS 106-1.

     The Company currently pays a portion of the prescription drug cost for certain retirees. The benefits for certain retirees were determined to be actuarially equivalent based on an analysis of the Company’s existing prescription drug plan provisions and claims experience as compared to the Medicare Part D prescription drug benefit that will be effective in 2006.

     Recognition of the subsidy for certain retiree groups as an offset to plan costs results in a $39.4 million reduction in the APBO. The reduction in APBO is included with other deferred actuarial gains and losses. The 2004 and subsequent net periodic postretirement benefit costs will be adjusted to reflect the lower interest cost due to the lower APBO. To the extent that the deferred gains and losses are outside the allowable corridor, the excess will be recognized as prescribed under SFAS 106. For other retiree groups, the impact of the potential subsidy benefit has not been calculated because those amounts could not be reasonably estimated.

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     The Company has not reflected any changes in participation in the Company’s plans as a result of the Act. The reduction in APBO represents the value of the 28% subsidy and does not reflect any other changes.

     More specific authoritative guidance on the accounting of the federal subsidy is pending and, when issued, could require the Company to change previously reported information.

Note 9 – Commitments

     Warranty Reserves. A reserve has been established to provide for the estimated future cost of warranties on the Company’s delivered products. Management periodically reviews the reserves and adjustments are made accordingly. A provision for warranty on products delivered is made on the basis of the Company’s historical experience and identified warranty issues. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. The following is a rollforward of amounts accrued for warranty reserves:

Note 10 – Environmental Costs

     Environmental liabilities are accrued when the Company determines it is responsible for remediation costs and such amounts are reasonably estimable. When only a range of amounts is established and no amount within the range is more accurate than another, the minimum amount in the range is recorded.

     Our facilities have been previously owned and operated by other entities and remediation is currently taking place at several facilities in connection with contamination that occurred prior to our ownership. In particular, we acquired several of our facilities from Northrop Grumman in July of 2000, including the Hawthorne, California facility, the Stuart, Florida facility, the Milledgeville and Perry, Georgia facilities and two Dallas, Texas facilities. Of those facilities, remediation projects are underway in Hawthorne, Stuart, Milledgeville and Dallas. Under our asset purchase agreement with Northrop Grumman, we obtained from Northrop Grumman an indemnity relating to contamination at all sites occurring prior to our ownership (so-called ''pre-closing liabilities’’). The indemnity effectively caps our exposure to such cleanup liabilities at $12 million, with Northrop Grumman assuming responsibility for all such costs in excess of $12 million. In accordance with the terms of the environmental indemnity, Northrop Grumman is managing all environmental remedial projects at the various sites, except with respect to most of the remediation activities now underway at the Dallas Facility. The Dallas facility is a Naval Weapons Industrial Reserve Plant, which the Navy leases to us. The Navy manages and finances most of the

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remediation activities at this site (although Northrop Grumman does manage other remediation activities at the site). Should the Navy cease to finance and perform remediation activities at the Dallas site, we would look to Northrop Grumman to manage those activities in accordance with its indemnity obligations. As part of the restructuring plan, options are being considered that could change the ownership structure of this facility. Any change in ownership would not impact the current arrangement with Northrop Grumman regarding remediation. Although we have no reason to believe that Northrop Grumman will not satisfy its indemnity obligations, if Northrop Grumman failed to do so, we could be exposed to environmental cleanup liabilities that could be material. As of September 26, 2004, our balance sheet included an accrued liability of $7.0 million for accrued environmental liabilities.

     The Nashville, Tennessee facility was acquired by the Aerostructures Corporation from Textron Inc. in 1996. In connection with that acquisition, Textron agreed to indemnify up to $60 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. While there are no pending environmental claims relating to the Nashville facility, there is no assurance that environmental claims will not arise after the expiration of the Textron indemnity in 2006, or that Textron will satisfy its indemnity obligations with respect to any environmental claims that are made before the indemnity expires.

     The following is a rollforward of amounts accrued for environmental liabilities:

Note 11 – Related Party Transactions

     In accordance with the management agreement between the Company and its principal stockholder, The Carlyle Group (“Carlyle”), the Company incurred a fee of $1.5 million for various management services provided by Carlyle for each of the nine month periods ended September 26, 2004 and September 28, 2003, respectively.

Note 12 – Guarantor Subsidiaries

     The 8% Senior Notes due 2011 are fully and unconditionally and jointly and severally guaranteed, on a senior unsecured basis, by the Company’s 100% owned subsidiaries. Summarized financial information of the Company and its subsidiaries is presented below:

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Consolidating Balance Sheet
September 26, 2004
($ in millions)

(1) Effective January 1, 2004 the Company implemented a corporate reorganization of its Aerostructures subsidiary. Pursuant to the reorganization, Aerostructures incorporated a new subsidiary, entitled Contour Aerospace Corporation, a Delaware corporation (''Contour’’). Then, Aerostructures contributed its Everett, Washington facility and Brea, California facility to Contour. Contemporaneous with the contribution of these assets and operations to Contour, Aerostructures merged with and into Vought Aircraft Industries, Inc., so that the remaining operating assets of Aerostructures are integrated with the ongoing operations of Vought. As a result of the reorganization, beginning in 2004, Aerostructures does not exist as a separate corporate entity and Contour is a direct subsidiary of Vought. Under the 8% Senior Notes due 2011, Contour is a guarantor on a fully and unconditionally and jointly and severally on a senior unsecured basis.

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Consolidating Balance Sheet
December 31, 2003
($ in millions)

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Consolidating Statement of Operations
Three Months Ended September 26, 2004
($ in millions)

Consolidating Statement of Operations
Three Months Ended September 28, 2003
($ in millions)

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Consolidating Statement of Operations
Nine Months Ended September 26, 2004
($ in millions)

Consolidating Statement of Operations
Nine Months Ended September 28, 2003
($ in millions)

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Consolidating Statement of Cash Flows
Nine Months Ended September 26, 2004
($ in millions)

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Consolidating Statement of Cash Flows
Nine Months Ended September 28, 2003
($ in millions)