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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes þ No o
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 check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes o No þ
As of March 8, 2007, there were 24,772,312 shares of common stock outstanding.
This annual report on Form 10-K contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to future events or our
future financial performance, and involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as “may,”“will,”“should,”“expects,”“intends,”“plans,”“anticipates,”“believes,”“estimates,”“predicts,”“potential,”“continue,”“assumption” or the
negative of these terms or other comparable terminology. These statements are only predictions.
Actual events or results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined in Item 1A. Risk Factors in
this report. Those risks and other factors may cause our actual results to differ materially from
any forward-looking statement. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements. We are under no duty to update any of the forward-looking statements
after the date of this annual report.
Vought Aircraft Industries, Inc. and its wholly owned subsidiaries, VAC Industries, Inc.,
Vought Commercial Aircraft Corporation and Contour Aerospace Corporation (“Contour”) are herein
referred to as the “Company” or “Vought.” We are one of the largest independent manufacturers of
aerostructures for commercial, military and business jet aircraft in the world. We develop and
manufacture fuselages, wings and wing assemblies, empennages (tail assemblies comprised of
horizontal and vertical stabilizers, elevators and rudders), aircraft doors, nacelle components
(the structures around engines) and control surfaces (such as rudders, spoilers, ailerons and
flaps) as well as rotorcraft cabins and substructures. These aerostructures are subsequently
integrated by our Original Equipment Manufacturer (OEM) customers into a wide range of commercial,
military and business jet aircraft. Additionally, we can provide customers with testing,
engineering services and Federal Aviation Administration (“FAA”) authorized maintenance, repair and
overhaul (MRO) of some of our products. Our customers include the leading prime aerospace
manufacturers, including Airbus S.A.S. (“Airbus”), Bell Helicopter Textron, Inc. (“Bell
Helicopter”), The Boeing Company (“Boeing”), Gulfstream Aerospace Corp., a General Dynamics Company
(“Gulfstream”), Lockheed Martin Corporation (“Lockheed Martin”), Northrop Grumman Corporation
(“Northrop Grumman”), Sikorsky Aircraft Corporation, a United Technologies Company (“Sikorsky”) and
the U.S. Air Force (“Air Force”). We generated net sales of $1,550.9 million for the year ended
December 31, 2006. Our Corporate office is in Dallas, Texas, and production work is performed at
sites in Hawthorne, California; Dallas and Grand Prairie, Texas; Milledgeville, Georgia; Nashville,
Tennessee; Stuart, Florida and North Charleston, South Carolina. Through Contour, we operate sites
in Brea, California, and Everett, Washington.
Vought’s heritage as an aircraft manufacturer extends to the company founded in 1917 by
aviation pioneer Chance Milton Vought. In more recent history, our business was acquired by The
Carlyle Group (“Carlyle”) and Northrop Grumman in 1992, and we were the Commercial Aircraft
Division of Northrop Grumman from 1994 to 2000. The Carlyle Group repurchased the business when we
acquired our assets and operations from Northrop Grumman in July 2000. Subsequently, Vought
acquired The Aerostructures Corporation in July 2003.
Markets
We operate within the aerospace industry as a manufacturer of aerostructures for commercial,
military and business jet aircraft. Market and economic trends that impact the rates of growth of
these markets affect the sales of our products. The competitive outlook for each of our markets is
discussed below:
Commercial Aircraft Market. General economic activity, airline profitability, passenger and
cargo traffic rates and aircraft retirements drive demand for new commercial aircraft. The primary
manufacturers of large commercial aircraft are Airbus and Boeing. In addition, Embraer and
Bombardier are the primary manufacturers of regional jets. Both Boeing and Airbus project
significant growth in commercial and freighter aircraft in service in their respective twenty year
forecasts, with the worldwide fleet doubling in numbers of aircraft over that period of time.
However, the manufacturers differ in their projections of numbers of aircraft and in their views of
the size and type of aircraft that will be delivered over that timeframe. Both companies agree
that higher fuel prices will accelerate the move to more fuel-efficient aircraft and, in the long
run, not slow the projected growth in travel over the forecast period. The long-term growth
projections used in their forecasts were:
Annual Passenger Revenue Growth
Annual Cargo Revenue Growth
Airbus
4.8
%
6.0
%
Boeing
4.9
%
6.1
%
However, forecasters have been unable to predict the peaks and troughs of the aviation cycle
which caused a significant downturn in production volumes post-2001, or the upturn of the order
cycle that saw more than 2,000 large commercial aircraft ordered in 2005 and more than 1,800
aircraft in 2006.
The broader commercial aircraft market can be categorized by aircraft size and seating as
follows:
•
Large wide-body aircraft with twin aisles (more than 200 seats). This category
includes the Boeing 747, 767, 777 and 787 (scheduled for first delivery in 2008) and
the Airbus A330, A340 and A380 (currently scheduled for delivery in 2008), as well as
the A350XWB, planned for entry into service in 2013.
•
Smaller narrow-body aircraft with single aisles (excluding regional aircraft) (100
to 200 seats). Current production aircraft in this category include the Boeing 737 and
the Airbus A320 family (A318/319/320/321).
•
Regional jets (approximately 40 to 110 seats). Bombardier’s primary regional jets
are the CRJ Series. Embraer produces small regional jets including the ERJ 135, 140 and
145 and larger (70-108 seats) regional aircraft known as the ERJ 170/175 and ERJ
190/195.
Military Aircraft Market. The national defense budget, procurement funding decisions,
geopolitical conditions worldwide and operational use drive demand for new military aircraft. In
February 2007 President Bush proposed a $102 billion Fiscal Year (FY) 2008 procurement defense
budget (not including emergency supplemental appropriations). This procurement budget reflects a
reduction of approximately 2% from fiscal year 2007 which was a reduction of approximately 2%
from fiscal year 2006. The ground wars in Iraq and Afghanistan have put significant pressure on
the defense budget due to the rapid deterioration of land-based transport and rotorcraft and the
increased personnel costs. While transport aircraft are essential to supporting the troops, the
replacement of damaged rotorcraft and ground vehicles seems to be taking precedence.
The following is a description of the broader military aircraft categories:
•
Transport Aircraft or Cargo Aircraft — This aircraft category is characterized by
the capability to transport troops, equipment and humanitarian aid into generally short
and roughly prepared airfields or to perform airdrops of troops and equipment when
landing is not an option. There are generally 3 classes of cargo aircraft: large cargo
aircraft, such as the C-17 Globemaster III, C-5 Galaxy and AN124; medium cargo
aircraft, such as the C-130J Hercules and the Airbus A400M, which is under development;
and small cargo aircraft, such as the C-24 Sherpa and the C-27 Spartan.
•
Unmanned Air Vehicles — Currently this class of aircraft is generally used for
observation and command and control. Increasingly important in the U.S. military
strategy, the use of this class of aircraft is broadening into weapons delivery and air
combat. Examples include Global Hawk, the Predator and the Hunter.
•
Rotorcraft — The missions of the rotorcraft fleet are broad and varied and are
critical to the war efforts in Iraq and Afganistan. The critical missions that
rotorcraft serve include intra-theatre cargo delivery, troop transport and rapid
insertion; observation and patrol; ground attack; and search and rescue. All models
are seeing heavy use in Iraq and Afghanistan and, as a result, the delivery rates are
increasing on most models due to the wear and damage the aircraft are experiencing.
Examples include the H-60 (Blackhawk and variants), V-22 Osprey, CH-47 Chinook and the
AH-64 Apache.
•
Fighter and Attack Aircraft — The fighter aircraft are used in air-to-air combat,
providing air superiority over the battle space. This role enables other friendly
aircraft to perform their missions. The attack aircraft are used to support ground
troops in close air support roles and penetrating attacks. This category includes the
F-22A Raptor, F-35 Lightning II, and the F/A-18 Super Hornet.
•
Aerial Tanker Aircraft — Tanker aircraft are essential to the effective use of all
combat and support aircraft in the U.S. military fleet and constitute a major advantage
in the status of world power. They are used to deliver fuel to other aircraft while
airborne. The Air Force is planning to modernize its aging fleet of tanker aircraft.
The competing tanker proposals are based on modifications of existing airframes such as
the Boeing 767 and Airbus A330.
Business Jet Aircraft Market. General economic activity and corporate profitability
continue to drive demand for new business jet aircraft. In addition, business jet aircraft have
increasingly been used as an alternative to commercial aircraft transportation due to security
concerns and convenience. This market includes personal, business and executive aircraft. While
this class may include the large commercial transports sold as business jets, the market is
generally considered those aircraft that seat from 4 to 18 passengers. Micro-jets range from 4 to 7
passengers and the larger business jets range from 8 to 18 passengers. The primary business jet
aircraft manufacturers are Bombardier, Cessna, Dassault Aviation, Gulfstream and Raytheon. As the
popularity of business jet aircraft has grown over the past decade, several companies are offering
fractional jet ownership. The Air Force also operates a fleet of business jet aircraft for use by
the executive and legislative branches of government as well as the U.S. joint command leadership.
In addition, many foreign governments provide business jet aircraft to high-ranking officials.
Products and Programs
We design, manufacture and supply aerospace structural assemblies including the following:
•
fuselage sections (including upper and lower ramp assemblies, skin panels, aft
sections, and pressure bulkheads);
•
complete integrated fuselage barrels;
•
wings and wing assemblies (including skin panels, spars, and leading edges);
•
empennages (tail assemblies, including horizontal and vertical stabilizers,
horizontal and vertical leading edge assemblies, elevators and rudders);
•
aircraft doors;
•
nacelles and nacelle components (the structures around engines, including fan cowls,
inlet cowls, pylons and exhaust nozzles);
•
rotorcraft cabins and substructures;
•
detail parts (metallic and composite); and
•
control surfaces (including flaps, ailerons, rudders, spoilers and elevators).
We have a diverse base of contracts in each of the significant aerospace markets described
above. The following chart summarizes our net sales by market for the years ended December 31,2006, 2005, and 2004:
Commercial Aircraft Products. We produce a wide range of commercial aircraft products and
participate in a number of major commercial programs for a variety of customers.
We are one of the largest independent manufacturers of aerostructures for Boeing Commercial
Airplanes (“Boeing Commercial”). We have almost 40 years of commercial aircraft experience with
Boeing Commercial, and we have maintained a formal strategic alliance with Boeing Commercial since
1994.
We are one of the largest U.S. manufacturers of aerostructures for Airbus and have over 15
years of commercial aircraft experience with the various Airbus entities.
In addition, we manufacture commercial aircraft aerostructures for General Electric Company,
Goodrich Corporation and Pratt & Whitney, a division of United Technologies Corporation.
The following table summarizes the major commercial programs that we currently have under
long-term contract by customer and product, indicating in each case whether we are a sole-source
provider and the date on which the program commenced. For purposes of the table, the year of
commencement of a program is the year a contract was signed with the OEM.
Commercial Aircraft
Year Program
Customer/Platform
Product
Sole-Source
Commenced
Airbus
A330/340
Upper skin panel assemblies, center spar and midrear spar, mid and
outboard leading edge assemblies, flap, spoiler and flap track fairing
ü
1988
A340-500/600
Upper skin panel, stringers, center spar and midrear spar, mid and
outboard leading edge assemblies
ü
1998
A319/320
Upper panel/stringer assemblies (last assemblies to be delivered march
2007)
Military Aircraft Products. We produce a broad array of products for military
organizations both in the United States and around the world. In the United States, we provide
aerostructures for a variety of military platforms, including fighter/attack, transport,
surveillance, rotor and unmanned aircraft utilized by all four branches of the U.S. military. The
following table summarizes the major military programs that we currently have under long-term
contract by customer and product, indicating in each case whether we are a sole-source provider and
the date on which the program commenced. For purposes of the table, the year of commencement of a
program is the year a contract was signed with the OEM.
Military Aircraft
Year Program
Customer/Platform
Product
Sole-Source
Commenced
Bell/Boeing
V-22 Osprey
Fuselage skin panels (upper and lower main landing gear panels,
sponsons, drag angles and side skins), empennage (horizontal and
vertical) ramp, and ramp door ramp assemblies
ü
1993
Boeing
767 Tanker
Modifications Kits
ü
2002
C-17 Globemaster III
Nacelle components (engine build up units, fan reversers, core
reversers,
and accessory doors), empennage (vertical stabilizer, horizontal
stabilizer), universal aerial refueling receptacle slipway installation,
control surfaces (upper and lower, forward and aft rudders, inboard and
outboard elevators, ailerons) and stringers, spar web, spar caps, door
jams and ramp toes
ü
1983
U.S. Government
C-5 Galaxy
Flaps, slats, elevators, wing tips, panels and other parts
ü
2002
Lockheed Martin
C-130J Hercules
Empennage (horizontal and vertical)
ü
1953
F-22 Raptor
Horizontal stabilator ( last assemblies to deliver in the 4th quarter of
2007)
2002
F-35 Joint Strike Fighter
Wing skins & Test Effort Dynamic drop for Navy carrier version (last
assemblies to deliver in December 2007)
2002
Northrop Grumman
E-2C Hawkeye
Bond assemblies, detail fabrication and machine parts for outer wing
panels and fuselage
Business Jet Aircraft Products. Our customers in this segment include primary business
jet aircraft manufacturers such as Cessna, Gulfstream, and Raytheon. We believe we are the largest
aerostructures supplier to Gulfstream for their G300, G350, G400, G450, G500, and G550 models.
The following table summarizes the major business jet aircraft programs that we currently have
under long-term contract by customer and product, indicating in each case whether we are a
sole-source provider and the date on which the program commenced. For purposes of the table, the
year of commencement of a program is the year a contract was signed with the OEM.
Business Jet Aircraft
Year Program
Customer/Platform
Product
Sole-Source
Commenced
Cessna
Citation X
Upper and lower wing skin assemblies
ü
1992
Gulfstream
Gulfstream V
Integrated wings
ü
1993
(G500/G550)
Gulfstream IV
Nacelle components and wing boxes including trailing edge assembly
ü
1983
(G300/G350/G400/G450)
Raytheon
Hawker 800
Nacelle components
ü
1981
End Markets and Customers
We generate a large proportion of our revenues from three large customers. The following
table reports the total sales from these customers relative to our total sales.
Our products are sold for a broad range of end uses. Although the majority of our
customers are in the U.S., we also have international customers. The following chart illustrates
the split between domestic and foreign revenue:
Industry Leader. We are one of the largest independent manufacturers of integrated structural
assemblies for commercial, military and business jet aircraft in the world. We enjoy long-term
relationships with our customers, which have been earned by delivering the quality aerostructures
they demand. We have earned the trust of our customers and normally produce our products and
provide our services under long-term, sole-source contracts. In fact, we are one of the largest
independent suppliers to Boeing, Airbus, and Gulfstream.
High Barriers to Entry. The dynamics of the aircraft industry make it extremely challenging
for new competitors to enter the market. It is difficult and expensive for new entrants to compete
for new program awards due to the substantial up-front, non-recurring investment associated with
new programs, the sophisticated manufacturing capability necessary to compete in our market, and
the experience-based industry knowledge required. Our established relationships with our customers,
particularly Boeing and Airbus, make it less likely that an existing program could be lost to a new
competitor. In addition, new entrants to the industry must have extensive certifications and
approvals from customers and government regulators, such as the Defense Contract Management Agency
and the FAA.
Advanced Manufacturing and Technological Capabilities. We are able to manufacture
large complex composite aircraft structures and some of the largest parts and assemblies for
aircraft of all types in the world. Our capabilities include precision assembly techniques as well
as automated assembly processes. We have large bed machining capability and the ability to make
large composite fiber reinforced parts. We also have one of the largest stretch forming processes
for aerodynamic surface metallic skins.
In addition, we traditionally have been a leader in the manufacturing and development of
large composite aircraft structures. With Vought’s selection as a program partner on the Boeing
787 program, we have enhanced our industry-leading capability in the design, manufacturing, and
integration of complex composite structures.
Our system integration capability and ability to support challenging new aircraft launch
schedules, with cost effective design and manufacturing solutions, makes us a preferred partner
participating from initial concept development of new aircraft. We operate one of the few
structural test laboratories in the world capable of full-scale carrier landing simulation.
Well Positioned in the Military Aircraft Market. We serve virtually every segment of the
military aircraft market, with particular strength in fixed-wing transport and rotor aircraft.
Currently, we provide aerostructures for many military programs, including the Boeing C-17
Globemaster III, as well as the important rotorcraft military segment, with Bell/Boeing V-22 Osprey
tilt rotor transport and the H-60 helicopter.
Continue as a Strategic Partner to our Customers. We strengthen customer relationships and
expand market opportunities by partnering with customers on their business endeavors. We want to be
our customer’s most valued
supplier. We provide prime contractors with development and, when requested, engineering
services to ensure our participation on their current and future programs.
Integrate Quality Throughout the Enterprise. We emphasize quality in the design and
production of cost-competitive, fully integrated major aircraft assemblies as a support partner to
the world’s leading aerospace companies.
Increase Productivity and Profitability. In our effort to improve profitability, we have
introduced Lean and Six Sigma into our production areas and have undertaken organizational
restructuring to improve accountability and control.
Leverage our Global Supply Chain. We have a global network of suppliers focused on strategic
cost reduction and manufacturing flexibility to maximize production and cost efficiency, while
supporting our customers’ need for strategic work placement.
Raw Materials, Purchased Parts and Suppliers
We depend on the availability of essential materials, parts and subassemblies from our
suppliers and subcontractors. Our suppliers’ ability to provide acceptable raw materials,
components, kits and subassemblies affects our production schedules and contract profitability. We
maintain an extensive qualification and performance surveillance system to control risk associated
with our reliance on this supply base. In addition, we depend on third parties for most of our
information technology services.
To an extent, we are also exposed to fluctuations in the prices of certain utilities and
services, such as electricity, natural gas, chemical processing and freight. We utilize a range of
long-term agreements and strategic e-Commerce aggregated sourcing to minimize procurement expense
and supply risk in these categories.
Some raw materials and operating supplies are subject to price and supply fluctuations caused
by market dynamics. Our strategic sourcing initiatives are focused on mitigating the impact of
commodity price risk. We have long-term supply agreements with a number of our major suppliers.
We, as well as our supply base, are experiencing delays and pricing increases in the receipt of
metallic raw materials due to unprecedented market demand across the industry. Based upon market
and industry analysis we expect these conditions to continue for the near term, as metallic
(aluminum and titanium) raw material supply adjusts to the industry upturn, increased
infrastructure demand in China and Russia, and increased aluminum and titanium usage in an ever
wider range of products. The increased demand for aluminum and titanium products created
significant cost pressures in the market place during 2006 with price increases seen in excess of
50% over 2005 levels for aerospace grade material. In some cases the impact of these price
increases has been mitigated through existing long-term agreements which remain in place for
several more years. Our expectation is that the continued demand for these materials will continue
to put additional pressures on pricing for the foreseeable future though not necessarily at the
levels seen recently. These market conditions may increase our operating costs which could have an
adverse impact on our cash flows or results of operations in future periods. We generally do not
employ forward contracts or other financial instruments to hedge commodity price risk; however, we
are reviewing a full range of business options focused on strategic risk management for all raw
material commodities.
Research and Development and Specialized Engineering Services
Our scientists, engineers and other personnel have capabilities and expertise in structural
design, stress analysis, fatigue and damage tolerance, testing, systems engineering, factory
support, product support, tool design, inspection and systems installation design. The costs
incurred relating to independent research and development for the years ended December 31, 2006,
2005 and 2004, were $3.4 million, $4.4 million and $6.7 million, respectively. We work jointly with
our customers and the supply base to insure that our investments complement the needs of our
industry, rather than duplicate what our stakeholders are developing.
We have a number of patents related to our processes and products. While in the aggregate our
patents are of material importance to our business, we believe that no single patent or group of
patents is of material importance to
our business as a whole. We also rely on trade secrets, confidentiality agreements,
unpatented knowledge, creative product development and continuing technological advancement to
maintain our competitive position.
Competition
In the production and sale of aerospace structural assemblies, we compete with numerous U.S.
and international companies on a worldwide basis. Primary competition comes from internal work
completed by the operating units of OEMs including Airbus, Boeing, Gulfstream, Lockheed Martin,
Northrop Grumman, Sikorsky and Raytheon. We also face competition from independent aerostructures
suppliers in the U.S. and overseas who, like us, provide services and products to the OEMs.
OEMs may choose not to outsource production due to, among other things, their own direct labor
and overhead considerations, capacity utilization at their own facilities, or their desire to
retain critical or core skills. Consequently, there are occasions when traditional factors
affecting competition, such as price and quality of service, may not be significant determinants,
because the OEM needs to maintain work within its sites.
However, when OEMs choose to outsource, they typically do so for one or more of the following reasons:
•
lower cost;
•
the prime manufacturer’s capacity limitations;
•
a business need or desire to utilize other’s unique engineering and design capabilities;
•
a desire to share the required upfront investment;
•
risk sharing; and
•
strategic reasons in support of sales.
Our ability to compete for large structural assembly contracts depends upon:
•
our underlying cost structure that enables a competitive price;
•
the readiness and availability of our facilities, equipment and personnel to
undertake and nimbly implement the programs;
•
our engineering and design capabilities;
•
our ability to manufacture or rapidly procure both metal and composite structures; and
•
our ability to support our customer’s needs for strategic work placement.
Employees
As of December 31, 2006, we employed approximately 5,900 people. Of those employed at
year-end, approximately 2,879 or 49%, are represented by four separate unions.
•
Local 848 of the United Automobile, Aerospace and Agricultural Implement Workers
of America represents approximately 2,071 of the employees located in Dallas and
Grand Prairie, Texas. This union contract, which covers the majority of our
production and maintenance employees at our Dallas and Grand Prairie Texas
facilities, is in effect through September 30, 2007.
•
Aero Lodge 735 of the International Association of Machinists and Aerospace
Workers represents approximately 743 of the employees located in Nashville,
Tennessee. This union contract is in effect through September 27, 2008.
•
Local 20 of the International Brotherhood of Electrical Workers represents
approximately 39 employees located in Dallas, Texas. This union contract is in
effect through April 6, 2008.
•
Local 263 of the Security, Police and Fire Professionals of America (formerly
United Plant Guard Workers of America) represents approximately 26 employees
located in Dallas, Texas. This union contract is in effect through February 18,2008.
From time to time, unions have sought and may continue to seek to organize at some of our
facilities. We cannot predict the impact of any unionization of our workforce. On March 8, 2007, an
election was held among our production and maintenance employees at our Hawthorne, California
facility as a result of a petition for representation filed by the International Association of
Machinists and Aerospace Workers. As a result of certain contested ballots,
the election results have not yet been finalized. If the union is certified as a
representative of those employees, we will commence negotiations on a union contract for that
facility.
We have not suffered an interruption of business as a result of a labor dispute since 1989, at
the Nashville facility. We believe we have constructive working relationships with our unions and
have been successful in negotiating collective bargaining agreements in the past. However, there
can be no assurance that we will reach an agreement on a timely basis or that we will not
experience a work stoppage or labor disruption that could significantly adversely affect our
operations.
Backlog
We calculate backlog using a method that results in a number that is substantially less than
the estimated aggregate dollar value of our contracts. We measure backlog for commercial and
business jet programs as firm orders, and backlog for military programs as funded orders or
authorizations to proceed, in each case for products that have not yet been shipped to our
customer. Using our measure of backlog, we estimate that at December 31, 2006, our funded backlog
was approximately $3.3 billion. Our backlog may fluctuate at any given time depending on whether
we have received significant new firm orders, funded orders or authorizations to proceed before the
date of measurement. For example, our military funded orders or authorizations to proceed generally
are awarded when the Department of Defense budget for the relevant year has been approved,
resulting in a significant increase in backlog at that time.
The following factors should be considered when evaluating our backlog. For our commercial and
business jet aircraft programs, changes in the economic environment and the financial condition of
airlines may cause our aerospace-manufacturing customers to increase or decrease deliveries,
adjusting firm orders that would affect our backlog. 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.
Environmental Matters
Our manufacturing operations are subject to various federal, state and local environmental
laws and regulations, including those related to pollution, air emissions and the protection of
human health and the environment. We routinely assess compliance and continuously monitor our
obligations with respect to these requirements. Based upon these assessments and other available
information, we believe that our manufacturing facilities are in substantial compliance with all
applicable existing federal, state and local environmental laws and regulations and we do not
expect environmental costs to have a material adverse effect on us. The operation of manufacturing
plants entails risk in these areas and there can be no assurance that we will not incur material
costs or liabilities in the future that could adversely affect us. For example, such costs or
liabilities could arise due to changes in the existing law or its interpretations, or newly
discovered contamination.
Under federal and state environmental laws, owners and operators of contaminated properties
can be held responsible for up to 100% of the costs to remediate contamination, regardless of
whether they caused such contamination. Our facilities have been previously owned and operated by
other entities and remediation is currently taking place at several facilities in connection with
contamination that occurred prior to our ownership. In particular, we acquired several of our
facilities from Northrop Grumman in July of 2000, including the Hawthorne, California facility, the
Stuart, Florida facility, the Milledgeville and Perry, Georgia facilities and two Texas facilities.
Of those facilities, remediation projects are underway in Hawthorne, Stuart, Milledgeville and
Dallas.
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 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 currently have no material outstanding or
unasserted asbestos, urea formaldehyde foam insulation or lead-based paints liabilities including
on property acquired from Northrop Grumman Corporation.
We acquired the Nashville, Tennessee facility from Textron Inc. in 1996. In connection with
that acquisition, Textron agreed to indemnify up to $60 million against any pre-closing
environmental liabilities with regard to claims made within ten years of the date on which the
facility was acquired, including with respect to a solid waste landfill located onsite that was
closed pursuant to a plan approved by the Tennessee Division of Solid Waste Management. Although
that indemnity was originally scheduled to expire in August 2006, we believe that the agreement may
continue to provide for indemnification for certain pre-closing environmental liabilities incurred
beyond that expiration date. While there are no currently pending environmental claims related to
the Nashville facility, there is no assurance that environmental claims will not arise in the
future.
As of December 31, 2006, our balance sheet included an accrued liability of $4.1 million for
accrued environmental liabilities.
Regulatory Conditions
The commercial and business jet aerospace industry is highly regulated in the United States by
the FAA. As a producer of major aerostructures for commercial and business jet aircraft, our
production activities are performed under the auspices of the applicable FAA type certificate held
by the prime manufacturer for which we produce product. In addition to qualifying our production
and quality systems to our customer’s requirements, we are also certified in Stuart, Florida by the
FAA to repair and overhaul damaged parts for delivery and reinstallation on commercial and business
jet aircraft.
Our Quality Management System (QMS) is fully compliant to AS9100, and we hold an industry
registration certificate to that standard through an accredited registrar. Our special production
processes are certified in compliance to industry manufacturing, quality and processing
requirements, as defined and controlled by the PRI/Nadcap accreditation program. Meeting the
certification and registration standards of the FAA, the OEMs, and domestic and international
rating agencies is a significant barrier to entry for potential new competitors.
The military aerospace industry is highly regulated by the U.S. Department of Defense. The
Defense Contract Management Agency has certified us to provide products to the U.S. military. We
are subject to review by the Defense Contract Management Agency whether we contract directly with
the U.S. Government or provide aerostructures to a OEM that contracts directly with the U.S.
Government. The U.S. Government contracts held by the Company and our customers are subject to
unique procurement and administrative rules based on laws and regulations. U.S. Government
contracts are, by their terms, subject to termination by the U.S. Government either for its
convenience or default by the contractor. In addition, U.S. Government contracts are conditioned
upon the continuing availability of Congressional appropriations. Congress usually appropriates
funds for a given program on a yearly basis, even though contract performance may take many years.
Consequently, at the outset of a major program, the contract is usually partially funded, and
additional monies are normally committed to the contract by the procuring agency only as
appropriations are made by Congress for future years.
In addition, use of foreign suppliers and sale to foreign customers, such as Airbus, and
foreign governments may subject us to the requirements of the U.S. Export Administration
Regulations and the International Trafficking in Arms Regulations.
Additional Information
Our principal executive offices are located at 9314 West Jefferson Boulevard M/S 49R-06,
Dallas, TX75211. Our telephone number is (972) 946-2011.
Our commercial business is cyclical and sensitive to the profitability of the commercial
airline and cargo industries . Our business is, in turn, affected by general economic conditions
and world safety considerations.
We compete in the aerostructures segment of the aerospace industry. While our direct
customers are aircraft manufacturers, such as Boeing and Airbus, our business is indirectly
affected by the financial condition of the commercial airlines and airfreight companies and other
economic factors that affect the demand for air transportation. Specifically, our commercial
business is dependent on the demand from passenger airlines and airfreight companies for the
production of new aircraft by our customers.
This demand for aircraft is dependent on and influenced by a number of factors including:
•
The World Economy — World-wide economic growth is a primary factor that both
Boeing and Airbus use to forecast future production requirements.
•
Ability of the industry to finance new aircraft, which is tied to their
profitability and load factors.
•
Air cargo requirements and airline load factors — Driven by world economy and
international trade volume.
•
Age and efficiency of the world fleet of active and stored fleet aircraft.
•
General public attitudes — Events such as the September 11, 2001 terrorist
attacks and later, the SARS outbreak in Asia, tend to dramatically and quickly
influence the market.
•
Fuel prices — While higher fuel prices impact the airline and cargo industry’s
short-term profitability, they may also drive more rapid fleet renewal to take
advantage of newer, more efficient aircraft technologies.
Our substantial indebtedness could prevent us from fulfilling our obligations under the senior
notes.
We have a significant amount of indebtedness. As of December 31, 2006, our total indebtedness
was $687 million, excluding unused commitments under the revolving credit facility in our amended
senior secured credit facilities. In addition, we had $1.3 million of capital lease obligations.
Our substantial indebtedness could have important consequences for us and investors in our
securities. For example, it could:
•
make it more difficult for us to satisfy our obligations with respect to our outstanding debt;
•
increase our vulnerability to general adverse economic and industry conditions;
•
require us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, thereby reducing the availability of our cash flow to
fund working capital, capital expenditures, research and development efforts and
other general corporate purposes;
•
limit our flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate;
•
restrict us from making strategic acquisitions or exploiting business opportunities;
•
place us at a competitive disadvantage compared to our competitors that have less debt; and
•
limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds, dispose
of assets or pay cash dividends.
Our outstanding senior notes and our amended senior secured credit facilities contain other
restrictive covenants that limit our ability to engage in activities that may be in our long-term
best interests. Our amended senior secured credit facilities also contain financial maintenance
covenants that require us to meet specified metrics related to our cash flows, indebtedness and
interest expense on a quarterly basis. Our failure to comply with those covenants could result in
an event of default, which, if not cured or waived, could result in the acceleration of our debts.
In addition, a substantial portion of our debt bears interest at variable rates. If market
interest rates increase, variable-rate indebtedness will create higher debt service requirements
and it may become necessary for us to dedicate a larger portion of cash flow to service such
indebtedness. To the extent we have not entered into hedging arrangements, we are exposed to cash
flow risk due to changes in interest rates with respect to the entire $417.0 million of
variable-rate indebtedness under our amended senior secured credit facilities.
As of December 31, 2006, a one-percentage point increase in interest rates on our
variable-rate indebtedness would decrease our annual pre-tax income by approximately $4.2 million.
We will require a significant amount of cash to service our indebtedness. Our ability to generate
cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital
expenditures will depend on our ability to generate cash in the future. This, to some extent, is
subject to general economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control.
Our business may not generate sufficient cash flow from operations or future borrowings may
not be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our
other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before
maturity. Depending on prevailing economic and financial conditions, competition and other
factors, we may not be able to refinance any of our indebtedness, including our amended senior
secured credit facilities and our outstanding senior notes, on commercially reasonable terms or at
all.
Despite current indebtedness levels, we may still be able to incur substantially more debt, which
would further increase the risks associated with our substantial leverage described above.
We may be able to incur substantial additional indebtedness in the future. The terms of our
senior notes indenture do not fully prohibit us, including our subsidiaries, from incurring
additional indebtedness. As of December 31, 2006, our amended senior secured credit facilities
permitted additional borrowings of up to $200 million, reduced by outstanding letters of credit of
$47.0 million. If new indebtedness is added to our current indebtedness levels, the related risks
that we face would be magnified.
Restrictive covenants in the amended senior secured credit facilities and the senior notes may
restrict our ability to pursue our business strategies.
The indenture governing our senior notes and the credit agreement governing our amended senior
secured credit facilities limit our ability, among other things, to:
•
incur additional indebtedness or contingent obligations;
•
pay dividends or make distributions to our stockholders;
•
repurchase or redeem our stock;
•
make investments;
•
grant liens;
•
make capital expenditures;
•
enter into transactions with our stockholders and affiliates;
•
engage in sale and leaseback transactions;
•
sell assets; and
•
acquire the assets of, or merge or consolidate with, other companies.
The restrictive covenants mentioned above may restrict our ability to pursue our business
strategies.
Financial ratios and tests in the amended senior secured credit facilities may further increase the
risks associated with the restrictive covenants described above.
In addition to the covenants described above, our amended senior secured credit facilities
require us to maintain certain financial ratios and tests. See Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Events
beyond our control can affect our ability to meet these financial ratios and tests. Our failure to
comply with these obligations could cause an event of default under our amended senior secured
credit facilities. If an event of default occurs, our lenders could elect to declare all amounts
outstanding and accrued and unpaid interest under our amended senior secured credit facilities to
be immediately due, and the lenders thereafter could foreclose upon the assets securing the amended
senior secured credit facilities. In that event, we may not have sufficient assets to repay all of
our obligations, including our senior notes. We may incur additional indebtedness in the future
that may contain financial or other covenants more restrictive than those applicable to our amended
senior secured credit facilities or our senior notes.
We operate in a very competitive business environment.
Competition in the aerostructures segment of the aerospace industry is intense and
concentrated. We face substantial competition from the operating units of some of our largest
customers, including Airbus, Boeing, Gulfstream, Lockheed Martin, Northrop Grumman and Raytheon.
These OEMs may choose not to outsource
production of aerostructures due to, among other things, their own direct labor and overhead
considerations and capacity utilization at their own facilities. Consequently, traditional factors
affecting competition, such as price and quality of service, may not be significant determinants
when OEMs decide whether to produce a part in-house or to outsource.
We also face competition from non-OEM suppliers in each of our product areas. Our principal
competitors among aerostructures suppliers are Alenia Aeronautica, Fokker Aerostructures, Fuji
Heavy Industries, Mitsubishi Heavy Industries, GKN Westland Aerospace (U.K.), Kawasaki Heavy
Industries, Goodrich Corp., and Spirit AeroSystems. Some of our competitors have greater
resources than us, and therefore may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements, or devote greater resources to the promotion and sale of
their products than we can. Providers of aerostructures have traditionally competed on the basis
of cost, technology, quality and service. We believe that developing and maintaining a competitive
advantage will require continued investment in product development, engineering, supply chain
management and sales and marketing, and we may not have enough resources to make the necessary
investments to do so. For these reasons, we may not be able to compete successfully in this market
or against such competitors. See Item 1. “Business—Competition.”
For the years ended December 31, 2006, 2005 and 2004, approximately 55%, 56% and 59% of our
sales, respectively, were made to Boeing for commercial and military programs. Accordingly, any
significant reduction in purchases by Boeing would have a material adverse effect on our financial
condition, results of operations and cash flows.
Further, our significant customers have in the past and may attempt in the future to use their
position to negotiate a reduction in price of a particular product regardless of the terms of an
existing contract. We have generally been successful in resisting such reductions and, where we
have taken reductions, we have attempted to maintain profitability by decreasing costs.
The U.S. Government is a significant customer of our largest customers and we and they are subject
to specific U.S. Government contracting rules and regulations.
We are a significant provider of aerostructures to military aircraft manufacturers. The
military aircraft manufacturers’ business, and by extension, our business, is affected by the U.S.
Government’s continued commitment to programs under contract with our customers. The terms of
defense contracts with the U.S. Government generally permit the government to terminate contracts
partially or completely, with or without cause, at any time. Sales to the U.S. Government are also
subject to changes in the government’s procurement policies in advance of design completion. An
unexpected termination of a significant government contract, a reduction in expenditures by the
U.S. Government for aircraft using our products, lower margins resulting from increasingly
competitive procurement policies, a reduction in the volume of contracts awarded to us, or
substantial cost overruns could materially reduce our cash flow and results of operations. We bear
the potential risk that the U.S. Government may unilaterally suspend our customers or us from new
contracts pending the resolution of alleged violations of procurement laws or regulations.
A decline in the U.S. defense budget or change of funding priorities may reduce demand for our
customers’ military aircraft and reduce our sales of products used on military aircraft.
The U.S. defense budget has fluctuated in recent years, at times resulting in reduced demand
for new aircraft and, to a lesser extent, spare parts. In addition, foreign military sales are
affected by U.S. Government regulations, foreign government regulations and political uncertainties
in the United States and abroad. The U.S. defense budget may continue to fluctuate, and may
decline sales of defense related items to foreign governments may decrease. A decline in defense
spending could reduce demand for our customers’ military aircraft, and thereby reduce sales of our
products used on military aircraft.
There is risk that the C-17 program could be completed in 2009 after the end of the current
contract as identified in the President’s FY 2007 Recommended Budget is completed in 2009. There
was no new funding identified for this program in the President’s FY 2008 Recommended Budget. We
are taking steps now to realign the company in recognition of the possible loss of the program in
2009. For 2006, the C-17 program provided a significant portion of our military revenues.
Our fixed-price contracts may commit us to unfavorable terms.
We provide most of our products and services through fixed-price contracts. For the year
ended December 31, 2006, over 90% of our revenues were derived from fixed-price contracts.
Although our fixed-price contracts generally permit us to keep unexpected profits if costs are
less than projected, we bear the risk that increased or unexpected costs may reduce our profit or
cause us to sustain losses on the contract. In a fixed-price contract, we must fully absorb cost
overruns, notwithstanding the difficulty of estimating all of the costs we will incur in performing
these contracts and in projecting the ultimate level of sales that we may achieve. Our failure to
anticipate technical problems, estimate delivery reductions, estimate costs accurately or control
costs during performance of a fixed-price contract may reduce the profitability of a fixed-price
contract or cause a loss.
On occasion we may enter into agreements with our customers modifying the terms of those fixed
price contracts, however there are no assurances that we will be able to do so in the future.
Although we believe that we have recorded adequate provisions in our consolidated financial
statements for losses on our fixed-price contracts, as required under accounting principles
generally accepted in the United States, our contract loss provisions may not be adequate to cover
all actual future losses.
We incur risk associated with new programs.
New programs with new technologies typically carry risks associated with design
responsibility, development of new production tools, hiring and training of qualified personnel,
increased capital and funding commitments, delays in the program schedule, failure of other
suppliers to our customer to perform and meet their obligations, ability to meet customer
specifications, delivery schedules and unique contractual requirements, supplier performance,
ability of the customer to meet its contractual obligations to us, and our ability to accurately
estimate costs associated with such programs.
The Boeing 787 is an example of such a program for Vought. We have recently completed the
construction of a new facility in North Charleston, South Carolina which utilizes state-of-the-art
equipment and processes completely dedicated to fabrication and assembly of composite fuselage
sections for the 787. We have begun the transition from design/development to production
manufacturing, and will complete the initial ship sets scheduled for delivery to Boeing in the
first half of 2007.
Programs new to Vought that represent customer offloads of existing aircraft components carry
risks associated with the transfer of:
•
technology, knowledge, and tooling;
•
hiring and training of qualified personnel;
•
increased capital and funding commitments;
•
ability to meet customer specifications, delivery requirements and unique contractual requirements;
•
supplier performance;
•
ability of the customer to meet its contractual obligations to us; and
•
our ability to accurately estimate costs associated with such programs.
The H-60 program with Sikorsky is an example of this type of program.
Any significant disruption in our supply from key suppliers could delay production and decrease
sales.
We are highly dependent on the availability of essential materials and purchased engineered
components from our suppliers, some of which may be available only from single customer specified
sources. Moreover, we are dependent upon the ability of our suppliers to provide material that
meets specifications, quality standards and delivery schedules. Our suppliers’ failure to provide
expected raw materials or component parts could adversely affect production schedules and contract
profitability.
We have from time to time experienced limited interruptions of supply, and we may experience a
significant interruption in the future. Our continued supply of materials is subject to a number
of risks including:
•
the destruction of our suppliers’ facilities or their distribution infrastructure;
•
a work stoppage or strike by our suppliers’ employees;
•
the failure of our suppliers to provide materials of the requisite quality;
•
the failure of essential equipment at our suppliers’ plants;
•
the failure or shortage of supply of raw materials to our suppliers;
•
contractual amendments and disputes with our suppliers; and
•
Geo-Political conditions in the Global Supply Base.
In addition, some contracts with our suppliers for raw materials and other goods are
short-term contracts. These suppliers may discontinue provision of products to us at attractive
prices or at all, and we may not be able to obtain such products in the future from these or other
providers on the scale and within the time periods we require. Furthermore, substitute raw
materials or component parts may not meet the strict specifications and quality standards we, our
customers, and the U.S. Government impose. If we are not able to obtain key products on a timely
basis and at an affordable cost, or we experience significant delays or interruptions of their
supply, revenues from sales of products that use these supplies will decrease. The increased
demand for aluminum and titanium products created significant cost pressures in the market place
during 2006 with price increases seen in excess of 50% over 2005 levels for aerospace grade
material. In some cases the impact of these price increases has been mitigated through existing
long-term agreements which remain in place for several more years. Our expectations are that the
continued demand for these materials will continue to put additional pressures on pricing for the
foreseeable future though not necessarily at the levels experienced recently.
We are also dependent upon third party suppliers, including Northrop Grumman Information
Technology and Perot Systems, to supply us with the majority of the information technology services
used to operate our facilities. If these suppliers could no longer supply us with information
technology services and we are required to secure another supplier, we might not be able to do so
on terms as favorable as our current terms, or at all.
Any future business combinations, acquisitions or mergers expose us to risks, including the risk
that we may not be able to successfully integrate these businesses or achieve expected operating
synergies.
We periodically consider strategic transactions. We evaluate acquisitions, joint ventures,
alliances or co-production programs as opportunities arise and we may be engaged in varying levels
of negotiations with potential competitors at any time. We may not be able to effect transactions
with strategic alliance, acquisition or co-production program candidates on commercially reasonable
terms, or at all. If we enter into these transactions, we also may not realize the benefits we
anticipate. In addition, we may not be able to obtain additional financing for these transactions.
The integration of companies that have previously been operated separately involves a number of
risks. Consummating any acquisitions, joint ventures, alliances or co-production programs could
result in the incurrence of additional debt and related interest expense, as well as unforeseen
contingent liabilities.
We may be subject to work stoppages at our facilities or those of our principal customers, which
could seriously impact the profitability of our business.
As of December 31, 2006, approximately 49% of our employees were represented by various labor
unions. Approximately 2,071 employees located at the Dallas and Grand Prairie, Texas facilities
are represented by United Automobile, Aerospace and Agricultural Implement Workers of America. This
union contract is in effect through September 30, 2007. The remaining union contracts are in
effect until various dates in 2008. In addition, on March 8, 2007, an election was held among our
production and maintenance employees at our Hawthorne, California facility as a result of a
petition for representation filed by the International Association of Machinists and Aerospace
Workers. As the result of certain contested ballots, the election results have not yet been
finalized. If the union is certified as a representative of those employees, we will commence
negotiations on a union contract for that facility.
We last experienced a labor strike at our Nashville, Tennessee plant in 1989 and a work
interruption at our Dallas, Texas plant in 1985. We believe we have constructive working
relationships with our unions and have been successful in negotiating collective bargaining
agreements in the past. However, there can be no assurance that we will reach an agreement on a
timely basis. If our unionized workers were to engage in a strike, work stoppage or other slowdown
in the future, we could experience a significant adverse disruption of our operations and we may be
prevented from completing production of our aircraft structures. See Item 1. “Business—Employees.”
Many aircraft manufacturers, airlines and aerospace suppliers have unionized work forces.
Strikes, work stoppages or slowdowns experienced by aircraft manufacturers, airlines or aerospace
suppliers could reduce our customers’ demand for additional aircraft structures or prevent us from
completing production of our aircraft structures.
We depend on key personnel and may not be able to retain those employees or recruit additional
qualified personnel.
We believe that our future success will be due, in part, to the services of our key employees
such as engineers and other skilled professionals. Competition for such employees has intensified
in recent years and may become even more intense in the future. Our ability to implement our
business plan is dependent on our ability to hire and retain technically skilled workers. Our
failure to recruit and retain qualified employees could prevent us from implementing our business
plan and may impair our ability to obtain future contracts.
Our operations depend on our manufacturing facilities throughout the U.S. These production
facilities are subject to physical and other risks that could disrupt production.
Our manufacturing facilities could be damaged or disrupted by a natural disaster, war, or
terrorist activity. Although we have obtained property damage and business interruption insurance,
a major catastrophe, such as an earthquake, hurricane, flood, tornado or other natural disaster at
any of our sites, or war or terrorist activities in any of the areas where we conduct operations
could result in a prolonged interruption of our business. Any disruption resulting from these
events could cause significant delays in shipments of products and the loss of sales and customers
and we may not have insurance to adequately compensate us for any of these events.
We are subject to environmental regulation and our ongoing operations may expose us to
environmental liabilities.
Our operations, like those of other companies engaged in similar businesses, are subject to
federal, state and local environmental, health and safety laws and regulations. We may be subject
to potentially significant fines or penalties, including criminal sanctions, if we fail to comply
with these requirements. We have made, and will continue to make, capital and other expenditures
in order to comply with these laws and regulations. Although we believe that we are currently in
substantial compliance with these laws and regulations, the aggregate amount of future clean-up
costs and other environmental liabilities could become material.
In the future, contamination may be discovered at our facilities or at off-site locations
where we send waste. The remediation of any such newly-discovered contamination, or the enactment
of new legislation or the stricter administration or interpretation of existing laws, may require
us to make additional expenditures, some of which could be material. See Item 1
“Business—Environmental Matters.”
Any product liability claims in excess of insurance may require us to dedicate cash flow from
operations to pay such claims.
Our operations expose us to potential liability for personal injury or death as a result of
the failure of aerostructures designed or manufactured by us or our suppliers. While we believe
that our liability insurance is adequate to protect us from these liabilities, our insurance may
not cover all liabilities. Additionally, insurance coverage may not be available in the future at
a cost acceptable to us. Any material liability not covered by insurance or for which third-party
indemnification is not available could require us to dedicate a substantial portion of our cash
flows to make payments on these liabilities. No such product liability claim is pending or has
been threatened against us; however, there is a potential risk that product liability claims could
be filed against us in the future.
The construction of aircraft is heavily regulated and failure to comply with applicable laws could
reduce our sales or require us to incur additional costs to achieve compliance, which could reduce
our results of operations.
The FAA prescribes standards and qualification requirements for aerostructures, including
virtually all commercial airline and general aviation products, and licenses component repair
stations within the U.S. Comparable agencies regulate these matters in other countries. If we fail
to qualify for or obtain a required license for one of our products or services or lose a
qualification or license previously granted, the sale of the subject product or service would be
prohibited by law until such license is obtained or renewed. In addition, designing new products
to meet existing regulatory requirements and retrofitting installed products to comply with new
regulatory requirements can be expensive and time consuming.
From time to time, the FAA or comparable agencies propose new regulations or changes to
existing regulations. These new changes or regulations generally cause an increase in costs of
compliance. To the extent the
FAA, or comparable agencies implement regulatory changes, we may
incur significant additional costs to achieve compliance.
We are subject to regulation of our technical data and goods exports.
Use of foreign suppliers and sale to foreign customers may subject us to the requirements of
the U.S. Export Administration Regulations and the International Trafficking in Arms Regulations.
Failure to comply with these regulations may result in significant fines and loss of the right to
export goods. In addition, restrictions may be placed on the export of technical data and goods in
the future as a result of changing geo-political conditions.
We may be unable to satisfy commitments related to grants received.
We have received grants from state governments associated with the construction of our 787
facility in South Carolina and the employment level in our Texas facilities. These grants require
that we satisfy certain requirements related to levels of expenditures and employment levels. Our
failure to satisfy any of these commitments could result in the incurrence of penalties or in the
requirement to repay all or part of the grants.
Private equity investment funds affiliated with Carlyle own a significant majority of our equity,
and their interests may not be aligned with debt holders.
Private equity investment funds affiliated with Carlyle own approximately 90% of our fully
diluted equity. These private equity investment funds have the power, subject to specific
exceptions, to direct our affairs and policies. Certain members of our Board of Directors have
been designated by these private equity investment funds. Through such representation on the Board
of Directors, they are able to substantially influence the appointment of management, the entering
into of mergers and sales of substantially all of our assets and other extraordinary transactions.
The directors so elected have authority, subject to the terms of our debt, to issue additional
stock, implement stock repurchase programs, declare dividends and make other decisions about our
capital stock.
The interests of Carlyle and its affiliates could conflict with the interests of debt holders.
For example, if we encounter financial difficulties or are unable to pay our debts as they mature,
the interests of Carlyle as equity holder might conflict with the interests of a debt holder.
Affiliates of Carlyle may also have an interest in pursuing acquisitions, divestitures, financings
or other transactions that, in their judgment, could enhance their equity investments, although
such transactions might involve risks to debt holders. In addition, Carlyle or its affiliates may
in the future own businesses that directly compete with ours.
Our internal controls over financial reporting may not be sufficient to ensure timely and reliable
external financial reporting.
We are not required to evaluate our internal controls over financial reporting in the same
manner that is required of certain public companies. Historically, we have designed our internal
controls and prepared our financial statements in a manner that management believes accurately
records transactions in accordance with generally accepted accounting principles (“GAAP”). We
have taken actions to improve our internal controls over financial reporting and we continue to
look for opportunities to further improve those controls. The effectiveness of our internal
controls over financial reporting is subject to continued management review, supported by
confirmation and testing by our internal audit department, as well as audit committee oversight.
We cannot be certain that these measures will ensure that we implement and maintain adequate
controls over our financial processes and reporting in the future. Any failure to implement
required new or improved controls, or difficulties encountered in their implementation could cause
us to fail to meet our reporting obligations. In addition, we cannot be certain that we will not
identify material weaknesses or significant deficiencies in our internal controls over financial
reporting in the future. Commencing with our annual report for 2007, pursuant to Section 404 of the
Sarbanes-Oxley Act our management will be required to deliver a report that assesses the
effectiveness of our internal controls over financial reporting, and commencing with our annual
report for 2008, we will be required to deliver an attestation report from an independent
registered public accounting firm on management’s assessment of the operating effectiveness of our
internal controls.
Our corporate offices and principal corporate support activities are located in Dallas, Texas.
We own and lease manufacturing facilities located throughout the United States. We currently have
manufacturing facilities in Texas, California, Tennessee, Georgia, Washington, Florida and South
Carolina. General information about our principal manufacturing facilities is presented in the
chart below.
Square
Site
Footage
Ownership
Functions
Dallas, TX
Jefferson Street
28,878
Owned
High speed wind tunnel.
Jefferson Street (1)
4,927,292
Leased
Vought Headquarters; design capabilities;
test labs; fabrication of parts and
structures; assembly and production of
wings, horizontal and vertical tail
sections, fuselage, empennage, and cabin
structures.
Grand Prairie, TX
Marshall Street
804,456
Leased
Manufacturing of empennage
assemblies, doors, skin polishing, automated fastening.
Marshall Street
335,292
Owned
Warehouse.
Hawthorne, CA (2)
1,382,096
Leased
Production of fuselage panels and main deck
cargo doors; reconfigurable tooling,
precision assembly and automated fastening.
Torrance, CA
84,654
Leased
Fuselage panel processing facility.
Nashville, TN
2,170,497
Owned
Design capabilities; wing, wing assembly and
control surface manufacturing and assembly
facilities.
Stuart, FL
519,690
Leased
Manufacturing of composite and metal
aircraft assemblies and manufacturing of
commercial aircraft doors.
Brea, CA
90,000
Leased
Manufacturing of wing skins, fuselage
panels, bulkheads, floor beams, spars,
stringers, landing gear and subassemblies.
Everett, WA
153,000
Leased
Manufacturing of wing skins, fuselage
panels, bulkheads, floor beams, spars,
stringers, landing gear and subassemblies.
Milledgeville, GA
566,168
Owned
Composite fabrication and component assembly.
North Charleston, SC
340,000
Owned
Fabrication of composite fuselage structures.
(1)
Lease expires July 2007. Currently in discussion with the U.S. Navy regarding terms of
our continued occupancy of the facility, which may include a lease extension or other
options.
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.
We operate in a highly regulated industry that subjects us to various audits, reviews and
investigations by several U.S. governmental entities. Currently, we are not aware of any
significant on-going audits, reviews or investigations which it believes would materially impact
our results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Our common equity consists of common stock, par value $0.01 per share. There is currently no
established public trading market for our common stock.
As of March 8, 2007, there were 82 stockholders of record of our common stock.
We have not declared a dividend on shares of common stock since inception in our current
corporate form in 2000. Any payment of cash dividends on our common stock in the future will be at
the discretion of our board of directors and will also depend upon such factors as compliance with
debt covenants, earnings levels, capital requirements, our financial condition and other factors
deemed relevant by our board of directors.
On August 2, 2006, we issued an aggregate of 10,650 shares of our common stock, or less than
1% of the aggregate amount of common stock outstanding, to four members of our board of directors
in reliance on Regulation D under the Securities Act. An aggregate of 33,225 shares of our common
stock were issued in 2006 in connection with the exercise of stock options originally granted in
accordance with Rule 701 of the Securities Act. The aggregate proceeds to Vought as a result of
these transactions were approximately $0.4 million.
Item 6. Selected Financial Data
The following selected consolidated financial data are derived from our consolidated financial
statements included elsewhere in this annual report. The information set forth below should be
read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our Consolidated Financial Statements and their related notes included
elsewhere in this annual report. The historical results presented are not necessarily indicative
of future results.
Certain prior years’ amounts have been reclassified to conform with the current year
presentation (See Note 5 in the Consolidated Financial Statements).
(2)
Interest expense, net includes the gain or loss on interest rate swaps.
(3)
Net income (loss) is calculated before other comprehensive income (losses) relating to
minimum pension liability adjustments of $112.9 million, $16.8 million, $(78.6) million,
$13.1 million and $(444.2) million in 2006, 2005, 2004, 2003 and 2002, respectively.
(4)
Amounts previously disclosed for 2004 have been updated to reflect a reclassification
of $35 million in grants received from the State of Texas from operating activities to
financing activities.
(5)
Total debt as of December 31, 2006, 2005, 2004 and 2003 includes $1.3 million, $2.0
million, $2.9 million and $4.5 million, respectively, of capitalized leases. There were no
capital leases in 2002.
(6)
Includes Aerostructures’ results of operations from July 2, 2003, the date of
acquisition.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General Business Overview
While we have long-term contracts for most of our programs, we generally build our inventory
and deliver products pursuant to separate purchase orders under those contracts. We measure
backlog for commercial and business jet programs as firm orders, and backlog for military programs
as funded orders or authorizations to proceed, in each case for products that have not yet been
shipped to our customer. In addition to our backlog, our contracts provide for additional units
for which we have not yet received a firm order, a funded order or an authorization to proceed.
Our measure of backlog produces a number that is significantly lower than the estimated aggregate
dollar value of our contracts because this measure excludes: commercial orders that are not firm,
military orders that are not funded or authorized, and commercial and military units under
contract for which we have not yet received orders. Using our measure of backlog, we estimate that
as of December 31, 2006, our backlog was approximately $3.3 billion. Our backlog may fluctuate at
any time depending on new firm orders, funded orders or authorizations to proceed that are
received, as well as orders that are shipped, immediately before the date of measurement.
In 2004 and 2005, we undertook site consolidation and restructuring plans for which related
charges including disruption charges were recorded, aggregating approximately $215.2 million in
2004 and 2005. The site consolidation plans were discontinued in early 2006, with additional
charges in 2006 of approximately $8.0 million. We do not expect to incur any additional
significant charges related to this plan.
We completed a new facility in North Charleston, South Carolina during 2006 and commenced
manufacturing, assembly and integration work for the Boeing 787 Dreamliner commercial aircraft
program. We are the sole-source supplier of the aft fuselage sections 47 and 48 for this program.
In addition, we have established a joint venture called Global Aeronautica, LLC with Alenia North
America (“Alenia”), a subsidiary of Finmeccanica SpA. Vought and Alenia each have a 50% stake in
the joint venture, which will combine the two companies’ respective 787 program fuselage products
with sections from other structures partners and systems from around the world to deliver an
integrated product to Boeing. With the increase in production of the Boeing 787 Dreamliner and the
potential reduction or completion of C-17 production over the next few years, we expect the portion
of our business represented by commercial sales to increase, and military sales to decrease.
We are focusing on improving our processes and profitability through significant cost
reduction efforts. Major initiatives in 2006 included: reducing headcount by approximately 1,000
positions, freezing the accrual of benefits, effective December 31, 2007, under our non-union
defined pension benefit plans and renegotiating major customer contracts and settlements in our
favor. We anticipate that the headcount reductions should result in approximately $100 million
in annual savings in the future. These reductions will be incorporated into our estimated costs
and should contribute to higher margins over time. They will be offset by future cost increases
due to growth of the business. In addition to these milestones, improving manufacturing
efficiencies, quality and safety have been a focus and have benefited from the implementation of
lean manufacturing and six sigma techniques.
The financial health of the commercial airline industry has a direct and significant effect on
our commercial aircraft programs. Following the declining trends after 2001, the industry has
experienced record numbers of orders for new aircraft in recent years. The market for business
jets was also impacted by the economic downturn, but generally recovered in 2005 and continued to
grow in 2006. The military market has also seen growth in recent years, due in part to the wars in
Iraq and Afghanistan. However, with the addition of the 787 program and the potential reduction or
completion of the C-17 program, we expect our commercial business to increase as a percentage of
sales over the next few years.
Certain prior period amounts have been reclassified to conform with the current year presentation
(See note 5 in the Consolidated Financial Statements for further explanation).
Net Sales. Net sales for the year ended December 31, 2006 were $1,550.9 million, an increase
of $253.7 million or 20% compared with net sales of $1,297.2 million for the prior year. When
comparing the current and prior year:
•
Commercial net sales increased approximately $96.6 million or 16% in 2006. This
increase was primarily due to the recognition of $70 million in sales related to
customer settlements in the second quarter of 2006, and increased sales of $60.3
million resulting from increased aircraft delivery rates on the Boeing 777, 767,
and 747, partially offset by decreased sales of $28.4 million due to reduced
delivery rates on the Airbus A319 and A340.
•
Military net sales increased approximately $89.2 million or 19% in 2006
primarily due to increased sales of $58.2 million on the Global Hawk and $22.3
million on the H-60 programs resulting from increased delivery rates.
•
Business Jet net sales increased approximately $67.9 million or 30% due
primarily to a $29 million of customer settlements finalized in the second quarter
and $35.1 million due to an increase in delivery rates for our Gulfstream programs,
partially offset by a decrease of $12.5 million due to the completion of the
Embraer program.
Cost of Sales. Cost of sales as a percentage of net sales were 82% for the year ended
December 31, 2006, compared with 95% for the same period in the prior year. The decrease in the
cost of sales percentage was caused primarily by the absence of one-time facility consolidation and
disruption expenses of $158.4 million recorded in 2005 that were not incurred in 2006, partially
offset by costs recognized related to customer settlements and losses recorded on the Airbus and
H-60 programs in 2006.
Selling, general and administrative expenses. Selling, general and administrative expenses
for the year ended December 31, 2006 were $236.0 million, an increase of $1.8 million or 1%
compared with selling, general and administrative expenses of $234.2 million for the prior year.
The increase in expenses was primarily due to increases of $19.0 million in Boeing 787 investment
and $9.0 million in stock compensation expense, offset by decreases of $13.0 million in headcount
reductions and $12.0 million in net periodic costs associated with our pension and other-post
retirement benefit plans.
Asset Impairment Charge. The asset impairment charge increased $3.1 million or 53% compared
to the prior period due to an impairment charge of $9.0 million on certain fixed assets that were
originally acquired as part of the consolidation effort.
Operating income (loss). Operating income for the year ended December 31, 2006 was $31.7
million, compared to an operating loss of ($174.7) million for the same period in the prior year.
The positive change in operating income of $206.4 million is primarily due to the absence of
facility consolidation expenses of $158.4 million recorded in 2005 that were not incurred in 2006,
favorable customer settlements and increased sales combined with our cost reduction efforts and
reduced benefit costs. These favorable changes were partially offset by losses on the Airbus and
H-60 programs.
Interest expense, net. Interest expense, net for the year ended December 31, 2006 was $63.1
million, an increase of $11.8 million or 23% compared with $51.3 million for the prior year.
Interest expense, net, increased primarily due to the increase in our borrowing levels under the
revolving credit agreement, combined with higher variable interest rates than in the prior year.
Net Sales. Net sales for the year ended December 31, 2005 were $1,297.2 million, an increase
of $82.5 million or 7% compared with net sales of $1,214.7 million for the prior year. When
comparing 2005 to 2004:
•
Commercial net sales increased approximately $24.2 million or 4% in 2005. This
increase was primarily due to increased sales of $62.1 million resulting from
increased aircraft delivery rates on the Boeing 777, 747, and Airbus programs,
partially offset by decreased sales of $39.5 million due to the decrease in
revenues in 2005 on the Boeing 767 program as well as the cancellation of the 757
program.
•
Military net sales increased approximately $36.9 million or 8% in 2005 primarily
due to increased sales of $56.7 million on the C-130, V-22, and F-22 programs
resulting from increased delivery rates, as well as the first article deliveries on
the C-5 program and initial deliveries on the H-60 program. These increases were
partially offset by decreased sales of $20.7 million caused by reduced aircraft
delivery rates on Global Hawk, a decrease in revenues in 2005 on the 767 Tanker,
and a temporary hold placed on the F-35 program.
•
Business Jet net sales increased approximately $21.4 million or 11% due
primarily to an increase in sales of $20.3 million on Gulfstream contracts as a
result of increased aircraft delivery rates.
Cost of Sales. Cost of sales as a percentage of net sales was 95% for the year ended December31, 2005, compared with 89% for the same period in the prior year. The increase in cost of sales
was caused primarily by higher program costs of $181.0 million, attributable to higher facility
consolidation and disruption costs related to the transition of certain Nashville programs to
Dallas, increased costs related to the Boeing strike, increased cost estimates on new and existing
programs due to the consolidation efforts and difficulties experienced with the start up, an
increase of $7.2 million for South Carolina activation charges, and an increase of $27.3 million
related to pension benefits, partially offset by a reduction of $65.0 million in the charges
related to employee benefits and accelerated depreciation for the planned facility closures and the
favorable effects of an increase in business base. The increase in facility consolidation and
disruption costs is primarily attributed to fewer experienced employees than expected transferring
from Nashville to Dallas, resulting in greater than expected efforts required to achieve first
article specifications for transferred products.
Selling, general and administrative expenses. Selling, general and administrative expenses
for the year ended December 31, 2005 were $234.2 million, an increase of $11.1 million or 5%
compared with selling, general and administrative expenses of $223.1 million for the prior year.
The increase was due mainly to $50.7 million of period expenses related to the start up of the
Boeing 787 program offset by cost reductions from our restructuring efforts and a reduction of
$6.4 million in stock compensation expense, a reduction of $3.6 million for financial advisory
fees, and a reduction of $6.0 million in amortization of intangible assets.
Asset Impairment Charge The asset impairment charge decreased $20.1 million or 77% compared
to the prior period due to an impairment charge of $26.0 million in 2004 due to write down of an
identified contract intangible asset in 2004.
Operating loss. Operating loss for the year ended December 31, 2005 was ($174.7) million,
compared to an operating loss of ($112.4) million for the same period in the prior year. The
increase in loss of ($62.3) million is primarily due to higher program costs resulting from
consolidation disruption costs and revised cost estimates on new and existing programs, increased
costs related to pension benefits, and the increased investment in the Boeing 787 program combined
with South Carolina activation charges, partially offset by reductions in charges for employee
benefits and accelerated depreciation related to site consolidation, a reduction in stock
compensation expense for executive officers and directors, reduced management fees, and a reduction
in the amortization of intangible assets. Additional offsetting factors were the decrease in
impairment charges and the favorable effects of an increase in business base.
Interest expense, net. Interest expense, net for the year ended December 31, 2005 was $51.3
million, an increase of $8.5 million or 20% compared with $42.8 million for the prior year.
Interest expense, net, increased primarily due to the increase in Vought’s senior secured debt
resulting from the credit agreement entered into in December 2004, combined with higher interest
rates than in the prior year.
Liquidity, or access to cash, 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 and borrowing capacity through our credit facility and long-term capital
markets. Vought’s 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. Working capital requirements fluctuate
between periods as a result of changes in delivery rates under existing contracts and production
associated with new contracts. For some aircraft programs, milestone payments finance working
capital, which helps to improve liquidity. In addition, we may, in the ordinary course of
business, settle outstanding claims with customers or suppliers or we may receive payments for
previously unnegotiated change orders. Settlement of pending claims can have a significant impact
on our results of operations and cash flows.
We believe that cash flow from operations, cash and cash equivalents on hand, and funds
available from our credit facility will provide adequate funds for our working capital needs,
planned capital expenditures and near term debt service obligations. Our ability to meet these
obligations will depend upon future operating performance and our ability to refinance our
indebtedness, which will be affected by economic conditions and financial, business and other
factors, some of which are beyond our control. Management has implemented and continues to
implement cost savings initiatives that should have a positive impact on the future cash flows
needed to satisfy long-term cash requirements.
On July 2, 2003, we issued $270.0 million of 8% Senior Notes due 2011 (“Senior Notes”) with
interest payable on January 15 and July 15 of each year, beginning January 15, 2004. Prior to July15, 2007, the notes may be redeemed in full or in part by paying a make-whole premium. We may also
redeem the notes in full or in part any time after July 15, 2007 by paying a premium specified in
the indenture. The notes are senior unsecured obligations guaranteed by all of Vought’s existing
and future domestic subsidiaries.
We entered into $650 million of senior secured credit facilities pursuant to a credit
agreement dated December 22, 2004. The senior secured credit facilities are comprised of a $150
million six-year revolving loan (“Revolver”), a $75 million synthetic letter of credit facility and
a $425 million seven-year term loan B. The term loan amortizes at $1 million per quarter with a
bullet payment at the maturity date of December 22, 2011.
Under the credit agreement, we have the option to solicit up to $200 million in additional
term loans from existing or new lenders, subject to substantially the same terms and
conditions as the outstanding term loans though pricing may be separately negotiated at that time.
Additionally, we also have the option to convert up to $25 million of the letter of credit facility
to outstanding term loans, which would also be subject to the same terms and conditions as the
outstanding term loans made as of December 2004. We are obligated to pay an annual commitment fee
on the unused portion of the senior secured credit facilities of 0.5% or less, determined based on
our leverage ratio.
As of December 31, 2006, we had no borrowings under the Revolver. We had long-term debt of
approximately $687.0 million, which included $417.0 million incurred under our senior secured
credit facilities and $270.0 million of Senior Notes. In addition, we had $47.0 million
outstanding Letters of Credit under the $75 million synthetic facility and $1.3 million of capital
lease obligations.
Debt Covenants. The agreements governing our debt 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 includes 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 senior notes indenture also
contains various restrictive covenants including the incurrence of additional indebtedness unless
the debt is otherwise permitted under the indenture. As of December 31, 2006, we were in
compliance with the covenants for our debt and credit facilities.
Net cash provided by (used in) operating activities
172.8
(65.0
)
(59.8
)
Net cash provided by (used in) investing activities
(102.7
)
(152.1
)
(70.6
)
Net cash provided by (used in) financing activities
13.2
98.3
152.9
Net increase (decrease) in cash and cash equivalents
83.3
(118.8
)
22.5
Cash and cash equivalents at beginning of year
10.1
128.9
106.4
Cash and cash equivalents at end of year
$
93.4
$
10.1
$
128.9
Net cash provided by operating activities for the year ended December 31, 2006 was $172.8
million, an increase of $237.8 million compared to net cash used by operating activities of $65.0
million for the prior year. The increase compared to the prior year was primarily due to cash
received from customer settlements and advances during 2006 in addition to improved program
results.
The increase in cash related to changes in working capital is due mainly to large customer
settlements and advances received throughout the year. The non-cash items were relatively
unchanged from the prior period as depreciation expense decreased from December 31, 2006 compared
to December 31, 2005 partially offset by an increase in the equity loss in our joint venture and
increased stock compensation expense of $9.5 million.
Cash used in investing activities generally has been for capital expenditures. Net cash used
for capital expenditures for the year ended December 31, 2006 was $115.4 million, a decrease of
$31.7 million or 22% compared to $147.1 million for the prior year. The decrease reflects
decreases in capital spending for the 787 program and the related construction for the South
Carolina site compared to 2005 investment levels.
Cash provided by financing activities for the year ended December 31, 2006 was $13.2 million, a
decrease of $85.1 million or 87% compared to net cash provided by financing activities of $98.3
million for the prior year. The decrease was primarily due to the 2005 receipt of $52.6 million
from the Hawthorne facility sale, as well as the decrease in cash received from governmental grants
of $34.8 million. As of December 31, 2006, there were no outstanding borrowings on the Revolver,
leaving borrowing capacity of $150.0 million available.
Contractual Obligations
The following table summarizes the scheduled maturities of financial obligations and
expiration dates of commitments as of December 31, 2006:
In addition to the obligations in the table, at December 31, 2006, we had contractual
interest payment obligations as follows: (a) variable interest rate payments on $417
million outstanding under our senior secured credit facilities based upon LIBOR plus the
applicable margin, which correlated to an interest rate of 7.88% on term loan B at December31, 2006, and (b) $21.6 million per year on the 8% senior notes due 2011.
(2)
Purchase obligations represent property, plant and equipment commitments at December31, 2006. Although we also have significant other purchase obligations, most commonly in
the form of purchase orders, the timing of the purchase is often variable rather than
specific and the payments made by the customer in accordance with our long-term contract
agreements substantially reimburses the payments due. Accordingly, these obligations are
not included in the table.
In addition to the financial obligations detailed in the table above, we also had obligations
related to our benefit plans at December 31, 2006 as detailed in the following table. The pension
contributions include both voluntary and required employer contributions. Our other
post-retirement benefits are not required to be funded in advance, so benefit payments are paid as
they are incurred. The expected company contributions and payments are included in the table
below:
Current plan documents reserve our right to amend or terminate the plans at any time, subject
to applicable collective bargaining requirements for represented employees.
Off Balance Sheet Arrangements
None.
Inflation
A majority of our sales are conducted pursuant to long-term contracts that set fixed unit
prices and some of which provide for price adjustment through escalation clauses. The effect of
inflation on our sales and earnings is minimal because the selling prices of those contracts,
established for deliveries in the future, generally reflect estimated costs to be incurred in these
future periods. Our estimated costs take into account the anticipated rate of inflation for the
duration of the relevant contract.
Our supply base contracts are conducted on a fixed price basis in U.S. Dollars. In some cases
our supplier arrangements contain escalation adjustment provisions based on accepted industry
indices, with appropriate forecasting incorporated in program financial estimates. As the metallic
raw material industry continues to experience significant demand pressure, it is expected that raw
material market pricing will increase as a cost consideration for us, despite current existing
long-term agreement protections. Strategic cost reduction plans will continue to focus on
mitigating the affects of this demand curve on company operations.
Vought’s discussion and analysis of its financial position and results of operations are based
upon its consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported for assets and liabilities, disclosure
of contingent assets and liabilities, and the reported amounts of revenue and expenses. Although
Vought evaluates its estimates, which are based on the most current and best available information
and on various other assumptions that are believed to be reasonable under the circumstances, on an
ongoing basis, actual results may differ from these estimates under different assumptions or
conditions. Vought believes the following items are the critical accounting policies and most
significant estimates and assumptions used in the preparation of its financial statements. These
accounting policies conform to the accounting policies contained in the consolidated financial
statements of Vought included in this annual report.
Accounting Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes and, in particular,
estimates of contract costs and revenues used in the earnings recognition process. We have
recorded all estimated contract losses. To enhance reliability in our estimates, we employ a
rigorous estimating process that is reviewed and updated on a quarterly basis. However, actual
results could differ from those estimates.
Revenue and Profit 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 American Institute of Certified Public Accountants Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts, (SOP 81-1)
and sales and profits on contracts are recognized using percentage-of-completion methods of
accounting. Sales and profits are recognized on production contracts as units are delivered and
accepted by the customer (the “units-of-delivery” method). Under the percentage-of-completion
method of accounting, a single estimated total profit margin is used to recognize profit for each
contract over its entire period of performance, which can exceed one year. Amounts representing
contract change orders or claims are included in sales only when they are probable.
Additionally, some contracts contain provisions for revenue sharing, price re-determination or
cost and/or performance incentives. Such amounts or incentives are included in sales when the
amounts can be reliably estimated and their realization is reasonably assured. The impact of
revisions in profit 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.
Revisions in contract estimates, if significant, can materially affect Vought’s results of
operations and cash flows, as well as Vought’s valuation of inventory. Furthermore, certain
contracts are combined or segmented for revenue recognition in accordance with SOP 81-1.
Advance payments by customers for deposits on orders not yet delivered are recorded as accrued
contract liabilities in the current liabilities section on the balance sheet. 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. Also, 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 Statement of Position 81-1
Accounting for Performance of Construction-Type and Certain Production –type contracts.
Accrued contract liabilities consisted of the following:
Accounting for the sales 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 contract’s
scope of work and (3) the measurement of progress towards completion. The estimated profit or loss
on a contract is equal to the difference between the total contract value and the estimated total
costs at completion. Under the units-of-delivery percentage of completion method, sales on a
contract are recorded as the units are delivered and accepted during the period at an amount equal
to the contractual selling price of those units. The profit recorded on a contract under the
units-of-delivery method is equal to the estimated total profit margin for the contract stated as a
percentage of contract revenue multiplied by the sales recorded on the contract during the period.
Adjustments to original estimates for a contract’s 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.
Although fixed-price contracts, which may extend several years into the future, generally
permit us to keep unexpected profits if costs are less than projected, we also bear the risk that
increased or unexpected costs may reduce our profit or cause us to sustain losses on the contract.
In a fixed-price contract, we must fully absorb cost overruns, not withstanding the difficulty of
estimating all of the costs it will incur in performing these contracts and in projecting the
ultimate level of sales that may otherwise be achieved. Our failure to anticipate technical
problems, estimate delivery reductions, estimate costs accurately or control costs during
performance of a fixed price contract may reduce the profitability of a fixed price contract or
cause a loss. We believe we have recorded adequate provisions in the financial statements for
losses on fixed-price contracts, but we cannot be certain that the contract loss provisions will be
adequate to cover all actual future losses.
Inventories. Inventoried costs primarily relate to work in process and represent accumulated
contract costs less the portion of such costs allocated to delivered items. Accumulated contract
costs include direct production costs, manufacturing and engineering overhead, production tooling
costs, and certain general and administration expenses.
In accordance with industry practice, inventoried costs are classified as a current asset and
include amounts related to contracts having production cycles longer than one year; therefore, a
portion thereof will not be realized within one year.
Post-retirement Plans. The liabilities and net periodic cost of our pension and other
postretirement 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,
and rate of growth for medical costs. The actuarial assumptions used to calculate these costs are
reviewed annually. Assumptions are based upon management’s best estimates, after consulting with
outside investment advisors and actuaries, as of the annual measurement date.
The assumed discount rate utilized is based on a point in time estimate as of our December 31
annual measurement date. This rate is determined based upon on a review of interest 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 effect of changing the discount rate 25
basis points is shown in Note 14 to the Consolidated Financial Statements in Item 8.
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 has been projected at
8.5% in 2006, 2005 and 2004. 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 year’s 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 its defined benefit pension plans, we provide certain healthcare and life
insurance benefits for eligible retired employees. Such benefits are unfunded as of December 31,2006. 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 the
Company’s right to amend or terminate the plans at any time, subject to applicable collective
bargaining requirements for represented employees. From time to time, we have made changes to the
benefits provided to various groups of plan participants. Premiums charged to most retirees for
medical coverage prior to age 65 are based on years of service and are adjusted annually for
changes in the cost of the plans as determined by an independent actuary. In addition to this
medical inflation cost-sharing feature, the plans also have provisions for deductibles,
co-payments, coinsurance percentages, out-of-pocket limits, schedules of reasonable fees, managed
care providers, coordination of benefits with other plans, and a Medicare carve-out. A
one-percentage point shift in the medical trend rate would have the
effect shown in Note 14 to the
Consolidated Financial Statements in Item 8.
Item 7A. 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.
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.
Accounts receivable include amounts billed and currently due from customers, amounts currently
due but unbilled, 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 and maintain a provision for estimated credit losses, as
deemed appropriate, based upon historical experience and any specific customer collection issues
that have been identified. 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 are focused on mitigating the impact of
commodity price risk. We have long-term supply agreements with a number of our major suppliers. We,
as well as our supply base, are experiencing delays and pricing increases in the receipt of
metallic raw materials common with unprecedented market demand across the industry. Based upon
market shift conditions and industry analysis we expect these conditions to continue through at
least 2007 as metallic (aluminum and titanium) raw material supply adjusts to the industry upturn,
increased infrastructure demand in China and Russia, and increased aluminum and titanium usage in
an ever wider range of global products.
These market conditions began to affect cost and production schedules in mid 2005, and may
have an impact on cash flows or results of operations in future periods. We generally do not
employ forward contracts or other financial instruments to hedge commodity price risk; however, we
are reviewing a full range of business options focused on strategic risk management for all raw
material commodities.
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 are dependent on third parties for all information technology services.
To a lesser extent, we also are exposed to fluctuations in the prices of certain utilities and
services, such as electricity, natural gas, chemical processing and freight. We utilizes a range
of long-term agreements and strategic e-Commerce aggregated sourcing to optimize procurement
expense and supply risk in these categories.
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. Management believes that
such contracts and agreements have been executed with creditworthy financial institutions. As
such, we consider the risk of nonperformance to be remote.
Management has performed sensitivity analyses to determine how market rate changes will affect
the fair value of the 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 rate movements. We are exposed to cash flow risk due to changes
in interest rates with respect to the entire $417.0 million of variable rate debt under our senior
secured credit facilities. A one-percentage point increase in interest rates on our variable rate
debt as of December 31, 2006 would decrease our annual pre-tax income by approximately $4.2
million. While there is no debt outstanding under our revolving credit facility at December 31,2006, 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.
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 may continue to manage market risk with respect to interest rates by entering into hedge
agreements, as we have done in the past. Our supply base contracting policy manages commodities
price risk by entering into long-term fixed-price contracts in most cases. However, we do not have
any futures hedge with respect to raw materials, such as aluminum, used to build our products, and
therefore we may be subject to price fluctuations for raw materials or utilities over the
long-term. Similarly, we do not hedge for foreign currency exchange risk because we have minimal
exposure to this risk. In the case of our substantial sales to Airbus in Europe, purchase prices
and payment terms under the relevant contracts are denominated in U.S. dollars.
We have no current plans to enter into additional interest rate swaps.
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.
Accounting Changes and Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 158, Employer’s Accounting for Defined Benefit Pension
and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS
158”). SFAS 158 requires an employer that is a business entity and sponsors one or more single
employer benefit plans to (1) recognize the funded status of the benefit obligation in its
statement of financial position, (2) recognize as a component of other comprehensive income, net of
tax, the gains or losses and prior service costs or credits that arise during the period but are
not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets
and obligations as of the date of the employer’s fiscal year end statement of financial position
and (4) disclose in the notes to financial statements additional information about certain effects
on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the
gains or losses, prior service costs or credits, and transition assets or obligations. We
will implement SFAS 158 in our financial statements for the year
ending December 31, 2007 and we are currently evaluating the
impact which is in part dependent in assumptions and the value of
plan assets at the measurement date.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS
157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosure about fair value measurements. SFAS 157 is effective
for our fiscal year beginning January 1, 2008. We are currently evaluating the potential impact,
if any, of SFAS 157 on our financial statements.
In June 2006, the FASB issued SFAS Interpretation No. 48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes – an interpretation of SFAS No. 109. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No.
109, “Accounting for Income Taxes.” FIN 48 prescribes that we should use a more likely than not
recognition threshold based on the technical merits if the tax position taken. Tax positions that
meet the more-likely-than-not recognition threshold should be measured in order to determine the
tax benefit to be recognized in the financial statements. FIN 48 is effective January 1, 2007. We
have not yet determined the impact, if any, of adopting FIN 48 on our financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which
replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements, and provides guidance on the accounting for and reporting of
accounting changes and error corrections. SFAS No. 154 applies to all voluntary changes in
accounting principle and requires retrospective application (a term defined by the statement) to
prior periods’ financial statements, unless it is impracticable to determine the effect of a
change. It also applies to changes required by an accounting pronouncement that does not include
specific transition provisions. In addition, SFAS No. 154 redefines restatement as the revising of
previously issued financial statements to reflect the correction of an error. The statement is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. We have adopted SFAS No. 154 beginning January 1, 2006.
In December 2004, the FASB issued SFAS No. 123 (revised) (“123R”), Share-based Payments. SFAS
123R revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Prior to 2006, we accounted for stock option grants using
the intrinsic value method. Under SFAS 123R, we are required to select a valuation technique or
option-pricing model that meets the standard. Allowable valuation models include a binomial model
and the Black-Scholes-Merton model. At the present time, we are continuing to use the Black-Scholes
model. We have adopted SFAS 123R at the beginning of the first quarter of fiscal 2006, applying the
“modified prospective application,” which requires us to value stock options granted prior to its
adoption of SFAS 123R under the fair value method and expense these amounts over the stock option’s
remaining vesting period. As a result of adopting SFAS 123R on January 1, 2006, our net loss for
the twelve months ended December 31, 2006 is $3.0 million more than if we had continued to account
for share-based compensation under APB Opinion No. 25.
In November 2004, the FASB issued SFAS No. 151 Inventory Costs. This Statement amends the
guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In
addition, this Statement requires that allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. The provisions of this
Statement became effective for the Company in January 2006 and did not have a material impact.
Report of Independent Registered Public Accounting Firm
The Board of Directors
Vought Aircraft Industries, Inc.
We have audited the accompanying consolidated balance sheets of Vought Aircraft Industries, Inc.
and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders’ equity (deficit), and cash flows for each of the three
years in the period ended December 31, 2006. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Company’s internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Vought Aircraft Industries, Inc. and subsidiaries
at December 31, 2006 and 2005, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method
of accounting for Share-Based Payments in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004) on January 1, 2006.
Common stock, par value $.01 per share; 50,000,000 shares authorized,
24,755,248 and 24,711,373 issued and outstanding at December 31, 2006
and 2005, respectively
0.3
0.3
Additional paid-in capital
414.8
411.4
Shares held in rabbi trust
(1.6
)
(1.6
)
Stockholders’ loans
(1.0
)
(1.1
)
Accumulated deficit
(641.3
)
(604.6
)
Accumulated other comprehensive loss
(464.5
)
(577.4
)
Total stockholders’ equity (deficit)
$
(693.3
)
$
(773.0
)
Total liabilities and stockholders’ equity (deficit)
Vought Aircraft Industries, Inc. and its wholly owned subsidiaries are herein referred to as
the “We”, “Our”, “Us”, “Company” or “Vought.”The Company is one of the world’s largest independent
suppliers of commercial and military aerostructures. The majority of the Company’s products are
sold to The Boeing Company and Airbus, and for military contracts, ultimately to the U.S.
Government. The Corporate office is in Dallas, Texas and production work is performed at sites in
Hawthorne and Brea, California; Everett, Washington; Dallas and Grand Prairie, Texas; North
Charleston, South Carolina; Milledgeville, Georgia; Nashville, Tennessee; and Stuart, Florida.
We have completed our new facility in North Charleston, South Carolina and have commenced
manufacturing, assembly and integration work for the Boeing 787 Dreamliner commercial aircraft
program. We are the sole-source supplier of the aft fuselage sections 47 and 48 for this program.
In addition, we have established a joint venture called Global Aeronautica, LLC with Alenia North
America (“Alenia”), a subsidiary of Finmeccanica SpA. Vought and Alenia each have a 50% stake in
the joint venture, which will combine the two companies’ respective 787 program fuselage products
with sections from other structures partners and systems from around the world to deliver an
integrated product to Boeing. With the increase in production of the Boeing 787 Dreamliner and the
potential reduction in C-17 over the next few years, we expect the portion of our business
represented by commercial sales to increase, and military to decrease.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes and, in particular, estimates of contract costs
and revenues used in the earning recognition process. We have recorded all estimated contract
losses. To enhance reliability in our estimates, we employ a rigorous estimating process that is
reviewed and updated on a quarterly basis. However, actual results could differ from those
estimates.
Revenue and Profit 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 American Institute of Certified
Public Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts, (SOP 81-1) and sales and profits on contracts are recognized
using percentage-of-completion methods of accounting. Sales and profits are recognized on
production contracts as units are delivered and accepted by the customer (the “units-of-delivery”
method). Under the percentage-of-completion method of accounting, a single estimated total profit
margin is used to recognize profit for each contract over its entire period of performance, which
can exceed one year. Amounts representing contract change orders or claims are included in
contract value only when they are probable. Additionally, some contracts contain provisions for
revenue sharing, price re-determination or cost and/or performance incentives. Such amounts or
incentives are included in contract value when the amounts can be reliably estimated and their
realization is reasonably assured. The impact of revisions in profit 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.
Revisions in contract estimates, if significant, can materially affect Vought’s results of
operations and cash flows, as well as Vought’s valuation of inventory. Furthermore, certain
contracts are combined or segmented for revenue recognition in accordance with SOP 81-1.
Accounting for the sales 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 contract’s
scope of work and (3) the measurement of progress towards completion. The estimated profit or loss
on a contract is equal to the difference between the total contract value and the estimated total
cost at completion. Under the units-of-delivery percentage of completion method, sales on a
contract are recorded as the units are delivered and accepted during the period at an amount equal
to the contractual selling price of those units. The profit recorded on a contract under the
units-of-delivery method is equal to the estimated total profit margin for the contract stated as a
percentage of contract revenue multiplied by the sales recorded on the contract during the period.
Adjustments to original estimates for a contract’s 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.
Although fixed-price contracts, which extend several years into the future, generally permit
the us to keep unexpected profits if costs are less than projected, we also bear the risk that
increased or unexpected costs may reduce the Company’s profit or cause the Company to sustain
losses on the contract. In a fixed-price contract, we must fully absorb cost overruns, not
withstanding the difficulty of estimating all of the costs we will incur in performing these
contracts and in projecting the ultimate level of sales that may otherwise be achieved. Our
failure to anticipate technical problems, estimate delivery reductions, estimate costs accurately
or control costs during performance of a fixed price contract may reduce the profitability of a
fixed price contract or cause a loss. We believe we have recorded adequate provisions in the
financial statements for losses on fixed-price contracts, but we cannot be certain that the
contract loss provisions will be adequate to cover all actual future losses.
Cash and Cash Equivalents
The Company considers cash on hand, deposits with banks, and other short-term marketable
securities with original maturities of three months or less as cash and cash equivalents.
Accounts Receivable
Accounts receivable include amounts billed and currently due from customers, amounts currently
due but unbilled, certain estimated contract changes, claims in negotiation that are probable of
recovery, and amounts retained by the customer pending contract completion. Unbilled amounts are
usually billed and collected within one year. The Company continuously monitors collections and
payments from their customers and maintains a provision for estimated credit losses, as deemed
appropriate, based upon historical experience and any specific customer collection issues that have
been identified.
Inventories
Inventoried costs primarily relate to work in process under fixed-price contracts. They
represent accumulated contract costs less the portion of such costs allocated to delivered items.
Accumulated contract costs include direct production costs, manufacturing and engineering overhead,
production tooling costs, and certain general and administrative expenses. For presentation
purposes, the selling , general and administrative costs are shown in as a separate line item in
the accompanying statement of operations.
Property, Plant and Equipment
Additions to property, plant and equipment are recorded at cost. Depreciation is calculated
principally on the straight-line method over the estimated useful lives of the assets. Repairs and
maintenance, which are not considered betterments and do not extend the useful life of property and
equipment, are charged to expense as incurred. When property and equipment are retired or
otherwise disposed of, the asset and accumulated depreciation are removed from the accounts and the
resulting gain or loss is reflected in income.
The consolidated financial statements include Vought Aircraft Industries, Inc. and its wholly
owned subsidiaries, as well as our proportionate share of our investment in Global Aeronautica LLC
(“Global”). All significant inter-company accounts and transactions have been eliminated.
Joint Venture
We account for our investment in Global under the equity method of accounting. The investment
balance is included as a liability of $4.1 million in the other non-current liability line item in
the accompanying balance sheet as of December 31, 2006. The investment balance had an asset balance
of $2.6 million at December 31, 2005.
Impairment of Long Lived Assets, Identifiable Intangible Assets and Goodwill
The Company records impairment losses on long-lived assets, including identifiable intangible
assets, when events and circumstances indicate that the assets might be impaired and the
undiscounted projected cash flows associated with those assets are less than the carrying amounts
of those assets. In those situations where the undiscounted projected cash flows are less than the
carrying amounts of those assets, impairment loss on a long-lived asset is measured based on the
excess of the carrying amount of the asset over the asset’s fair value, generally determined based
upon discounted projected cash flows. For assets held for sale, impairment losses are recognized
based upon the excess of carrying value over the estimated fair value of the assets, less estimated
selling costs. We perform an annual impairment test as of the end of the third fiscal quarter, in
accordance with Statement of Financial Accounting Standards (SFAS) 142 (further described in Note
7- Goodwill and Intangible Assets).
Derivatives
Derivatives consist of an interest rate cap agreement. Gains and losses from interest rate
caps are included on the accrual basis in interest expense. (Further
described in Note 13 –
Derivatives and Other Financial Instruments).
Advance Payments and Progress Payments
Advance payments by customers for deposits on orders not yet delivered are recorded as current
liabilities. 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.
Stock-Based Compensation
Effective January 1, 2006, the company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment, using the modified prospective-transition method. Under
that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the
grant date fair value estimated in accordance with the original provisions of Statement 123, and
(b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on
the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results
for prior periods have not been restated.
As a result of adopting Statement 123(R) on January 1, 2006, our income(loss) before income
taxes and net income(loss) for the year ended December 31, 2006 is $3.0 million lower than if we
had continued to account for share-based compensation under SFAS 123. Prior to the adoption of SFAS
No. 123R, the fair value of an option was amortized to expense in the pro forma footnote disclosure
using the graded method. Upon the adoption of SFAS No. 123R, options granted prior to the date of
adoption are amortized using a graded method and the associated expenses is included in our
operations from the date of adoption under the modified-prospective transition approach. For
options granted after the date of adoption, the fair value will continue to be amortized to expense
using a graded method over the vesting period.
Had we used the fair value based accounting method for stock-based compensation expense
described by SFAS No. 123 for the 2005 and 2004 fiscal periods, our net income(loss) for the years
ended December 31, 2005 and 2004, respectively, would have been as set forth in the table below.
As of January 1, 2006, we adopted SFAS No. 123R thereby eliminating pro forma disclosure for
periods following such adoption.
Less: Fair value based compensation expense per SFAS 123
(1.9
)
(1.2
)
Pro forma net loss per SFAS 123
$
(238.0
)
$
(156.2
)
2005
2004
Expected dividend yield
0
%
0
%
Risk free interest rate
3.9%-4.4
%
3.8%-4.5
%
Expected life of options
6 years
6 years
During the fourth quarter of 2006, we granted 797,270 stock appreciation rights and 395,140
restricted stock units. The stock appreciation rights and the restricted stock units are payable in
common stock. We recorded compensation expense of $3.0 million related to these awards based on
performance criteria designated in the award agreements.
During the fourth quarter of 2005, we recorded stock compensation income of $6.4 million
included in general and administrative expenses, to reflect the impact of an estimated decrease in
the fair value of the Company’s common stock, related to non-recourse notes previously issued to
officers for stock purchases and decreased deferred compensation liability for our rabbi trust.
Debt Origination Costs
Debt origination costs are amortized using the effective interest rate method. Amortization
is adjusted when debt prepayments are made to more closely match the reduction of the debt balance.
Debt origination costs, net of accumulated amortization, are as follows:
2006
2005
($ in millions)
Debt origination cost, net
$
14.1
$
17.2
Warranty Reserves
A reserve has been established to provide for the estimated future cost of warranties on our
delivered products. Management periodically reviews the reserves and adjustments are made
accordingly. A provision for warranty on products delivered is made on the basis of our historical
experience and identified warranty issues. Warranties cover such factors as non-conformance to
specifications and defects in material and workmanship.
The following is a rollforward of amounts accrued for warranty reserves and amounts are
included in accrued and other liabilities and other non-current liabilities:
2006
2005
($ in millions)
Beginning Balance
$
8.0
$
10.2
Warranty costs incurred
(0.2
)
(0.5
)
Additions charged to cost of sales:
Warranties issued
1.3
0.3
Charges related to pre-existing warranties
(2.3
)
(2.0
)
Ending Balance
$
6.8
$
8.0
Income Taxes
Income taxes are accounted for using the liability method. Deferred income taxes are
determined based upon the net tax effects of temporary differences between the carrying amounts of
the assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year
presentation.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 158, Employer’s Accounting for Defined Benefit
Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106 and 132(R)
(“SFAS 158”). SFAS 158 requires an employer that is a business entity and sponsors one or more
single employer benefit plans to (1) recognize the funded status of the benefit obligation in its
statement of financial position, (2) recognize as a component of other comprehensive income, net of
tax, the gains or losses and prior service costs or credits that arise during the period but are
not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets
and obligations as of the date of the employer’s fiscal year end statement of financial position
and (4) disclose in the notes to financial statements additional information about certain effects
on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the
gains or losses, prior service costs or credits, and transition assets or obligations. We
will implement SFAS 158 in our financial statements for year ending December 31, 2007 and we are
currently evaluating the impact on our financial statements which is in part dependent on changes
in assumptions and the value of plan assets at the measurement date.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS
157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosure about fair value measurements. SFAS 157 is effective
for our fiscal year beginning January 1, 2008. We are currently evaluating the potential impact, if
any, of SFAS 157 on our financial statements.
In June 2006, the FASB issued SFAS Interpretation Number 48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes — an interpretation of SFAS No. 109. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No.
109, “Accounting for Income Taxes.” FIN 48 prescribes that we should use a more-likely-than-not
recognition threshold based on the technical merits of the tax position taken. Tax positions that
meet the more-likely-than-not recognition threshold should be measured in order to determine the
tax benefit to be recognized in the financial statements. FIN 48 is effective January 1, 2007. We
have not yet determined the impact, if any, of adopting FIN 48 on our financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which
replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in
Interim Financial
Statements, and provides guidance on the accounting for and reporting of
accounting changes and error corrections. SFAS No. 154 applies to all voluntary changes in
accounting principle and requires retrospective application (a term defined by the statement) to
prior periods’ financial statements, unless it is impracticable to determine the effect of a
change.
It also applies to changes required by an accounting pronouncement that does not include
specific transition provisions. In addition, SFAS No. 154 redefines restatement as the revising of
previously issued financial statements to reflect the correction of an error. The statement is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. We have adopted SFAS No. 154 on January 1, 2006.
In December 2004, the FASB issued SFAS No. 123 (revised) (“123R”), Share-based Payments. SFAS
123R revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Prior to 2006, we accounted for stock option grants using
the intrinsic value method. Under SFAS 123R, we are required to select a valuation technique or
option-pricing model that meets the standard. Allowable valuation models include a binomial model
and the Black-Scholes-Merton model. At the present time, we are continuing to use the Black-Scholes
model. We have adopted SFAS 123R at the beginning of the first quarter of fiscal 2006, applying the
“modified prospective application,” which requires us to value stock options granted prior to its
adoption of SFAS 123R under the fair value method and expense these amounts over the stock option’s
remaining vesting period. As a result of adopting SFAS 123R on January 1, 2006, our net loss for
the twelve months ended December 31, 2006 is $3.0 million more than if we had continued to account
for share-based compensation under APB Opinion No. 25.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. This Statement amends the
guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In
addition, this Statement requires that allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. The provisions of this
Statement became effective for the Company in January 2006 and it did not have a material impact.
3. RESTRUCTURING
In February 2004, we announced plans to consolidate portions of our manufacturing operations
to Dallas and Grand Prairie, Texas. The consolidation plan, as originally designed, was intended to
renovate and modernize the Dallas facilities, close the Nashville and Stuart sites and reduce the
size of the Hawthorne site. In December 2005, we announced our intention to keep the Nashville and
Stuart facilities open to support certain programs whose future deliveries did not justify the
costs to move the programs to Dallas and these plans were finalized in April 2006. Pursuant to the
original plan to close the Nashville and Stuart facilities, we had previously offered relocation or
termination benefits (voluntary and involuntary) to the approximately 1,300 employees at these
facilities. As a result of our decision in the second quarter of 2006 to keep these facilities
open, we reduced our original estimates of the costs for these benefits and as of September 24,2006, all benefit elections have been finalized. As of December 31, 2006, all payments related to
the restructuring liability have been completed. The following table is a roll-forward of the
amounts accrued for the restructuring liabilities discussed above:
During 2001, the Company finalized and approved a restructuring plan designed to reduce our
infrastructure costs by closing its Perry, Georgia facility and relocating the facility’s
production effort to the Stuart, Florida site. At December 31, 2001, we had accrued $12.6 million
related to costs on non-cancelable lease payments, maintenance and other costs after the
anticipated closure date for the Perry facility. The closure of Perry was completed at the
beginning of the third quarter of 2002. Subsequent to the closure, we have recorded $9.1 million
of lease payments and maintenance against the accrual. The remaining non-cancelable lease payments
and maintenance extend to 2007.
The following is a rollforward of amounts accrued for restructuring at the Perry site and are
included in accrued and other liabilities:
As discussed in Note 2 “Inventories”, we include the inventoried cost of all direct production
costs, manufacturing and engineering overhead, production tooling costs, and certain general and
administrative expenses. In 2006, we decided that costs related to information technology, which
were previously classified as general and administrative expenses, should be classified within
manufacturing and engineering overhead since information and technology directly supports those
activities. At December 31, 2006 and 2005, general and administrative expenses included in
inventories approximate $34.9 million and $41.9 million at December 31, 2006 and 2005.
Inventories consisted of the following at December 31:
According to the provisions of U.S. Government contracts, the customer has title to, or a
security interest in, substantially all inventories related to such contracts. The total inventory
on government contracts was $52.9 million and $74.1 million at December 31, 2006 and 2005,
respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Major categories of property, plant and equipment, including their depreciable lives,
consisted of the following at December 31:
2006
2005
Lives
($ in millions)
Land and land improvements
$
23.3
$
23.3
12 years
Buildings
117.6
117.0
12 to 39 years
Machinery and other equipment
514.1
486.6
4 to 18 years
Capitalized software
45.6
39.3
3 years
Leasehold improvements
97.1
30.0
7 years or life of lease
Assets under construction
127.3
145.7
Less: accumulated depreciation and amortization
(394.6
)
(356.8
)
Net property, plant and equipment
$
530.4
$
485.1
7. GOODWILL AND INTANGIBLE ASSETS
We completed our annual impairment analysis at the end of the third fiscal quarter by
computing enterprise value using a combination of the discounted future cash flow method, market
multiple method, and comparable transaction method and determined that there was no impairment to
goodwill as of December 31, 2006 or 2005.
Identifiable intangible assets primarily consist of profitable programs and contracts acquired
and are amortized over periods ranging from 7 to 15 years, computed primarily on a straight-line
method. The value assigned to programs and contracts was based on a fair value method using
projected discounted future cash flows. On a regular basis, the Company reviews the programs for
which intangible assets exist to determine if any events or circumstances have occurred that might
indicate an impairment has occurred. This review consists of analyzing the profitability and
expected future performance of these programs and looking for significant changes that might
be indicative of an impairment.
If this process were to indicate potential impairment, then undiscounted projected cash flows
would be compared to the carrying value of the asset(s) in question to determine if impairment had
in fact occurred. If this proved to be the case, the assets would be written down to equal the
value of the discounted future cash flows.
Intangible assets consisted of the following at December 31:
Scheduled estimated amortization of identifiable intangible assets is as follows:
($ in millions)
2007
$
10.0
2008
8.9
2009
8.9
2010
6.0
2011
2.1
Thereafter
13.3
49.2
8. INVESTMENT IN JOINT VENTURE
In April 2005, Vought Aircraft Industries entered into a joint venture agreement with Alenia
North America (“Alenia”), a subsidiary of Finmeccanica SpA to form a Limited Liability Company
called Global Aeronautica, LLC. Vought and Alenia have a 50% stake in the joint venture. The
purpose of the joint venture is limited to the performance of the integration of major components
of the fuselage and related testing activities for the Boeing 787 Program.
The Investment in joint venture balance is comprised of the following:
2006
2005
2004
($ in milions)
Beginning balance
$
2.6
$
1.0
$
—
Equity contributions
—
5.0
1.0
Distributions
—
—
—
Earnings (losses)
(6.7
)
(3.4
)
—
Ending balance
$
(4.1
)
$
2.6
$
1.0
The following table includes summary financial information for the investment in joint venture
as of December 31,:
2006
2005
($ in millions)
Current assets
$
33.2
$
28.9
Current liabilities
(10.1
)
(2.7
)
Working capital
$
23.1
$
26.2
Noncurrent assets
$
74.4
$
13.6
Noncurrent liabilities
105.8
34.6
Revenues
$
—
$
—
Gross Profit
—
—
Net income (loss)
$
(13.4
)
$
(6.9
)
We have a $2.9 million and $1.4 million receivable from the investment in joint venture as of
December 31, 2006 and 2005, respectively. We have a $7.0 million payable to the investment in the
joint venture as of December 31, 2006. We had no payable balance as of December 31, 2005.
9. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consisted of the following at December 31:
2006
2005
($ in millions)
Workers compensation
$
13.0
$
15.0
Group medical insurance
14.9
12.4
Site consolidation and Perry facility restructure accrued
3.5
8.6
Property taxes
5.2
6.0
Accrued rent in-kind
10.2
4.2
787 Taxiway (1)
5.5
—
Interest
11.5
10.0
Other
12.4
12.8
Total accrued and other liabilities
$
76.2
$
69.0
(1)
On July, 25 2006, we entered into an agreement with The Boeing Company (“Boeing”) to design
and construct the Charleston, South Carolina site taxiway. We have received $12.1 million from
Boeing and $0.6 million from the State of South Carolina as an advance for future design and
construction costs and we have incurred $7.2 million of expenses as of December 31, 2006.
The Company leases various plants and facilities, office space, and vehicles, under
non-cancelable operating and capital leases with an initial term in excess of one year. The
largest operating lease is for the Dallas, Texas facility. The Navy owns the 4.9 million square
foot facility. In July 2000, we signed a five-year assignment and transfer of rights and duties
lease which has since been extended twice with one year amendments with the Navy which allows us
to retain the use of the facility with payment terms of $8.0 million per year in the form of
rent-in-kind capital maintenance. We are currently in discussions regarding changes to the lease
or other ownership options.
As of December 31, 2006, the future minimum payments required under all operating and capital
leases are summarized as follows:
Operating
Capital
Leases
Leases
($ in millions)
2007
$
14.3
$
1.3
2008
8.1
—
2009
7.5
—
2010
7.0
—
2011
3.7
—
Thereafter
4.0
—
Total
44.6
$
1.3
Less: sublease income
(1.0
)
—
Less: imputed interest
—
—
Total
$
43.6
$
1.3
Rental expense incurred was approximately $22.7 million, net of sublease income of $0.2 million in
2006, $21.9 million, net of sublease income of $0.2 million, in 2005, and $19.9 million, net of
sublease income of $0.2 million, in 2004.
11. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consisted of the following at December 31:
2006
2005
($ in millions)
Deferred income from the sale of Hawthorne facility
$
52.6
$
52.6
State of South Carolina grant monies (a)
67.2
52.2
State of Texas grant monies
35.0
35.0
Deferred worker’s compensation
16.9
19.5
Accrued warranties
5.5
7.5
Investment in joint venture
4.1
—
Other
5.6
4.7
Total other non-current liabilities
$
186.9
$
171.5
(a)
With the activation of the South Carolina plant in June 2006, we began
recognizing a portion of the State of South Carolina grant monies as a reduction of
depreciation expense, which amounted to $1.8 million for the 2006 period.
Borrowings under long-term arrangements consisted of the following at December 31:
2006
2005
Term loan B
$
417.0
$
421.0
Senior note
270.0
270.0
Total long-term debt
$
687.0
$
691.0
On July 2, 2003, we issued $270.0 million of 8% Senior Notes due 2011 with interest payable on
January 15 and July 15 of each year, beginning January 15, 2004. Prior to maturity, the notes may
be redeemed in full or in part at any time prior to July 15, 2007, by paying a make-whole premium.
We may also redeem the notes in full or in part at any time after July 15, 2007 by paying a premium
specified in the indenture. The notes are senior unsecured obligations guaranteed by all of
Vought’s existing and future domestic subsidiaries.
On December 22, 2004, Vought completed the syndication of a $650 million senior secured credit
facility (“Credit Facility”) pursuant to the terms and conditions of a Credit Agreement dated
December 22, 2004 (“Credit Agreement”). The Credit Facility is comprised of a $150 million
six-year revolving credit facility (“Revolver”), a $75 million synthetic letter of credit facility
and a $425 million seven-year term loan B (“Term Loan”). The proceeds were used to refinance the
Company’s previous credit facility and for general corporate purposes, including investment in the
Boeing 787 program and the execution of the manufacturing facility consolidation and modernization
plan. The Credit Facility is guaranteed by each of our domestic subsidiaries and secured by a
first priority security interest in most of the Company’s assets.
The initial pricing of any drawn portion of the Revolver was LIBOR plus a spread of 250 basis
points, and the pricing of the Term Loan was LIBOR plus a spread of 250 basis points, in each case
subject to a leverage-based pricing grid. The initial pricing for the Letter of Credit Facility
was 260 basis points on the full deposit amount. The Term Loan amortizes at $1 million per quarter
with a bullet payment at the maturity date of December 22, 2011. Under the Credit Agreement, the
Company has the option to solicit from existing or new lenders up to $200 million in additional
term loans subject to substantially the same terms and conditions as the outstanding loan though
pricing may be separately negotiated at that time. Additionally, the Company also has the option
to convert up to $25 million of the Letter of Credit Facility to outstanding term loans, which
would also be subject to the same terms and conditions as the outstanding Term Loans made as of
December 2004.
As of December 31, 2006, there are no borrowings under the Revolver, $417.0 million of
borrowings under the Term Loan, and $47 million outstanding Letters of Credit under the $75 million
synthetic facility. We are obligated to pay an annual commitment fee on the unused Revolver of
0.5% or less dependent upon the leverage ratio. The interest rate on the Term Loan at December 31,2006 was 7.88% while the interest rate paid on the Letter of Credit is fixed at 2.6%.
We collateralized all of our credit facility obligations by granting to the collateral agent,
for the benefit of collateralized parties, a first priority lien on certain of its assets,
including a pledge of all of the capital stock of each of its domestic subsidiaries and 65% of all
of the capital stock of each of its foreign subsidiaries, if created in future years.
The Credit Facility requires us to maintain and report quarterly debt covenant ratios defined
in the senior credit agreement, including financial covenants relating to interest coverage ratio,
leverage ratio and maximum consolidated capital expenditures.
Interest expense for both the Credit Facility and $270 million bond debt was $60.7 million,
$46.4 million, and $36.5 million for the years ended December 31, 2006, 2005, and 2004,
respectively. Capitalized debt origination costs of $14.1 million, net for the period December 31,2006, are being amortized over the terms of the related bond debt, Term Loan, and Revolver.
Amortization of debt origination costs for the years ended December 31, 2006, 2005 and 2004 were
$3.1 million, $3.1 million, and $6.4 million, respectively. Included in the 2004 amortization is
$3.0 million representing the amount of unamortized debt issue costs written off related to the
prior credit facility. Scheduled maturities of debt are as follows at December 31, 2006:
At December 31, 2006, 2005 and 2004, the fair value of the Company’s long-term bank and bond
debt, based on current interest rates, approximated its carrying value.
13. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
From time to time, we may enter into interest rate swap or other financial instruments in its
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 believe that
such contracts and agreements have been executed with creditworthy financial institutions. As
such, we consider the risk of nonperformance to be remote.
To reduce the impact of changes in interest rates on its floating rate debt, we have
previously entered into interest rate swap agreements. These agreements have allowed us to
exchange floating rate interest payments for fixed rate payments periodically over the term of the
swap agreements. An underlying notional amount is used to measure the interest to be paid or
received and does not represent the amount of exposure to credit loss.
Upon entering into the Credit Agreement, we had a requirement to hedge 50% of our then
outstanding debt balance net of the fixed rate instrument balances for two years. To comply with
this requirement, we entered into an interest rate cap in 2005 whereby $100 million was capped at a
maximum LIBOR rate of 6%. As of December 31, 2006, the fair value of this cap was immaterial. This
cap expired on January 1, 2007.
14. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
We sponsor several defined benefit pension plans covering most of our employees. Benefits
under defined benefit plans are based on years of service and, for most non-represented employees,
on average compensation for certain years. It is our policy to fund at least the minimum amount
required for all qualified plans, using actuarial cost methods and assumptions acceptable under
U.S. Government regulations, by making payments into a trust separate from the Company.
We also sponsor defined contribution savings plans for several employee groups. We make
contributions for non-represented participants in these plans based on a matching of employee
contributions up to 4% of eligible compensation, for the majority of our non-represented employees.
We also make additional contributions of up to 3% of eligible compensation for certain employee
groups who are not eligible to participate in the defined benefit pension plans.
In addition to its defined benefit pension plans, the Company provides certain healthcare and
life insurance benefits for eligible retired employees. Such benefits are unfunded as of December31, 2006. 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 the
Company’s right to amend or terminate the plans at any time, subject to applicable collective
bargaining requirements for represented employees. From time to time, we have made changes to the
benefits provided to various groups of plan participants. Premiums charged to most retirees for
medical coverage prior to age 65 are based on years of service and are adjusted annually for
changes in the cost of the plans as determined by an independent actuary. In addition to this
medical inflation cost-sharing feature, the plans also have provisions for deductibles,
co-payments, coinsurance percentages, out-of-pocket limits, schedules of reasonable fees, managed
care providers, coordination of benefits with other plans, and a Medicare carve-out.
The following table sets forth the benefit plan obligations, assets, funded status and amounts
recorded in the consolidated balance sheet for our defined benefit pension and retiree healthcare
and life insurance plans. Pension plan assets consist primarily of equity securities, fixed income
securities, private equity funds and real estate. Pension benefit data includes the qualified
plans as well as an unfunded nonqualified plan that provides benefits to directors, officers and
employees either beyond those provided by, or payable under, our main plans. All of the defined
benefit pension plans had obligations that exceeded the fair value of their assets. We use
December 31 as our measurement date.
Assumptions Used to Determine Net
Periodic Benefit Costs:
Weighted Average Discount Rate for Year
5.96
%
5.75
%
6.25
%
5.73
%
5.75
%
6.25
%
Expected long-term rate of return on assets
8.50
%
8.50
%
8.50
%
N/A
N/A
N/A
Rate of compensation increases
4.00
%
4.00
%
4.00
%
N/A
N/A
N/A
We periodically experience events or make changes to our benefit plans that result in special
charges. Some require remeasurements. During the past few years we have implemented several changes
designed to lower our benefit plan costs and obligations. The following summarizes the key events
whose effects on our net periodic benefit cost and obligations are included in the tables above:
•
The site consolidation (see Note 3) plan was initiated in February 2004 increasing our
pension and other post-retirement benefit obligation by $14.2 million. A revision to the
plan in December 2005 reduced our benefit obligation by $16.9 million and the termination
of the plan in April 2006 further reduced our benefit obligation by $5.9 million.
•
The reduction in-force initiative in 2006 increased our pension and other
post-retirement benefit obligations by $4.9 million.
•
The enaction of Medicare Part D legislation in December 2004 reduced our other
post-retirement benefit obligation by $47.4 million.
•
The discontinuation of Post 65 medical benefits for certain retirees announced October
2005 reduced our other post-retirement benefit obligation by $86.8 million.
•
The pension accrual freeze (effective December 31, 2007) announced November 2006
reduced our pension benefit obligation by $69.4 million.
The total estimated future benefit payments for the pension plans are expected to be paid from
the plan assets and company funds. The other post-retirement plan benefit payments reflect our
portion of the funding. Estimated future benefit payments from plan assets and company funds for
the next ten years are as follows:
Other Post-
Pension
retirement
Benefits
Benefits *
($ in millions)
2007
$
129.5
$
51.3
2008
116.7
53.1
2009
118.4
53.7
2010
119.8
53.0
2011
121.6
52.0
2012-2016
626.7
238.7
*
Net of expected Medicare Part D subsidies of $3.7 — $4.0 million per
year.
$3.7 million was received in 2006.
Asset Allocation and Investment Policy
Pension plan assets are invested in various asset classes that are expected to produce a
sufficient level of diversification and investment return over the long-term. The investment goals
are to exceed the assumed actuarial rate of return over the long-term within reasonable and prudent
levels of risk and to preserve the real purchasing power of assets to meet future obligations.
Liability studies are conducted on a regular basis to provide guidance in setting investment
goals with an objective to balance risk. Risk targets are established and monitored against
acceptable ranges. All investment policies and procedures are designed to ensure that the plans’
investments are in compliance with the Employee Retirement Income Security Act. Guidelines are
established defining permitted investments within each asset class. Investment guidelines are
specified for each investment manager to ensure that the investments made are within parameters for
that asset class. Certain investments are not permitted at any time including investment in
employer securities and short sales.
The actual allocations for the pension assets as of December 31, 2006 and 2005, and target
allocations by asset category, are as follows:
The discount rate is determined annually as of each measurement date, based on a review of
interest rates associated with long-term, high quality corporate bonds. The determination was
refined at December 31, 2005 to separately match benefit payments against those rates. In 2006,
there were interim remeasurements for certain plans at June 30 and November 1. The full year
weighted average discount rates for pension and post retirement benefit plans are 5.96% and 5.73%,
respectively.
The effect of a 25 basis point change in discount rates as of December 31, 2006 is shown
below:
Other
Post-retirement
Pension Benefit
Benefits
($ in millions)
Increase of 25 basis points
Obligation
$
(48.4
)
$
(12.2
)
Net periodic expense
$
(4.5
)
$
(0.8
)
Decrease of 25 basis points
Obligation
$
49.7
$
12.5
Net periodic expense
$
4.5
$
0.8
The long-term rate of return assumption represents the expected average rate of earnings on
the funds invested to provide for the benefits included in the benefit obligations. The long-term
rate of return assumption is determined based on a number of factors, including historical market
index returns, the anticipated long-term asset allocation of the plans, historical plan return
data, plan expenses and the potential to outperform market index returns. The expected long-term
rate of return on assets was 8.5%.
A significant factor used in estimating future per capita cost of covered healthcare benefits
for the Company and its retirees are the healthcare cost trend rate assumption. The rate used at
December 31, 2006 was 8.5% for 2007 and is assumed to decrease gradually to 4.5% by 2012 and remain
at that level thereafter. The effect of a one-percentage point change in the healthcare cost
trend rate in each year is shown below:
Other Post-retirement Benefits
One Percentage
One Percentage
Point Increase
Point Decrease
($ in millions)
Net periodic expense (service and interest cost)
$
2.1
$
(1.8
)
Obligation
$
34.3
$
(29.7
)
Pension Protection Act of 2006
The Pension Protection Act of 2006 was signed into law on August 17, 2006. The law
significantly changed the rules used to determine minimum funding requirements for qualified
defined benefit pension plans. The funding targets contained in the law were generally consistent
with the Company’s internal targets. However, the law requires a more mechanical approach to
annual funding requirements and generally reduces short-term flexibility in funding.
We estimate that our total pension plan contributions in 2007 will be approximately $90.0
million. This amount reflects the effects of the recent pension legislation.
15. INCOME TAXES
In accordance with industry practice, state and local income and franchise tax provisions are
included in general and administrative expenses.
The provisions for federal income taxes differ from the U.S. statutory rate as follows:
At December 31, 2006, the Company had the following net operating loss carryforwards for
federal income tax purposes:
Balance at
December 31,
Year of Expiration
2006
($ in millions)
2010
$
4.6
2011
17.5
2017
34.0
2018
45.8
2020
11.0
2022
42.5
2024
95.9
2025
219.9
2026
39.0
Total
$
510.2
The Company has a tax credit carryforward related to alternative minimum taxes of $0.2
million. This credit is available to offset future regular taxable income and carries forward
indefinitely. The 2006 tax benefit reflects an AMT carryback refund of $1.9 million.
Due to the uncertain nature of the ultimate realization of the deferred tax assets, the
Company has established a valuation allowance against these future benefits and will recognize
benefits only as reassessment demonstrates they are more likely than not to be realized. The
valuation allowance has been recorded in income and equity (for items of comprehensive loss) as
appropriate.
16. STOCKHOLDERS’ EQUITY
During 2001, the Company 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. The incentive options granted to
Company employees are intended to qualify as “incentive stock options” under Section 422 of the
Internal Revenue Code. At December 31, 2006, options granted and outstanding from the 2001 Stock
Option Plan to employees and directors amounted to 651,590 shares of which 568,920 are vested and
exercisable.
In connection with the acquisition of Aerostructures in 2003, Vought assumed a similar stock
option plan maintained by Aerostructures (the “2003 Stock Option Plan). Outstanding options
granted under that plan, which had been fully vested pursuant prior to the acquisition, were
exchanged for 217,266 of Vought stock options. No new options have been granted under the 2003
Stock Option Plan. At December 31, 2006, options granted and outstanding from the 2003 Stock
Option Plan amounted to 198,997, and all are vested.
During 2006, we adopted the Vought Aircraft Industries, Inc. 2006 Incentive Award Plan (the
“2006 Incentive Plan”), under which 1,500,000 shares of common stock were reserved for issuance for
the purposes of providing awards to employees and directors. During 2006, 797,270 stock
appreciation rights (“SARs”), and 395,140 restricted stock units (“RSUs”) were awarded to
management. As of December 31,2006, SARs granted and outstanding under the 2006 Incentive Plan were
797,270, of which 199,318 are vested and exercisable, while RSUs granted and outstanding were 395,140, of
which 48,785 are vested.
The following table summarizes information about SARs outstanding as of December 31,2006:
SARs Outstanding
SARs Exercisable
Weighted
Weighted
Number of
Weighted
Average
Number of
Weighted
Average
Exercise
Shares
Average
Exercise Price
Intrinsic
Shares
Average
Exercise Price
Intrinsic
Price Per Share
Outstanding
Term
Per Share
Value
Outstanding
Term
Per Share
Value
$10
797,270
9.9
$
10.00
$
—
199,318
9.9
10
$
—
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan in 2000, which provides certain employees
and independent directors the opportunity to purchase shares of the Company’s stock at its
estimated fair value. Certain employee stock purchases were eligible for financing by the Company
through stockholder notes. Those notes provide for loan amounts, including interest at 6.09%, to
become due after 7 years, or upon specified events occurring. During 2000, 95,335 shares were sold
to employees for cash and 227,605 shares were sold for notes at a price of $10 per share. During
2001, 123,025 shares were sold to employees for cash and 5,000 shares were sold for notes at a
price of $10 per share. During 2002, 5,000 shares were sold for cash at a price of $10 per share.
As previously disclosed, during 2005, a total of 145,860 shares were repurchased in connection with
the departure of certain executives and directors, with such shares being retired. Those
transactions also included the forgiveness of $1.0 million of the above-described stockholder
notes, plus interest accrued thereon and the repayment of an additional $0.2 million of the
above-described indebtedness, plus accrued interest. During 2006, 10,650 shares were sold to four
outside directors for cash at a price of $8.38 per share.
17. STOCK COMPENSATION EXPENSE
Effective January 1, 2006, the company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment, using the modified prospective-transition method. As a
result of adopting Statement 123(R) on January 1, 2006, we recorded compensation expense of $3.0
million for the year ended December 31, 2006. The tables and discussions below show the methods and
assumptions we used to calculate our stock compensation expense.
Stock Options
The fair value of each option granted under the 2001 and 2003 Plans is estimated on the date
of grant using the Black-Scholes-Merton option-pricing model with the following weighted-average
assumptions:
2005
2004
Expected dividend yield
0
%
0
%
Risk free interest rate
3.9%-4.4
%
3.8%-4.5
%
Expected life of options
6 years
6 years
The SFAS 123R stock compensation expense for the options granted under the 2001 and 2003
Plans, stock is approximately $25,000 for the year ending period of December 31, 2006.
During the fourth quarter of 2005, we recorded stock compensation income of $6.4 million,
included in general and administrative expense, to reflect the impact of an estimated decrease in
the fair value of our common stock, related to non-recourse notes previously issued to officers for
stock purchases and decreased deferred compensation liability for the Company’s rabbi trust.
At December 31, 2006, we have several stock-based employee compensation plans, which are
described above. Prior to January 1, 2006, the company accounted for those plans under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for
Stock-Based Compensation. No stock based employee compensation cost was recognized in the Statement
of Operations for the years ended December 31, 2005 or 2004, as all options granted under those
plans had an exercise price less than the market value of the underlying common stock on the date
of grant. Effective January 1, 2006, the company adopted the fair value recognition provisions of
FASB Statement No. 123(R), Share-Based Payment, using the modified prospective-transition method.
Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost
for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on
the grant date fair value estimated in accordance with the original provisions of Statement 123,
and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of Statement 123(R).
Results for prior periods have not been restated.
As a result of adopting Statement 123(R) on January 1, 2006, the company’s income (loss)
before income taxes and net income (loss) for the year ended December 31, 2006, is $3.0 million
lower, than if it had continued to account for share-based compensation under SFAS 123. Prior to
the adoption of SFAS No. 123R, the fair value of an option was amortized to expense in the pro
forma footnote disclosure using the graded method. Upon the adoption of SFAS No. 123R, options
granted prior to the date of adoption continue to be amortized using a graded method. For options
granted after the date of adoption, the fair value will continue to be amortized to expense using a
graded method over the vesting period.
Stock Appreciation Rights
For SARs granted after the date of adoption, the fair value is amortized to expense ratably
over the vesting period.
The fair value of each SARs grant is estimated on the date of grant using the
Black-Scholes-Merton option-pricing model with the following weighted-average assumptions:
2006
Expected dividend yield
0
%
Risk free interest rate
4.5% - 5.0
%
Expected life of options
6.25 years
Expected Volatility
54.5
%
As stated above, since we are a non-public company, we calculated the expected volatility from
an index of historical volatilities from several companies that conduct business in the aerospace
industry based on the guidance of SFAS 123R. The stock compensation expense calculated using the
Black-Scholes-Merton model for these SARs was approximately $1.6 million for the year ending period
of December 31, 2006.
The fair value of the SARs granted are amortized to expense using a graded method over the
vesting period. Our estimated forfeiture rate was 11% as of December 31, 2006. As of December 31,2006, we have $1.9 million of unrecognized compensation cost related to the nonvested SARs to be
amortized over the remaining vesting period.
Restricted Stock Units (“RSUs”)
During 2006, we granted 195,140 restricted stock unit awards (RSUs) that are eligible to vest over
a four-year period ending December 31, 2009 if certain performance goals are met. No RSUs will
vest if the performance goal is not met. The weighted average fair value of these awards is $8.79
per share and compensation costs related to these awards was $0.8 million recorded in the general
and administrative expense in compliance with SFAS 123R. The fair value of the RSUs granted are
amortized to expense using a graded method over the vesting period.
Our estimated forfeiture rate was 11% as of December 31, 2006. As of December 31, 2006, we had $0.7 million of unrecognized
compensation cost related to nonvested RSUs to be amortized over the remaining vesting period.
During 2006, we also granted 200,000 RSUs to our CEO that are scheduled to vest on the first
to occur of: May 25, 2009 or upon the occurrence of a change in control. The weighted average
fair value of these awards is $8.79 per share and compensation costs related to these awards was
$0.6 million recorded in the general and administrative expense in compliance with SFAS 123R. The
fair value of this award is amortized to expense ratably over the vesting period. No forfeiture
rate was used in our calculation due to our assumption that our CEO will remain employed through vesting. As of December 31, 2006, we have $1.2 million of unrecognized
compensation cost related to unvested RSUs to be amortized over the remaining vesting period.
18. 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 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.
We acquired the Nashville, Tennessee facility from Textron Inc. in 1996. In connection with
that acquisition, Textron agreed to indemnify up to $60 million against any pre-closing
environmental liabilities with regard to claims made within ten years of the date on which the
facility was acquired, including with respect to a solid waste landfill located onsite that was
closed pursuant to a plan approved by the Tennessee Division of Solid Waste Management. Although
that indemnity was originally scheduled to expire in August 2006, we believe that the agreement may
continue to provide indemnification for certain pre-closing environmental liabilities incurred
beyond that expiration date. While there are no currently pending environmental claims relating to
the Nashville facility, there is no assurance that environmental claims will not arise in the
future.
We have an accrual of $4.1 million and $4.3 million for environmental costs at December 31,2006 and 2005, respectively.
The following is a roll-forward of amounts accrued for environmental liabilities :
Financial instruments that potentially subject us to significant concentrations of credit risk
consist principally of cash and cash equivalents and trade accounts receivable.
We maintain cash and cash equivalents with various financial institutions. We perform
periodic evaluations of the relative credit standing of those financial institutions that are
considered in the Company’s banking relationships. We have not experienced any losses in such
accounts and we believe we are not exposed to any significant credit risk on cash and cash
equivalents.
The following table lists the net sales and accounts receivable balances at the year end
December 31, from our three largest customers:
Net Sales
2006
2005
2004
($ in millions)
Airbus
$
161.8
$
186.3
$
170.2
Boeing
857.9
728.9
711.0
Gulfstream
248.4
183.9
167.8
Accounts Receivable
Airbus
$
12.6
$
20.7
$
20.6
Boeing
23.2
18.6
37.8
Gulfstream
19.5
34.0
40.0
Some raw materials and operating supplies are subject to price and supply fluctuations caused
by market dynamics. Our strategic sourcing initiatives are focused on mitigating the impact of
commodity price risk. We have long-term supply agreements with a number of our major suppliers. We,
as well as our supply base, are experiencing delays and pricing increases in the receipt of
metallic raw materials common with unprecedented market demand across the industry. Based upon
market shift conditions and industry analysis we expect these conditions to continue through at
least 2007 as metallic (aluminum and titanium) raw material supply adjusts to the industry upturn,
increased infrastructure demand in China and Russia, and increased aluminum and titanium usage in
an ever wider range of global products. These market conditions began to affect cost and
production schedules in mid 2005, and may have an impact on cash flows or results of operations in
future periods. We generally do not employ forward contracts or other financial instruments to
hedge commodity price risk, however, we are reviewing a full range of business options focused on
strategic risk management for all raw material commodities.
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 are dependent on third parties for all information technology services.
To a lesser extent, we also are exposed to fluctuations in the prices of certain utilities and
services, such as electricity, natural gas, chemical processing and freight. We utilize a range of
long-term agreements and strategic e-Commerce aggregated sourcing to optimize procurement expense
and supply risk in these categories.
As of December 31, 2006, 49% of our employees are represented by various labor unions.
Approximately 72% of the union membership is represented by the United Automobile, Aerospace and
Agricultural Implement Workers of America at the Dallas, Texas facility. This union contract is in
effect through September 30, 2007. Our remaining union contracts are all in effect through
various dates in 2008.
20. RELATED PARTY TRANSACTIONS
A management agreement between Vought and its principal stockholder, The Carlyle Group,
requires us to pay an annual fee of $2.0 million for various management services. We incurred fees
and allowable expenses of $2.0 million in 2006 and $2.1 million each in 2005 and 2004. In
addition, we paid TC Group L.L.C. fees of $3.5 million in 2004 in connection with investment
banking and financial advisory services.
As previously disclosed in Exhibit 10.2 of Form 8-K filed with the U.S. Securities and
Exchange Commission on February 6, 2006, upon the retirement in the first quarter of 2006 of Tom
Risley (“Mr. Risley”), our former Chief Executive Officer, the Company entered into a consulting
agreement with Mr. Risley for a minimum fee of $36,000 plus expenses, with a total payout plus
expenses not to exceed $200,000. The total fees and expenses paid to Mr. Risley during 2006 pursuant to their agreement were $34,800.
Since approximately 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 arm’s-length,
long-term contracts. On September 29th, 2006, The Carlyle Group (which is our controlling stockholder) acquired
a majority stake in Wesco, and as a result we and Wesco are now under common control of The Carlyle Group through its
affiliated funds. In addition, three of our Directors, Messrs. Squier, Clare and Palmer, also serve on the board
of directors of Wesco. The Carlyle Group will 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 in 2006 was approximately $11 million.
21. OTHER COMMITMENTS AND OTHER CONTINGENCIES
We completed a new facility in North Charleston, South Carolina for the Boeing 787 Dreamliner
commercial aircraft program, and in connection with that program, we established a joint venture
with Alenia North America (“Alenia”), a subsidiary of Finmeccanica SpA, called Global Aeronautica,
LLC. Vought and Alenia each have a 50% stake in the joint venture, which will combine the two
companies’ respective 787 program fuselage products to deliver an integrated product to Boeing. We
are the sole-source supplier of the aft fuselage for Boeing’s 787 program and our investment in the
787 program is primarily tooling and capital expenditures, design and engineering, and a cash
contribution to the joint venture of approximately $20 million in total over the next several
years.
A rabbi trust was established in 2000 for key executives. 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.” In the fourth quarter of 2005, we recorded income that
resulted from the decline in the fair value of our stock in the amount of $3.8 million. This
income was reflected in Stock Compensation expense that is included in general and administrative
expense. In connection with the separation of service of two executives in 2005, the number of
shares held in the rabbi trust was reduced by a total of 29,178 shares. There were no changes to
the share amounts in 2006.
From time to time, we are involved in various legal proceedings arising out of the ordinary
course of business. None of the matters in which we are currently involved, either individually, or
in the aggregate, is expected to have a material adverse effect on the our business or financial
condition, results of operations or cash flows.
The 8% Senior Notes due 2011 are fully and unconditionally and jointly and severally
guaranteed, on a senior unsecured basis, by our wholly owned “100% owned”subsidiaries. In
accordance with criteria established under Rule 3-10(f) of Regulation S-X under the Securities Act,
summarized financial information of the Vought and its subsidiary is presented below:
Includes fourth quarter income of $6.4 million from the revision in the Company’s stock
value, income of $17.2 million from the reversal of the restructuring charges related to
the pension and OPEB curtailment and the reversal of charges previously recognized for
severance and completion bonuses.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We are committed to maintaining disclosure controls and procedures designed to ensure
that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to our management, including our Vice President &
Chief Financial Officer, our President & Chief Executive Officer and the Board of Directors, as
appropriate, to allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures and
implementing controls and procedures based on the application of management’s judgment. Our Chief
Executive Officer and Chief Financial Officer have evaluated our disclosure controls as of December31, 2006, and have concluded that these disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. These disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by us in the reports we file or submit is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). As previously
disclosed in our 2005 Annual Report on Form 10-K the company had previously identified two material
weaknesses in our disclosure controls and procedures. As previously disclosed, in order to address
these material weaknesses we implemented a number of improvements to remediate these items. Our
management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the
framework in Internal Control – Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 31, 2006.
Changes in Internal Controls
There were no other changes in our internal control over financial reporting, other than the
enhancements described in our 2005 Annual Report on Form 10-K and subsequent Quarterly Reports on
Form 10-Q, that occurred during 2006 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
Set forth below are the names, ages and positions of our directors and executive officers as
of the date of this annual report. No family relationship exists between any of our directors or
executive officers.
Elmer Dotyhas been a Director and our President and Chief Executive Officer since February
2006. Mr. Doty most recently served as the Vice President & General Manager of BAE Systems (“BAE”)
Ground Systems Division, a position he held since July 2005, when BAE acquired United Defense Inc.
(“UDI”). Mr. Doty had served in the identical position with UDI since April 2001, with the
additional duties of an executive officer of UDI. Prior to that time, he had served in other
senior executive positions with UDI and its predecessor company FMC Corporation.
Keith Howewas appointed Vice President and Chief Financial Officer effective January 16,2007. His responsibilities include all financial and business management functions, including
creation and implementation of financial strategy, control and accounting policy, treasury, risk
management and insurance, budget, and financial and economic planning and analysis. Prior to
joining Vought, Mr. Howe served as President and General Manager of the Armament Systems Division
of BAE , a position he held since July 2005, when BAE acquired UDI. Mr. Howe had served in a
substantially comparable position with UDI since January 2002 and, prior to that time, had served
as the unit’s Deputy General Manager from October 1998 to December 2001 and as its Controller from
September 1996 to October 1998. Prior to that time, Mr. Howe served in a number of senior financial
executive positions with UDI.
Steve Davis was named Vice President, Programs in April 2006. His responsibilities include
all aspects of program management for both commercial and military customers, including marketing,
business development, business management and design engineering. Prior to that he was General
Manager of Boeing Commercial Business, a position he held since December 2005, and had
responsibility for leading Vought’s Boeing Commercial Programs. Previously, Mr. Davis was Vice
President of Boeing and Gulfstream Commercial Programs and prior to that assignment, in August
2000, he served as part of Northrop Grumman’s Aerostructures business segment as Vice President of
Fabrication at the Dallas, Texas site. He joined the company in January 1980 and has held
positions of increasing responsibility since that time.
Kevin McGlinchey was named Vice President and General Counsel in September 2006. His
responsibilities include leadership of the legal, internal audit and corporate governance
organizations. Mr. McGlinchey has been with Vought and its predecessor company since 1995, when he
joined the corporate legal staff of the Northrop Grumman Corporation. Since that time, he has held
positions of increasing responsibility with the legal departments of Northrop Grumman and later
with Vought, serving most recently as Deputy General Counsel and Assistant Corporate Secretary. He
is a member of the bar in Texas, Pennsylvania and the District of Columbia.
Dennis Orzel was named Vice President of Manufacturing Operations in August 2006. In
that role, he oversees manufacturing operations for Vought including the implementation of Lean
Manufacturing and Six Sigma as core strategies in driving operational improvements. Prior to
joining Vought, Mr. Orzel served since March 2003 as Vice President for Operations and Distribution
for the Transportation Division of Exide Technologies Corporation, where he was responsible for
production planning, manufacturing, distribution, transportation and logistics. At Exide, he led
efforts to restructure the operational footprint, reduce finished goods inventory and increase
plant productivity through the utilizations of lean tools and methodologies . Prior to
that, Mr. Orzel was the General Manager of the Turbine Module Center at Pratt and Whitney Aircraft
Division of United Technologies.
Ted Perdue was named Vice President of the new 787 Division in October 2006. In that role Mr.
Perdue leads all aspects of the Boeing 787 program execution for Vought, including Vought’s
interest in its Global Aeronautica, LLC joint venture. Mr. Perdue is a member of the board of
managers for Global Aeronautica. Since January 2005, Mr. Perdue served as Program Director of the
787 program for Vought, and he has been involved in the program since its inception. Prior to his
787 assignments, he held executive positions for Vought including Director of Technical Operations
from January 2000 to January 2001.
Mike Schwarz has served as Vice President of Communications since April 2006. In that role,
he oversees corporate communications, strategic messaging, marketing communications, and industry
and state government relations. Prior to that appointment, Mr. Schwarz served as the Director of
Corporate Communications since July 2000 when Vought was formed as an independent company. In that
assignment he was responsible for the Company’s employee communications, community relations,
external communications and media services. Prior to that, Mr. Schwarz performed communications
and marketing duties for the Chief Information Officer of Pharmacia & Upjohn in Kalamazoo,
Michigan.
Tom Stubbins is Vice President of Human Resources and has led the Human Resources organization
since April 2004. His responsibilities include oversight of human resources strategy and policies
including benefits design, compensation, succession planning and organizational development.
Previously, Mr. Stubbins served as the Company’s Director of Human Resources and Administration
since 2000. He has been with Vought and its predecessor companies since 1980 serving positions of
increasing responsibility in the Human Resources and Administration areas.
Peter Clarewas appointed as a Director in February 2005. Mr. Clare is currently a Partner
and Managing Director of Carlyle, as well as head of Carlyle’s Global Aerospace, Defense,
Technology and Business/Government Services group. Mr. Clare has been with Carlyle since 1992, and
currently serves on the Boards of Directors of Standard Aero Ltd., Wesco Holdings, Inc. and
Landmark Aviation.
Allan Holthas been a Director since 2000. Mr. Holt has been a Partner and Managing Director
of Carlyle, focused on U.S. buyout opportunities in aerospace, defense, government services and
information technologies sectors since 1991. He is currently co-head of the U.S. Buyout group.
Prior to joining Carlyle, Mr. Holt spent three and a half years with Avenir Group, Inc., an
investment and advisory group that acquired equity positions in small and medium-sized companies
and provided active management support to its acquired companies. He also serves on the Boards of
Directors of MedPointe, Inc., The Nielsen Company, SS&C Technologies, Inc., Standard Aero, Ltd. and
Landmark Aviation.
John Jumperwas appointed a Director in June 2006. Mr. Jumper retired from the United States
Air Force in 2005 after a distinguished 39-year military career. In his last position as Chief of
Staff he served as the senior military officer in the Air Force leading more than 700,000 military,
civilian, Air National Guard and Air Force Reserve men and women. As Chief of Staff he was a member
of the Joint Chiefs of Staff providing military advice to the Secretary of Defense, the National
Security Council and the President. From 2000 to 2001 Mr. Jumper served as Commander, Air Combat
Command. During the 1999 war in Kosovo and Serbia he commanded U.S. Air Forces in Europe and Allied
Air Forces Central Europe. In earlier assignments he served on the Joint Staff and as Senior
Military Assistant to Secretary of Defense Dick Cheney and Secretary Les Aspin. He also commanded
an F-16 fighter squadron and two fighter wings, accumulating more than 5,000 flying hours including
more than 1,400 combat hours in Vietnam and Iraq. He currently serves on the Boards of Directors of
Goodrich Corporation, TechTeam Global, Jacobs Engineering and Rolls-Royce North America Holdings,
Inc. as well as on the non-profit Boards of the Air Force Association and the Air Force Village
Charitable Foundation and the George C. Marshall Foundation.
Ian Masseyhas been a Director since 2001. Mr. Massey has been a qualified management
accountant since 1979. In September 2001, Mr. Massey joined Republic Financial Corporation as
President of the Aircraft and Portfolio Group and was subsequently promoted to Executive
Vice-President in 2004 with added responsibility for the Private Equity Group of the company and
Marketing & Communications. From January 1980 to December 1990, Mr. Massey served in a variety of
financial positions with British Aerospace in the UK. From January 1991 to February 2001, Mr.
Massey was Financial Controller of Airbus Industries having been appointed by its Supervisory Board
in January 1991. Mr. Massey joined the Board of Pinnacle Airlines as an independent director in
January 2006.
Adam Palmerhas been a Director since 2000. Mr. Palmer has been a Partner since 2005 and
since 2004 has served as a Managing Director of Carlyle, focused on U.S. buyout opportunities in
the aerospace, defense and information technology sectors. Prior to joining Carlyle in 1996, Mr.
Palmer was with Lehman Brothers focusing on mergers, acquisitions and financings for defense
electronics and information services companies. Mr. Palmer also serves on the Boards of Directors
of Landmark Aviation, Standard Aero, Ltd., US Investigations Services, Inc. and Wesco Holdings,
Inc.
Dan Schragewas appointed a Director in June 2006. Dr. Schrage serves as Professor of
Aerospace Engineering and Director of the Center for Excellence in Rotorcraft Technology (CERT) and
Director of the Center for Aerospace Systems Engineering (CASE) at the Georgia Institute of
Technology. Prior to becoming a professor at Georgia Tech, Dr. Schrage was an engineer, manager,
and senior executive with the U.S. Army Aviation Systems Command from 1974-1984. During this period
he served as the Director for Advanced Systems, Chief of Structures and Aeromechanics, Vibration
and Dynamics Engineer and was directly involved with the design, development, and production of all
of the Army’s current helicopter systems, including the UH-60 Black Hawk, the AH-64 Apache, CH-47
Chinook, and the OH-58D Kiowa Warrior. Dr. Schrage also served for 11 years as an Army Aviator and
commander with combat experience in Southeast Asia.
David Squierhas been a Director since 2000. In March 2006, Mr. Squier was elected as
Chairman of the Board. Mr. Squier has been a consultant and advisor to Carlyle since 2000. He
retired from Howmet Corporation in October 2000 where he served as President and Chief Executive
Officer since 1992. As Chief Executive Officer, he was responsible for the operations of an
organization with more than $1.5 billion in annual sales and some 29 manufacturing facilities in
five nations. He is the Chairman of the Board of Directors of United Components, Inc. In
addition, Mr. Squier is a Director at Standard Aero Holdings, Firth Rixson, plc and Wesco Aircraft
Hardware Corp. Mr. Squier had been a member of the Board of Directors of Howmet Corporation since
1987, until his retirement.
Sam Whitehas been a Director since 2000. Mr. White has been retired since 2000. Formerly,
he served as Director of Procurement and International Business Operations for the Boeing Company
from 1990 to 2000. In his former position, he oversaw the procurement of major structure end items
and assemblies from suppliers throughout the world. He also played an integral role in the
development of Boeing Commercial’s global procurement strategy. From 1990 to 2000, Mr. White led
the strategic process at Boeing for procurement of all major structures on a global basis.
Committees of the Board of Directors
We have nine directors. Each director is elected to serve until a successor is elected.
Audit committee. The audit committee reviews our various accounting, financial reporting and
internal control functions and is directly responsible for the appointment, termination,
compensation, and oversight of the work of the independent auditors (including the resolution of
disagreements between management and the independent auditors regarding financial reporting) for
the purpose of preparing or issuing an audit report or related work. The audit committee
participates in the review of certain plans and results of any selected independent public
accountants, approves the scope of professional services provided by such independent public
accountants and reviews the independence of the independent public accountants. The audit
committee also reviews the adequacy of our internal accounting controls. The directors on this
committee are Ian Massey (chair), Adam Palmer and Sam White. Our board of directors has determined
that we have at least one “audit committee financial expert” (as defined in Item 407(d)(5)(ii) of
Regulation S-K) serving on our audit committee, and has identified Mr. Massey as that expert. Our
board of directors also has determined that Mr. Massey is “independent” according to criteria
generally consistent with the criteria established by major stock exchanges; however, our capital
stock is not listed on any exchange and we are not subject to any particular definition of director
independence.
Compensation committee. The compensation committee is responsible for approving the
compensation strategies for Vought and for determining the compensation of the executive officers.
The compensation committee also administers any equity based compensation plans maintained by
Vought and reviews Vought’s management development and succession programs. The directors on this
committee are David Squier (chair), Peter Clare and Adam Palmer.
Compensation committee interlocks and insider participation. There are no current employees
who are members of the compensation committee.
We are a closely held corporation, and there is currently no established public trading market
for our common stock. The election of members of our board of directors is at the discretion of
our controlling stockholders, subject only to the criteria, if any, set forth in our certificate of
incorporation and by-laws. In addition, certain of our stockholders have entered into a
stockholders’ rights agreement, as further described in Item 13. Certain Relationships and Related Transactions, which among other things relates to voting of
their shares in an election of directors. There were no material changes in 2006 to the procedures
by which security holders may recommend nominees to our board of directors.
Code of Ethics
The Audit Committee and the Board have adopted a code of ethics (within the meaning of Item
406(b) of Regulation S-K) that applies to the Board of Directors, Chief Executive Officer, Chief
Financial Officer and Controller. The Board believes that these individuals must set an exemplary
standard of conduct for the Company, particularly in the areas of accounting, internal accounting
control, auditing and finance. The code of ethics sets forth ethical standards the designated
officers must adhere to. The code of ethics is filed as Exhibit 14.1 to this Form 10-K and has
been posted to the Company’s website (www.voughtaircraft.com).
Item 11. Executive Compensation
Compensation Discussion and Analysis
Role of the Compensation Committee. The compensation committee was established for the
purpose of overseeing the Company’s compensation programs and strategies, management development
and successorship plans and strategies, and for administering the company’s equity-based
compensation plans. With respect to executive compensation in particular, the responsibilities of
the compensation committee include:
•
approving the compensation policies and approving all elements of compensation for
our executive officers (including base pay, annual incentive compensation, and
long-term incentives);
approving goals and objectives relevant to the compensation of the CEO and
evaluating the CEO’s performance in light of those objectives; and
•
reviewing our management development and succession planning practices and
strategies.
The compensation committee is supported by our human resources organization, which prepares
recommendations regarding executive compensation for the compensation committee’s consideration.
Because individual performance plays a significant role in the setting of executive compensation,
the compensation committee also receives input from the President & CEO regarding the performance
of those executives reporting to him.
The Compensation Committee is comprised of the following members: David Squier (chair), Peter
Clare, and Adam Palmer. Each of the current members of the Committee served on the Committee for
the entirety of 2006.
Objectives of the Executive Compensation Program. Performance (as measured at both the
Company-element and the individual level) is the cornerstone of our overall compensation program.
We seek to provide pay and benefits that are externally competitive and internally equitable,
supportive of the achievement of our business objectives, and reflective of both Company and
individual performance. Our executive compensation program supports this overall compensation
philosophy, with an additional focus placed on ensuring the retention of key individuals. More
specifically, the goals of our executive compensation programs are to:
•
attract and retain strong business leaders;
•
pay competitively within the aerospace industry for total compensation; and
•
motivate the executive team by linking pay to Company and individual performance.
In establishing annual total compensation for the executive officers, the compensation
committee reviews base salary, annual incentive compensation, and annual total compensation against
executive compensation surveys compiled by retained outside compensation consultants. Beginning in
2007, the outside executive compensation consultant has been retained directly by the compensation
committee. Surveys used for this purpose reflect the compensation levels and practices for
individuals holding comparable positions at an array of companies in the aerospace industry and,
when appropriate, in manufacturing and general industry, comparable with our annual revenues. We
do not regularly benchmark executive compensation against a specific group of comparable companies.
In general, the compensation committee’s philosophy is to target annual total cash
compensation to the executive officers (i.e., base salary and annual incentive compensation) equal
to, or slightly above market for instances in which annual company and individual performance
targets have been achieved. Individual variations from the market reflect differences in an
individual officer’s experience, internal equity considerations and/or individual performance.
Executive officer compensation is reviewed with respect to these factors on an annual basis, and
may be adjusted up or down accordingly in connection with any promotion or significant change in an
executive officer’s responsibilities.
Elements of Executive Compensation. Our executive compensation program is comprised of the
following components:
Annual Compensation
•
Base Salary
•
Annual Incentive Bonus
Long-term Compensation
•
Equity-Based Awards
Other Benefits
Annual Compensation.
Base Salary. Base salaries for executive officers are determined in relation to a market value
established for each executive position. These market values are developed through the use of
compensation surveys compiled by the outside executive compensation consultant and are based upon
data derived from the aerospace manufacturing industry and, where appropriate, manufacturing or
general industry, adjusted for company size, comparing executives with comparable responsibilities
at other companies. Base salaries are set within an established range in relation to that market
value (typically between 80% and 120% of the market rate) in recognition of the particular
competencies, skills, experience and performance of the particular individual, as well as
consideration of the significance of the individual executive’s assigned role as it relates to our
business objectives and internal equity considerations. In general, base salaries for executives
are targeted at or near the 50th percentile of the market value. However, individual
salaries may be above or below the 50th percentile due to business or industry trends or
other individual factors such as experience, internal equity, and sustained individual performance.
Base salaries for executive officers are reviewed on an annual basis and at the time of promotion,
hiring, or as necessary as the result of a significant change in responsibilities.
Annual Incentive Bonus. Incentive bonus compensation is designed to align the compensation of
individual executives with the achievement of specified annual Company business objectives, and to
motivate and reward individual performance in support of those objectives. To that end, the bonus
awarded to an individual executive will be determined by the application of both a business
performance factor (BPF) and an individual strategic performance factor (SPF). Performance with
respect to the BPF is measured by the Company’s performance against one or more predetermined
Company business objectives. BPF objectives are established each year and reflect a significant
measure of Company performance.
Typically, the BPF will be comprised of one or more financial measures which reflect the key
areas of focus for the executive team during the upcoming year and which are indicative of the
performance that our bonus program seeks to reward. Performance with respect to the SPF is
determined by the executive’s individual performance as measured against individualized performance
objectives that are established annually and are designed to support the overall objectives of the
business. An individual officer’s SPF factor is determined as part of the officer’s annual
performance evaluation. The rating for each factor in a given year may range from 0 to 2.0,
depending upon the degree to which the particular BPF and SPF objectives were met.
The relative weighting of the BPF and SPF factors may vary in a given year. In order to
ensure the proper executive management focus on the achievement of the Company’s key performance
objectives, a significant portion of the bonus is weighted towards the achievement of the
Company-level objectives as reflected by the BPF. For 2006, the annual incentive bonus was
determined through the application of a BPF weighting of 80% and an SPF weighting of 20%.
Annual incentive bonuses are awarded as a percentage of each officer’s annual base salary,
with an individual annual bonus target percentage established for each individual executive
officer. The program is designed to provide a payout at the target level when the applicable
performance objectives are achieved, with either no payout or payout at a reduced level when those
objectives are not achieved, and with a maximum bonus opportunity equal to two-times the amount of
the target payout. In order to ensure that the bonus amounts are truly reflective of performance
during the year, the compensation committee has the discretion to make appropriate adjustments in
the application of the BPF to address situations in which the occurrence of unusual events during
the course of the year has a significant impact on the application of the BPF and where the BPF
would, if unadjusted, fail to accurately reflect company performance.
For 2006, the BPF was based on the Company’s ability to achieve certain cash flow objectives
as evidenced by the Company’s year-end cash balance. The specific performance targets established
with respect to this measure of Company performance were designed such that achievement of a BPF
factor of 1.0 represented a significant management challenge and the target performance associated
with achievement of that rating would reflect substantial improvement in Company performance with
respect to this measure. Company performance that exceeded this target would be reflected by a BPF
factor above 1.0, with the maximum BPF factor of 2.0 designed to reflect a level of performance
that the management team would have substantial difficulty achieving. As a result of the
Company’s performance against the designated objective, the BPF for 2006 was determined to be 2.0.
Mr. Doty’s employment agreement originally provided for an annual bonus to be paid to Mr. Doty
based upon Company and individual performance, with a minimum bonus equal to his annual base
salary, and with a maximum bonus opportunity equal to 150% of that amount. In order to better
align Mr. Doty’s compensation with the principles described above applicable to other executive
officers, on February 13, 2007, the Company and Mr. Doty entered into an amendment to that
agreement which removed the bonus limitation, providing instead that Mr. Doty’s bonus for 2006
would be an amount approved by the board of directors of the Company (or its compensation
committee). Accordingly, Mr. Doty’s incentive bonus for 2006 was calculated by application of the
same principles as applicable to other executive officers, as applied against a target bonus equal
to 100% of Mr. Doty’s annual base compensation.
Taken together, the annual compensation paid to the executive officers in the form of annual
base pay and annual incentive bonus is designed to provide those officers with total annual
compensation that is competitive, internally equitable, and aligned with both individual
performance and the Company’s performance against key management objectives in a given year.
Equity-Based Awards. Our executive officers are eligible to receive long-term incentives in
the form of equity-based awards (including stock options, stock appreciation rights (SARs), and
restricted stock units (RSUs)). These awards are designed to attract, retain and motivate key
executive personnel and to align management decision-making with our long-term strategic objectives
and long-term performance, thereby aligning executives’ interests with those of our stockholders.
Equity-based awards are not awarded to executives on an annual basis, but rather have been
granted to our executive officers from time to time, when, in the opinion of the compensation
committee, existing outstanding awards were insufficient to properly support these objectives.
To that end, in 2006, we adopted the Vought Aircraft Industries, Inc. 2006 Incentive Award
Plan (the “2006 Incentive Plan”). A copy of the 2006 Incentive Plan was filed as Exhibit 10.1 to
our quarterly report (Form 10-Q filed on November 8, 2006). In conjunction with the adoption of
the 2006 Incentive Plan, we awarded to certain executives, including the named executive officers,
a combination of SARs and RSUs. In general, those awards were granted at a ratio of approximately
3.5 SARs for every 1 RSU (before taking into consideration outstanding equity awards). This ratio
was selected in order to ensure that a significant portion of the potential value of the grant was
dependent upon an increase in the value of the Company (reflected by the SAR component), thereby
aligning the equity awards with the long-term interest of Company shareholders, while a smaller
component of the award provided compensation in the form of full-value share grants (the RSU
component). In order to further align these incentives with the Company’s near-term financial
performance, the SARs awarded in 2006, which are scheduled to vest in 2012, are subject to
accelerated vesting in four equal annual installments in the event that we achieve certain
financial objectives in each of 2006, 2007, 2008 and 2009, the attainment of which is believed to be challenging,
but reasonably achievable. The RSUs are scheduled to vest in four equal annual
installments based upon our attainment of the same performance objectives applicable to the SARs.
In order to provide an appropriate retention incentive, both the SAR and RSU awards are subject to
forfeiture in the event of an employee’s voluntary termination or termination for cause prior to
exercise. In the case of two executive officers, the grant of a portion of these equity awards was
conditioned upon their achievement of certain specified business objectives within the scope of
their assigned responsibilities. Following the achievement of those objectives at year-end 2006,
those awards were granted in early 2007.
Consistent with our desire to align the compensation of our CEO with the interests of our
shareholders, Mr. Doty’s employment agreement provided that, unless otherwise mutually agreed to by
the parties, Mr. Doty would be granted an option to purchase 250,000 shares of our common stock
under terms and conditions outlined in the agreement. In satisfaction of those obligations and in
order to align Mr. Doty’s equity compensation with that of other executive officers, Mr. Doty was
awarded a grant of 250,000 SARs under the same terms as SARs awarded to other executive officers
during 2006. Mr. Doty’s employment agreement also provided that we would work with Mr. Doty to
develop a compensation program, subject to Board approval, designed to compensate him for pension
benefits and other compensation forfeited by Mr. Doty as a result of his termination of employment
with his previous employer. In satisfaction of that commitment, Mr. Doty was granted an award of
200,000 restricted stock units which will become fully vested upon the first to occur of: May 25,2009 or a change of control of the Company (as defined in the Plan). This award is subject to
forfeiture in the event Mr. Doty should voluntarily terminate his employment or be terminated for
cause (as defined in his employment agreement) prior to the vesting of the award.
Individual equity awards are also made from time to time in conjunction with a particular
executive’s hiring, promotion or significant increase in responsibilities, or to reward unique
individual performance achievements. The amount of any executive’s equity-based award is
determined by reference to the executive’s responsibilities and the executive’s potential for
contributing to the success of the Company, and the amount of any outstanding awards previously
granted to the individual.
Awards under our equity plans are typically granted at regularly scheduled meetings of the
compensation committee (or, in the case of grants made to Directors, regularly scheduled meetings
of the Board of Directors), or in conjunction with the hiring of new executives. We do not grant
discounted options or SARs; rather, all option and SAR awards are granted with exercise prices at
no less than the fair market value of the underlying shares at the time of the grant. The exercise
price for options and SARs granted in 2006 was based upon an independent, third party appraisal of
the fair market value of our common stock, which was obtained specifically for that purpose.
In order to assist our executives in fully utilizing the benefits and other compensation made
available to them under our executive compensation programs, we currently offer our executive
officers, on a taxable basis; reimbursement of amounts expended for financial services, including
financial planning and tax preparation. In order to align Mr. Doty’s benefits under this program
with that of other executive officers, the previously-described amendment to Mr. Doty’s employment
agreement also removed a provision that had limited Mr. Doty’s reimbursement for such amounts,
providing instead that Mr. Doty’s reimbursement shall be subject to reimbursement in accordance
with the arrangements applicable to other senior executive officers. In recognition of the fact
that their positions as executive officers may expose our executives to an increased potential for
personal liability claims asserted against them, we offer our executive officers supplemental
personal liability insurance coverage. Because we believe strongly that the health of our
executive team contributes directly to their effectiveness and longevity, we provide our executive
officers with a comprehensive annual physical. In order to defray the costs to our executive
officers associated with any relocation that may be required in connection with the performance of
their assigned duties, we provide relocation assistance, which may include temporary housing,
transportation, and reimbursement of other relocation expenses. In connection with his hiring in
2006 and in order compensate him for certain expenses incurred in connection with this termination
of employment with his previous employer and his relocation to Texas, Mr. Doty’s employment
agreement provided for
the payment to Mr. Doty of a series of taxable relocation bonuses totaling $450,000 payable over
the course of calendar year 2006. Those payments, along with the reimbursement of certain
temporary living and commuting expenses, were made to Mr. Doty in lieu of any other relocation
assistance that would otherwise be available under the Company’s programs. Certain perquisites
that had been previously provided to executive officers including supplemental medical and
accidental death and disability coverage, an automobile allowance, and reimbursement for
organizational membership dues were discontinued in 2006. The costs to the Company associated with
providing all of these benefits to officers named in the Summary Compensation table are reflected
in the “All Other Compensation” Column of the Summary Compensation table.
We also provide our executive officers with other benefits, such as 401(k), medical, dental,
life insurance and disability coverage under the same benefit plans and under the same terms and
conditions applicable generally to most of our non-represented employees. Like most of our
non-represented employees, executive officers that were hired prior to October 10, 2005 also
participate in our defined benefit retirement plans, on the same terms and conditions as other
non-represented employees. Executives participating in our tax-qualified defined benefit
retirement plan also participate in our non-qualified defined benefit plan which, when combined
with benefits payable under the qualified plan, is designed to provide our executives with a
benefit that is, in the aggregate, substantially equal to the amounts that would have been payable
under the qualified plan in the absence of applicable IRS limits regarding the compensation that
may be covered under the plan or the maximum benefits payable under the plan. Like most other
non-represented employees hired on or after October 10, 2005, executive officers hired after that
date receive an additional defined contribution benefit contributed to our Savings and Investment
Plan in an amount equal to 3% of eligible compensation in lieu of participation in the defined
benefit plans.
Severance Arrangements.
The Company does not have severance agreements in place with its executive officers generally.
In order to help secure the focus of our CEO and CFO on their assigned duties, however, the
employment agreements with Mr. Doty and with Mr. Howe (entered into with Mr. Howe in connection
with his hiring in 2007) provide for the payment of severance in the event that either of these
executive’s employment is terminated by the Company without “cause” or the executive resigns for
“good reason,” as those terms are defined in the respective agreements. Each executive’s severance
consists of one year’s base salary and one year’s medical insurance
premiums for the executive and his spouse and dependents. Each of those agreements currently
extends through December 31, 2007 and is subject to automatic annual extension for successive
one-year periods unless timely notice of non-renewal is provided. Each agreement also includes
certain non-competition and non-solicitation provisions, applicable for a period of twelve months
following the termination of employment.
The Company does not have in place any change of control agreements, nor do the employment
arrangements for Mr. Doty or Mr. Howe provide for any additional benefits in connection with the
occurrence of a change in control. The 2006 Incentive Award Plan provides that, if a change in
control occurs and a participant’s SAR and RSU awards are not converted, assumed, or replaced by a
successor entity, then immediately prior to the change in control, such awards outstanding under
the plan shall become fully exercisable and all forfeiture restrictions on such awards shall lapse.
The Company included this acceleration provision to ensure that executives’ awards, which comprise
a significant component of their compensation and constitute a material inducement for such
executives to remain employed by the Company, would entitle the executives to an equitable payment
or substitution in the event such awards were no longer available following the occurrence of a
corporate transaction.
In 2000, the Company adopted a deferred compensation plan in order to permit then-current
executives to make a one-time deferral of certain retention bonuses payable to those executives
upon their completion of a one-year retention period. No other deferrals have been made pursuant
to the plan since 2000. The terms of each participant’s deferral provided that amounts deferred
would be payable upon the occurrence of a change in control of the Company as defined therein. We
have only one current executive officer who is a participant in the deferred compensation plan and
the account balances under the plan are included in “Deferred Compensation” Table.
Summary Compensation Table
The table below shows the before-tax compensation for all individuals who served as the
Company’s Chief Executive Officer and Principal Financial Officer during 2006 as well as the next
three highest compensated executive officers. These individuals are sometimes referred to as the
named executive officers. The table also includes two individuals for whom this disclosure would
have been otherwise provided, but for the fact that the individual was not serving as one of our
executive officers at the end of 2006.
Mr. Risley served as President, CEO and Chairman through 01/31/2006.
(2)
Ms. Hargus served as interim Principal Financial Officer until the appointment of Mr. Howe on 01/16/2007.
(3)
Mr. Sorenson served as Chief Financial Officer until 04/03/2006.
(4)
Mr. Broomall served as Vice President and Chief Technology Officer through 06/09/2006.
(5)
Mr. White served as Vice President, General Counsel and Corporate Secretary through 08/31/2006.
(6)
The amounts in this column reflect amounts recognized for financial statement reporting purposes for the year
ended December 31, 2006 in accordance with FAS 123R for restricted stock units. The assumptions used in
calculating these amounts are set forth in Note 15 and Note 16 to our Consolidated Financial Statements in Item 8.
The RSUs awarded to Mssrs. Orzel, Stubbins and Davis and Ms. Hargus in 2006 are eligible to vest in four equal
annual installments based upon the Company’s ability to achieve certain specified financial objectives for the
years 2006, 2007, 2008 and 2009. In the event that these performance objectives are not achieved, the shares
associated with that installment are forfeited. Once vested, such units are eligible to be paid upon the first to
occur of: (i) a change in control (as defined); (ii) January 2, 2014; or (iii) the participant’s termination due
to death or disability. Any unvested awards are subject to forfeiture in the event of an employee’s voluntary
termination or termination for cause (as defined) prior to payment. The RSUs awarded to Mr. Doty in 2006 will
become fully vested upon the first to occur of: May 25, 2009 or a change of control of the Company (as defined),
and are subject to forfeiture in the event Mr. Doty should voluntarily terminate his employment or be terminated
for cause (as defined) prior to the vesting of the award.
(7)
The amounts in this column reflect amounts recognized for financial statement reporting purposes for the fiscal
year ended December 31, 2006 in accordance with FAS 123(R) for stock appreciation rights and stock options. The
assumptions used in calculating these amounts are set forth in Note 15 and Note 16 to our Consolidated Financial
Statements included in Item 8 of this annual report. The SARs awarded in 2006 are scheduled to vest on December31, 2012 and are subject to accelerated vesting, in four equal annual installments, in the event that certain
Company performance objectives are met. For those awards granted in 2006, accelerated vesting will occur upon our
achievement of certain specified financial objectives for the years 2006, 2007, 2008 and 2009. All awards are
subject to forfeiture in the event of an employee’s voluntary termination or termination for cause (as defined)
prior to exercise.
(8)
The amounts in this column reflect the actuarial increase in present value of the executive officer’s benefits
under our qualified and non-qualified defined benefit plans determined using interest rate and mortality rate
assumptions consistent with those used in our consolidated financial statements. Mr. Doty, Ms. Hargus, and Mr.
Orzel do not participate in the plans as they were each hired after October 10, 2005 when the plans were closed to
new participants. The actuarial present value of Mr. Risley’s benefits under the plans decreased by a net amount
of $271,066 during 2006. The actuarial present value of Mr. Sorenson’s benefits decreased by $36,287 during 2006.
(9)
The amounts in this column include all other compensation as detailed in the table “All Other Compensation” below.
The amount in this column for Mr. Doty includes three lump sum payments in the amounts of
$175,000, $175,000, and $100,000 which were payable to Mr. Doty during the course of 2006 pursuant to the terms
of his employment agreement. In addition, Mr. Doty was provided with temporary living expenses
and transportation totaling $76,475. These amounts are provided pursuant to the terms of our employment agreement
with Mr. Doty in connection with Mr. Doty’s relocation to Texas.
(2)
The severance amounts paid to Mr. Sorenson were paid pursuant to his employment agreement with Vought filed as Exhibit 10.5 to our Form 10-K filed on 03/30/05. The severance amounts paid to Mr. Broomall were paid pursuant to the severance agreement filed as Exhibit 10.1 to our Form 10-Q filed on 8/09/06. The severance amounts paid to Mr. White were paid pursuant to the terms of a severance agreement with Mr. White that was substantially comparable to the
previously reported agreements entered into with other departing executives.
(3)
The amounts included for Mr. Doty, Mr. Orzel, and Ms. Hargus include contributions made to the savings plan in lieu of their participation in our defined benefit plan.
(4)
This column includes the following elements of compensation with respect to Mr. Doty: $716 personal liability umbrella, $42,694 tax gross up of temporary living and transportation expenses payments and $2,054 executive physical. In addition, this column includes the following amounts for previously offered elements discontinued during the course of 2006: $2,154 car allowance, $772 supplemental health care premium, and $666 supplemental accidental death and dismemberment premium.
This column includes the following elements of compensation with respect to Mr. Risley: $669 personal liability umbrella, $168 executive physical, $34,800 of consulting fees and $13,234 paid for the cost of health care premiums for a one year period pursuant to the terms of Mr. Risley’s separation agreement filed as Exhibit 10.1 to our Form 8-K filed on 02/06/06. In addition, this column includes the following amounts for previously offered elements discontinued during the course
of 2006: $2,325 car allowance, $516 supplemental health care premium, $1,332 supplemental accidental death and dismemberment premium,
and $710 organizational dues.
This column includes the following elements of compensation with respect to Ms. Hargus: $530 personal liability umbrella.
This column includes the following elements of compensation
with respect to Mr. Sorenson: $669 personal liability umbrella. In addition, this column
includes the following amounts for previously offered elements discontinued during the course
of 2006: $3,664 car allowance, $1,158 supplemental health care premium, $1,000 supplemental accidental death and dismemberment premium and $1,170 organizational dues.
This column includes the following elements of compensation with respect to Mr. Davis: $783 personal liability umbrella. In addition, this column includes the following amounts for previously offered elements discontinued during the course of 2006: $3,524 car allowance, $772 supplemental health care premium, and $666 supplemental accidental death and dismemberment premium and $810 organizational dues.
This column includes the following elements of compensation with respect to Mr. Orzel: a bonus in the amount of $50,000 paid to Mr. Orzel at the time of his commencement of employment, $300 payment resulting from his election to opt out of certain employee benefits, $313 personal liability umbrella and $2,792 tax gross up of certain transportation and temporary living expenses.
This column includes the following elements of compensation with respect to Mr. Stubbins: $783 personal liability umbrella and $2,144 executive physical. In addition, this column includes the following amounts for previously offered elements discontinued during the course of 2006: $3,520 car allowance, $772 supplemental health care premium, and $666 supplemental accidental death and dismemberment premium and $1,495 organizational dues.
This column includes the following elements of compensation with respect to Mr. Broomall: $669 personal liability umbrella. In addition, this column includes the following amounts for previously offered elements discontinued during the course of 2006: $3,506 car allowance, $514 supplemental health care premium, and $666 supplemental accidental death and dismemberment premium and $1,136 organizational dues.
This column includes the following elements of compensation with respect to Mr. White: $669 personal liability umbrella and $1,443 executive physical. In addition, this column includes the following amounts for previously offered elements discontinued during the course of 2006: $3,506 car allowance, $772 supplemental health care premium, and $666 supplemental accidental death and dismemberment premium and $300 organizational dues.
Grants of Plan-Based Awards
The table below details the grants of plan based awards made to our named executive officers
in 2006. We made no awards under non-equity based award plans during 2006.
The table below details the unexecuted stock options and unvested stock grants for each of our
named executive officers. Mssrs. Risley, Broomall and White had no outstanding equity awards as of
December 31, 2006.
The table below details the stock option awards exercised in 2006 as well as the restricted
stock units vested during the year ending December 31, 2006.
Neither Mr. Sorenson nor Mr. White realized any value upon
their exercise of stock options as the fair market value of the stock was below the exercise price.
Pension Benefits
The following table details the accrued benefits for each of our named executive officers that
participate in our defined benefit plans.
Present
Years
Value of
Payments
Plan
Credited
Accumulated
in
Name
Name
Service
Benefits
2006
Tom Risley
Retirement Plan
37.7167
$
1,452,209
$
84,425
Excess Plans
37.7167
7,533,995
596,827
Lloyd Sorenson (1)
Retirement Plan
1.0000
—
—
Excess Plans
11.0000
260,083
5,974
Steve Davis
Retirement Plan
26.9682
926,074
—
Excess Plans
26.9682
924,158
—
Tom Stubbins
Retirement Plan
26.6000
815,679
—
Excess Plans
26.6000
44,976
—
Vern Broomall
Retirement Plan
15.9827
577,018
21,484
Excess Plans
15.9827
623,068
37,926
Bruce White
Retirement Plan
25.6122
1,007,091
20,796
Excess Plans
25.6122
1,184,708
48,702
(1)
Mr. Sorenson’s benefit under the Excess Plans includes 10 years of additional imputed service (including vesting service), which was awarded to Mr. Sorenson at the commencement of his employment in 2005. Mr. Sorenson’s accrued benefit under the Retirement Plan was forfeited as a result of his failure to meet the Retirement Plan’s vesting requirements and, as a result, his entire benefit is payable under the Excess Plans.
The values reflected in the “Present Value of Accumulated Benefits” column of the Pension
Benefits Table are equal to the actuarial present value of each officer’s accrued benefit under the
applicable plan as of December 31, 2006 using the same actuarial factors and assumptions used for
financial statement reporting purposes, except that retirement age is assumed to be the earliest
age at which an officer is eligible for an unreduced benefit under the applicable plan. These
assumptions are described in Note 13 to our Consolidated Financial Statements included in Item 8 of
this annual report.
Employees hired on or after October 10, 2005, including Mr. Doty, Mr. Orzel, and Ms. Hargus,
do not participate in the plans. In lieu of participation in the plans, those officers each
receive a defined contribution equal to 3% of eligible compensation made to their account in our
Savings and Investment Plan. Those contribution amounts are reflected in the “Other Compensation”
column of the Summary Compensation Table. On November 8, 2006, we announced that the accrual of benefits for all plan participants under
the plans will be frozen as of December 31, 2007, and, following that date, all officers will
receive the above-described defined contribution benefit.
A benefit payable under the Vought Aircraft Industries, Inc. Retirement Plan (the “Retirement
Plan”) is, in general, a function of the participant’s average eligible compensation for the
highest three years out of the most recent consecutive ten years of service (“Average Annual
Compensation”) and the participant’s years of credited benefit service under the plan. Eligible
compensation for the purpose of the plan generally includes base salary as well as annual incentive
compensation. The current plan formula provides for an accrual rate of 1.5% of the participant’s
Average Annual Compensation with a reduced accrual rate of 1% for Average Annual Compensation below
50% of the Social Security taxable wage base. Benefits accrued under certain prior plan formulas
are subject to offsets, including offsets for Social Security benefits. Retirement benefits are
limited to 50% of Average Annual Compensation, unless a greater benefit was accrued as of January1, 1995. Benefits under the Retirement Plan may be supplemented by benefits under one of two
non-qualified defined benefit plans maintained by the Company: the Vought Aircraft Industries,
Inc. ERISA 1 Excess Plan and the Vought Aircraft Industries, Inc. ERISA 2 Excess Plan
(collectively, the “Excess Plans”). The Excess Plans are designed to provide a benefit which ,
when combined with the amounts payable
under the Retirement Plan, is substantially equal to the amount that otherwise would have
been payable under the Retirement Plan in the absence of the IRS limits regarding the compensation
that may be covered by the Retirement Plan or the maximum benefits payable there under.
The Retirement Plan contains the following material terms:
•
A participant has a fully vested benefit under the plan after completing five years of vesting service.
•
A participant is eligible for an unreduced benefit upon reaching the earlier of age 65; or at least age 55 with a combination of age and years of benefit service totaling 85.
•
A participant is eligible for a subsidized early retirement benefit after reaching age 55 with at least 10 years of benefit service.
•
A participant laid off before reaching age 55 may elect an early retirement to begin as early as age 55 if the individual has a combination of age and years of benefit service totaling 75 on the date of lay off, or if the participant is age 53 and has 10 or more years of vesting service at the time of layoff.
•
The normal form of benefit is a life annuity for unmarried participants and a joint and 50% survivor annuity for married participants.
•
Participants may elect out of the normal form of benefit and may elect to receive the benefit through one of a variety of actuarially equivalent optional forms.
•
There is no lump sum form of payment available (except for benefits with a lump sum value smaller than $7,500).
The Excess Plans contain the following material terms:
•
A participant’s benefit under the Excess Plans is calculated in the same manner as under the Retirement Plan, except without giving effect to the applicable IRS limits on eligible compensation and benefit amount. Such benefit is reduced by the amount of any benefit payable under the Retirement Plan.
•
The normal form of benefit under the plan is a lump sum payable 13 months following termination of employment, with a monthly payment payable in the form of a joint and 100% survivor annuity until the lump sum is paid.
•
For benefits accrued after January 1, 2005, the lump sum payout is the only available form.
No current named executive officers are eligible for an early retirement under the plans,
however, both Mr. Stubbins and Mr. Davis are eligible as of December 31, 2006, to commence an early
retirement as early as age 55 if their employment is terminated as the result of a lay-off.
The following table
details the outstanding account balances for the individuals included in the Summary Compensation table
under our deferred compensation plan and aggregate earnings on those amounts in 2006. The plan was
established in 2000 to permit a one-time deferral by then current executive officers of a retention
bonus payable to those executives following the completion of a one-year retention period. The
balances in each individual’s account are credited with earnings or losses as if such amounts were
invested in our common stock. Balances under the plan are payable upon the occurrence of a change
in control as defined in the plan.
Executive
Registrants
Aggregates
Aggregates
Aggregates
contributions
contributions
earnings
withdrawl/
balance
in last FY
in last FY
in last FY
distributions
at last FY
Name
[ $ ]
[ $ ]
[ $ ]
[ $ ]
[ $ ]
Vern Broomall
$
—
$
—
$
6,215
$
—
$
133,248
Tom Risley
$
—
$
—
$
6,810
$
—
$
145,993
Bruce White
$
—
$
—
$
7,396
$
—
$
158,554
Steve Davis
$
—
$
—
$
6,554
$
—
$
140,517
Compensation of Directors
The following table details the fees paid to our board of directors for the period ending
December 31, 2006.
Mr. Schrage and Mr. Jumper were each appointed to the Board on June 7, 2006.
For 2006, the outside directors, Ian Massey, Sam White, David Squier, John Jumper and Dan
Schrage were each eligible to receive cash compensation of $12,500 per calendar quarter of service
on the board. Each Director was offered the opportunity to apply approximately fifty percent of
this compensation towards the purchase of Company stock. We use the term outside directors to refer
to directors who are not currently officers of Vought or Carlyle. All of the directors are also
reimbursed for reasonable out-of-pocket expenses incurred in connection with their attendance at
meetings of the Board of Directors and committee meetings and other work associated with their
service on the Board of Directors. We do not maintain medical, dental or retirement benefits plans
for these directors. The remaining directors, Allan Holt, Adam Palmer, Peter Clare and Elmer Doty,
are employed by Carlyle or the Company, and are not separately compensated for their service as
directors, but will be reimbursed for reasonable out-of-pocket expenses incurred in connection with
their attendance at meetings of the Board of Directors and committee meetings and other work
associated with their service on the Board of Directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following table sets forth information as of March 8, 2007, with respect to the beneficial
ownership of our capital stock by:
•
each person known to us to own beneficially more than 5% of the capital stock;
•
each of our directors;
•
each of our executive officers named in the summary compensation table; and
•
all such directors and executive officers as a group.
The amounts and percentages of shares beneficially owned are reported on the basis of SEC
regulations governing the determination of beneficial ownership of securities. Under SEC rules, a
person is deemed to be a “beneficial” owner of a security if that person has or shares voting power
or investment power, which includes the power to dispose of or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of which that person
has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are
deemed to be outstanding for purposes of computing any other person’s percentage. Under these
rules, more than one person may be deemed to be a beneficial owner of securities as to which such
person has no economic interest.
Except as otherwise indicated in these footnotes, each of the beneficial owners listed has, to
our knowledge, sole voting and investment power with respect to the shares of capital stock.
The address of each of the directors and executive officers listed below is c/o Vought
Aircraft Industries, Inc., 9314 West Jefferson Boulevard M/S 49R-06, Dallas, Texas75211.
All directors and executive officers as a group (16 persons) (9)
481,439
1.7
%
*
Denotes less than 1.0% beneficial ownership.
(1)
Includes 2,113,524 shares held by Carlyle Partners II, L.P., a Delaware limited
partnership, 16,158,770 shares held by Carlyle Partners III, L.P., a Delaware limited
partnership, 1,780,100 shares held by Carlyle International Partners II, L.P., a Cayman
Islands limited partnership, 95,738 shares held by Carlyle International Partners III,
L.P., a Cayman Islands limited partnership, 494,730 shares held by CP III Coinvestment,
L.P., a Delaware limited partnership, 96,334 shares held by Carlyle SBC Partners II, L.P.,
a
Delaware limited partnership, 401,371 shares held by C/S International Partners, a Cayman
Islands general partnership, 821,152 shares held by Florida State Board of Administration,
2,052 shares held by Carlyle Investment Group, L.P., a Delaware limited partnership, 114,709
shares held by Carlyle-Contour Partners, L.P., a Delaware limited partnership, 26,405 shares
held by Carlyle-Contour International Partners, L.P., a Cayman Islands limited partnership,
659,948 shares held by Carlyle-Aerostructures Partners, L.P., a Delaware limited
partnership, 505,511 shares held by Carlyle-Aerostructures Partners II, L.P., a Delaware
limited partnership, 261,992 shares held by Carlyle-Aerostructures International Partners,
L.P., a Cayman Islands limited partnership, 65,534 shares held by Carlyle-Aerostructures
Management, L.P., a Delaware limited partnership and 600,000 shares held by Carlyle High
Yield Partners, L.P., a Delaware limited partnership (collectively, the “Investment
Partnerships”). TC Group, L.L.C. (which generally does business under the name of The
Carlyle Group) is the sole member of TC Group III, L.L.C., which itself is the sole general
partner of TC Group III, L.P., which is the sole general partner of Carlyle Partners III,
L.P. and CP III Coinvestment, L.P., and, in such capacity, TC Group, L.L.C. exercises
investment discretion and control over the shares held by these Investment Partnerships. TC
Group, L.L.C. is also the sole member of TCG High Yield Holdings, L.L.C., which itself is
the sole member of TCG High Yield, L.L.C., the sole general partner of Carlyle High Yield
Partners, L.P. In such capacity, TC Group L.L.C. exercises investment discretion and
control over the shares held by Carlyle High Yield Partners, L.P. TC Group, L.L.C. is also
the sole member of TC Group II, L.L.C., which itself is the sole general partner of Carlyle
Partners II, L.P. and Carlyle Partners SBC II, L.P. and the general partner of Carlyle
International Partners II, L.P., Carlyle International Partners III, L.P. and C/S
International Partners, and, in such capacity, TC Group, L.L.C. exercises investment
discretion and control over the shares held by these Investment Partnerships. TC Group,
L.L.C. also serves as the managing member of the investment manager for the Florida State
Board of Administration and as the general partner for the remaining Investment
Partnerships, and, in such capacities, TC Group, L.L.C. exercises investment discretion and
control over the shares held by these Investment Partnerships. TCG Holdings, L.L.C., a
Delaware limited liability company, is the sole managing member of TC Group, L.L.C., and, in
such capacity, exercises investment discretion and control of the shares beneficially owned
by TC Group, L.L.C. TCG Holdings, L.L.C. is managed by a three-person managing board, and
all board action relating to the voting or disposition of these shares requires approval of
a majority of the board. The members of the managing board are William E. Conway, Jr.,
Daniel A. D’Aniello and David M. Rubenstein, all of whom disclaim beneficial ownership of
these shares.
(2)
Includes 5,000 shares under stock options that are exercisable within 60 days of March8, 2007.
(3)
Includes 5,000 shares under stock options that are exercisable within 60 days of March8, 2007.
(4)
Includes 5,000 shares under stock options that are exercisable within 60 days of March8, 2007.
(5)
Includes 62,500 shares under stock options that are exercisable within 60 days of March8, 2007.
(6)
Includes 63,800 shares under stock options that are exercisable within 60 days of March8, 2007.
(7)
Includes 17,500 shares under stock options that are exercisable within 60 days of March8, 2007.
(8)
Includes 26,550 shares under stock options that are exercisable within 60 days of March8, 2007.
(9)
Includes 356,414 shares under stock options that are exercisable within 60 days of
March 8, 2007.
Item 13. Certain Relationships and Related Transactions
The Transactions
Vought completed the acquisition of the Aerostructures Company, on July 2, 2003.
Aerostructures operated as a wholly owned subsidiary of Vought from the date of the Aerostructures
Acquisition until it merged with and into Vought on January 1, 2004. In exchange for 100% of the
outstanding common and preferred stock of the parent company of Aerostructures (“Holdings”), Vought
issued 6,966,346 shares of common stock as stock consideration to Holdings’ stockholders that
represented 27.5% of the fully diluted equity of the combined company. The stock consideration
value of $230.0 million was based upon an estimated fair value of $32.33 per share of each share of
Vought common stock. Additional consideration of $2.4 million was provided based upon the fair
value of vested Aerostructures stock options that were exchanged for Vought stock options. These
determinations were made by the Boards of Directors of both companies in consultation with their
respective advisors.
Carlyle Partners III,
L.P. (“CPIII”) and affiliates owned approximately 93% of Vought on a
fully diluted basis and Carlyle Partners II, L.P. (“CPII”) and affiliates owned approximately 96%
of Aerostructures on a fully diluted basis when Vought and Aerostructures entered into the
agreement and plan of merger. Both CPIII and CPII are affiliates of TC Group, L.L.C. which
generally does business under the name of The Carlyle Group. Subsequent to the consummation of the
transactions associated with the Aerostructures acquisition, private equity investment funds
affiliated with The Carlyle Group own approximately 90% of our fully diluted equity and, therefore,
The Carlyle Group has the power, subject to certain exceptions, to control our affairs and
policies. They also control the election of directors, the appointment of management, the entering
into of mergers, sales of substantially all of our assets and other extraordinary transactions.
Management Consulting Agreement
We have entered into a management consulting agreement with TC Group L.L.C which is an
affiliate of TCG Holdings, L.L.C. The agreement allows us to avail ourselves of TC Group L.L.C.’s
expertise in areas such as financial transactions, acquisitions and other matters that relate to
our business, administration and policies. TC Group L.L.C. receives an annual fee of $2.0 million
for its management services and advice and is also reimbursed for its out-of-pocket expenses
related to these activities. TC Group L.L.C. also serves, in return for additional fees, as our
financial advisor or investment banker for mergers, acquisitions, dispositions and other strategic
and financial activities. Fees are mutually agreed upon by Vought and TC Group L.L.C. for
investment banking and advisory services. The fee is paid on a success basis only. Historically,
these fees have been less than 1% of related transaction value. Such fees may vary in the future.
TC Group L.L.C. received transaction fees of $3.5 million and $2.5 million in 2004 and 2003,
respectively, for investment banking and advisory services.
Vought and private equity investment funds affiliated with The Carlyle Group are parties to a
stockholders rights agreement. The agreement provides that three members of our board of directors
will be designated by certain affiliates of The Carlyle Group. The parties agree to vote their
shares in favor of such affiliates’ designees for director.
Certain Related Party Transactions
As previously disclosed in Exhibit 10.2 of Form 8-K filed U.S. Securities and Exchange
Commission on February 6, 2006, upon the retirement in the first quarter of 2006 of Tom Risley
(“Mr. Risley”), our former Chief Executive Officer, we entered into a consulting agreement with Mr.
Risley for a minimum fee of $36,000 plus expenses, with a total payout plus expenses not to exceed
$200,000. The total fees and expense paid to Mr. Risley during 2006 pursuant to that agreement were $34,800.
Since approximately 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 arm’s-length,
long-term contracts. On September 29th, 2006, The Carlyle Group (which is our controlling stockholder) acquired
a majority stake in Wesco, and as a result we and Wesco are now under common control of The Carlyle Group through its
affiliated funds. In addition, three of our Directors, Messrs. Squier, Clare and Palmer, also serve on the board
of directors of Wesco. The Carlyle Group will 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 in 2006 was approximately $11 million.
Indebtedness of Management. We adopted an Employee Stock Purchase Plan, which provides certain
employees and independent directors the opportunity to purchase shares of our stock at its
estimated fair value. Certain employee stock purchases are eligible for financing by the Company
through stockholder notes. Stockholder loans, including interest at 6.09%, are due after 7 years,
or upon specified events occurring. On October 24, 2000, 227,605 shares were sold for notes at a
price of $10 per share. During 2001, 5,000 shares were sold for notes at a price of $10 per share.
The principal amounts shown below have been outstanding for the entire 2006 fiscal year. The
table below shows the outstanding balances of loans held by individuals who served as executive
officers or directors during 2006 or any of their immediate family members:
Related primarily to audits of employee benefit plans, accounting
consultations and consultations related to the Sarbanes-Oxley Act of 2002, and
due diligence procedures associated with potential acquisitions.
(2)
Related primarily to tax compliance, tax advice and tax planning.
(3)
Of the fees listed above approved by the Audit Committee, none were approved based
on waiver of pre-approval under
Rule 2-01(c)(7)(i)(c).
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
The Audit Committee has responsibility for appointing, setting compensation and overseeing the
work of the independent auditor. In recognition of this responsibility, the Audit Committee has
established a policy to pre-approve audit and permissible non-audit services provided by the
independent auditor.
In connection with the engagement of the independent auditor for the 2006 fiscal year, the
Audit Committee pre-approved the services listed below by category of service, including the
pre-approval of fee limits. The Audit Committee’s pre-approval process by category of service also
includes a review of specific services to be performed and fees expected to be incurred within each
category of service. The term of any pre-approval is 12 months from the date of the pre-approval,
unless the Audit Committee specifically provides for a different period. Fees for any of the above
services that will exceed the pre-approval fee limits must be separately approved by the Audit
Committee. During fiscal 2006, circumstances may arise when it may become necessary to engage the
independent auditor for additional services not contemplated in the original pre-approval. In those
instances, the Audit Committee requires separate pre-approval before engaging the independent
auditor.
The services pre-approved by the Audit Committee to be performed by our auditor during our
fiscal year 2006, included the following:
Audit Services include audit work performed in the preparation of financial statements
(including quarterly reviews), as well as work that generally only the independent auditor can
reasonably be expected to provide, including comfort letters, statutory audits, and attest services
and consultation regarding financial accounting and/or reporting standards.
Audit-Related Services are for assurance and related services that are traditionally performed
by the independent auditor, including due diligence related to mergers and acquisitions, employee
benefit plan audits, and special procedures required to meet certain regulatory requirements.
Tax Services include all services performed by the independent auditor’s tax personnel except
those services specifically related to the audit of the financial statements, and include fees in
the areas of tax compliance, tax planning, and tax advice.
All Other Fees are those associated with permitted services not included in the other
categories.
The Audit Committee may delegate pre-approval authority to one or more of its members. The
member or members to whom such authority is delegated shall report any pre-approval decisions to
the Audit Committee at its next scheduled meeting. The Audit Committee may not otherwise delegate
its responsibilities to pre-approve services performed by the independent auditor to management.
Item 15. Exhibits and Financial Statement Schedules
(a)
The following documents are filed as part of this report:
1.
Financial Statements:
See Item 8 above.
2.
Financial Statement Schedules:
Schedules for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related instructions
or are not applicable, and therefore have been omitted.
(b) Exhibits
Exhibit
No.
Description of Exhibit
2.1
Asset Purchase Agreement, dated as of June 9, 2000, by and between Northrop Grumman Corporation and Vought Aircraft Industries, Inc. (fka “VAC Acquisition Corp. II”). Incorporated by reference from Exhibit 2.1 to the Registrant’s Registration Statement on Form S-4/A (Registration No. 333-112528), filed with the SEC on April 15, 2004.
Certificate of Ownership and Merger, dated as of January 1, 2004, merging The Aerostructures Corporation with and into Vought Aircraft Industries, Inc. Incorporated by reference from Exhibit 2.4 to the Registrant’s Registration Statement on Form S-4/A (Registration No. 333-112528), filed with the SEC on April 15, 2004.
Indenture, dated July 2, 2003, among Vought Aircraft Industries, Inc., as issuer, VAC Industries, Inc., Vought Commercial Aircraft Company and The Aerostructures Corporation, as guarantors, and Wells Fargo Bank Minnesota, National Association, as trustee. Incorporated by reference from Exhibit 4.1 to the Registrant’s Registration Statement on Form S-4/A (Registration No. 333-112528), filed with the SEC on April 15, 2004.
4.2
Supplemental Indenture, dated December 4, 2003, among Vought Aircraft Industries, Inc., as issuer, VAC Industries, Inc., Vought Commercial Aircraft Company and The Aerostructures Corporation, as guarantors, Contour Aerospace Corporation, as additional guarantor, and Wells Fargo Bank Minnesota, National Association, as trustee. Incorporated by reference from Exhibit 4.2 to the Registrant’s Registration Statement on Form S-4/A (Registration No. 333-11
2528), filed with the SEC on April 15, 2004.
Form of Notation of Senior Note Relating to Subsidiary Guarantee (included as Exhibit C to Exhibit 4.1). Incorporated by reference from Exhibit 4.4 to the Registrant’s Registration Statement on Form S-4/A (Registration No. 333-112528), filed with the SEC on April 15, 2004.
10.1
Credit Agreement, dated as of December 22, 2004, by and among Vought Aircraft Industries, Inc., as borrower, certain subsidiaries of Vought Aircraft Industries, Inc., as guarantors, certain Financial Institutions, as lenders, Lehman Commercial Paper Inc., in its capacity as administrative agent and in its capacity as collateral agent, JPMorgan Chase Bank, N.A., in its capacity as syndication agent and Goldman Sachs Credit Partners, L.P., as Documentation Agent. (Portio
ns of this exhibit have
been redacted in connection with our application for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.) Incorporated by reference from Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K (Registration No. 333-112528), filed with the SEC on March 30, 2005.
Sublease agreement between Vought Aircraft Industries, Inc. and Lockheed Martin Corporation, as amended, dated October 15, 1993, with respect to the property known as 1701 W. Marshall Street, Grand Prairie, TX. Incorporated by reference from Exhibit 10.2 to the Registrant’s Registration Statement on Form S-4/A (Registration No. 333-112528), filed with the SEC on April 15, 2004.
10.3
Facilities Use Agreement between Vought Aircraft Industries, Inc. and the United States Government, dated August 23, 2001 (contract # NOO421-01-E-0372) with respect to the property known as 9314 West Jefferson Street, Dallas, TX. Incorporated by reference from Exhibit 10.3 to the Registrant’s Registration Statement on Form S-4/A (Registration No. 333-112528), filed with the SEC on April 15, 2004.
10.4
Information Services Agreement between Vought Aircraft Industries, Inc. and Northrop Grumman Commercial Information Services Inc., dated December 17, 2002. Incorporated by reference from Exhibit 10.4 to the Registrant’s Registration Statement on Form S-4/A (Registration No. 333-112528), filed with the SEC on April 15, 2004.
Agreement dated March 29, 2006 regarding the extension of the Severance
Agreement between Vought Aircraft Industrites, Inc. and Lloyd “Skip” Sorenson. Incorporated by
reference from exhibit 10.6 to the registrant’s Annual Report on Form 10-K, filed with the SEC on March 29, 2006.
10.7
Employment agreement between Vought Aircraft Industrites, Inc. and Elmer Doty Incorporated by
reference from exhibit 10.7 to the registrant’s Annual Report on Form 10-K, filed with the SEC on March 29, 2006.
Code of Ethics for the Board of Directors, Chief Executive Officer, Chief Financial Officer and Controller. Incorporated by reference from Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K (Registration No. 333-112528), filed with the SEC on March 30, 2005.
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by
the following persons in the capacities and on the dates indicated.