Attached files
file | filename |
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EX-31.1 - EX-31.1 - VOUGHT AIRCRAFT INDUSTRIES INC | d72838exv31w1.htm |
EX-10.5 - EX-10.5 - VOUGHT AIRCRAFT INDUSTRIES INC | d72838exv10w5.htm |
EX-10.7 - EX-10.7 - VOUGHT AIRCRAFT INDUSTRIES INC | d72838exv10w7.htm |
EX-31.2 - EX-31.2 - VOUGHT AIRCRAFT INDUSTRIES INC | d72838exv31w2.htm |
EX-10.3 - EX-10.3 - VOUGHT AIRCRAFT INDUSTRIES INC | d72838exv10w3.htm |
EX-10.4 - EX-10.4 - VOUGHT AIRCRAFT INDUSTRIES INC | d72838exv10w4.htm |
EX-32.1 - EX-32.1 - VOUGHT AIRCRAFT INDUSTRIES INC | d72838exv32w1.htm |
EX-10.1 - EX-10.1 - VOUGHT AIRCRAFT INDUSTRIES INC | d72838exv10w1.htm |
EX-10.6 - EX-10.6 - VOUGHT AIRCRAFT INDUSTRIES INC | d72838exv10w6.htm |
EX-10.2 - EX-10.2 - VOUGHT AIRCRAFT INDUSTRIES INC | d72838exv10w2.htm |
EX-32.2 - EX-32.2 - VOUGHT AIRCRAFT INDUSTRIES INC | d72838exv32w2.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 March 28, 2010
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 May 7, 2010 was 24,818,900.
TABLE OF CONTENTS
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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. |
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Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Vought Aircraft Industries, Inc.
Consolidated Balance Sheets
($ in millions, except share amounts)
Consolidated Balance Sheets
($ in millions, except share amounts)
March 28, | ||||||||
2010 | December 31, | |||||||
(unaudited) | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 149.7 | $ | 116.0 | ||||
Restricted cash |
43.4 | 43.8 | ||||||
Trade and other receivables |
159.5 | 127.9 | ||||||
Inventories |
453.4 | 511.3 | ||||||
Other current assets |
10.1 | 8.5 | ||||||
Total current assets |
816.1 | 807.5 | ||||||
Property, plant and equipment, net |
273.1 | 275.9 | ||||||
Goodwill |
404.8 | 404.8 | ||||||
Identifiable intangible assets, net |
18.6 | 20.4 | ||||||
Other non-current assets |
0.9 | 1.3 | ||||||
Total assets |
$ | 1,513.5 | $ | 1,509.9 | ||||
Liabilities and stockholders equity (deficit) |
||||||||
Current liabilities: |
||||||||
Accounts payable, trade |
$ | 171.1 | $ | 140.9 | ||||
Accrued and other liabilities |
59.8 | 68.3 | ||||||
Accrued payroll and employee benefits |
44.5 | 46.9 | ||||||
Accrued post-retirement benefits-current |
37.5 | 37.4 | ||||||
Accrued pension-current |
3.3 | 3.5 | ||||||
Current portion of long-term bank debt |
320.4 | 319.8 | ||||||
Accrued contract liabilities |
40.0 | 74.2 | ||||||
Total current liabilities |
676.6 | 691.0 | ||||||
Long-term liabilities: |
||||||||
Accrued post-retirement benefits |
363.5 | 364.9 | ||||||
Accrued pension |
595.2 | 612.2 | ||||||
Long-term bond debt |
270.0 | 270.0 | ||||||
Other non-current liabilities |
74.2 | 75.3 | ||||||
Total liabilities |
1,979.5 | 2,013.4 | ||||||
Stockholders equity (deficit): |
||||||||
Common stock, par value $.01 per share;
50,000,000 shares authorized, 24,818,900 and
24,818,806 issued and outstanding at March 28,
2010 and December 31, 2009, respectively |
0.3 | 0.3 | ||||||
Additional paid-in capital |
423.2 | 422.8 | ||||||
Shares held in rabbi trust |
(1.6 | ) | (1.6 | ) | ||||
Accumulated deficit |
(146.2 | ) | (173.0 | ) | ||||
Accumulated other comprehensive loss |
(741.7 | ) | (752.0 | ) | ||||
Total stockholders equity (deficit) |
$ | (466.0 | ) | $ | (503.5 | ) | ||
Total liabilities and stockholders equity (deficit) |
$ | 1,513.5 | $ | 1,509.9 | ||||
See accompanying notes
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Vought Aircraft Industries, Inc.
Consolidated Statements of Operations
(unaudited, $ in millions)
Consolidated Statements of Operations
(unaudited, $ in millions)
For the Three Months Ended | ||||||||
March 28, | March 29, | |||||||
2010 | 2009 | |||||||
Revenue |
$ | 470.5 | $ | 390.3 | ||||
Costs and expenses |
||||||||
Cost of sales |
391.5 | 324.8 | ||||||
Selling, general and
administrative expenses |
39.7 | 28.5 | ||||||
Total costs and expenses |
431.2 | 353.3 | ||||||
Operating income |
39.3 | 37.0 | ||||||
Other income (expense) |
||||||||
Interest income |
0.1 | 0.2 | ||||||
Interest expense |
(12.6 | ) | (15.0 | ) | ||||
Income before income taxes |
26.8 | 22.2 | ||||||
Income tax expense |
| | ||||||
Income (loss) from continuing
operations |
$ | 26.8 | $ | 22.2 | ||||
Income (loss) from
discontinued operations |
| (4.3 | ) | |||||
Net Income |
$ | 26.8 | $ | 17.9 | ||||
See accompanying notes
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Table of Contents
Vought Aircraft Industries, Inc.
Consolidated Statements of Cash Flows
(unaudited, $ in millions)
Consolidated Statements of Cash Flows
(unaudited, $ in millions)
Three Months Ended | ||||||||
March 28, | March 29, | |||||||
2010 | 2009 | |||||||
Operating activities |
||||||||
Net income |
$ | 26.8 | $ | 17.9 | ||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
12.9 | 15.9 | ||||||
Stock compensation expense |
2.7 | 0.5 | ||||||
Changes in current assets and liabilities: |
||||||||
Trade and other receivables |
(31.6 | ) | (9.6 | ) | ||||
Inventories |
57.9 | (66.1 | ) | |||||
Other current assets |
(2.6 | ) | (3.7 | ) | ||||
Accounts payable, trade |
30.2 | 12.1 | ||||||
Accrued payroll and employee benefits |
(2.4 | ) | (1.7 | ) | ||||
Accrued and other liabilities |
(10.9 | ) | | |||||
Accrued contract liabilities |
(34.2 | ) | (36.7 | ) | ||||
Other assets and liabilitieslong-term |
(8.8 | ) | (1.6 | ) | ||||
Net cash provided by (used in) operating activities |
40.0 | (73.0 | ) | |||||
Investing activities |
||||||||
Capital expenditures |
(6.7 | ) | (8.3 | ) | ||||
Net cash used in investing activities |
(6.7 | ) | (8.3 | ) | ||||
Financing activities |
||||||||
Proceeds from short-term bank debt |
| 135.0 | ||||||
Proceeds from long-term bank debt |
| 25.0 | ||||||
Changes in restricted cash |
0.4 | | ||||||
Net cash provided by (used in) financing activities |
0.4 | 160.0 | ||||||
Net increase (decrease) in cash and cash equivalents |
33.7 | 78.7 | ||||||
Cash and cash equivalents at beginning of period |
116.0 | 86.7 | ||||||
Cash and cash equivalents at end of period |
$ | 149.7 | $ | 165.4 | ||||
See accompanying notes
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Vought Aircraft Industries, Inc.
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
Period Ending March 28, 2010
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
Period Ending March 28, 2010
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.
On March 23, 2010, we entered into a merger agreement with Triumph Group, Inc. pursuant to
which we will be acquired by Triumph. It is anticipated that in connection with that transaction
all of our currently outstanding material indebtedness will be repaid in full. Triumph is a public
company listed on the NYSE under the ticker symbol TGI, and is a designer, engineer,
manufacturer, repairer and over hauler of aircraft components and accessories. The details of this
merger agreement are further described in Note 14 Debt.
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 month period ended March 28, 2010 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2010.
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, 2009, filed with the U.S. Securities and Exchange Commission (SEC) on
March 25, 2010.
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 activities of the 787 business
have been segregated and reported as discontinued operations for the three month period ended
March 29, 2009 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.
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Table of Contents
The consolidated balance sheet at December 31, 2009 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.
Note 2
Recent Accounting Pronouncements
In December 2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update No. 2009-17, Consolidations (Topic 810) Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities (ASU 2009-17). ASU 2009-17 changes how a
reporting entity determines when an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. The determination of whether a reporting
entity is required to consolidate another entity is based on, among other things, the other
entitys purpose and design and the reporting entitys ability to direct the activities of the
other entity that most significantly impact the other entitys economic performance. ASU 2009-17
requires a reporting entity to provide additional disclosures about its involvement with variable
interest entities and any significant changes in risk exposure due to that involvement. A reporting
entity is required to disclose how its involvement with a variable interest entity affects the
reporting entitys financial statements. ASU 2009-17 is effective for fiscal years beginning after
November 15, 2009, and interim periods within those fiscal years. We adopted ASU 2009-17 as of
January 1, 2010, and its application had no impact on our interim, unaudited, condensed,
consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving
Disclosures about Fair Value Measurements (ASU 2010-06), which provides amendments to Fair Value
Measurements and Disclosures Overall subtopic of the ASC. ASU 2010-06 requires additional
disclosures and clarifications of existing disclosures for recurring and nonrecurring fair value
measurements. We adopted this update for our fiscal year beginning January 1, 2010. ASU 2010-06
did not have a material impact on our interim, unaudited, condensed, consolidated financial
statements.
Note 3 Discontinued Operations
On July 30, 2009, we sold the assets and operations of our 787 business conducted at North
Charleston, South Carolina to a wholly owned subsidiary of The Boeing Company. Concurrent with the
closing of the transaction, we entered into an agreement terminating and resolving rights and
obligations under the existing 787 supply agreement. We are currently providing 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
Charleston 787 business. The transition services are included as a component of continuing
operations and are expected to be completed in the next 15 months.
We 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
the three month period ended March 29, 2009. The following table summarizes the components of
income (loss) from discontinued operations, net of tax:
March 29, | ||||
2009 | ||||
($ in millions) | ||||
Revenue |
$ | 12.3 | ||
Operating income |
(4.3 | ) | ||
Income (loss) from discontinued operations, net of tax |
$ | (4.3 | ) |
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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:
March 28, | December 31, | |||||||
2010 | 2009 | |||||||
($ in millions) | ||||||||
Production costs of contracts in
process |
$ | 630.7 | $ | 659.1 | ||||
Finished goods |
2.4 | 3.1 | ||||||
Less: unliquidated progress
payments |
(179.7 | ) | (150.9 | ) | ||||
Total inventories |
$ | 453.4 | $ | 511.3 | ||||
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.
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:
March 28, | December 31, | |||||||
2010 | 2009 | |||||||
($ in millions) | ||||||||
Programs and contracts |
$ | 137.3 | $ | 137.3 | ||||
Less: accumulated amortization |
(118.7 | ) | (116.9 | ) | ||||
Identifiable intangible assets, net |
$ | 18.6 | $ | 20.4 | ||||
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The scheduled remaining amortization of identifiable intangible assets as of March 28, 2010 is
as follows:
($ in millions) | ||||
2010 |
$ | 3.0 | ||
2011 |
2.1 | |||
2012 |
2.1 | |||
2013 |
2.1 | |||
2014 |
2.1 | |||
Thereafter |
7.2 | |||
Total remaining amortization of identifiable
intangible assets |
$ | 18.6 | ||
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 | Other Post-retirement Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 28, | March 29, | March 28, | March 29, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
($ in millions) | ||||||||||||||||
Components of net periodic benefit
cost (income): |
||||||||||||||||
Service cost |
$ | 4.4 | $ | 4.0 | $ | 0.9 | $ | 1.0 | ||||||||
Interest cost |
28.7 | 28.2 | 5.3 | 6.4 | ||||||||||||
Expected return on plan assets |
(31.9 | ) | (31.4 | ) | | | ||||||||||
Amortization of net (gain) loss |
13.1 | 9.8 | 1.1 | 0.4 | ||||||||||||
Amortization of prior service cost |
3.1 | 3.1 | (7.0 | ) | (6.1 | ) | ||||||||||
Prior service cost recognized -
curtailment |
| 1.8 | | (0.2 | ) | |||||||||||
Plan settlement or curtailment
(gain)/loss |
| 4.6 | | 3.4 | ||||||||||||
Net periodic benefit cost |
$ | 17.4 | $ | 20.1 | $ | 0.3 | $ | 4.9 | ||||||||
Defined contribution plan cost |
$ | 5.3 | $ | 4.6 | ||||||||||||
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 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 $9.6 million of net non-recurring charges. |
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Note 7 Commitments
Warranty Reserve. We have established a reserve to provide for the estimated future cost of
warranties on our delivered products. We periodically review the reserve and adjustments are made
accordingly. A provision for warranties on products delivered is made on the basis of our
historical experience and specific warranty issues. Warranties cover such factors as
non-conformance to specifications and defects in material and workmanship. The majority of our
agreements include a three-year warranty, although certain programs have warranties up to 20 years.
The following table is a roll-forward of amounts accrued for warranty reserve included in
Current and Long-term liabilities:
Warranty | ||||
Reserve | ||||
($ in millions) | ||||
Balance at December 31, 2008 |
$ | 16.1 | ||
Warranty costs incurred |
(1.5 | ) | ||
Provisions for warranties |
(1.2 | ) | ||
Balance at December 31, 2009 |
$ | 13.4 | ||
Warranty costs incurred |
(1.0 | ) | ||
Provisions for warranties |
| |||
Balance at March 28, 2010 |
$ | 12.4 | ||
Consolidated Balance Sheet classification |
||||
Accrued and other liabilities |
4.5 | |||
Other non-current liabilities |
7.9 |
Note 8- Environmental Contingencies
We accrue environmental liabilities when we determine we are 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 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 million for environmental costs
incurred relating to pre-existing matters as of July 24, 2000. Pre-existing environmental
liabilities at the formerly Northrop Grumman Corporation sites exceeding our $12 million liability
limit remain the responsibility of Northrop Grumman Corporation under the terms of the acquisition
agreement, to the extent they are identified within 10 years from the acquisition date.
Thereafter, to the extent environmental remediation is required for hazardous materials including
asbestos, urea formaldehyde foam insulation or lead-based paints, used as construction materials
in, on, or otherwise affixed to structures or improvements on property acquired from Northrop
Grumman Corporation, we would be responsible. We have no material outstanding or unasserted
asbestos, urea formaldehyde foam insulation or lead-based paints liabilities including on property
acquired from Northrop Grumman Corporation.
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The following is a roll-forward of amounts accrued for environmental liabilities included
in Current and Long-term liabilities:
Environmental | ||||
Liability | ||||
($ in millions) | ||||
Balance at December 31, 2008 |
$ | 3.2 | ||
Environmental costs incurred |
(0.8 | ) | ||
Balance at December 31, 2009 |
2.4 | |||
Environmental costs incurred |
(0.2 | ) | ||
Balance at March 28, 2010 |
$ | 2.2 | ||
Consolidated Balance Sheet classification |
||||
Accrued and other liabilities |
0.6 | |||
Other non-current liabilities |
1.6 |
Note 9 Other Non-Current Liabilities
Other non-current liabilities consisted of the following:
March 28, | December 31, | |||||||
2010 | 2009 | |||||||
($ in millions) | ||||||||
Deferred income from the sale of
Hawthorne facility (a) |
$ | 12.6 | $ | 12.6 | ||||
State of Texas grant monies |
33.1 | 34.1 | ||||||
Deferred workers compensation |
17.7 | 16.5 | ||||||
Accrued warranties |
7.9 | 8.9 | ||||||
Other |
2.9 | 3.2 | ||||||
Total other non-current liabilities |
$ | 74.2 | $ | 75.3 | ||||
(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 2008, 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 during the fiscal year ended December 31, 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 repaid $0.9 million related to the Texas grant during the three month period ended March 28, 2010. Additionally, we reclassified $1.0 million related to the Texas grant to the Accrued and Other Liabilities caption in our Consolidated Balance Sheet due to a potential repayment of a portion of the grant funds in 2011. |
12
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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. Our unrecognized tax benefit position as of December 31, 2009
was $1.8 million and there has not been a material change to that position during the three months
ended March 28, 2010.
On March 23, 2010 the Patient Protection and Affordable Care Act was signed into law, which
was amended on March 30, 2010 by the Health Care and Education Reconciliation Act of 2010. These
Acts include provisions that eliminate a future tax deduction related to Medicare Part D subsidies
received on or after January 1, 2013. This change in tax law did not require an adjustment to tax
expense because the Company has recorded a full valuation allowance against the deferred tax asset
adjusted by the enacted legislation.
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 2000-2009 tax years. We are also subject to examination in various state jurisdictions for
the 2000-2009 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 March 28, 2010, 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 March 28, 2010 options granted and outstanding from the 2001 Stock Option Plan to
employees and directors amounted to 514,490 shares of which 451,560 are vested and exercisable.
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A summary of stock option activity for the three month period ended March 28, 2010 is as
follows:
Weighted | ||||||||||||
Average | ||||||||||||
Weighted | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Term | |||||||||||
Options | Price | (in Years) | ||||||||||
Outstanding at December 31, 2009 |
520,200 | $ | 15.56 | |||||||||
Granted |
| | ||||||||||
Forfeited or expired |
(5,710 | ) | 10.00 | |||||||||
Exercised |
| | ||||||||||
Outstanding at March 28, 2010 |
514,490 | $ | 15.62 | 2.4 | ||||||||
Vested or expected to vest (a) |
514,490 | $ | 15.62 | |||||||||
Exercisable at March 28, 2010 |
451,560 | $ | 14.96 | 2.4 | ||||||||
(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 March 28, 2010, 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 three month period ended March 28, 2010 is as follows:
Weighted | ||||||||||||
Average | ||||||||||||
Weighted | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Term | |||||||||||
SARs | Price | (in Years) | ||||||||||
Outstanding at December
31, 2009 |
976,840 | $ | 10.00 | 7.3 | ||||||||
Granted |
| | ||||||||||
Forfeited or expired |
| | ||||||||||
Exercised |
| | ||||||||||
Outstanding at March 28, 2010 |
976,840 | $ | 10.00 | 7.1 | ||||||||
Vested or expected to vest (a) |
976,840 | 10.00 | ||||||||||
Exercisable at March 28, 2010 |
801,479 | 10.00 | 6.7 |
(a) | Represents outstanding SARs reduced by expected forfeitures. |
During the year ended December 31, 2009, the exercise of SARs resulted in the issuance of
1,614 shares of common stock. No SARs were exercised during the three month period ended March 28,
2010.
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.
A summary of RSUs activity for the three months ended March 28, 2010 is as follows:
Grant-date | ||||||||
RSUs | Fair-Value | |||||||
Outstanding at December 31, 2009 |
617,105 | $ | 10.50 | |||||
Granted |
| | ||||||
Forfeited or expired |
| | ||||||
Exercised |
| | ||||||
Outstanding at March 28, 2010 |
617,105 | $ | 10.50 | |||||
Vested or expected to vest (a) |
617,105 | |||||||
Exercisable at March 28, 2010 |
260,976 | $ | 11.73 | |||||
(a) | Represents outstanding RSUs reduced by expected forfeitures. |
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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 2010 and 2009, 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 | ||||||||
March 28, 2010 | March 29, 2009 | |||||||
($ in millions) | ||||||||
Stock Options |
$ | | $ | | ||||
Rabbi Trust |
2.3 | | ||||||
Stock appreciation rights (SARs) |
0.1 | 0.1 | ||||||
Restricted stock units (RSUs) |
0.1 | 0.3 | ||||||
Restricted shares |
| 0.1 | ||||||
Stock compensation expense, gross |
$ | 2.5 | $ | 0.5 | ||||
Change in forfeiture estimate |
0.2 | | ||||||
Stock compensation expense, net |
$ | 2.7 | $ | 0.5 | ||||
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 month period ended March 28, 2010 and March 29, 2009 was immaterial.
Shares Held in Rabbi Trust
During the three month period ended March 28, 2010, we recorded additional stock compensation
expense, included in general and administrative expense, to reflect the impact of an estimated
increase in the fair value of our common stock. This increase in value resulted in an increase to
our accrued payroll and employee benefits line item on our balance sheet.
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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 March 29, 2009 but was adjusted to 22%
during the three month period ended June 28, 2009. During the three month period ended March 28.
2010, we adjusted the forfeiture rate to assume no further forfeitures. As a result, we recorded
$0.1 million of additional stock compensation expense related to SARs.
No SARs were granted during the three month periods ended March 28, 2010 and March 29, 2009.
As of March 28, 2010, we had $0.5 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
March 29, 2009 but was adjusted to 22% during the three month period ended June 28, 2009. During
the three month period ended March 28. 2010, we adjusted the forfeiture rate to assume no further
forfeitures. As a result, we recorded $0.1 million additional compensation expense related to
RSUs. Additionally, 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 March 28, 2010, we had $0.7 million of unrecognized compensation expense remaining.
Note 13- Comprehensive Income
Comprehensive income consisted of the following:
For the Three Months Ended | ||||||||
March 28, | March 29, | |||||||
2010 | 2009 | |||||||
($ in millions) | ||||||||
Net income |
$ | 26.8 | $ | 17.9 | ||||
Other comprehensive income (loss), net of tax |
||||||||
Pension |
16.2 | 11.4 | ||||||
OPEB |
(5.9 | ) | 27.0 | |||||
Total other comprehensive income |
$ | 37.1 | $ | 56.3 | ||||
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Note 14 Debt
Our total outstanding debt as of March 28, 2010 was $590.4 million which included $320.4
million incurred under our senior credit facilities and $270.0 million of 8% Senior Notes due 2011
(Senior Notes). The $320.4 million balance under our senior credit facilities reflected on the
Consolidated Balance Sheet includes $322.2 million in outstanding term loans, net of $1.8 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
as 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 $271.9 million and $269.7 million as of March 28, 2010
and December 31, 2009, 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.
Our effective interest rate on the Incremental Facility for the three month periods ended March 28,
2010 and March 29, 2009 was 12.0% and 10.1% respectively.
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 March
28, 2010, the cash restricted as collateral for outstanding letters of credit was $43.4 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%.
In August 2009, Barclays Bank PLC replaced Lehman Commercial Paper, Inc. as the
administrative and collateral agent under our existing senior credit facilities.
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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). Because of the requirement to refinance the Senior Notes, the amounts
outstanding under our senior credit facility have been classified as a current liability as of
March 28, 2010.
On March 23, 2010, we entered into a merger agreement with Triumph Group, Inc. pursuant to
which we will be acquired by Triumph. It is anticipated that in connection with that transaction
all of our currently outstanding material indebtedness will be repaid in full. The consummation of
the acquisition is subject to, among other things, approval of Triumphs stockholders and other
customary closing conditions, which may not be satisfied. In the event that the anticipated
acquisition is not completed and such indebtedness remains outstanding, we plan to refinance our
senior credit facility or the Senior Notes prior to the last business day of 2010. There are no
assurances that we will be able to refinance on commercially reasonable terms or at all. This
creates an uncertainty about our ability to continue as a going concern. Notwithstanding this, the
consolidated financial statements and related notes have been prepared assuming that we will
continue as a going concern.
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 pursuant to this management agreement for the three month periods ended March 28, 2010 and
March 29, 2009, 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.
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 March 28, 2010 and March 29, 2009 was approximately $8.1 million and $5.1
million, respectively.
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 $1.0 million was paid to Wesco under those agreements for the three month period
ending March 29, 2009.
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. During 2008 and most of 2009, The Carlyle
Group held a majority equity interest in the Gardner Group. As a result, the Gardner Group and
our company were both under common control of The Carlyle Group through its affiliated funds during
those periods. The Carlyle Group may have indirectly benefited 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 month period ended March 29, 2009 was
$0.2 million.
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Table of Contents
Note 16- Guarantor Subsidiaries
The 8% Senior Notes due 2011 are fully and unconditionally and jointly and severally
guaranteed, on a senior unsecured basis, by our 100% owned subsidiaries. In accordance with
criteria established under Rule 3-10(f) of Regulation S-X under the Securities Act of 1933, as
amended (the Securities Act), summarized financial information of Vought and its guarantor
subsidiaries is presented below:
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Vought Aircraft Industries, Inc.
Consolidating Balance Sheet
March 28, 2010
($ in millions, except share amounts) (Unaudited)
Consolidating Balance Sheet
March 28, 2010
($ in millions, except share amounts) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Total | |||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 149.6 | $ | 0.1 | $ | | $ | 149.7 | ||||||||
Restricted cash |
43.4 | | | 43.4 | ||||||||||||
Trade and other receivables |
152.8 | 6.7 | | 159.5 | ||||||||||||
Intercompany receivable |
12.2 | 8.7 | (20.9 | ) | | |||||||||||
Inventories |
439.6 | 13.8 | | 453.4 | ||||||||||||
Other current assets |
9.5 | 0.6 | | 10.1 | ||||||||||||
Total current assets |
807.1 | 29.9 | (20.9 | ) | 816.1 | |||||||||||
Property, plant and equipment, net |
265.1 | 8.0 | | 273.1 | ||||||||||||
Goodwill |
341.1 | 63.7 | | 404.8 | ||||||||||||
Identifiable intangible assets, net |
18.6 | | | 18.6 | ||||||||||||
Other non-current assets |
0.9 | | | 0.9 | ||||||||||||
Investment in affiliated company |
81.4 | | (81.4 | ) | | |||||||||||
Total assets |
$ | 1,514.2 | $ | 101.6 | $ | (102.3 | ) | $ | 1,513.5 | |||||||
Liabilities and stockholders equity (deficit) |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable, trade |
$ | 165.6 | $ | 5.5 | $ | | $ | 171.1 | ||||||||
Intercompany payable |
8.7 | 12.2 | (20.9 | ) | | |||||||||||
Accrued and other liabilities |
58.5 | 1.3 | | 59.8 | ||||||||||||
Accrued payroll and employee benefits |
43.3 | 1.2 | | 44.5 | ||||||||||||
Accrued post-retirement benefits-current |
37.5 | | | 37.5 | ||||||||||||
Accrued pension-current |
3.3 | | | 3.3 | ||||||||||||
Current portion of long-term bank debt |
320.4 | | | 320.4 | ||||||||||||
Accrued contract liabilities |
40.0 | | | 40.0 | ||||||||||||
Total current liabilities |
677.3 | 20.2 | (20.9 | ) | 676.6 | |||||||||||
Long-term liabilities: |
||||||||||||||||
Accrued post-retirement benefits |
363.5 | | | 363.5 | ||||||||||||
Accrued pension |
595.2 | | | 595.2 | ||||||||||||
Long-term bond debt |
270.0 | | | 270.0 | ||||||||||||
Other non-current liabilities |
74.2 | | | 74.2 | ||||||||||||
Total liabilities |
1,980.2 | 20.2 | (20.9 | ) | 1,979.5 | |||||||||||
Stockholders equity (deficit): |
||||||||||||||||
Common stock, par value $.01 per share;
50,000,000 shares authorized, 24,818,806 issued
and outstanding at March 29, 2009 |
0.3 | | | 0.3 | ||||||||||||
Additional paid-in capital |
423.2 | 80.3 | (80.3 | ) | 423.2 | |||||||||||
Shares held in rabbi trust |
(1.6 | ) | | | (1.6 | ) | ||||||||||
Accumulated equity (deficit) |
(146.2 | ) | 1.1 | (1.1 | ) | (146.2 | ) | |||||||||
Accumulated other comprehensive loss |
(741.7 | ) | | | (741.7 | ) | ||||||||||
Total stockholders equity (deficit) |
$ | (466.0 | ) | $ | 81.4 | $ | (81.4 | ) | $ | (466.0 | ) | |||||
Total liabilities and stockholders equity
(deficit) |
$ | 1,514.2 | $ | 101.6 | $ | (102.3 | ) | $ | 1,513.5 | |||||||
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Vought Aircraft Industries, Inc.
Consolidating Balance Sheet
December 31, 2009
($ in millions, except par value per share)
Consolidating Balance Sheet
December 31, 2009
($ in millions, except par value per share)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Total | |||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 115.2 | $ | 0.8 | $ | | $ | 116.0 | ||||||||
Restricted cash |
43.8 | | | 43.8 | ||||||||||||
Trade and other receivables |
120.9 | 7.0 | | 127.9 | ||||||||||||
Intercompany receivable |
15.7 | 8.2 | (23.9 | ) | | |||||||||||
Inventories |
497.9 | 13.4 | | 511.3 | ||||||||||||
Other current assets |
7.9 | 0.6 | | 8.5 | ||||||||||||
Total current assets |
801.4 | 30.0 | (23.9 | ) | 807.5 | |||||||||||
Property, plant and equipment, net |
267.5 | 8.4 | | 275.9 | ||||||||||||
Goodwill |
341.1 | 63.7 | | 404.8 | ||||||||||||
Identifiable intangible assets, net |
20.4 | | | 20.4 | ||||||||||||
Other non-current assets |
1.3 | | | 1.3 | ||||||||||||
Investment in affiliated company |
79.9 | | (79.9 | ) | | |||||||||||
Total assets |
$ | 1,511.6 | $ | 102.1 | $ | (103.8 | ) | $ | 1,509.9 | |||||||
Liabilities and stockholders equity (deficit) |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable, trade |
$ | 137.3 | $ | 3.6 | $ | | $ | 140.9 | ||||||||
Intercompany payable |
8.2 | 15.7 | (23.9 | ) | | |||||||||||
Accrued and other liabilities |
66.8 | 1.5 | | 68.3 | ||||||||||||
Accrued payroll and employee benefits |
45.5 | 1.4 | | 46.9 | ||||||||||||
Accrued post-retirement benefits-current |
37.4 | | | 37.4 | ||||||||||||
Accrued pension-current |
3.5 | | | 3.5 | ||||||||||||
Current portion of long-term bank debt |
319.8 | | | 319.8 | ||||||||||||
Accrued contract liabilities |
74.2 | | | 74.2 | ||||||||||||
Total current liabilities |
692.7 | 22.2 | (23.9 | ) | 691.0 | |||||||||||
Long-term liabilities: |
||||||||||||||||
Accrued post-retirement benefits |
364.9 | | | 364.9 | ||||||||||||
Accrued pension |
612.2 | | | 612.2 | ||||||||||||
Long-term bond debt |
270.0 | | | 270.0 | ||||||||||||
Other non-current liabilities |
75.3 | | | 75.3 | ||||||||||||
Total liabilities |
2,015.1 | 22.2 | (23.9 | ) | 2,013.4 | |||||||||||
Stockholders equity (deficit): |
||||||||||||||||
Common stock, par value $.01 per share;
50,000,000 shares authorized, 24,818,806
issued and outstanding at December 31,
2009 |
0.3 | | | 0.3 | ||||||||||||
Additional paid-in capital |
422.8 | 80.3 | (80.3 | ) | 422.8 | |||||||||||
Shares held in rabbi trust |
(1.6 | ) | | | (1.6 | ) | ||||||||||
Accumulated deficit |
(173.0 | ) | (0.4 | ) | 0.4 | (173.0 | ) | |||||||||
Accumulated other comprehensive loss |
(752.0 | ) | | | (752.0 | ) | ||||||||||
Total stockholders equity (deficit) |
$ | (503.5 | ) | $ | 79.9 | $ | (79.9 | ) | $ | (503.5 | ) | |||||
Total liabilities and stockholders equity
(deficit) |
$ | 1,511.6 | $ | 102.1 | $ | (103.8 | ) | $ | 1,509.9 | |||||||
22
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Vought Aircraft Industries, Inc.
Consolidating Statement of Operations
Three Months Ended March 28, 2010
($ in millions) (Unaudited)
Consolidating Statement of Operations
Three Months Ended March 28, 2010
($ in millions) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Totals | |||||||||||||
Revenue |
$ | 455.7 | $ | 18.5 | $ | (3.7 | ) | $ | 470.5 | |||||||
Costs and expenses |
||||||||||||||||
Cost of sales |
379.4 | 15.8 | (3.7 | ) | 391.5 | |||||||||||
Selling, general and administrative expenses |
38.5 | 1.2 | | 39.7 | ||||||||||||
Total costs and expenses |
417.9 | 17.0 | (3.7 | ) | 431.2 | |||||||||||
Operating income |
37.8 | 1.5 | | 39.3 | ||||||||||||
Other income (expense) |
||||||||||||||||
Interest income |
0.1 | | | 0.1 | ||||||||||||
Interest expense |
(12.6 | ) | | | (12.6 | ) | ||||||||||
Equity in income (loss) of consolidated
subsidiaries |
1.5 | | (1.5 | ) | | |||||||||||
Income (loss) before income taxes |
26.8 | 1.5 | (1.5 | ) | 26.8 | |||||||||||
Income tax expense |
| | | | ||||||||||||
Net income (loss) |
$ | 26.8 | $ | 1.5 | $ | (1.5 | ) | $ | 26.8 | |||||||
Vought Aircraft Industries, Inc.
Consolidating Statement of Operations
Three Months Ended March 29, 2009
($ in millions) (Unaudited)
Consolidating Statement of Operations
Three Months Ended March 29, 2009
($ in millions) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Totals | |||||||||||||
Revenue |
$ | 377.0 | $ | 17.0 | $ | (3.7 | ) | $ | 390.3 | |||||||
Costs and expenses |
||||||||||||||||
Cost of sales |
313.4 | 15.1 | (3.7 | ) | 324.8 | |||||||||||
Selling, general and administrative expenses |
27.3 | 1.2 | | 28.5 | ||||||||||||
Total costs and expenses |
340.7 | 16.3 | (3.7 | ) | 353.3 | |||||||||||
Operating income |
36.3 | 0.7 | | 37.0 | ||||||||||||
Other income (expense) |
||||||||||||||||
Interest income |
0.2 | | | 0.2 | ||||||||||||
Interest expense |
(15.0 | ) | | | (15.0 | ) | ||||||||||
Equity in income (loss) of consolidated
subsidiaries |
0.7 | | (0.7 | ) | | |||||||||||
Income (loss) before income taxes |
22.2 | 0.7 | (0.7 | ) | 22.2 | |||||||||||
Income tax expense |
| | | | ||||||||||||
Income (loss) from continuing operations |
22.2 | 0.7 | (0.7 | ) | 22.2 | |||||||||||
Income (loss) from discontinued operations, net
of tax |
(4.3 | ) | | | (4.3 | ) | ||||||||||
Net income (loss) |
$ | 17.9 | $ | 0.7 | $ | (0.7 | ) | $ | 17.9 | |||||||
23
Table of Contents
Vought Aircraft Industries, Inc.
Consolidating Cash Flow Statement
Three Months Ended March 28, 2010
($ in millions) (Unaudited)
Consolidating Cash Flow Statement
Three Months Ended March 28, 2010
($ in millions) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Total | |||||||||||||
Operating activities |
||||||||||||||||
Net income (loss) |
$ | 26.8 | $ | 1.5 | $ | (1.5 | ) | $ | 26.8 | |||||||
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
||||||||||||||||
Depreciation and amortization |
12.5 | 0.4 | | 12.9 | ||||||||||||
Stock compensation expense |
2.7 | | | 2.7 | ||||||||||||
Income from investments in consolidated subsidiaries |
(1.5 | ) | | 1.5 | | |||||||||||
Changes in current assets and liabilities: |
||||||||||||||||
Trade and other receivables |
(31.9 | ) | 0.3 | | (31.6 | ) | ||||||||||
Intercompany accounts receivable |
3.5 | (0.5 | ) | (3.0 | ) | | ||||||||||
Inventories |
58.3 | (0.4 | ) | | 57.9 | |||||||||||
Other current assets |
(2.6 | ) | | | (2.6 | ) | ||||||||||
Accounts payable, trade |
28.3 | 1.9 | | 30.2 | ||||||||||||
Intercompany accounts payable |
0.5 | (3.5 | ) | 3.0 | | |||||||||||
Accrued payroll and employee benefits |
(2.2 | ) | (0.2 | ) | | (2.4 | ) | |||||||||
Accrued and other liabilities |
(10.7 | ) | (0.2 | ) | | (10.9 | ) | |||||||||
Accrued contract liabilities |
(34.2 | ) | | | (34.2 | ) | ||||||||||
Other assets and liabilitieslong-term |
(8.8 | ) | | | (8.8 | ) | ||||||||||
Net cash provided by (used in) operating activities |
40.7 | (0.7 | ) | | 40.0 | |||||||||||
Investing activities |
||||||||||||||||
Capital expenditures |
(6.7 | ) | | | (6.7 | ) | ||||||||||
Net cash used in investing activities |
(6.7 | ) | | | (6.7 | ) | ||||||||||
Financing activities |
||||||||||||||||
Changes in restricted cash |
0.4 | | | 0.4 | ||||||||||||
Net cash provided by (used in) financing activities |
0.4 | | | 0.4 | ||||||||||||
Net increase in cash and cash equivalents |
34.4 | (0.7 | ) | | 33.7 | |||||||||||
Cash and cash equivalents at beginning of period |
115.2 | 0.8 | | 116.0 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 149.6 | $ | 0.1 | $ | | $ | 149.7 | ||||||||
24
Table of Contents
Vought Aircraft Industries, Inc.
Consolidating Cash Flow Statement
Three Months Ended March 29, 2009
($ in millions) (Unaudited)
Consolidating Cash Flow Statement
Three Months Ended March 29, 2009
($ in millions) (Unaudited)
Guarantor | Intercompany | |||||||||||||||
Vought | Subsidiaries | Eliminations | Total | |||||||||||||
Operating activities |
||||||||||||||||
Net income (loss) |
$ | 17.9 | $ | 0.7 | $ | (0.7 | ) | $ | 17.9 | |||||||
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities: |
||||||||||||||||
Depreciation and amortization |
15.5 | 0.4 | | 15.9 | ||||||||||||
Stock compensation expense |
0.5 | | | 0.5 | ||||||||||||
Income from investments in
consolidated subsidiaries |
(0.7 | ) | | 0.7 | | |||||||||||
Changes in current assets and
liabilities: |
||||||||||||||||
Trade and other receivables |
(8.5 | ) | (1.1 | ) | | (9.6 | ) | |||||||||
Intercompany accounts receivable |
(1.4 | ) | (0.6 | ) | 2.0 | | ||||||||||
Inventories |
(65.0 | ) | (1.1 | ) | | (66.1 | ) | |||||||||
Other current assets |
(3.6 | ) | (0.1 | ) | | (3.7 | ) | |||||||||
Accounts payable, trade |
10.7 | 1.4 | | 12.1 | ||||||||||||
Intercompany accounts payable |
0.6 | 1.4 | (2.0 | ) | | |||||||||||
Accrued payroll and employee
benefits |
(1.4 | ) | (0.3 | ) | | (1.7 | ) | |||||||||
Accrued and other liabilities |
(0.1 | ) | 0.1 | | | |||||||||||
Accrued contract liabilities |
(36.7 | ) | | | (36.7 | ) | ||||||||||
Other assets and
liabilities long-term |
(2.6 | ) | 1.0 | | (1.6 | ) | ||||||||||
Net cash provided by (used in)
operating activities |
(74.8 | ) | 1.8 | | (73.0 | ) | ||||||||||
Investing activities |
||||||||||||||||
Capital expenditures |
(6.5 | ) | (1.8 | ) | | (8.3 | ) | |||||||||
Net cash used in investing activities |
(6.5 | ) | (1.8 | ) | | (8.3 | ) | |||||||||
Financing activities |
||||||||||||||||
Proceeds from short-term bank debt |
135.0 | | | 135.0 | ||||||||||||
Proceeds from long-term bank debt |
25.0 | | | 25.0 | ||||||||||||
Net cash provided by (used in)
financing activities |
160.0 | | | 160.0 | ||||||||||||
Net increase in cash and cash
equivalents |
78.7 | | | 78.7 | ||||||||||||
Cash and cash equivalents at
beginning of period |
86.6 | 0.1 | | 86.7 | ||||||||||||
Cash and cash equivalents at end of
period |
$ | 165.3 | $ | 0.1 | $ | | $ | 165.4 | ||||||||
25
Table of Contents
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 March 28, 2010, we had $149.4 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 of this asset involves Level 2 inputs and is
determined based on a market approach.
Our deferred compensation liability to former executives is based on the most recently
obtained fair value of our common stock. As of March 28, 2010, the determination of the fair value
of this $4.4 million liability involved Level 3 inputs. The value of this liability has increased
by $2.3 million since December 31, 2009.
Note 18 Subsequent Events
Subsequent to
March 28, 2010, and in connection with our prior entry into the merger agreement with Triumph, we
entered into letter agreements relating to certain transaction bonus opportunities totaling
approximately $5.0 million with certain executives. The letter agreements provide for the payment
of a cash bonus to each of the executives within 5 days of the closing of the merger with Triumph.
The bonuses are conditioned on the closing of the merger with Triumph and the executives execution
of a general release of claims against us. In the event the merger agreement is terminated or
amended prior to the closing date of the merger, we have reserved the right to revise or retract
the executives right to receive the bonus.
26
Table of Contents
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, 2009 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 are also a key supplier on newer platforms with high
growth potential. 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 10% 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 $2.1 billion at March 28, 2010. 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. Also, volatility in the financial markets may
impact the overall demand for our commercial and business aircraft products. To the extent
financial market conditions worsen, we could experience decline in the future on demand for our
commercial and business aircraft products. 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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Table of Contents
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 in recent years, the unprecedented global market and economic conditions along with
tighter credit conditions resulted in reduced aircraft demand in 2009. 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 for the next few years. Additionally, future volatility in the U.S. and international
markets and economies and delayed recovery of 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. Production rates slowed on many
of our commercial aircraft in 2009 and we expect those lower rates to continue through 2010 with a
slow recovery thereafter.
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. The U.S.
government has funded aircraft that would support C-17 production through mid 2012. However, our
business could be adversely impacted if the Government does not fund additional C-17 aircraft.
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. Reflecting the pressures in the financial and
business markets in 2009, we experienced reduced production rates on several of our programs and
were notified of the suspension of the Cessna Citation Columbus Model 850 program. We expect
those reduced delivery rates to continue through the end of 2010 with slow recovery thereafter. In
spite of these pressures, as a major supplier to the top-selling G350, G450, G500 and G550 and
Citation X programs, we still believe we are well positioned to operate in key segments of the
business jet market as macro-economic conditions continue to improve.
On July 30, 2009, we sold the assets and operations of our 787 business conducted at North
Charleston, South Carolina to a wholly owned subsidiary of The Boeing Company. Concurrent with the
closing of the transaction, we entered into an agreement terminating and resolving rights and
obligations under the existing 787 supply agreement. Under a newly negotiated contract, we still
manufacture certain components for the 787 program as well as provide engineering services to
Boeing pursuant to an engineering services agreement. We are providing certain transition services
to Boeing pursuant to a transition services agreement and performing new work scope on the Boeing
737 and 777 aircraft pursuant to a long-term supply agreement.
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). Because of the requirement to refinance the Senior Notes, the amounts
outstanding under our senior credit facility have been classified as a current liability as of
March 28, 2010.
28
Table of Contents
On March 23, 2010, we entered into a merger agreement with Triumph Group, Inc. pursuant to
which we will be acquired by Triumph. It is anticipated that in connection with that transaction
all of our currently outstanding material indebtedness will be repaid in full. The consummation of
the acquisition is subject to, among other things, approval of Triumphs stockholders and other
customary closing conditions, which may not be satisfied. In the event that the anticipated
acquisition is not completed and such indebtedness remains outstanding, we plan to refinance our
senior credit facility or the Senior Notes prior to the last business day of 2010. There are no
assurances that we will be able to refinance on commercially reasonable terms or at all. This
creates an uncertainty about our ability to continue as a going concern. Notwithstanding this, the
consolidated financial statements and related notes have been prepared assuming that we will
continue as a going concern.
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.
29
Table of Contents
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.
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).
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.
See Note 3 Discontinued Operations in the notes to the interim unaudited condensed consolidated
financial statements included in Item 1.
Results of Operations
Three Months | Three Months | |||||||||||
Ended | Ended | |||||||||||
March 28, 2010 | March 29, 2009 | $ Change | ||||||||||
($ in millions) | ||||||||||||
Revenue: |
||||||||||||
Commercial |
$ | 229.9 | $ | 168.5 | $ | 61.4 | ||||||
Military |
172.9 | 146.2 | 26.7 | |||||||||
Business Jet |
67.7 | 75.6 | (7.9 | ) | ||||||||
Total revenue |
$ | 470.5 | $ | 390.3 | $ | 80.2 | ||||||
Costs and expenses: |
||||||||||||
Cost of sales |
391.5 | 324.8 | 66.7 | |||||||||
Selling, general
and administrative |
39.7 | 28.5 | 11.2 | |||||||||
Total costs and expenses |
$ | 431.2 | $ | 353.3 | $ | 77.9 | ||||||
Operating income |
39.3 | 37.0 | 2.3 | |||||||||
Interest expense, net |
(12.5 | ) | (14.8 | ) | 2.3 | |||||||
Income tax expense |
| | | |||||||||
Income from continuing
operations |
$ | 26.8 | $ | 22.2 | $ | 4.6 | ||||||
Income from
discontinued
operations, net of tax |
| (4.3 | ) | 4.3 | ||||||||
Net income |
$ | 26.8 | $ | 17.9 | $ | 8.9 | ||||||
30
Table of Contents
Comparison of Results of Operations for the Three Months Ended March 28, 2010 and March 29, 2009
Revenues. Revenue for the three months ended March 28, 2010 was $470.5 million, an increase of
$80.2 million, or 21%, compared with the same period in the prior year. When comparing the first
quarter of 2010 with the same period in the prior year:
| Commercial revenue increased $61.4 million, or 36%, primarily due to increased sales for the 747-8 program. | ||
| Military revenue increased $26.7 million, or 18% mainly due increased deliveries for the V-22 and C-130 programs as well as higher spares deliveries for the C-17 program. | ||
| Business Jet revenue decreased $7.9 million, or 10%, primarily due to the absence in 2010 of non-recurring sales for the Cessna Citation Columbus 850. |
Operating income. Operating income from continuing operations for the three months ended March 28,
2010 was $39.3 million, an increase of $2.3 million, or 6%, compared with $37.0 million for the
comparable period in the prior year. This increase was largely due to increased deliveries on
747-8 program and the absence in 2010 of a pension and other post-employment benefits curtailment
charge recognized in 2009 that resulted from the IAM collective bargaining agreement in Nashville
partially offset by lower margins on military programs.
Interest expense, net. Interest expense, net for the three month period ended March 28, 2010 was
$12.5 million, a decrease of $2.3 million, or 16%, compared with $14.8 million for the same period
in the prior year. Interest expense decreased due to lower outstanding debt balances in 2010 as
compared to 2009.
Income (loss) from discontinued operations, net of tax. Loss from discontinued operations, net of
tax for the three month period ended March 29, 2009 was $4.3 million reflecting the loss recognized
on the operations of the 787 business during that period.
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.
31
Table of Contents
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.
Accrued contract liabilities consisted of the following:
March 28, | December 31, | |||||||
2010 | 2009 | |||||||
($ in millions) | ||||||||
Advances and progress billings |
$ | 34.2 | $ | 59.4 | ||||
Forward loss |
| 1.7 | ||||||
Other |
5.8 | 13.1 | ||||||
Total accrued contract
liabilities |
$ | 40.0 | $ | 74.2 | ||||
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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.
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.
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, 2009 and March 28, 2010. 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.
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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,
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.
Recent Accounting Pronouncements
In December 2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update No. 2009-17, Consolidations (Topic 810) Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities (ASU 2009-17). ASU 2009-17 changes how a
reporting entity determines when an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. The determination of whether a reporting
entity is required to consolidate another entity is based on, among other things, the other
entitys purpose and design and the reporting entitys ability to direct the activities of the
other entity that most significantly impact the other entitys economic performance. ASU 2009-17
requires a reporting entity to provide additional disclosures about its involvement with variable
interest entities and any significant changes in risk exposure due to that involvement. A reporting
entity is required to disclose how its involvement with a variable interest entity affects the
reporting entitys financial statements. ASU 2009-17 is effective for fiscal years beginning after
November 15, 2009, and interim periods within those fiscal years. We adopted ASU 2009-17 as of
January 1, 2010, and its application had no impact on our interim, unaudited, condensed,
consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving
Disclosures about Fair Value Measurements (ASU 2010-06), which provides amendments to Fair Value
Measurements and Disclosures Overall subtopic of the ASC. ASU 2010-06 requires additional
disclosures and clarifications of existing disclosures for recurring and nonrecurring fair value
measurements. We adopted this update for our fiscal year beginning January 1, 2010. ASU 2010-06
did not have a material impact on our interim, unaudited, condensed, consolidated financial
statements.
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.
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We believe that cash flow from operations, cash and cash equivalents on hand and funds that
will be raised as part of a refinancing or restructuring of our senior credit facility and Senior
Notes will provide adequate funding for our ongoing working capital expenditures, pension
contributions and capital investments required to meet our current contractual and legal
commitments for at least the next twelve months. However, there is no assurance that we can
refinance the Senior Notes or the senior credit facility prior to the last business day of 2010.
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, 2009, we provided estimates of
our pension plan contributions for 2010 2014. Our future pension contributions are primarily
driven by the funded level of our plans as of December 31 of each fiscal year. Two of the factors
used in determining our liability under our plan are the discount rate and the market value of the
plan assets.
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 March 28, 2010, our total outstanding debt was approximately $590.4 million. This amount
includes $270.0 million of 8% Senior Notes due 2011 (Senior Notes) and $320.4 million of term
loans outstanding under our senior credit facilities. Additionally, we had $41.3 million in
outstanding letters of credit with $43.4 million of restricted cash as collateral for them.
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. However, we have 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). Because of the requirement to refinance the Senior Notes, the amounts
outstanding under our senior credit facility have been classified as a current liability as of
March 28, 2010.
On March 23, 2010, we entered into a merger agreement with Triumph Group, Inc. pursuant to
which we will be acquired by Triumph. It is anticipated that in connection with that transaction
all of our currently outstanding material indebtedness will be repaid in full. The consummation of
the acquisition is subject to, among other things, approval of Triumphs stockholders and other
customary closing conditions, which may not be satisfied. In the event that the anticipated
acquisition is not completed and such indebtedness remains outstanding, we plan to refinance our
senior credit facility or the Senior Notes prior to the last business day of 2010. There are no
assurances that we will be able to refinance on commercially reasonable terms or at all. This
creates an uncertainty about our ability to continue as a going concern. Notwithstanding this, the
consolidated financial statements and related notes have been prepared assuming that we will
continue as a going concern.
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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 March 28, 2010, 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 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 2010 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 three month period ended March 28, 2010 were 1.61:1.00 and 5.39:1.00, respectively.
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.
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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.
Adjusted EBITDA for the three month period ended March 28, 2010 was $60.7 million, a decrease
of $7.5 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 | ||||||||
March 28, | March 29, | |||||||
2010 | 2009 | |||||||
Net cash provided by (used in) operating activities |
$ | 40.0 | $ | (73.0 | ) | |||
Interest expense, net |
12.5 | 14.8 | ||||||
Income tax expense (benefit) |
| | ||||||
Stock compensation expense |
(2.7 | ) | (0.5 | ) | ||||
Non-cash interest expense |
(1.6 | ) | (1.8 | ) | ||||
787 tooling amortization |
| 0.5 | ||||||
Changes in operating assets and liabilities |
2.4 | 107.3 | ||||||
EBITDA |
$ | 50.6 | $ | 47.3 | ||||
Non-recurring investment in Boeing 787 (1) |
| 3.1 | ||||||
Unusual charges & other non-recurring program
costs (2) |
6.9 | 7.2 | ||||||
Pension & OPEB curtailment and non-cash expense (3) |
| 9.6 | ||||||
Other (4) |
3.2 | 1.0 | ||||||
Adjusted EBITDA |
$ | 60.7 | $ | 68.2 | ||||
(1) | Investment in Boeing 787The 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. Our credit agreement 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 investment that was expensed during the period was excluded from the calculation of Adjusted EBITDA. |
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(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. | |
For the three month periods ended March 28, 2010 and March 29, 2009, we incurred $3.9 million and $3.1 million, respectively, of non-recurring costs primarily related to a facilities rationalization initiative and $3.0 million and $0.3 million of non-recurring costs related to Information Systems implementation initiatives. Additionally, for the three month period ended March 29, 2009, we recognized an additional $3.8 million in non-recurring program costs related to the strike at our Nashville facility. | ||
(3) | 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 three month period ended March 29, 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. | |
(4) | 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 |
| 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. |
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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 Three Months Ended | ||||||||||||
March 28, | March 29, | |||||||||||
2010 | 2009 | Change | ||||||||||
($ in millions) | ||||||||||||
Net income |
$ | 26.8 | $ | 17.9 | $ | 8.9 | ||||||
Non-cash items |
15.6 | 16.4 | (0.8 | ) | ||||||||
Changes in working capital |
(2.4 | ) | (107.3 | ) | 104.9 | |||||||
Net cash provided by (used in) operating activities |
40.0 | (73.0 | ) | 113.0 | ||||||||
Net cash used in investing activities |
(6.7 | ) | (8.3 | ) | 1.6 | |||||||
Net cash provided by financing activities |
0.4 | 160.0 | (159.6 | ) | ||||||||
Net increase in cash and cash equivalents |
33.7 | 78.7 | (45.0 | ) | ||||||||
Cash and cash equivalents at beginning of period |
116.0 | 86.7 | 29.3 | |||||||||
Cash and cash equivalents at end of period |
$ | 149.7 | $ | 165.4 | $ | (15.7 | ) | |||||
Net cash provided by operating activities for the three month period ended March 28, 2010 was
$40.0 million, an increase of $113.0 million compared to cash used of $73.0 million for the same
period in 2009. This change primarily resulted from the timing of customer payments for the 747-8
program and the timing of milestone payments for the C-17 program.
Net cash used in investing activities for the three months ended March 28, 2010 was $6.7
million, a decrease of $1.6 million compared to net cash used in investing activities of $8.3
million for the same period in 2009. The change is due to fewer capital expenditures in 2010.
Net cash provided by financing activities for the three months ended March 28, 2010 was $0.4
million, a change of $159.6 million compared to cash provided of $160.0 million for the same period
in 2009. This change primarily resulted from the absence in 2010 of the $135.0 million in revolver
borrowings and the $25.0 million conversion of the synthetic letter of credit facility to a term
loan that occurred in 2009.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements as of March 28, 2010.
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 impact 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.
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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 historical 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 2010 and after that, experience increases that are in line with
inflation. 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
would adversely affect our production schedules and contract profitability. We maintain an
extensive 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 $320.4 million of long-term, variable rate
debt outstanding under our senior credit facilities at March 28, 2010. A one-percentage point
increase in interest rates on our long-term variable-rate indebtedness would decrease our annual
pre-tax income by approximately $3.2 million for the year ending December 31, 2010. While there
was no debt outstanding under our Revolver at March 28, 2010, any future borrowings would be
subject to the same type of variable rate risks. 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 March 28, 2010 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, 2009.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the three months ended March 28, 2010, we did not issue any shares of our common stock.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 5. | OTHER INFORMATION |
Compensatory Arrangements of Certain Officers.
On May 6, 2010, and in connection with our prior entry into the merger agreement with
Triumph, we entered into a Change in Control Severance Agreement with each of Kevin McGlinchey, our
Vice President, General Counsel and Corporate Secretary and Ronald Muckley, our Vice President,
Engineering and Materiel. In addition, on May 6, 2010, and in connection with the merger
agreement, we entered into letter agreements relating to certain transaction bonus opportunities
with each of Mr. McGlinchey and Mr. Muckley, as well as with Elmer Doty, our President and Chief
Executive Officer, Keith Howe, our Vice President and Chief Financial Officer and Stephen Davis,
our Vice President, Commercial Aerostructures.
Change in Control Severance Agreements
The Change in Control Severance Agreements provide that in the event Mr. McGlincheys or Mr.
Muckleys employment is terminated by us or our successor without Cause (as such term is defined in
the agreements) or the executive resigns his employment for Good Reason (as such term is defined in
the agreements), in each case upon or within one year following the closing of the merger with
Triumph, the executive will be entitled to receive cash severance payments equal to (i) two times
the executives annual base salary, payable in equal installments over the two year period
following termination, plus (ii) two times the executives target annual bonus amount, payable in a
lump sum shortly following termination. The Change in Control Severance
Agreements will remain effective for a period of one year following the closing date of merger with
Triumph. However, if the closing date of the merger with Triumph does not occur within six months
of the execution of the agreements, they will terminate and be of no further force or effect.
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Transaction Bonus Letters
The letter agreements we have entered into with each of Mr. Doty, Mr. Howe, Mr. Davis, Mr.
McGlinchey and Mr. Muckley provide for the payment of a cash bonus to each of the executives within
5 days of the closing of the merger with Triumph in the following amounts: Mr. Doty: $500,000; Mr.
Howe: $1,000,000; Mr. Davis: $100,000; Mr. McGlinchey: $1,000,000; and Mr. Muckley: $350,000. The
bonuses are conditioned on the closing of the merger with Triumph and the executives execution of
a general release of claims against us. In the event the merger agreement is terminated or amended
prior to the closing date of the merger, we have reserved the right to revise or retract the
executives right to receive the bonus.
The foregoing summaries are qualified in their entirety by reference to the full text of the
Change in Control Severance Agreements and letter agreements, copies of which are attached as
Exhibits 10.1 through 10.7 to this Quarterly Report on Form 10-Q and are incorporated by reference
herein.
ITEM 6. | EXHIBITS |
(a) Exhibits
(10.1)*
|
Transaction Bonus letter agreement between Vought Aircraft Industries, Inc. and Elmer Doty dated May 6, 2010. | |
(10.2)*
|
Transaction Bonus letter agreement between Vought Aircraft Industries, Inc. and Keith Howe dated May 6, 2010. | |
(10.3)*
|
Transaction Bonus letter agreement between Vought Aircraft Industries, Inc. and Steve Davis dated May 6, 2010. | |
(10.4)*
|
Transaction Bonus letter agreement between Vought Aircraft Industries, Inc. and Kevin McGlinchey dated May 6, 2010. | |
(10.5)*
|
Transaction Bonus letter agreement between Vought Aircraft Industries, Inc. and Ronald Muckley dated May 6, 2010. | |
(10.6)*
|
Change in Control Severance agreement between Vought Aircraft Industries, Inc. and Kevin McGlinchey dated May 6, 2010. | |
(10.7)*
|
Change in Control Severance agreement between Vought Aircraft Industries, Inc. and Ronald Muckley dated May 6, 2010. | |
(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. | |||||
(Registrant) | |||||
May 7, 2010 | /s/ KEITH HOWE | ||||
(Date) | Vice President and Chief Financial Officer | ||||
May 7, 2010 | /s/ MARK JOLLY | ||||
(Date) | Principal Accounting Officer | ||||
44