##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 Commission File No. 333-124394
 STANDARD AERO HOLDINGS, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    98-0432892(State of Incorporation)
    
    (I.R.S. EmployerIdentification Number)
 500-1780 Wellington Avenue
Winnipeg, Manitoba, Canada R3H 1B3
(Address of Principal Executive Offices and Zip Code)
 (204) 987-8860
(Registrants Telephone Number, Including Area Code)
  þ o
  o o þ
 o þ




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##### 



INDEX
 PART I
FINANCIAL INFORMATION
 PageNo.Item 1.
    
    Financial StatementsUnaudited Condensed Consolidated Statements of Operations for the three months ended
March 31, 2007 and March 31, 2006
    
    
    1Unaudited Condensed Consolidated Balance Sheets as of March 31, 2007 and December
31, 2006
    
    
    2Unaudited Condensed Consolidated Statements of Stockholders Equity for the three
months ended March 31, 2007 and March 31, 2006
    
    
    3Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2007 and March 31, 2006
    
    
    4Unaudited Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    33PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    35Item 1A.
    
    Risk Factors
    
    
    35Item 6.
    
    Exhibits
    
    
    36SIGNATURES
    
    
    37




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##### 



STANDARD AERO HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
 Three months ended March 312007
    
    2006Revenues
    
    $
    194,930
    
    
    $
    185,798Operating expensesCost of revenues
    
    
    168,661
    
    
    
    154,974Selling, general and administrative expense
    
    
    10,468
    
    
    
    13,553Amortization of intangible assets
    
    
    2,146
    
    
    
    2,146Total operating expenses
    
    
    181,275
    
    
    
    170,673Income from operations
    
    
    13,655
    
    
    
    15,125Interest expense
    
    
    8,915
    
    
    
    9,473Income before income taxes
    
    
    4,740
    
    
    
    5,652Income tax expense
    
    
    1,299
    
    
    
    1,878Net income
    
    $
    3,441
    
    
    $
    3,774
 The accompanying notes are an integral part of the financial statements.
 1




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##### 



STANDARD AERO HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 March 31,
    
    December 31,2007
    
    2006ASSETSCurrent assetsCash and cash equivalents
    
    $
    2,781
    
    
    $
    17,047Cash and cash equivalents (restricted)
    
    
    40,927
    
    
    
    35,200Accounts receivable (less allowance for
doubtful accounts of $1,890 and $2,050 at
March 31, 2007 and December 31, 2006,
respectively)
    
    
    121,339
    
    
    
    114,405Inventories
    
    
    147,329
    
    
    
    140,560Prepaid expenses and other current assets
    
    
    7,529
    
    
    
    5,495Income taxes receivable
    
    
    871
    
    
    
    2,575Deferred income taxes
    
    
    1,232
    
    
    
    1,493Total current assets
    
    
    322,008
    
    
    
    316,775Deferred finance charges
    
    
    14,282
    
    
    
    14,880Deferred income taxes
    
    
    8,235
    
    
    
    7,384Property, plant and equipment, net
    
    
    130,841
    
    
    
    132,032Intangible assets, net
    
    
    182,400
    
    
    
    185,241Goodwill
    
    
    189,909
    
    
    
    189,909Total assets
    
    $
    847,675
    
    
    $
    846,221LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    95,693
    
    
    $
    82,764Other accrued liabilities
    
    
    20,408
    
    
    
    30,410Due to related party
    
    
    3,624
    
    
    
    3,940Unearned revenue
    
    
    56,081
    
    
    
    55,545Accrued warranty provision
    
    
    3,537
    
    
    
    4,446Income taxes payable
    
    
    56
    
    
    
    1,208Deferred income taxes
    
    
    26
    
    
    
    24Current portion of long-term debt
    
    
    2,028
    
    
    
    27Total current liabilities
    
    
    181,453
    
    
    
    178,364Deferred income taxes
    
    
    66,218
    
    
    
    66,058Long-term debt
    
    
    412,795
    
    
    
    420,295Other accrued liabilities
    
    
    2,231
    
    
    
    Total liabilities
    
    
    662,697
    
    
    
    664,717Commitments and contingencies (Note 8)Stockholders equityCommon stock(1,000 shares authorized,
issued and outstanding, par value $0.01)
    
    
    
    
    
    
    Additional paid in capital
    
    
    215,132
    
    
    
    215,099Accumulated deficit
    
    
    (30,154
    )
    
    
    (33,595
    )Accumulated other comprehensive income
    
    
    
    
    
    
    Total stockholders equity
    
    
    184,978
    
    
    
    181,504Total liabilities and stockholders equity
    
    $
    847,675
    
    
    $
    846,221
 The accompanying notes are an integral part of the financial statements.
 2




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##### 



STANDARD AERO HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)
 Three months Ended March 31, 2006
 Accumulatedother
    
    TotalCommon
    
    
    
    
    
    Accumulated
    
    comprehensive
    
    Stockholdersstock
    
    Paid in capital
    
    deficit
    
    income
    
    equityBalance as of December 31, 2005
    
    $
    
    
    
    $
    215,000
    
    
    $
    (53,082
    )
    
    $
    61
    
    
    $
    161,979Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    3,774
    
    
    
    
    
    
    
    3,774Other comprehensive incomeUnrealized gain on
cash flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129
    
    
    
    129Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    3,774
    
    
    
    129
    
    
    
    3,903Balance as of March 31, 2006
    
    $
    
    
    
    $
    215,000
    
    
    $
    (49,308
    )
    
    $
    190
    
    
    $
    165,882
 Three months Ended March 31, 2007
 Accumulatedother
    
    TotalCommon
    
    
    
    
    
    Accumulated
    
    comprehensive
    
    Stockholdersstock
    
    Paid in capital
    
    deficit
    
    income
    
    equityBalance as of December 31, 2006
    
    $
    
    
    
    $
    215,099
    
    
    $
    (33,595
    )
    
    $
    
    
    
    $
    181,504Stock based compensation
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    33Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    3,441
    
    
    
    
    
    
    
    3,441Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    3,441
    
    
    
    
    
    
    
    3,441Balance as of March 31, 2007
    
    $
    
    
    
    $
    215,132
    
    
    $
    (30,154
    )
    
    $
    
    
    
    $
    184,978
 The accompanying notes are an integral part of the financial statements.
 3




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##### 



STANDARD AERO HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Three Months Ended March 31,2007
    
    2006Operating activitiesNet income for the period
    
    $
    3,441
    
    
    $
    3,774Adjustments to reconcile net income to net cash provided by
(used in) operating activitiesDepreciation and amortization
    
    
    6,524
    
    
    
    5,844Amortization of deferred finance charges
    
    
    735
    
    
    
    913Deferred income taxes
    
    
    (428
    )
    
    
    (763
    )Loss (gain) on disposal of property, plant and equipment
    
    
    6
    
    
    
    (2
    )Foreign exchange loss
    
    
    6
    
    
    
    136Stock based compensation expense
    
    
    33
    
    
    
    Changes in assets and liabilitiesAccounts receivable, net
    
    
    (6,934
    )
    
    
    11,708Inventories
    
    
    (6,769
    )
    
    
    (18,953
    )Prepaid expenses and other current assets
    
    
    (2,034
    )
    
    
    127Accounts payable and other current liabilities
    
    
    (9,446
    )
    
    
    (359
    )Income taxes payable and receivable
    
    
    2,783
    
    
    
    (2,187
    )Net cash (used in) provided by operating activities
    
    
    (12,083
    )
    
    
    238Investing activitiesAcquisitions of property, plant and equipment
    
    
    (1,060
    )
    
    
    (1,234
    )Proceeds from disposals of property, plant, and equipment
    
    
    2
    
    
    
    4Acquisition of rental assets
    
    
    (2,905
    )
    
    
    (5,191
    )Proceeds from disposals of rental assets
    
    
    1,580
    
    
    
    2,896Acquisition of intangible assets
    
    
    (750
    )
    
    
    Net cash used in investing activities
    
    
    (3,133
    )
    
    
    (3,525
    )Financing activitiesRepayment of debt
    
    
    (7,500
    )
    
    
    (20,000
    )Increase in revolving credit facility
    
    
    2,000
    
    
    
    Payments of capital lease obligations and other
    
    
    (4
    )
    
    
    (360
    )Change in due from related party
    
    
    (316
    )
    
    
    Change in cash overdraft
    
    
    6,771
    
    
    
    Net cash provided by (used in) financing activities
    
    
    951
    
    
    
    (20,360
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (1
    )
    
    
    (136
    )Net decrease in cash and cash equivalents
    
    
    (14,266
    )
    
    
    (23,783
    )Cash and cash equivalents  Beginning of period
    
    
    17,047
    
    
    
    24,056Cash and cash equivalents  End of period
    
    $
    2,781
    
    
    $
    273
 The accompanying notes are an integral part of the financial statements.
 4




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1
    
    Nature of operations
 The Company
  Name
    
    Country of IncorporationStandard Aero, Inc.
    
    USAStandard Aero (US) Inc.
    
    USAStandard Aero (San Antonio) Inc.
    
    USAStandard Aero (Alliance) Inc.
    
    USAStandard Aero (US) Legal Inc.
    
    USAStandard Aero Materials Inc.
    
    USAStandard Aero Canada Inc.
    
    USAStandard Aero Redesign Services, Inc.
    
    USAStandard Aero de Mexico
    
    MexicoStandard Aero Limited
    
    CanadaNot FM Canada Inc.
    
    Canada3091781 Nova Scotia Company
    
    Canada3091782 Nova Scotia Company
    
    Canada3091783 Nova Scotia Company
    
    CanadaStandard Aero (Australia) Pty Limited
    
    AustraliaStandard Aero International Pty Limited
    
    AustraliaStandard Aero (Asia) Pte Limited
    
    SingaporeStandard Aero BV
    
    NetherlandsStandard Aero (Netherlands) BV
    
    Netherlands
  Basis of presentation
   5




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 2
    
    Summary of significant accounting policiesThe condensed consolidated financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States of America (US GAAP) and
are reported in U.S. dollars.
 a)
    
    Comparative figuresCertain comparative figures have been reclassified to conform with the current years
financial statement presentation.b)
    
    Variable Interest EntitiesFinancial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable
Interest Entities (FIN 46), requires the, primary beneficiary of a variable interest
entity (VIE) to include the VIEs assets, liabilities and operating results in its
consolidated financial statements. In general, a VIE is a corporation, partnership,
limited liability corporation, trust or any other legal structure used to conduct
activities or hold assets that either (i) has an insufficient amount of equity to carry
out its principal activities without additional subordinate financial support; (ii) has a
group of owners that are unable to make significant decisions about its activities; or
(iii) has a group of equity owners that do not have the obligation to absorb losses or the
right to receive returns generated by its operations.In the normal course of business, the Company enters into agreements to provide engine
repair and maintenance services. Certain of these agreements establish trust accounts in
which the customer will deposit cash, generally in advance of the services to be performed
under the contract, based on an agreed upon engine operating fee. Subject to the terms
of each agreement, the Company will generally receive cash distributions from the trust
accounts when maintenance worked is performed. Actual gross payments by the customer into
the trust accounts could exceed the cost of services performed by the Company. Per the
agreements the Company would receive the benefit of the remaining proceeds in the trust
account upon completion of the contract, if any. The Company has determined that the
trust accounts are VIEs and that the Company is the primary beneficiary. Based on this
determination, the Company commenced consolidating the trust accounts in its consolidated
financial statements as of the quarter ended June 30, 2006.The consolidation of the VIE resulted in restricted cash of $40.9 million and unearned
revenue of $40.9 million as at March 31, 2007.c)
    
    New accounting standardsIn February 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities using
different measurement techniques. SFAS 159 requires additional disclosures related to the
fair value measurements included in the entitys financial statements. This statement is
effective for financial statements issued for fiscal years beginning after November 15,
2007. The Company is currently determining the effect of SFAS 159 on the consolidated
financial statements.In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Benefit Plans. SFAS 158 requires companies to recognize
the overfunded or underfunded status of a defined benefit postretirement plan as an asset
or liability in its statement of financial position. This statement is effective for
financial statements without publicly traded equity securities as of the end of fiscal
years ending after June 15, 2007. The Company is currently determining the effect of SFAS
158 on the consolidated financial statements . The Company will adopt this statement as
at December 31, 2007.
 6




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 d)
    
    Cash OverdraftThe Company has included cash overdrafts of $6.8 million in accounts payable as of March
31, 2007. The cash overdraft exists due to outstanding cheques. There were no material
cash overdrafts as of December 31, 2006.e)
    
    Change in accounting principleEffective in the first quarter of 2007, the Company has changed its method of recognizing
revenue under FASB Technical Bulletin No. 90-1, Accounting for Separately Priced Extended
Warranty and Product Maintenance Contracts, for fixed price pay-by-the-hour engine
maintenance contracts from a proportional performance model based on actual costs incurred
to a proportional performance model based on the expected number of completed output
deliverables under each contract. The new accounting principle allows for a better
matching of the revenue recognized for these specific contracts with the services actually
performed by the Company. As required by SFAS No. 154, Accounting Changes and Error
Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3, the change in
accounting should be applied retrospectively. The above change in accounting principle was
not applied retrospectively by the Company as the change did not have a material impact on
the Companys consolidated financial statements in any previous annual period. The
cumulative effect of this change in accounting principle was recorded as an adjustment to
revenues in the three-month period ended March 31, 2007 and was not material
 3
    
    Inventories
 March 31,
    
    December 31,2007
    
    2006(In thousands)Raw materials
    
    $
    61,296
    
    
    $
    60,918Work in process
    
    
    86,033
    
    
    
    79,642$
    147,329
    
    
    $
    140,560
 7




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 4
    
    Intangible assetsIntangible assets are comprised of:
 Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Net BalanceAt March 31, 2007
    
    (In thousands)Definite lived intangible assets:Customer relationships
    
    $
    98,000
    
    
    $
    19,296
    
    
    $
    78,704OEM authorizations and licenses
    
    
    40,215
    
    
    
    7,937
    
    
    
    32,278Technology and other
    
    
    7,900
    
    
    
    4,082
    
    
    
    3,818146,115
    
    
    
    31,315
    
    
    
    114,800Indefinite lived intangible assets:Trademarks
    
    
    67,600
    
    
    
    
    
    
    
    67,600Total intangible assets
    
    $
    213,715
    
    
    $
    31,315
    
    
    $
    182,400
 Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Net BalanceAt December 31, 2006
    
    (In thousands)Definite lived intangible assets:Customer relationships
    
    $
    98,000
    
    
    $
    17,545
    
    
    $
    80,455OEM authorizations and licenses
    
    
    40,100
    
    
    
    7,127
    
    
    
    32,973Technology and other
    
    
    7,900
    
    
    
    3,687
    
    
    
    4,213146,000
    
    
    
    28,359
    
    
    
    117,641Indefinite lived intangible assets:Trademarks
    
    
    67,600
    
    
    
    
    
    
    
    67,600Total intangible assets
    
    $
    213,600
    
    
    $
    28,359
    
    
    $
    185,241
 The amortization expense for the period from January 1, 2007 to March 31, 2007 was $3.0 million.
The amortization expense for the period January 1, 2006 to March 31, 2006 was $2.9 million.The Company acquired an OEM license for $115,000 during the three months ended March 31, 2007.
Under the terms of the agreement, payment for the OEM license is due after March 31, 2007. In
2006, the Company acquired OEM authorizations for $1.75 million, of which $750,000 was paid
during the quarter ended March 31, 2007.Amortization of OEM authorizations and licenses is included within cost of revenues.
 8




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 5
    
    Long-term debtLong-term debt is summarized as follows:
 March 31,
    
    December 31,2007
    
    2006(In thousands)Term loans
    
    $
    212,500
    
    
    $
    220,000Revolving credit facility
    
    
    2,000
    
    
    
    Senior subordinated notes
    
    
    200,000
    
    
    
    200,000Obligations under capital leases
    
    
    16
    
    
    
    18Other
    
    
    307
    
    
    
    304414,823
    
    
    
    420,322Less: Current portion
    
    
    2,028
    
    
    
    27Long-term debt
    
    $
    412,795
    
    
    $
    420,295
 The Company had outstanding bank term loans of $212.5 million at March 31, 2007. The Company
has provided as collateral for the loan substantially all of its assets. The term loan is due
in 2012 through scheduled installments during that year. At the option of the Company,
borrowing under the term loans bears interest at Base Prime Rate or Eurodollar rate plus an
applicable margin. The bank term loans of $212.5 million were denominated and are repayable in
US dollars, and bear interest at 7.60% at March 31, 2007 (7.62% at December 31, 2006). The
borrowing under the term loans will bear interest between 1.25% and 1.5% plus the Base Prime
Rate or between 2.25% and 2.5% plus the Eurodollar rate. The applicable margin is determined
based on the Companys leverage ratio as specified in the credit facility agreement.The credit agreement also provides Standard Aero Holdings, Inc. with a $50.0 million revolving
credit facility. There were borrowings outstanding under the revolving credit facility of $2.0
million at March 31, 2007. As of May 9, 2007, there was $4.5 million outstanding under the
revolving credit facility. The borrowings under the revolving credit facility were denominated
and are repayable in US dollars, and bear interest at 9.25% at March 31, 2007. The revolving
credit facility bears interest between 0.75% and 1.50% plus the Base Prime Rate or between
1.75% and 2.50% plus the Eurodollar rate. The related commitment fee equals between 0.375% and
0.5% of the undrawn revolving credit facility. The rates are determined based on the Companys
leverage ratio as specified in the credit agreement.The Companys weighted average interest rate of borrowings under the credit agreement was 7.61%
for the period January 1 to March 31, 2007.In addition, $200 million of senior subordinated unsecured notes were issued with an interest
rate of 8.25%, maturing on September 1, 2014. Prior to September 1, 2007, the Company may
redeem up to 35% of the original principal amount of the notes at a premium. Further, at any
time on or after September 1, 2009, the Company may redeem any portion of the notes at
pre-determined premiums.The Company had outstanding term loans with a public utility company of $307,000 at March 31,
2007. The term of the loans is ten years, repayable in monthly installments of $4,389,
including interest, due in 2016. The term loans of $307,000 are denominated and repayable in
Canadian dollars, and bear interest between 7.9% and 8.4%.Certain of these facilities contain covenants that restrict the Companys ability to raise
additional financings in the future and the Companys ability to pay dividends. The financial
covenants are based on long-term solvency ratios calculated from the Companys consolidated
financial statements, which are prepared in accordance with accounting principles generally
accepted in the United States of America.
 9




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 6
    
    Employee benefit plansThe Company provides defined contribution pension plans and a defined benefit pension
plan covering substantially all of its employees. The Company does not provide any other
post-retirement benefits or supplemental retirement plans.Costs for the defined contribution pension plans for the three months ended March 31, 2007
and March 31, 2006 were $1.5 million and $1.6 million, respectively.Costs for the defined benefit pension plans for each of the three months ended March 31,
2007 and March 31, 2006 were $0.1 million.7
    
    Income taxesThe Companys effective tax rate for the three months ended March 31, 2007 was 27%, which is
different than the U.S. statutory rate of 35% primarily due to the release of certain tax
reserves and the impact of foreign exchange rates on deferred tax balances.The Companys effective tax rate for the three months ended March 31, 2006 was 33% which is
different than the U.S. statutory rate of 35% primarily due to the impact of foreign exchange
rates on deferred tax balances.The estimated annual effective rate is calculated quarterly based on the projected full year
income projections by legal entity in each corresponding tax jurisdiction and the Companys
corporate structure. The effective rate will fluctuate primarily as changes in income by tax
jurisdiction occur.In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for
Income Taxes. The Interpretation addresses the determination of whether tax benefits claimed
or expected to be claimed on a tax return should be recorded in the financial statements. Under
FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the
financial statements from such a position would be measured based on the largest benefit that
has a greater than 50 percent likelihood of being realized upon ultimate settlement. FIN 48
also provides guidance on derecognition, classification, interest and penalties on income
taxes, accounting in interim periods and requires increased disclosures.The Company adopted the provisions of FIN 48 on January 1, 2007. The impact of adopting FIN 48
was not material; therefore no amount was recorded to retained earnings. The amount of
unrecognized tax benefits at January 1, 2007 was $2.5 million of which $2.2 million would
impact the Companys effective tax rate, if recognized.The Company recognizes accrued interest and penalties associated with uncertain tax positions
as part of the tax provision, which is consistent with the recognition of these items in prior
reporting periods. As of January 1, 2007, the Company has recorded a liability of approximately
$49,000 for the payment of interest and penalties.It is expected that the amount of unrecognized tax benefits will change in the next 12 months,
however we do not expect the change to have a significant impact on the results of operations
of the financial position of the Company. During the quarter the Company recognized a decrease
in the liability for unrecognized tax benefits of $310,000 due to settlements with tax
authorities.With respect to its income tax liabilities, the following tax years remain subject to
examination by taxing authorities:
 US Federal
    
    2003-2006US State
    
    2002-2006
 10




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Canada
    
    2000-2006The Netherlands
    
    2001-2006
 8
    
    Commitments and contingenciesCommitmentsThe Company leases facilities, office equipment, machinery, computer, and rental engines under
non-cancellable operating leases having initial terms of more than one year.Contingent liabilitiesThe Company is involved, from time to time, in legal actions and claims arising in the ordinary
course of business. While the ultimate result of these claims cannot presently be determined,
management does not expect that these matters will have a material adverse effect on the
financial condition, statement of operations or cash flows of the Company.The Company has facilities that are located on land that has been used for industrial purposes
for an extended period of time. The Company has not been named as a defendant to any
environmental suit. Management believes that the Company is currently in substantial
compliance with environmental laws. The Company incurs capital and operating costs relating to
environmental compliance on an ongoing basis. Management does not, however, believe that the
Company will be required under existing environmental laws to expend amounts that would have a
material adverse effect to its financial condition or results of operations as a whole.9
    
    Related party transactionsAt March 31, 2007, the Company has an outstanding payable of $3.6 million to its parent,
Standard Aero Acquisition Holdings, Inc. (SAAHI), for cash advanced by SAAHI. The payable is
non-interest bearing and has no repayment terms, however is payable on demand.The Carlyle Group charges the Company a monthly management fee of $125,000.10
    
    GuaranteesThe Company issues letters of credit, performance bonds, bid bonds or guarantees in the
ordinary course of its business. These instruments are generally issued in conjunction with
contracts or other business requirements. The total of these instruments outstanding at March
31, 2007 was approximately $2.4 million (March 31, 2006  $3.8 million).Warranty guaranteeReserves are recorded to reflect the Companys contractual liabilities relating to warranty
commitments to customers. Warranty coverage of various lengths and terms is provided to
customers depending on standard offerings and negotiated contractual agreements.
 11




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Changes in the carrying amount of accrued warranty costs for the three-month period ended March
31 are summarized as follows:
 2007
    
    2006(In thousands)Balance at January 1
    
    $
    (4,446
    )
    
    $
    (3,986
    )Warranty costs incurred
    
    
    770
    
    
    
    642Warranty accrued
    
    
    139
    
    
    
    (594
    )Balance at March 31
    
    $
    (3,537
    )
    
    $
    (3,938
    )
 11
    
    Subsequent eventsOn April 2, 2007, Standard Aero Acquisition Holdings, Inc., the corporate parent of the
Company entered into an Agreement and Plan of Merger (the Agreement) pursuant to which Dubai
Aerospace Enterprise LTD (DAE) agreed to purchase the Company and Piedmont/Hawthorne
Holdings, Inc. (d/b/a Landmark Aviation) (Landmark) from The Carlyle Group and certain
members of the companies management for aggregate consideration of $1.8 billion, with $1.034
billion being allocated to the purchase of the Company.The parties to the Agreement are the Company, Landmark, SAH Merger Sub, Inc., LMA Merger Sub,
Inc. DAE and TC Group L.L.C., an affiliate of The Carlyle Group. The acquisition of each of
the Company and Landmark are conditioned on the acquisition of the other and subject to certain
customary conditions as well as government approvals including with respect to the Committee on
Foreign Investment in the United States (CFIUS). The transactions are expected to close
during the third calendar quarter of 2007.On May 8, 2007, the Company, caused its subsidiary, Standard Aero, Inc. (Standard Aero) to
enter into a Purchase Agreement pursuant to which Standard Aero agreed to purchase all the
issued and outstanding capital stock of TSS Aviation, Inc. (TSS) from its parent company, TSS
Holdings Inc. for approximately $65 million. The consummation of the acquisition is conditioned
upon certain customary conditions as well as termination of the waiting period under the Hart
Scott Rodino Act. The acquisition will be financed through additional borrowings under the
Companys senior secured term loan facility and is expected to close during the second calendar
quarter of 2007.12
    
    Segment informationThe Company has two principal operating segments, which are Aviation Maintenance Repair and
Overhaul (Aviation MRO) and Enterprise Services. The Aviation MRO segment provides gas turbine
engine maintenance repair and overhaul services primarily for the aviation market. The
Enterprise Services segment provides services related to the design and implementation of lean
manufacturing operational redesigns. These operating segments were determined based on the
nature of the products and services offered. Operating segments are defined as components of an
enterprise about which separate financial information is available that is evaluated regularly
by the chief operating decision-maker in deciding how to allocate resources and in assessing
performance. The Companys chief executive officer has been identified as the chief operating
decision-maker. The Companys chief operating decision-maker directs the allocation of
resources to operating segments based on profitability and cash flows of each respective
segment.Certain administrative and management services are shared by the segments and are allocated
based on direct usage, revenue and employee levels. Corporate management expenses and interest
expense are not allocated to the segments.There are no revenues between segments.
 12




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 For the three months ended March 31, 2007
 EnterpriseAviation MRO
    
    Services
    
    Unallocated
    
    Total(In thousands)Revenues
    
    $
    183,059
    
    
    $
    11,871
    
    
    $
    
    
    
    $
    194,930Income (loss)
before income taxes
    
    
    12,829
    
    
    
    1,964
    
    
    
    (10,053
    )
    
    
    4,740
 For the three months ended March 31, 2006
 EnterpriseAviation MRO
    
    Services
    
    Unallocated
    
    Total(In thousands)Revenues
    
    $
    177,270
    
    
    $
    8,528
    
    
    $
    
    
    
    $
    185,798Income (loss)
before income taxes
    
    
    19,143
    
    
    
    (483
    )
    
    
    (13,008
    )
    
    
    5,652
 13




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 13
    
    Guarantor informationSeparate financial statements of the Guarantor Subsidiaries are not presented because
guarantees of the Notes are full and unconditional and joint and several. The Guarantor
Subsidiaries guarantee the senior subordinated notes. The Guarantor Subsidiaries are 100%
owned by the Company.The parent and certain of the Guarantor Subsidiaries file a consolidated tax return. The
losses of the parent reduce the income taxes payable of the consolidated group. The taxes
receivable of the parent are reported in the due from related parties.
 Condensed Consolidating Statements of Operations
For the three months ended March 31, 2007
(Unaudited)
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    171,842
    
    
    $
    23,429
    
    
    $
    (341
    )
    
    $
    194,930Operating expensesCost of revenues
    
    
    
    
    
    
    147,412
    
    
    
    21,590
    
    
    
    (341
    )
    
    
    168,661Selling, general and administrative
expense
    
    
    (124
    )
    
    
    8,812
    
    
    
    1,780
    
    
    
    
    
    
    
    10,468Amortization of intangible assets
    
    
    
    
    
    
    2,146
    
    
    
    
    
    
    
    
    
    
    
    2,146Total operating expenses
    
    
    (124
    )
    
    
    158,370
    
    
    
    23,370
    
    
    
    (341
    )
    
    
    181,275Income from operations
    
    
    124
    
    
    
    13,472
    
    
    
    59
    
    
    
    
    
    
    
    13,655Interest expense
    
    
    9,359
    
    
    
    (430
    )
    
    
    (14
    )
    
    
    
    
    
    
    8,915Income (loss) before income taxes
    
    
    (9,235
    )
    
    
    13,902
    
    
    
    73
    
    
    
    
    
    
    
    4,740Income tax expense (benefit)
    
    
    (4,027
    )
    
    
    5,265
    
    
    
    61
    
    
    
    
    
    
    
    1,299Income (loss) before equity earnings of
Subsidiaries
    
    
    (5,208
    )
    
    
    8,637
    
    
    
    12
    
    
    
    
    
    
    
    3,441Equity in earnings (loss) of subsidiaries
    
    
    8,649
    
    
    
    42
    
    
    
    
    
    
    
    (8,691
    )
    
    
    Net income (loss)
    
    $
    3,441
    
    
    $
    8,679
    
    
    $
    12
    
    
    $
    (8,691
    )
    
    $
    3,441
 14




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Statements of Operations
For the three months ended March 31, 2006
(Unaudited)
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    165,796
    
    
    $
    21,043
    
    
    $
    (1,041
    )
    
    $
    185,798Operating expensesCost of revenues
    
    
    
    
    
    
    136,742
    
    
    
    19,273
    
    
    
    (1,041
    )
    
    
    154,974Selling, general and administrative
expense
    
    
    2,019
    
    
    
    9,892
    
    
    
    1,642
    
    
    
    
    
    
    
    13,553Amortization of intangible assets
    
    
    
    
    
    
    2,146
    
    
    
    
    
    
    
    
    
    
    
    2,146Total operating expenses
    
    
    2,019
    
    
    
    148,780
    
    
    
    20,915
    
    
    
    (1,041
    )
    
    
    170,673Income (loss) from operations
    
    
    (2,019
    )
    
    
    17,016
    
    
    
    128
    
    
    
    
    
    
    
    15,125Interest expense
    
    
    7,639
    
    
    
    1,805
    
    
    
    29
    
    
    
    
    
    
    
    9,473Income (loss) before income taxes
    
    
    (9,658
    )
    
    
    15,211
    
    
    
    99
    
    
    
    
    
    
    
    5,652Income tax expense (benefit)
    
    
    (3,380
    )
    
    
    5,622
    
    
    
    (364
    )
    
    
    
    
    
    
    1,878Income (loss) before equity earnings of
Subsidiaries
    
    
    (6,278
    )
    
    
    9,589
    
    
    
    463
    
    
    
    
    
    
    
    3,774Equity in earnings (loss) of subsidiaries
    
    
    10,052
    
    
    
    503
    
    
    
    
    
    
    
    (10,555
    )
    
    
    Net income (loss)
    
    $
    3,774
    
    
    $
    10,092
    
    
    $
    463
    
    
    $
    (10,555
    )
    
    $
    3,774
 15




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Balance Sheet
March 31, 2007
(Unaudited)
 SubsidiarySubsidiary
    
    Non-
    
    CombiningParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    Total(In thousands)ASSETSCurrent assetsCash and cash equivalents
    
    $
    75
    
    
    $
    863
    
    
    $
    1,843
    
    
    $
    
    
    
    $
    2,781Cash and cash equivalents (restricted)
    
    
    
    
    
    
    40,927
    
    
    
    
    
    
    
    
    
    
    
    40,927Accounts receivable, net
    
    
    
    
    
    
    101,661
    
    
    
    19,678
    
    
    
    
    
    
    
    121,339Due from related party
    
    
    54,486
    
    
    
    234,936
    
    
    
    3,603
    
    
    
    (293,025
    )
    
    
    Inventories
    
    
    
    
    
    
    120,077
    
    
    
    27,252
    
    
    
    
    
    
    
    147,329Prepaid expenses and other current assets
    
    
    23
    
    
    
    6,575
    
    
    
    931
    
    
    
    
    
    
    
    7,529Income taxes receivable
    
    
    
    
    
    
    871
    
    
    
    
    
    
    
    
    
    
    
    871Deferred income taxes
    
    
    46
    
    
    
    1,042
    
    
    
    144
    
    
    
    
    
    
    
    1,232Total current assets
    
    
    54,630
    
    
    
    506,952
    
    
    
    53,451
    
    
    
    (293,025
    )
    
    
    322,008Deferred finance charges
    
    
    7,626
    
    
    
    6,656
    
    
    
    
    
    
    
    
    
    
    
    14,282Deferred income taxes
    
    
    
    
    
    
    6,340
    
    
    
    1,895
    
    
    
    
    
    
    
    8,235Property, plant and equipment, net
    
    
    
    
    
    
    111,451
    
    
    
    19,390
    
    
    
    
    
    
    
    130,841Intangible assets, net
    
    
    
    
    
    
    178,806
    
    
    
    3,594
    
    
    
    
    
    
    
    182,400Due from related party
    
    
    
    
    
    
    6,004
    
    
    
    
    
    
    
    (6,004
    )
    
    
    Goodwill
    
    
    
    
    
    
    189,909
    
    
    
    
    
    
    
    
    
    
    
    189,909Investments in subsidiaries
    
    
    755,015
    
    
    
    35,493
    
    
    
    
    
    
    
    (790,508
    )
    
    
    Total assets
    
    $
    817,271
    
    
    $
    1,041,611
    
    
    $
    78,330
    
    
    $
    (1,089,537
    )
    
    $
    847,675LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    
    316
    
    
    
    87,247
    
    
    
    8,130
    
    
    
    
    
    
    
    95,693Other accrued liabilities
    
    
    5,067
    
    
    
    13,092
    
    
    
    2,249
    
    
    
    
    
    
    
    20,408Due to related party
    
    
    211,731
    
    
    
    72,473
    
    
    
    12,445
    
    
    
    (293,025
    )
    
    
    3,624Unearned revenue
    
    
    
    
    
    
    51,368
    
    
    
    4,713
    
    
    
    
    
    
    
    56,081Accrued warranty provision
    
    
    
    
    
    
    2,702
    
    
    
    835
    
    
    
    
    
    
    
    3,537Income taxes payable
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    56Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    26Current portion of long-term debt
    
    
    2,000
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    2,028Total current liabilities
    
    
    219,114
    
    
    
    226,910
    
    
    
    28,454
    
    
    
    (293,025
    )
    
    
    181,453Deferred income taxes
    
    
    679
    
    
    
    60,701
    
    
    
    4,838
    
    
    
    
    
    
    
    66,218Due to related party
    
    
    
    
    
    
    
    
    
    
    6,004
    
    
    
    (6,004
    )
    
    
    Long-term debt
    
    
    412,500
    
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    412,795Other accrued liabilities
    
    
    
    
    
    
    2,207
    
    
    
    24
    
    
    
    
    
    
    
    2,231Total liabilities
    
    
    632,293
    
    
    
    290,113
    
    
    
    39,320
    
    
    
    (299,029
    )
    
    
    662,697Stockholders equityCommon stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional paid in capital
    
    
    215,132
    
    
    
    709,656
    
    
    
    47,612
    
    
    
    (757,268
    )
    
    
    215,132Accumulated deficit
    
    
    (30,154
    )
    
    
    41,842
    
    
    
    (8,602
    )
    
    
    (33,240
    )
    
    
    (30,154
    )Total stockholders equity
    
    
    184,978
    
    
    
    751,498
    
    
    
    39,010
    
    
    
    (790,508
    )
    
    
    184,978Total liabilities and stockholders equity
    
    $
    817,271
    
    
    $
    1,041,611
    
    
    $
    78,330
    
    
    $
    (1,089,537
    )
    
    $
    847,675
 16




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Balance Sheet
December 31, 2006
(Unaudited)
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    Total(In thousands)ASSETSCurrent assetsCash and cash equivalents
    
    $
    272
    
    
    $
    13,282
    
    
    $
    3,493
    
    
    $
    
    
    
    $
    17,047Cash and cash equivalents (restricted)
    
    
    
    
    
    
    35,200
    
    
    
    
    
    
    
    
    
    
    
    35,200Accounts receivable, net
    
    
    
    
    
    
    98,786
    
    
    
    15,619
    
    
    
    
    
    
    
    114,405Due from related party
    
    
    51,938
    
    
    
    214,283
    
    
    
    499
    
    
    
    (266,720
    )
    
    
    Inventories
    
    
    
    
    
    
    110,342
    
    
    
    30,218
    
    
    
    
    
    
    
    140,560Prepaid expenses and other current assets
    
    
    44
    
    
    
    4,535
    
    
    
    916
    
    
    
    
    
    
    
    5,495Income taxes receivable
    
    
    
    
    
    
    309
    
    
    
    2,266
    
    
    
    
    
    
    
    2,575Deferred income taxes
    
    
    
    
    
    
    1,209
    
    
    
    284
    
    
    
    
    
    
    
    1,493Total current assets
    
    
    52,254
    
    
    
    477,946
    
    
    
    53,295
    
    
    
    (266,720
    )
    
    
    316,775Deferred finance charges
    
    
    7,834
    
    
    
    7,046
    
    
    
    
    
    
    
    
    
    
    
    14,880Deferred income taxes
    
    
    
    
    
    
    5,981
    
    
    
    1,403
    
    
    
    
    
    
    
    7,384Property, plant and equipment, net
    
    
    
    
    
    
    112,147
    
    
    
    19,885
    
    
    
    
    
    
    
    132,032Intangible assets, net
    
    
    
    
    
    
    181,511
    
    
    
    3,730
    
    
    
    
    
    
    
    185,241Due from related party
    
    
    
    
    
    
    5,896
    
    
    
    
    
    
    
    (5,896
    )
    
    
    Goodwill
    
    
    
    
    
    
    189,909
    
    
    
    
    
    
    
    
    
    
    
    189,909Investments in subsidiaries
    
    
    746,366
    
    
    
    35,451
    
    
    
    
    
    
    
    (781,817
    )
    
    
    Total assets
    
    $
    806,454
    
    
    $
    1,015,887
    
    
    $
    78,313
    
    
    $
    (1,054,433
    )
    
    $
    846,221LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    
    
    
    $
    75,146
    
    
    $
    7,618
    
    
    $
    
    
    
    $
    82,764Other accrued liabilities
    
    
    10,004
    
    
    
    17,731
    
    
    
    2,675
    
    
    
    
    
    
    
    30,410Due to related party
    
    
    194,370
    
    
    
    63,369
    
    
    
    12,921
    
    
    
    (266,720
    )
    
    
    3,940Unearned revenue
    
    
    
    
    
    
    51,095
    
    
    
    4,450
    
    
    
    
    
    
    
    55,545Accrued warranty provision
    
    
    
    
    
    
    3,349
    
    
    
    1,097
    
    
    
    
    
    
    
    4,446Income taxes payable
    
    
    
    
    
    
    1,051
    
    
    
    157
    
    
    
    
    
    
    
    1,208Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    24Current portion of long-term debt
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    27Total current liabilities
    
    
    204,374
    
    
    
    211,768
    
    
    
    28,942
    
    
    
    (266,720
    )
    
    
    178,364Deferred income taxes
    
    
    576
    
    
    
    61,005
    
    
    
    4,477
    
    
    
    
    
    
    
    66,058Due to related party
    
    
    
    
    
    
    
    
    
    
    5,896
    
    
    
    (5,896
    )
    
    
    Long-term debt
    
    
    420,000
    
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    420,295Total liabilities
    
    
    624,950
    
    
    
    273,068
    
    
    
    39,315
    
    
    
    (272,616
    )
    
    
    664,717Stockholders equityCommon stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional paid in capital
    
    
    215,099
    
    
    
    709,656
    
    
    
    47,612
    
    
    
    (757,268
    )
    
    
    215,099Accumulated deficit
    
    
    (33,595
    )
    
    
    33,163
    
    
    
    (8,614
    )
    
    
    (24,549
    )
    
    
    (33,595
    )Total stockholders equity
    
    
    181,504
    
    
    
    742,819
    
    
    
    38,998
    
    
    
    (781,817
    )
    
    
    181,504Total liabilities and stockholders equity
    
    $
    806,454
    
    
    $
    1,015,887
    
    
    $
    78,313
    
    
    $
    (1,054,433
    )
    
    $
    846,221
 17




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2007
(Unaudited)
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    Total(In thousands)Operating activitiesNet income (loss) for the period
    
    $
    3,441
    
    
    $
    8,679
    
    
    $
    12
    
    
    $
    (8,691
    )
    
    $
    3,441Adjustments to reconcile net income (loss) to
net
cash provided by (used in) operating activitiesDepreciation and amortization
    
    
    
    
    
    
    5,219
    
    
    
    1,305
    
    
    
    
    
    
    
    6,524Amortization of deferred finance charges
    
    
    345
    
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    735Deferred income taxes
    
    
    57
    
    
    
    (496
    )
    
    
    11
    
    
    
    
    
    
    
    (428
    )Loss on disposal of property, plant
And equipment
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Foreign exchange (gain) / loss
    
    
    
    
    
    
    (15
    )
    
    
    21
    
    
    
    
    
    
    
    6Stock based compensation expense
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Equity in earnings of subsidiaries
    
    
    (8,649
    )
    
    
    (42
    )
    
    
    
    
    
    
    8,691
    
    
    
    Changes in assets and liabilities
Accounts receivable, net
    
    
    
    
    
    
    (2,875
    )
    
    
    (4,059
    )
    
    
    
    
    
    
    (6,934
    )Inventories
    
    
    
    
    
    
    (9,735
    )
    
    
    2,966
    
    
    
    
    
    
    
    (6,769
    )Prepaid expenses and other current assets
    
    
    21
    
    
    
    (2,040
    )
    
    
    (15
    )
    
    
    
    
    
    
    (2,034
    )Accounts payable and other accrued
liabilities
    
    
    (4,758
    )
    
    
    (4,775
    )
    
    
    87
    
    
    
    
    
    
    
    (9,446
    )Income taxes payable and receivable
    
    
    
    
    
    
    594
    
    
    
    2,189
    
    
    
    
    
    
    
    2,783Net cash (used in) provided by operating
activities
    
    
    (9,510
    )
    
    
    (5,090
    )
    
    
    2,517
    
    
    
    
    
    
    
    (12,083
    )Investing activitiesAcquisitions of property, plant and equipment
    
    
    
    
    
    
    (852
    )
    
    
    (208
    )
    
    
    
    
    
    
    (1,060
    )Proceeds on disposal of property, plant and
equipment
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Acquisition of rental assets
    
    
    
    
    
    
    (1,928
    )
    
    
    (977
    )
    
    
    
    
    
    
    (2,905
    )Proceeds on disposal of rental assets
    
    
    
    
    
    
    1,069
    
    
    
    511
    
    
    
    
    
    
    
    1,580Acquisition of intangible assets
    
    
    
    
    
    
    (750
    )
    
    
    
    
    
    
    
    
    
    
    (750
    )Net cash used in investing activities
    
    
    
    
    
    
    (2,459
    )
    
    
    (674
    )
    
    
    
    
    
    
    (3,133
    )Financing activitiesRepayment of debt
    
    
    (7,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,500
    )Increase in revolving credit facility
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000Payments of capital lease obligations and other
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Change in due to / (from) related companies
    
    
    14,813
    
    
    
    (11,657
    )
    
    
    (3,472
    )
    
    
    
    
    
    
    (316
    )Change in cash overdraft
    
    
    
    
    
    
    6,771
    
    
    
    
    
    
    
    
    
    
    
    6,771Net cash (used in) provided by financing
activities
    
    
    9,313
    
    
    
    (4,890
    )
    
    
    (3,472
    )
    
    
    
    
    
    
    951Effect of exchange rate changes on cash and
cash equivalents
    
    
    
    
    
    
    20
    
    
    
    (21
    )
    
    
    
    
    
    
    (1
    )Net decrease in cash and cash
equivalents
    
    
    (197
    )
    
    
    (12,419
    )
    
    
    (1,650
    )
    
    
    
    
    
    
    (14,266
    )Cash and cash equivalents  Beginning of
period
    
    
    272
    
    
    
    13,282
    
    
    
    3,493
    
    
    
    
    
    
    
    17,047Cash and cash equivalents  End of period
    
    $
    75
    
    
    $
    863
    
    
    $
    1,843
    
    
    $
    
    
    
    $

    2,781
 18




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2006
(Unaudited)
 Subsidiary

    
    

    Subsidiary
    
    
    CombiningParent
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Adjustments
    
    
    Total(In thousands)Operating activitiesNet income (loss) for the period
    
    $
    3,774
    
    
    $
    10,092
    
    
    $
    463
    
    
    $
    (10,555
    )
    
    $
    3,774Adjustments to reconcile net income to net
cash provided by (used in) operating activitiesDepreciation and amortization
    
    
    
    
    
    
    5,229
    
    
    
    615
    
    
    
    
    
    
    
    5,844Amortization of deferred finance charges
    
    
    
    
    
    
    913
    
    
    
    
    
    
    
    
    
    
    
    913Deferred income taxes
    
    
    257
    
    
    
    (1,034
    )
    
    
    14
    
    
    
    
    
    
    
    (763
    )Gain on disposal of property, plant and
equipment
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Foreign exchange loss / (gain)
    
    
    
    
    
    
    175
    
    
    
    (39
    )
    
    
    
    
    
    
    136Equity in earnings (losses) of subsidiaries
    
    
    (10,052
    )
    
    
    (503
    )
    
    
    
    
    
    
    10,555
    
    
    
    Changes in assets and liabilitiesAccounts receivable, net
    
    
    
    
    
    
    11,530
    
    
    
    178
    
    
    
    
    
    
    
    11,708Inventories
    
    
    
    
    
    
    (16,636
    )
    
    
    (2,317
    )
    
    
    
    
    
    
    (18,953
    )Prepaid expenses and other current assets
    
    
    15
    
    
    
    230
    
    
    
    (118
    )
    
    
    
    
    
    
    127Accounts payable and other accrued
liabilities
    
    
    (4,411
    )
    
    
    6,684
    
    
    
    (2,632
    )
    
    
    
    
    
    
    (359
    )Income taxes payable and receivable
    
    
    
    
    
    
    (1,780
    )
    
    
    (407
    )
    
    
    
    
    
    
    (2,187
    )Net cash (used in) provided by operating
activities
    
    
    (10,417
    )
    
    
    14,898
    
    
    
    (4,243
    )
    
    
    
    
    
    
    238Investing activitiesAcquisitions of property, plant and equipment
    
    
    
    
    
    
    (1,134
    )
    
    
    (100
    )
    
    
    
    
    
    
    (1,234
    )Proceeds on disposal of property, plant and
equipment
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Acquisition of rental assets
    
    
    
    
    
    
    (4,653
    )
    
    
    (538
    )
    
    
    
    
    
    
    (5,191
    )Proceeds on disposal of rental assets
    
    
    
    
    
    
    2,297
    
    
    
    599
    
    
    
    
    
    
    
    2,896Net cash used in investing activities
    
    
    
    
    
    
    (3,486
    )
    
    
    (39
    )
    
    
    
    
    
    
    (3,525
    )Financing activitiesRepayment of debt
    
    
    (20,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,000
    )Payments of capital lease obligations and other
    
    
    
    
    
    
    (320
    )
    
    
    (40
    )
    
    
    
    
    
    
    (360
    )Increase in revolving credit facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in due to / (from) related companies
    
    
    30,289
    
    
    
    (35,268
    )
    
    
    4,979
    
    
    
    
    
    
    
    Net cash (used in) provided by financing
activities
    
    
    10,289
    
    
    
    (35,588
    )
    
    
    4,939
    
    
    
    
    
    
    
    (20,360
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    
    
    
    
    (175
    )
    
    
    39
    
    
    
    
    
    
    
    (136
    )Net (decrease) increase in cash and cash
equivalents
    
    
    (128
    )
    
    
    (24,351
    )
    
    
    696
    
    
    
    
    
    
    
    (23,783
    )Cash and cash equivalents  Beginning of
period
    
    
    557
    
    
    
    20,519
    
    
    
    2,980
    
    
    
    
    
    
    
    24,056Cash and cash equivalents  End of period
    
    $
    429
    
    
    $
    (3,832
    )
    
    $
    3,676
    
    
    $
    
    
    
    $
    273
 19




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Special Note Regarding Forward Looking Statements
 Certain statements included in Managements Discussion and Analysis of Financial Condition and
Results of Operations, other than purely historical information, including estimates, projections,
statements relating to our business plans, objectives and expected operating results, and the
assumptions upon which those statements are based, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements
generally are identified by the words believes, project, expects, anticipates, estimates,
intends, strategy, plan, may, will, would, will be, will continue, will likely
result, and similar expressions. Forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause actual results to differ
materially from the forward-looking statements, including those risks and uncertainties described
under the caption  Risk Factors herein and in our Annual Report on Form 10-K for the year ended
December 31, 2006. We undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
 Overview
   
    
    the number of engines in operation (the installed base);
    
    the age of the installed base; and
    
    the utilization rate of the installed base.
   Recent Events
  20




---



##### 



Trends Affecting Our Business
 Military MRO.
    21




---



##### 



Regional Jet Engine MRO.
   Turboprop MRO.
 Very Light Jet market.
 22




---



##### 



Financial statement presentation
  Revenues.
 Cost of revenues.
 Selling, general and administrative expense.
 Critical accounting policies
  Revenue recognition.
 23




---



##### 



Reserve for warranty costs.
 Reserve for doubtful accounts receivable.
 Goodwill and intangible assets.
 Impairment of long-lived assets. Accounting for the Impairment or Disposal of Long-Lived Assets.
 Inventory.
 24




---



##### 



Income taxes. Accounting
for Income Taxes.
  Results of Operations
 Three Months Ended March 31, 2007 compared with the Three Months ended March 31, 2006
  Three months
    
    Three monthsended March
    
    ended March31, 2007
    
    31, 2006(In thousands)Revenues
    
    $
    194,930
    
    
    $
    185,798Cost of revenues Cost of revenues
    
    
    168,661
    
    
    
    154,974Gross profit
    
    
    26,269
    
    
    
    30,824Selling, general and administrative
expense
    
    
    10,468
    
    
    
    13,553Amortization of intangible assets
    
    
    2,146
    
    
    
    2,146Income from operations
    
    
    13,655
    
    
    
    15,125Interest expense
    
    
    8,915
    
    
    
    9,473Income before income taxes
    
    
    4,740
    
    
    
    5,652Income tax expense
    
    
    1,299
    
    
    
    1,878Net income
    
    $
    3,441
    
    
    $
    3,774
 Revenues.
 25




---



##### 



Gross profit.
 Selling, general and administration expense.
 Amortization of intangible assets.
 Income from operations.
 Interest expense.
 Income tax expense
 26




---



##### 



Segment Results of Operations
 Three Months Ended March 31, 2007 compared to the Three Months ended March 31, 2006
  Three months
    
    
    Three monthsended March
    
    
    ended March31, 2007
    
    
    31, 2006(In thousands)Revenues:Aviation MRO
    
    $
    183,059
    
    
    $
    177,270Enterprise Services
    
    
    11,871
    
    
    
    8,528Total revenue
    
    
    194,930
    
    
    
    185,798Segment Income (loss) from Operations:Aviation MRO
    
    
    12,829
    
    
    
    19,143Enterprise Services
    
    
    1,964
    
    
    
    (483
    )Segment income from operations
    
    
    14,793
    
    
    
    18,660Corporate expenses
    
    
    1,138
    
    
    
    3,535Interest expense
    
    
    8,915
    
    
    
    9,473Income before income taxes
    
    
    4,740
    
    
    
    5,652Income tax expense
    
    
    1,299
    
    
    
    1,878Net income
    
    $
    3,441
    
    
    $
    3,774
 Aviation MRO
 Three Months Ended March 31, 2007 compared to the Three Months ended March 31, 2006
 Revenues.
 Segment income from operations.
 Enterprise Services
 Three Months Ended March 31, 2007 compared to the Three Months ended March 31, 2006
 Revenues.
 Segment income from operations. 27
        Liquidity and capital resources
 Liquidity requirements
    
    
    our senior credit facilities, consisting of an eight-year term loan facility, under
which we had outstanding indebtedness of $212.5 million, and a $50.0 million six-year
revolving credit facility, under which we had $4.5 million outstanding indebtedness; and
    
    $200.0 million in aggregate principal amount of our 8 1/4% senior subordinated notes due
2014.
   Senior credit facilities
  28




---



##### 



Senior credit agreement covenant compliance
     29
         Last 12monthsApril 1 
    
    
    endedJanuary 1 
    
    
    December 31,
    
    
    March 31,March 31, 2007
    
    
    2006
    
    
    2007(In millions)Net income
    
    $
    3.4
    
    
    $
    15.8
    
    
    $
    19.2Add:Depreciation and amortization
    
    
    6.5
    
    
    
    19.7
    
    
    
    26.2Interest expense, net
    
    
    8.9
    
    
    
    29.1
    
    
    
    38.0Provision (benefit) for income taxes
    
    
    1.3
    
    
    
    (1.3
    )
    
    
    0.0Non-recurring expenses (1)
    
    
    0.0
    
    
    
    7.4
    
    
    
    7.4Management fee
    
    
    0.4
    
    
    
    1.1
    
    
    
    1.5Adjusted EBITDA
    
    $
    20.5
    
    
    $
    71.8
    
    
    $
    92.3
 
 (1)
    
    We incurred $7.4 million in costs associated with a charge under a fixed price per engine
utilization contract, professional fees and other costs associated with the KAC contractual
review and a fixed asset write-off during the period April 1, 2006 to December 31, 2006. Senior subordinated notes
 1 4
 Cash flows
  Three months
    
    
    Three monthsended March
    
    
    ended March31, 2007
    
    
    31, 2006(In thousands)Net cash (used in) provided by operating activities
    
    $
    (12,083
    )
    
    $
    238Net cash used in investing activities
    
    
    (3,133
    )
    
    
    (3,525
    )Net cash provided by (used in) financing activities
    
    
    951
    
    
    
    (20,360
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (1
    )
    
    
    (136
    )Net decrease in cash and cash equivalents
    
    $
    (14,266
    )
    
    $
    (23,783
    )
 Net cash (used in) provided by operating activities
  30
        Net cash used in investing activities
   Net cash provided by (used in) financing activities
   31




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  Interest rate risks.
 Currency risks.
 32




---



##### 



ITEM 4. CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  33




---



##### 



PART II OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
 
 34




---



##### 



ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description2.1*†
    
    
    Agreement and Plan of Merger dated as of April 2, 2007 by and
among Dubai Aerospace Enterprise (DAE) Ltd, LMA Merger Sub, Inc., SAH Merger Sub Inc.,
Piedmont/Hawthorne Holdings Inc., Standard Aero Acquisition Holdings Inc., and TC Group, L.L.C.2.2*
    
    
    Purchase Agreement dated as of May 8, 2007 by and among TSS Aviation, Inc., TSS Holdings, Inc. and Standard Aero, Inc.3.1
    
    
    Certificate of Incorporation of Standard Aero Holdings, Inc. (incorporated by reference to
Exhibit 3.1 of Standard Aero Holdings, Inc.s Registration Statement No. 333-124394).3.2
    
    
    Bylaws of Standard Aero Holdings, Inc. (incorporated by reference to Exhibit 3.17 of
Standard Aero Holdings, Inc.s Registration Statement No. 333-124394).4.1
    
    
    Senior Subordinated Note Indenture with respect to the 8 1/ 4 %
Senior Subordinated Notes due 2014, between Standard Aero Holdings, Inc., Wells Fargo Bank
Minnesota, National Association, as trustee, and the Guarantors listed on the signature
pages thereto, dated as of August 20, 2004 (incorporated by reference to Exhibit 4.1 of
Standard Aero Holdings, Inc.s Registration Statement No. 333-124394).4.2
    
    
    Supplemental Indenture, dated as of August 24, 2004, among Dunlop Standard Aerospace
(Nederland) BV and Standard Aero BV, Standard Aero Holdings, Inc. and Wells Fargo Bank,
National Association, as trustee (incorporated by reference to Exhibit 4.2 of Standard
Aero Holdings, Inc.s Registration Statement No. 333-124394).4.3
    
    
    Supplemental Indenture, dated as of August 24, 2004, among Dunlop Standard Aerospace (US)
Inc., Dunlop Standard Aerospace (US) Legal Inc., Standard Aero, Inc., Dunlop Aerospace
Parts, Inc., Standard Aero (San Antonio) Inc., Standard Aero (Alliance) Inc., Standard
Aero Canada, Inc., 3091781 Nova Scotia Company, 3091782 Nova Scotia Company, 3091783 Nova
Scotia Company, Standard Aero Limited, Not FM Canada Inc., Standard Aero Holdings, Inc.
and Wells Fargo Bank, National Association, as trustee (incorporated by reference to
Exhibit 4.3 of Standard Aero Holdings, Inc.s Registration Statement No. 333-124394).4.4
    
    
    Supplemental Indenture, dated as of March 3, 2005, among Standard Aero (US), Inc. (f/k/a
Dunlop Standard Aerospace (U.S.) Inc.); Standard Aero (US) Legal, Inc. (f/k/a Dunlop
Standard Aerospace (US) Legal, Inc.); Standard Aero Inc.; Standard Aero Materials, Inc.
(f/k/a Dunlop Aerospace Parts Inc.); Standard Aero (San Antonio) Inc.; Standard Aero
(Alliance) Inc.; Standard Aero Canada, Inc.; 3091781 Nova Scotia Company; 3091782 Nova
Scotia Company; 3091783 Nova Scotia Company; Standard Aero Limited; Not FM Canada Inc.;
Standard Aero (Netherlands) B.V. (f/k/a Dunlop Standard Aerospace (Nederland) BV) and
Standard Aero BV, Standard Aero Holdings, Inc. and Wells Fargo Bank, National Association,
as trustee (incorporated by reference to Exhibit 4.4 of Standard Aero Holdings, Inc.s
Registration Statement No. 333-124394).4.5
    
    
    Supplemental Indenture, dated as of March 31, 2005, among Standard Aero (US), Inc. (f/k/a
Dunlop Standard Aerospace (U.S.) Inc.); Standard Aero (US) Legal, Inc. (f/k/a Dunlop
Standard Aerospace (US) Legal, Inc.); Standard Aero Inc.; Standard Aero Materials, Inc.
(f/k/a Dunlop Aerospace Parts Inc.); Standard Aero (San Antonio) Inc.; Standard Aero
(Alliance) Inc.; Standard Aero Canada, Inc.; 3091781 Nova Scotia Company; 3091782 Nova
Scotia Company; 3091783 Nova Scotia Company; Standard Aero Limited; Not FM Canada Inc. and
Standard Aero Redesign Services Inc., Standard Aero Holdings, Inc. and Wells Fargo Bank,
National Association, as trustee (incorporated by reference to Exhibit 4.5 of Standard
Aero Holdings, Inc.s Registration Statement No. 333-124394).10.24
    
    
    Amendment No. 92 to Subcontract No. LMKAC-98-0001 between Standard Aero and Lockheed,
dated as of July 11, 2006 (incorporated by reference for Exhibit 10.1 of Standard Aero
Holdings, Inc.s Form 10-Q for the quarterly period ended June 30, 2006, filed August 14,
2006).18.1
    
    

PricewaterhouseCoopers
letter to the Board of Directors, Standard Aero Holdings, Inc., dated
May 11, 2007.31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 15d-14(a) (17 CFR 240.15d-14(a)).31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 15d-14(a) (17 CFR 240.15d-14(a)).32.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 15d-14(b) (17 CFR 240.15d-14(b))
and 18 U.S.C. Section 1350.32.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 15d-14(b) (17 CFR 240.15d-14(b))
and 18 U.S.C. Section 1350.
    *
    
    Upon the request of the SEC, the Company will
furnish supplementally a copy of the schedules to this agreement
which have been omitted pursuant to Item 601(b)(2) of Regulation S-K.†
    
    Portions of this agreement have been omitted
and filed separately with the Secretary of the Securities and
Exchange Commission pursuant to the Companys request for
confidential treatment of such information under Rule 24b-2 of the
Securities Exchange Act of 1934. 35




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##### 



SIGNATURES
  STANDARD AERO HOLDINGS, INC.Dated: May 15, 2007
    /s/ DAVID SHAWName:
    David ShawTitle:
    Chief Executive Officer
(principal executive officer) Dated: May 15, 2007
    /s/ BRADLEY BERTOUILLEName:
    Bradley BertouilleTitle:
    Chief Financial Officer
(principal financial and
accounting officer) 36