Filed Pursuant to Rule 424(b)(3)
Registration Nos. 333-152394,
333-152394-01 through 333-152394-12
PROSPECTUS SUPPLEMENT
(To Prospectus dated April 8, 2009)
HAWKER BEECHCRAFT ACQUISITION COMPANY, LLC
HAWKER BEECHCRAFT NOTES COMPANY
$400,000,000 8.5% Senior Fixed Rate Notes due April 1, 2015
$400,000,000 8.875%/9.625% Senior PIK-Election Notes due April 1, 2015
$300,000,000 9.75% Senior Subordinated Notes due April 1, 2017
Attached hereto and incorporated by reference herein is our Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 6, 2009. This Prospectus Supplement is not complete without, and may not be delivered or utilized except in connection with, the Prospectus, dated April 8, 2009, with respect to the 8.5% Senior Fixed Rate Notes due April 1, 2015, 8.875%/9.625% Senior PIK-Election Notes due April 1, 2015 and 9.75% Senior Subordinated Notes due April 1, 2017, including any amendments or supplements thereto.
INVESTING IN THE NOTES INVOLVES A HIGH DEGREE OF RISK. SEE “RISK FACTORS” BEGINNING ON PAGE 10 OF THE PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these notes or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
This prospectus has been prepared for and will be used by Goldman, Sachs & Co. in connection with offers and sales of the notes in market-making transactions. These transactions may occur in the open market or may be privately negotiated, at prices related to prevailing market prices at the time of sale or at negotiated prices. Goldman, Sachs & Co. may act as principal or agent in these transactions. We will not receive any of the proceeds of such sales.
GOLDMAN, SACHS & CO.
November 6, 2009
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 27, 2009
Or
| ¨ | 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 333-147828
Hawker Beechcraft Acquisition Company, LLC
Hawker Beechcraft Notes Company
(Exact name of registrant as specified in its charter)
| Delaware | 71-1018770, 20-8650498 | |
| (State of Incorporation) | (I.R.S. Employer Identification Number) |
10511 East Central, Wichita, Kansas 67206
(Address of Principal Executive Offices) (Zip Code)
(316) 676-7111
(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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
No membership interests in Hawker Beechcraft Acquisition Company, LLC, and no common shares of Hawker Beechcraft Notes Company are held by non-affiliates.
2
PART I — FINANCIAL INFORMATION
| Item 1. | Financial Statements (Unaudited) |
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidated Statements of Financial Position (Unaudited)
(In millions)
| September 27, 2009 | December 31, 2008 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 300.2 | $ | 377.6 | ||||
Accounts and notes receivable, net | 122.8 | 103.0 | ||||||
Unbilled revenue | 78.6 | 35.9 | ||||||
Inventories, net | 1,673.6 | 1,782.3 | ||||||
Current deferred income tax asset, net | 16.0 | — | ||||||
Prepaid expenses and other current assets | 24.7 | 32.5 | ||||||
Total current assets | 2,215.9 | 2,331.3 | ||||||
Property, plant and equipment, net | 564.0 | 641.8 | ||||||
Goodwill | 259.5 | 599.6 | ||||||
Intangible assets, net | 822.5 | 1,049.5 | ||||||
Other assets, net | 48.8 | 65.4 | ||||||
Total assets | $ | 3,910.7 | $ | 4,687.6 | ||||
Liabilities and Equity | ||||||||
Current liabilities | ||||||||
Notes payable, revolver, and current portion of long-term debt | $ | 426.3 | $ | 126.6 | ||||
Advance payments and billings in excess of costs incurred | 456.9 | 507.4 | ||||||
Accounts payable | 278.3 | 404.3 | ||||||
Accrued salaries and wages | 51.9 | 56.6 | ||||||
Current deferred income tax liability, net | — | 19.4 | ||||||
Accrued interest payable | 39.5 | 25.9 | ||||||
Other accrued expenses | 257.5 | 272.6 | ||||||
Total current liabilities | 1,510.4 | 1,412.8 | ||||||
Long-term debt | 1,861.2 | 2,364.2 | ||||||
Accrued pension benefits | 334.9 | 310.8 | ||||||
Other long-term liabilities | 97.3 | 140.1 | ||||||
Non-current deferred income tax liability, net | 25.7 | 24.4 | ||||||
Total liabilities | 3,829.5 | 4,252.3 | ||||||
Equity | ||||||||
Paid-in capital | 999.3 | 996.8 | ||||||
Accumulated other comprehensive loss | (306.7 | ) | (409.3 | ) | ||||
Retained deficit | (615.3 | ) | (156.4 | ) | ||||
Total equity attributable to parent company | 77.3 | 431.1 | ||||||
Non-Controlling Interest | 3.9 | 4.2 | ||||||
Total equity | 81.2 | 435.3 | ||||||
Total liabilities and equity | $ | 3,910.7 | $ | 4,687.6 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidated Statements of Operations (Unaudited)
(In millions)
| Three Months Ended September 27, 2009 | Three Months Ended September 28, 2008 | Nine Months Ended September 27, 2009 | Nine Months Ended September 28, 2008 | |||||||||||||
Sales: | ||||||||||||||||
Aircraft and parts | $ | 717.9 | $ | 728.4 | $ | 1,992.0 | $ | 2,201.8 | ||||||||
Services | 39.8 | 54.9 | 119.6 | 186.7 | ||||||||||||
Total sales | 757.7 | 783.3 | 2,111.6 | 2,388.5 | ||||||||||||
Cost of sales: | ||||||||||||||||
Aircraft and parts | 841.7 | 626.5 | 1,948.5 | 1,852.6 | ||||||||||||
Services | 33.9 | 47.8 | 102.7 | 156.8 | ||||||||||||
Total cost of sales | 875.6 | 674.3 | 2,051.2 | 2,009.4 | ||||||||||||
Gross profit | (117.9 | ) | 109.0 | 60.4 | 379.1 | |||||||||||
Restructuring, net | 8.5 | — | 29.1 | — | ||||||||||||
Definite-lived intangible asset impairment | 73.0 | — | 73.0 | — | ||||||||||||
Goodwill and indefinite-lived intangible asset impairment | 448.3 | — | 448.3 | — | ||||||||||||
Selling, general and administrative expenses | 48.4 | 65.9 | 155.8 | 198.6 | ||||||||||||
Research and development expenses | 25.0 | 27.8 | 81.8 | 80.3 | ||||||||||||
Operating (loss) income | (721.1 | ) | 15.3 | (727.6 | ) | 100.2 | ||||||||||
Interest expense | 35.6 | 50.1 | 115.1 | 149.9 | ||||||||||||
Interest income | (0.2 | ) | (2.1 | ) | (1.0 | ) | (7.4 | ) | ||||||||
Gain on debt repurchase, net | — | — | (352.1 | ) | — | |||||||||||
Other income, net | (0.3 | ) | (1.1 | ) | (0.3 | ) | (0.7 | ) | ||||||||
Non-operating expense (income), net | 35.1 | 46.9 | (238.3 | ) | 141.8 | |||||||||||
Loss before taxes | (756.2 | ) | (31.6 | ) | (489.3 | ) | (41.6 | ) | ||||||||
Benefit from income taxes | (72.3 | ) | (10.4 | ) | (30.7 | ) | (14.0 | ) | ||||||||
Net loss | $ | (683.9 | ) | $ | (21.2 | ) | $ | (458.6 | ) | $ | (27.6 | ) | ||||
Net income attributable to non-controlling interest | 0.3 | 0.3 | 0.3 | 0.6 | ||||||||||||
Net loss attributable to parent company | $ | (684.2 | ) | $ | (21.5 | ) | $ | (458.9 | ) | $ | (28.2 | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidated Statements of Equity and Comprehensive Income (Unaudited)
(In millions)
For the Period January 1, 2008 - September 27, 2009
| Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Non-Controlling Interest | Total Equity | Total Comprehensive Income (Loss) | ||||||||||||||||||
Balance at January 1, 2008 | $ | 989.2 | $ | 0.8 | $ | 14.4 | $ | 2.8 | $ | 1,007.2 | |||||||||||||
Stock-based compensation | 7.6 | 7.6 | |||||||||||||||||||||
Net (loss) income | (157.2 | ) | 1.4 | (155.8 | ) | $ | (155.8 | ) | |||||||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
Net loss on pension and other benefits | (276.1 | ) | (276.1 | ) | (276.1 | ) | |||||||||||||||||
Prior service cost | (28.4 | ) | (28.4 | ) | (28.4 | ) | |||||||||||||||||
Unrealized loss on cash flow hedges | (114.2 | ) | (114.2 | ) | (114.2 | ) | |||||||||||||||||
Foreign currency translation adjustments | (5.0 | ) | (5.0 | ) | (5.0 | ) | |||||||||||||||||
Total comprehensive loss | $ | (579.5 | ) | ||||||||||||||||||||
Balance at December 31, 2008 | $ | 996.8 | $ | (156.4 | ) | $ | (409.3 | ) | $ | 4.2 | $ | 435.3 | |||||||||||
Stock-based compensation | 2.5 | 2.5 | |||||||||||||||||||||
Net (loss) income | (458.9 | ) | 0.3 | (458.6 | ) | $ | (458.6 | ) | |||||||||||||||
Dividends declared | (0.6 | ) | (0.6 | ) | |||||||||||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
Realized prior service cost due to curtailment | 2.4 | 2.4 | 2.4 | ||||||||||||||||||||
Unrealized gain on cash flow hedges | 37.7 | 37.7 | 37.7 | ||||||||||||||||||||
Realized losses due to de-designation of cash flow hedges | 31.1 | 31.1 | 31.1 | ||||||||||||||||||||
Reclassification of unrealized losses due to maturities | 30.1 | 30.1 | 30.1 | ||||||||||||||||||||
Foreign currency translation adjustments | 1.3 | 1.3 | 1.3 | ||||||||||||||||||||
Total comprehensive loss | $ | (356.0 | ) | ||||||||||||||||||||
Balance at September 27, 2009 | $ | 999.3 | $ | (615.3 | ) | $ | (306.7 | ) | $ | 3.9 | $ | 81.2 | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
| Nine Months Ended September 27, 2009 | Nine Months Ended September 28, 2008 | |||||||
Cash flows from operating activities: | ||||||||
Net loss attributable to parent company | $ | (458.9 | ) | $ | (27.6 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 69.0 | 63.0 | ||||||
Amortization of intangible assets | 49.0 | 54.9 | ||||||
Amortization of debt issuance costs | 8.2 | 7.2 | ||||||
Amortization of deferred compensation | 0.3 | 3.0 | ||||||
Stock-based compensation | 2.5 | 6.9 | ||||||
Current and deferred income taxes | (31.2 | ) | (24.1 | ) | ||||
Gain on repurchase of long-term debt, net of write-off of debt issuance costs | (352.1 | ) | — | |||||
Inventory impairments | 70.7 | — | ||||||
Definite-lived asset impairment | 94.0 | — | ||||||
Goodwill and other indefinite-lived intangible impairment charges | 448.3 | — | ||||||
Non-cash interest expense | 13.3 | — | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (19.8 | ) | (18.5 | ) | ||||
Unbilled revenue, advanced payments and billings in excess of costs incurred | (93.2 | ) | 53.8 | |||||
Inventories, net | 171.3 | (464.3 | ) | |||||
Prepaid expenses and other current assets | 4.4 | 12.4 | ||||||
Accounts payable | (126.0 | ) | 73.4 | |||||
Accrued salaries and wages | (4.8 | ) | (0.4 | ) | ||||
Other accrued expenses | (0.1 | ) | 114.9 | |||||
Pension and other changes, net | 71.2 | (8.4 | ) | |||||
Income taxes payable | 0.7 | (6.3 | ) | |||||
Collection of financing receivables not sold | — | 0.4 | ||||||
Net cash used in operating activities | (83.2 | ) | (159.7 | ) | ||||
Cash flows from investing activities: | ||||||||
Expenditures for property, plant and equipment | (42.0 | ) | (46.2 | ) | ||||
Additions to computer software | (3.1 | ) | (3.1 | ) | ||||
Proceeds from sale of property, plant and equipment | 1.2 | 101.7 | ||||||
Net cash provided by (used in) investing activities | (43.9 | ) | 52.4 | |||||
Cash flows from financing activities: | ||||||||
Payment of notes payable | (174.8 | ) | (136.0 | ) | ||||
Payment of term loan | (6.5 | ) | (6.5 | ) | ||||
Utilization of revolving credit facility | 365.0 | — | ||||||
Payment of revolving credit facility | (1.8 | ) | — | |||||
Proceeds from IRB funding | 4.5 | — | ||||||
Debt repurchase | (136.7 | ) | — | |||||
Net cash provided by (used in) financing activities | 49.7 | (142.5 | ) | |||||
Effect of exchange rates on cash and cash equivalents | — | (0.7 | ) | |||||
Net decrease in cash and cash equivalents | (77.4 | ) | (250.5 | ) | ||||
Cash and cash equivalents at beginning of period | 377.6 | 569.5 | ||||||
Cash and cash equivalents at end of period | $ | 300.2 | $ | 319.0 | ||||
Supplemental Disclosures: | ||||||||
Cash paid for interest | $ | 88.5 | $ | 96.2 | ||||
Income tax (refunds) paid | (0.7 | ) | 6.3 | |||||
Net non-cash transfers (from) to property, plant and equipment | (21.9 | ) | 12.8 | |||||
Inventories acquired through issuance of notes | 111.4 | 169.1 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Notes to Consolidated Financial Statements (Unaudited)
1.Background and Basis of Interim Presentation
Hawker Beechcraft, Inc. (“HBI”) was formed in late 2006 by GS Capital Partners VI, L.P., an affiliate of The Goldman Sachs Group, Inc., and Onex Partners II LP, an affiliate of Onex Corporation, for the purpose of purchasing the Raytheon Aircraft business (“RA” or the “Predecessor”) from Raytheon Company (“Raytheon”) (the “Acquisition”). The Acquisition was completed on March 26, 2007. HBI acquired all of the outstanding membership interests of Raytheon Aircraft Acquisition Company, LLC, which was renamed Hawker Beechcraft Acquisition Company, LLC (“HBAC”), and substantially all of the assets of Raytheon Aircraft Services Limited. Following the Acquisition, HBI contributed the equity interest of the entity purchasing the assets of Raytheon Aircraft Services Limited to HBAC. HBAC is engaged in the design, development, manufacturing, marketing, selling and servicing of business and general aviation, training and special mission aircraft. The accompanying unaudited condensed consolidated financial statements include the accounts of HBAC and its subsidiaries subsequent to the Acquisition.
Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted. In the opinion of HBAC management, these unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial statements for the interim periods in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). All intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the cost of sales between segments in prior period financial statements and notes to conform to the current period presentation. The unaudited condensed consolidated statement of financial position as of December 31, 2008 was derived from audited financial statements but does not include all disclosures required by GAAP. The interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in our Annual Report on Form 10-K as amended by Form 10-K/A, filed July 15, 2009, for the year ended December 31, 2008.
We evaluated subsequent events through November 6, 2009, the date of financial statement issuance.
2.Summary of Significant Accounting Policies
Since the Company’s fiscal year ended December 31, 2008, there have been no significant changes in its critical accounting policies. Please refer to theSummary of Significant Accounting Policies in the “Notes to the Consolidated Financial statements” contained in Part II, Item 8 of the Company’s Annual Report as Amended on Form 10-K/A for the fiscal year ended December 31, 2008, as filed with the SEC on July 15, 2009, for a discussion of the Company’s critical accounting policies. As the Company incurred impairment charges relating to goodwill, intangible assets and long-lived assets during the three months ended September 27, 2009, the disclosures below provide additional detail related to the policies applicable to the review and determination of the impairment of goodwill, intangible assets, and other long-lived assets.
Goodwill and Intangible Assets.Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Intangible assets are recorded at cost or, when acquired as part of a business combination, at estimated fair value. Intangible assets with definite lives consist of certain trade names and trademarks, order backlog, customer relationships, technological knowledge and computer software and are amortized on a straight-line basis over their estimated useful life. The weighted average amortization periods assigned to definite-lived intangible assets are: 3 years for order backlog, 8 years for computer software, 10 years for trademarks and trade names with definite lives, 15 years for technological knowledge and 17 years for customer relationships. Intangible assets with indefinite lives include certain trademarks and trade names and are not amortized.
Goodwill and intangible assets with indefinite lives are not amortized but are instead reviewed for impairment on an annual basis during the fourth quarter or upon the occurrence of events that may indicate possible impairment. HBAC conducts its review for impairment on an operating segment basis.
The valuation methodology and underlying financial information that is used to estimate the fair value of our reporting units requires significant judgments to be made by management. These judgments include, but are not limited to, the long-term projections of future financial performance and the selection of appropriate discount rates used to present value future cash flows. Discount rates are determined by weighting the required returns on interest-bearing debt and paid-in capital in proportion to their estimated percentages in an expected industry capital structure.
The necessity for, and the amount of, any goodwill impairment is determined using a two-step process. The first step is to identify if a potential impairment is indicated by comparing the fair value of a segment with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the segment unit is not considered to be impaired and the second step of the impairment test is not necessary. However, if the carrying amount of a segment exceeds its fair value, the second step is performed for that reporting unit to determine if goodwill is impaired and to measure the amount of impairment loss that should be recognized, if any.
7
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
The second step, if necessary, compares the implied fair value of a segment’s goodwill with the carrying amount of that reporting unit’s goodwill. The process of determining such implied fair value of goodwill involves allocating the reporting unit’s fair value as determined in step one to all of the reporting unit’s assets and liabilities. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.
The Company estimates the fair value of its reporting units, using various valuation techniques, including discounted cash flow analysis, market and transaction comparable approaches. A discounted cash flow analysis requires the Company to make various judgmental assumptions about sales, operating margins, growth rates and discount rates. Assumptions about discount rates are based on a weighted-average cost of capital for comparable companies. Assumptions about sales, operating margins, and growth rates are based on the Company’s forecasts, business plans, economic projections, anticipated future cash flows and marketplace data. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period.
Impairments of indefinite-lived intangible assets are recognized when events or changes in circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be recoverable, and our estimate of discounted cash flows over the assets’ remaining useful lives is less than the carrying value of the assets. We test these intangibles for impairment by comparing their carrying value to current projections of discounted cash flows attributable to the brand and trade names. Any excess carrying value over the amount of discounted cash flows represents the amount of impairment.
We will continue to perform our annual impairment testing during the fourth quarter each year absent any impairment indicators or other changes that may necessitate more frequent impairment analysis.
Impairment of Long-Lived Assets. Management determines whether long-lived assets are to be held-for-use or held-for-disposal. Upon indication of possible impairment, management evaluates the recoverability of held-for-use long-lived assets by measuring the carrying amount of the assets against the related estimated undiscounted future cash flows. When an evaluation indicates that the future undiscounted cash flows are not sufficient to recover the carrying value of the asset, the asset is written down to its estimated fair value. In order for long-lived assets to be considered held-for-disposal, management must have committed to a plan to dispose of the assets. Once deemed held-for-disposal, the assets are stated at the lower of carrying amount or net realizable value.
See additional disclosure of these analyses in Note 7 to the Company’s Condensed Consolidated Financial Statements including the impairment charges recorded during the three months ended September 27, 2009.
3.Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards Codification (Codification). The Codification became the single source for all authoritative GAAP recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and does not have an effect on our financial position, results of operations or liquidity.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. This amendment requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, this amendment eliminates the concept of a qualifying special-purpose entity (QSPE). This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. This amendment will not have a material effect on our financial position, results of operations or liquidity.
In June 2009, the FASB also issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (VIEs). The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this amendment. This amendment requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE. Additionally, the amendment requires enhanced disclosures about an enterprise’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprise’s financial statements. Finally, an enterprise will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. This amendment will not have a material effect on our financial position, results of operations or liquidity.
In December 2007, the FASB issued a new accounting standard to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Noncontrolling interests represent the portion of earnings that is not within the parent company’s control. These amounts are now required to be reported as equity instead of as a liability on the balance sheet. Additionally, this statement requires net income from noncontrolling interests to be shown separately on the consolidated income statements. This change resulted in a $4.2 million reclassification from other current liabilities to equity on the December 2008 consolidated balance sheet. These interests are primarily related to investment in a shared service facility
8
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
in Toluca, Mexico.
In December 2007, the FASB revised the authoritative guidance for business combinations, which requires a company to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date. It further requires that research and development assets acquired in a business combination that have no alternative future use to be measured at their acquisition-date fair value and then monitored for impairment periodically, and that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Among other changes, this guidance also requires that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, and any deferred tax benefits resulting from a business combination are recognized in income from continuing operations in the period of the combination. The guidance is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. In January 2009, the Company adopted this guidance and expects that this guidance will result in the recognition of expenses to the Company’s results of operations for any future acquisitions which would have been capitalized prior to the adoption of this guidance. The Company cannot predict any acquisition activities and therefore cannot access the impact to its financial positions, results of operations, or cash flows.
In April 2009, the FASB revised the authoritative guidance for business combinations. The guidance deals with the initial recognition and measurement of an asset acquired or a liability assumed in a business combination that arises from a contingency provided the asset or liability’s fair value on the date of acquisition can be determined. It is effective for assets or liabilities arising from contingencies in business combinations that occur following the start of the first fiscal year that begins on or after December 15, 2008. In the first quarter of 2009, the Company adopted this guidance, which did not have a significant impact on its consolidated financial position, results of operations or cash flows.
In March 2009, the FASB issued an accounting standard that requires entities to evaluate the significance and relevance of market factors for fair value inputs to determine if, due to reduced volume and market activity, the factors are still relevant and substantive measures of fair value. The standard is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material effect on our financial position or results of operations.
In April 2009, the FASB issued new accounting standards to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. In addition, the standard requires those disclosures in summarized financial information at interim reporting periods. These standards do not change the accounting treatment for these financial instruments and is effective for interim periods ending after June 15, 2009. Adoption of these standards did not have a material impact on the Company’s consolidated financial statements.
In August 2009, the FASB issued an update to fair value accounting standards. This update provides additional guidance, including illustrative examples, clarifying the measurement of liabilities at fair value. This update is effective for the first reporting period beginning after its issuance. The company will adopt the provisions of this update in the second quarter of fiscal 2010 and is currently evaluating the impact the adoption of these provisions will have on its consolidated financial statements.
In September 2009, the FASB issued an update to the authoritative guidance for revenue recognition related to multiple-deliverable arrangements. This update removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, replaces references to “fair value” with “selling price” to distinguish from the fair value measurements required under the authoritative guidance for fair value measurements and disclosures, provides a hierarchy that entities must use to estimate the selling price, eliminates the use of the residual method for allocation, and expands the ongoing disclosure requirements. In addition, this update removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance. This update is effective in fiscal years beginning on or after June 15, 2010 and can be applied prospectively or retrospectively. The Company is currently evaluating the effect that adoption of this update will have, if any, on its consolidated financial position, results of operations or cash flows.
Other new pronouncements issued but not effective until after September 27, 2009 are not expected to have a material effect on our cash flows.
4.Fair Value Measurements
Effective January 1, 2008, we adopted a newly issued accounting standard for fair value measurements. The standard defines fair value, establishes a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. We performed an analysis of all existing financial assets and financial liabilities measured at fair value on a recurring basis to determine the significance and character of all inputs used to determine their fair value. Financial instruments carried at fair value on our balance sheet include cash and cash equivalents and derivatives. Our other financial instruments, including accounts receivable, prepaid expenses, accounts payable, accrued interest payable, short-term borrowings and long-term debt, are carried at cost or amortized cost. The carrying values of our short-term receivables, prepaid expenses, accrued interest payable and payables approximate their fair value because of their nature and respective maturity dates or durations.
We also use derivatives to manage foreign currency risk and interest rate risk for non-trading purposes. We carry the instruments at fair value on our balance sheet. The derivatives section below details our derivatives and fair values as at September 27, 2009. The fair values are classified as long-term or short-term based on anticipated settlement date. Any change in fair value is included in income or accumulated other comprehensible income, depending upon the designation of the derivative as a cash flow hedge.
We carry our long-term debt at amortized cost. The table below details the long-term debt and fair values as of September 27, 2009 and December 31, 2008. The fair value of long-term debt is estimated based on prices provided by quoted markets and third-party brokers.
The standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories:
Level 1 Inputs – Quoted prices for identical assets and liabilities in active markets.
Level 2 Inputs – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; observable inputs other than quoted prices; and inputs that are derived principally from or corroborated by other observable market data.
Level 3 Inputs – Unobservable inputs reflecting the entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
9
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
The following table presents financial assets and liabilities measured at fair value on a recurring basis:
| September 27, 2009 | December 31, 2008 | |||||||||||||||||||
(In millions) | (Level 1) | (Level 2) | (Level 3) | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
Assets | ||||||||||||||||||||
Cash equivalents | $ | 279.8 | $ | — | $ | — | $ | 342.6 | $ | — | $ | — | ||||||||
Foreign currency forward contracts | — | — | — | — | 0.7 | |||||||||||||||
Total | $ | 279.8 | $ | — | $ | — | $ | 342.6 | $ | 0.7 | $ | — | ||||||||
Liabilities | ||||||||||||||||||||
Foreign currency forward contracts | $ | — | $ | (44.3 | ) | $ | — | $ | — | $ | (129.1 | ) | $ | — | ||||||
Interest rate swaps | — | (24.1 | ) | — | — | (26.3 | ) | — | ||||||||||||
Total | $ | — | $ | (68.4 | ) | $ | — | $ | — | $ | (155.4 | ) | $ | — | ||||||
The foreign currency forward contracts and the interest rate swaps were recorded at fair value in our statement of financial position as follows:
| September 27, 2009 | December 31, 2008 | |||||||||||||||
(In millions) | Foreign Currency Forward Contracts | Interest Rate Swaps | Foreign Currency Forward Contracts | Interest Rate Swap | ||||||||||||
Prepaid expenses and other current assets | $ | — | $ | — | $ | 0.7 | $ | — | ||||||||
Other accrued expenses-current | (43.6 | ) | — | (89.9 | ) | — | ||||||||||
Other long-term liabilities | (0.7 | ) | (24.1 | ) | (39.2 | ) | (26.3 | ) | ||||||||
Net derivative liability | $ | (44.3 | ) | $ | (24.1 | ) | $ | (128.4 | ) | $ | (26.3 | ) | ||||
Derivative financial instruments are valued using an income valuation approach. The fair value of the foreign currency forward contracts is calculated as the present value of the forward rate less the contract rate multiplied by the notional amount. The fair value of the interest rate swaps is derived from discounted cash flow analyses based on the terms of the contract and the interest rate yield curve. The fair value measurements also incorporate credit risk. For derivatives in a liability position, we incorporated our own credit risk, and, for derivatives in an asset position, the counterparty’s credit risk is incorporated. To measure credit risk, we modify our discount rate to include the applicable credit spread, which is calculated as the difference between the relevant entity’s yield curve (or average yield curve for similarly rated companies, if the specific entity’s yield curve is not available) and LIBOR, for the derivative. Significant inputs to these valuation models include forward rates, interest rates and yield curves, which are obtained from third-party pricing services. These inputs are derived principally from, or corroborated by, other observable market data and are therefore considered to be Level 2 inputs. Our valuations do not include any significant Level 3, or unobservable, inputs.
The estimated fair value of long-term debt is based on indicative broker pricing. The following table presents the carrying amount and estimated fair value of long-term debt in accordance with the accounting standard for fair value measurements:
| September 27, 2009 | December 31, 2008 | |||||||||||
(In millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||
Senior secured term loan (including current portion) | $ | 1,270.8 | $ | 972.1 | $ | 1,277.2 | $ | 625.9 | ||||
Senior fixed rate notes | 182.9 | 130.1 | 400.0 | 167.0 | ||||||||
Senior PIK-election notes | 275.4 | 186.6 | 400.0 | 135.0 | ||||||||
Senior subordinated notes | 145.1 | 89.6 | 300.0 | 77.3 | ||||||||
| $ | 1,874.2 | $ | 1,378.4 | $ | 2,377.2 | $ | 1,005.2 | |||||
10
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
The following table presents non-financial assets and liabilities measured at fair value on a non-recurring basis:
| September 27, 2009 | ||||||||||||||||
(In millions) | Total | (Level 1) | (Level 2) | (Level 3) | Total Gains (Losses) | |||||||||||
Goodwill | $ | — | $ | — | $ | — | $ | — | $ | (340.1 | ) | |||||
Indefinite-lived intangible assets | 352.8 | — | — | 352.8 | (108.2 | ) | ||||||||||
Definite-lived assets held for use | 603.0 | — | — | 603.0 | (73.0 | ) | ||||||||||
| $ | 955.8 | $ | — | $ | — | $ | 955.8 | |||||||||
The losses shown in the table above reflect impairment charges recorded during the three months ended September 27, 2009. Refer to Note 7, “Goodwill and Intangibles” for further information.
5.Product Warranty
Warranty provisions related to commercial aircraft and parts sales are determined based upon an estimate of costs that may be incurred for warranty services over the period of coverage from 1 to 10 years. We estimate our warranty costs based on historical warranty claim experience. The warranty accrual is reviewed quarterly to verify that it appropriately reflects the estimated remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience causes management to revise its estimates. The effects of changes in estimates are reflected in the period the estimates are revised. Activity related to commercial aircraft and part warranty provisions, which is recorded in other long-term liabilities on the balance sheet, was as follows:
(In millions) | Three Months Ended September 27, 2009 | Three Months Ended September 28, 2008 | Nine Months Ended September 27, 2009 | Nine Months Ended September 28, 2008 | ||||||||||||
Beginning balance | $ | 64.7 | $ | 64.0 | $ | 67.3 | $ | 60.8 | ||||||||
Accrual for aircraft and part deliveries | 6.4 | 6.4 | 17.0 | 20.6 | ||||||||||||
Reversals related to prior period deliveries | (0.4 | ) | (5.5 | ) | (3.3 | ) | (7.3 | ) | ||||||||
Warranty services provided | (6.0 | ) | (4.5 | ) | (16.3 | ) | (13.7 | ) | ||||||||
Ending balance | $ | 64.7 | $ | 60.4 | $ | 64.7 | $ | 60.4 | ||||||||
Warranty provisions related to aircraft deliveries on contracts accounted for using the cost-to-cost method to measure progress towards completion are recorded as contract costs as the warranty work is performed. The estimation of these costs is an integral part of the revenue recognition process for these contracts.
11
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
6.Inventories, net
Inventories consisted of the following:
(In millions) | September 27, 2009 | December 31, 2008 | ||||
Finished goods | $ | 183.1 | $ | 254.3 | ||
Work in process | 1,151.3 | 1,038.0 | ||||
Materials and purchased parts | 339.2 | 490.0 | ||||
Total | $ | 1,673.6 | $ | 1,782.3 | ||
Net non-cash transfers of $21.9 million and $1.8 million for the nine months ended September 27, 2009 and September 28, 2008, respectively, were excluded from changes in inventories in the statement of cash flows for aircraft physically transferred from property, plant and equipment to inventory. In connection with our interim assessment of goodwill and indefinite-lived intangible assets discussed more fully in Note 7, we reviewed the valuation of certain inventory during the third quarter of 2009 and recorded non-cash charges in cost of sales totaling $70.7 million to reduce inventory to net realizable value. These charges were excluded from changes in inventories in the statement of cash flows.
7.Goodwill and Intangibles
We test goodwill for impairment at least annually during the fourth quarter of each calendar year. However, certain factors may result in the need to perform an impairment test prior to the fourth quarter. Based on current global economic conditions, the company’s updated expectation of the timing of a general aviation market recovery and increased downward pricing pressure, we concluded that it was more likely than not that the fair value of one of our business segments had been reduced below its carrying value. Accordingly, we performed an interim review of the value of our goodwill and indefinite-lived intangible assets during the third quarter of 2009.
The assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time we perform the valuation. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rate, earnings before interest, taxes, depreciation and amortization, or EBITDA, and capital expenditures forecasts. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation. Due to the inherent uncertainty involved in making these estimates, actual results could differ from our estimates. The following is a description of the valuation methodologies we used to derive the fair value of the reporting segments:
| • | Income Approach: To determine fair value, we discounted the expected cash flows of the reporting units. We calculated expected cash flows using annual revenue growth rates of approximately 3% for the Business and General Aviation segment, 3% for the Trainer segment, and 4% for the Customer Support segment. We used a discount rate of 13.5% for the Business and General Aviation segment, 10.0% for the Trainer segment, and 12.0% for the Customer Support segment, representing the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in the respective operations and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of our model, we used a terminal value and incorporated the present value of the resulting terminal value into our estimate of fair value. |
| • | Market-Based Approach: We used the guideline company method, which focuses on comparing our risk profile and growth prospects, to select reasonably similar publicly traded companies. Using the guideline company method, we selected revenue multiples below the median for our comparable companies. |
| • | Transaction-Based Approach: We assessed EBITDA multiples realized in actual purchase transactions of comparable companies and applied multiples to the low end of the range of comparable transactions. |
Equal weightings were assigned to each of the aforementioned model results, judgmentally allocated based on the observability and reliability of the inputs, to arrive at a final fair value estimate of the reporting unit. The first step of our interim impairment analysis indicated that the fair value of the Company’s Trainer and Customer Support reporting units exceeded their carrying values. Changes in assumptions plus or minus 10% would not result in a goodwill impairment charge for the Trainer and Customer Support reporting units. The Company’s Business and General Aviation reporting unit, however, had a fair value less than its carrying value. Accordingly, we performed the second step analysis as described in our summary of significant accounting policies footnote.
As a result of our analysis, we concluded that the implied fair value of the goodwill of our Business and General Aviation segment was zero. Accordingly, we recorded an impairment charge of $340.1 million during the three months ended September 27, 2009 to reduce the carrying value to zero. The primary cause of the goodwill impairment was the overall decline in the market value of the segment as a result of the adverse global economic conditions and our expectations as to the timing of a recovery in the general aviation market.
12
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
Changes in the net carrying amount of goodwill for the periods shown, by reportable segment, are as follows:
Goodwill by Segment:
(In millions) | Business and General Aviation | Trainer Aircraft | Customer Support | Total | ||||||||||
Balance at January 1, 2009 | ||||||||||||||
Goodwill | $ | 340.1 | $ | 222.0 | $ | 37.5 | $ | 599.6 | ||||||
Accumulated impairment losses | — | — | — | — | ||||||||||
| 340.1 | 222.0 | 37.5 | 599.6 | |||||||||||
Goodwill acquired during the year | — | — | — | — | ||||||||||
Impairment losses recognized during the period | (340.1 | ) | — | — | (340.1 | ) | ||||||||
Balance at September 27, 2009 | $ | — | $ | 222.0 | $ | 37.5 | $ | 259.5 | ||||||
Indefinite-Lived Intangible Assets:
As part of the interim goodwill impairment test discussed above, the Company performed an assessment of the fair value of our indefinite-lived intangible assets and recorded non-cash impairment charges of $107.8 million related to the “Hawker” trade name and $0.4 million related to the “Bonanza” trade name to reduce the carrying values to fair value. The impairment was caused by a decrease in the expected cash flows from the underlying products as a result of the depressed general aviation market and resulting reduced production volumes and downward pricing pressure. A change in the underlying assumptions plus or minus 10% would not result in impairment charges for those trade names.
Changes in the net carrying amount of indefinite-lived intangible assets for the periods shown, by reportable segment, are as follows:
(In millions) | Business and General Aviation | Trainer Aircraft | Customer Support | Total | ||||||||||
Balance at January 1, 2009 | ||||||||||||||
Trademarks / trade names - indefinite lives | $ | 461.0 | $ | — | $ | — | $ | 461.0 | ||||||
Accumulated impairment losses | — | — | — | — | ||||||||||
| 461.0 | — | — | 461.0 | |||||||||||
Intangibles acquired during the year | — | — | — | |||||||||||
Impairment losses recognized during the period | (108.2 | ) | — | — | (108.2 | ) | ||||||||
Balance at September 27, 2009 | $ | 352.8 | $ | — | $ | — | $ | 352.8 | ||||||
Definite-Lived Intangible Assets
We also performed an analysis of the potential impairment of our identifiable intangible assets and recorded impairment charges totaling $73.0 million to reduce the carrying value of certain assets to their fair values. The primary reason for the impairment was a decrease in expected cash flows from the products underlying the recorded asset values due to reduced production volume and downward pricing pressures.
13
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
Changes in the net carrying amount of definite-lived intangible assets for the periods shown are as follows:
(In millions) | Definite-Lived Intangibles, gross January 1, 2009 | Accumulated Amortization as of January 1, 2009 | Intangibles Acquired During the Period | Impairment Losses During the Period | Amortization During the Period | Definite-Lived Intangibles, net September 27, 2009 | Accumulated Impairment Losses | ||||||||||||||||||
Balance at January 1, 2009 | |||||||||||||||||||||||||
Technological knowledge | $ | 380.0 | $ | (45.7 | ) | $ | — | $ | (70.7 | ) | $ | (19.9 | ) | $ | 243.7 | $ | (70.7 | ) | |||||||
Customer relationships | 228.0 | (25.2 | ) | — | — | (10.8 | ) | 192.0 | — | ||||||||||||||||
Computer software | 40.5 | (12.5 | ) | 3.2 | — | (5.8 | ) | 25.4 | — | ||||||||||||||||
Order backlog | 62.0 | (43.5 | ) | — | (1.0 | ) | (12.3 | ) | 5.2 | (1.0 | ) | ||||||||||||||
Trademarks / trade names - definite lives | 6.0 | (1.1 | ) | — | (1.3 | ) | (0.2 | ) | 3.4 | (1.3 | ) | ||||||||||||||
| $ | 716.5 | $ | (128.0 | ) | $ | 3.2 | $ | (73.0 | ) | $ | (49.0 | ) | $ | 469.7 | $ | (73.0 | ) | ||||||||
8.Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following:
(In millions) | September 27, 2009 | December 31, 2008 | ||||
Land | $ | 29.5 | $ | 29.5 | ||
Buildings and leasehold improvements | 161.4 | 149.8 | ||||
Aircraft and autos | 40.9 | 59.0 | ||||
Furniture, fixtures and office equipment | 5.4 | 4.7 | ||||
Tooling | 394.7 | 389.3 | ||||
Machinery and equipment | 106.2 | 101.7 | ||||
Construction in process | 25.9 | 44.9 | ||||
| $ | 764.0 | $ | 778.9 | |||
Less accumulated depreciation | 200.0 | 137.1 | ||||
Property, plant and equipment, net | $ | 564.0 | $ | 641.8 | ||
In conjunction with the impairment testing of our goodwill and indefinite-lived intangible assets discussed above, we also performed an analysis of the potential impairment of other identifiable equipment. The analysis and re-assessment resulted in an impairment charge in cost of sales of $21.0 million due to a decrease in expected cash flows from the products underlying the recorded tooling asset values due to reduced production volume and downward pricing pressures. A 10% decrease in the expected cash flows would not result in additional impairment charges.
14
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
Changes in the net carrying amount of property, plant and equipment for the period shown are as follows:
(In millions) | PP&E, gross January 1, 2009 | Accumulated Depreciation as of January 1, 2009 | Assets Acquired/ Disposed/ Transferred During the Period | Impairment Losses During the Period | Depreciation During the Period | PP&E, net September 27, 2009 | Accumulated Impairment Losses | |||||||||||||||||||
Land | $ | 29.5 | $ | — | $ | — | $ | — | $ | — | $ | 29.5 | $ | — | ||||||||||||
Buildings and leasehold improvements | 149.8 | (15.5 | ) | 11.8 | — | (7.8 | ) | 138.3 | — | |||||||||||||||||
Aircraft and autos | 59.0 | (9.4 | ) | (12.5 | ) | — | (7.3 | ) | 29.8 | — | ||||||||||||||||
Furniture, fixtures and office equipment | 4.7 | (1.6 | ) | 0.8 | — | (0.8 | ) | 3.1 | — | |||||||||||||||||
Tooling | 389.3 | (82.2 | ) | 26.4 | (21.0 | ) | (40.1 | ) | 272.4 | (21.0 | ) | |||||||||||||||
Machinery and equipment | 101.7 | (28.4 | ) | 4.7 | — | (13.0 | ) | 65.0 | — | |||||||||||||||||
Construction in process | 44.9 | — | (19.0 | ) | — | — | 25.9 | — | ||||||||||||||||||
| $ | 778.9 | $ | (137.1 | ) | $ | 12.2 | $ | (21.0 | ) | $ | (69.0 | ) | $ | 564.0 | $ | (21.0 | ) | |||||||||
9.Derivatives and Hedging Activities
We use derivative instruments in the form of foreign currency forward contracts and interest rate swap contracts to hedge our economic exposure to changes in the variability of future cash flows attributable to changes in foreign exchange rates and interest rates, and, when appropriate, we designate these instruments as cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. We believe our derivative instruments are executed with creditworthy institutions, and we do not hold or issue derivative instruments for trading or speculative purposes.
Foreign Currency Forward Contracts
We use foreign currency forward contracts to hedge forecasted U.K. pound sterling inventory purchases. Notional amounts outstanding at September 27, 2009 and September 28, 2008 based on contract rates were $308.7 million and $666.2 million, respectively. The maturity dates of the foreign currency forward contracts outstanding at September 27, 2009 extend through January 2011. For the nine months ended September 27, 2009, the net loss recognized in earnings due to ineffectiveness or for foreign currency forward contracts not designated or de-designated was $27.8 million. At September 27, 2009, approximately $16.7 million of net losses are expected to be reclassified from accumulated other comprehensive income into earnings over the next twelve months as the underlying transactions mature and the hedged items impact earnings.
As a result of depressed demand in the general aviation market, we have reduced production rates and, as a result, reduced purchase volumes including previously forecast U.K. pound sterling inventory purchases. As a result, we discontinued cash flow hedge accounting for foreign currency forward contracts when the underlying inventory purchase transactions are no longer probable. The impact of the discontinuation of cash flow hedge accounting is included in the net losses discussed above. We may purchase offsetting foreign currency forward contracts as market conditions allow. We will continue to record the change in fair value of these foreign currency forward contracts in earnings until our position can be terminated.
Interest Rate Swap
We entered into an interest rate swap agreement in April 2007 to effectively convert a portion of our variable rate debt to fixed rate debt. The notional amount of the swap amortizes as follows: $420.0 million for the period from December 31, 2008 through December 30, 2009; $335.0 million for the period from December 31, 2009 through December 30, 2010; and $150.0 million for the period from December 31, 2010 through December 30, 2011.
15
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
Our counterparty syndicated 40% of the swap by entering into risk participation agreements with a subsidiary of Lehman Brothers Holding, Inc. (“Lehman”) and another financial institution. On September 15, 2008, Lehman filed for Chapter 11 bankruptcy, which triggered termination of its risk participation agreement with our counterparty. As agreed with our counterparty, the swap was amended to increase the fixed rate by four basis points to 4.95% to compensate our counterparty for assuming the additional credit risk. We de-designated the cash flow hedging relationship under the original terms of the swap and re-designated the amended swap in a new cash flow hedging relationship. The deferred loss associated with the de-designated hedge is being amortized over the life of the debt.
For the three and nine months ended September 27, 2009, we reclassified a loss of $1.4 million and $4.2 million, respectively, from accumulated other comprehensive income into interest expense related to the de-designation of the original hedging relationship. For the three and nine months ended September 27, 2009, no ineffectiveness was recognized for the new hedging relationship. At September 27, 2009, a loss of approximately $3.8 million is expected to be reclassified from accumulated other comprehensive income into interest expense over the next twelve months related to the de-designation of the original hedging relationship.
We entered into an additional interest rate swap agreement in June 2009 to effectively convert a portion of our variable rate debt to fixed rate debt. The notional amount of the swap is $300.0 million and matures on June 30, 2011.
The following tables disclose the effects derivative instruments have on our statements of financial position, operations, and cash flows:
September 27, 2009 | |||||
(In millions) | Statement of Financial Position Location | Fair Value | |||
Derivatives designated as hedging instruments | |||||
Interest rate contracts | Accrued retiree benefits and other long-term liabilities | $ | 24.1 | ||
Foreign exchange contracts, current | Other accrued expenses | 21.1 | |||
Foreign exchange contracts, non-current | Accrued retiree benefits and other long-term liabilities | 0.7 | |||
Total derivatives designated as hedging instruments | $ | 45.9 | |||
Derivatives not designated as hedging instruments | |||||
Foreign exchange contracts, current | Other accrued expenses | $ | 22.5 | ||
Total derivatives not designated as hedging instruments | $ | 22.5 | |||
Total derivatives | $ | 68.4 | |||
16
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
The Effect of Derivative Instruments on the Statement of Financial Performance
(In millions)
Derivatives Not Designated as Hedging Instruments under | Location of Gain/(Loss) Recognized in Income on Derivative | Amount of Gain/(Loss) Recognized in Income on Derivative | ||||
| Nine months ended September 27, 2009 | ||||||
Interest rate contracts | Interest expense, net | $ | (4.2 | ) | ||
Foreign exchange contracts | Cost of sales | $ | (27.8 | ) | ||
Total | $ | (32.0 | ) | |||
Derivatives in Cash Flow Hedging Relationships | Amount of Gain/(Loss) Recognized in OCI on Derivative (Effective Portion) | Location of Gain/(Loss) | Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Location of Gain/(Loss) | Amount of Gain/ (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | ||||||||||
| Nine months ended September 27, 2009 | Nine months ended September 27, 2009 | Nine months ended September 27, 2009 | |||||||||||||
Interest rate contracts | $ | 2.7 | Interest expense, net | $ | — | Interest expense, net | $ | (0.6 | ) | ||||||
Foreign exchange contracts | 16.7 | Cost of sales | (26.8 | ) | Cost of sales | — | |||||||||
Total | $ | 19.4 | $ | (26.8 | ) | $ | (0.6 | ) | |||||||
10.Restructuring
During the nine months ended September 27, 2009, we undertook several restructuring actions in response to reduced aircraft production rates due to weakening in the global economy and decreased demand in the general aviation industry. During the three and nine months ended September 27, 2009, we recorded pre-tax charges of $8.5 million and $29.1 million, respectively, related to restructuring costs, costs to exit facilities, and related items, net, on our Consolidated Statements of Operations, as follows:
| • | Workforce Reduction. A $24.7 million charge related to our decision to reduce staffing; and |
| • | Exit and Other Consolidation Activities. A $3.8 million charge related to the exit from a leased facility; and a $0.6 million charge for other consolidation activities. |
The following table shows pre-tax charges for the nine months ended September 27, 2009:
(In millions) | Nine Months Ended September 27, 2009 | ||
Business and General Aviation | $ | 27.7 | |
Trainer Aircraft | 0.6 | ||
Customer Support | 0.8 | ||
Total | $ | 29.1 | |
17
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
The following table shows changes in our restructuring and other reserve balances:
| Facilities and Other Consolidation Costs | Severance and Related Costs | |||||||
(In millions) | Nine Months Ended September 27, 2009 | Nine Months Ended September 27, 2009 | ||||||
Beginning balance | $ | — | $ | 0.2 | ||||
Accruals | 4.4 | 24.7 | ||||||
Payments | (3.5 | ) | (20.3 | ) | ||||
Ending balance | $ | 0.9 | $ | 4.6 | ||||
The facilities and other consolidation costs represent costs related primarily to future lease payments for facility closures.
11.Debt and Notes Payable
Debt and notes payable consisted of the following:
(In millions) | September 27, 2009 | December 31, 2008 | ||||
Short-term debt: | ||||||
Notes payable | $ | 50.1 | $ | 113.6 | ||
Revolving Credit Facility | 363.2 | — | ||||
Current portion of long-term debt | 13.0 | 13.0 | ||||
Total short-term debt | $ | 426.3 | $ | 126.6 | ||
Senior secured term loan due 2014 | $ | 1,270.8 | $ | 1,277.2 | ||
Senior fixed rate notes due 2015 | 182.9 | 400.0 | ||||
Senior PIK-election notes due 2015 | 275.4 | 400.0 | ||||
Senior subordinated notes due 2017 | 145.1 | 300.0 | ||||
Long-term debt | 1,874.2 | 2,377.2 | ||||
Less current portion | 13.0 | 13.0 | ||||
Long-term debt, net of current portion | $ | 1,861.2 | $ | 2,364.2 | ||
Total Indebtedness | $ | 2,287.5 | $ | 2,490.8 | ||
The average floating interest rate on the senior secured term loan was 2.37% and 2.79% at September 27, 2009 and December 31, 2008, respectively.
During the first quarter of 2009, we purchased $222.1 million of our outstanding notes for $41.0 million in cash, realizing a net gain of $177.1 million after considering a $4.0 million charge to reduce the carrying value of deferred debt issuance cost for the portion related to the notes purchased. We also paid $2.6 million in accrued but previously unpaid interest on the Senior Fixed Rate Notes and Senior Subordinated Notes purchased.
On June 2, 2009, we completed a cash tender offer to purchase a portion of our outstanding Senior Fixed Rate Notes, Senior PIK-Election Notes and Senior Subordinated Notes. The tender offer resulted in the purchase of $274.5 million aggregate principal amount of our debt securities for $96.1 million in cash, realizing a net gain of $175.0 million after considering transaction fees, a $3.8 million charge to reduce the carrying value of deferred debt issuance cost for the portion of the notes purchased and an allocation of a portion of the cash settlement amount to the accrued but unpaid PIK-Election which would have increased the principal balance of the Senior PIK-Election Notes had the underlying notes not been purchased. The tender offer, along with open market purchases executed in the first quarter of 2009, resulted in an aggregate purchase of $496.6 million of our debt securities, realizing a net cumulative gain of $352.1 million during the nine months ended September 27, 2009.
18
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
Notes payable represents a deferred payment obligation to a supplier under which the supplier is paid by the lender upon our receipt of goods, and we pay the lender within 155 days under the terms of the underlying short-term promissory notes, with interest determined at the five month LIBOR plus 5.00% for those notes issued after May 1, 2009. At September 27, 2009, we had $50.1 million of outstanding notes payable at a weighted-average interest rate of 5.86%. At December 31, 2008, we had $113.6 million of outstanding notes payable at a weighted-average interest rate of 3.62%. The issuance of these notes is treated as a non-cash financing transaction. $111.4 million and $169.1 million of notes were issued during the nine months ended September 27, 2009 and September 28, 2008, respectively.
On November 6, 2009, we amended our credit agreement as discussed further in a filing to the SEC on Form 8-K also filed on November 6, 2009. The amendment waives compliance with a quarterly consolidated secured debt ratio test subject to certain conditions outlined in the amendment. The amendment adds a new minimum liquidity test for quarters in which a revolving commitment is outstanding and adds a new covenant for a minimum adjusted earnings before interest, tax, depreciation and amortization (EBITDA) beginning for the second quarter of 2011. The amendment also required us to repay $125.0 million of our outstanding borrowings under the revolving credit facility and to permanently reduce the revolving credit facility by $137.0 million, including a portion of the amount committed, but not currently being fulfilled, by Lehman Brothers. The repayment and permanent reduction in the facility occurred on November 6, 2009 and lowers the effective commitment of the revolving facility to $240.0 million.
12.Income Taxes
We utilize the asset and liability method of accounting for income taxes, which requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the book and tax basis of various assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of changes in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period in which the rate change occurs. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”). Among its provisions, the Act permits certain taxpayers to elect to defer the taxation of cancellation-of-indebtedness (“COD”) income arising from certain repurchases, exchanges or modifications of their outstanding debt that occur during 2009 and 2010. The COD income can be deferred for five years and then included in taxable income ratably over the next five years. We plan to defer the COD income on the purchase of our debt securities recorded in the financial statements for the period ending September 27, 2009.
Income taxes for the interim period presented have been included in the accompanying financial statements on the basis of a blended estimated annual effective tax rate. In addition to the amount of tax resulting from applying the blended estimated annual effective tax rate to pre-tax income or loss, we include certain items treated as discrete events to arrive at an estimated overall tax amount. As of September 27, 2009, the estimated effective tax rate for the full year 2009 was 6.3%. Included in the estimated overall tax amount was the discrete tax impact from gain on the debt repurchases and the impairment charges discussed below. The blended estimated annual effective tax rate, excluding discrete items, was negative 1.5%.
We recorded a net benefit for income taxes of $30.7 million for the nine months ending September 27, 2009. The net benefit for income taxes includes a gross discrete tax benefit of $36.5 million from the reversal of deferred income taxes upon recording the impairment to goodwill and indefinite-lived intangibles during the three months ended September 27, 2009.
In the fourth quarter of 2008, we recorded a valuation allowance against the full amount of our net deferred tax asset at December 31, 2008 in the amount of $296.9 million. Our deferred tax asset valuation allowance increased $140.8 million during the nine months ending September 27, 2009 to $437.7 million. The increase was primarily caused by an increase in our net deferred tax assets resulting from the impairment of goodwill and other tangible and intangible assets as well as an increase in our gross deferred tax asset relating to our federal and certain state net operating loss carryforwards. We intend to maintain the valuation allowance until sufficient positive evidence related to sources of future taxable income exists to support a reversal of the valuation allowance.
13.Pension and Other Employee Benefits
We have defined benefit pension and retirement plans covering the majority of our employees hired prior to January 1, 2007 (“Pension Benefits”). In addition to providing Pension Benefits, we provide certain health care and life insurance benefits to retired employees through other postretirement defined benefit plans (“Other Benefits”).
The following table outlines the components of net periodic benefit cost for Pension Benefits:
19
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
(In millions) | Three Months Ended September 27, 2009 | Three Months Ended September 28, 2008 | Nine Months Ended September 27, 2009 | Nine Months Ended September 28, 2008 | ||||||||||||
Service cost | $ | 6.8 | $ | 5.9 | $ | 20.5 | $ | 17.8 | ||||||||
Interest cost | 14.2 | 13.1 | 42.6 | 39.4 | ||||||||||||
Expected return on plan assets | (15.1 | ) | (16.3 | ) | (45.5 | ) | (48.9 | ) | ||||||||
Amortization of prior service cost | 0.6 | — | 1.7 | — | ||||||||||||
Amortization of net loss (gain) | 1.8 | (1.2 | ) | 5.5 | (3.7 | ) | ||||||||||
Pension curtailment | — | — | 2.3 | — | ||||||||||||
Net amount recognized | $ | 8.3 | $ | 1.5 | $ | 27.1 | $ | 4.6 | ||||||||
The $2.3 million curtailment charge is related to our defined benefit pension plans for our salaried (“Salaried Plan”) and hourly (“Hourly Plan”) employees. This charge relates to the impact on the plans of workforce reductions announced during 2009.
The following table outlines the components of net periodic benefit cost for Other Benefits:
(In millions) | Three Months Ended September 27, 2009 | Three Months Ended September 28, 2008 | Nine Months Ended September 27, 2009 | Nine Months Ended September 28, 2008 | ||||||||
Service cost | $ | 0.1 | $ | 0.1 | $ | 0.5 | $ | 0.4 | ||||
Interest cost | 0.3 | 0.3 | 0.8 | 0.8 | ||||||||
Amount recognized | $ | 0.4 | $ | 0.4 | $ | 1.3 | $ | 1.2 | ||||
We expect total contributions, both required and discretionary, to the Pension Benefits and Other Benefits plans to be approximately $0.3 million and $1.0 million, respectively, in 2009.
We maintain a 401(k) defined contribution plan under which covered employees are allowed to contribute up to a specific percentage of their eligible compensation. Prior to October 5, 2009, we matched (“HBAC Match”) employee contributions up to a maximum of four percent of eligible compensation. Total HBAC Match expense was $3.8 million and $12.3 million for the three and nine months ended September 27, 2009, respectively. For the three and nine months ended September 28, 2008, HBAC’s Match expense was $4.1 million and $13.8 million, respectively. The company match was suspended indefinitely, effective October 5, 2009.
We maintain a retirement income savings program (“RISP”), which is a defined contribution plan, for certain employees who were hired on or after January 1, 2007. These employees will participate in the RISP in place of the Pension Benefits described above. We contribute to the covered employee’s participant account up to a maximum of 9% of the employee’s pay based on the employee’s age and tenure. The funds can be invested among several investment options as directed by the employee. Total expense for the RISP was $0.9 million and $2.8 million for the three and nine months ended September 27, 2009, respectively. For the three and nine months ended September 28, 2008 the total expenses for the RISP were $1.0 million and $2.3 million, respectively.
14.Stock-Based Compensation
Stock option activity for the nine months ended September 27, 2009 was as follows:
20
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
Service Vesting | Number of Options | ||
Nonvested at December 31, 2008 | 2,986,724 | ||
Granted | 753,125 | ||
Exercised | — | ||
Forefeited or expired | (584,048 | ) | |
Nonvested at September 27, 2009 | 3,155,801 | ||
Performance Vesting | Number of Options | ||
Nonvested at December 31, 2008 | 3,056,104 | ||
Granted | 809,375 | ||
Exercised | — | ||
Forefeited or expired | (960,358 | ) | |
Nonvested at September 27, 2009 | 2,905,121 | ||
Restricted share activity for the nine months ended September 27, 2009 was as follows:
Restricted Shares | Number of Shares | ||
Nonvested at December 31, 2008 | 98,687 | ||
Granted | 127,500 | ||
Vested | (67,308 | ) | |
Forfeited | — | ||
Nonvested at September 27, 2009 | 158,879 | ||
We recognized stock-based compensation expense of $2.5 million and $6.9 million for the nine months ended September 27, 2009 and September 28, 2008, respectively. The expense associated with the 2008 Performance Vesting options was reversed in the third quarter of 2008.
15.Related Party Transactions
Onex Partners II LP and its affiliated entities own approximately 49% of the issued and outstanding common stock of HBI. Affiliates of Onex Partners II LP currently own a controlling interest in Spirit AeroSystems Holdings, Inc. (“Spirit”), one of our suppliers. Spirit supplies certain components for our Hawker aircraft, and we believe that purchases of components from Spirit are based on standard market terms. We received components from Spirit of approximately $15.5 million and $22.3 million for the nine months ended September 27, 2009 and September 28, 2008, respectively. Advance payments to Spirit for goods not yet received were $0.5 million and $10.7 million at September 27, 2009 and December 31, 2008, respectively.
GS Capital Partners VI, L.P. and other private equity funds affiliated with Goldman, Sachs & Co. own approximately 49% of the issued and outstanding common stock of HBI. Goldman, Sachs & Co. acted as an initial purchaser in the 2007 offering of the notes that were later exchanged for our outstanding publicly held notes in a registered exchange offer. In connection with the registration rights agreement we entered into at the time of the issuance of the notes, we also agreed to maintain a market making shelf registration for the benefit of Goldman, Sachs & Co. Goldman Sachs Credit Partners L.P., an affiliate of GS Capital Partners VI, L.P. and its related investment funds, acted as the joint lead arranger and a lender under our senior secured credit facilities. In addition, Goldman, Sachs & Co., Goldman Sachs Credit Partners L.P. and its affiliates may occasionally engage in commercial banking, investment banking or other financial advisory transactions with us and our affiliates. Currently, Goldman Sachs Credit Partners L.P. is a participating lender in the Company’s credit agreement and Goldman Sachs Capital Markets, L. P. has entered into an interest rate swap with the Company. We believe these agreements were executed at market terms for a similar company with a similar risk profile. In addition, Goldman, Sachs & Co. served as Dealer Manager for the tender offer to purchase a portion of our outstanding Senior Notes and Senior Subordinated Notes and was paid customary fees for this service.
We entered into a management services arrangement with the investment managers of GS Capital Partners VI, L.P., and its related funds, and Onex Partners II LP, effective upon the closing of the Acquisition. Under the arrangement, we pay these parties an annual aggregate fee of $2.0 million, plus reasonable out-of-pocket expenses, as compensation for various advisory services. This fee is shared equally by the two sets of investment managers. We also agreed to indemnify these parties and their affiliates for liabilities arising from their actions under the management services arrangement.
21
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
A member of the Board of Directors of HBI is also a member of the Board of Directors of Spirit.
16.Commitments and Contingencies
In the normal course of business, we lease equipment, office buildings and other facilities under leases that include standard escalation clauses to reflect changes in price indices, as well as renewal options. Our rent expense was $3.4 million and $11.1 million for the three and nine months ended September 27, 2009, respectively. Our rent expense was $3.6 million and $8.5 million for the three and nine months ended September 28, 2008, respectively.
We have assigned certain leasehold interests to third parties but remain liable to the lessor to the extent the assignee defaults on future lease payments amounting to $22.0 million and $23.7 million at September 27, 2009 and December 31, 2008, respectively, extending through 2026.
We have committed to construct facilities and purchase equipment under contracts with various third parties. Future payments of $7.4 million and $40.9 million were required under these contracts at September 27, 2009 and December 31, 2008, respectively. The current commitments relate primarily to the expansion of our existing service center in Indianapolis, Indiana, and the completion of a new service center in Mesa, Arizona, much of which we expect will be funded by proceeds from the future issuance of Airport Special Purpose Revenue Bonds, and the purchase of new tooling and machinery.
We retain a portion of the liability for losses and expenses for aircraft product liability. In March 2009, in connection with our insurance renewal, we elected to increase our retained liability from $5 million per occurrence to $10 million per occurrence based on our evaluation of risks involved. The maximum liability of $20 million per fiscal year remains unchanged. Insurance purchased from third parties is expected to cover excess aggregate liability exposure from $20 million to $750 million. This coverage also includes the excess liability over the per occurrence limits. Raytheon retained the liability for claims relating to occurrences after April 1, 2001 through March 25, 2007. We retain liability for claims relating to occurrences prior to April 1, 2001, subject to limited exceptions covering specific liabilities retained by Raytheon. The aircraft product liability reserve was $15.4 million and $11.2 million at September 27, 2009 and December 31, 2008, respectively, and was based on management’s estimate of its expected losses not covered by third party insurers. We currently have no offsetting receivable for insurance recovery associated with this estimate.
We issue guarantees and have banks and surety companies issue, on our behalf, letters of credit and surety bonds to meet various administrative, bid, performance, warranty, retention and advance payment obligations of us or our affiliates. Approximately $160.5 million, $68.2 million and $1.2 million of these guarantees, letters of credit and surety bonds, for which there were stated values, were outstanding at September 27, 2009, respectively, and $151.9 million, $89.8 million and $1.2 million were outstanding at December 31, 2008, respectively. These instruments expire on various dates through 2016.
In connection with certain aircraft sales, we offer trade-in incentives whereby the customer will receive a pre-determined trade-in value if they purchase another aircraft of equal or greater value from us. The differences between the value of these trade-in incentives and the current, estimated fair value of the underlying aircraft was approximately $26.0 million at September 27, 2009. There is a high degree of uncertainty inherent in the assessment of the likelihood of trade-in commitments.
We are subject to oversight by the Federal Aviation Administration (“FAA”). The FAA routinely evaluates aircraft operational and safety requirements and is responsible for certification of new and modified aircraft. Future action by the FAA may adversely affect our financial position or results of operations, including recovery of its investment in new aircraft.
As a defense contractor, we are subject to many levels of audit and investigation. Agencies that oversee contract performance include: the Defense Contract Audit Agency, the U.S. Department of Defense Inspector General, the Government Accountability Office, the U.S. Department of Justice and Congressional committees. Future action by these agencies and legislative committees may adversely affect our financial position or results of operations.
In July 2007, the FAA informed us that it had initiated an investigation concerning compliance by one of our suppliers with part specifications involving our T-6A trainers and certain special mission King Air aircraft sold to the U.S. Government. HBAC cooperated with the FAA investigation and conducted its own supplier quality audits. HBAC believes the alleged non-compliance condition does not impact safety of flight. On June 17, 2008, the U.S. Attorney’s Office for the District of Kansas notified us that the FAA had referred a civil penalty matter arising out of its investigation to the U.S. Attorney’s Office for enforcement. According to the U.S. Attorney’s Office, the FAA had recommended fines against HBAC of at least $2.5 million arising out of the alleged supplier non-conformance and HBAC’s alleged quality oversight of the supplier. We do not believe any resulting civil penalty would be material to our financial condition, results of operations or liquidity.
On June 28, 2008, the U.S. Attorney’s Office sent notice to us that it was investigating whether HBAC’s alleged conduct
22
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
violated the civil False Claims Act (“FCA”) arising from the same facts as the FAA proceeding described above. The investigation was focused on the alleged supplier non-conformance with specifications and HBAC’s alleged inadequate quality control over the supplier’s manufacturing process on certain T-6A and King Air aircraft delivered to the government. HBAC cooperated with the government’s investigation. On March 26, 2009, the United States Attorney’s Office for the District of Kansas filed a Notice in the United States District Court for the District of Kansas informing the Court that the United States declined to intervene in a qui tam lawsuit relating to the FCA investigation. The U.S. Attorney’s Notice to the Court further asserted that the government retains the right to intervene in the FCA qui tam action and that no settlement of that action can occur without the government’s consent. The Court directed that the Second Amended Complaint in the qui tam lawsuit be unsealed. On April 13, 2009, the qui tam relators filed a Third Amended Complaint. The qui tam lawsuit, United States ex rel. Minge, et al. v. Turbine Engine Components Technologies Corporation, et al., No. 07-1212-MLB (D. Kan.), alleges FCA causes of action against HBAC (and its predecessor, Raytheon Aircraft Company). The lawsuit also alleges FCA causes of action, retaliation causes of action, and a tort cause of action against TECT Aerospace Wellington, Inc. (an HBAC supplier) and various affiliates of TECT. The Third Amended Complaint does not quantify the damages alleged against HBAC. Under the FCA, the government can recover treble damages suffered by the government plus civil penalties of up to $11,000 for each false claim. An adverse judgment under the FCA can also subject HBAC to suspension or debarment of future government business. The matter is now pending.
On April 7, 2009, Airbus UK Ltd. (“Airbus”) filed a Request for Arbitration (“RFA”) with the International Chamber of Commerce (“ICC”) in Paris initiating proceedings against HBAC. In the RFA, Airbus alleges that HBAC breached its obligations under the Airframe Purchase and Support Agreement dated August 19, 1998 between Airbus and HBAC. More particularly, Airbus claims that it and HBAC reached agreement in April of 2008 for HBAC to purchase increased volumes of fuselages, wings, track kits and spare parts (collectively the “shipsets”) in the 2008 to 2010 time frame. Airbus further alleges that (i) beginning in late 2008, HBAC unilaterally reduced the number of shipsets that it would purchase in breach of its contractual obligations and (ii) that Airbus made substantial investments to expand its production capacity at the urging of HBAC and in reliance on alleged expanded commitments from HBAC. Airbus claims damages in an amount in excess of 40 million pounds sterling. HBAC filed its response in June, 2009, vigorously contesting Airbus’s claims and denying the material allegations of the RFA and further alleging that Airbus breached the Joint Cost Reduction Agreement between the parties, claiming unspecified damages as well as claiming damages of $500,325 related to defective shipset deliveries. Airbus filed a response on July 17, 2009, denying HBAC’s claims.
The arbitration tribunal has been selected and the Chairman has been confirmed. A scheduling conference was held and the arbitration is set to begin July 27, 2010.
Similar to other companies in our industry, we receive requests for information from government agencies in connection with their regulatory or investigational authority in the ordinary course of business. Such requests can include subpoenas or demand letters for documents to assist the government in audits or investigations. We review such requests and notices and take appropriate action.
17.Business Segment Information
Reportable segments include the following: Business and General Aviation, Trainer Aircraft and Customer Support. Business and General Aviation designs, develops, manufactures, markets and sells commercial and specially modified general aviation aircraft and related service contracts. Trainer Aircraft designs, develops, manufactures, markets and sells military training aircraft to the U.S. Government and foreign governments. Customer Support provides parts and service support for in-service aircraft worldwide.
23
Notes to Consolidated Financial Statements (Unaudited)—(Continued)
While some working capital accounts are maintained on a segment basis, much of our assets are not managed or maintained on a segment basis. Certain property, plant and equipment, including tooling, is used in the design and production of products for each of the segments and, therefore, is not allocated to any individual segment. In addition, cash, other assets, non-current liabilities and deferred taxes are maintained and managed on a consolidated basis and generally do not pertain to any particular segment. Raw materials and certain component parts are used in production across all segments. Work in process inventory is identifiable by segment but is managed and evaluated at the program level. As there is no segmentation of our productive assets, no allocation of these amounts has been made for purposes of segment disclosure.
Segment financial results were as follows:
(In millions) | Three Months Ended September 27, 2009 | Three Months Ended September 28, 2008 | Nine Months Ended September 27, 2009 | Nine Months Ended September 28, 2008 | ||||||||||||
Sales | ||||||||||||||||
Business and General Aviation | $ | 504.4 | $ | 603.0 | $ | 1,491.2 | $ | 1,844.6 | ||||||||
Trainer Aircraft | 169.7 | 77.4 | 367.6 | 248.1 | ||||||||||||
Customer Support | 100.2 | 125.7 | 313.8 | 407.1 | ||||||||||||
Eliminations | (16.6 | ) | (22.8 | ) | (61.0 | ) | (111.3 | ) | ||||||||
Total | $ | 757.7 | $ | 783.3 | $ | 2,111.6 | $ | 2,388.5 | ||||||||
Operating Income (Loss) | ||||||||||||||||
Business and General Aviation | $ | (719.3 | ) | $ | (5.1 | ) | $ | (777.0 | ) | $ | 24.0 | |||||
Trainer Aircraft | 14.3 | 1.6 | 24.3 | 13.2 | ||||||||||||
Customer Support | (16.1 | ) | 18.8 | 25.0 | 63.0 | |||||||||||
Eliminations | — | — | 0.1 | — | ||||||||||||
Total | $ | (721.1 | ) | $ | 15.3 | $ | (727.6 | ) | $ | 100.2 | ||||||
Intersegment sales for the three and nine months ended September 27, 2009 were $7.8 million and $30.6 million, respectively, for Business and General Aviation and $8.8 million and $30.4 million, respectively, for Customer Support. Intersegment sales for the three and nine months ended September 28, 2008 were $13.4 million and $79.8 million, respectively, for Business and General Aviation and $9.4 million and $31.5 million, respectively, for Customer Support. The Trainer Aircraft segment does not have intersegment sales.
18.Subsequent Events
On November 6, 2009, we amended our credit agreement as discussed further in a filing to the SEC on Form 8-K also filed on November 6, 2009. The amendment waives compliance with a quarterly consolidated secured debt ratio test subject to certain conditions outlined in the amendment. The amendment adds a new minimum liquidity test for quarters in which a revolving commitment is outstanding and adds a new covenant for a minimum adjusted earnings before interest, tax, depreciation and amortization (EBITDA) beginning for the second quarter of 2011. The amendment also required us to repay $125.0 million of our outstanding borrowings under the revolving credit facility and to permanently reduce the revolving credit facility by $137.0 million, including a portion of the amount committed, but not currently being fulfilled, by Lehman Brothers. The repayment and permanent reduction in the facility occurred on November 6, 2009 and lowers the effective commitment of the revolving facility to $240.0 million.
19.Guarantor Subsidiary Financial Information
Our obligation to pay principal and interest under certain debt instruments is guaranteed on a joint and several basis by certain guarantor subsidiaries. The guarantees are full and unconditional, and the guarantor subsidiaries are 100% owned by us. Non-guarantor subsidiaries consist primarily of foreign subsidiaries of HBAC, which are organized outside the United States of America.
The following unaudited condensed consolidating financial information presents Condensed Consolidating Statements of Financial Position as of September 27, 2009 and December 31, 2008; Condensed Consolidating Statements of Operations for the three months ended September 27, 2009, the three months ended September 28, 2008, the nine months ended September 27, 2009, and the nine months ended September 28, 2008; Condensed Consolidating Statements of Cash Flows for the nine months ended September 27, 2009 and the nine months ended September 28, 2008.
Elimination entries necessary to consolidate guarantor and non-guarantor subsidiaries have been included in the eliminations columns. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
24
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidating Statement of Financial Position
As of September 27, 2009
(In millions)
| Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||
Assets | |||||||||||||||||||
Current assets | |||||||||||||||||||
Cash and cash equivalents | $ | 291.4 | $ | — | $ | 8.8 | $ | — | $ | 300.2 | |||||||||
Accounts and notes receivable, net | — | 115.8 | 7.0 | — | 122.8 | ||||||||||||||
Intercompany receivables | — | 12.8 | 2.2 | (15.0 | ) | — | |||||||||||||
Unbilled revenue | — | 51.2 | 27.4 | — | 78.6 | ||||||||||||||
Inventories, net | — | 1,666.6 | 7.0 | — | 1,673.6 | ||||||||||||||
Current deferred income tax asset | — | 16.0 | — | — | 16.0 | ||||||||||||||
Prepaid expenses and other current assets | 0.1 | 22.7 | 1.9 | — | 24.7 | ||||||||||||||
Total current assets | 291.5 | 1,885.1 | 54.3 | (15.0 | ) | 2,215.9 | |||||||||||||
Property, plant and equipment, net | 18.0 | 542.7 | 3.3 | — | 564.0 | ||||||||||||||
Investment in subsidiaries | 1,841.4 | — | — | (1,841.4 | ) | — | |||||||||||||
Goodwill | — | 259.5 | — | — | 259.5 | ||||||||||||||
Intangible assets, net | — | 821.7 | 0.8 | — | 822.5 | ||||||||||||||
Non-current deferred income tax asset | 20.6 | (20.6 | ) | — | — | — | |||||||||||||
Other assets, net | 39.2 | 9.7 | (0.1 | ) | — | 48.8 | |||||||||||||
Total assets | $ | 2,210.7 | $ | 3,498.1 | $ | 58.3 | $ | (1,856.4 | ) | $ | 3,910.7 | ||||||||
Liabilities and Equity | |||||||||||||||||||
Current liabilities | |||||||||||||||||||
Notes payable and current portion of long-term debt | $ | 426.3 | $ | — | $ | — | $ | — | $ | 426.3 | |||||||||
Current portion of industrial revenue bonds (receivable) payable | (71.8 | ) | 71.8 | — | — | — | |||||||||||||
Advance payments and billings in excess of costs incurred | — | 434.4 | 22.5 | — | 456.9 | ||||||||||||||
Accounts payable | 0.1 | 281.2 | 4.6 | (7.6 | ) | 278.3 | |||||||||||||
Accrued salaries and wages | — | 51.2 | 0.7 | — | 51.9 | ||||||||||||||
Current deferred income tax liability | — | — | — | — | — | ||||||||||||||
Accrued interest payable | 37.9 | 1.6 | — | — | 39.5 | ||||||||||||||
Other accrued expenses | (6.7 | ) | 259.2 | 5.0 | — | 257.5 | |||||||||||||
Total current liabilities | 385.8 | 1,099.4 | 32.8 | (7.6 | ) | 1,510.4 | |||||||||||||
Long-term debt | 1,861.2 | — | — | — | 1,861.2 | ||||||||||||||
Industrial revenue bonds (receivable) payable | (255.1 | ) | 255.1 | — | — | — | |||||||||||||
Intercompany loan | 113.5 | (117.4 | ) | 11.3 | (7.4 | ) | — | ||||||||||||
Accrued pension benefits | — | 334.9 | — | — | 334.9 | ||||||||||||||
Other long-term liabilities | 24.1 | 73.2 | — | — | 97.3 | ||||||||||||||
Non-current deferred income tax liability | — | 25.7 | — | — | 25.7 | ||||||||||||||
Total liabilities | 2,129.5 | 1,670.9 | 44.1 | (15.0 | ) | 3,829.5 | |||||||||||||
Total equity | 81.2 | 1,827.2 | 14.2 | (1,841.4 | ) | 81.2 | |||||||||||||
Total liabilities and equity | $ | 2,210.7 | $ | 3,498.1 | $ | 58.3 | $ | (1,856.4 | ) | $ | 3,910.7 | ||||||||
25
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidating Statement of Financial Position
As of December 31, 2008
(In millions)
| Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||||||
Assets | ||||||||||||||||||
Current assets | ||||||||||||||||||
Cash and cash equivalents | $ | 370.9 | $ | 0.3 | $ | 6.4 | $ | — | $ | 377.6 | ||||||||
Accounts and notes receivable, net | 0.3 | 98.8 | 3.9 | — | 103.0 | |||||||||||||
Intercompany receivables | — | 14.6 | 2.1 | (16.7 | ) | — | ||||||||||||
Unbilled revenue | — | 26.4 | 9.5 | — | 35.9 | |||||||||||||
Inventories, net | — | 1,773.3 | 9.0 | — | 1,782.3 | |||||||||||||
Current deferred income tax asset | — | — | — | — | — | |||||||||||||
Prepaid expenses and other current assets | 42.9 | (12.0 | ) | 1.6 | — | 32.5 | ||||||||||||
Total current assets | 414.1 | 1,901.4 | 32.5 | (16.7 | ) | 2,331.3 | ||||||||||||
Property, plant and equipment, net | 18.4 | 620.4 | 3.0 | — | 641.8 | |||||||||||||
Investment in subsidiaries | 2,499.6 | — | — | (2,499.6 | ) | — | ||||||||||||
Goodwill | — | 599.6 | — | — | 599.6 | |||||||||||||
Intangible assets, net | — | 1,048.8 | 0.7 | — | 1,049.5 | |||||||||||||
Non-current deferred income tax asset | — | — | — | — | — | |||||||||||||
Other assets, net | 55.1 | 10.3 | — | — | 65.4 | |||||||||||||
Total assets | $ | 2,987.2 | $ | 4,180.5 | $ | 36.2 | $ | (2,516.3 | ) | $ | 4,687.6 | |||||||
Liabilities and Equity | ||||||||||||||||||
Current liabilities | ||||||||||||||||||
Notes payable and current portion of long-term debt | $ | 126.6 | $ | — | $ | — | $ | — | $ | 126.6 | ||||||||
Current portion of industrial revenue bonds (receivable) payable | (76.8 | ) | 76.8 | — | — | — | ||||||||||||
Advance payments and billings in excess of costs incurred | — | 505.8 | 1.6 | — | 507.4 | |||||||||||||
Accounts payable | 67.0 | 346.0 | 3.3 | (12.0 | ) | 404.3 | ||||||||||||
Accrued salaries and wages | — | 55.0 | 1.6 | — | 56.6 | |||||||||||||
Current deferred income tax liability | — | 19.4 | — | — | 19.4 | |||||||||||||
Accrued interest payable | 25.3 | 0.6 | — | — | 25.9 | |||||||||||||
Other accrued expenses | (9.6 | ) | 271.0 | 11.2 | — | 272.6 | ||||||||||||
Total current liabilities | 132.5 | 1,274.6 | 17.7 | (12.0 | ) | 1,412.8 | ||||||||||||
Long-term debt | 2,364.2 | — | — | — | 2,364.2 | |||||||||||||
Industrial revenue bonds (receivable) payable | (292.5 | ) | 292.5 | — | — | — | ||||||||||||
Intercompany loan | 321.4 | (330.3 | ) | 13.6 | (4.7 | ) | — | |||||||||||
Accrued pension benefits | 310.8 | 310.8 | ||||||||||||||||
Other long-term liabilities | 26.3 | 113.8 | — | — | 140.1 | |||||||||||||
Non-current deferred income tax liability | — | 24.4 | — | — | 24.4 | |||||||||||||
Total liabilities | 2,551.9 | 1,685.8 | 31.3 | (16.7 | ) | 4,252.3 | ||||||||||||
Total equity | 435.3 | 2,494.7 | 4.9 | (2,499.6 | ) | 435.3 | ||||||||||||
Total liabilities and equity | $ | 2,987.2 | $ | 4,180.5 | $ | 36.2 | $ | (2,516.3 | ) | $ | 4,687.6 | |||||||
26
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidating Statement of Operations
Three Months Ended September 27, 2009
(In millions)
| Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||||||||
Sales | $ | — | $ | 773.4 | $ | 20.2 | $ | (35.9 | ) | $ | 757.7 | |||||||||
Cost of sales | — | 894.1 | 17.4 | (35.9 | ) | 875.6 | ||||||||||||||
Gross margin | — | (120.7 | ) | 2.8 | — | (117.9 | ) | |||||||||||||
Restructuring expenses | — | 8.5 | — | — | 8.5 | |||||||||||||||
Definite-lived asset impairment | — | 73.0 | — | — | 73.0 | |||||||||||||||
Goodwill and indefinite-lived asset impairment | — | 448.3 | — | — | 448.3 | |||||||||||||||
Selling, general and administrative expenses | 0.3 | 47.3 | 0.8 | — | 48.4 | |||||||||||||||
Research and development expenses | — | 25.0 | — | — | 25.0 | |||||||||||||||
Operating (loss) income | (0.3 | ) | (722.8 | ) | 2.0 | — | (721.1 | ) | ||||||||||||
Intercompany interest expense (income), net | 0.1 | (0.1 | ) | — | — | — | ||||||||||||||
Interest expense, net | 34.1 | 1.3 | — | — | 35.4 | |||||||||||||||
Other (income) expense, net | — | (1.1 | ) | 0.8 | — | (0.3 | ) | |||||||||||||
Non-operating expense, net | 34.2 | 0.1 | 0.8 | — | 35.1 | |||||||||||||||
(Loss) income before taxes | (34.5 | ) | (722.9 | ) | 1.2 | — | (756.2 | ) | ||||||||||||
(Benefit from) provision for income taxes | (42.1 | ) | (32.5 | ) | 2.3 | — | (72.3 | ) | ||||||||||||
Earnings (loss) before Equity Loss | 7.6 | (690.4 | ) | (1.1 | ) | — | (683.9 | ) | ||||||||||||
Equity loss in subsidiaries | 691.5 | — | — | (691.5 | ) | — | ||||||||||||||
Net (loss) income | $ | (683.9 | ) | $ | (690.4 | ) | $ | (1.1 | ) | $ | 691.5 | $ | (683.9 | ) | ||||||
Net income attributable to non-controlling interest | $ | — | $ | — | $ | 0.3 | $ | — | $ | 0.3 | ||||||||||
Net (loss) income attributable to parent company | $ | (683.9 | ) | $ | (690.4 | ) | $ | (1.4 | ) | $ | 691.5 | $ | (684.2 | ) | ||||||
27
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidating Statement of Operations
Three Months Ended September 28, 2008
(In millions)
| Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||||||||
Sales | $ | — | $ | 768.1 | $ | 21.4 | $ | (6.2 | ) | $ | 783.3 | |||||||||
Cost of sales | — | 661.7 | 18.8 | (6.2 | ) | 674.3 | ||||||||||||||
Gross margin | — | 106.4 | 2.6 | — | 109.0 | |||||||||||||||
Selling, general and administrative expenses | 0.2 | 64.7 | 1.0 | — | 65.9 | |||||||||||||||
Research and development expenses | — | 27.8 | — | — | 27.8 | |||||||||||||||
Operating (loss) income | (0.2 | ) | 13.9 | 1.6 | — | 15.3 | ||||||||||||||
Intercompany interest (income) expense, net | (0.1 | ) | 0.1 | — | — | — | ||||||||||||||
Interest expense (income) , net | 45.4 | 2.7 | (0.1 | ) | — | 48.0 | ||||||||||||||
Other income, net | — | (0.5 | ) | (0.6 | ) | — | (1.1 | ) | ||||||||||||
Non-operating expense (income), net | 45.3 | 2.3 | (0.7 | ) | — | 46.9 | ||||||||||||||
(Loss) income before taxes | (45.5 | ) | 11.6 | 2.3 | — | (31.6 | ) | |||||||||||||
(Benefit from) provision for income taxes | (11.3 | ) | — | 0.9 | — | (10.4 | ) | |||||||||||||
(Loss) Earnings before Equity Loss | (34.2 | ) | 11.6 | 1.4 | — | (21.2 | ) | |||||||||||||
Equity loss in subsidiaries | (13.0 | ) | — | — | 13.0 | — | ||||||||||||||
Net (loss) income | $ | (21.2 | ) | $ | 11.6 | $ | 1.4 | $ | (13.0 | ) | $ | (21.2 | ) | |||||||
Net income attributable to non-controlling interest | $ | — | $ | — | $ | 0.3 | $ | — | $ | 0.3 | ||||||||||
Net (loss) income attributable to parent company | $ | (21.2 | ) | $ | 11.6 | $ | 1.1 | $ | (13.0 | ) | $ | (21.5 | ) | |||||||
28
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidating Statement of Operations
Nine Months Ended September 27, 2009
(In millions)
| Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||||||||
Sales | $ | — | $ | 2,167.1 | $ | 61.2 | $ | (116.7 | ) | $ | 2,111.6 | |||||||||
Cost of sales | — | 2,114.3 | 53.6 | (116.7 | ) | 2,051.2 | ||||||||||||||
Gross margin | — | 52.8 | 7.6 | — | 60.4 | |||||||||||||||
Restructuring expenses | — | 29.1 | — | — | 29.1 | |||||||||||||||
Definite-lived asset impairment | 73.0 | 73.0 | ||||||||||||||||||
Goodwill and indefinite-lived asset impairment | 448.3 | 448.3 | ||||||||||||||||||
Selling, general and administrative expenses | 0.8 | 152.0 | 3.0 | — | 155.8 | |||||||||||||||
Research and development expenses | — | 81.8 | — | — | 81.8 | |||||||||||||||
Operating (loss) income | (0.8 | ) | (731.4 | ) | 4.6 | — | (727.6 | ) | ||||||||||||
Intercompany interest expense (income), net | 0.4 | (0.4 | ) | — | — | — | ||||||||||||||
Interest expense, net | 110.2 | 3.9 | — | — | 114.1 | |||||||||||||||
Gain on debt repurchase, net | (352.1 | ) | — | — | — | (352.1 | ) | |||||||||||||
Other income, net | — | — | (0.3 | ) | — | (0.3 | ) | |||||||||||||
Non-operating (income) expense, net | (241.5 | ) | 3.5 | (0.3 | ) | — | (238.3 | ) | ||||||||||||
Income (loss) before taxes | 240.7 | (734.9 | ) | 4.9 | — | (489.3 | ) | |||||||||||||
Provision for (benefit from) income taxes | 3.3 | (36.4 | ) | 2.4 | — | (30.7 | ) | |||||||||||||
Earnings (loss) before Equity Loss | 237.4 | (698.5 | ) | 2.5 | — | (458.6 | ) | |||||||||||||
Equity loss in subsidiaries | 696.0 | — | — | (696.0 | ) | — | ||||||||||||||
Net (loss) income | $ | (458.6 | ) | $ | (698.5 | ) | $ | 2.5 | $ | 696.0 | $ | (458.6 | ) | |||||||
Net income attributable to non-controlling interest | $ | — | $ | — | $ | 0.3 | $ | — | $ | 0.3 | ||||||||||
Net (loss) income attributable to parent company | $ | (458.6 | ) | $ | (698.5 | ) | $ | 2.2 | $ | 696.0 | $ | (458.9 | ) | |||||||
29
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidating Statement of Operations
Nine Months Ended September 28, 2008
(In millions)
| Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated Total | ||||||||||||||||
Sales | $ | — | $ | 2,338.0 | $ | 64.1 | $ | (13.6 | ) | $ | 2,388.5 | |||||||||
Cost of sales | — | 1,969.9 | 53.1 | (13.6 | ) | 2,009.4 | ||||||||||||||
Gross margin | — | 368.1 | 11.0 | — | 379.1 | |||||||||||||||
| �� | ||||||||||||||||||||
Selling, general and administrative expenses | 0.3 | 195.5 | 2.8 | — | 198.6 | |||||||||||||||
Research and development expenses | — | 80.3 | — | — | 80.3 | |||||||||||||||
Operating (loss) income | (0.3 | ) | 92.3 | 8.2 | — | 100.2 | ||||||||||||||
Intercompany interest (income) expense, net | (0.3 | ) | 0.3 | — | — | — | ||||||||||||||
Interest expense (income), net | 131.9 | 10.9 | (0.3 | ) | — | 142.5 | ||||||||||||||
Other income, net | — | (0.5 | ) | (0.2 | ) | — | (0.7 | ) | ||||||||||||
Non-operating expense (income), net | 131.6 | 10.7 | (0.5 | ) | — | 141.8 | ||||||||||||||
(Loss) income before taxes | (131.9 | ) | 81.6 | 8.7 | — | (41.6 | ) | |||||||||||||
(Benefit from) provision for income taxes | (17.2 | ) | 0.2 | 3.0 | — | (14.0 | ) | |||||||||||||
(Loss) Earnings before Equity Loss | (114.7 | ) | 81.4 | 5.7 | — | (27.6 | ) | |||||||||||||
Equity loss in subsidiaries | (87.1 | ) | — | — | 87.1 | — | ||||||||||||||
Net (loss) income | $ | (27.6 | ) | $ | 81.4 | $ | 5.7 | $ | (87.1 | ) | $ | (27.6 | ) | |||||||
Net income attributable to non-controlling interest | $ | — | $ | — | $ | 0.6 | $ | — | $ | 0.6 | ||||||||||
Net (loss) income attributable to parent company | $ | (27.6 | ) | $ | 81.4 | $ | 5.1 | $ | (87.1 | ) | $ | (28.2 | ) | |||||||
30
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 27, 2009
(In millions)
| Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||
Net cash (used in) provided by operating activities | $ | (124.7 | ) | $ | 38.5 | $ | 3.0 | $ | — | $ | (83.2 | ) | |||||||
Cash flows from investing activities: | |||||||||||||||||||
Expenditures for property, plant and equipment | — | (41.4 | ) | (0.6 | ) | — | (42.0 | ) | |||||||||||
Additions to computer software | — | (3.1 | ) | — | — | (3.1 | ) | ||||||||||||
Proceeds from sale of property, plant and equipment | 1.2 | 1.2 | |||||||||||||||||
Net cash used in investing activities | — | (43.3 | ) | (0.6 | ) | — | (43.9 | ) | |||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Payment of term loan | (6.5 | ) | — | — | — | (6.5 | ) | ||||||||||||
Payment of notes payable | (174.8 | ) | — | — | — | (174.8 | ) | ||||||||||||
Repurchase of debt | (136.7 | ) | — | — | — | (136.7 | ) | ||||||||||||
Proceeds from IRB funding | — | 4.5 | — | — | 4.5 | ||||||||||||||
Utilization of revolving credit facility | 365.0 | — | — | — | 365.0 | ||||||||||||||
Payment of revolving credit facility | (1.8 | ) | — | — | — | (1.8 | ) | ||||||||||||
Net cash provided by financing activities | 45.2 | 4.5 | — | — | 49.7 | ||||||||||||||
Effect of exchange rates on cash and cash equivalents | — | — | — | — | — | ||||||||||||||
Net (decrease) in cash and cash equivalents | (79.5 | ) | (0.3 | ) | 2.4 | — | (77.4 | ) | |||||||||||
Cash and cash equivalents at beginning of period | 370.9 | 0.3 | 6.4 | — | 377.6 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 291.4 | $ | — | $ | 8.8 | $ | — | $ | 300.2 | |||||||||
31
Hawker Beechcraft Acquisition Company, LLC
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 28, 2008
(In millions)
| Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||
Net cash (used in) provided by operating activities | $ | (106.7 | ) | $ | (56.0 | ) | $ | 3.0 | $ | — | $ | (159.7 | ) | ||||||
Cash flows from investing activities: | |||||||||||||||||||
Expenditures for property, plant and equipment | (1.2 | ) | (43.2 | ) | (1.8 | ) | — | (46.2 | ) | ||||||||||
Additions to computer software | — | (3.1 | ) | — | — | (3.1 | ) | ||||||||||||
Sale of fuel and line operations, net of cost of sale | — | 101.7 | — | — | 101.7 | ||||||||||||||
Net cash (used in) provided by investing activities | (1.2 | ) | 55.4 | (1.8 | ) | — | 52.4 | ||||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Payment of term loan | (6.5 | ) | — | — | — | (6.5 | ) | ||||||||||||
Payment of notes payable | (136.0 | ) | — | — | — | (136.0 | ) | ||||||||||||
Net cash used in financing activities | (142.5 | ) | — | — | — | (142.5 | ) | ||||||||||||
Effect of exchange rates on cash and cash equivalents | (0.7 | ) | — | — | (0.7 | ) | |||||||||||||
Net (decrease) increase in cash and cash equivalents | (251.1 | ) | (0.6 | ) | 1.2 | — | (250.5 | ) | |||||||||||
Cash and cash equivalents at beginning of period | 558.1 | 0.7 | 10.7 | — | 569.5 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 307.0 | $ | 0.1 | $ | 11.9 | $ | — | $ | 319.0 | |||||||||
32
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of financial condition and results of operations for the three and nine months ended September 27, 2009 and September 28, 2008 reflects the business of Hawker Beechcraft Acquisition Company, LLC (“HBAC” or “the company”).
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements, including the notes thereto, included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements, including the notes thereto, in our Annual Report on Form 10-K, as amended by Form 10-K/A, filed July 15, 2009, for the year ended December 31, 2008.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, including statements that address activities, events or developments that we or our management intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements are based on management’s assumptions and assessments in light of past experience and trends, current conditions, expected future developments and other relevant factors. They are not guarantees of future performance, and actual results may differ significantly from those envisaged by our forward-looking statements. Among the factors that could cause actual results to differ materially from those described or implied in the forward-looking statements are general business and economic conditions, production delays resulting from lack of regulatory certifications and other factors, competition in our existing and future markets, lack of market acceptance of our products and services, the substantial leverage and debt service resulting from our indebtedness, loss or retirement of key executives and other risks disclosed in our filings with the Securities and Exchange Commission.
Our Company
We are a leading designer and manufacturer of business jet, turboprop and piston aircraft. We are also the sole source provider of the primary military trainer aircraft to the U.S. Air Force and the U.S. Navy. We deliver our products to a diverse customer base, including corporations, fractional and charter operators, governments and individuals throughout the world. We provide parts, maintenance and flight support services through an extensive network of service centers in 29 countries to an estimated installed fleet of more than 37,000 aircraft.
Our operations are divided into three segments—Business and General Aviation, Trainer Aircraft and Customer Support. The Business and General Aviation segment designs, develops, manufactures, markets and sells commercial and specially modified general aviation aircraft, as well as manufactures and provides aircraft parts to our Trainer Aircraft and Customer Support segments. The Business and General Aviation segment also sells used general aviation aircraft which may be received as a trade-in during a new aircraft sales transaction. The Trainer Aircraft segment designs, develops, manufactures, markets and sells military training aircraft. The Customer Support segment provides aftermarket parts and service support for our installed fleet of aircraft worldwide.
We operate in the global general aviation industry, which continues to experience depressed demand primarily as a result of weakness in the global economy. The general aviation industry has historically been cyclical and has been impacted by many factors, including the condition of the U.S. and global economies, the exchange rate of the U.S. dollar compared to other currencies, corporate profits and geo-political events. Additionally, the general aviation industry has historically lagged behind changes in general economic conditions and corporate profit trends. As the general economic environment deteriorated in late 2008 and into 2009, new order activity declined, and order cancellations increased. Consequently, while we believe that our backlog of $6.6 billion at September 27, 2009 as well as our existing aircraft portfolio and planned derivative upgrades position us well within this market, we believe that we, and the general aviation industry as a whole, will continue to experience depressed demand and declining backlog for the remainder of 2009 and likely into 2010.
Our Customer Support segment is also impacted by the general economic environment that has affected the general aviation industry; however, historically, the impact on this segment of our business has not been as significant as the impact on our Business and General Aviation segment. In addition to general market conditions, our Customer Support business is influenced by the size and age of the installed fleet of aircraft, our customers’ aircraft usage patterns and the overall maintenance requirements for our aircraft.
Our Trainer Aircraft segment is less susceptible to changes in general economic conditions and provides us with a more stable and recurring source of revenue. Sales in this segment are principally generated by U.S. and foreign government and defense spending. Decreases or reprioritization of such spending could affect the financial performance of this segment.
33
Recent Events Affecting our Results
As disclosed in a Current Report on Form 8-K filed September 23, 2009, as amended by Form 8-K/A filed on November 5, 2009, we recorded material goodwill and intangible asset impairment charges for the three months ended September 27, 2009 as a result of interim impairment testing triggered by global economic conditions, our updated expectations as to the timing of a general aviation market recovery and increased downward pricing pressure. We recorded a $340.1 million charge to eliminate all of the carrying value of goodwill for the Business & General Aviation segment. In addition, we recorded charges to reduce the carrying value of the “Hawker” trade name by $107.8 million and the “Bonanza” trade name by $0.4 million, and to reduce the carrying value of definite-lived intangible assets by $73.0 million. Additional information regarding these charges, and the methodology used in performing the impairment testing are included in Note 7 to the unaudited condensed financial statements found elsewhere in this Form 10-Q.
In connection with the evaluation of goodwill and intangible assets, we also evaluated other tangible fixed assets and surplus inventory for potential impairment and recorded charges totaling $91.7 million to reduce the recorded values for these assets. In addition, we recorded charges totaling $113.4 million to increase reserves for loss-making aircraft, primarily the Hawker 4000, and for potential vendor claims. The primary causes for these charges were the depressed general aviation market and the resulting decreased production levels and increased downward pricing pressure on new aircraft sales. This downward pricing pressure is expected to continue to cause additional charges for loss-making aircraft through 2010, particularly on the Hawker 4000, as additional units are built and sold at below estimated final cost.
On September 28, 2009, we notified holders of our Senior PIK-Election Notes that we had elected to pay the April 2010 semi-annual interest payment on our Senior PIK-Election Notes by increasing the principal value of the notes rather than by paying in cash. We also exercised this option on March 30, 2009, for the October 2009 semi-annual interest payment. Such elections are available to the Company for each semi-annual interest period through April 1, 2011.
During the three months ended September 27, 2009, we continued restructuring actions in response to reduced production rates, including continued space consolidation and work force reductions. During the three months ended September 27, 2009, we recorded an additional $8.5 million charge related to estimated severance costs. For the nine months ended September 27, 2009, we have recorded charges totaling $29.1 million related to the estimated cost of severance for work force reductions and as a result of our exit of certain leased facilities. Charges are expected to continue in the fourth quarter of 2009 when previously announced workforce reductions are expected to occur.
Results of Operations
(In millions) | Three Months Ended September 27, 2009 | Three Months Ended September 28, 2008 | Nine Months Ended September 27, 2009 | Nine Months Ended September 28, 2008 | ||||||||||||
Sales | $ | 757.7 | $ | 783.3 | $ | 2,111.6 | $ | 2,388.5 | ||||||||
Cost of sales | 875.6 | 674.3 | 2,051.2 | 2,009.4 | ||||||||||||
Gross profit | (117.9 | ) | 109.0 | 60.4 | 379.1 | |||||||||||
Restructuring, net | 8.5 | — | 29.1 | — | ||||||||||||
Definite-lived asset impairment | 73.0 | — | 73.0 | — | ||||||||||||
Goodwill and indefinite-lived asset impairment | 448.3 | — | 448.3 | — | ||||||||||||
Selling, general and administrative expenses | 48.4 | 65.9 | 155.8 | 198.6 | ||||||||||||
Research and development expenses | 25.0 | 27.8 | 81.8 | 80.3 | ||||||||||||
Operating income (loss) | (721.1 | ) | 15.3 | (727.6 | ) | 100.2 | ||||||||||
Interest expense | 35.6 | 50.1 | 115.1 | 149.9 | ||||||||||||
Interest income | (0.2 | ) | (2.1 | ) | (1.0 | ) | (7.4 | ) | ||||||||
Gain on debt repurchase, net | — | — | (352.1 | ) | — | |||||||||||
Other expense (income), net | (0.3 | ) | (1.1 | ) | (0.3 | ) | (0.7 | ) | ||||||||
Non-operating (income) expense, net | 35.1 | 46.9 | (238.3 | ) | 141.8 | |||||||||||
Loss before taxes | (756.2 | ) | (31.6 | ) | (489.3 | ) | (41.6 | ) | ||||||||
Benefit from income taxes | (72.3 | ) | (10.4 | ) | (30.7 | ) | (14.0 | ) | ||||||||
Net loss | $ | (683.9 | ) | $ | (21.2 | ) | $ | (458.6 | ) | $ | (27.6 | ) | ||||
34
Three and Nine Months Ended September 27, 2009 as Compared to the Three and Nine Months Ended September 28, 2008
Sales. As detailed in the table below, sales decreased by $25.6 million and $276.9 million, respectively, for the three and nine months ended September 27, 2009 compared to the similar periods of 2008. The decrease was driven primarily by the adverse market conditions impacting our Business and General Aviation segment partially offset by increased volume in the Trainer Aircraft segment. The comparable three and nine month period ending September 28, 2008 was impacted by a strike by the Company’s union work force during August 2008.
(In millions) | Three Months Ended September 27, 2009 | Three Months Ended September 28, 2008 | Nine Months Ended September 27, 2009 | Nine Months Ended September 28, 2008 | ||||||||||||
Business and General Aviation | $ | 504.4 | $ | 603.0 | $ | 1,491.2 | $ | 1,844.6 | ||||||||
Trainer Aircraft | 169.7 | 77.4 | 367.6 | 248.1 | ||||||||||||
Customer Support | 100.2 | 125.7 | 313.8 | 407.1 | ||||||||||||
Eliminations | (16.6 | ) | (22.8 | ) | (61.0 | ) | (111.3 | ) | ||||||||
Total | $ | 757.7 | $ | 783.3 | $ | 2,111.6 | $ | 2,388.5 | ||||||||
The decrease in Business and General Aviation sales for the three and nine months ended September 27, 2009 of $98.6 million and $353.4 million, respectively, is attributable to reduced aircraft deliveries as reflected in the aircraft unit delivery table below. Sales for the nine months ended September 27, 2009 were also impacted by lower sales of parts to the Customer Support segment.
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Business and General Aviation New Aircraft Deliveries | Three Months Ended September 27, 2009 | Three Months Ended September 28, 2008 | Nine Months Ended September 27, 2009 | Nine Months Ended September 28, 2008 | ||||
Hawker 4000 | 4 | 2 | 8 | 3 | ||||
Hawker 900XP | 11 | 10 | 27 | 33 | ||||
Hawker 800XP/850XP | 0 | 6 | 1 | 11 | ||||
Hawker 750 | 1 | 9 | 8 | 15 | ||||
Hawker 400XP | 4 | 5 | 8 | 19 | ||||
Premier | 5 | 2 | 12 | 23 | ||||
King Airs | 30 | 33 | 100 | 112 | ||||
Pistons | 9 | 19 | 35 | 71 | ||||
Total | 64 | 86 | 199 | 287 | ||||
Sales in the Trainer Aircraft segment are principally comprised of revenue on the Joint Primary Aircraft Training System (“JPATS”) contract with the U.S. Government. Revenue is recognized on this contract using the cost-to-cost method to measure progress towards completion. Accordingly, the majority of Trainer Aircraft segment sales, including estimated earned gross margin, are recognized as costs are incurred. Program cost in any period is impacted by the number of aircraft in production as well as support provided for the Contractor Operated and Maintained Base Supply (“COMBS”) and Ground Based Training Systems (“GBTS”) elements of our contracts with the U.S. Government. The increase in segment revenue for the three and nine months ended September 27, 2009 of $92.3 million and $119.5 million, respectively, is due to increased production volumes in support of resumed deliveries of the T-6A as well as the negative impact of the strike on production volume during the third quarter of 2008.
Customer Support segment sales are principally comprised of the sale of spare parts and maintenance services to existing aircraft operators. The decrease in segment sales for the three and nine months ended September 27, 2009 of $25.5 million and $93.3 million, respectively, is due to reduced volumes in both parts sales and maintenance services as a result of generally lower general aviation aircraft usage as well as the sale of our fuel and line operations in late 2008. Sales for the fuel and line operations were $7.0 million and $48.4 million, respectively, for the three and nine months ended September 28, 2008.
Operating Income. The table below details the decrease in operating income of $736.4 million and $827.8 million, respectively, for the three and nine months ended September 27, 2009 compared to the similar periods of 2008. The decline is primarily due to the previously discussed charges totaling $726.4 million related to asset impairments and reserves for loss-making aircraft and vendor claims recorded for the three months ended September 27, 2009. A majority of these charges were recorded in the Business and General Aviation segment.
(In millions) | Three Months Ended September 27, 2009 | Three Months Ended September 28, 2008 | Nine Months Ended September 27, 2009 | Nine Months Ended September 28, 2008 | |||||||||||
Operating Income (Loss) | |||||||||||||||
Business and General Aviation | $ | (719.3 | ) | $ | (5.1 | ) | $ | (777.0 | ) | $ | 24.0 | ||||
Trainer Aircraft | 14.3 | 1.6 | 24.3 | 13.2 | |||||||||||
Customer Support | (16.1 | ) | 18.8 | 25.0 | 63.0 | ||||||||||
Eliminations | — | — | 0.1 | — | |||||||||||
Total | $ | (721.1 | ) | $ | 15.3 | $ | (727.6 | ) | $ | 100.2 | |||||
Business and General Aviation segment operating loss increased by $714.2 million for the three months ended September 27, 2009 compared to the similar period in 2008. During the three months ended September 27, 2009, the segment recorded a charge of $340.1 million to reduce the carrying value of segment goodwill to zero and charges totaling $181.2 million as a result of other intangible asset impairments. In addition, the segment’s portion of the previously discussed charges recorded for tangible asset and inventory impairment was $60.2 million. Charges totaling $113.4 million related to reserves for loss-making aircraft and vendor claims were also recorded during the three months ended September 27, 2009. A majority of the reserves for loss-making aircraft relate to the Hawker 4000. A charge of $25.3 million was recorded related to the Hawker 4000 program for the three months ended September 28, 2008. The reduction in general aviation deliveries as well as downward pricing pressure on new aircraft sales also contributed to the overall increase in operating loss for the three months ended September 27, 2009.
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Business and General Aviation segment operating income decreased by $801.0 million for the nine months ended September 27, 2009 compared to the similar period in 2008 due primarily to the charges recorded during the three months ended September 27, 2009 and the overall decline in delivery volumes discussed above.
In addition to the charges noted above, during the nine months ended September 27, 2009, the segment recorded charges totaling $23.7 million to reduce the carrying value of used aircraft inventory to current market values and charges totaling $27.8 million related to mark-to-market adjustments on foreign currency forward contracts no longer designated as cash flow hedges because the underlying purchase volumes are no longer expected to occur. Further, $27.7 million of the total restructuring charges recorded during the nine months ended September 27, 2009 related to this segment. As noted above, the Hawker 4000 program is the primary contributor to the third quarter 2009 charge for loss-making aircraft. Earlier in 2009, an additional charge of $18.8 million was recorded on the Hawker 4000 program. Hawker 4000 program charges totaling $60.0 million were recorded during the nine months ended September 28, 2008.
Trainer Aircraft segment operating income increased by $12.7 million for the three months ended September 27, 2009 compared to the similar period in 2008 due primarily to the increased production volumes discussed previously. The use of the cost-to-cost method of revenue recognition causes gross margin to be recognized based on management’s estimate of total contract revenue and total contract cost at completion. As estimates are updated, any impact on revenue and gross margin as a result of the change in estimate is reflected in current earnings on a cumulative catch-up basis. Favorable cumulative catch-up adjustments of $2.3 million were recorded during the three months ended September 27, 2009, compared to $1.8 million during the three months ended September 28, 2008.
Trainer Aircraft segment operating income increased by $11.1 million for the nine months ended September 27, 2009 compared to the similar period in 2008 as a result of the increased production volumes discussed previously, offset by increased research and development costs associated with derivatives of the T-6 aircraft and smaller profit adjustments on the JPATS program during the period. Favorable cumulative catch-up adjustments of $4.3 million were recorded during the nine months ended September 27, 2009, compared to $8.0 million during the nine months ended September 28, 2008.
Customer Support segment operating income decreased by $34.9 million and $38.0 million, respectively, for the three and nine months ended September 27, 2009 compared to the similar periods in 2008 due primarily to the segment’s $31.5 million portion of the impaired inventory charge recorded during the three months ended September 27, 2009 as discussed previously. The remaining decrease is due to the reduced sales volumes as a result of the sale of the fuel and line operations in late 2008 and the overall decline in general aviation aircraft usage.
Selling, general, and administrative expense totaled $48.4 million, or 6.4% of sales and $155.8 million, or 7.4% of sales, respectively, for the three and nine months ended September 27, 2009 compared to $65.9 million, or 8.4% of sales and $198.6 million, or 8.3% of sales, respectively, for the three and nine months ended September 28, 2008. The decrease was due to lower Business and General Aviation segment selling expense as a result of decreased sales activity as well as the impact of cost reduction measures implemented throughout the company, including the work force reductions previously discussed.
Research and development expense decreased by $2.8 million and increased by $1.5 million, respectively, for the three and nine months ended September 27, 2009 compared to the similar periods in 2008. While we have increased development efforts on the T-6 derivative products in the Trainer Aircraft segment, our Business and General Aviation segment research and development efforts have decreased slightly as a result of deferrals of certain product development activities. We continue efforts on our derivative aircraft strategy as well as ongoing certification activities related to the Hawker 4000.
Non-operating Income/Expense, net. Net non-operating expense was $35.1 million for the three months ended September 27, 2009 compared to net non-operating expense of $46.9 million for the comparable period in 2008 and is comprised almost exclusively of the interest expense on our existing debt. The reduction is the result of lower interest rates on our floating rate debt as well as reduced principal balances on the fixed rate debt as a result of the debt repurchases during the first half of 2009.
For the nine months ended September 27, 2009, net non-operating income was $238.3 million compared to a net non-operating expense of $141.8 million for the comparable period in 2008. In addition to a decrease in net interest expense of $28.4 million for the reasons discussed above, we recorded a $352.1 million gain on the purchase of our debt securities during the first half of 2009.
Provision for Income Taxes. During the nine months ended September 27, 2009, we recorded net gains related to the purchase of our debt securities of $352.1 and impairment charges related to goodwill and other tangible and intangible assets of $542.3 million. Both the cancellation of debt income related to the gains and the impairment charges were treated as discretely affecting the tax provision as opposed to being included in the blended estimated annual effective tax rate. See Note 12 to the unaudited condensed consolidated financial statements for additional information.
The blended estimated annual effective tax rate for the nine months ended September 27, 2009, excluding the impact of the
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discrete items discussed above, was negative 1.5% and was 6.3% including the impact of the discrete items. The effective tax rate for the nine months ended September 28, 2008 was 33.7%. The change in the effective tax rate was due to the full valuation allowance recorded on our net deferred tax assets at December 31, 2008. The valuation allowance affects our current tax provision and effective tax rate by deferring tax benefits until management determines we have sufficient positive evidence related to sources of future taxable income to recognize those benefits.
Cash Flow Analysis
The following table illustrates sources and uses of funds:
(In millions) | Nine Months Ended September 27, 2009 | Nine Months Ended September 28, 2008 | ||||||
Net cash used in operating activities | $ | (83.2 | ) | $ | (159.7 | ) | ||
Net cash (used in) provided by investing activities | (43.9 | ) | 52.4 | |||||
Net cash provided by (used in) financing activities | 49.7 | (142.5 | ) | |||||
Effect of exchange rates on cash and cash equivalents | — | (0.7 | ) | |||||
Net decrease in cash and cash equivalents | $ | (77.4 | ) | $ | (250.5 | ) | ||
Nine Months Ended September 27, 2009. Net cash used in operating activities was $83.2 million. The net cash consumed was primarily due to significantly decreased accounts payable balances as amounts due vendors associated with higher activity in late 2008 were paid early in 2009. In addition, customer deposits were reduced as a result of the decline in new orders. Partially offsetting these uses was reduced inventory associated with aircraft deliveries and reduced material receipts associated with lower production levels.
Net cash used in investing activities of $43.9 million related primarily to capital expenditures for tooling in our Business and General Aviation segment and facilities improvements in our Customer Support segment.
Net cash from financing activities of $49.7 million represents the proceeds from the drawing of our $365 million revolving credit facility offset by the cash used to purchase our debt securities in the first half of 2009 as well as payments on notes payable used to finance engine purchases.
Nine Months Ended September 28, 2008. Net cash used in operating activities was $159.7 million. The net cash consumed was primarily due to an increase in inventory in connection with increased build rates for the Hawker 4000 and other aircraft models as well as the reduced delivery volume as a result of the strike by the Company’s union work force in August 2008. These impacts were partially offset by a third-party financing arrangement used to finance engine purchases, increased commercial aircraft deposits received and an increases in accounts payable and other accrued expenses. The seasonality of our aircraft deliveries coupled with a more linear aircraft production schedule also contributed to net operating cash consumption for the nine months ended September 28, 2008.
Net cash provided by investing activities of $52.4 million included net cash proceeds of $101.7 million from completing the sale of six of the seven fuel and line operations facilities offset by capital expenditures of $46.2 million primarily related to tooling, facilities improvements and equipment used in the manufacturing process and additions to computer software of $3.1 million.
Net cash used in financing activities of $142.5 million represents payments on notes payable used to finance engine purchases and mandatory principal payments of the senior secured term loan.
Liquidity and Capital Resources
In connection with the Acquisition, we issued $1,100.0 million of notes, including $400.0 million of 8.5% Senior Fixed Rate Notes due April 1, 2015, $400.0 million of 8.875%/9.625% Senior PIK-Election Notes due April 1, 2015 and $300.0 million of 9.75% Senior Subordinated Notes due April 1, 2017. In February 2008, we exchanged these notes for new notes with identical terms, except that the new notes have been registered under the Securities Act of 1933 (the “Securities Act”) and do not bear restrictions on transferability mandated by the Securities Act or certain penalties for failure to file a registration statement relating to the exchange.
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On June 2, 2009, we completed a cash tender offer to purchase a portion of our outstanding Senior Fixed Rate Notes, Senior PIK-Election Notes and Senior Subordinated Notes. The tender offer, along with open market purchases executed in the first quarter of 2009, resulted in an aggregate purchase of $496.6 million of our debt securities, realizing a net gain of $352.1 million.
In addition, in connection with the Acquisition, we entered into senior secured credit facilities totaling $1,810.0 million, consisting of a $1,300.0 million term loan drawn at the close of the Acquisition, an undrawn $400.0 million revolving credit facility and a $110.0 million synthetic letter of credit facility. In March 2008, we reduced the synthetic letter of credit facility to $75.0 million based on our expected needs in the future.
On September 15, 2008, Lehman Brothers Holdings, Inc. (“Lehman”) filed for bankruptcy. One of Lehman’s subsidiaries, Lehman Brothers Commercial Bank, has a $35.0 million commitment in the Company’s $400.0 million revolving credit facility. Lehman Brothers Commercial Bank has not fulfilled its funding obligations under the Company’s revolving credit facility.
In December 2008, we amended the credit agreement to allow us to prepay, up to a maximum of $300.0 million, the secured term loan at a discount price to par to be determined pursuant to certain auction procedures.
On November 6, 2009, we further amended our credit agreement (the “Second Amendment”). The Second Amendment provides that compliance with the maximum consolidated secured debt ratio test under Section 6.10(a) of the Credit Agreement is waived. The continuing effectiveness of this waiver is subject to the condition we shall not have made a restricted payment pursuant to certain available restricted payment baskets under the Credit Agreement. If this condition fails to be satisfied, then the waiver of the Consolidated Secured Debt Ratio covenant shall be revoked and we shall be required to comply (and, with respect to the two most recently completed fiscal quarters as of the earliest date that such condition shall fail be satisfied, to have complied) with the maximum consolidated secured debt ratio test in Section 6.10(a) of the Credit Agreement.
The Second Amendment added a new minimum liquidity covenant requiring our unrestricted cash plus available commitments under our revolving credit facility, determined in each case as of the last day of such fiscal quarter, must be not less than $162.5 million plus an adjustment in the event of any new term loans made prior to March 31, 2010.
In addition, the Second Amendment added a new Adjusted EBITDA covenant requiring that, to the extent the Consolidated Secured Debt Ratio covenant is waived as described above, for any fiscal quarter beginning with the second quarter of 2011 for which any revolving facility commitment is outstanding on the last day of such fiscal quarter we must maintain a certain minimum Adjusted EBITDA as specified in the Second Amendment.
The initial effectiveness of the Second Amendment was conditioned upon, among other items, that we repay $125.0 million of our outstanding borrowings under the revolving credit facility and permanently reduce commitments under the revolving credit facility by $137.0 million (including amounts committed by Lehman Brothers). Following the reduction in commitments, the total availability under the U.S. revolving facility after the expected reduction due to the Lehman bankruptcy will be $240.0 million.
The indentures governing the notes and the credit agreement governing our senior secured credit facilities contain a number of covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions these covenants place on us include limitations on our ability to:
| • | incur indebtedness or issue disqualified stock or preferred stock; |
| • | pay dividends on, redeem or repurchase our capital stock; |
| • | make investments or acquisitions; |
| • | create liens; |
| • | sell assets; |
| • | engage in sale and leaseback transactions; |
| • | restrict dividends or other payments to us; |
| • | guarantee indebtedness; |
| • | engage in transactions with affiliates; and |
| • | consolidate, merge or transfer all or substantially all of our assets. |
We have substantial indebtedness. As of September 27, 2009, our total indebtedness was $2,287.5 million, including $50.1 million of short-term obligations payable to a third party under a financing arrangement and reflecting $363.2 million of borrowings under our revolving credit facility. We also had up to $75.0 million of available letter of credit issuances under a synthetic letter of credit facility. In addition, our Senior PIK-Election Notes permit us to pay interest by increasing the principal amount thereunder (“PIK-interest”) rather than paying cash interest through April 1, 2011. If we were to elect to pay PIK-interest for all periods in which we have the option, we will incur indebtedness in an amount equal to the PIK-interest. On September 28, 2009, we notified our noteholders that we had elected to pay the April 2010 semi-annual interest payment on our Senior PIK-Election Notes by increasing the principal value of the notes rather than by paying in cash. We had previously notified our noteholders of our intention to pay the October 2009 semi-annual interest payment similarly.
As of September 27, 2009, we continue to be in full compliance with all covenants contained in our debt agreements.
As of September 27, 2009, we had $300.2 million of cash and cash equivalents and had drawn $363.2 million of the $365.0
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million available under our revolving credit facility. We continue to evaluate our short- and long-term balance sheet management plans. We have taken, and continue to take, various actions to preserve our liquidity and cash position, including reduced production levels to better match expected demand; work force reductions consistent with the lower production levels; and other cost reduction efforts including facility consolidation, sharply reduced discretionary spending and deferrals of certain product development activity. As discussed previously, the amendment to our credit agreement requires us to repay $125.0 million of our revolving credit facility and permanently reduce commitments under the revolving facility to $240.0 million. We believe the actions discussed above will result in our having sufficient liquidity to meet our cash requirements for the next twelve months.
Continued economic deterioration may further depress the general aviation market and we could be required to take additional measures to meet our liquidity needs. As our visibility regarding future market conditions improves, our future balance sheet management plans could include any combination of seeking additional financing, repayment of drawings under the revolving credit facility, prepayment of the term loan, or other investments in our business.
Seasonality
In recent years, a significant portion of our Business and General Aviation aircraft deliveries have occurred during the second half of the year. Given the long lead time involved in the production of aircraft, it is necessary to build aircraft throughout the year in support of the higher second half delivery volume. As a result, our working capital levels typically rise during the first half of the year and are reduced significantly during the fourth quarter. Any disruptions to our business or delivery schedule during the second half of the year could have a disproportionate effect on our full-year financial operating results.
Backlog
Orders for general aviation aircraft are included in backlog upon receipt of an executed contract. Our backlog was $6.6 billion at September 27, 2009 of which approximately 76% is not expected to be converted into revenue within the next twelve months. Our backlog continues to include significant orders with NetJets® Inc. and the U.S. Government. Earlier in 2009, NetJets cancelled orders for 12 aircraft and deferred essentially all of their remaining orders previously scheduled for delivery in 2009 or 2010, until after the end of 2010. The NetJets backlog remains significant and continues to be scheduled for delivery over many years; however, NetJets has historically not represented more than 10% of our annual revenue.
Off-Balance Sheet Arrangements
We use customary off-balance sheet arrangements, such as operating leases and letters of credit, in the normal course of our business. We may, from time to time, instruct banks to issue letters of credit on our behalf to support cash deposits and to guarantee the performance of our contractual obligations. None of the arrangements has or is likely to have a material effect on our financial condition, results of operations or liquidity. See Note 16 to the unaudited condensed consolidated financial statements for additional information.
Summary of Critical Accounting Policies
For a discussion of our critical accounting policies, refer to “Summary of Critical Accounting Policies” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K, as amended by Form 10-K/A, filed July 15, 2009, for the year ended December 31, 2008.
Recent Accounting Pronouncements
See Note 3 to the unaudited condensed consolidated financial statements for a discussion of Recent Accounting Pronouncements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There has been no material change in our exposure to market risk during the nine months ended September 27, 2009. For a discussion of our exposure to market risk, refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report on Form 10-K, as amended by Form 10-K/A, filed July 15, 2009, for the year ended December 31, 2008.
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| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated our disclosure controls and procedures as of September 27, 2009. Based on this evaluation and in consideration of the ongoing remediation of the material weakness described below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in the reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Remediation of Weakness in Internal Control Over Financial Reporting
We have designed and are in the process of implementing improvements in our internal control over financial reporting to address the material weakness in accounting for income taxes. These improvements include, among other things, improved documentation and analysis regarding the temporary differences between financial and tax reporting, training individuals involved in accounting and reporting for income taxes regarding these issues, and enhancing the documentation around conclusions reached in the implementation of the applicable generally accepted accounting principles. Beginning in 2009, the Company engaged an outside consulting firm to assist in income tax accounting.
Changes in Internal Control over Financial Reporting
With the exception of the remediation activities described above, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the last fiscal quarter.
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| Item 1. | Legal Proceedings |
We are from time to time subject to, and are presently involved in, litigation or other legal proceedings arising in the ordinary course of business. We are a defendant in a number of product liability lawsuits with respect to accidents involving our aircraft that allege personal injury and property damage and seek substantial recoveries, including, in some cases, punitive and exemplary damages. We maintain partial insurance coverage against such claims at a level determined by management to be prudent (see Note 16 to the unaudited condensed consolidated financial statements). In addition, Raytheon retained all product liability claims arising from incidents occurring after April 1, 2001 until March 25, 2007. We cannot predict the outcome of these matters or whether Raytheon will uphold its indemnity obligations (see Item 1A, “Risk Factors” contained in our Annual Report on Form 10-K, as amended by Form 10-K/A, filed July 15, 2009, for the year ended December 31, 2008). We are at risk of losses and adverse publicity stemming from any accident involving aircraft for which we hold design authority. The outcome of litigation in which we have been named as a defendant is unpredictable and an adverse decision in any such matter could have a material adverse effect on our financial condition, results of operations or liquidity.
In July 2007, the FAA informed us that it had initiated an investigation concerning compliance by one of our suppliers with part specifications involving our T-6A trainers and certain special mission King Air aircraft sold to the U.S. Government. HBAC cooperated with the FAA investigation and conducted its own supplier quality audits. HBAC believes the alleged non-compliance condition does not impact safety of flight. On June 17, 2008, the U.S. Attorney’s Office for the District of Kansas notified us that the FAA had referred a civil penalty matter arising out of its investigation to the U.S. Attorney’s Office for enforcement. According to the U.S. Attorney’s Office, the FAA had recommended fines against HBAC of at least $2.5 million arising out of the alleged supplier non-conformance and HBAC’s alleged quality oversight of the supplier. We do not believe any resulting civil penalty would be material to our financial condition, results of operations or liquidity.
On June 28, 2008, the U.S. Attorney’s Office sent notice to us that it was investigating whether HBAC’s alleged conduct violated the civil False Claims Act (“FCA”) arising from the same facts as the FAA proceeding described above. The investigation was focused on the alleged supplier non-conformance with specifications and HBAC’s alleged inadequate quality control over the supplier’s manufacturing process on certain T-6A and King Air aircraft delivered to the government. HBAC cooperated with the government’s investigation. On March 26, 2009, the United States Attorney’s Office for the District of Kansas filed a Notice in the United States District Court for the District of Kansas informing the Court that the United States declined to intervene in a qui tam lawsuit relating to the FCA investigation. The U.S. Attorney’s Notice to the Court further asserted that the government retains the right to intervene in the FCA qui tam action and that no settlement of that action can occur without the government’s consent. The Court directed that the Second Amended Complaint in the qui tam lawsuit be unsealed. On April 13, 2009, the qui tam relators filed a Third Amended Complaint. The qui tam lawsuit, United States ex rel. Minge, et al. v. Turbine Engine Components Technologies Corporation, et al., No. 07-1212-MLB (D. Kan.), alleges FCA causes of action against HBAC (and its predecessor, Raytheon Aircraft Company). The lawsuit also alleges FCA causes of action, retaliation causes of action, and a tort cause of action against TECT Aerospace Wellington, Inc. (an HBAC supplier) and various affiliates of TECT. The Third Amended Complaint does not quantify the damages alleged against HBAC. Under the FCA, the government can recover treble damages suffered by the government plus civil penalties of up to $11,000 for each false claim. An adverse judgment under the FCA can also subject HBAC to suspension or debarment of future government business. The matter is now pending.
On April 7, 2009, Airbus UK Ltd. (“Airbus”) filed a Request for Arbitration (“RFA”) with the International Chamber of Commerce (“ICC”) in Paris initiating proceedings against HBAC. In the RFA, Airbus alleges that HBAC breached its obligations under the Airframe Purchase and Support Agreement dated August 19, 1998 between Airbus and HBAC. More particularly, Airbus claims that it and HBAC reached agreement in April of 2008 for HBAC to purchase increased volumes of fuselages, wings, track kits and spare parts (collectively the “shipsets”) in the 2008 to 2010 time frame. Airbus further alleges that (i) beginning in late 2008, HBAC unilaterally reduced the number of shipsets that it would purchase in breach of its contractual obligations and (ii) that Airbus made substantial investments to expand its production capacity at the urging of HBAC and in reliance on alleged expanded commitments from HBAC. Airbus claims damages in an amount in excess of 40 million pounds sterling. HBAC filed its response in June, 2009, vigorously contesting Airbus’s claims and denying the material allegations of the RFA and further alleging that Airbus breached the Joint Cost Reduction Agreement between the parties, claiming unspecified damages as well as claiming damages of $500,325 related to defective shipset deliveries. Airbus filed a response on July 17, 2009, denying HBAC’s claims.
The arbitration tribunal has been selected and the Chairman has been confirmed. A scheduling conference was held and the arbitration is set to begin July 27, 2010.
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Similar to other companies in our industry, we receive requests for information from government agencies in connection with their regulatory or investigational authority in the ordinary course of business. Such requests can include subpoenas or demand letters for documents to assist the government in audits or investigations. We review such requests and notices and take appropriate action.
| Item 1A. | Risk Factors |
In addition to the risk factors below and the other information set forth in this report, you should carefully consider the risk factors discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K, as amended by Form 10-K/A, filed July 15, 2009, for the year ended December 31, 2008, which could materially affect our business, financial position or results of operations.
We Could Suffer Losses Due to Asset Impairment Charges for Goodwill and Intangible Assets.
We test goodwill and intangible assets with indefinite lives, for impairment during the fourth quarter of each year, or more frequently if certain factors result in the need to perform an impairment test prior to the fourth quarter. Due to the current global economic conditions, on September 28, 2009, we commenced an interim review of the value of our goodwill and intangible assets, and on October 30, 2009, we concluded our analysis and recorded material impairment charges related to goodwill and intangible assets for the three-month period ended September 27, 2009.
The assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time we perform the valuation. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation. Due to the inherent uncertainty involved in making these estimates, actual results could differ from our estimates.
Any additional downward revisions in the fair value of a reporting unit or intangible assets could result in an impairment and a non-cash charge would be required. Any such charge could have a material adverse effect on our reported results of operations.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
| Item 3. | Defaults Upon Senior Securities |
Not applicable.
| Item 4. | Submission of Matters to a Vote of Security Holders |
Not applicable.
| Item 5. | Other Information |
Not applicable.
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| Item 6. | Exhibits |
Exhibit Number | Description | |
| 10.1* | Joint Written Consent, dated as of July 9, 2009, to amend the Amended and Restated Shareholders’ Agreement, dated as of May 3, 2007. | |
| 10.2* | Separation of Employment Agreement and General Release, by and between Hawker Beechcraft Corporation, Hawker Beechcraft, Inc., and Giap Thanh Nguyen, dated September 4, 2009. | |
| 10.3* | Second Amendment, dated as of September 1, 2009, to the Hawker Beechcraft Savings and Investment Plan. | |
| 10.4* | Hawker Beechcraft Corporation Excess Savings and Deferred Compensation Plan, Amended and Restated September 16, 2009. | |
| 31.1.1* | Certifications of the Principal Executive Officer of Hawker Beechcraft Acquisition Company, LLC. | |
| 31.1.2* | Certifications of the Principal Executive Officer of Hawker Beechcraft Notes Company. | |
| 31.1.3* | Certifications of the Principal Financial Officer of Hawker Beechcraft Acquisition Company, LLC. | |
| 31.1.4* | Certifications of the Principal Financial Officer of Hawker Beechcraft Notes Company. | |
| 32.1.1* | Certification of the Principal Executive Officer of Hawker Beechcraft Acquisition Company, LLC. | |
| 32.1.2* | Certification of the Principal Executive Officer of Hawker Beechcraft Notes Company. | |
| 32.1.3* | Certification of the Principal Financial Officer of Hawker Beechcraft Acquisition Company, LLC. | |
| 32.1.4* | Certification of the Principal Financial Officer of Hawker Beechcraft Notes Company. | |
| * | Filed herewith. |
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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.
| HAWKER BEECHCRAFT ACQUISITION COMPANY, LLC | ||
| By: | Hawker Beechcraft, Inc., its Sole Member | |
| By: | /s/ Sidney E. Anderson | |
| Sidney E. Anderson, Vice President and | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| By: | /s/ James D. Knight | |
James D. Knight, Vice President and Controller (Principal Accounting Officer) | ||
Date: November 6, 2009
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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.
| HAWKER BEECHCRAFT NOTES COMPANY | ||
| By: | /s/ Sidney E. Anderson | |
| Sidney E. Anderson, Vice President and | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| By: | /s/ James D. Knight | |
James D. Knight, Vice President and Controller | ||
| (Principal Accounting Officer) | ||
Date: November 6, 2009
46
EXHIBIT INDEX
Exhibit Number | Description | |
| 10.1* | Joint Written Consent, dated as of July 9, 2009, to the Amended and Restated Shareholders’ Agreement, dated as of May 3, 2007. | |
| 10.2* | Separation of Employment Agreement and General Release, by and between Hawker Beechcraft Corporation, Hawker Beechcraft, Inc., and Giap Thanh Nguyen, dated September 4, 2009. | |
| 10.3* | Second Amendment, dated as of September 1, 2009, to the Hawker Beechcraft Savings and Investment Plan. | |
| 10.4* | Hawker Beechcraft Corporation Excess Savings and Deferred Compensation Plan, Amended and Restated September 16, 2009. | |
| 31.1.1* | Certifications of the Principal Executive Officer of Hawker Beechcraft Acquisition Company, LLC. | |
| 31.1.2* | Certifications of the Principal Executive Officer of Hawker Beechcraft Notes Company. | |
| 31.1.3* | Certifications of the Principal Financial Officer of Hawker Beechcraft Acquisition Company, LLC. | |
| 31.1.4* | Certifications of the Principal Financial Officer of Hawker Beechcraft Notes Company. | |
| 32.1.1* | Certification of the Principal Executive Officer of Hawker Beechcraft Acquisition Company, LLC. | |
| 32.1.2* | Certification of the Principal Executive Officer of Hawker Beechcraft Notes Company. | |
| 32.1.3* | Certification of the Principal Financial Officer of Hawker Beechcraft Acquisition Company, LLC. | |
| 32.1.4* | Certification of the Principal Financial Officer of Hawker Beechcraft Notes Company. | |
| * | Filed herewith. |
Exhibit 10.1
JOINT WRITTEN CONSENT
WHEREAS, Hawker Beechcraft, Inc., a corporation organized under the laws of Delaware, 1597257 Ontario Inc., Onex Partners II LP, Onex Partners II GP LP, Onex US Principals LP, Onex HBI Holdings II Limited S.a.r.l., GS Capital Partners VI Fund, L.P., GS Capital Partners VI Offshore Fund, L.P., GS Capital Partners VI Parallel, L.P., GS Capital Partners VI GmbH & Co., KG, and the individuals listed on the Shareholder Schedule to and the individuals who have subsequently entered into Joinder Agreements to become shareholders, have entered into that certain Amended and Restated Shareholders’ Agreement dated as of May 3, 2007;
WHEREAS, Section 8.9(a) of the Amended and Restated Shareholders’ Agreement provides that such agreement may be amended only by a written instrument duly executed by Shareholders holding more than 65% of the Common Shares;
WHEREAS, Shareholders of more than 65% of the Common Shares in the aggregate desire to amend the Amended and Restated Shareholders’ Agreement in the form attached hereto as “Exhibit A”.
RESOLVED, that the Shareholders of more than 65% of the Common Shares in the aggregate hereby agree to amend the Amended and Restated Shareholders Agreement in the form attached hereto as “Exhibit A”.
[Rest of page intentionally left blank]
EXHIBIT A
This Amendment (this “Amendment”) to the Amended and Restated Shareholders’ Agreement of Hawker Beechcraft, Inc., a Delaware corporation (the “Company”), is made as of July 9, 2009.
WITNESSETH
WHEREAS, the Company and the Shareholders party thereto are parties to the Amended and Restated Shareholders’ Agreement, dated as of May 3, 2007 (the “Shareholders’ Agreement”).
WHEREAS, the Company and the holders of at least 65% of the Common Shares in the aggregate have agreed to amend the Shareholders’ Agreement as hereinafter set forth. All capitalized terms used but not defined in this Amendment shall have the meanings given to them in the Shareholders’ Agreement.
NOW THEREFORE, the parties hereto agree as follows:
| 1. | Section 6.1(b) is hereby deleted in its entirety and replaced as follows: |
If the Company desires to exercise the Equity Call Option, it shall deliver written notice thereof (a “Call Notice”) to the Management Shareholder no later than the first anniversary of the Termination Date (the “Call Period”), which notice shall set forth the number of and identify the Call Equity Securities of the Management Shareholder the Company desires to repurchase, the Equity Call Purchase Price for each such Call Equity Security, and the proposed closing date of the transaction; provided, however, that for the avoidance of doubt if at the end of the Call Period such Management Shareholder continues to have the right to acquire any Shares pursuant to any convertible security, option, warrant or other right to acquire Common Shares or other shares of the Company, the Call Period with respect to such Management Shareholder shall be extended to the date that is 30 days following the expiration of such option, warrant or other right to acquire Shares or with respect to convertible securities, the date that is 30 days from date of acquisition by such Management Shareholder of Shares of the Company.
| 2. | Except as expressly set forth herein, the Shareholders’ Agreement remains in full force and effect without amendment or modification. |
2
| 3. | This Amendment shall be governed by, and construed and enforced in accordance with the internal laws of the State of Delaware applicable to contracts made and intended to be performed in such state. |
| 4. | This Amendment may be executed in counterparts, and such counterparts, when taken together shall constitute one and the same Amendment, valid and binding upon each of the parties to the Shareholders’ Agreement. |
[Signature pages follow]
3
IN WITNESS WHEREOF, the parties have entered into the Amendment as of the date first above written.
| THE COMPANY: | ||||||
| HAWKER BEECHCRAFT, INC. | ||||||
| Date: July 9, 2009 | By: | /s/ Gail E. Lehman | ||||
| Name: | Gail E. Lehman | |||||
| Title: | Vice President, General Counsel and Secretary | |||||
| STOCKHOLDERS: | ||||||
| GS CAPITAL PARTNERS VI FUND, L.P. | ||||||
| By: | GSCP VI Advisors, L.L.C. its General Partner | |||||
| Date: July 9, 2009 | By: | /s/ John Bowman | ||||
| GS Capital Partners VI Offshore Fund, L.P. | ||||||
| By: | GSCP VI Offshore Advisors, L.L.C. its General Partner | |||||
| Date: July 9, 2009 | By: | /s/ John Bowman | ||||
| GS Capital Partners VI GmbH & Co. KG | ||||||
| By: | GS Advisors VI, L.L.C. its Managing Limited Partner | |||||
| Date: July 9, 2009 | By: | /s/ John Bowman | ||||
| GS Capital Partners VI Parallel, L.P. | ||||||
| By: | GS Advisors VI, L.L.C. its General Partner | |||||
| Date: July 9, 2009 | By: | /s/ John Bowman | ||||
4
| ONEX PARTNERS II LP | ||||||
| By: | Onex Partners II GP LP, its General Partner | |||||
| By: | Onex Partners Manager LP, its Agent | |||||
| By: | Onex Partners Manager GP ULC, its General Partner | |||||
| Date: July 9, 2009 | By: | /s/ Robert M. LeBlanc | ||||
| Name: | Robert M. LeBlanc | |||||
| Title: | Managing Director | |||||
| Date: July 9, 2009 | By: | /s/ Donald F. West | ||||
| Name: | Donald F. West | |||||
| Title: | Vice President and Secretary | |||||
| ONEX PARTNERS II GP LP | ||||||
| By: | Onex Partners GP Inc., its General Partner | |||||
| Date: July 9, 2009 | By: | /s/ Robert M. LeBlanc | ||||
| Name: | Robert M. LeBlanc | |||||
| Title: | President | |||||
| Date: July 9, 2009 | By: | /s/ Donald F. West | ||||
| Name: | Donald F. West | |||||
| Title: | Vice President | |||||
5
| ONEX US PRINCIPALS LP | ||||||
| By: | Onex American Holdings GP LLC, its General Partner | |||||
| Date: July 9, 2009 | By: | /s/ Robert M. LeBlanc | ||||
| Name: | Robert M. LeBlanc | |||||
| Title: | Director | |||||
| Date: July 9, 2009 | By: | /s/ Donald F. West | ||||
| Name: | Donald F. West | |||||
| Title: | Director | |||||
| ONEX HBI Holdings II Limited S.a.r.l. | ||||||
| Date: July 9, 2009 | By: | /s/ Donald F. West | ||||
| Name: | Donald F. West | |||||
| Title: | Type A Manager | |||||
| Date: July 9, 2009 | By: | /s/ Olivier Dorier | ||||
| Name: | Olivier Dorier | |||||
| Title: | Type B Manager | |||||
| 1597257 Ontario Inc. | ||||||
| Date: July 9, 2009 | By: | /s/ Christopher A. Govan | ||||
| Name: | Christopher A. Govan | |||||
| Title: | Managing Director | |||||
| Date: July 9, 2009 | By: | /s/ Andrea E. Daly | ||||
| Name: | Andrea E. Daly | |||||
| Title: | Vice President and General Counsel | |||||
6
Exhibit 10.2
SEPARATION OF EMPLOYMENT AGREEMENT AND GENERAL RELEASE
THIS SEPARATION OF EMPLOYMENT AGREEMENT AND GENERAL RELEASE (the “Agreement”) is made as of this 4th day of September, 2009, by and between Hawker Beechcraft Corporation (the “Company”), Hawker Beechcraft, Inc. (“HBI”), and George Nguyen (“Employee”).
WHEREAS, Employee was employed by the Company as the SVP - - Operations; and
WHEREAS,Employee and the Company have agreed that, effective as of August 17, 2009 (the “Exit Date”), Employee will resign from his position as SVP - Operations for the Company; and
WHEREAS, pursuant to certain Subscription Agreements dated as follows, entered into by and between the Employee and HBI, the Employee made the following share purchases: (i) on October 22, 2007, the Employee purchased a total of 25,000 shares of HBI common stock for a purchase price of $10.00 per share (the “Initial Subscription Amount”), with the purchase of such shares entitling the Employee options to purchase 3.5 shares of HBI for every share purchased as part of the purchase of the Initial Subscription Amount, and (ii) on March 28, 2008, the Employee purchased a total of 4,000 shares of HBI common stock for a purchase price of $12.50 per share (the “Additional Share Purchase”), which did not involve the grant of any additional options to purchase HBI shares attendant upon such Additional Share Purchase (such purchased shares in the aggregate to be referred to as the “Purchased Shares”); and
WHEREAS, pursuant to Section 6.1 of the Shareholders Agreement, as amended, upon the Employee’s Exit Date, HBI shall have the right to purchase for cash all or any portion of his Purchased Shares and vested Restricted Shares, as well as any shares purchased by Employee as a result of any exercise of stock options by the Employee (the “Equity Call Option”) at their Fair Market Value (as defined in the Shareholders Agreement) on the date of HBI’s exercise of the Equity Call Option; and
WHEREAS, in connection with the Employee’s entry into the Initial Subscription Amount and the purchase of the Purchased Shares, the Employee became party to an Amended and Restated Shareholders Agreement, as amended, with HBI dated as of May 3, 2007 (the Shareholders Agreement); and
WHEREAS, upon the approval of the HBI Board of Directors, HBI may exercise the Equity Call Option within one year of the Exit Date; and
WHEREAS, in connection with the Employee’s resignation, the parties have agreed to a separation package and the resolution of any and all disputes between them;
NOW, THEREFORE, IT IS HEREBY AGREED by and between Employee, the Company, and HBI as follows:
1.Salary Continuance and Accrued Vacation: Employee will receive salary continuance payments for a period of nine (9) months and two (2) weeks, beginning on the Exit Date, at Employee’s base pay as of August 17, 2009 subject to normal statutory withholding. The Employee shall receive any payroll amounts earned, accrued or owing but not yet paid to Employee up through
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and including the Exit Date, including, but not limited to any benefits accrued or earned, which will be distributed in accordance with the terms of the applicable benefit plans and programs of the Company. The Employee shall receive any vacation time earned and accrued or owing but not yet paid to Employee up through and including August 17, 2009, according to the Exempt Employee Vacation Policy existing as of August 17, 2009.
2.Equity Call Option: HBI may exercise the Equity Call Option by HBI within one year of the Exit Date if approved by the HBI Board of Directors. If approved, Employee will receive notice thereof and will receive a lump sum cash payment equal to the Equity Call Purchase Price, which shall be equal to the fair market value on the date designated, in consideration for HBI’s re-purchase of 29,000 shares of Hawker Beechcraft Inc. common stock purchased by or awarded to the Employee. Notification of such fair market value will be made in writing to the Employee within ten (10) days of such determination by the Board of Directors.
3.Management Incentive Plan (“MIP”) 2009 Bonus: You will be eligible to receive a MIP Bonus for 2009, but only to the extent your performance and the financial results for the Company for the relevant time period trigger a bonus strictly in accordance with the terms of the MIP. Payment of the bonus, if any, will be made in a lump sum amount within sixty (60) days from the date the Company determines whether the Employee is entitled to a 2009 bonus. If approved, you will be eligible to receive sixty-seven percent (67%) of a full year’s bonus, based upon your months of service in 2009 with the Company.
4.Vested Options: As a result of the Employee’s resignation as stated herein, and pursuant to the Nonqualified Stock Option Agreements entered into between HBI and the Employee, the following options shall vest on the Exit Date or the end of the revocation period for the Release, whichever is later: (i) a total of 22,353.5 shares of the Employee’s October 22, 2007 Time-Vesting Options that vested on October 22, 2008; (ii) a total of 22,353.5 shares of Time-Vesting Options that vest as a result of the exit; (iii) a total of 12,573.2 of the Employee’s Performance-Vesting Type A Options that vested as a result of achievement of the 2007 EBITDA target, (iv) a total of 12,573.2 of the Employee’s Performance-Vesting, Type A Options if the EBITDA target for the year of exit is met; (v) a total of 12,573.2 of the Employee’s Performance-Vesting, Type B Options that vested as a result of achievement of the 2007 EBITDA target; and (vi) a total of 12,573.2 of the Employee’s Performance-Vesting, Type B Options, if the EBITDA Target for the year of exit is met. The Employee may exercise all or any part of the total number of vested Options, 69,853.4 in total, at any time prior to the earliest to occur of the tenth (10th) anniversary of the Date of Grant and 5:00 p.m. (Eastern Time) on the ninetieth (90th) day following the date of the Participant’s exit. The Employee may exercise all or any part of the Vested Portion of the 12,573.2 shares of Performance-Vesting, Type A Options and 12,573.2 shares of Performance-Vesting, Type B Options at any time prior to the earliest to occur of the tenth (10th) anniversary of the Date of Grant and 5:00 p.m. (Eastern Time) on the ninetieth (90th) day following the date the Participant is notified in writing by the Company whether the Target for the year of exit has been attained, and thus, whether such options have vested. All other HBI options held by the Employee other than the Vested Options shall become null and void, and be unexercisable and of no further force and effect, as of the Exit Date or the end of the revocation period for the Release, whichever is later.
5.Fringe Benefits: Employee may continue, on an active employee basis, in Company-sponsored welfare benefit plans, except for Long-Term Disability, Flexible Spending Accounts, and Company Travel Insurance, for the period of time of salary continuation. If Employee is not eligible to
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participate in an employer-sponsored medical plan at the end of this period, COBRA benefits will be made available at that time for a period not to exceed eighteen (18) months. Employee’s 401(k) deductions will cease effective with the last day worked.
6.Reduction of Separation Benefits: The Company and HBI each reserve the right to make deductions in accordance with applicable law for any monies owed to the Company or HBI, respectively, by the Employee or the value of the Company or HBI property that the Employee has retained in his possession.
7. (a) Employee, for and in consideration of the commitments of the Company and HBI as set forth in paragraphs 1 through 4 of this Agreement, and intending to be legally bound, does hereby REMISE, RELEASE AND FOREVER DISCHARGE the Company and HBI, their affiliates, subsidiaries and parents, and their officers, directors, employees, and agents, and their respective successors and assigns, heirs, executors, and administrators (collectively, “Releasees”) from all causes of action, suits, debts, claims and demands whatsoever in law or in equity, which Employee ever had, now has, or hereafter may have, whether known or unknown, or which Employee’s heirs, executors, or administrators may have, by reason of any matter, cause or thing whatsoever, from the beginning of Employee’s employment to the Final Payroll Date, and particularly, but without limitation of the foregoing general terms, any claims arising from or relating in any way to Employee’s employment relationship with the Company and/or HBI, the terms and conditions of that employment relationship, and the termination of that employment relationship, including, but not limited to, any claims arising under the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act (“OWBPA”), Title VII of The Civil Rights Act of 1964, the Americans with Disabilities Act, the Family and Medical Leave Act of 1993, the Employee Retirement Income Security Act of 1974, the Rehabilitation Act, the Fair Labor Standards Act (29 U.S.C. 201 et seq.), the Kansas Act Against Discrimination (K.S.A. 44-1001 et seq.), the Kansas Age Discrimination in Employment Act (K.S.A. 44-1111 et seq.), the Kansas Wage Payment Act (K.S.A. 44-313 et seq.), and any other claims under any federal, state, or local common law, statutory, or regulatory provision, now or hereafter recognized including, but not limited to, breach of contract, unlawful retaliation, and defamation, and any claims for attorneys’ fees and costs. This Agreement is effective without regard to the legal nature of the claims raised and without regard to whether any such claims are based upon tort, equity, implied or express contract or discrimination of any sort.
(b) To the fullest extent permitted by law, Employee represents and affirms that (i), Employee has not filed or caused to be filed on Employee’s behalf any claim for relief against the Company, HBI or any Releasee and, to the best of Employee’s knowledge and belief, no outstanding claims for relief have been filed or asserted against the Company, HBI or any Releasee on Employee’s behalf; and (ii), Employee has no knowledge of any improper, unethical or illegal conduct or activities that Employee has not already reported to any supervisor, manager, department head, human resources representative, agent or other representative of the Company and/or HBI, to any member of the Company’s legal or compliance departments, or to the ethics hotline; and (iii) Employee will not file, commence, prosecute or participate in any judicial or arbitral action or proceeding against the Company, HBI or any Releasee based upon or arising out of any act, omission, transaction, occurrence, contract, claim or event existing or occurring on or before the final payroll date.
8. In further consideration of the payments described in paragraphs 1 through 4, Employee agrees that Employee will not file, charge, claim, sue or cause or permit to be filed, charged or claimed, any civil action, suit or legal proceeding seeking equitable or monetary relief (including
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damages, injunctive, declaratory, monetary or other relief) for himself involving any matter released in paragraph 6. In the event that suit is filed in breach of this covenant not to sue, it is expressly understood and agreed that this covenant shall constitute a complete defense to any such suit. In the event any Releasee is required to institute litigation to enforce the terms of this paragraph, Releasees shall be entitled to recover reasonable costs and attorneys’ fees incurred in such enforcement. Employee further agrees and covenants that should any person, organization, or other entity file, charge, claim, sue, or cause or permit to be filed any civil action, suit or legal proceeding involving any matter occurring at any time in the past, Employee will not seek or accept personal equitable or monetary relief in such civil action, suit or legal proceeding.
9. (a) Confidentiality. Employee agrees that Employee shall not directly or indirectly, use, make available, sell, disclose or otherwise communicate to any person, other than in the course of the Employee’s assigned duties and for the benefit of the Company, either during the period of the Employee’s employment or at any time thereafter, any nonpublic, proprietary or confidential information, knowledge or data relating to the Company, any of its subsidiaries, affiliated companies or businesses, which shall have been obtained by the Employee during Employee’s employment by the Company or a subsidiary.
(b)Continued Cooperation. Employee acknowledges that Company may need to consult with Employee from time to time on a reasonable basis after Employee’s Exit Date on matters that Employee had worked on prior to the Exit Date. Employee agrees to continue to cooperate with Company and to provide any such information as is reasonably requested by Company.
(c)Non-Disparagement. Employee further agrees that Employee will not disparage or subvert the Company or HBI, or make any statement reflecting negatively on the Company, on HBI, on their affiliated corporations or entities, or on any of their officers, directors, employees, agents or representatives, including, but not limited to, any matters relating to the operation or management of the Company and HBI, Employee’s employment and Employee’s resignation, irrespective of the truthfulness or falsity of such.
10. Employee understands and agrees that the payments, benefits and agreements provided in this Agreement are being provided to Employee in consideration for Employee’s acceptance and execution of, and in reliance upon Employee’s representations in, this Agreement, and that they are greater than the payments, benefits and agreements, if any, to which the Employee would have received if Employee had not executed this Agreement.
11. Employee acknowledges and agrees that the Company previously has satisfied any and all obligations owed to Employee under any employment agreement or offer letter Employee has with the Company and, further, that this Agreement fully supersedes any prior agreements or understandings, whether written or oral, between the parties. Employee acknowledges that, except as set forth expressly herein, neither the Company, HBI, the Releasees, nor their agents or attorneys have made any promise, representation or warranty whatsoever, either express or implied, or written or oral.
12. Employee agrees not to disclose the terms of this Agreement to anyone, except his spouse, attorney and, as necessary, tax/financial advisor. It is expressly understood that any violation of the confidentiality obligation imposed hereunder constitutes a material breach of this Agreement.
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13. Employee represents that Employee does not presently have in his possession any records and business documents, whether on computer or hard copy, and other materials (including but not limited to computer disks and tapes, computer programs and software, office keys, correspondence, files, customer lists, technical information, customer information, pricing information, business strategies and plans, sales records and all copies thereof) (collectively, the “Corporate Records”) provided by the Company and/or its predecessors, subsidiaries or affiliates or obtained as a result of Employee’s prior employment with the Company and/or its predecessors, subsidiaries or affiliates, or created by Employee while employed by or rendering services to the Company and/or its predecessors, subsidiaries or affiliates. Employee acknowledges that all such Corporate Records are the property of the Company.
14. Employee agrees and recognizes that should Employee breach any of the obligations or covenants set forth in this Agreement, the Company and HBI will have no further obligation to provide Employee with the consideration set forth herein, and will have the right to seek repayment of all consideration paid up to the time of any such breach. Further, Employee acknowledges in the event of a breach of this Agreement, Releasees may seek any and all appropriate relief for any such breach, including equitable relief and/or money damages, attorney’s fees and costs.
15. Employee further agrees that the Company and HBI shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as to an equitable accounting of all earnings, profits and other benefits relating to or arising out of any violations of this Agreement, which rights shall be cumulative and in addition to any other rights or remedies to which the Company and/or HBI may be entitled. Employee irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding relating to or arising out of this Agreement, including without limitation, any action commenced by the Company or HBI for preliminary and permanent injunctive relief or other equitable relief, may be brought in Kansas, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Employee may have to the laying of venue of any such suit, action or proceeding in any such court. Employee also irrevocably and unconditionally consents to the service of any process, pleadings, notices or other papers by personal service or by registered or certified mail, return receipt requested, or by overnight express courier service, addressed to Employee at the home address which Employee most recently communicated to the Company in writing.
16. This Agreement and the obligations of the parties hereunder shall be construed, interpreted and enforced in accordance with the laws of the State of Kansas.
17. Employee certifies and acknowledges as follows:
(a) That Employee has read the terms of this Agreement, and that Employee understands its terms and effects, including the fact that Employee has agreed to RELEASE AND FOREVER DISCHARGE the Company and HBI and each and everyone of its affiliated entitles and Releasees listed herein from any legal action arising out of Employee’s employment relationship with the Company and the termination of that employment relationship;
(b) That Employee has signed this Agreement voluntarily and knowingly in exchange for the consideration described herein, which Employee acknowledges is adequate and satisfactory to Employee and which Employee acknowledges is in addition to any other benefits to which Employee is otherwise entitled;
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(c) That Employee has been and is hereby advised in writing to consult with an attorney prior to signing this Agreement;
(d) That Employee does not waive rights or claims that may arise after the date this Agreement is executed;
(e) That the Company has provided Employee with a period of twenty-one (21) days within which to consider this Agreement, and that Employee has signed on the date indicated below after concluding that this Agreement is satisfactory to Employee; and
(f) Employee acknowledges that this Agreement may be revoked by Employee within seven (7) days after Employee’s execution, and it shall not become effective until the expiration of such seventh day revocation period. Any revocation within this period must be submitted, in writing, to Company and state, “I hereby revoke my acceptance of our Agreement.” The revocation must be personally delivered to Rich Jiwanlal, or his designee, or mailed to Rich Jiwanlal, 10511 E. Central, Wichita, KS 67206, and postmarked within seven (7) calendar days of Employee’s execution of this Agreement. If the last day of the revocation period is a Saturday, Sunday, or legal holiday in Kansas, then the revocation period shall not expire until the next following day which is not a Saturday, Sunday, or legal holiday. In the event of a timely revocation by Employee, this Agreement will be deemed null and void and the Company and HBI will have no obligations hereunder. Any and all such notices required hereunder shall be delivered to the same individual and address.
Intending to be legally bound hereby, Employee, the Company, and HBI have executed the foregoing Separation of Employment Agreement and General Release this 4th day of September, 2009.
GEORGE NGUYEN | HAWKER BEECHCRAFT CORPORATION | |||||
| /s/ George Nguyen | By: | /s/ Rich Jiwanlal | ||||
| Witness: | /s/ Thom Anderson | |
| Name: | Thom Anderson | |
| Title: | Director - HR | |
| HAWKER BEECHCRAFT INC. | ||
| By: | /s/ S. E. Anderson | |
| Name: | S. E. Anderson | |
| Title: | VP, CFO and Legal | |
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Exhibit 10.3
SECOND AMENDMENT TO THE
HAWKER BEECHCRAFT SAVINGS AND INVESTMENT PLAN
This Second Amendment to the Hawker Beechcraft Savings and Investment Plan is made this 1st day of September, 2009.
WHEREAS, Hawker Beechcraft Corporation (the “Company”) maintains the Hawker Beechcraft Savings and Investment Plan (the “Plan”); and
WHEREAS, the Company has reserved the right to amend the Plan.
NOW, THEREFOREin consideration of the foregoing premises, the Plan is amended to read as follows:
FIRST:Effective October 5, 2009, Section 4.03 is amended to read as follows:
Section 4.03.Employer Matching Contribution. Subject to the terms and conditions hereinafter provided, the Employer will make a matching contribution for each eligible Participant (as defined in Article II) who is covered under the provisions of a collective bargaining agreement equal to a designated percentage of such Participant’s Compensation contributed by such Participant as an elective before-tax or after-tax contribution pursuant to Section 4.04. Until suspended or modified as hereinafter provided, the designated contribution will be 100% of such Participant’s salary reduction contribution,provided, that no matching contribution will be based upon a Participant’s contribution above the first 4% of Compensation contributed by a Participant. Notwithstanding anything herein to the contrary, no Participant will accrue or be entitled to any matching contribution hereunder unless and until such contribution is contributed to the Trust.
The amount of the Employer Matching Contribution for each eligible Participant will be determined based on the amount or percentage contributed as a salary reduction contribution for each pay period and not on the total percentage contributed throughout the year.
The amount of the Employer’s matching contribution made for each Participant pursuant to this Section 4.03 will be allocated to the Participant’s Matching Account.
The Company reserves, by action of its governing body, the right to terminate, suspend, or modify contributions at any time and from time to time.
SECOND:Effective January 1, 2009, the first paragraph of Section 4.05 is amended to read as follows:
Section 4.05.401(k) Test. The following provisions will govern compliance with the nondiscrimination tests of Code Section 401(k). For purposes of this Section 4.05, certain additional definitions are set forth in
Subsection I. For each Plan Year the Administrative Committee will determine whether the Actual Deferral Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year compared to the Actual Deferral Percentage for all other Eligible Participants for the current year satisfies one of the following described ratio tests.
THIRD:Effective January 1, 2009, the first paragraph of Section 4.06 is amended to read as follows:
Section 4.06.401(m) Test. The following provisions will govern compliance with the nondiscrimination tests of Code Section 401(m). For purposes of this Section 4.06, certain additional definitions are set forth in Subsection I. For each Plan Year the Administrative Committee will determine whether the Actual Contribution Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year compared to the Actual Contribution Percentage for all other Eligible Participants for the current year satisfies one of the following described ratio tests.
IN WITNESS WHEREOF, the foregoing amendment is executed as of the day, month, and year first appearing above.
| HAWKER BEECHCRAFT CORPORATION | ||
| By: | /s/ Rich Jiwanlal | |
ATTEST: |
| /s/ Marzella Ervin |
2
Exhibit 10.4
HAWKER BEECHCRAFT
EXCESS SAVINGSAND DEFERRED
COMPENSATION
PLAN
Amended and Restated September 16, 2009
HAWKER BEECHCRAFT EXCESS SAVINGS AND
DEFERRED COMPENSATION PLAN
Table of Contents
ARTICLE I – PURPOSE | 1 | |||
Section 1.01. | Purpose | 1 | ||
ARTICLE II – DEFINITIONS | 1 | |||
Section 2.01. | Beneficiary or Beneficiaries | 1 | ||
Section 2.02. | Board of Directors | 1 | ||
Section 2.03. | Closing Date | 1 | ||
Section 2.04. | Code | 2 | ||
Section 2.05. | Committee | 2 | ||
Section 2.06. | Company | 2 | ||
Section 2.07. | Deferred Compensation Account | 2 | ||
Section 2.08. | Employee | 2 | ||
Section 2.09. | Employer | 2 | ||
Section 2.10. | Participant | 3 | ||
Section 2.11. | Plan | 3 | ||
Section 2.12. | Plan Year | 3 | ||
Section 2.13. | Separation from Service | 3 | ||
Section 2.14. | Sole Discretion | 3 | ||
Section 2.15. | Specified Employee | 3 | ||
ARTICLE III – PARTICIPATION | 4 | |||
Section 3.01. | Eligibility | 4 | ||
Section 3.02. | Salary Reduction Agreements | 4 | ||
ARTICLE IV – DEFERRED COMPENSATION ACCOUNT | 4 | |||
Section 4.01. | Deferred Compensation Account | 4 | ||
Section 4.02. | Increases and Decreases in Account | 5 | ||
Section 4.03. | Statement of Account | 6 | ||
ARTICLE V – BENEFITS | 6 | |||
Section 5.01. | General | 6 | ||
Section 5.02. | Beneficiary Designations | 6 | ||
Section 5.03. | Payment | 7 | ||
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ARTICLE VI – SOURCE OF BENEFITS | 7 | |||
Section 6.01. | Source of Benefits | 7 | ||
Section 6.02. | Multiple Employers | 8 | ||
ARTICLE VII – ADMINISTRATION | 8 | |||
Section 7.01. | Committee | 8 | ||
Section 7.02. | Reliance on Certificates, etc. | 9 | ||
ARTICLE VIII – AMENDMENT AND TERMINATION | 9 | |||
Section 8.01. | Amendment | 9 | ||
Section 8.02. | Termination | 9 | ||
ARTICLE IX – RESTRICTIONS ON ALIENATION | 9 | |||
Section 9.01. | Restrictions on Alienation | 9 | ||
ARTICLE X – CLAIMS PROCEDURES | 10 | |||
Section 10.01. | Claims Procedures | 10 | ||
Section 10.02. | Litigation of Claim | 11 | ||
ARTICLE XI – MISCELLANEOUS | 11 | |||
Section 11.01. | Effective Date | 11 | ||
Section 11.02. | No Guarantee of Interests | 11 | ||
Section 11.03. | Payments Net of Withholding and Other Amounts | 11 | ||
Section 11.04. | Binding on Successors | 11 | ||
Section 11.05. | Adoption by Other Employers | 12 | ||
Section 11.06. | Minors and Incompetents | 12 | ||
Section 11.07. | Erroneous Payments | 12 | ||
Section 11.08. | Headings | 12 | ||
Section 11.09. | Notices | 12 | ||
Section 11.10. | Severability | 12 | ||
Section 11.11. | No Contract of Employment | 12 | ||
Section 11.12. | Certain Limitations | 13 | ||
Section 11.13. | Governing Law | 13 | ||
Section 11.14. | Nonexclusivity of the Plan | 13 | ||
Section 11.15. | Changes in Time or Form of Distribution | 13 | ||
Section 11.16. | No Acceleration | 13 | ||
Section 11.17. | Transition Relief for Change in Payment Elections During 2007 | 14 | ||
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HAWKER BEECHCRAFT EXCESS SAVINGS AND
DEFERRED COMPENSATION PLAN
WITNESSETH: That;
WHEREAS,the Company sponsors and maintains the Hawker Beechcraft Excess Savings and Deferred Compensation Plan (the “Plan”), through which it provides specified unfunded and deferred compensation benefits; and
WHEREAS, it has become desirable to amend and restate the Plan in its entirety on the terms and conditions set forth herein; and
WHEREAS,the Board of Directors of the Company has reviewed the terms and provisions of this amended and restated plan document and found them satisfactory.
NOW, THEREFORE,the Company hereby adopts this amended and restated Plan document on the terms and conditions set forth herein, which Plan shall continue to be known as the “Hawker Beechcraft Excess Savings and Deferred Compensation Plan.”
ARTICLE I – PURPOSE
Section 1.01.Purpose. The purpose of the Plan is to provide specified unfunded deferred compensation benefits for individuals who are eligible to participate in the Plan. It is the intention of the Company that this program shall be administered as an unfunded plan of deferred compensation for income tax purposes and, in the case of Participants who are common-law employees of the Employer, as an unfunded employee benefit plan established and maintained primarily for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
ARTICLE II – DEFINITIONS
For purposes of the Plan, the following terms shall have the following meanings, unless the context clearly indicates otherwise.
Section 2.01.Beneficiary or Beneficiariesmeans the person, persons, entity, or entities entitled to receive any benefits under this Plan pursuant to the designation of the Participant (or in default of such designation) as provided in Section 5.02 hereof.
Section 2.02.Board of Directorsmeans the Board of Directors of the Company.
Section 2.03.Closing Datemeans the closing date of the sale of Raytheon Aircraft Acquisition Company to Hawker Beechcraft, Inc.
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Section 2.04.Codemeans the Internal Revenue Code of 1986, as amended.
Section 2.05.Committeemeans the Board of Directors or a committee appointed by, and serving at the pleasure of, the Board of Directors for purposes of administering the Plan, which committee shall operate under rules and procedures established by the Board of Directors from time to time for such purpose.
Section 2.06.Companymeans Hawker Beechcraft Corporation, or its successor.
Section 2.07.Deferred Compensation Accountmeans the ledger entry established for each Participant under the Plan, which entry shall represent the Employer’s unsecured and unfunded promise to pay the amount of benefits set forth by such entry. The Committee may establish one or more sub-accounts for each Participant, including, but not limited to, the following:
| A. | A “Salary Reduction Account” created to hold Employee salary reduction contributions. |
| B. | An “Employer Match Account” created to hold Employer matching contributions. |
| C. | An “Employer Contribution Account” created to hold discretionary Employer contributions made on behalf of a Participant (if any), which contributions may include, but are not limited to, amounts that would have been contributed as RISP contributions under the Hawker Beechcraft Savings and Investment Plan but for the limitations of Code Section 401(a)(17). |
Separate accounting among a Participant’s sub-accounts shall be utilized.
Section 2.08.Employeemeans a consultant, independent contractor, or director of the Employer and any individual who is employed and compensated (by a payroll check issued directly from the Employer or Employer agent to the Employee or direct payroll deposit made to the Employee’s account by the Employer or Employer agent) by the Employer. In no event will the term “Employee” include any individual classified or treated or otherwise characterized by the Employer as a leased employee or temporary agency employee or otherwise not treated by the Employer as an “Employee” for purposes of this Plan. The foregoing determination will apply for all purposes of this Plan and regardless of whether an individual is later classified by any governmental agency, court, tribunal, governing body, or any other person as a common-law employee of the Employer.
Section 2.09.Employermeans the Company (or its successor), Hawker Beechcraft, Inc. (or its successor), and any other entity that adopts this Plan with the consent and approval of the Committee.
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Section 2.10.Participantmeans an Employee who has been designated by the Committee as eligible to participate in this Plan pursuant to Section 3.01. Where the context requires, the term “Participant” also shall include a former Participant.
Section 2.11.Planmeans this Hawker Beechcraft Excess Savings and Deferred Compensation Plan, as amended.
Section 2.12.Plan Yearmeans the 12-month period commencing January 1 each year.
Section 2.13.Separation from Servicemeans the termination of employment (including, but not limited to, termination of service as a consultant, independent contractor, or director) with the Employer and each Affiliated Company. The term includes, but is not limited to, a termination which arises from a Participant’s death, disability, retirement, discharge (with or without cause), or voluntary termination. In the case of an employee, the term will not include any temporary absences due to vacation, sickness, or other leaves of absence granted by the Employer. A Separation from Service will not be deemed to occur, however, upon a transfer of service involving any combination of any entity comprising the Employer or any Affiliated Company.
For purposes of this Section, the term “Affiliated Company” means an entity affiliated with the Employer within the meaning of Code Sections 414(b) and (c) (applied by substituting the phrase “more than 50%” for the phrase “at least 80%” in each place it appears in Code Section 1563(a)(1), (2), and (3) and in each place it appears in Treasury Regulation Section 1.414(c)-2).
Section 2.14.Sole Discretionmeans the right and power to decide a matter, which right may be exercised arbitrarily at any time and from time to time.
Section 2.15.Specified Employeemeans, at any time any stock of a corporation is publicly traded on an established securities market or otherwise, each individual who is either (i) an officer of the corporation having annual compensation greater than $130,000 (as adjusted for cost-of-living increases in accordance with Code Section 416(i)(1)(A) and Code Section 415(d)), (ii) a 5% owner of the corporation, or (iii) a 1% owner of the corporation having annual compensation from the corporation of more than $150,000. For purposes of determining an individual’s percentage ownership in the corporation, the constructive-ownership rules described in Code Section 416(i)(1)(B) will apply.
The determination of whether an individual is a Specified Employee will be made by the Plan Administrator in accordance with regulations issued under Code Section 409A and other available guidance.
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ARTICLE III – PARTICIPATION
Section 3.01.Eligibility. The Committee shall have the unrestricted right and power, which may be exercised in its Sole Discretion at any time and from time to time, to designate Employees who are eligible to participate in this Plan. The Committee also shall have the right, in its Sole Discretion, to terminate an individual’s future participation in this Plan. If an individual’s participation in this Plan is terminated, the Participant (or Beneficiary, in the event of death) shall be entitled to receive the Participant’s Deferred Compensation Account balance at the time and in the manner determined under Article V.
Section 3.02.Salary Reduction Agreements. For each Plan Year (or portion of the Plan Year after entry into the Plan), each Participant designated by the Committee as eligible to participate in the salary reduction feature of the Plan may elect to execute a salary reduction agreement in the form, time, and manner established by the Committee;provided,however, that the Committee shall not prescribe a time later than 30 days after the date a Participant is first designated as eligible to participate.
An election by a Participant to reduce the Participant’s compensation shall only apply to compensation attributable to services to be performed by the Participant after the date of such election;provided,however, that in the case of an election to defer any performance-based compensation payable with respect to services performed over a period of at least 12 months, such election must be made no later than 6 months before the end of such period.
The terms of any such salary reduction agreement shall provide that the Participant agrees to accept a reduction in compensation from the Employer. Except as otherwise provided herein, the agreement shall be irrevocable by the Participant during the Plan Year and each subsequent Plan Year, unless the Participant enters into a new agreement prior to the beginning of the Plan Year for which the change is to be effective. All elections, including modifications and revocation, shall be made upon such terms and conditions and at such time and in such manner as the Committee may from time to time determine in its Sole Discretion. The agreement shall automatically terminate upon the termination of this Plan, upon a Participant’s Separation from Service, on a date determined by the Committee, or at such time as the Committee determines the Participant is no longer eligible to participate in the Plan.
Notwithstanding anything to the contrary, Employees who were participants in the Raytheon Deferred Compensation Plan and/or Raytheon Excess Savings Plan as of the Closing Date, shall be deemed to have made the same salary reduction election under this Plan as such Participant had in effect under Raytheon Deferred Compensation Plan and/or Raytheon Excess Savings Plan on the day before the Closing Date.
ARTICLE IV – DEFERRED COMPENSATION ACCOUNT
Section 4.01.Deferred Compensation Account. Contributions shall be credited to a Participant’s Deferred Compensation Account in accordance with the following provisions:
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| A. | Employee Contributions. The amount of compensation that a Participant elects to defer under the Plan pursuant to a salary reduction agreement entered into in accordance with Section 3.02 hereof shall be credited to the Participant’s Salary Reduction Account. |
| B. | Employer Matching Contributions. For each Participant who enters into a salary reduction agreement, the Employer may contribute a matching contribution to the Participant’s Employer Match Account in such amount and at such time as the Employer may determine, in its Sole Discretion. |
| C. | Employer Discretionary Contributions. The Employer may make contributions to the Participant’s Deferred Compensation Account, at such times and in such amounts as the Employer determines in its Sole Discretion, which amounts will be credited to the Participant’s Employer Contribution Account. Employer contributions may include, but are not limited to, amounts that would have been contributed as RISP contributions for the Participant under the Hawker Beechcraft Savings and Investment Plan but for the limitations of Code Section 401(a)(17). |
To the extent the Employer is required to withhold any taxes or other amounts pursuant to any federal, state, or local law, such amounts shall be taken out of the portion of the Participant’s compensation which is not deferred under this Plan.
Section 4.02.Increases and Decreases in Account. A Participant’s Deferred Compensation Account shall be (i) increased or decreased (as appropriate) by an earnings factor, (ii) decreased by any distribution from the Participant’s Deferred Compensation Account, (iii) decreased by any costs, fees, or other expenses of the Plan (including, but not limited to, taxes) allocable to the Participant’s Deferred Compensation Account, as determined by the Committee in its Sole Discretion, and (iv) decreased by any amount that the Participant is not entitled to receive pursuant to Sections 5.01. The earnings factor will equal an amount that the Committee determines proper for each Participant in its Sole Discretion. The Committee may elect, in its Sole Discretion, that the earnings factor for each Participant will equal the amount that the Participant’s Deferred Compensation Account would have earned had it been invested in one or more investment options designated by the Committee from time to time for such purpose. If the Committee elects to establish investment options, Participants who are granted the option to direct the investment of their Deferred Compensation Accounts shall elect, at such time and in such manner as the Committee may from time to time prescribe, the investment options used to determine the earnings factor applicable to such Participant’s Deferred Compensation Account. Changes in such elections may be made at such time and in such manner as the Committee may determine in its Sole Discretion. Subject to the Committee’s right, in its Sole Discretion, to change, eliminate, modify, or alter investment options under the Plan, any investment election shall be deemed to continue until revoked or modified by the Participant. In the event a Participant fails or refuses to make an election among the investment options established by the Committee, the Committee may designate a default investment option and
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the Participant will be deemed to have elected to have earnings (if any) credited to the Participant’s Deferred Compensation Account by reference to such investment option. If the Committee determines that an investment option is no longer suitable, it may freeze additional elections to have earnings credited by reference to such option and may select another investment option. Alternatively, the Committee may delete the unsuitable investment option for all existing and future elections and may direct that elections with respect to the unsuitable option be transferred to a new option.
Notwithstanding anything to the contrary, Employees who were employed by the Employer as of the Closing Date shall be deemed, in the absence of a contrary election prior to the Closing Date, to have elected to invest such Participant’s Deferred Compensation Account in the same manner as the Participant’s election under the Raytheon Excess Savings Plan on the day before the Closing Date, provided that the Committee may designate one or more funds which shall automatically be substituted for any election to invest in Raytheon Common Stock.
Section 4.03.Statement of Account. The Committee shall make available to each Participant, at least annually, a statement setting forth the balance to the credit of each Participant in his or her Deferred Compensation Account.
ARTICLE V – BENEFITS
Section 5.01.General. Each Participant (or if the Participant is deceased, the Participant’s Beneficiary) shall be entitled to receive, at the time and in the manner set forth in Section 5.03, the sum of: (i) the amount (if any) credited to the Participant’s Salary Reduction Account, (ii) the amount (if any) credited to the Participant’s Employer Match Account, (iii) the amount (if any) credited to the Participant’s Employer Contribution Account, and (iv) any other amounts (if any) credited to the Participant’s Deferred Compensation Account, less all of the following: (i) all amounts sufficient to satisfy all federal, state, and local withholding requirements, and (ii) any reduction required pursuant to Section 11.12.
Section 5.02.Beneficiary Designations. In the event a Participant dies before receiving payment of all amounts payable to Participant under the Plan, payment of the remaining amounts shall be made to the Participant’s Beneficiary. The Beneficiary of a Participant shall be the person, persons, entity, or entities designated by the Participant on a beneficiary designation form provided by the Committee. A Participant shall have the right to change the Participant’s Beneficiary designation at any time;provided,however, that no change of a Beneficiary shall be effective until received and accepted by the Committee. In the event a Participant dies without having a Beneficiary designation in force, or in the event no Beneficiary is alive or in being at the time of the Participant’s death, all payments due hereunder shall be made to Participant’s surviving spouse or, if the Participant leaves no surviving spouse, to the Participant’s estate.
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If the Committee has any doubt as to the proper Beneficiary to receive payments hereunder, it shall have the right to withhold payment until the matter is finally adjudicated. Any payment made in good faith and in accordance with the provisions of the Plan and a Participant’s Beneficiary designation form shall fully discharge the Employer (and all Affiliated Companies), the Committee, and all other persons from all further obligations with respect to such payment.
Section 5.03.Payment. Payment of the portion of the Participant’s Deferred Compensation Account that the Participant is entitled to receive hereunder shall be made in a lump sum payment or in annual installment payments of five, ten, or fifteen years, as elected by the Participant, with payment commencing during the month of January following the calendar year in which the Participant incurs a Separation from Service (or, in the case of a Participant who is a Specified Employee and who incurs a Separation from Service other than due to death, during the first month that begins on or after the 6-month anniversary of the Specified Employee’s Separation from Service, if such month is later than the month of January following the calendar year in which the Specified Employee incurs the Separation from Service). In no event will payment commence earlier or later than during the calendar year after the year in which the Participant incurs a Separation from Service. For purposes of this Plan, no election to receive installment payments shall be valid unless such election is made within 30 days after the Employee is first designated as a Participant by the Committee. The failure to make a timely election by a Participant shall require payment to be made in one lump sum payment. Subject to the provisions of Section 11.15 hereof, a Participant may make a written request to the Committee to change an election previously made (or deemed made) and elect to receive payment of the Participant’s benefits (as specified above) in a different form, and the Committee may, in its Sole Discretion, grant such request.
In the case of payment of all or a portion of the Participant’s Deferred Compensation Account in installment payments, the earnings factor (as determined by the Committee in its Sole Discretion pursuant to Section 4.02) will be applied to the portion of Participant’s Deferred Compensation Account remaining to be paid to the Participant.
All elections under this Section 5.03 shall be made upon such form or forms and in such manner as the Committee may from time to time establish.
ARTICLE VI – SOURCE OF BENEFITS
Section 6.01.Source of Benefits. Amounts payable hereunder shall be paid exclusively from the general assets of the Employer. The Employer’s obligation under this Plan shall constitute a mere promise to pay benefits in the future, and no person entitled to payment hereunder shall have any claim, right, security interest, or other interest in any fund, trust, account, insurance contract, or other asset of Employer. The Employer is not obligated to invest in any specific assets or fund, but it may invest in any asset or assets it deems advisable in order to provide a means for the payment of any liabilities under this Plan and may contribute amounts to a trust conforming to the requirements of Revenue Procedure 92-
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64, as amended. Each Participant shall be an unsecured general creditor of the Employer and shall have no interest whatsoever in any such assets or fund. The Employer’s liability for the payment of benefits hereunder shall be evidenced only by this Plan.
Section 6.02.Multiple Employers. In the event a Participant is or has been employed by two or more Employers and is entitled to a benefit from more than one Employer under this Plan, the liability for the payment of such Participant’s benefits under this Plan shall be apportioned among the Employers based upon a determination made by the Committee in its Sole Discretion. A Participant may only secure payment of benefits from the Employer to whom the Committee has apportioned liability for the benefits.
ARTICLE VII – ADMINISTRATION
Section 7.01.Committee. The Committee shall have full power to administer this Plan in all of its details, which powers shall include, but are not limited to, the authority, in addition to all other powers provided by this Plan, to:
| A. | Determine in its Sole Discretion the eligibility of any individual to participate in the Plan; |
| B. | Make discretionary interpretations regarding the terms of the Plan and make factual findings with respect to any issue arising under the Plan, including, but not limited to, the power to determine whether an individual is eligible to participate in the Plan or receive benefits under the Plan and whether an individual has incurred a Separation from Service, with its interpretation to be final and conclusive; |
| C. | Compute the amounts payable for any Participant or other person in accordance with the provisions of the Plan, determine the manner and time for making such payments in accordance with the provisions of the Plan, and determine and authorize the person or persons to whom such payments will be paid; |
| D. | Receive and review claims for benefits and render decisions respecting such claims under the Plan; |
| E. | Make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of this Plan; |
| F. | Appoint such agents, specialists, legal counsel, accountants, consultants, or other persons as the Committee deems advisable to assist in administering the Plan; and |
| G. | Maintain all records of the Plan. |
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Section 7.02.Reliance on Certificates, etc. The members of the Committee, the Board of Directors, and the officers and employees of the Company shall be entitled to rely on all certificates and reports made by any duly appointed accountants and on all opinions given by any duly appointed legal counsel. Such legal counsel may be counsel for the Employer.
ARTICLE XIII – AMENDMENT AND TERMINATION
Section 8.01.Amendment. The Board of Directors reserves the right, at will, at any time and from time to time, to modify, alter, or amend this Plan (including without limitation a retroactive modification, alteration, or amendment), in whole or in part, and any such modification, alteration, or amendment shall be binding upon the Company, the Committee, each Participant, any adopting Employer, and all other persons;provided,however, that no amendment will reduce the amount of the benefit that a Participant is then entitled to receive (the same as if the Participant had incurred a Separation from Service as of such date) without the Participant’s (or present-interest Beneficiary’s) written consent. Notwithstanding the foregoing, no consent shall be required and the Board of Directors shall have the right to modify, alter, or amend this Plan (including a retroactive modification, alteration or amendment), at will and at any time, if it determines, in its Sole Discretion, that such amendment is necessary to comply with applicable law, which shall include, but shall not be limited to, the right to retroactively apply any amendments necessary to keep this Plan an unfunded employee benefit plan described in Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA or to comply with any applicable provision of the Code or ERISA or any judicial or administrative guidance.
Section 8.02.Termination. The Company has established this Plan with the bona fide intention and expectation that it will be continued indefinitely, but the Company will have no obligation whatsoever to maintain this Plan for any given length of time and may, at will and at any time, discontinue or terminate this Plan in whole or in part. In addition, an adopting Employer shall have the right to discontinue or terminate its participation in this Plan as to its Employees. Upon a complete or partial termination of the Plan, each affected Participant (and present-interest Beneficiary) shall be given notice of the termination and shall be entitled to receive benefits in accordance with Article V.
ARTICLE IX – RESTRICTIONS ON ALIENATION
Section 9.01.Restrictions on Alienation. Until the actual receipt of any benefit under this Plan by a Participant or Beneficiary, no right or benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, assignment, transfer, pledge, encumbrance, garnishment, execution, levy, or charge of any kind, whether voluntary or involuntary, including assignment or transfer to satisfy any liability for alimony or other payments for property settlement or support of a spouse or former spouse or other relative of a Participant or Beneficiary, whether upon divorce, legal separation, or otherwise. Any attempt to anticipate, alienate, sell, assign, transfer, pledge, encumber, garnish, execute upon,
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levy upon, or charge any right or benefit under the Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, engagements, or torts of the person entitled to such benefit, and no right or benefit hereunder shall be considered an asset of such person in the event of his or her divorce, insolvency, or bankruptcy. The rights of a Participant or a Beneficiary hereunder shall not be subject in any manner to attachment or other legal process for the debts of the Participant or such Beneficiary.
ARTICLE X – CLAIMS PROCEDURES
Section 10.01.Claims Procedures. Any Participant or Beneficiary of a deceased Participant (such participant or Beneficiary being referred to below as a “Claimant”) may deliver to the Plan Administrator a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. Any such determination by the Administrator shall be made pursuant to the following procedures, which shall be conducted in a manner designed to comply with Section 503 of ERISA:
| A. | Step 1. Claims for a benefit should be filed by a Claimant as soon as practicable after the Claimant knows or should know that a dispute has arisen with respect to the benefit, but at least thirty (30) days prior to the Claimant’s actual retirement date or, if applicable, within sixty (60) days after the death, disability or termination of employment of the Participant whose benefit is at issue, by mailing a copy of the claim to Hawker Beechcraft Benefits Department, Human Resources, 10511 East Central, Wichita, Kansas 67206. |
| B. | Step 2. In the event that a claim is wholly or partially denied by the Plan Administrator, the Plan Administrator shall, within ninety (90) days following receipt of the claim, so advise the Claimant in writing setting forth: the specific reason or reasons for the denial; specific reference to pertinent Plan provisions on which the denial is based; a description of any additional material or information necessary for the Claimant to perfect the claim; an explanation as to why such material or information is necessary; and an explanation of the Plan’s claim review procedures (including, if applicable, a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination). If the Plan Administrator determines that an extension of time for processing the claim is necessary, written notice will be provided to the Claimant before the end of the initial 90-day period and will indicate the special circumstances that require the extension. The extension will not exceed a 90-day period of time. |
| C. | Step 3. Within sixty (60) days following receipt of the denial of a claim for a benefit, a Claimant desiring to have the denial appealed shall file a request for review by an officer of the Company or a review committee, as designated by the Company, by mailing a copy thereof to the address shown in Section 10.01.A.; provided, however, that such officer or any member of |
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such review committee, as applicable, may not be the person who made the initial adverse benefit determination nor a subordinate of such person. |
| D. | Step 4. Within thirty (30) days following receipt of a request for review, the designated officer or review committee shall provide the Claimant for a further opportunity to present his or her position. At the designated officer or review committee’s discretion, such presentation may be through an oral or written presentation. Prior to such presentation, the Claimant shall be permitted the opportunity to review pertinent documents and to submit issues and comments in writing. Within a reasonable time following presentation of the Claimant’s position, which usually should not exceed thirty (30) days, the designated officer or review committee shall inform the Claimant in writing of the decision on review setting forth the reasons for such decision and citing pertinent provisions in the Plan. Notice of the decision on review also will include a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits, and will include, if applicable, a statement of the Claimant’s right to bring an action under ERISA Section 502(a). |
Section 10.02.Litigation of Claim. Prior to initiating legal action concerning a claim in any court, state or federal, against the Plan, any trust used in conjunction with the Plan, the Employer, the Company, or the Plan Administrator, a claimant must first exhaust the administrative remedies provided in this Article X. Failure to exhaust the administrative remedies provided for in this Article X will be a bar to any civil action concerning a claim for benefits under the Plan.
ARTICLE XI – MISCELLANEOUS
Section 11.01.Effective Date. This amended and restated Plan shall be effective from and after the date of its approval by the Board of Directors (the “Effective Date”).
Section 11.02.No Guarantee of Interests. Neither the Employer, Committee, nor Board of Directors (nor any of their members) may guarantee the payment of any amounts which may be or becomes due to any person or entity under this Plan. The liability to make any payment under this Plan is limited to the then available assets of the Employer.
Section 11.03.Payments Net of Withholding and Other Amounts. Notwithstanding any other provision of the Plan, all payments shall be net of any amount sufficient to satisfy all federal, state, and local withholding tax requirements.
Section 11.04.Binding on Successors. This Plan shall be binding upon all Participants, their respective heirs, and personal representatives and upon the Employer, its successors, and assigns.
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Section 11.05.Adoption by Other Employers. Any employer, corporation or other entity with employees now in existence or hereafter formed or acquired, which is not already an Employer under this Plan, and which is otherwise legally eligible, may in the future, with the consent and approval of the Company, adopt this Plan, and thereby, from and after the specified effective date, become an Employer under this Plan. However, the sole and absolute right to amend the Plan is reserved to the Company. It shall not be necessary for the adopting corporation or entity to sign or execute the original or the amended Plan documents. The administrative powers and control of the Company as provided in the Plan, including the sole right of amendment and of appointment and removal of the Committee, shall not be diminished by reason of the participation of any such adopting entity in this Plan.
Section 11.06.Minors and Incompetents. If any person to whom a benefit is payable under this Plan is legally incompetent, either by reason of age or by reason of mental or physical disability, the Committee is authorized to cause the payments becoming due to such person to be made to another for his or her benefit without responsibility of the Company, the Employer, the Committee or the Board of Directors to see to the application of such payments. Payments made pursuant to this authority shall constitute a complete discharge of all obligations hereunder.
Section 11.07.Erroneous Payments. If any person receives any amount of benefits that the Committee in its Sole Discretion later determines that such person was not entitled to receive under the terms of the Plan, such person shall be required to immediately make reimbursement to the Employer.
Section 11.08.Headings. The headings used in this Plan are inserted for reference purposes only and shall not be deemed to limit or affect in any way the meaning or interpretation of any of the terms or provisions herein.
Section 11.09.Notices. Any notices or communications permitted or required to be given herein by any Participant, the Company, the Committee, the Employer, or any other person shall be deemed given when delivered or when placed in the United States mail in an envelope addressed to the last communicated address of the person to whom the notice is being given, with adequate postage thereon prepaid.
Section 11.10.Severability. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions thereof, and the Plan shall be construed and enforced as if such provisions had not been included.
Section 11.11.No Contract of Employment. Nothing contained herein shall be construed to constitute a contract of employment between any employee and any employer. Nothing herein contained shall be deemed to give any employee the right to be retained in the employ of an employer or to interfere with the right of the employer to discharge any employee at any time without regard to the effect such discharge might have on the employee as a Participant under this Plan. Further, nothing in this Plan will give any service
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provider the right to continue performing services for any Employer (whether as a consultant, independent contractor, director, or otherwise), notwithstanding the effect termination of the service relationship might have on the service provider as a Participant under this Plan.
Section 11.12.Certain Limitations. In the event the Employer is subject to legal limitations on the payment of benefits, then benefit payments hereunder shall be reduced or eliminated, as the case may be, to comply with such legal limitations.
Section 11.13.Governing Law. It is the Company’s intention that the Plan comply with and satisfy the applicable provisions of the Code and ERISA, including, but not limited to, Section 409A of the Code, and, consistent with such provisions of the laws of the United States of America and in all other respects, the Plan and all agreements entered into under the Plan shall be governed, construed, administered, and regulated in accordance with the laws of the State of Kansas, without regard to the principles of conflicts of law, to the extent such laws are not preempted by the laws of the United States of America. Any action concerning the Plan or any agreement entered into under the Plan shall be maintained exclusively in the state or federal courts in Kansas.
Section 11.14.Nonexclusivity of the Plan. The adoption of the Plan by the Board of Directors shall not be construed as creating any limitations on the power of the Board of Directors to adopt such other incentive arrangements as it may deem desirable.
Section 11.15.Changes in Time or Form of Distribution. Notwithstanding any other provision of the Plan, any subsequent election by a Participant under the Plan that has the effect of delaying the time or changing the form of any distribution or payment under the Plan shall satisfy the following requirements:
| A. | Such election shall not take effect until at least 12 months after the date on which the election is made; |
| B. | In the case of an election related to distribution or payment on account of Separation from Service or reaching a specified time, the first payment with respect to which the election is made must be deferred for a period of not less than 5 years from the date such payment otherwise would have been made; and |
| C. | In the case of an election related to a distribution or payment on account of reaching a specified time, the election shall not be made less than 12 months before the date of the first scheduled payment with respect to such distribution. |
Section 11.16.No Acceleration. Except as otherwise permitted by law, the time or schedule of any payment of benefits under this Plan will not be accelerated, and no interpretation, modification, alteration, amendment, or complete or partial termination of this
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Plan, or any provision of this Plan, will cause or permit acceleration of the time or schedule of any payment of benefits under this Plan.
Section 11.17.Transition Relief for Change in Payment Elections During 2007. A Participant may make a written request to the Committee prior to December 31, 2007, to change an election previously made (or deemed made) pursuant to Section 5.03 and to elect to receive payment of the Participant’s benefits (as specified in Section 5.03 above) and the Committee may, in its Sole Discretion, grant such request. Any such election change will not be treated as a change in the time and form of payment under Code Section 409A or an acceleration of payment under Code Section 409A(a)(3), and this Section 11.17 shall override any inconsistent provision hereof.
IN WITNESS WHEREOF,the Company has caused this amended and restated Plan to be executed the 16th day of September, 2009, effective as of the Effective Date.
| HAWKER BEECHCRAFT CORPORATION | ||
| By: | /s/ Rich Jiwanlal | |
| Name: | Rich Jiwanlal | |
| Title: | Vice President - Human Resources | |
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Exhibit 31.1.1
CERTIFICATIONS
I, W. W. Boisture, Jr., certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Hawker Beechcraft Acquisition Company, LLC; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 6, 2009
| /s/ W. W. Boisture, Jr. |
| W. W. Boisture, Jr. |
| President |
| (Principal Executive Officer) |
Exhibit 31.1.2
CERTIFICATIONS
I, W. W. Boisture, Jr., certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Hawker Beechcraft Notes Company; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 6, 2009
| /s/ W. W. Boisture, Jr. |
| W. W. Boisture, Jr. |
| Chief Executive Officer |
| (Principal Executive Officer) |
Exhibit 31.1.3
CERTIFICATIONS
I, Sidney E. Anderson, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Hawker Beechcraft Acquisition Company, LLC; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 6, 2009
| /s/ Sidney E. Anderson |
| Sidney E. Anderson |
| Vice President and Chief Financial Officer |
| (Principal Financial Officer) |
Exhibit 31.1.4
CERTIFICATIONS
I, Sidney E. Anderson, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Hawker Beechcraft Notes Company; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 6, 2009
| /s/ Sidney E. Anderson |
| Sidney E. Anderson |
| Vice President and Chief Financial Officer |
| (Principal Financial Officer) |
Exhibit 32.1.1
CERTIFICATION
I, W. W. Boisture, Jr., principal executive officer of Hawker Beechcraft Acquisition Company, LLC (the “Company”), hereby certify that:
| (1) | The Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ W. W. Boisture, Jr. |
W. W. Boisture, Jr., President (Principal Executive Officer) |
November 6, 2009
Exhibit 32.1.2
CERTIFICATION
I, W. W. Boisture, Jr., principal executive officer of Hawker Beechcraft Notes Company (the “Company”), hereby certify that:
| (1) | The Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ W. W. Boisture, Jr. |
W. W. Boisture, Jr., Chief Executive Officer (Principal Executive Officer) |
November 6, 2009
Exhibit 32.1.3
CERTIFICATION
I, Sidney E. Anderson, principal financial officer of Hawker Beechcraft Acquisition Company, LLC (the “Company”), hereby certify that:
| (1) | The Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Sidney E. Anderson |
Sidney E. Anderson, Vice President and Chief Financial Officer (Principal Financial Officer) |
November 6, 2009
Exhibit 32.1.4
CERTIFICATION
I, Sidney E. Anderson, principal financial officer of Hawker Beechcraft Notes Company (the “Company”), hereby certify that:
| (1) | The Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Sidney E. Anderson |
Sidney E. Anderson, Vice President and Chief Financial Officer (Principal Financial Officer) |
November 6, 2009
