##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 33-29035
 K&F Industries, Inc.
 
  Delaware
    
    34-1614845(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 50 Main Street, White Plains, New York
    
    10606(Address of principal executive offices)
    
    (Zip Code)
 (914) 448-2700
 þ o
 o þ
 o þ




---



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 Form 10-Q
 For the quarterly period ended September 30, 2005
 INDEX
 PagePart I. Condensed Consolidated Financial InformationItem 1.
    
    Condensed Consolidated Financial Statements (Unaudited)a)
    
    Condensed Consolidated Balance Sheets as   of September 30, 2005 and December 31, 2004
    
    
    3b)
    
    Condensed Consolidated Statements of Operations for the nine months ended September 30, 2005 and 2004 (Predecessor)
    
    
    4c)
    
    Condensed Consolidated Statements of Operations for the three months ended September 30, 2005 and 2004 (Predecessor)
    
    
    5d)
    
    Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (Predecessor)
    
    
    6e)
    
    Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    29Part II. Other InformationItem 6.
    
    Exhibits
    
    
    30Signatures
    
    
    31EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 K&F INDUSTRIES, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
 (Unaudited)
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETS:Current Assets:Cash and cash equivalents
    
    $
    21,590,000
    
    
    $
    9,636,000Accounts receivable, net
    
    
    50,969,000
    
    
    
    42,333,000Inventory
    
    
    59,367,000
    
    
    
    61,247,000Other current assets
    
    
    5,821,000
    
    
    
    4,336,000Total current assets
    
    
    137,747,000
    
    
    
    117,552,000Property, plant and equipment
    
    
    104,444,000
    
    
    
    101,083,000Less, accumulated depreciation and amortization
    
    
    8,222,000
    
    
    
    1,491,00096,222,000
    
    
    
    99,592,000Other long-term assets
    
    
    93,000
    
    
    
    351,000Debt issuance costs, net of amortization
    
    
    23,118,000
    
    
    
    28,768,000Program participation costs, net of amortization
    
    
    69,610,000
    
    
    
    51,778,000Intangible assets, net of amortization
    
    
    186,153,000
    
    
    
    195,196,000Goodwill
    
    
    858,807,000
    
    
    
    856,668,000$
    1,371,750,000
    
    
    $
    1,349,905,000LIABILITIES AND STOCKHOLDERS EQUITY:Current Liabilities:Accounts payable, trade
    
    $
    15,806,000
    
    
    $
    15,030,000Interest payable
    
    
    11,035,000
    
    
    
    3,505,000Note payable
    
    
    
    
    
    
    14,682,000Income taxes payable
    
    
    14,692,000
    
    
    
    3,714,000Other current liabilities
    
    
    46,090,000
    
    
    
    46,420,000Total current liabilities
    
    
    87,623,000
    
    
    
    83,351,000Pension liabilities
    
    
    51,048,000
    
    
    
    48,248,000Deferred income taxes
    
    
    29,247,000
    
    
    
    19,541,000Postretirement benefit obligation other
than pensions
    
    
    93,936,000
    
    
    
    92,269,000Other long-term liabilities
    
    
    5,431,000
    
    
    
    5,180,000Senior term loan
    
    
    456,000,000
    
    
    
    475,000,0007 3/4% senior subordinated notes due 2014
    
    
    315,000,000
    
    
    
    315,000,0009 5/8% senior subordinated notes due 2010
    
    
    577,000
    
    
    
    577,000Stockholders Equity:Preferred stock, $.01 par value  authorized, 0 shares at
September 30, 2005 and 9,250 shares at December 31,
2004; issued and outstanding, 0 shares at September
30, 2005 and 9,250 shares at December 31, 2004
    
    
    
    
    
    
    Common stock, $.01 par value  authorized, 1,000
shares; issued and outstanding,
1,000 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    309,810,000
    
    
    
    309,790,000Retained earnings
    
    
    23,195,000
    
    
    
    880,000Accumulated other comprehensive (loss) income
    
    
    (117,000
    )
    
    
    69,000Total stockholders equity
    
    
    332,888,000
    
    
    
    310,739,000$
    1,371,750,000
    
    
    $
    1,349,905,000
  3




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
 (Unaudited)
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Sales
    
    $
    278,982,000
    
    
    $
    257,497,000Cost of sales (including inventory
purchase accounting charges of
$12,084,000 for the nine months ended September
30, 2005)
    
    
    160,114,000
    
    
    
    147,863,000Gross profit
    
    
    118,868,000
    
    
    
    109,634,000Independent research and development
    
    
    11,490,000
    
    
    
    10,226,000Selling, general and administrative expenses
    
    
    26,937,000
    
    
    
    23,364,000Amortization of intangible assets
    
    
    9,043,000
    
    
    
    3,552,000Operating income
    
    
    71,398,000
    
    
    
    72,492,000Interest and investment income
    
    
    256,000
    
    
    
    393,000Interest expense
    
    
    (43,738,000
    )
    
    
    (29,588,000
    )Income before income taxes
    
    
    27,916,000
    
    
    
    43,297,000Income tax provision
    
    
    (5,601,000
    )
    
    
    (10,647,000
    )Net income
    
    $
    22,315,000
    
    
    $
    32,650,000
  4




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
 (Unaudited)
 Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Sales
    
    $
    99,990,000
    
    
    $
    90,757,000Cost of sales
    
    
    51,450,000
    
    
    
    50,101,000Gross profit
    
    
    48,540,000
    
    
    
    40,656,000Independent research and development
    
    
    3,904,000
    
    
    
    3,441,000Selling, general and administrative expenses
    
    
    12,996,000
    
    
    
    8,866,000Amortization of intangible assets
    
    
    3,015,000
    
    
    
    1,212,000Operating income
    
    
    28,625,000
    
    
    
    27,137,000Interest and investment income
    
    
    105,000
    
    
    
    173,000Interest expense
    
    
    (14,097,000
    )
    
    
    (9,864,000
    )Income before income taxes
    
    
    14,633,000
    
    
    
    17,446,000Income tax provision
    
    
    (1,111,000
    )
    
    
    (2,371,000
    )Net income
    
    $
    13,522,000
    
    
    $
    15,075,000
  5




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Cash flows from operating activities:Net income
    
    $
    22,315,000
    
    
    $
    32,650,000Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    7,545,000
    
    
    
    5,322,000Amortization of program participation costs
    
    
    1,886,000
    
    
    
    Amortization of intangible assets
    
    
    9,043,000
    
    
    
    3,552,000Non-cash interest expense  amortization of debt issuance cost
    
    
    5,650,000
    
    
    
    1,377,000Non-cash interest expense  change in fair market value of
interest rate cap
    
    
    272,000
    
    
    
    Non-recurring inventory purchase accounting charge
    
    
    12,084,000
    
    
    
    Deferred income taxes
    
    
    9,706,000
    
    
    
    1,323,000Changes in assets and liabilities:Accounts receivable, net
    
    
    (8,720,000
    )
    
    
    (544,000
    )Inventory
    
    
    (10,306,000
    )
    
    
    (1,348,000
    )Other current assets
    
    
    (1,499,000
    )
    
    
    1,509,000Program participation costs
    
    
    (19,718,000
    )
    
    
    (6,282,000
    )Accounts payable, interest payable and other current
liabilities
    
    
    18,954,000
    
    
    
    4,462,000Postretirement benefit obligation other
than pensions
    
    
    1,667,000
    
    
    
    (597,000
    )Long-term liabilities
    
    
    3,051,000
    
    
    
    6,144,000Net cash provided by operating
activities
    
    
    51,930,000
    
    
    
    47,568,000Cash flows from investing activities:Payment of deferred purchase price
    
    
    (14,682,000
    )
    
    
    Capital expenditures
    
    
    (6,314,000
    )
    
    
    (2,071,000
    )Net cash used in investing activities
    
    
    (20,996,000
    )
    
    
    (2,071,000
    )Cash flows from financing activities:Equity contributions
    
    
    20,000
    
    
    
    Payments of long-term debt
    
    
    (19,000,000
    )
    
    
    Net cash used in financing activities
    
    
    (18,980,000
    )
    
    
    Net increase in cash and cash equivalents
    
    
    11,954,000
    
    
    
    45,497,000Cash and cash equivalents, beginning of
period
    
    
    9,636,000
    
    
    
    24,464,000Cash and cash equivalents, end of period
    
    $
    21,590,000
    
    
    $
    69,961,000Supplemental cash flow information:Interest paid during period
    
    $
    30,286,000
    
    
    $
    18,842,000Income taxes paid during the period
    
    $
    167,000
    
    
    $
    6,419,000
  6




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
  Description of Business
   The Acquisition
     7




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Assets Acquired:Current assets
    
    $
    183,467,000Property, plant and equipment
    
    
    96,866,000Debt issuance costs
    
    
    29,280,000Program participation costs
    
    
    49,238,000Other intangible assets
    
    
    196,636,000Goodwill
    
    
    858,807,000Total assets acquired
    
    
    1,414,294,000Liabilities Assumed:Current liabilities
    
    
    142,242,000Pension liabilities
    
    
    47,629,000Postretirement benefit obligation
    
    
    91,858,000Deferred income taxes
    
    
    20,169,000Other long-term liabilities
    
    
    5,684,000Long-term debt
    
    
    796,922,000Total liabilities assumed
    
    
    1,104,504,000Net assets acquired
    
    $
    309,790,000
   Recent Developments
    8




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
       9




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
       10




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
   September 30,
    
    
    December 31,2005
    
    
    2004Accounts receivable,
principally
from commercial customers
    
    $
    46,046,000
    
    
    $
    35,885,000Accounts receivable, on U.S.
Government and other long-term
contracts
    
    
    6,300,000
    
    
    
    7,684,000Allowances
    
    
    (1,377,000
    )
    
    
    (1,236,000
    )$
    50,969,000
    
    
    $
    42,333,000
  September 30,
    
    
    December 31,2005
    
    
    2004Raw materials and work-in-process
    
    $
    32,068,000
    
    
    $
    35,356,000Finished goods
    
    
    11,900,000
    
    
    
    16,017,000Inventoried costs related to U.S.
Government and other long-term
contracts
    
    
    15,399,000
    
    
    
    9,874,000$
    59,367,000
    
    
    $
    61,247,000
  11




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
  September 30,
    
    
    December 31,2005
    
    
    2004Accrued payroll costs
    
    $
    13,023,000
    
    
    $
    15,919,000Accrued property and other taxes
    
    
    2,079,000
    
    
    
    2,197,000Accrued costs on long-term contracts
    
    
    5,155,000
    
    
    
    2,639,000Accrued warranty costs
    
    
    13,180,000
    
    
    
    12,261,000Customer credits
    
    
    5,682,000
    
    
    
    5,402,000Postretirement benefit obligation other
than pensions
    
    
    4,000,000
    
    
    
    4,000,000Other
    
    
    2,971,000
    
    
    
    4,002,000$
    46,090,000
    
    
    $
    46,420,000
 8.
    
    Stock OptionsThe following information has been adjusted for a 133 to one stock split which occurred at
K&F Holdings on August 8, 2005.In 2005, K&F Holdings established and amended a stock option plan, covering an aggregate of
2,500,000 authorized but unissued shares of common stock, for the benefit of, and to
incentivize, officers, directors, employees and certain other persons of K&F Holdings and
its subsidiaries. In 2005, K&F Holdings issued options to purchase its stock to certain of
K&Fs officers, directors and employees to purchase an aggregate of 1,342,005 shares of
common stock, at an exercise price of $5.22 per share (adjusted pursuant to anti-dilution
provisions contained in the stock option agreements which were triggered by a special cash
and stock dividend to holders of K&F Holdings stock prior to an initial public offering of
K&F Holdings stock). All options were issued at the estimated fair value at the date of
grant. The options vest at the rate of 20% per year.The Company currently applies the intrinsic value method under APB No. 25, Accounting for
Stock Issued to Employees, and related interpretations to account for K&F Holdings stock
option plan (see Note 4).The following tables detail the effect on net income had compensation expense for the stock
option plan been recorded based on the fair value method under SFAS No. 123, Accounting for
Stock-based Compensation, as amended:
 Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Reported net income
    
    $
    13,522,000
    
    
    $
    15,075,000Deduct: Total stock-based employee and
director compensation expense
determined under fair value method for
all awards, net of related tax effects
    
    
    (146,000
    )
    
    
    Pro forma net income
    
    $
    13,376,000
    
    
    $
    15,075,000
 12




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Reported net income
    
    $
    22,315,000
    
    
    $
    32,650,000Deduct: Total stock-based employee and
director compensation expense
determined under fair value method
for all awards, net of related tax
effects
    
    
    (413,000
    )
    
    
    Pro forma net income
    
    $
    21,902,000
    
    
    $
    32,650,000
 There were no stock options granted during the three and nine months ended September 30, 2004
(Predecessor). The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future results.The weighted average fair value of K&F Holdings stock options granted during the nine months
ended September 30, 2005 was $2.25 per stock option, estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average assumptions: expected
volatility of 33% (represents an average of the three-year trailing volatility of publicly
traded companies in our peer group); risk-free interest rate of 3.97% (represents the rate
available on U.S. government bonds at the grant date); and expected lives of option grants of
seven years.9.
    
    Income TaxesThe Companys effective tax rate of 7.6% and 20.1% for the three and nine months ended
September 30, 2005, respectively, differs from the statutory rate of 35% due to tax benefits
derived from export sales and the reversal of prior years tax reserves no longer needed. The
Companys effective tax rate of 13.6% and 24.6% for the three and nine months ended September
30, 2004 (Predecessor), respectively, differs from the statutory rate of 35% due to tax
benefits derived from export sales and the reversal of prior years tax reserves no longer
needed.10.
    
    ContingenciesThere are various lawsuits and claims pending against the Company which are incidental to its
business. Although the ultimate resolution of such suits cannot be predicted with certainty,
in the opinion of the Companys management, the ultimate settlement, if any, will not have a
material adverse effect on the Companys results of operations or financial position.
 13




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 11.
    
    Comprehensive Income
 Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Net income
    
    $
    13,522,000
    
    
    $
    15,075,000Other comprehensive (loss) income:Cumulative translation adjustments
    
    
    (36,000
    )
    
    
    (9,000
    )Comprehensive income
    
    $
    13,486,000
    
    
    $
    15,066,000
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Net income
    
    $
    22,315,000
    
    
    $
    32,650,000Other comprehensive (loss) income:Cumulative translation adjustments
    
    
    (186,000
    )
    
    
    53,000Comprehensive income
    
    $
    22,129,000
    
    
    $
    32,703,000
 12.
    
    SegmentsThe following tables represent financial information about the Companys segments:
 Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Sales:Aircraft Braking Systems
    
    $
    84,022,000
    
    
    $
    75,166,000Engineered Fabrics
    
    
    15,968,000
    
    
    
    15,591,000$
    99,990,000
    
    
    $
    90,757,000Operating Profit:Aircraft Braking Systems
    
    $
    27,091,000
    
    
    $
    24,738,000Engineered Fabrics
    
    
    1,534,000
    
    
    
    2,399,000Operating income
    
    
    28,625,000
    
    
    
    27,137,000Interest expense, net of interest
income
    
    
    (13,992,000
    )
    
    
    (9,691,000
    )Income before income taxes
    
    $
    14,633,000
    
    
    $
    17,446,000
 14




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Sales:Aircraft Braking Systems
    
    $
    231,683,000
    
    
    $
    213,205,000Engineered Fabrics
    
    
    47,299,000
    
    
    
    44,292,000$
    278,982,000
    
    
    $
    257,497,000Operating Profit:Aircraft Braking Systems
    
    $
    67,821,000
    
    
    $
    65,360,000Engineered Fabrics
    
    
    3,577,000
    
    
    
    7,132,000Operating income
    
    
    71,398,000
    
    
    
    72,492,000Interest expense, net of interest
income
    
    
    (43,482,000
    )
    
    
    (29,195,000
    )Income before income taxes
    
    $
    27,916,000
    
    
    $
    43,297,000
 September 30,
    
    
    December 31,2005
    
    
    2004Total Assets:Aircraft Braking Systems
    
    $
    1,208,546,000
    
    
    $
    1,183,123,000Engineered Fabrics
    
    
    134,153,000
    
    
    
    133,750,000Debt issuance costs not allocated
to segments
    
    
    23,118,000
    
    
    
    28,768,000Corporate assets
    
    
    5,933,000
    
    
    
    4,264,000$
    1,371,750,000
    
    
    $
    1,349,905,000
 13.
    
    Product WarrantiesEstimated costs of product warranties are accrued when individual claims arise with respect
to a product. When the Company becomes aware of a defect in a particular product, the
estimated costs of all potential warranty claims arising from similar defects of all similar
products are fully accrued. An analysis of changes in the liability for product warranty for
the nine months ended September 30, 2005 is as follows:
 Balance at December 31, 2004
    
    $
    12,858,000Current provisions
    
    
    5,535,000Expenditures
    
    
    (4,616,000
    )Balance at
September 30, 2005
    
    
    $13,777,000
  September 30,
    
    
    December 31,2005
    
    
    2004Current liabilities
    
    $
    13,180,000
    
    
    $
    12,261,000Long-term liabilities
    
    
    597,000
    
    
    
    597,000Total
    
    $
    13,777,000
    
    
    $
    12,858,000
 15




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 14.
    
    Employee Benefit PlansThe following represents the net periodic benefit cost for the defined benefit and
postretirement benefit plans:
 Pension BenefitsThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Predecessor)
    
    
    
    
    
    
    (Predecessor)Service cost
    
    $
    836,000
    
    
    $
    1,080,000
    
    
    $
    2,897,000
    
    
    $
    3,240,000Interest cost
    
    
    2,192,000
    
    
    
    2,102,000
    
    
    
    6,577,000
    
    
    
    6,306,000Expected return on
plan assets
    
    
    (2,228,000
    )
    
    
    (2,267,000
    )
    
    
    (6,674,000
    )
    
    
    (6,801,000
    )Amortization of prior
service cost
    
    
    
    
    
    
    98,000
    
    
    
    
    
    
    
    294,000Recognized actuarial loss
    
    
    
    
    
    
    990,000
    
    
    
    
    
    
    
    2,970,000Net periodic benefit cost
    
    $
    800,000
    
    
    $
    2,003,000
    
    
    $
    2,800,000
    
    
    $
    6,009,000
 Postretirement BenefitsThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Predecessor)
    
    
    
    
    
    
    (Predecessor)Service cost
    
    $
    478,000
    
    
    $
    473,000
    
    
    $
    1,434,000
    
    
    $
    1,419,000Interest cost
    
    
    1,396,000
    
    
    
    1,574,000
    
    
    
    4,188,000
    
    
    
    4,722,000Expected return on
plan assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior
service cost
    
    
    
    
    
    
    (1,305,000
    )
    
    
    
    
    
    
    (3,915,000
    )Recognized actuarial loss
    
    
    
    
    
    
    586,000
    
    
    
    
    
    
    
    1,758,000Net periodic benefit cost
    
    $
    1,874,000
    
    
    $
    1,328,000
    
    
    $
    5,622,000
    
    
    $
    3,984,000
  15.
    
    Subsequent EventOn October 17, 2005, the Company amended its existing credit facility to provide for more
favorable borrowing costs. The amendment reduces the interest rate across the entire
pricing grid of the Companys term loans by 25 basis points resulting in an annual reduction
in interest expense of approximately $1.0 million, based on the Companys $456.0 million of
term loans currently outstanding.
 16




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
 General
  Amendment of Management Services Agreement
  The Acquisition
     17




---



##### Table of Contents



Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Net income
    
    $
    13,522,000
    
    
    $
    15,075,000Adjustments:Depreciation and amortization expense
    
    
    6,105,000
    
    
    
    2,992,000Interest expense, net of interest
income
    
    
    13,992,000
    
    
    
    9,691,000Income tax provision
    
    
    1,111,000
    
    
    
    2,371,000EBITDA
    
    $
    34,730,000
    
    
    $
    30,129,000
 18




---



##### Table of Contents



Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Net income
    
    $
    22,315,000
    
    
    $
    32,650,000Adjustments:Depreciation and amortization expense
    
    
    18,474,000
    
    
    
    8,874,000Interest expense, net of interest
income
    
    
    43,482,000
    
    
    
    29,195,000Income tax provision
    
    
    5,601,000
    
    
    
    10,647,000EBITDA
    
    $
    89,872,000
    
    
    $
    81,366,000
  Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Non-recurring salary and benefit
expense
    
    $
    
    
    
    $
    3,243,000Non-recurring non-cash income
    
    
    
    
    
    
    (1,758,000
    )Program Participation Costs
previously expensed
    
    
    
    
    
    
    6,507,000$
    
    
    
    $
    7,992,000
 19




---



##### Table of Contents



Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Inventory purchase accounting
charge
    
    $
    12,084,000
    
    
    $
    Non-recurring salary and benefit
expense
    
    
    
    
    
    
    6,671,000Non-recurring non-cash income
    
    
    
    
    
    
    (2,350,000
    )Program Participation Costs
previously expensed
    
    
    
    
    
    
    17,324,000$
    12,084,000
    
    
    $
    21,645,000
 Critical Accounting Policies and Estimates
  Revenue Recognition
 Inventory.
  20




---



##### Table of Contents



Program Participation Costs.
   Evaluation of Long-Lived Assets.
 Goodwill and Other Intangible Assets.
 21




---



##### Table of Contents



Warranty.
 Pension and Other Postretirement Benefits.
   22




---



##### Table of Contents



Comparison of Results of Operations for the Nine Months Ended September 30, 2005 and September
30, 2004
     23




---



##### Table of Contents



Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Gross Program Participation Costs
    
    $
    29,217,000
    
    
    $
    25,243,000Amount capitalized during period
    
    
    (18,718,000
    )
    
    
    Amortization of Program Participation Costs
    
    
    1,886,000
    
    
    
    Program Participation Costs expensed in period
    
    $
    12,385,000
    
    
    $
    25,243,000
      24




---



##### Table of Contents



Comparison of Results of Operations for the Three Months Ended September 30, 2005 and
September 30, 2004
     Three Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004(Predecessor)Gross Program Participation Costs
    
    $
    10,286,000
    
    
    $
    9,048,000Amount capitalized during period
    
    
    (6,156,000
    )
    
    
    Amortization of Program Participation Costs
    
    
    696,000
    
    
    
    Program Participation Costs expensed in period
    
    $
    4,826,000
    
    
    $
    9,048,000
  25




---



##### Table of Contents



Liquidity and Capital Resources
    26




---



##### Table of Contents



Cash Flows
    Accounting Pronouncements
  
 27




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
    
    a 3 month LIBOR interest rate cap at 4.5% from December 2004 to
December 2005 on $240 million of our term loans;
    
    a 3 month LIBOR interest rate cap at 6% from December 2005 to December
2007 for an increasing notional amount starting at $144.6 million,
increasing to $161.2 million;
    
    a swap arrangement for a portion of our term loans from a variable 3
month LIBOR interest rate to a fixed rate of 4.0375%, beginning
January 24, 2006. The notional amount of the swaps is initially $95.4
million and declines to $78.8 million on January 24, 2008 at the
termination of the swap agreement; and
    
    a swap arrangement for a portion of our term loans from a variable 3
month LIBOR interest rate to a fixed rate of 4.506%, beginning January
24, 2006. The notional amount of the swaps is initially $47.7 million
and declines to $39.4 million on January 24, 2008 at the termination
of the swap agreement.
 28




---



##### Table of Contents



Item 4. Controls and Procedures
   29




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 6. Exhibits
 Exhibits
 31.1

    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a)of the Securities Exchange Act, as amended.31.2

    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a)of the Securities Exchange Act, as amended.32.1

    
    Certification of Chief Executive Office pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
 30




---



##### Table of Contents



SIGNATURES
  K&F INDUSTRIES, INC.Registrant /s/


DIRKSON R. CHARLESDirkson R. CharlesExecutive Vice President and
Chief Financial Officer
and
Registrants Authorized
Officer  31