##### 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 June 27, 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 2-01
Dallas, 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 August 2, 2004 was 25,015,552.




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TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of June 27, 2004 and December 31, 2003 (unaudited)
    
    
    1Consolidated Statements of Operations for the three months and six months ended June 27, 2004 and June 29, 2003 (unaudited)
    
    
    2Consolidated Statements of Cash Flows for the six months ended June 27, 2004 and June 29, 2003 (unaudited)
    
    
    3Item 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
    
    
    29Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    30Signatures
    
    
    
    
    
    31Certification of Chief Executive Officer - Section 302Certification of Principal Financial and Accounting Officer - Section 302Certification of Chief Executive Officer - Section 906Certification of Principal Financial and Accounting Officer - Section 906




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PART 1. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS Vought Aircraft Industries, Inc.
Consolidated Balance Sheets (Unaudited)
($ in millions)
 June 27,
    
    December 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    162.6
    
    
    $
    106.4Accounts receivable
    
    
    119.2
    
    
    
    114.5Inventories
    
    
    209.5
    
    
    
    197.3Other current assets
    
    
    5.7
    
    
    
    6.4Total current assets
    
    
    497.0
    
    
    
    424.6Property, plant and equipment, net
    
    
    396.8
    
    
    
    414.1Goodwill, net
    
    
    527.7
    
    
    
    527.7Identifiable intangible assets, net
    
    
    106.5
    
    
    
    114.9Debt origination costs, net and other assets
    
    
    16.9
    
    
    
    18.4Total assets
    
    $
    1,544.9
    
    
    $
    1,499.7Liabilities and stockholders equity (deficit)Current liabilities:Accounts payable, trade
    
    $
    76.7
    
    
    $
    54.3Accrued and other liabilities
    
    
    76.3
    
    
    
    77.7Accrued payroll and employee benefits
    
    
    40.4
    
    
    
    46.4Accrued post-employment benefits-current
    
    
    54.1
    
    
    
    54.1Accrued pension-current
    
    
    30.5
    
    
    
    30.5Capital lease obligation
    
    
    1.0
    
    
    
    1.2Accrued contract liabilities
    
    
    194.0
    
    
    
    192.6Total current liabilities
    
    
    473.0
    
    
    
    456.8Long-term liabilities:Accrued post employment benefits
    
    
    491.5
    
    
    
    477.7Accrued pension
    
    
    293.8
    
    
    
    282.0Long-term bank debt
    
    
    295.9
    
    
    
    295.9Long-term bond debt
    
    
    270.0
    
    
    
    270.0Long-term capital lease obligation
    
    
    2.4
    
    
    
    3.3Other non-current liabilities
    
    
    79.7
    
    
    
    36.9Total liabilities
    
    
    1,906.3
    
    
    
    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
    
    
    (3.9
    )
    
    
    (3.9
    )Stockholders loans
    
    
    (2.3
    )
    
    
    (2.3
    )Accumulated deficit
    
    
    (257.9
    )
    
    
    (219.4
    )Accumulated other comprehensive loss
    
    
    (515.6
    )
    
    
    (515.6
    )Total stockholders equity (deficit)
    
    $
    (361.4
    )
    
    $
    (322.9
    )Total liabilities and stockholders equity (deficit)
    
    $
    1,544.9
    
    
    $
    1,499.7
 See accompanying notes 1




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Vought Aircraft Industries, Inc.
Consolidated Statements of Operations (Unaudited)
($ in millions) For the Three Months Ended
    
    For the Six Months EndedJune 27, 2004
    
    June 29, 2003
    
    June 27, 2004
    
    June 29, 2003Net sales
    
    $
    294.2
    
    
    $
    274.2
    
    
    $
    589.1
    
    
    $
    537.7Costs and expensesCost of sales
    
    
    236.5
    
    
    
    210.8
    
    
    
    483.2
    
    
    
    423.0Selling, general and administrative expenses
    
    
    63.0
    
    
    
    53.8
    
    
    
    125.7
    
    
    
    109.4Total costs and expenses
    
    
    299.5
    
    
    
    264.6
    
    
    
    608.9
    
    
    
    532.4Operating income (loss)
    
    
    (5.3
    )
    
    
    9.6
    
    
    
    (19.8
    )
    
    
    5.3Other income (expense)Non-cash
income  interest rate swaps
    
    
    
    
    
    
    2.6
    
    
    
    
    
    
    
    4.8Interest income
    
    
    0.6
    
    
    
    0.6
    
    
    
    1.1
    
    
    
    1.1Interest expense
    
    
    (10.1
    )
    
    
    (7.5
    )
    
    
    (19.8
    )
    
    
    (15.7
    )Income (loss) before income taxes
    
    
    (14.8
    )
    
    
    5.3
    
    
    
    (38.5
    )
    
    
    (4.5
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (14.8
    )
    
    $
    5.3
    
    
    $
    (38.5
    )
    
    $
    (4.5
    )
 See accompanying notes 2




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Vought Aircraft Industries, Inc.
Consolidated Statements of Cash Flows (Unaudited)
($ in millions)  For the Six Months EndedJune 27, 2004
    
    June 29, 2003Operating activitiesNet loss
    
    $
    (38.5
    )
    
    $
    (4.5
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation and amortization
    
    
    43.6
    
    
    
    33.4Stock compensation expense
    
    
    
    
    
    
    11.1Loss from asset sales
    
    
    1.5
    
    
    
    0.2Non-cash income  interest rate swaps
    
    
    
    
    
    
    (4.8
    )Changes in current assets and liabilities:Accounts receivable
    
    
    (4.7
    )
    
    
    5.8Inventories, net of advances and progress billings
    
    
    (12.2
    )
    
    
    19.9Other current assets
    
    
    0.7
    
    
    
    1.9Accounts payable, trade
    
    
    22.4
    
    
    
    6.9Accrued interest
    
    
    0.4
    
    
    
    Accrued payroll and employee benefits
    
    
    (6.0
    )
    
    
    (24.0
    )Accrued and other liabilities
    
    
    (1.8
    )
    
    
    (5.6
    )Accrued contract liabilities
    
    
    1.4
    
    
    
    122.2Other assets and liabilities  long-term
    
    
    66.8
    
    
    
    2.9Net cash provided by operating activities
    
    
    73.6
    
    
    
    165.4Investing activitiesCapital expenditures
    
    
    (16.3
    )
    
    
    (13.8
    )Net cash used in investing activities
    
    
    (16.3
    )
    
    
    (13.8
    )Financing activitiesPayments on long-term bank debt
    
    
    
    
    
    
    (39.7
    )Payments on capital leases
    
    
    (1.1
    )
    
    
    Net cash used in financing activities
    
    
    (1.1
    )
    
    
    (39.7
    )Net increase in cash and cash equivalents
    
    
    56.2
    
    
    
    111.9Cash and cash equivalents at beginning of period
    
    
    106.4
    
    
    
    68.6Cash and cash equivalents at end of period
    
    $
    162.6
    
    
    $
    180.5
 See accompanying notes 3




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VOUGHT AIRCRAFT INDUSTRIES, INC.
Notes to Consolidated Financial Statements (Unaudited)  June 27, 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, 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 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 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 six months ended June 27,
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 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




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Three months ended
    
    Six months endedJune 27, 2004
    
    June 29, 2003
    
    June 27, 2004
    
    June 29, 2003$( in millions)Reported net income (loss)
    
    
    $(14.8
    )
    
    $
    5.3
    
    
    
    $(38.5
    )
    
    $
    (4.5
    )Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.1(14.8
    )
    
    
    5.3
    
    
    
    (38.5
    )
    
    
    6.6Compensation expense per SFAS No. 123
    
    
    (0.2
    )
    
    
    (0.2
    )
    
    
    (0.3
    )
    
    
    (11.4
    )Pro forma net income (loss) for SFAS
No. 123
    
    
    $(15.0
    )
    
    $
    5.1
    
    
    
    $(38.8
    )
    
    
    $(4.8
    )
 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 June 27,
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 in 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 the Texas General Land Office and
several other state and local agencies. By accepting this grant, the
Company is obligated to add 3,000 jobs in Texas over the next 6 years
with a prorated penalty (based on any shortfall of incremental
headcount to the 3,000 goal with the total penalty amount 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 dates for closing the Stuart and Nashville
facilities are December 31, 2005 and December 31, 2006, respectively. 5




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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 1,360 employees at these facilities. All Stuart employees
and Nashville non-union employees were offered the opportunity to transfer to
the Dallas site (with certain relocation costs provided), or to accept certain
termination benefits. These termination benefits include a severance component
for all terminated employees and a retention component for employees who elect
to remain with the Company through various completion dates during these
closures. The Company recorded a liability in the amount of $5.4 million
during the first quarter of fiscal 2004 associated with the severance
termination benefits. Additionally, the Company estimates total costs of
approximately $2.8 million associated with the retention termination benefits
and is recognizing this liability ratably over the period of employees
retention period. At June 27, 2004, a liability for the retention termination
benefits has been recorded in the amount of approximately $400,000. As part of the restructuring plan, the Company negotiated termination
benefit agreements with union employees at the Nashville location. These
negotiations were completed in April 2004. The Company offered these employees
the same employment options offered to all Stuart employees and Nashville
non-union employees. As a result of the union negotiations, certain retention
termination benefits were agreed to which are estimated to be approximately
$4.4 million. Beginning in April 2004, the Company began recognizing this
liability ratably over the employee retention period. At June 27, 2004, a
liability for retention termination benefits for union employees has been
recorded in the amount of approximately $400,000. Approximately 425 out of the 1,360 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 $10.8
million and will be recognized as incurred over 34 months. The following table
is a roll-forward of the amounts accrued for the restructuring liabilities
discussed above as of June 27, 2004. Accrued RestructuringLiability  EmployeeReductions($ in millions)Balance December 31, 2003
    
    $
    Restructuring liabilities recognized
    
    
    6.2Cash expenditures
    
    
    (0.1
    )Balance June 27, 2004
    
    $
    6.1
 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. 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
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. We have estimated 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
June 27, 2004, increased depreciation for these assets is $6.5
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 6




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measurable. The Company currently has $1.7 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 $0.2 million during the first half 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
$25.5 million for the six months ended June 27, 2004 which
is reflective of increased forward losses as a result of these costs
at the Stuart and Dallas facilities and reduced profit margins 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 $4.0 million of lease payments and maintenance
against the accrual. The remaining non-cancelable lease payments and
maintenance, extend to 2007. Additionally during 2002, the Company relocated
165 employees from the Perry facility to the Stuart facility. The following is
a rollforward of amounts accrued for restructuring at the Perry site: Accrued RestructuringReserve Perry Site($ 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 six months ending June 27, 2004
    
    
    (0.9
    )Balance June 27, 2004
    
    $
    8.6
 7




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Note 5  Inventories Inventories consisted of the following: June 27,
    
    December 31,2004
    
    2003($ in millions)Production costs of contracts in process
    
    $
    371.2
    
    
    $
    342.9Excess of production cost of delivered
items over the estimated average unit
cost
    
    
    0.7
    
    
    
    2.1Finished goods
    
    
    25.5
    
    
    
    24.2Less: unliquidated progress payments
    
    
    (187.9
    )
    
    
    (171.9
    )Total inventories
    
    $
    209.5
    
    
    $
    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: June 27,
    
    December 31,2004
    
    2003($ in millions)Programs and contracts
    
    $
    166.8
    
    
    $
    166.8Pension asset
    
    
    1.3
    
    
    
    1.3Less: accumulated amortization
    
    
    (61.6
    )
    
    
    (53.2
    )Identifiable intangible assets, net
    
    $
    106.5
    
    
    $
    114.9
 Scheduled remaining amortization of identifiable intangible assets is as follows as of June 27, 2004: ($ in millions)2004
    
    $
    8.32005
    
    
    13.12006
    
    
    13.12007
    
    
    12.32008
    
    
    11.2Thereafter
    
    
    48.5$
    106.5
 8




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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 at June 27, 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 $49.9 million of outstanding letters of credit. At June 27, 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
    
    Six MonthsEnded
    
    EndedPension Benefits
    
    June 27, 2004
    
    June 27, 2004($ in millions)Components of net periodic benefit cost (income):Service cost
    
    $
    7.1
    
    
    $
    14.6Interest cost
    
    
    25.0
    
    
    
    50.3Expected return on plan assets
    
    
    (29.8
    )
    
    
    (60.2
    )Recognized (gains) or losses
    
    
    9.5
    
    
    
    18.5Prior service cost recognized
    
    
    
    
    
    
    9.6Amortization of prior service cost
    
    
    0.1
    
    
    
    0.1Plan curtailment (gain)/loss
    
    
    (2.8
    )
    
    
    (12.7
    )Special termination benefits
    
    
    9.5
    
    
    
    10.7Net periodic benefit cost
    
    $
    18.6
    
    
    $
    30.9Defined contribution plan cost
    
    $
    1.8
    
    
    $
    3.6
 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 six months of 2003, the net periodic benefit cost and the defined
contribution plan costs were $8.7 million and $3.3 million, respectively.
There were no special termination benefits or plan curtailments in the first
six months of 2003. 9




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##### Table of Contents



Three Months
    
    Six MonthsEnded
    
    EndedOther Post-employment Benefits
    
    June 27, 2004
    
    June 27, 2004($ in millions)Components of net periodic benefit cost (income):Service cost
    
    $
    1.6
    
    
    $
    3.1Interest cost
    
    
    9.7
    
    
    
    19.1Expected return on plan assets
    
    
    
    
    
    
    Prior service cost recognized
    
    
    
    
    
    
    (0.2
    )Amortization of prior service cost
    
    
    0.5
    
    
    
    1.1Amortization of net (gain)/loss
    
    
    0.5
    
    
    
    0.9Plan curtailment (gain)/loss
    
    
    
    
    
    
    11.7Special termination benefits
    
    
    1.9
    
    
    
    2.6Net periodic benefit cost
    
    $
    14.2
    
    
    $
    38.3
 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 six months of 2003, the net periodic benefit cost was $19.0
million. There were no special termination benefits or plan curtailments in
the first six 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. 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. 10




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##### Table of Contents



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
    
    
    0.8Charges related to pre-existing warranties
    
    
    (0.8
    )Balance at June 27, 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 and Torrance, California facilities, 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 currently now underway at the Dallas
Facility. The Dallas facility is currently a Naval Weapons Industrial Reserve Plant,
which the Navy is leasing to us. The Navy manages and finances most of the
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 11




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##### Table of Contents



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 June 27, 2004, our balance sheet included an accrued liability of $7.9
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 six months ending
June 27, 2004
    
    
    (0.6
    )Balance at June 27, 2004
    
    $
    7.9
 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 $1.0 million for various management
services provided by Carlyle for each of the six month periods ended June 27,
2004 and June 29, 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




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##### Table of Contents



Consolidating Balance Sheet
June 27, 2004
($ in millions) Guarantor
    
    IntercompanyVought (1)
    
    Subsidiary(1)
    
    Eliminations
    
    TotalAssetsCurrent assets:Cash and cash equivalents
    
    $
    162.5
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    162.6Trade and other receivables
    
    
    107.3
    
    
    
    11.9
    
    
    
    
    
    
    
    119.2Intercompany receivable
    
    
    18.5
    
    
    
    1.4
    
    
    
    (19.9
    )
    
    
    Inventories
    
    
    195.7
    
    
    
    13.8
    
    
    
    
    
    
    
    209.5Other current assets
    
    
    5.5
    
    
    
    0.2
    
    
    
    
    
    
    
    5.7Total current assets
    
    
    489.5
    
    
    
    27.4
    
    
    
    (19.9
    )
    
    
    497.0Property, plant and equipment, net
    
    
    383.3
    
    
    
    13.5
    
    
    
    
    
    
    
    396.8Goodwill, net
    
    
    464.0
    
    
    
    63.7
    
    
    
    
    
    
    
    527.7Identifiable intangible assets, net
    
    
    106.5
    
    
    
    
    
    
    
    
    
    
    
    106.5Investment in affiliated company
    
    
    74.6
    
    
    
    
    
    
    
    (74.6
    )
    
    
    Debt origination costs, net and other assets
    
    
    16.8
    
    
    
    0.1
    
    
    
    
    
    
    
    16.9Total assets
    
    $
    1,534.7
    
    
    $
    104.7
    
    
    $
    (94.5
    )
    
    $
    1,544.9Liabilities and stockholders equity (deficit)Current liabilities:Accounts payable, trade
    
    $
    71.4
    
    
    $
    5.3
    
    
    $
    
    
     
    $
    76.7Accrued and other liabilities
    
    
    74.7
    
    
    
    1.6
    
    
    
    
    
    
    
    76.3Accrued payroll and employee benefits
    
    
    39.3
    
    
    
    1.1
    
    
    
    
    
    
    
    40.4Accrued postemployment benefits  current
    
    
    54.1
    
    
    
    
    
    
    
    
    
    
    
    54.1Accrued pension  current
    
    
    30.5
    
    
    
    
    
    
    
    
    
    
    
    30.5Intercompany payable
    
    
    1.4
    
    
    
    18.5
    
    
    
    (19.9
    )
    
    
    Capital lease obligations
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    1.0Accrued contract liabilities
    
    
    193.8
    
    
    
    0.2
    
    
    
    
    
    
    
    194.0Total current liabilities
    
    
    465.2
    
    
    
    27.7
    
    
    
    (19.9
    )
    
    
    473.0Long-term liabilities:Accrued postemployment benefits
    
    
    491.5
    
    
    
    
    
    
    
    
    
    
    
    491.5Accrued pension
    
    
    293.8
    
    
    
    
    
    
    
    
    
    
    
    293.8Long-term bank debt
    
    
    295.9
    
    
    
    
    
    
    
    
    
    
    
    295.9Long-term bond debt
    
    
    270.0
    
    
    
    
    
    
    
    
    
    
    
    270.0Long-term capital lease obligations
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    2.4Other non-current liabilities
    
    
    79.7
    
    
    
    
    
    
    
    
    
    
    
    79.7Total liabilities
    
    
    1,896.1
    
    
    
    30.1
    
    
    
    (19.9
    )
    
    
    1,906.3Stockholders 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 and CMG escrow
    
    
    (3.9
    )
    
    
    
    
    
    
    
    
    
    
    (3.9
    )Stockholders loans
    
    
    (2.3
    )
    
    
    
    
    
    
    
    
    
    
    (2.3
    )Accumulated deficit
    
    
    (257.9
    )
    
    
    (5.7
    )
    
    
    5.7
    
    
    
    (257.9
    )Accumulated other comprehensive loss
    
    
    (515.6
    )
    
    
    
    
    
    
    
    
    
    
    (515.6
    )Total stockholders equity (deficit)
    
    
    (361.4
    )
    
    
    74.6
    
    
    
    (74.6
    )
    
    
    (361.4
    )Total liabilities and stockholders equity (deficit)
    
    $
    1,534.7
    
    
    $
    104.7
    
    
    $
    (94.5
    )
    
    $
    1,544.9
 (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




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##### 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



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##### Table of Contents



Consolidating Statement of Operations
Three Months Ended June 27, 2004
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalNet sales
    
    $
    278.8
    
    
    $
    17.4
    
    
    $
    (2.0
    )
    
    $
    294.2Costs and expensesCost of sales
    
    
    226.0
    
    
    
    12.5
    
    
    
    (2.0
    )
    
    
    236.5Selling, general and administrative expenses
    
    
    61.8
    
    
    
    1.2
    
    
    
    
    
    
    
    63.0Total costs and expenses
    
    
    287.8
    
    
    
    13.7
    
    
    
    (2.0
    )
    
    
    299.5Operating income (loss)
    
    
    (9.0
    )
    
    
    3.7
    
    
    
    
    
    
    
    (5.3
    )Other income (expense)Interest income
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    0.6Interest expense
    
    
    (10.0
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    (10.1
    )Equity in income of consolidated subsidiaries
    
    
    3.6
    
    
    
    
    
    
    
    (3.6
    )
    
    
    Income (loss) before income taxes
    
    
    (14.8
    )
    
    
    3.6
    
    
    
    (3.6
    )
    
    
    (14.8
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (14.8
    )
    
    $
    3.6
    
    
    $
    (3.6
    )
    
    $
    (14.8
    )
 Consolidating Statement of Operations
Three Months Ended June 29, 2003
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalNet sales
    
    $
    274.2
    
    
    $
    
    
    
    $
    
    
    
    $
    274.2Costs and expensesCost of sales
    
    
    210.8
    
    
    
    
    
    
    
    
    
    
    
    210.8Selling, general and administrative expenses
    
    
    53.8
    
    
    
    
    
    
    
    
    
    
    
    53.8Total costs and expenses
    
    
    264.6
    
    
    
    
    
    
    
    
    
    
    
    264.6Operating income
    
    
    9.6
    
    
    
    
    
    
    
    
    
    
    
    9.6Other income (expense)FAS 133 non-cash income   interest rate swaps
    
    
    2.6
    
    
    
    
    
    
    
    
    
    
    
    2.6Interest income
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    0.6Interest expense
    
    
    (7.5
    )
    
    
    
    
    
    
    
    
    
    
    (7.5
    )Income before income taxes
    
    
    5.3
    
    
    
    
    
    
    
    
    
    
    
    5.3Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    5.3
    
    
    $
    
    
    
    $
    
    
    
    $
    5.3
 15




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##### Table of Contents



Consolidating Statement of Operations
Six Months Ended June 27, 2004
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalNet sales
    
    $
    560.3
    
    
    $
    32.5
    
    
    $
    (3.7
    )
    
    $
    589.1Costs and expensesCost of sales
    
    
    458.6
    
    
    
    28.3
    
    
    
    (3.7
    )
    
    
    483.2Selling, general and administrative expenses
    
    
    123.3
    
    
    
    2.4
    
    
    
    
    
    
    
    125.7Total costs and expenses
    
    
    581.9
    
    
    
    30.7
    
    
    
    (3.7
    )
    
    
    608.9Operating income (loss)
    
    
    (21.6
    )
    
    
    1.8
    
    
    
    
    
    
    
    (19.8
    )Other income (expense)Interest income
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    1.1Interest expense
    
    
    (19.6
    )
    
    
    (0.2
    )
    
    
    
    
    
    
    (19.8
    )Equity in income of consolidated subsidiaries
    
    
    1.6
    
    
    
    
    
    
    
    (1.6
    )
    
    
    Income (loss) before income taxes
    
    
    (38.5
    )
    
    
    1.6
    
    
    
    (1.6
    )
    
    
    (38.5
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (38.5
    )
    
    $
    1.6
    
    
    $
    (1.6
    )
    
    $
    (38.5
    )
 Consolidating Statement of Operations
Six Months Ended June 29, 2003
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalNet sales
    
    $
    537.7
    
    
    $
    
    
    
    $
    
    
    
    $
    537.7Costs and expensesCost of sales
    
    
    423.0
    
    
    
    
    
    
    
    
    
    
    
    423.0Selling, general and administrative expenses
    
    
    109.4
    
    
    
    
    
    
    
    
    
    
    
    109.4Total costs and expenses
    
    
    532.4
    
    
    
    
    
    
    
    
    
    
    
    532.4Operating income
    
    
    5.3
    
    
    
    
    
    
    
    
    
    
    
    5.3Other income (expense)FAS 133 non-cash income   interest rate swaps
    
    
    4.8
    
    
    
    
    
    
    
    
    
    
    
    4.8Interest income
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    1.1Interest expense
    
    
    (15.7
    )
    
    
    
    
    
    
    
    
    
    
    (15.7
    )Loss before income taxes
    
    
    (4.5
    )
    
    
    
    
    
    
    
    
    
    
    (4.5
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (4.5
    )
    
    $
    
    
    
    $
    
    
    
    $
    (4.5
    )
 16




---



##### Table of Contents



Consolidating Statement of Cash Flows
Six Months Ended June 27, 2004
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalOperating activitiesNet income (loss)
    
    $
    (38.5
    )
    
    $
    1.6
    
    
    $
    (1.6
    )
    
    $
    (38.5
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation & amortization
    
    
    41.5
    
    
    
    2.1
    
    
    
    
    
    
    
    43.6Loss from asset sales
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    1.5Income from investment in consolidated subsidiaries
    
    
    (1.6
    )
    
    
    
    
    
    
    1.6
    
    
    
    Changes in current assets and liabilities:Accounts receivable
    
    
    2.2
    
    
    
    (6.9
    )
    
    
    
    
    
    
    (4.7
    )Intercompany accounts receivable
    
    
    (12.7
    )
    
    
    (1.4
    )
    
    
    14.1
    
    
    
    Inventories, net of advance and progress billings
    
    
    (11.5
    )
    
    
    (0.7
    )
    
    
    
    
    
    
    (12.2
    )Other current assets
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    0.7Accounts payable, trade
    
    
    23.9
    
    
    
    (1.5
    )
    
    
    
    
    
    
    22.4Intercompany accounts payable
    
    
    1.4
    
    
    
    12.7
    
    
    
    (14.1
    )
    
    
    Accrued payroll and employee benefits
    
    
    (6.1
    )
    
    
    0.1
    
    
    
    
    
    
    
    (6.0
    )Accrued and other liabilities
    
    
    (1.8
    )
    
    
    0.4
    
    
    
    
    
    
    
    (1.4
    )Accrued contract liabilities
    
    
    5.5
    
    
    
    (4.1
    )
    
    
    
    
    
    
    1.4Other assets and liabilities  long-term
    
    
    66.8
    
    
    
    
    
    
    
    
    
    
    
    66.8Net cash provided by operating activities
    
    
    71.3
    
    
    
    2.3
    
    
    
    
    
    
    
    73.6Investing activitiesCapital expenditures
    
    
    (15.2
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    (16.3
    )Net cash used in investing activities
    
    
    (15.2
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    (16.3
    )Financing activitiesPayments on capital leases
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )Net cash used in financing activities
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )Net increase in cash and cash equivalents
    
    
    56.1
    
    
    
    0.1
    
    
    
    
    
    
    
    56.2Cash and cash equivalents at beginning of period
    
    
    106.4
    
    
    
    
    
    
    
    
    
    
    
    106.4Cash and cash equivalents at end of period
    
    $
    162.5
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    162.6
 17




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##### Table of Contents



Consolidating Statement of Cash Flows
Six Months Ended June 29, 2003
($ in millions) Guarantor
    
    IntercompanyVought
    
    Subsidiary
    
    Eliminations
    
    TotalOperating activitiesNet loss
    
    $
    (4.5
    )
    
    $
    
    
    
    $
    
    
    
    $
    (4.5
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation & amortization
    
    
    33.4
    
    
    
    
    
    
    
    
    
    
    
    33.4Loss from asset sales
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2Stock compensation expense
    
    
    11.1
    
    
    
    
    
    
    
    
    
    
    
    11.1Non-cash income  interest rate swaps
    
    
    (4.8
    )
    
    
    
    
    
    
    
    
    
    
    (4.8
    )Changes in current assets and liabilities:Accounts receivable
    
    
    5.8
    
    
    
    
    
    
    
    
    
    
    
    5.8Inventories, net of advance and progress billings
    
    
    19.9
    
    
    
    
    
    
    
    
    
    
    
    19.9Other current assets
    
    
    1.9
    
    
    
    
    
    
    
    
    
    
    
    1.9Accounts payable, trade
    
    
    6.9
    
    
    
    
    
    
    
    
    
    
    
    6.9Accrued payroll and employee benefits
    
    
    (24.0
    )
    
    
    
    
    
    
    
    
    
    
    (24.0
    )Accrued and other liabilities
    
    
    (5.6
    )
    
    
    
    
    
    
    
    
    
    
    (5.6
    )Accrued contract liabilities
    
    
    122.2
    
    
    
    
    
    
    
    
    
    
    
    122.2Other assets and liabilities  long-term
    
    
    2.9
    
    
    
    
    
    
    
    
    
    
    
    2.9Net cash provided by operating activities
    
    
    165.4
    
    
    
    
    
    
    
    
    
    
    
    165.4Investing activitiesCapital expenditures
    
    
    (13.8
    )
    
    
    
    
    
    
    
    
    
    
    (13.8
    )Net cash used in investing activities
    
    
    (13.8
    )
    
    
    
    
    
    
    
    
    
    
    (13.8
    )Financing activitiesPayments on long-term bank debt
    
    
    (39.7
    )
    
    
    
    
    
    
    
    
    
    
    (39.7
    )Net cash used in financing activities
    
    
    (39.7
    )
    
    
    
    
    
    
    
    
    
    
    (39.7
    )Net increase in cash and cash equivalents
    
    
    111.9
    
    
    
    
    
    
    
    
    
    
    
    111.9Cash and cash equivalents at beginning of period
    
    
    68.6
    
    
    
    
    
    
    
    
    
    
    
    68.6Cash and cash equivalents at end of period
    
    $
    180.5
    
    
    $
    
    
    
    $
    
    
    
    $
    180.5
 18




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##### 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. A number of important factors could cause
actual results to differ materially from those in the forward-looking
statements. These factors include (i) reduced demand for new commercial
aircraft due to reduction in airline traffic, (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. Managements discussion and analysis should be
read in conjunction with the respective financial statements of Vought and the
accompanying notes contained therein. Recent Events Management has undertaken a series of studies to assess the facilities
required to remain competitive and position the Company for the future. Vought
has implemented and completed programs to reduce overhead expenses but excess
capacity requires further reductions. On February 26, 2004, Vought announced
plans to consolidate much of its manufacturing operations to Dallas. To help
accomplish this major restructuring, Vought received a $35 million grant from
the Texas Enterprise Fund in April 2004 and is working with the Texas General
Land Office and several other state and local agencies.
By accepting this grant, the
Company is obligated to add 3,000 jobs in Texas over the next 6 years
with a prorated penalty (based on any shortfall of incremental
headcount to the 3,000 goal with the total penalty amount 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 and to 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 1,360 employees at these facilities. All Stuart employees
and Nashville non-union employees were offered the opportunity to transfer to
the Dallas site (with certain relocation costs provided), or to accept certain
termination benefits. These termination benefits include a severance component
for all terminated employees and a retention component for employees who elect
to remain with the Company through various completion dates during these
closures. The Company recorded a liability in the amount of $5.4 million
during the first quarter of fiscal 2004 associated with the severance
termination benefits. Additionally, the Company estimates total costs of
approximately $2.8 million associated with the retention termination benefits
and is recognizing this liability ratably over the period of employees
retention period. At June 27, 2004, a liability for the retention termination
benefits has been recorded in the amount of approximately $400,000. As part of the restructuring plan, the Company negotiated termination
benefit agreements with union employees at the Nashville location. These
negotiations were completed in April 2004. The Company offered these employees
the same employment options offered to all Stuart employees and Nashville
non-union employees. As a result of the union negotiations, certain retention
termination benefits were agreed to which are estimated to be approximately
$4.4 million. Beginning in April 2004, the Company recognizes this liability
ratably over the employee retention period. At June 27, 2004, a liability for
retention termination benefits for union employees has been recorded in the
amount of approximately $400,000. 19




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##### Table of Contents





Approximately 425 out of the 1,360 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 $10.8
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.

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
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. We have estimated 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 June 27,
2004, increased depreciation for these assets is $6.5 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 $1.7 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 $0.2 million during the
first half 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
$25.5 million for the six months ended June 27, 2004 which
is reflective of increased forward losses as a result of these costs
at the Stuart and Dallas facilities and reduced profit margins on
contracts in process at the Nashville facility.

In
addition to these restructuring charges, the Company incurred approximately $8 million in expenses
associated with moving, renovation, restoration, rearrangement, and disruption incurred as a result of the restructuring during the three months ended June 27, 2004.

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 a $39.4 million reduction in its
accumulated postretirement benefit obligation (APBO) for certain retiree
groups due to the estimated effects of the Act. The reduction will be included
in other deferred actuarial gains or losses. 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.

20



---



##### Table of Contents



Business We build structural assemblies for commercial, military and business jet
aircraft programs. In most cases, our customer is the primary manufacturer for
the aircraft program. For the six months ended June 27, 2004, approximately
45%, 36% and 19% of our revenues were generated from our commercial, military
and business jet aircraft programs, respectively. From time to time, the company considers potential mergers and
acquisitions to further enhance the company value. Occasionally, we may enter
into due diligence with potential targets. Funds required for mergers and
acquisitions, including purchase price, closing costs and working capital
requirements, may come from excess internally generated cash flow, additional
equity contributions or additional financing. 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 that have had negative
impacts on commercial air traffic, and correspondingly, have resulted 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 767 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
as evidenced by an almost 10% increase in current year sales for programs we had
at this time last year. 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 Form S-4, as amended, filed with the
Securities and Exchange Commission (the SEC) on June 15, 2004. 21




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##### Table of Contents



Results of Operations Three
    
    
    
    
    
    Three
    
    Six
    
    
    
    
    
    SixMonths
    
    
    
    
    
    Months
    
    Months
    
    
    
    
    
    MonthsEnded
    
    Percentage
    
    Ended
    
    Ended
    
    Percentage
    
    EndedJune 27,
    
    Change to
    
    June 29,
    
    June 27,
    
    Change to
    
    June 29,2004
    
    Prior Year
    
    2003
    
    2004
    
    Prior Year
    
    2003($ in millions)Net sales:Commercial
    
    $
    131.9
    
    
    
    24.2
    %
    
    $
    106.2
    
    
    $
    266.6
    
    
    
    18.1
    %
    
    $
    225.7Military
    
    
    104.0
    
    
    
    (18.4
    )%
    
    
    127.5
    
    
    
    213.4
    
    
    
    (9.6
    )%
    
    
    236.0Business Jets
    
    
    58.3
    
    
    
    44.0
    %
    
    
    40.5
    
    
    
    109.1
    
    
    
    43.6
    %
    
    
    76.0Total net sales
    
    $
    294.2
    
    
    
    7.3
    %
    
    $
    274.2
    
    
    $
    589.1
    
    
    
    9.6
    %
    
    $
    537.7Costs and expenses:Cost of sales
    
    
    236.5
    
    
    
    12.2
    %
    
    
    210.8
    
    
    
    483.2
    
    
    
    14.2
    %
    
    
    423.0Selling, general and
administrative
    
    
    63.0
    
    
    
    17.1
    %
    
    
    53.8
    
    
    
    125.7
    
    
    
    14.9
    %
    
    
    109.4Total costs and expenses
    
    $
    299.5
    
    
    
    13.2
    %
    
    $
    264.6
    
    
    $
    608.9
    
    
    
    14.4
    %
    
    $
    532.4Operating income (loss)
    
    
    (5.3
    )
    
    
    (155.2
    )%
    
    
    9.6
    
    
    
    (19.8
    )
    
    
    (473.6
    )%
    
    
    5.3Interest expense, net
    
    
    (9.5
    )
    
    
    (120.9
    )%
    
    
    (4.3
    )
    
    
    (18.7
    )
    
    
    (90.8
    )%
    
    
    (9.8
    )Net income (loss)
    
    $
    (14.8
    )
    
    
    (379.2
    )%
    
    $
    5.3
    
    
    $
    (38.5
    )
    
    
    (755.6
    )%
    
    $
    (4.5
    )
 Comparison of Results of Operations for the Three Months Ended June 27, 2004
and June 29, 2003 Net sales. Net sales for the three months ended June 27, 2004 were $294.2
million, an increase of $20 million or 7.3% compared with net sales of $274.2
million for the same period in the prior year. Management believes that total
net sales will be in the range of $300 million per quarter for the remainder of
2004. When comparing the three months ended June 27, 2004 with the same period in the
prior year:  
    
    Commercial net sales increased approximately $25.7 million or
24.2% as a result of $41.9 million in sales from contracts acquired
in the acquisition of Aerostructures partially offset by $15.0 million due to
lower aircraft delivery rates on contracts included in both periods.
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 the commercial
airlines reduced capacity and ordered fewer new aircraft.
Management believes, based upon current contractual delivery
schedules provided by customers, that deliveries will decrease in
2004 followed by a gradual increase in deliveries 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 including the implementation of the facility consolidation project;
    
    Military net sales decreased approximately $23.5 million or
18.4% due to lower selling prices for the C-17 program and the completion of a
detail parts contract with Northrop Grumman, partially
offset by $11.7 million in sales from contract 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; 22




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##### Table of Contents




    
    Business Jet net sales increased approximately $17.8 million
or 44% due to $14.5 million in sales from Aerostructures contracts
and from higher delivery rates on the Gulfstream V program.
Management believes, based upon current contractual delivery
schedules provided by customers, that sales will be in the range of
$50 million per quarter for the remainder of 2004. Cost of sales.
Cost of sales for the three months ended June 27, 2004
was $236.5 million, an increase of $25.7 million compared with cost of sales
of $210.8 million for the same period in the prior year. The increase in
cost of sales was due to additional restructuring and facility
consolidation charges of $15.5 million in
the second quarter of 2004 (see recent events for further discussion of
restructuring charges), and the addition of
cost of sales on contracts acquired in the
Aerostructures acquisition, partially offset by lower aircraft delivery rates
on contracts included in both periods and a favorable outcome of negotiations
with Embraer resulting in the partial reversal of forward losses in the second quarter. Selling, general and administrative expenses.
Selling, general and
administrative expenses for the three months ended June 27, 2004 were $63.0
million, a increase of $9.2 million compared with selling, general and
administrative expenses of $53.8 million for the same period in the prior year.
The increase was primarily due to expenses incurred as part of our investment
in the Boeing 7E7 of $5.7 million. As a percentage of net sales year over
year, selling, general and administrative expenses remained approximately 20%. Operating income (loss).
Operating loss for the three months ended June
27, 2004 was ($5.3) million, compared to operating income of $9.6 million for
the same period in the prior year. The increase in loss of $14.9 million is
primarily due to the additional restructuring and facility
consolidation charges of $15.5 million, $5.7
million of expenses related to our investment in the Boeing 7E7 program during
the second quarter of 2004 and lower margin on the C-17 program due to lower
prices on the current contract partially offset by positive performance of
acquired programs. Interest expense, net. Interest expense, net for the three months ended
June 27, 2004 was $9.5 million, an increase of $5.2 million or 120.9% compared
with $4.3 million for the same period in the prior year. Interest expense, net
increased primarily due to the issuance of $270 million of 8% Senior Notes due
2011, partially offset by $30.0 million of reductions on Voughts senior
secured credit facilities made during the intervening period. Comparison of Results of Operations for the Six Months Ended June 27, 2004 and
June 29, 2003 Net sales. Net sales for the six months ended June 27, 2004 were $589.1
million, an increase of $51.4 million or 9.6% compared with net sales of $537.7
million for the same period in the prior year. When comparing the first half of
2004 with the same period in the prior year:  
    
    Commercial net sales increased approximately $40.9 million or
18.1% primarily as a result of $77.7 million in sales from contracts acquired
in the acquisition of Aerostructures partially offset by $35.0 million due to
lower aircraft delivery rates on contracts included in both periods.
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 the commercial
airlines reduced capacity and ordered fewer new aircraft.
Management believes, based upon current contractual delivery
schedules provided by customers, that deliveries will decrease in 23




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2004 followed by a gradual increase in deliveries 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 $22.6 million or
9.6% due to lower selling prices for the C-17 program and the completion of a detail
parts contract with Northrop Grumman. This decrease was more than
offset by $23.5 million 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;
    
    Business Jet net sales increased approximately $33.1 million
or 43.6% due to $25.8 million in sales from Aerostructures contracts
and from higher delivery rates on the Gulfstream V program.
Management believes, based upon current contractual delivery
schedules provided by customers, that sales will be in the range of
$50 million per quarter for the remainder of 2004. Cost of sales.
Cost of sales for the six months ended June 27, 2004 was
$483.2 million, an increase of $60.2 million compared with cost of sales of
$423.0 million for the same period in the prior year. The increase in cost of
sales was due to restructuring and facility consolidation charges of
$33.5 million in the first six months
of 2004 (see recent events for further discussion of restructuring charges),
and approximately $86 million in cost
of sales on contracts acquired in the Aerostructures acquisition, partially
offset by lower aircraft delivery rates on contracts included in both periods
and a favorable outcome of negotiations with Embraer resulting in the partial reversal
of forward losses in the second quarter. Selling, general and administrative expenses. Selling, general and
administrative expenses for the six months ended June 27, 2004 were $125.7
million, an increase of $16.3 million compared with selling, general and
administrative expenses of $109.4 million for the same period in the prior
year. The increase was primarily due to $9.0 million of expenses incurred as
part of our investment in the 7E7 program, a $2.7 million increase to pension
expense and slightly higher expenses due to contracts acquired from
Aerostructures, partially offset by stock compensation expense of $11.1
million and higher other compensation in 2003. As a percentage of net sales year over year, selling, general and
administrative expenses remained approximately 20%. Operating income (loss). Operating loss for the six months ended June 27,
2004 was ($19.8) million, compared to operating income of $5.3 million for the
same period in the prior year. The increase in loss of $25.1 million is
primarily due to the restructuring and facility consolidation charges of $33.5 million during the first
half of 2004, $9.0 million of costs incurred related to our investment in 7E7,
and lower margin on the C-17 program due to lower prices on the current
contract partially offset by positive performance of acquired programs. Interest expense, net. Interest expense, net for the six months ended
June 27, 2004 was $18.7 million, an increase of $8.9 million or 90.8% compared
with $9.8 million for the same period in the prior year. Interest expense, net
increased primarily due to the issuance of $270 million of 8% Senior Notes due
2011, partially offset by $30.0 million of reductions on Voughts senior
secured credit facilities made during the intervening period. 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 six months ended June 27, 2004.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations included in our Form S-4 as
amended, filed with the SEC on June 15, 2004 for a complete discussion. 24




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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 restructuring project, which it anticipates
completing in the next 3 years, will be approximately $350
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
bank financing and/or modification of the current debt covenants), which the Company is in the process of finalizing. While the
Company is in discussions with various financing sources, there can be no
assurance that we may be able to obtain such financing on favorable terms or at
all. Based upon the Companys preliminary restructuring plan, the Company
currently expects 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. As of June 27, 2004, Vought had long-term debt of approximately $568.3
million, which included $295.9 million that was incurred under its senior
secured credit facilities, $270 million of 8% Senior Notes due 2011 and $2.4
million of capital leases. In addition, Vought had $162.6 million of cash at
June 27, 2004. Net cash provided by operating activities for the six months ended June
27, 2004 was $73.6 million, a decrease of $91.8 million or
55.5% compared to
net cash provided by operating activities of $165.4 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, restructuring expenses and Boeing 7E7 investments. Cash used in investing activities generally has been for capital
expenditures. Net cash used in investing activities for capital expenditures
during the six months ended June 27, 2004 was $16.3 million, an increase of
$2.5 million or 18.1% compared to $13.8 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 June 27, 2004: 25




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##### Table of Contents



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 (2)
    
    $
    
    
    
    $
    14.6
    
    
    $
    109.0
    
    
    $
    90.2
    
    
    $
    82.1
    
    
    $
    
    
    
    $
    295.9Capital leases
    
    
    0.5
    
    
    
    0.9
    
    
    
    0.8
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    3.4Operating leases
    
    
    7.3
    
    
    
    14.0
    
    
    
    8.5
    
    
    
    1.5
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    32.1Purchase Obligations (1)
    
    
    24.4
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25.2Total financial obligations
    
    
    32.2
    
    
    $
    30.3
    
    
    $
    118.3
    
    
    $
    92.9
    
    
    $
    82.6
    
    
    $
    0.3
    
    
    $
    356.68% senior notes due 2011 (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270.0
    
    
    
    270.0Total
    
    $
    32.2
    
    
    $
    30.3
    
    
    $
    118.3
    
    
    $
    92.9
    
    
    $
    82.6
    
    
    $
    270.3
    
    
    $
    626.6
  (1)
    
    Purchase obligations represent property, plant and equipment
commitments at June 27, 2004. Capital expenditures for 2004 are
expected to be approximately $60 million which amount includes
property, plant and equipment commitments at June 27, 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.(2)
    
    In addition to the obligations in the table, at June 27, 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 4.60%, 4.85% and 4.35% on Tranche
B, Tranche C and Tranche X, respectively, and (b) $21.6 million per
year on the 8% senior notes due 2011. 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. If we pursue any of 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 have been selected as a structures partner on the Boeing 7E7 aircraft
program. We anticipate receiving a Memorandum of Agreement from Boeing
during the third quarter with the initial scope of work. The business terms
are likely to 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. The entire scope of production has not been
finalized, however; our current estimate for the initial investment will utilize projected cash from operations as well as additional debt funding and may also include modification of current debt
covenants. We anticipate a total non-recurring investment between $300 and $400 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 expect to recover any investment through delivery and sale of
aircraft beginning in 2008. 26




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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
six months ended June 27, 2004, as compared to those we discussed in
Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our 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




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##### 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




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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 June 27, 2004 would decrease the annual
pre-tax income of the Company by approximately $2.96 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. We have no current plans to enter into additional interest rate swaps. 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. There were no changes in the Companys internal control over
financial reporting during the quarter ended June 27, 2004, that have
materially affected, or are reasonably likely to materially affect, the
Companys internal controls over financial reporting. In conjunction with its
evaluation, management has communicated its findings to the Audit Committee of
the Board of Directors. 
 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. 29




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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits



|(31.1)* |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------
|       
|(31.2)* |  | Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|       
|(32.1)* |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                   
|       
|(32.2)* |  | Certification of Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*      Filed
herewith

(b) Reports on Form 8-K



30



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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. VOUGHT AIRCRAFT INDUSTRIES, INC.Date:  August 10, 2004
    
    /s/ Cletus Glasener
    
    Cletus Glasener

Vice President, Controller andTreasurer
 31