##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549
 FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 26, 2004 Or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from               to Commission File Number 333-112528 Vought Aircraft Industries, Inc. (Exact name of registrant as specified in its charter)
 Delaware
    
    75-2884072(State of Incorporation)
    
    (I.R.S. Employer Identification Number)9314 West Jefferson Boulevard M/S 2-01Dallas, TX
    
    75211(Address of Principal executive offices)
    
    (Zip Code)
 (972)-946-2011
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes o No x Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes o No x The number of shares outstanding of the registrants common stock, $0.01 par
value per share, at November 8, 2004 was 25,015,552.




---



TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of September 26, 2004
(unaudited) and December 31,
2003
    
    
    1Consolidated Statements of Operations for the three months and
nine months ended
September 26, 2004 and September 28, 2003
(unaudited)Consolidated Statements of Cash Flows for the nine months
ended September 26, 2004 and September 28, 2003
(unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    29PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 5.
Other Information
    
    
    30Item 6. Exhibits and Reports on Form 8-K
    
    
    31Signature
    
    
    32Certification of CEO Pursuant to Section 302Certification of Principal Financial and Accounting Officer Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of Principal Financial and Accounting Officer Pursuant to Section 906




---



##### Table of Contents



PART 1. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS
 Vought Aircraft Industries, Inc.
 
 Consolidated Balance Sheets
 ($ in millions) (unaudited)
 September 26,
    
    December 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    136.0
    
    
    $
    106.4Accounts receivable
    
    
    140.1
    
    
    
    114.5Inventories
    
    
    217.7
    
    
    
    197.3Other current assets
    
    
    6.1
    
    
    
    6.4Total current assets
    
    
    499.9
    
    
    
    424.6Property, plant and equipment, net
    
    
    391.5
    
    
    
    414.1Goodwill, net
    
    
    527.7
    
    
    
    527.7Identifiable intangible assets, net
    
    
    102.3
    
    
    
    114.9Debt origination costs, net and other assets
    
    
    16.1
    
    
    
    18.4Total assets
    
    $
    1,537.5
    
    
    $
    1,499.7Liabilities and stockholders equity (deficit)Current liabilities:Accounts payable, trade
    
    $
    81.6
    
    
    $
    54.3Accrued and other liabilities
    
    
    79.4
    
    
    
    77.7Accrued payroll and employee benefits
    
    
    46.9
    
    
    
    46.4Accrued post-employment benefits-current
    
    
    54.1
    
    
    
    54.1Accrued pension-current
    
    
    17.7
    
    
    
    30.5Capital lease obligation
    
    
    1.0
    
    
    
    1.2Accrued contract liabilities
    
    
    212.4
    
    
    
    192.6Total current liabilities
    
    
    493.1
    
    
    
    456.8Long-term liabilities:Accrued post employment benefits
    
    
    490.9
    
    
    
    477.7Accrued pension
    
    
    310.2
    
    
    
    282.0Long-term bank debt
    
    
    295.9
    
    
    
    295.9Long-term bond debt
    
    
    270.0
    
    
    
    270.0Long-term capital lease obligation
    
    
    2.2
    
    
    
    3.3Other non-current liabilities
    
    
    76.2
    
    
    
    36.9Total liabilities
    
    $
    1,938.5
    
    
    $
    1,822.6Stockholders equity (deficit):Common stock, par value $.01; 50,000,000
shares authorized, 25,015,552 and
25,012,052 issued and outstanding in 2004
and 2003, respectively
    
    
    0.3
    
    
    
    0.3Additional paid-in
capital
    
    
    418.0
    
    
    
    418.0Shares held in rabbi trust and CMG
escrow
    
    
    (1.9
    )
    
    
    (3.9
    )Stockholders
loans
    
    
    (2.3
    )
    
    
    (2.3
    )Accumulated
deficit
    
    
    (299.5
    )
    
    
    (219.4
    )Accumulated other comprehensive
loss
    
    
    (515.6
    )
    
    
    (515.6
    )Total stockholders equity
(deficit)
    
    $
    (401.0
    )
    
    $
    (322.9
    )Total liabilities and stockholders equity
(deficit)
    
    $
    1,537.5
    
    
    $
    1,499.7
 See accompanying notes 1




---



##### Table of Contents



Vought Aircraft Industries, Inc. 
 Consolidated Statements of Operations
 ($ in millions) (Unaudited)
 For the Three Months
    
    For the Nine MonthsEnded
    
    EndedSeptember
    
    September
    
    September
    
    September26, 2004
    
    28, 2003
    
    26, 2004
    
    28, 2003Net sales
    
    $
    295.3
    
    
    $
    314.1
    
    
    $
    884.4
    
    
    $
    851.8Costs and expensesCost of sales
    
    
    262.5
    
    
    
    255.3
    
    
    
    745.7
    
    
    
    678.3Selling, general and administrative expenses
    
    
    64.4
    
    
    

    58.7
    
    
    
    190.1
    
    
    
    168.1Total costs and expenses
    
    
    326.9
    
    
    
    314.0
    
    
    
    935.8
    
    
    
    846.4Operating income (loss)
    
    
    (31.6
    )
    
    
    0.1
    
    
    
    (51.4
    )
    
    
    5.4Other income (expense)Non-cash income - interest rate swaps
    
    
    
    
    
    
    2.8
    
    
    
    
    
    
    
    7.6Interest income
    
    
    0.7
    
    
    
    0.5
    
    
    
    1.8
    
    
    
    1.6Interest expense
    
    
    (10.7
    )
    
    
    (13.9
    )
    
    
    (30.5
    )
    
    
    (29.6
    )Income (loss) before income taxes
    
    
    (41.6
    )
    
    
    (10.5
    )
    
    
    (80.1
    )
    
    
    (15.0
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (41.6
    )
    
    $
    (10.5
    )
    
    $
    (80.1
    )
    
    $
    (15.0
    )
 See accompanying notes 2




---



##### Table of Contents



Vought Aircraft Industries, Inc. 
 Consolidated Statements of Cash Flows
 ($ in millions)
 (Unaudited)
 For the Nine Months EndedSeptember 26,
    
    September 28,2004
    
    2003Operating activitiesNet loss
    
    $
    (80.1
    )
    
    $
    (15.0
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation and amortization
    
    
    67.0
    
    
    
    57.8Stock compensation expense
    
    
    
    
    
    
    11.1Loss from asset sales
    
    
    1.6
    
    
    
    1.6Non-cash income interest rate swaps
    
    
    
    
    
    
    (7.6
    )Changes in current assets and liabilities:Accounts receivable
    
    
    (25.6
    )
    
    
    (9.0
    )Inventories, net of advances and progress billings
    
    
    (20.4
    )
    
    
    17.8Other current assets
    
    
    0.3
    
    
    
    1.1Accounts payable, trade
    
    
    27.3
    
    
    
    4.3Accrued interest
    
    
    (5.1
    )
    
    
    Accrued payroll and employee benefits
    
    
    0.5
    
    
    
    (17.0
    )Accrued and other liabilities
    
    
    (4.0
    )
    
    
    8.6Accrued contract liabilities
    
    
    19.8
    
    
    
    110.1Other assets and liabilitieslong-term
    
    
    79.1
    
    
    
    1.8Net cash provided by operating activities
    
    
    60.4
    
    
    
    165.6Investing activitiesCash paid for Aerostructures net of cash acquired
    
    
    
    
    
    
    (183.3
    )Capital expenditures
    
    
    (29.5
    )
    
    
    (20.7
    )Net cash used in investing activities
    
    
    (29.5
    )
    
    
    (204.0
    )Financing activitiesPayments on long-term bank debt
    
    
    
    
    
    
    (99.7
    )Payment of debt origination cost
    
    
    
    
    
    
    (13.5
    )Payments on capital leases
    
    
    (1.3
    )
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    270.0Net cash (used in) provided by financing activities
    
    
    (1.3
    )
    
    
    156.8Net increase in cash and cash equivalents
    
    
    29.6
    
    
    
    118.4Cash and cash equivalents at beginning of period
    
    
    106.4
    
    
    
    68.6Cash and cash equivalents at end of period
    
    $
    136.0
    
    
    $
    187.0
 See accompanying notes 3




---



##### Table of Contents



VOUGHT AIRCRAFT INDUSTRIES, INC.
Notes to Consolidated Financial Statements (Unaudited) September 26, 2004 Note 1  Organization and Basis of Presentation Vought Aircraft Industries, Inc. and its wholly owned subsidiaries are
herein referred to as the Company or Vought. The Company is one of the
worlds largest independent providers of commercial and military
aerostructures. The majority of the Companys products are sold to The Boeing
Company (Boeing), Airbus S.A.S. (Airbus), Gulfstream Aerospace Corp., a
General Dynamics Company (Gulfstream), and for military contracts, ultimately
to the U.S. Government. The Corporate office is in Dallas, Texas and production
work is performed at sites in Hawthorne and Brea, California, Everett,
Washington, Dallas and Grand Prairie, Texas, Milledgeville, Georgia, Nashville,
Tennessee, and Stuart, Florida. We implemented a corporate reorganization of our Aerostructures subsidiary
effective on January 1, 2004. Pursuant to the reorganization, Aerostructures
incorporated a new subsidiary, named Contour Aerospace Corporation, a Delaware
corporation (''Contour). Then, Aerostructures contributed (i) its Everett,
Washington facility, that builds fuselage skins, spars, stringers, pylons and
machined components, and (ii) its Brea, California facility, that builds wing
skins, spars, stringers, chords and ribs, to Contour. Contemporaneous with the
contribution of these assets and operations to Contour, Aerostructures merged
with and into Vought Aircraft Industries, Inc., so that the remaining operating
assets of Aerostructures are integrated with the ongoing operations of Vought.
As a result of the reorganization, beginning in 2004, Aerostructures does not
exist as a separate corporate entity and Contour is a direct subsidiary of
Vought. Under the 8% Senior Notes due 2011, Contour is a guarantor on a fully
and unconditionally and jointly and severally on a senior unsecured basis. The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles. In the opinion of management, the
accompanying interim unaudited condensed consolidated financial statements
contain all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the results of operations for the interim
periods. The results of operations for the three and nine months ended
September 26, 2004 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. These interim unaudited
condensed consolidated financial statements should be read in conjunction with
the financial statements and the notes thereto included in Voughts
registration statement on Form S-4, as amended, filed with the Securities and
Exchange Commission (the SEC) on June 15, 2004. Note 2  Stock-Based Compensation The Company grants stock options for a fixed number of shares to employees
and directors with an exercise price equal to the fair value of the shares at
the date of grant. The Company accounts for stock option grants using the
intrinsic value method. The following schedule reflects the impact on net loss
if the Company had applied the fair value recognition provisions of SFAS No.
123, Accounting for Stock Based Compensation, to stock based employee
compensation: 4




---



##### Table of Contents



Three months ended
    
    Nine months endedSeptember 26,
    
    September 28,
    
    September 26,
    
    September 28,2004
    
    2003
    
    2004
    
    2003($ in millions)Reported net income (loss)
    
    ($
    41.6
    )
    
    ($
    10.5
    )
    
    ($
    80.1
    )
    
    $
    (15.0
    )Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.1(41.6
    )
    
    ($
    10.5
    )
    
    
    (80.1
    )
    
    ($
    3.9
    )Compensation expense per SFAS No. 123
    
    
    (0.2
    )
    
    
    (0.2
    )
    
    
    (0.5
    )
    
    
    (11.6
    )Pro forma net income (loss) for SFAS No. 123
    
    ($
    41.8
    )
    
    ($
    10.7
    )
    
    ($
    80.6
    )
    
    ($
    15.5
    )
 The effects of applying SFAS No. 123 in the pro forma disclosure may not
be indicative of future amounts as options vest over several years and
additional option grants are expected. During the first quarter of 2003, the Company recorded non-cash stock
compensation charges of $11.1 million, included in general and administrative
expense, to reflect the impact of an estimated increase in the fair value of
the Companys common stock, related to non-recourse notes previously issued to
officers for stock purchases, increased deferred compensation liability for the
Companys rabbi trust and the modification of stock options in connection with
executive retirements. Note 3  New Accounting Pronouncements On December 8, 2003, the President signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The
Act introduces a prescription drug benefit under Medicare (Medicare Part D)
as well as a federal subsidy to employers who sponsor retiree health care
benefit plans that provide a prescription drug plan that is at least
actuarially equivalent to Medicare Part D. In January 2004, the FASB issued a
Staff Position (FSP) that allows companies to defer recognition of the impact
that the Act might have on the benefit obligations they provide their retirees,
pending the issuance of specific guidance on the accounting for the federal
subsidy introduced by the Act. The Company deferred recognition of the impact
of the Act as permitted by the FSP at December 31, 2003. As a result of the
first quarter restructuring, the deferral election expired. The Company has
included the estimated effects of this pronouncement in its accumulated
postretirement benefit obligation (APBO) at September 26, 2004. See Note 8 
Pension and other Postemployment Benefits for further discussion of the
adoption of this pronouncement. Note 4  Restructuring On February 26, 2004, Vought announced plans to consolidate portions of
its manufacturing operations to Dallas, Texas. The plans include renovating
and modernizing the Dallas facilities, closing the facilities in Nashville and
Stuart over the next 18 to 36 months and moving their operations to Dallas and
reducing the size of the Hawthorne facility. In support of this restructuring,
Vought received a $35 million grant from the Texas Enterprise Fund in April
2004 and is in the process of working with several other state and local
agencies. By accepting this grant, the Company is obligated to add a set number
of jobs in Texas over the next 6 years with a prorated penalty (not to exceed
the amount of the grant) assessed at the end of 2009 if that goal is not
reached. When completed, this project is expected to reduce the Companys
occupied square footage by more than three million square feet, reduce
operating costs and increase productivity. As part of this plan, the Company
will incur charges at Nashville and Stuart for employee termination benefits
and relocation costs, certain pension costs, consolidation of excess facilities
and various other closure costs. The final expected completion date of closing
the Stuart and Nashville facilities is December 31, 2005 and December 31, 2006,
respectively. 5




---



##### Table of Contents



As a result of the closure of the Stuart and Nashville facilities, the
Company offered relocation or termination benefits (voluntary and involuntary)
to the approximately 1,300 employees at these facilities. The Company recorded
a liability in the amount of $5.4 million associated with the severance
termination benefits during the first quarter of fiscal 2004. Additionally,
the Company estimates total costs of approximately $2.8 million associated with
the non-union employee retention termination benefits and is recognizing this
liability ratably over the employees retention period. At September 26, 2004,
a liability for the retention termination benefits has been recorded in the
amount of approximately $700,000. As part of the restructuring plan, the Company negotiated termination
benefit agreements with union employees at the Nashville location. As a result
of the union negotiations, certain retention termination benefits were agreed
to which are estimated to be approximately $4.7 million. In April 2004, the
Company began recognizing this liability ratably over the employee retention
period. At September 26, 2004, a liability for retention termination benefits
for union employees has been recorded in the amount of approximately $900,000. The following table is a roll-forward of the amounts accrued for the
restructuring liabilities discussed above as of September 26, 2004. Accrued RestructuringReserve  Stuart andNashville Sites($ in millions)Balance December 31, 2003
    
    $
    Restructuring liabilities recognized
    
    
    7.0Expenditures-to-date
    
    
    (0.3
    )Balance September 26, 2004
    
    $
    6.7
 See
Note 8  Pension and Other Post-employment Benefits for further
discussion of the effects of the restructuring on the pension and other
post-employment benefits at the Nashville and Stuart facilities. Approximately 425 out of the 1,300 employees at these locations have
elected to relocate to Dallas. The Company currently estimates that the
relocation costs associated with these transfers will be approximately $11.3
million and will be recognized as incurred over 34 months. Since the announcement for the closures of the Stuart and Nashville
facilities, the Company has been evaluating the fixed assets associated with
these facilities and developing a plan for moving these assets to Dallas or for
selling or abandoning the assets once the facilities are vacated. For the
Nashville facility, the Company has performed an initial assessment of the
recoverability for those assets that will not be moved and has determined that,
at present, no impairment has taken place. Nonetheless, an impairment charge
for these assets could be necessary in future periods. Related to the shutdown
of the Nashville facility, the Company has accelerated depreciation over the
remaining periods of those assets that will not be transferred to Dallas. The
Company estimates that approximately $21.6 million of depreciation will be
accelerated over the remaining life of these assets so that they will be fully
depreciated by the end of fiscal 2006 when production has ceased at this
facility. As of September 26, 2004, increased depreciation for these assets is
$9.9 million. Substantially all of the fixed assets from the Stuart facility
are expected to be moved and utilized after the plant closes. The Company is
in the process of evaluating the lease for the Stuart facility and a potential
buyout of the remaining lease term after the facility has been exited. If an
agreement is reached, the Company will record any liability 6




---



##### Table of Contents



associated with the
buyout at the time an agreement is reached and the liability becomes
measurable. The Company currently has $1.6 million in net book value of
leasehold improvements at Stuart. As a result of the closure, the Company has
accelerated the depreciation on these items so they will be fully depreciated
by the end of 2005. The increased depreciation for these assets was $1.3
million during the first three quarters of fiscal 2004. The Company is currently in the process of reviewing final qualified
proposals to buy the Hawthorne facility which the Company would lease back
through 2005, after which, the Company plans to reduce the total square footage
under the lease, with the lease extending to approximately 2010. The Dallas facility is currently a Naval Weapons Industrial Reserve Plant,
which is owned by the Navy. As part of the restructure plan, options are being
considered that could change the ownership structure of the plant. The restructuring and other related charges are recorded to program costs.
In accordance with SOP 81-1, the total additional costs associated with the
planned facility closures for relocation, termination and retention benefits,
and pension and other post-employment benefits (OPEB) were considered in the
Companys estimated costs at completion for contracts at each site. As a
result of including the estimated restructuring costs in each facilitys
contracts, the Company recorded a charge to cost of sales in the amount of
$40.9 million for the nine months ended September 26, 2004, which is reflective
of increased forward losses as a result of these costs at the Stuart and Dallas
facilities and reduced profit margins or increased forward losses on contracts
in process at the Nashville facility. During 2001, the Company finalized and approved a restructuring plan
designed to reduce the Companys infrastructure costs by closing its Perry,
Georgia facility and relocating the facilitys production effort to the Stuart,
Florida site. At December 31, 2001, the Company had accrued $12.6 million
related to costs on non-cancelable lease payments and maintenance, after the
anticipated closure date for the Perry facility. The closure of Perry was
completed at the beginning of the third quarter of 2002. Subsequent to the
closure, the Company recorded $4.5 million of lease payments and maintenance
against the accrual. The remaining non-cancelable lease payments and
maintenance, extend to 2007. Additionally during 2002, the Company relocated
165 employees from the Perry facility to the Stuart facility. The following is
a rollforward of amounts accrued for restructuring at the Perry site: Accrued RestructuringReserve Perry Site($ in millions)Balance December 31, 2000
    
    $
    Restructuring charge recognized
    
    
    12.6Balance December 31, 2001
    
    $
    12.6Cash expenditures
    
    
    (1.0
    )Balance December 31, 2002
    
    $
    11.6Cash expenditures
    
    
    (2.1
    )Balance December 31, 2003
    
    $
    9.5Cash expenditures for the nine months ending
September 26, 2004
    
    
    (1.4
    )Balance September 26, 2004
    
    $
    8.1
 7




---



##### Table of Contents



Note 5  Inventories Inventories consisted of the following: September 26,
    
    December 31,2004
    
    2003($ in millions)Production costs of contracts in process
    
    $
    390.8
    
    
    $
    342.9Excess of production cost of delivered
items over the estimated average unit cost
    
    
    0.7
    
    
    
    2.1Finished goods
    
    
    31.8
    
    
    
    24.2Less: unliquidated progress payments
    
    
    (205.6
    )
    
    
    (171.9
    )Total inventories
    
    $
    217.7
    
    
    $
    197.3
 Note 6  Goodwill and Intangible Assets With the adoption of SFAS No. 142, amortization of Goodwill ceased
effective January 1, 2002 and is now subject to annual impairment tests in
accordance with the standard. The Company completed its annual impairment
analysis based primarily on the discounted future cash flow method and
determined that there was no impairment to goodwill as of December 31, 2003. Intangible assets consisted of the following: September 26,
    
    December 31,2004
    
    2003($ in millions)Programs and contracts
    
    $
    166.8
    
    
    $
    166.8Pension asset
    
    
    1.3
    
    
    
    1.3Less: accumulated amortization
    
    
    (65.8
    )
    
    
    (53.2
    )Identifiable intangible assets, net
    
    $
    102.3
    
    
    $
    114.9
 Scheduled remaining amortization of identifiable intangible assets is as
follows as of September 26, 2004: ($ in millions)2004
    
    $
    4.12005
    
    
    13.12006
    
    
    13.12007
    
    
    12.32008
    
    
    11.2Thereafter
    
    
    48.5$
    102.3
 8




---



##### Table of Contents



Note 7  Long-Term Debt On July 24, 2000, the Company entered into a senior credit and guaranty
agreement that included $525 million of term loan facilities and a $90 million
revolving credit facility. The revolving credit facility expires on June 30,
2006. No borrowings have been made under the revolving credit facility. Total
long-term bank debt was $295.9 million September 26, 2004 and December 31,
2003. On July 2, 2003, Vought issued $270.0 million of 8% Senior Notes due 2011
with interest payable on January 15 and July 15 of each year, beginning January
15, 2004. The notes may be redeemed in full or in part prior to maturity on
July 15, 2007, by paying a make-whole premium. Additionally, prior to July 15,
2006, Vought may redeem up to 35% of the notes from the proceeds of certain
equity offerings. The notes are senior unsecured obligations guaranteed by all
of Voughts existing and future domestic subsidiaries. In connection with the
offering of the notes, Vought entered into an amendment to their senior secured
credit facility. As part of the transaction, Vought prepaid $60.0 million of
term loans including the retirement of Tranche A and obtained an amendment to
its revolving credit facility, which increased the availability of the
revolving credit facility by $60.0 million to a revolving credit facility of
$150.0 million, reduced by $51.4 million of outstanding letters of credit. At September 26, 2004 and December 31, 2003, the fair value of the
Companys long-term bank debt, based on current interest rates, approximated
its carrying value. Note 8  Pension and Other Post-employment Benefits The components of net periodic benefit cost for the Companys pension
plans and other postretirement benefit plans were as follows: Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 26,
    
    September 26,Pension Benefits
    
    2004
    
    2004($ in millions)Components of net periodic benefit cost (income):Service cost
    
    $
    7.3
    
    
    $
    21.9Interest cost
    
    
    25.3
    
    
    
    75.6Expected return on plan assets
    
    
    (30.2
    )
    
    
    (90.4
    )Recognized (gains) or losses
    
    
    9.2
    
    
    
    27.7Prior service cost recognized
    
    
    
    
    
    
    9.6Amortization of prior service cost
    
    
    
    
    
    
    0.1Plan curtailment (gain)/loss
    
    
    
    
    
    
    (12.7
    )Special termination benefits
    
    
    
    
    
    
    10.7Net periodic benefit cost
    
    $
    11.6
    
    
    $
    42.5Defined contribution plan cost
    
    $
    1.5
    
    
    $
    5.1
 The Company has determined that obtaining by-component information for the
comparable periods of 2003 net periodic benefit cost would be impracticable.
For the first nine months of 2003, the net periodic benefit cost and the
defined contribution plan costs were $16.7 million and $4.8 million,
respectively. There were no special termination benefits or plan curtailments
in the first nine months of 2003. 9




---



##### Table of Contents



Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 26,
    
    September 26,Other Post-employment Benefits
    
    2004
    
    2004($ in millions)Components of net periodic benefit cost (income):Service cost
    
    $
    1.9
    
    
    $
    5.0Interest cost
    
    
    9.9
    
    
    
    29.0Expected return on plan assets
    
    
    
    
    
    
    Prior service cost recognized
    
    
    
    
    
    
    (0.2
    )Amortization of prior service cost
    
    
    0.7
    
    
    
    1.8Amortization of net (gain)/loss
    
    
    0.6
    
    
    
    1.5Plan curtailment (gain)/loss
    
    
    
    
    
    
    11.7Special termination benefits
    
    
    
    
    
    
    2.6Net periodic benefit cost
    
    $
    13.1
    
    
    $
    51.4
 The Company has determined that obtaining by-component information for the
comparable periods of 2003 net periodic benefit cost would be impracticable.
For the first nine months of 2003, the net periodic benefit cost was $32.8
million. There were no special termination benefits or plan curtailments in
the first nine months of 2003. As a result of the Companys announcement on February 26, 2004 of its
plans to consolidate much of its manufacturing operations in Dallas, the
Company recorded liabilities for pension and postretirement benefit plan
curtailments and recognition of prior service cost of $11.2 million and special
termination benefits of $1.9 million in the first quarter. The special
termination benefits related to its affected nonrepresented employees that
received and accepted transfer or completion opportunities in March 2004.
Represented employees accepted similar offers through a certified vote on April
20, 2004. As a result of that vote, the Company recorded an additional
liability of $8.6 million in the second quarter. On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare
Part D), as well as a
federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. As of
March 28, 2004, the Company recognized the effects of the Act in the measure of
its accumulated postretirement benefit obligation (APBO) for certain retiree
groups in accordance with FASB Staff Position No. FAS 106-1. The Company currently pays a portion of the prescription drug cost for
certain retirees. The benefits for certain retirees were determined to be
actuarially equivalent based on an analysis of the Companys existing
prescription drug plan provisions and claims experience as compared to the
Medicare Part D prescription drug benefit that will be effective in 2006. Recognition of the subsidy for certain retiree groups as an offset to plan
costs results in a $39.4 million reduction in the APBO. The reduction in APBO
is included with other deferred actuarial gains and losses. The 2004 and
subsequent net periodic postretirement benefit costs will be adjusted to
reflect the lower interest cost due to the lower APBO. To the extent that the
deferred gains and losses are outside the allowable corridor, the excess will
be recognized as prescribed under SFAS 106. For other retiree groups, the
impact of the potential subsidy benefit has not been calculated because those
amounts could not be reasonably estimated. 10




---



##### Table of Contents



The Company has not reflected any changes in participation in the
Companys plans as a result of the Act. The reduction in APBO represents the
value of the 28% subsidy and does not reflect any other changes. More specific authoritative guidance on the accounting of the federal
subsidy is pending and, when issued, could require the Company to change
previously reported information. Note 9  Commitments Warranty Reserves.A reserve has been established to provide for the
estimated future cost of warranties on the Companys delivered products.
Management periodically reviews the reserves and adjustments are made
accordingly. A provision for warranty on products delivered is made on the
basis of the Companys historical experience and identified warranty issues.
Warranties cover such factors as non-conformance to specifications and defects
in material and workmanship. The following is a rollforward of amounts accrued
for warranty reserves: WarrantyReserve($ in millions)Balance at December 31, 2002
    
    $
    10.9Acquired balance from Aerostructures
    
    
    1.5Warranty costs incurred
    
    
    (1.7
    )Additions charged to cost of sales:Warranties issued
    
    
    1.7Charges related to pre-existing warranties
    
    
    (1.8
    )Balance at December 31, 2003
    
    
    10.6Warranty costs incurred
    
    
    (0.2
    )Additions charged to cost of sales:Warranties issued
    
    
    1.2Charges related to pre-existing warranties
    
    
    (1.2
    )Balance at September 26, 2004
    
    $
    10.4
 Note 10  Environmental Costs Environmental liabilities are accrued when the Company determines it is
responsible for remediation costs and such amounts are reasonably estimable.
When only a range of amounts is established and no amount within the range is
more accurate than another, the minimum amount in the range is recorded. Our facilities have been previously owned and operated by other entities
and remediation is currently taking place at several facilities in connection
with contamination that occurred prior to our ownership. In particular, we
acquired several of our facilities from Northrop Grumman in July of 2000,
including the Hawthorne, California facility, the Stuart, Florida facility, the
Milledgeville and Perry, Georgia facilities and two Dallas, Texas facilities.
Of those facilities, remediation projects are underway in Hawthorne, Stuart,
Milledgeville and Dallas. Under our asset purchase agreement with Northrop
Grumman, we obtained from Northrop Grumman an indemnity relating to
contamination at all sites occurring prior to our ownership (so-called
''pre-closing liabilities). The indemnity effectively caps our exposure to
such cleanup liabilities at $12 million, with Northrop Grumman assuming
responsibility for all such costs in excess of $12 million. In accordance with
the terms of the environmental indemnity, Northrop Grumman is managing all
environmental remedial projects at the various sites, except with respect to
most of the remediation activities now underway at the Dallas Facility. The
Dallas facility is a Naval Weapons Industrial Reserve Plant, which the Navy
leases to us. The Navy manages and finances most of the 11




---



##### Table of Contents



remediation activities
at this site (although Northrop Grumman does manage other remediation
activities at the site). Should the Navy cease to finance and perform
remediation activities at the Dallas site, we would look to Northrop Grumman to
manage those activities in accordance with its indemnity obligations. As part
of the restructuring plan, options are being considered that could change the
ownership structure of this facility. Any change in ownership would not impact
the current arrangement with Northrop Grumman regarding remediation. Although
we have no reason to believe that Northrop Grumman will not satisfy its
indemnity obligations, if Northrop Grumman failed to do so, we could be exposed
to environmental cleanup liabilities that could be material. As of September
26, 2004, our balance sheet included an accrued liability of $7.0 million for
accrued environmental liabilities. The Nashville, Tennessee facility was acquired by the Aerostructures
Corporation from Textron Inc. in 1996. In connection with that acquisition,
Textron agreed to indemnify up to $60 million against any pre-closing
environmental liabilities with regard to claims made within ten years of the
date on which the facility was acquired, including with respect to a solid
waste landfill located onsite that was closed pursuant to a plan approved by
the Tennessee Division of Solid Waste Management. While there are no pending
environmental claims relating to the Nashville facility, there is no assurance
that environmental claims will not arise after the expiration of the Textron
indemnity in 2006, or that Textron will satisfy its indemnity obligations with
respect to any environmental claims that are made before the indemnity expires. The following is a rollforward of amounts accrued for environmental
liabilities: EnvironmentalLiability($ in millions)Balance at December 31, 2002
    
    $
    10.5Environmental costs incurred
    
    
    (2.0
    )Balance at December 31, 2003
    
    
    8.5Environmental costs incurred for the nine months ending
September 26, 2004
    
    
    (1.5
    )Balance at September 26, 2004
    
    $
    7.0
 Note 11  Related Party Transactions In accordance with the management agreement between the Company and its
principal stockholder, The Carlyle Group (Carlyle), the Company incurred a
fee of $1.5 million for various management services provided by Carlyle for
each of the nine month periods ended September 26, 2004 and September 28, 2003,
respectively. Note 12  Guarantor Subsidiaries The 8% Senior Notes due 2011 are fully and unconditionally and jointly and
severally guaranteed, on a senior unsecured basis, by the Companys 100% owned
subsidiaries. Summarized financial information of the Company and its
subsidiaries is presented below: 12




---



##### Table of Contents



Consolidating Balance Sheet
September 26, 2004
($ in millions) Guarantor
    
    IntercompanyVought (1)
    
    Subsidiary (1)
    
    Eliminations
    

    TotalAssetsCurrent assets:Cash and cash equivalents
    
    $
    135.9
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    136.0Trade and other receivables
    
    
    125.1
    
    
    
    15.0
    
    
    
    
    
    
    
    140.1Intercompany receivable
    
    
    23.4
    
    
    
    2.6
    
    
    
    (26.0
    )
    
    
    Inventories
    
    
    203.5
    
    
    
    14.2
    
    
    
    
    
    
    
    217.7Other current assets
    
    
    5.6
    
    
    
    0.5
    
    
    
    
    
    
    
    6.1Total current assets
    
    
    493.5
    
    
    
    32.4
    
    
    
    (26.0
    )
    
    
    499.9Property, plant and equipment, net
    
    
    378.8
    
    
    
    12.7
    
    
    
    
    
    
    
    391.5Goodwill, net
    
    
    464.0
    
    
    
    63.7
    
    
    
    
    
    
    
    527.7Identifiable intangible assets, net
    
    
    102.3
    
    
    
    
    
    
    
    
    
    
    
    102.3Investment in affiliated company
    
    
    74.7
    
    
    
    
    
    
    
    (74.7
    )
    
    
    Debt origination costs, net and other assets
    
    
    16.0
    
    
    
    0.1
    
    
    
    
    
    
    
    16.1Total assets
    
    $
    1,529.3
    
    
    $
    108.9
    
    
    $
    (100.7
    )
    
    $
    1,537.5Liabilities and stockholders equity (deficit)Current liabilities:Accounts payable, trade
    
    $
    76.4
    
    
    $
    5.2
    
    
    $
    
    
    
    $
    81.6Accrued and other liabilities
    
    
    72.6
    
    
    
    1.2
    
    
    
    
    
    
    
    73.8Accrued interest
    
    
    5.6
    
    
    
    
    
    
    
    
    
    
    
    5.6Accrued payroll and employee benefits
    
    
    45.8
    
    
    
    1.1
    
    
    
    
    
    
    
    46.9Accrued postemployment benefits - current
    
    
    54.1
    
    
    
    
    
    
    
    
    
    
    
    54.1Accrued pension - current
    
    
    17.7
    
    
    
    
    
    
    
    
    
    
    
    17.7Intercompany payable
    
    
    2.6
    
    
    
    23.4
    
    
    
    (26.0
    )
    
    
    Capital lease obligations
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    1.0Accrued contract liabilities
    
    
    212.3
    
    
    
    0.1
    
    
    
    
    
    
    
    212.4Total current liabilities
    
    
    487.1
    
    
    
    32.0
    
    
    
    (26.0
    )
    
    
    493.1Long-term liabilities:Accrued postemployment benefits
    
    
    490.9
    
    
    
    
    
    
    
    
    
    
    
    490.9Accrued pension
    
    
    310.2
    
    
    
    
    
    
    
    
    
    
    
    310.2Long-term bank debt
    
    
    295.9
    
    
    
    
    
    
    
    
    
    
    
    295.9Long-term bond debt
    
    
    270.0
    
    
    
    
    
    
    
    
    
    
    
    270.0Long-term capital lease obligations
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    2.2Other non-current liabilities
    
    
    76.2
    
    
    
    
    
    
    
    
    
    
    
    76.2Total liabilities
    
    
    1,930.3
    
    
    
    34.2
    
    
    
    (26.0
    )
    
    
    1,938.5Stockholders equity (deficit):Common stock, par value $0.01; 50,000,000 shares
authorized, 25,015,552 issued and outstanding
in 2004
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.3Additional paid-in capital
    
    
    418.0
    
    
    
    80.3
    
    
    
    (80.3
    )
    
    
    418.0Shares held in rabbi trust
    
    
    (1.9
    )
    
    
    
    
    
    
    
    
    
    
    (1.9
    )Stockholders loans
    
    
    (2.3
    )
    
    
    
    
    
    
    
    
    
    
    (2.3
    )Accumulated deficit
    
    
    (299.5
    )
    
    
    (5.6
    )
    
    
    5.6
    
    
    
    (299.5
    )Accumulated other comprehensive loss
    
    
    (515.6
    )
    
    
    
    
    
    
    
    
    
    
    (515.6
    )Total stockholders equity (deficit)
    
    
    (401.0
    )
    
    
    74.7
    
    
    
    (74.7
    )
    
    
    (401.0
    )Total liabilities and stockholders equity (deficit)
    
    $
    1,529.3
    
    
    $
    108.9
    
    
    $
    (100.7
    )
    
    $
    1,537.5
 (1) Effective January 1, 2004 the Company implemented a corporate reorganization of its Aerostructures subsidiary. Pursuant to the reorganization, Aerostructures incorporated a new subsidiary, entitled Contour Aerospace Corporation, a Delaware corporation (''Contour). Then, Aerostructures contributed its Everett,
Washington facility and Brea, California facility to Contour. Contemporaneous with the contribution of these assets and operations to Contour, Aerostructures merged with and into Vought Aircraft Industries, Inc., so that the remaining operating assets of Aerostructures are integrated with the ongoing operations of
Vought. As a result of the reorganization, beginning in 2004, Aerostructures does not exist as a separate corporate entity and Contour is a direct subsidiary of Vought. Under the 8% Senior Notes due 2011, Contour is a guarantor on a fully and unconditionally and jointly and severally on a senior unsecured basis. 13




---



##### Table of Contents



Consolidating Balance Sheet
December 31, 2003
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalAssetsCurrent assets:Cash and cash equivalents
    
    $
    106.4
    
    
    $
    
    
    
    $
    
    
    
    $
    106.4Trade and other receivables
    
    
    92.6
    
    
    
    21.9
    
    
    
    
    
    
    
    114.5Intercompany receivable
    
    
    
    
    
    
    13.6
    
    
    
    (13.6
    )
    
    
    Inventories
    
    
    162.7
    
    
    
    34.6
    
    
    
    
    
    
    
    197.3Other current assets
    
    
    4.9
    
    
    
    1.5
    
    
    
    
    
    
    
    6.4Total current assets
    
    
    366.6
    
    
    
    71.6
    
    
    
    (13.6
    )
    
    
    424.6Property, plant and equipment, net
    
    
    319.1
    
    
    
    95.0
    
    
    
    
    
    
    
    414.1Goodwill, net
    
    
    96.7
    
    
    
    431.0
    
    
    
    
    
    
    
    527.7Identifiable intangible assets, net
    
    
    56.3
    
    
    
    58.6
    
    
    
    
    
    
    
    114.9Investment in affiliated company
    
    
    413.9
    
    
    
    
    
    
    
    (413.9
    )
    
    
    Debt origination costs, net and other assets
    
    
    18.3
    
    
    
    0.1
    
    
    
    
    
    
    
    18.4Total assets
    
    $
    1,270.9
    
    
    $
    656.3
    
    
    $
    (427.5
    )
    
    $
    1,499.7Liabilities and stockholders equity (deficit)Current liabilities:Accounts payable, trade
    
    $
    37.4
    
    
    $
    16.9
    
    
    $
    
    
    
    $
    54.3Accrued and other liabilities
    
    
    62.2
    
    
    
    17.5
    
    
    
    (2.0
    )
    
    
    77.7Accrued payroll and employee benefits
    
    
    41.9
    
    
    
    4.5
    
    
    
    
    
    
    
    46.4Accrued postemployment benefits - current
    
    
    43.8
    
    
    
    10.3
    
    
    
    
    
    
    
    54.1Accrued pension - current
    
    
    30.5
    
    
    
    
    
    
    
    
    
    
    
    30.5Intercompany payable
    
    
    13.6
    
    
    
    
    
    
    
    (13.6
    )
    
    
    Capital lease obligations
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    1.2Accrued contract liabilities
    
    
    154.1
    
    
    
    38.5
    
    
    
    
    
    
    
    192.6Total current liabilities
    
    
    383.5
    
    
    
    88.9
    
    
    
    (15.6
    )
    
    
    456.8Long-term liabilities:Accrued postemployment benefits
    
    
    392.5
    
    
    
    85.2
    
    
    
    
    
    
    
    477.7Accrued pension
    
    
    215.0
    
    
    
    67.0
    
    
    
    
    
    
    
    282.0Long-term bank debt
    
    
    295.9
    
    
    
    
    
    
    
    
    
    
    
    295.9Long-term bond debt
    
    
    270.0
    
    
    
    
    
    
    
    
    
    
    
    270.0Long-term capital lease obligations
    
    
    
    
    
    
    3.3
    
    
    
    
    
    
    
    3.3Other non-current liabilities
    
    
    36.9
    
    
    
    
    
    
    
    
    
    
    
    36.9Total liabilities
    
    
    1,593.8
    
    
    
    244.4
    
    
    
    (15.6
    )
    
    
    1,822.6Stockholders equity (deficit):Common stock, par value $0.01; 50,000,000 shares
authorized, 25,012,052 issued and outstanding
in 2003
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.3Additional paid-in capital
    
    
    418.0
    
    
    
    415.6
    
    
    
    (415.6
    )
    
    
    418.0Shares held in rabbi trust and CMG escrow
    
    
    (3.9
    )
    
    
    (2.0
    )
    
    
    2.0
    
    
    
    (3.9
    )Stockholders loans
    
    
    (2.3
    )
    
    
    
    
    
    
    
    
    
    
    (2.3
    )Accumulated deficit
    
    
    (219.4
    )
    
    
    (1.7
    )
    
    
    1.7
    
    
    
    (219.4
    )Accumulated other comprehensive loss
    
    
    (515.6
    )
    
    
    
    
    
    
    
    
    
    
    (515.6
    )Total stockholders equity (deficit)
    
    
    (322.9
    )
    
    
    411.9
    
    
    
    (411.9
    )
    
    
    (322.9
    )Total liabilities and stockholders equity (deficit)
    
    $
    1,270.9
    
    
    $
    656.3
    
    
    $
    (427.5
    )
    
    $
    1,499.7
 14




---



##### Table of Contents



Consolidating Statement of Operations
Three Months Ended September 26, 2004
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalNet sales
    
    $
    278.9
    
    
    $
    19.2
    
    
    $
    (2.8
    )
    
    $
    295.3Costs and expensesCost of sales
    
    
    247.6
    
    
    
    17.7
    
    
    
    (2.8
    )
    
    
    262.5Selling, general and administrative expenses
    
    
    63.1
    
    
    
    1.3
    
    
    

    
    
    
    64.4Total costs and expenses
    
    
    310.7
    
    
    
    19.0
    
    
    
    (2.8
    )
    
    
    326.9Operating income (loss)
    
    
    (31.8
    )
    
    
    0.2
    
    
    
    
    
    
    
    (31.6
    )Other income (expense)Interest income
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    0.7Interest expense
    
    
    (10.6
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    (10.7
    )Equity in income of consolidated subsidiaries
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    Income (loss) before income taxes
    
    
    (41.6
    )
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    (41.6
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (41.6
    )
    
    $
    0.1
    
    
    $
    (0.1
    )
    
    $
    (41.6
    )
 Consolidating Statement of Operations
Three Months Ended September 28, 2003
($ in millions) Guarantor
    
    IntercompanyVought
    

    Subsidiary
    
    Eliminations
    
    TotalNet sales
    
    $
    259.0
    
    
    $
    56.2
    
    
    $
    (1.1
    )
    
    $
    314.1Costs and expensesCost of sales
    
    
    209.9
    
    
    
    46.5
    
    
    
    (1.1
    )
    
    
    255.3Selling, general and administrative expenses
    
    
    43.4
    
    
    
    15.3
    
    
    
    
    
    
    
    58.7Total costs and expenses
    
    
    253.3
    
    
    
    61.8
    
    
    
    (1.1
    )
    
    
    314.0Operating income
    
    
    5.7
    
    
    
    (5.6
    )
    
    
    
    
    
    
    0.1Other income (expense)FAS 133 non-cash income  interest rate swaps
    
    
    2.8
    
    
    
    
    
    
    
    
    
    
    
    2.8Interest income
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5Interest expense
    
    
    (13.6
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    (13.9
    )Equity in income of consolidated subsidiaries
    
    
    (5.9
    )
    
    
    
    
    
    
    5.9
    
    
    
    Income (loss) before income taxes
    
    
    (10.5
    )
    
    
    (5.9
    )
    
    
    5.9
    
    
    
    (10.5
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (10.5
    )
    
    $
    (5.9
    )
    
    $
    5.9
    
    
    $
    (10.5
    )
 15




---



##### Table of Contents



Consolidating Statement of Operations
Nine Months Ended September 26, 2004
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalNet sales
    
    $
    839.2
    
    
    $
    51.7
    
    
    $
    (6.5
    )
    
    $
    884.4Costs and expensesCost of sales
    
    
    706.2
    
    
    
    46.0
    
    
    
    (6.5
    )
    
    
    745.7Selling, general and administrative expenses
    
    
    186.4
    
    
    
    3.7
    
    
    
    
    
    
    
    190.1Total costs and expenses
    
    
    892.6
    
    
    
    49.7
    
    
    
    (6.5
    )
    
    
    935.8Operating income (loss)
    
    
    (53.4
    )
    
    
    2.0
    
    
    
    
    
    
    
    (51.4
    )Other income (expense)Interest income
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    1.8Interest expense
    
    
    (30.2
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    (30.5
    )Equity in income of consolidated subsidiaries
    
    
    1.7
    
    
    
    
    
    
    
    (1.7
    )
    
    
    Income (loss) before income taxes
    
    
    (80.1
    )
    
    
    1.7
    
    
    
    (1.7
    )
    
    
    (80.1
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (80.1
    )
    
    $
    1.7
    
    
    $
    (1.7
    )
    
    $
    (80.1
    )
 Consolidating Statement of Operations
Nine Months Ended September 28, 2003
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalNet sales
    
    $
    796.7
    
    
    $
    56.2
    
    
    $
    (1.1
    )
    
    $
    851.8Costs and expensesCost of sales
    
    
    632.9
    
    
    
    46.5
    
    
    
    (1.1
    )
    
    
    678.3Selling, general and administrative expenses
    
    
    152.8
    
    
    
    15.3
    
    
    
    
    
    
    
    168.1Total costs and expenses
    
    
    785.7
    
    
    
    61.8
    
    
    
    (1.1
    )
    
    
    846.4Operating income
    
    
    11.0
    
    
    
    (5.6
    )
    
    
    
    
    
    
    5.4Other income (expense)FAS 133 non-cash income  interest rate swaps
    
    
    7.6
    
    
    
    
    
    
    
    
    
    
    
    7.6Interest income
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    1.6Interest expense
    
    
    (29.3
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    (29.6
    )Equity in income of consolidated subsidiaries
    
    
    (5.9
    )
    
    
    
    
    
    
    5.9
    
    
    
    Loss before income taxes
    
    
    (15.0
    )
    
    
    (5.9
    )
    
    
    5.9
    
    
    
    (15.0
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (15.0
    )
    
    $
    (5.9
    )
    
    $
    5.9
    
    
    $

    (15.0
    )
 16




---



##### Table of Contents



Consolidating Statement of Cash Flows
Nine Months Ended September 26, 2004
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalOperating activitiesNet income (loss)
    
    $
    (80.1
    )
    
    $
    1.7
    
    
    $
    (1.7
    )
    
    $
    (80.1
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation & amortization
    
    
    63.9
    
    
    
    3.1
    
    
    
    
    
    
    
    67.0Loss from asset sales
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    1.6Income from investment in consolidated subsidiaries
    
    
    (1.7
    )
    
    
    
    
    
    
    1.7
    
    
    
    Changes in current assets and liabilities:Accounts receivable
    
    
    (15.6
    )
    
    
    (10.0
    )
    
    
    
    
    
    
    (25.6
    )Intercompany accounts receivable
    
    
    (17.6
    )
    
    
    (2.6
    )
    
    
    20.2
    
    
    
    Inventories, net of advance and progress billings
    
    
    (19.3
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    (20.4
    )Other current assets
    
    
    0.6
    
    
    
    (0.3
    )
    
    
    
    
    
    
    0.3Accounts payable, trade
    
    
    28.9
    
    
    
    (1.6
    )
    
    
    
    
    
    
    27.3Intercompany accounts payable
    
    
    2.6
    
    
    
    17.6
    
    
    
    (20.2
    )
    
    
    Accrued payroll and employee benefits
    
    
    0.4
    
    
    
    0.1
    
    
    
    
    
    
    
    0.5Accrued interest
    
    
    (5.1
    )
    
    
    
    
    
    
    
    
    
    
    (5.1
    )Intercompany Transactions
    
    
    0.4
    
    
    
    (0.4
    )
    
    
    
    
    
    
    Accrued and other liabilities
    
    
    (4.0
    )
    
    
    
    
    
    
    
    
    
    
    (4.0
    )Accrued contract liabilities
    
    
    24.0
    
    
    
    (4.2
    )
    
    
    
    
    
    
    19.8Other assets and liabilities  long-term
    
    
    79.1
    
    
    
    
    
    
    
    
    
    
    
    79.1Net cash provided by operating activities
    
    
    58.1
    
    
    
    2.3
    
    
    
    
    
    
    
    60.4Investing activitiesCapital expenditures
    
    
    (28.6
    )
    
    
    (0.9
    )
    
    
    
    
    
    
    (29.5
    )Net cash used in investing activities
    
    
    (28.6
    )
    
    
    (0.9
    )
    
    
    
    
    
    
    (29.5
    )Financing activitiesPayments on capital leases
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    (1.3
    )Net cash used in financing activities
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    (1.3
    )Net increase in cash and cash equivalents
    
    
    29.5
    
    
    
    0.1
    
    
    
    
    
    
    
    29.6Cash and cash equivalents at beginning of period
    
    
    106.4
    
    
    
    
    
    
    
    
    
    
    
    106.4Cash and cash equivalents at end of period
    
    $
    135.9
    
    
    $
    0.1
    
    
    
    
    
    
    $
    136.0
 17




---



##### Table of Contents



Consolidating Statement of Cash Flows
Nine Months Ended September 28, 2003
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalOperating activitiesNet loss
    
    $
    (15.0
    )
    
    $
    (5.9
    )
    
    
    5.9
    
    
    $
    (15.0
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation & amortization
    
    
    50.0
    
    
    
    7.8
    
    
    
    
    
    
    
    57.8Loss from asset sales
    
    
    0.8
    
    
    
    0.8
    
    
    
    
    
    
    
    1.6Income from investment in consolidated subsidiaries
    
    
    5.9
    
    
    
    
    
    
    
    (5.9
    )
    
    
    Stock compensation expense
    
    
    11.1
    
    
    
    
    
    
    
    
    
    
    
    11.1Non-cash income  interest rate swaps
    
    
    (7.6
    )
    
    
    
    
    
    
    
    
    
    
    (7.6
    )Changes in current assets and liabilities:Accounts receivable
    
    
    (5.4
    )
    
    
    (3.6
    )
    
    
    
    
    
    
    (9.0
    )Inventories, net of advance and progress billings
    
    
    23.9
    
    
    
    (6.1
    )
    
    
    
    
    
    
    17.8Other current assets
    
    
    1.0
    
    
    
    0.1
    
    
    
    
    
    
    
    1.1Accounts payable, trade
    
    
    2.3
    
    
    
    2.0
    
    
    
    
    
    
    
    4.3Accrued payroll and employee benefits
    
    
    (19.1
    )
    
    
    2.1
    
    
    
    
    
    
    
    (17.0
    )Accrued and other liabilities
    
    
    5.6
    
    
    
    3.0
    
    
    
    
    
    
    
    8.6Accrued contract liabilities
    
    
    103.8
    
    
    
    6.3
    
    
    
    
    
    
    
    110.1Other assets and liabilities  long-term
    
    
    2.4
    
    
    
    (0.6
    )
    
    
    
    
    
    
    1.8Net cash provided by operating activities
    
    
    159.7
    
    
    
    5.9
    
    
    
    
    
    
    
    165.6Investing activitiesCash paid for Aerostructures net of cash acquired
    
    
    (178.1
    )
    
    
    (5.2
    )
    
    
    
    
    
    
    (183.3
    )Capital expenditures
    
    
    (20.0
    )
    
    
    (0.7
    )
    
    
    
    
    
    
    (20.7
    )Net cash used in investing activities
    
    
    (198.1
    )
    
    
    (5.9
    )
    
    
    
    
    
    
    (204.0
    )Financing activitiesPayments on long-term bank debt
    
    
    (99.7
    )
    
    
    
    
    
    
    
    
    
    
    (99.7
    )Payment of debt origination cost
    
    
    (13.5
    )
    
    
    
    
    
    
    
    
    
    
    (13.5
    )Proceeds from long-term debt
    
    
    270.0
    
    
    
    
    
    
    
    
    
    
    
    270.0Net cash used in financing activities
    
    
    156.8
    
    
    
    
    
    
    
    
    
    
    
    156.8Net increase in cash and cash equivalents
    
    
    118.4
    
    
    
    
    
    
    
    
    
    
    
    118.4Cash and cash equivalents at beginning of period
    
    
    68.6
    
    
    
    
    
    
    
    
    
    
    
    68.6Cash and cash equivalents at end of period
    
    $
    187.0
    
    
    $
    
    
    
    
    
    
    
    $
    187.0
 18




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following section may include forward-looking statements that involve
inherent risks and uncertainties which are further discussed in the section
titled Forward-Looking Statements located at the end of Part I of this
report. References in this report to the Company or Vought are to Vought
Aircraft Industries, Inc. and its wholly-owned subsidiaries. Managements
discussion and analysis should be read in conjunction with the financial
statements of Vought and the accompanying notes contained therein. Recent Events On February 26, 2004, Vought announced
plans to consolidate much of its manufacturing operations to Dallas. To
facilitate this major restructuring, Vought received a $35 million grant from
the Texas Enterprise Fund in April 2004 and is working with several other state
and local agencies. By accepting this grant, the Company is obligated to add
a set number of jobs in Texas over the next 6 years with a prorated penalty (not to
exceed the amount of the grant) assessed at the end of 2009 if that goal is not
reached. The Company intends to renovate and modernize the Dallas facilities,
close the Nashville and Stuart sites and reduce the size of the Hawthorne site
over the next 18 to 36 months. When completed, this project is expected to
reduce the Companys occupied square footage by more than three million square
feet, reduce operating costs and increase productivity. As part of this plan,
the Company will incur charges at Nashville and Stuart for employee termination
benefits and relocation costs, certain pension costs, consolidation of excess
facilities and various other closure costs. The final expected completion
dates for closing the Stuart and Nashville facilities are December 31, 2005 and
December 31, 2006, respectively. As a result of the closure of the Stuart and Nashville facilities, the
Company offered relocation or termination benefits (voluntary and involuntary)
to the approximately 1,300 employees at these facilities. The Company recorded
a liability in the amount of $5.4 million associated with the severance
termination benefits during the first quarter of fiscal 2004. Additionally,
the Company estimates total costs of approximately $2.8 million associated with
the non-union employee retention termination benefits and is recognizing this
liability ratably over the employees retention period. At September 26, 2004,
a liability for the retention termination benefits has been recorded in the
amount of approximately $700,000. As part of the restructuring plan, the Company negotiated termination
benefit agreements with union employees at the Nashville location. As a result
of the union negotiations, certain retention termination benefits were agreed
to which are estimated to be approximately $4.7 million. In April 2004, the
Company began recognizing this liability ratably over the employee retention
period. At September 26, 2004, a liability for retention termination benefits
for union employees has been recorded in the amount of approximately $900,000. Approximately 425 out of the 1,300 employees at these locations have
elected to relocate to Dallas. The Company currently estimates that the
relocation costs associated with these transfers will be approximately $11.3
million and will be recognized as incurred over 34 months. See Note 8 to the Companys consolidated financial statements Pension and
Other Post-employment Benefitsfor further discussion of the effects of the
restructuring on the pension and other post-employment benefits at the
Nashville and Stuart facilities. 19




---



##### Table of Contents



Since the announcement for the closures of the Stuart and Nashville
facilities, the Company has been evaluating the fixed assets associated with
these facilities and developing a plan for moving these assets to Dallas or for
selling or abandoning the assets once the facilities are vacated. For the
Nashville facility, the Company has performed an initial assessment of the
recoverability for those assets that will not be moved and has determined that,
at present, no impairment has taken place. Nonetheless, an impairment charge
for these assets could be necessary in future periods. Related to the shutdown
of the Nashville facility, the Company has accelerated depreciation over the
remaining periods of those assets that will not be transferred to Dallas. The
Company estimates that approximately $21.6 million of depreciation will be
accelerated over the remaining life of these assets so that they will be fully
depreciated by the end of fiscal 2006 when production has ceased at this
facility. As of September 26, 2004, increased depreciation for these assets
is $9.9 million. Substantially all of the fixed assets from the Stuart facility
are expected to be moved and utilized after the plant closes. The Company is
in the process of evaluating the lease for the Stuart facility and a potential
buyout of the remaining lease term after the facility has been exited. If an
agreement is reached, the Company will record any liability associated with the
buyout at the time an agreement is reached and the liability becomes
measurable. The Company currently has $1.6 million in net book value of
leasehold improvements at Stuart. As a result of the closure, the Company has
accelerated the depreciation on these items so they will be fully depreciated
by the end of 2005. The increased depreciation for these assets was $1.3
million during the first three quarters of fiscal 2004. Our production facility in Stuart, Florida was damaged as a result of two
hurricanes during the third quarter. Hurricanes Frances and Jeanne inflicted
major damage to the building that housed the production area for 747 floor
beams. Production of those items has since been transitioned to the Dallas,
Texas facility. In September, the Company recorded a charge of $2.1 million to
reserve for the insurance deductible. The Company is currently in the process of reviewing final qualified
proposals from third parties to buy the Hawthorne facility which the Company
would lease back through 2005, after which, the Company plans to significantly
reduce the total square footage under the lease, with the lease extending to
approximately 2010. The Dallas facility is currently a Naval Weapons Industrial Reserve Plant,
which is owned by the Navy. As part of the restructure plan, options are being
considered that could change the ownership structure of the plant. The restructuring and other related charges are recorded to program costs.
In accordance with SOP 81-1, the total additional costs associated with the
planned facility closures for relocation, termination and retention benefits,
and pension and other post-employment benefits (OPEB) were considered in the
Companys estimated costs at completion for contracts at each site. As a
result of including the estimated restructuring costs in each facilitys
contracts, the Company recorded a charge to cost of sales in the amount of
$40.9 million for the nine months ended September 26, 2004 which is reflective
of increased forward losses as a result of these costs at the Stuart and Dallas
facilities and reduced profit margins or increased forward losses on contracts
in process at the Nashville facility. In addition to these restructuring charges, the Company incurred
approximately $23.8 million in expenses associated with renovation,
restoration, rearrangement, and disruption incurred as a result of the
restructuring during the nine months ended September 26, 2004. 20




---



##### Table of Contents



On September 26, 2004, the labor union contract for Local 848 of the
United Automobile, Aerospace and Agricultural Implement Workers of America in
Dallas, Texas expired. As of September 26, 2004, this union represented
approximately 28% of the company-wide labor force. Negotiations continued for
three weeks until an agreement was reached and the union membership ratified a
new three-year contract on October 17, 2004. Financial Business Trends The financial health of the commercial airline industry has a direct and
significant effect on our commercial aircraft programs. The commercial airline
industry continues to suffer from the effects of an economic downturn that
began in 2000 in addition to various other factors including record-high oil
prices that have had negative impacts on the operating results of the major
airlines and commercial air traffic, and correspondingly, may result in reduced
delivery rates of components for new aircraft. We believe that recovery in
this industry will begin in 2005 or later. In addition, Boeing has announced
its decision to end production of the 757 program, with the final aircraft
scheduled to be produced in late 2004. The backlog and demand for the Boeing
767 program has also declined in recent years. We cannot assure you that the
commercial airlines will order additional aircraft in the future in sufficient
quantities to justify continued production of this model. Although the market for business jets was also impacted by the economic
downturn discussed above, the demand in this market has appeared to improve
over 2003. Sales associated with military aircraft have decreased mainly due to lower
prices as a result of the negotiation of a lower sales price in the C-17
follow-on contract. Partially offsetting this impact is the positive
performance of substantially all other military programs. We expect the
overall performance of our military programs to improve consistent with trends
in spending by the U.S. military. We are aggressively pursuing additional new business opportunities,
particularly in military aircraft programs, which may include classified
projects, which have the potential to further add to the long-term contracts of
the Company. For additional information regarding financial and business trends
overall, see the Managements Discussion and Analysis of Financial Condition
and Results of Operations included in Voughts registration statement on Form
S-4, as amended, filed with the Securities and Exchange Commission (the SEC)
on June 15, 2004. 21




---



##### Table of Contents



Results of Operations Three
    
    
    
    
    
    Three
    
    Nine
    
    
    
    
    
    NineMonths
    
    
    
    
    
    Months
    
    Months
    
    
    
    
    
    MonthsEnded
    
    Percentage
    
    Ended
    
    Ended
    
    Percentage
    
    EndedSeptember
    
    Change to
    
    September
    
    September
    
    Change to
    
    September26, 2004
    
    Prior Year
    
    28, 2003
    
    26, 2004
    
    Prior Year
    
    28, 2003($ in millions)Net sales:Commercial
    
    $
    144.4
    
    
    
    2.0
    %
    
    $
    141.6
    
    
    $
    411.0
    
    
    
    11.9
    %
    
    $
    367.3Military
    
    
    103.0
    
    
    
    (19.5
    )%
    
    
    128.0
    
    
    
    316.4
    
    
    
    (13.1
    )%
    
    
    364.0Business Jets
    
    
    47.9
    
    
    
    7.6
    %
    
    
    44.5
    
    
    
    157.0
    
    
    
    30.3
    %
    
    
    120.5Total net sales
    
    $
    295.3
    
    
    
    (6.0
    )%
    
    $
    314.1
    
    
    $
    884.4
    
    
    
    3.8
    %
    
    $
    851.8Costs and expenses:Cost of sales
    
    
    262.5
    
    
    
    2.8
    %
    
    
    255.3
    
    
    
    745.7
    
    
    
    9.9
    %
    
    
    678.3Selling, general
and administrative
    
    
    64.4
    
    
    
    9.7
    %
    
    
    58.7
    
    
    
    190.1
    
    
    
    13.1
    %
    
    
    168.1Total costs and
expenses
    
    $
    326.9
    
    
    
    4.1
    %
    
    $
    314.0
    
    
    $
    935.8
    
    
    
    10.6
    %
    
    $
    846.4Operating income
(loss)
    
    
    (31.6
    )
    
    
    (31,700.0
    )%
    
    
    0.1
    
    
    
    (51.4
    )
    
    
    (1,051.9
    )%
    
    
    5.4Interest expense, net
    
    
    (10.0
    )
    
    
    5.7
    %
    
    
    (10.6
    )
    
    
    (28.7
    )
    
    
    (40.7
    )%
    
    
    (20.4
    )Net income (loss)
    
    $
    (41.6
    )
    
    
    (296.2
    )%
    
    $
    (10.5
    )
    
    $
    (80.1
    )
    
    
    (434.0
    )%
    
    $
    (15.0
    )
 Comparison of Results of Operations for the Three Months Ended September 26,
2004 and September 28, 2003 Net sales. Net sales for the three months ended September 26, 2004 were
$295.3 million, a decrease of $18.8 million or 6.0% compared with net sales of
$314.1 million for the same period in the prior year. On July 2, 2003, the
Company completed the acquisition of Aerostructures. As such, the comparative
period for 2003 includes a full quarter of sales activity for programs acquired
from Aerostructures. Management believes that total net sales in the fourth
quarter will be comparable to third quarter net sales. When comparing the three
months ended September 26, 2004 with the same period in the prior year:  
    
    Commercial net sales increased approximately $2.8 million or
2.0% as a result of an increase in Airbus contract sales of $8.4
million partially offset by $5.6 million due to lower aircraft
delivery rates on Boeing contracts. The decrease in Boeing delivery
rates was due to the continuing downturn in the domestic commercial
airline industry following the economic downturn in 2000 and the
terrorist attacks of September 11, 2001 which caused reduced demand
for our products by Boeing because the commercial airlines reduced
capacity and ordered fewer new aircraft. Management believes, based
upon current contractual delivery schedules provided by customers,
that Airbus deliveries will continue to trend upwards through 2005
and that Boeing deliveries will bottom out in 2004 followed by a
gradual increase beginning in 2005 and 2006 as a result of increased
demand by the airline customers. Management has addressed this
decline in net sales since 2003 by reducing labor, material, and
overhead costs in addition to the facility consolidation project; 22




---



##### Table of Contents




    
    Military net sales decreased approximately $25.0 million or
19.5% due to lower selling prices for the C-17 program and the
completion of a detail parts contract with Northrop Grumman,
partially offset by a slight increase in sales from contracts
acquired from Aerostructures and other military programs. Management
believes, based upon current contractual delivery schedules provided
by customers and pending new business proposals, that sales will
recover in the fourth quarter of 2004 and trend upward in 2005; and
    
    Business Jet net sales increased approximately $3.4 million
or 7.6% due to an increase in sales on our Embraer and Gulfstream IV
programs of $6.6 million and $2.7 million, respectively, partially
offset by decreased delivery rates and prices on the Gulfstream V
program this quarter. Management believes, based upon current
contractual delivery schedules provided by customers, that fourth
quarter sales will be comparable to third quarter net sales. Cost of sales. Cost of sales for the three months ended September 26,
2004 was $262.5 million, an increase of $7.2 million compared with cost of
sales of $255.3 million for the three months ended September 28, 2003. The
increase in cost of sales was due to additional restructuring and facility
consolidation charges of $31.2 million in the third quarter of 2004 (see Recent
Events for further discussion of restructuring charges), primarily offset by
third quarter 2003 program margin reductions of $25 million. Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended September 26, 2004 were
$64.4 million, a increase of $5.7 million compared with selling, general and
administrative expenses of $58.7 million for the same period in the prior year.
The increase was primarily due to expenses of $6.1 million incurred as part of
our investment in the Boeing 7E7 program. Operating income (loss). Operating loss for the three months ended
September 26, 2004 was ($31.6) million, compared to operating income of $0.1
million for the same period in the prior year. The increase in loss of ($31.7)
million is primarily due to the additional restructuring charges and facility
consolidation charges of $31.2 million, $6.1 million of expenses related to our
investment in the Boeing 7E7 program and lower prices on the C-17 program of
approximately 20%. These items were partially offset by the third quarter 2003
program margin reductions of $25 million. Interest expense, net. Interest expense, net for the three months ended
September 26, 2004 was $10.0 million, a decrease of $0.6 million or 5.7%
compared with $10.6 million for the same period in the prior year. In July
2003, Vought paid off the acquired Aerostructures debt and accelerated the
amortization of unamortized debt origination costs. These charges were offset
by gains of $2.8 million on interest rate swaps. Due to the prepayment of
$60.0 million of term loans in 2003, the total amount of debt was essentially
the same for the third quarter year over year. As such, interest expense, net
remained flat for the three months ended September 26, 2004 as compared with
the same period in 2003. Comparison of Results of Operations for the Nine Months Ended September 26,
2004 and September 28, 2003 Net sales. Net sales for the nine months ended September 26, 2004 were
$884.4 million, an increase of $32.6 million or 3.8% compared with net sales of
$851.8 million for the same period in the prior year. On July 2, 2003, the
Company completed the acquisition of Aerostructures. As such, the comparative
period for 2003 includes one quarter of sales activity for programs acquired
from Aerostructures. When comparing the first nine months of 2004 with the
same period in the prior year: 23




---



##### Table of Contents




    
    Commercial net sales increased approximately $43.7 million or
11.9% as a result of six months of sales totaling $77.7 million and
a third quarter increase in sales of $8.6 million from contracts
acquired in the acquisition of Aerostructures offset by a $42.6
million decrease in sales caused by lower aircraft delivery rates on
other commercial contracts. The decrease in delivery rates was due
to the continuing downturn in the commercial airline industry
following the economic downturn in 2000 and the terrorist attacks of
September 11, 2001 which caused reduced demand for our products by
Boeing because commercial airlines reduced capacity and ordered
fewer new aircraft. Management believes, based upon current
contractual delivery schedules provided by customers, that Airbus
deliveries will continue to trend upwards through 2005 and that
Boeing deliveries will bottom out in 2004 followed by a gradual
increase beginning in 2005 and 2006 as a result of increased demand
by the airline customers. Management has addressed this decline in
net sales by reducing labor, material, and overhead costs in
addition to the facility consolidation project;
    
    Military net sales decreased approximately $47.6 million or
13.1% due to lower selling prices for the C-17 program and the
completion of a detail parts contract with Northrop Grumman. This
decrease in pricing was partially offset by six months of additional
sales in 2004 from the Aerostructures facilities totaling $23.5
million and a slight third quarter increase in sales from contracts
acquired from Aerostructures. Management believes, based upon
current contractual delivery schedules provided by customers and
pending new business proposals, that sales will trend upward for the
remainder of 2004 and into 2005;
    
    Business Jet net sales increased approximately $36.5 million
or 30.3% due primarily to six months of sales totaling $25.8 million
and a third quarter increase of $9.5 million from Aerostructures
contracts. Management believes, based upon current contractual
delivery schedules provided by customers, that fourth quarter sales
will be comparable to third quarter net sales. Cost of sales. Cost of sales for the nine months ended September 26, 2004
was $745.7 million, an increase of $67.4 million compared with cost of sales of
$678.3 million for the nine months ended September 28, 2003. The increase in
cost of sales was consistent with increased sales, along with restructuring and
facility consolidation charges of $64.7 million in the first nine months of
2004. Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended September 26, 2004 were
$190.1 million, an increase of $22.0 million compared with selling, general and
administrative expenses of $168.1 million for the same period in the prior
year. The increase was primarily due to $15.1 million of expenses incurred as
part of our investment in the 7E7 program, a $2.3 million increase to pension
expense, a $6.8 million increase in retiree fringe benefits and slightly higher
expenses due to six months of additional expenses in 2004 from the
Aerostructures facilities, partially offset by lower stock compensation expense
of $11.1 million in 2003. Operating income (loss). Operating loss for the nine months ended
September 26, 2004 was ($51.4) million, compared to operating income of $5.4
million for the same period in the prior year. The increase in loss of ($56.8)
million is primarily due to the restructuring and facility consolidation
charges of $64.7 million during the first nine months of 2004, $15.1 million of
costs incurred related to our investment in the Boeing 7E7 program, and lower
margin on the C-17 program due to lower prices on the current contract
partially offset by increased overall sales year over year of $32.6 million. 24




---



##### Table of Contents



Interest expense, net. Interest expense, net for the nine months ended
September 26, 2004 was $28.7 million, an increase of $8.3 million or 40.7%
compared with $20.4 million for the same period in the prior year. Interest
expense, net increased primarily due to the issuance on July 2, 2003 of $270
million of 8% Senior Notes due 2011, partially offset by $99.7 million of
reductions on Voughts senior secured credit facilities made during the
corresponding period of 2003. Critical Accounting Policies Voughts discussion and analysis of its financial position and results of
operations are based upon its consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported for assets and
liabilities, disclosure of contingent assets and liabilities, and the reported
amounts of revenue and expenses. Although Vought evaluates its estimates, which
are based on the most current and best available information and on various
other assumptions that are believed to be reasonable under the circumstances,
on an ongoing basis, actual results may differ from these estimates under
different assumptions or conditions. We believe there have been no significant
changes to our critical accounting policies during the nine months ended
September 26, 2004. See Managements Discussion and Analysis of Financial
Condition and Results of Operations included in our registration statement on
Form S-4 as amended, filed with the SEC on June 15, 2004 for a complete
discussion. Liquidity and Capital Resources On February 26, 2004, Vought announced a major restructuring project to
consolidate manufacturing operations, primarily in the Dallas, Texas
facilities. The Company currently expects that the total cost of this site
consolidation project, which it anticipates completing in the next 3 years, is
currently estimated to be in the range of $300 million. It is currently
anticipated that funding to complete the project will come from a combination
of the $35 million grant received from the Texas Enterprise Fund in April 2004,
the sale of the Hawthorne facility, and other financing arrangements (which may
include but are not limited to, additional external financing), which the
Company is in the process of pursuing. While the Company is in discussions
with various financing sources, there can be no assurance that we will obtain
such financing on favorable terms or at all. Based upon the Companys preliminary restructuring plan, the Company
currently estimates that the benefit to operating earnings and cash flows,
annually, will potentially be in the range of $30.0 million to $40.0 million,
following the substantial completion of such project. However, due to the scale
and nature of estimates involved with consolidation of facilities of this size,
there can be no assurance that the benefit will be realized in full or that
unanticipated additional costs will not outweigh the benefits of the project. We have been selected as a structures partner on the Boeing 7E7 aircraft
program. We anticipate receiving a Memorandum of Agreement from Boeing during
the fourth quarter of 2004 with the initial scope of work. The business terms
will require us to invest significant amounts of money to design, develop,
test, produce tools, purchase capital assets and purchase working capital to
support this program. We are also exploring options with Boeing and another
major structures manufacturer to work together on additional work scope for
this program. The exact terms and structure of this relationship will depend
on the scope of work. The entire scope of production has not been finalized;
however, our current estimate for our initial investment will utilize cash
on-hand and projected cash from operations as well as additional financing. We
anticipate a total non-recurring investment between $350 and $450 million with
a maximum negative cash position, net of cash received on the program, to be
approximately $200 to $250 million peaking in 2009. We are currently seeking
to obtain financing that will cover this negative cash position as well as a
portion of the site consolidation expenses. In the process, we intend 25




---



##### Table of Contents



to
restructure or refinance our current term loans and debt covenants as well as
obtain an update to our current credit rating. We expect to recover our
investment through delivery and sale of aircraft beginning in 2008. As of September 26, 2004, Vought had long-term debt of approximately
$568.1 million, which included $295.9 million that was incurred under its
senior secured credit facilities, $270 million of 8% Senior Notes due 2011 and
$2.2 million of capital leases. In addition, Vought had $136.0 million of cash
at September 26, 2004. Net cash provided by operating activities for the nine months ended
September 26, 2004 was $60.4 million, a decrease of $105.2 million or 63.5%
compared to net cash provided by operating activities of $165.6 million for the
same period in the prior year. The decrease from the prior year was primarily
due to lower cash receipts on the C-17 program in addition to facility
consolidation costs and our expenditures related to our investment in the
Boeing 7E7 program. Cash used in investing activities generally has been for capital
expenditures. Net cash used in investing activities for capital expenditures
during the nine months ended September 26, 2004 was $29.5 million, an increase
of $8.8 million or 42.5% compared to $20.7 million for the same period in the
prior year. The increase reflects the Aerostructures acquisition and timing of
investment in our facilities. The capital expenditures are an investment in
our facilities and capabilities, such as continuing modernization,
productivity, efficiency and technology improvements. Capital expenditures for
2004 are expected to be approximately $60 million. The principal source of liquidity for Vought is cash provided by
operations. Voughts liquidity requirements depend on a number of factors,
including the level of delivery rates under our contracts. Working capital
needs fluctuate between periods as a result of changes in delivery rates under
existing contracts and production associated with new contracts. For some
military aircraft programs, milestone payments finance working capital, which
helps to improve liquidity. However, our business generates sufficient cash
flow to manage our general liquidity needs and Vought has not historically
needed short-term borrowings to finance normal operations. The following table
summarizes the scheduled maturities of financial obligations and expiration
dates of commitments as of September 26, 2004: 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total($ in millions)Senior secured credit facilitiesTerm loan A
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Term loan B
    
    
    
    
    
    
    
    
    
    
    24.1
    
    
    
    50.0
    
    
    
    
    
    
    
    
    
    
    
    74.1Term loan C
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40.2
    
    
    
    82.1
    
    
    
    
    
    
    
    122.3Term loan X
    
    
    
    
    
    
    14.6
    
    
    
    84.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99.5Total senior secured credit
facilities (1)
    
    $
    
    
    
    $
    14.6
    
    
    $
    109.0
    
    
    $
    90.2
    
    
    $
    82.1
    
    
    $
    
    
    
    $
    295.9Capital leases
    
    
    0.2
    
    
    
    0.9
    
    
    
    0.8
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    3.1Operating leases
    
    
    4.1
    
    
    
    14.0
    
    
    
    8.5
    
    
    
    1.5
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    28.9Purchase Obligations (2)
    
    
    8.7
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.8Total financial obligations
    
    
    13.0
    
    
    $
    30.6
    
    
    $
    118.3
    
    
    $
    92.9
    
    
    $
    82.6
    
    
    $
    0.3
    
    
    $
    337.78% senior notes due 2011 (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270.0
    
    
    
    270.0Total
    
    $
    13.0
    
    
    $
    30.6
    
    
    $
    118.3
    
    
    $
    92.9
    
    
    $
    82.6
    
    
    $
    270.3
    
    
    $
    607.7
 26




---



##### Table of Contents



(1)
    
    In addition to the obligations in the table, at September 26, 2004,
we had contractual interest payment obligations as follows: (a)
variable interest rate payments on $295.9 million outstanding under our
senior secured credit facilities based upon LIBOR plus the applicable
margin, which correlated to interest rates of 5.14%, 5.39% and 4.89% on
Tranche B, Tranche C and Tranche X, respectively, and (b) $21.6 million
per year on the 8% senior notes due 2011.(2)
    
    Purchase obligations represent property, plant and equipment
commitments at September 26, 2004. Capital expenditures for 2004 are
expected to be approximately $60 million which amount includes
property, plant and equipment commitments at September 26, 2004.
Although we also have significant other purchase obligations, most
commonly in the form of purchase orders, the timing of the purchase is
often variable rather than specific and the payments made by the
customer in accordance with our long term contract agreements
substantially reimburses the payments due. Accordingly, these
obligations are not included in the table. We believe that cash flow from operations, cash and cash equivalents on
hand, and funds available under our amended credit facility will provide
adequate funds for our working capital needs, planned capital expenditures, and
near term debt service obligations. Our ability to pay interest and principal
on the indebtedness and to satisfy our other obligations will depend upon
future operating performance and the availability of refinancing indebtedness,
which will be affected by prevailing economic conditions and financial,
business and other factors, some of which are beyond our control. From time to time we actively consider strategic opportunities to expand
our operations and leverage our capabilities. We evaluate acquisitions, joint
ventures, alliances or co-production programs as opportunities arise and may be
engaged in varying levels of negotiations with potential counter-parties for
any such transaction at any time. As part of our operation and strategic plan,
we intend to bid for new aircraft programs in the markets that we serve when
the opportunities arise. As we pursue these opportunities, we may require
additional equity or debt financing to consummate any such transaction, and
there can be no assurance that we may be able to obtain such financing on
favorable terms, or at all. We may continue to manage market risk with respect to interest rates by
entering into swap agreements, as we have done in the past. To some extent, we
manage commodities price risk by entering into long-term fixed-price contracts.
However, we do not have any futures hedge with respect to raw materials used
to build our products such as aluminum, and therefore we are subject to price
fluctuations for raw materials or utilities over the long term. Similarly, we
do not hedge for foreign currency exchange risk because we have no or limited
exposure to this risk. In the case of our substantial sales to Airbus in
Europe, purchase prices and payment terms under the relevant contracts are
denominated in U.S. dollars. Debt Covenants.There have been no changes to our debt covenants during
the nine months ended September 26, 2004, as compared to those we discussed in
Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our registration statement on Form S-4, as amended,
filed with the SEC on June 15, 2004. We are currently in compliance with the covenants in the amended senior
secured credit facilities and the notes. 27




---



##### Table of Contents



Accounting Changes and Pronouncements On December 8, 2003, the President signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The
Act introduces a prescription drug benefit under Medicare (Medicare Part D)
as well as a federal subsidy to employers who sponsor retiree health care
benefit plans that provide a prescription drug plan that is at least
actuarially equivalent to Medicare Part D. In January 2004, the FASB issued a
Staff Position (FSP) that allows companies to defer recognition of the impact
that the Act might have on the benefit obligations they provide their retirees,
pending the issuance of specific guidance on the accounting for the federal
subsidy introduced by the Act. The Company deferred recognition of the impact
of the Act as permitted by the FSP at December 31, 2003. As a result of the
first quarter restructuring, the deferral election expired. The Company has
included the estimated effects of this pronouncement in its accumulated
postretirement benefit obligation (APBO) at March 28, 2004. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a result of our operating and financing activities, we are exposed to
various market risks that may affect our consolidated results of operations and
financial position. These market risks include fluctuations in interest rates,
which impact the amount of interest we must pay on our variable-rate debt. Other than the interest rate swaps described below, financial instruments
that potentially subject us to significant concentrations of credit risk
consist principally of cash and cash equivalents and trade accounts receivable.
We maintain cash and cash equivalents with various financial institutions and
perform periodic evaluations of the relative credit standing of those financial
institutions. We have not experienced any losses in such accounts and believe
that we are not exposed to any significant credit risk on cash and cash
equivalents. We are highly dependent on the availability of essential materials and
parts from our suppliers. We are dependent upon the ability of our suppliers
to provide material that meets specifications, quality standards, delivery
schedules and anticipated costs. Suppliers failure to provide acceptable
material and parts would adversely affect our production schedules and contract
profitability. We maintain an extensive qualification and performance
surveillance system to control risk associated with such reliance
on suppliers. We are dependent on third parties for all information
technology services. To a lesser extent, we also are exposed to fluctuations
in the prices of certain commodities, such as electricity, natural gas and
aluminum. Interest Rate Risks From time to time, we may enter into interest rate swap agreements or
other financial instruments in the normal course of business for purposes other
than trading. These financial instruments are used to mitigate interest rate
or other risks, although to some extent they expose us to market risks and
credit risks. We control the credit risks associated with these instruments
through the evaluation of the creditworthiness of the counter parties. In the
event that a counter party fails to meet the terms of a contract or agreement
then our exposure is limited to the current value, at that time, of the
interest rate differential, not the full notional or contract amount.
Management believes that such contracts and agreements have been executed with
creditworthy financial institutions. As such, we consider the risk of
nonperformance to be remote. 28




---



##### Table of Contents



Management has performed sensitivity analyses to determine how market rate
changes will affect the fair value of the market risk sensitive hedge positions
and all other debt that we will bear. Such an analysis is inherently limited
in that it represents a singular, hypothetical set of assumptions. Actual
market movements may vary significantly from our assumptions. Fair value
sensitivity is not necessarily indicative of the ultimate cash flow or earnings
effect we would recognize from the assumed market rate movements. The amendment
of the senior secured credit facilities and issuance of the 8% Senior Notes due
2011, resulted in cash flow risk due to changes in interest rates with respect
to $295.9 million of the floating rate balance previously borrowed under our
senior secured credit facilities. A one-percentage point increase in interest
rates on our variable rate debt as of September 26, 2004 would decrease the
annual pre-tax income of the Company by approximately $3.0 million. All of our
remaining debt is at fixed rates; therefore, changes in market interest rates
under these instruments would not significantly impact our cash flows or
results of operations. Utility Price Risks The Company has exposure to utility price risks as a result of volatility
in the cost and supply of energy and in natural gas prices. To minimize this
risk, we have entered into fixed price contracts at certain of the
manufacturing locations for a portion of its energy usage for periods of up to
three years. Although these contracts would reduce the risk to us during the
contract period, future volatility in the supply and pricing of energy and
natural gas could have an impact on our consolidated results of operations. 
 ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Chief Executive
Officer and President, and the Vice President, Controller and Treasurer, the
Companys management has evaluated the effectiveness of the Companys
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of
the end of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and President and the Vice President, Controller and
Treasurer have concluded that these disclosure controls and procedures are
effective for ensuring that information required to be disclosed by us in the
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. There were no changes in the Companys internal
control over financial reporting during the quarter ended September 26, 2004,
that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting. In conjunction with
its evaluation, management has communicated its findings to the Audit Committee
of the Board of Directors. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements. These statements relate
to future events or our future financial performance, and involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as
may, will, should, expects, intends, plans, anticipates,
believes, estimates, predicts, potential, continue, assumption or
the negative of these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined in Risk Factors in our registration statement on
Form S-4, as amended, filed with the U.S. Securities and Exchange Commission
(the SEC) on June 15, 2004 and elsewhere in this report. These factors
include among other things (i) reduced demand for new commercial aircraft due
to reduction in airline 29




---



##### Table of Contents



traffic and the financial condition of the airline
industry, (ii) business risks inherent to the airline industry including armed
conflict, terrorism, global health warnings, government regulation, rising fuel
and labor costs, lower than expected profitability, and general economic
conditions and (iii) reduced demand for military aircraft due to reductions in
defense spending, cancellation or modification of military aircraft programs
and changes to government export controls. These and other factors may cause
our actual results to differ materially from any forward-looking statement. The forward-looking statements in this document are intended to be subject
to the safe harbor protection provided by Sections 27A of the Securities Act
and 21E of the Exchange Act. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. These
forward-looking statements are made as of the date of this report and, except
as required under the federal securities laws and the rules and regulations of
the SEC, we assume no obligation to update or revise them or to provide reasons
why actual results may differ. We do not undertake any responsibility to
release publicly any revisions to these forward-looking statements to take into
account events or circumstances that occur after the date of this report.
Additionally, we do not undertake any responsibility to update you on the
occurrence of any unanticipated events which may cause actual results to differ
from those expressed or implied by the forward-looking statements contained in
this report. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS In the normal course of business, we are party to various lawsuits, legal
proceedings and claims arising out of our business. We cannot predict the
outcome of these lawsuits, legal proceedings and claims with certainty.
Nevertheless, we believe that the outcome of any currently existing proceeding,
even if determined adversely, would not have a material adverse effect on our
business, financial condition or results of operations. 
 ITEM 5. OTHER INFORMATION The Company has been made aware that affiliates of its Independent
Registered Public Accounting Firm, Ernst & Young LLP (Ernst & Young), in
China and Korea performed certain tax return and payment services that raise
issues under the auditor independence rules. These services are
not permitted under the auditor independence rules. The Company, its Audit
Committee and Ernst & Young have considered the impact the providing of these
services may have had on Ernst & Youngs independence with respect to the
Company and concluded there has been no impairment of Ernst & Youngs
independence. The services were administrative in nature and the associated
fees over the period the services were provided (fiscal year 2002) aggregated
to approximately $19,685. The services have been discontinued. 30




---



##### Table of Contents



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (31.1)*
    
    Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.(31.2)*
    
    Certification of Principal Financial and Accounting Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.(32.1)*
    
    Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.(32.2)*
    
    Certification of Principal Financial and Accounting Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
  *
    
    Filed herewith(b)
    
    Reports on Form 8-K None. 31




---



##### Table of Contents



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Vought Aircraft Industries, Inc.(Registrant)November 10, 2004
    
    /s/ Cletus Glasener(Date)
    
    Cletus GlasenerVice President, Controller andTreasurer
 32