e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 333-112528

Vought Aircraft Industries, Inc.

(Exact name of registrant as specified in its charter)


Delaware		75-2884072

(State of Incorporation)		(I.R.S. Employer Identification Number)

201 East John Carpenter Freeway, Tower 1, Suite 900 Irving, Texas		75062

(Address of Principal executive offices)		(Zip Code)

(972) 946-2011
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer þ	Smaller reporting company o
		(Do not check if a 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 o No þ

The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, at August 7, 2008 was 24,798,382.

Cautionary Statement Regarding Forward Looking Statements

Some of the statements made in this Quarterly Report on Form 10-Q are forward-looking statements. These forward looking statements are based upon our current expectations and projections about future events. When used in this quarterly report, the words “believe,” “anticipate,” “intend,” “estimate,” “expect,” “should,” “may” and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this quarterly report are primarily located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are found in other locations as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this quarterly report completely and with the understanding that actual future results may be materially different from what we expect. We will not update forward-looking statements even though our situation may change in the future.

Specific factors that might cause actual results to differ from our expectations include, but are not limited to:

	•		significant considerations and risks discussed in this report, our Quarterly Report on Form 10-Q for the period ended March 30, 2008 and our Annual Report on Form 10-K for the year ended December 31, 2007;

	•		global and domestic financial market conditions and the results of financing efforts;

	•		competition;

	•		operating risks and the amounts and timing of revenues and expenses;

	•		project delays or cancellations;

	•		global and domestic market or business conditions and fluctuations in demand;

	•		the impact of recent and future federal and state regulatory proceedings and changes, including changes in environmental and other laws and regulations to which we are subject, as well as changes in the application of existing laws and regulations;

	•		political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States;

	•		the effect of and changes in economic conditions in the areas in which we operate;

	•		environmental constraints on operations and environmental liabilities arising out of past or present operations;

	•		current and future litigation;

	•		the direct or indirect impact on our company’s business resulting from terrorist incidents or responses to such incidents, including the effect on the availability of and premiums on insurance; and

	•		weather and other natural phenomena.

Vought Aircraft Industries, Inc.

Consolidated Balance Sheets

(dollars in millions, except par value per share )


	June 29,
	2008			December 31,
	(unaudited)			2007
Assets
Current assets:
Cash and cash equivalents	$	243.8		$	75.6
Trade and other receivables		121.2			81.4
Inventories		336.4			362.8
Other current assets		9.5			6.4

Total current assets		710.9			526.2

Property, plant and equipment, net		516.1			507.0
Goodwill		527.7			527.7
Identifiable intangible assets, net		33.0			40.1
Debt origination costs, net and other assets		15.6			11.5
Investment in joint venture		—			8.4

Total assets	$	1,803.3		$	1,620.9


Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable, trade	$	140.6		$	178.7
Accrued and other liabilities		68.9			74.1
Accrued payroll and employee benefits		44.9			48.2
Accrued post-retirement benefits-current		47.2			47.2
Accrued pension-current		0.3			0.7
Current portion of long-term bank debt		5.9			4.0
Accrued contract liabilities		185.2			230.4

Total current liabilities		493.0			583.3

Long-term liabilities:
Accrued post-retirement benefits		435.2			482.0
Accrued pension		345.2			361.2
Long-term bank debt, net of current portion		596.6			409.0
Long-term bond debt		270.0			270.0
Other non-current liabilities		177.2			181.2


Total liabilities		2,317.2			2,286.7

Stockholders’ equity (deficit):
Common stock, par value $.01 per share; 50,000,000 shares authorized, 24,798,382 and 24,768,991 issued and outstanding at June 29, 2008 and December 31, 2007, respectively		0.3			0.3
Additional paid-in capital		418.9			417.4
Shares held in rabbi trust		(1.6	)		(1.6	)
Accumulated deficit		(487.0	)		(595.0	)
Accumulated other comprehensive loss		(444.5	)		(486.9	)

Total stockholders’ equity (deficit)	$	(513.9	)	$	(665.8	)


Total liabilities and stockholders’ equity (deficit)	$	1,803.3		$	1,620.9

See accompanying notes

Vought Aircraft Industries, Inc.

Consolidated Statements of Cash Flows

(unaudited, in millions)


	Six Months Ended
	June 29,			July 1,
	2008			2007
Operating activities
Net income	$	108.0		$	45.3
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		32.8			30.4
Stock compensation expense		1.4			1.8
Equity in losses of joint venture		0.6			0.7
(Gain) Loss from asset disposals		(48.5	)		0.6
Changes in current assets and liabilities:
Trade and other receivables		(39.8	)		(32.9	)
Inventories		26.4			(13.7	)
Other current assets		(3.1	)		(1.4	)
Accounts payable, trade		(38.1	)		(7.2	)
Accrued payroll and employee benefits		(3.3	)		(9.5	)
Accrued and other liabilities		(5.6	)		13.1
Accrued contract liabilities		(45.2	)		1.4
Other assets and liabilities—long-term		(23.3	)		(26.9	)

Net cash provided by (used in) operating activities		(37.7	)		1.7
Investing activities
Capital expenditures		(32.8	)		(31.0	)
Proceeds from sale of assets		—			23.1
Proceeds from sale of joint venture		55.0			—
Investment in joint venture		—			(14.0	)

Net cash provided by (used in) investing activities		22.2			(21.9	)
Financing activities
Proceeds from short-term bank debt		153.0			—
Payments on short-term bank debt		(153.0	)		—
Proceeds from Incremental Facility		184.6			—
Payments on long-term bank debt		(1.0	)		(2.0	)
Payments on capital leases		—			(0.6	)
Proceeds from sale of common stock		0.1			—

Net cash provided by (used in) financing activities		183.7			(2.6	)

Net increase (decrease) in cash and cash equivalents		168.2			(22.8	)
Cash and cash equivalents at beginning of period		75.6			93.4

Cash and cash equivalents at end of period	$	243.8		$	70.6

See accompanying notes

Vought Aircraft Industries, Inc.

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

Period Ending June 29, 2008

Note 1 – Organization and Basis of Presentation

Vought Aircraft Industries, Inc. (“Vought”) and its wholly owned subsidiaries, VAC Industries, Inc., Vought Commercial Aircraft Corporation and Contour Aerospace Corporation (“Contour”) are herein referred to collectively as “we” or the “Company.” We are a leading global manufacturer of aerostructure products for commercial, military and business jet aircraft. We have a long history of developing and manufacturing a wide range of complex aerostructures such as fuselages, wing and tail assemblies, engine nacelles, flight control surfaces as well as helicopter cabins. Our diverse and long-standing customer base consists of the leading aerospace original equipment manufacturers, or OEMs, including Airbus, Bell Helicopter, Boeing, Cessna, Gulfstream, Hawker Beechcraft, Lockheed Martin, Northrop Grumman and Sikorsky, as well as the U.S. Air Force.

Our heritage as an aircraft manufacturer extends to the company founded in 1917 by aviation pioneer Chance Milton Vought. From 1994 to 2000, we operated as Northrop Grumman’s commercial aircraft division. Vought was formed in 2000 in connection with The Carlyle Group’s acquisition of Northrop Grumman’s aerostructures business. In July 2003, we purchased The Aerostructures Corp, with manufacturing sites in Nashville, Tennessee; Brea, California; and Everett, Washington. We are a Delaware corporation with our principal executive offices located at 201 East John Carpenter Freeway, Tower 1, Suite 900, Irving, TX 75062, and we perform production work at sites throughout the United States, including California, Texas, Georgia, Tennessee, Florida, South Carolina and Washington.

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. In the opinion of management, the accompanying interim unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of operations for the interim periods. The results of operations for the three and six month periods ended June 29, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 18, 2008.

It is our practice to close our books and records based on a thirteen-week quarter, which can lead to different period end dates for comparative purposes. The interim financial statements and tables of financial information included herein are labeled based on that convention. This practice only affects interim periods, as our fiscal years end on December 31.

The consolidated balance sheet at December 31, 2007 presented herein has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Note 2 – Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. We adopted SFAS No. 157 for our financial assets and liabilities on January 1, 2008 and it has not materially affected our financial statements. The FAS 157 requirements for certain non-financial assets and liabilities have been deferred until the first quarter of 2009 in accordance with Financial Accounting Standards Board Staff Position (FSP) 157-2. See Note 15 — Fair Value Measurements for a summary of the assets and liabilities that are measured at fair value as of June 29, 2008.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 expands the use of fair value measurement by permitting entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. We adopted SFAS No. 159 on January 1, 2008 and did not elect the fair value option. Thus, it had no material impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141(R)), which replaces SFAS No. 141. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, any non-controlling interest in the acquiree, and any goodwill acquired to be measured at their fair value at the acquisition date. The Statement also establishes disclosure requirements, which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for acquisitions occurring in fiscal years beginning after December 15, 2008. The adoption of SFAS No. 141(R) will have an impact on accounting for business combinations that occur after the adoption date.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 requires entities to provide greater transparency through additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 is not expected to have a material impact on our financial statements as we currently do not participate in derivative or hedging instruments.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States (“GAAP”). SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of SFAS No. 162 to have a material impact on our consolidated financial statements.

Note 3 – Inventories

Costs included in inventory consist of all direct production costs, manufacturing and engineering overhead, production tooling costs and certain general and administrative expenses.

Inventories consisted of the following:


	June 29,			December 31,
	2008			2007
	(in millions)
Production costs of contracts in process	$	856.9		$	727.7
Finished goods		2.1			2.0
Less: unliquidated progress payments		(522.6	)		(366.9	)

Total inventories	$	336.4		$	362.8

During the six month period ended June 29, 2008, we released purchase accounting reserves of $22.6 million for the 747 program to reflect the scheduled completion of the deliveries for the 747-400 model. They were released from inventory and accrued contract liabilities to income through the Cost of Sales caption in our Consolidated Statement of Operations, increasing our reported income for the period. Additionally, we accelerated the useful life of an intangible asset associated with the 747 program for the same reason. Refer to Note 4 — Goodwill and Intangible Assets for disclosure of the impact of the change in useful life.

Note 4 – Goodwill and Intangible Assets

Goodwill is tested for impairment, at least annually, in accordance with the provisions of SFAS 142 Goodwill and Other Intangible Assets (SFAS 142). Under SFAS 142, the first step of the goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit with its carrying value. We have concluded that the Company is a single reporting unit. Accordingly, all assets and liabilities are used to determine our carrying value. Because we currently have an accumulated deficit, no impairment charges were recognized in the six months ended June 29, 2008 or the six months ended July 1, 2007.

We use an independent valuation firm to assist in the estimation of enterprise fair value using standard valuation techniques such as discounted cash flow, market multiples and comparable transactions. The discounted cash flow fair value estimates are based on management’s projected future cash flows and the estimated weighted average cost of capital. The estimated weighted average cost of capital is based on the risk-free interest rate and other factors such as equity risk premiums and the ratio of total debt and equity capital.

We must make assumptions regarding estimated future cash flows and other factors used by the independent valuation firm to determine the fair value. If these estimates or the related assumptions change, we may be required to record non-cash impairment charges for goodwill in the future.

Intangible assets consisted of the following:


	June 29,			December 31,
	2008			2007
	(in millions)
Programs and contracts	$	137.3		$	137.3
Less: accumulated amortization		(104.3	)		(97.2	)

Identifiable intangible assets, net	$	33.0		$	40.1

During the six month period ended June 29, 2008, we made a change to the estimated useful life of an intangible asset associated with our 747 program to reflect a change in the estimated period during which the remaining deliveries of the 747-400 model would be made. As of March 30, 2008, the useful life was accelerated from 28 months to 7 months. This change in estimate resulted in an additional $1.2 million recorded to selling, general and administrative expenses. Including this change, scheduled remaining amortization of identifiable intangible assets as of June 29, 2008 is as follows:


	(in millions)
2008	$	5.9
2009		6.8
2010		4.8
2011		2.1
2012		2.1
Thereafter		11.3

Total remaining amortization of identifiable intangible assets	$	33.0

Note 5 – Pension and Other Post-retirement Benefits

The components of net periodic benefit cost for our pension plans and other post-retirement benefit plans were as follows:


	Pension Benefits												Other Post-retirement Benefits
	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 29,			July 1,			June 29,			July 1,			June 29,			July 1,			June 29,			July 1,
	2008			2007			2008			2007			2008			2007			2008			2007
	(in millions)
Components of net periodic benefit cost (income):
Service cost	$	4.7		$	4.7		$	9.5		$	9.4		$	1.2		$	1.4		$	2.5		$	2.8
Interest cost		27.5			25.6			54.8			51.1			7.2			8.2			14.9			16.4
Expected return on plan assets		(31.0	)		(29.1	)		(62.1	)		(58.5	)		—			—			—			—
Amortization of net (gain) loss		6.9			9.2			13.8			18.4			1.4			1.5			2.7			3.0
Amortization of prior service cost		2.9			1.0			5.9			2.0			(5.4	)		(2.4	)		(9.2	)		(4.7	)
Plan settlement or curtailment (gain) loss (a)		—			1.3			—			5.9			—			—			—			—

Net periodic benefit cost	$	11.0		$	12.7		$	21.9		$	28.3		$	4.4		$	8.7		$	10.9		$	17.5


Defined contribution plans cost	$	4.6		$	1.7		$	9.3		$	3.7


(a)		As a result of lump sum payments made under provisions of our non-qualified (“excess”) pension plan, we recorded pension settlement charges of $4.6 million and $1.3 million as part of net periodic benefit cost and other comprehensive loss during the first and second quarters of 2007, respectively.

We periodically experience events or take actions that affect our benefit plans. Some of these events or actions require remeasurements and result in special charges. The following summarizes the key events that affect our net periodic benefit cost and obligations:

	•		During February and April of 2008, two of our union represented groups ratified new collective bargaining agreements. Those agreements each provide for a freeze in pension benefit accruals, effective December 31, 2008, for bargaining unit employees who, as of December 31, 2007, had less than 16 years of bargaining unit seniority. Employees subject to the pension freeze, and any employees hired on or after March 1, 2008 for the first group and April 1, 2008 for the second group, will receive a defined contribution benefit. The agreements provide for a one-time retirement incentive program to be offered to eligible employees during 2008. The agreements also provided for certain modifications to the retiree medical benefits for bargaining unit retirees and eliminated retiree medical coverage for any bargaining unit employees hired on or after January 1, 2008.

	•		Also, during the six months ended June 29, 2008, we announced amendments to medical plans for two groups of non-represented, current retirees. Effective January 1, 2008, medical coverage for participants in those two groups will be eliminated at age 65 and replaced with a fixed monthly stipend.

	•		The aforementioned 2008 changes led to remeasurement of affected plans’ assets and obligations, which resulted in a $14.9 million increase in unfunded liability for pension plans and a $44.1 million decrease in liability for the OPEB plans remeasured.

Note 6 – Commitments

Warranty Reserve. We have established a reserve to provide for the estimated future cost of warranties on our delivered products. We periodically review the reserve and adjustments are made accordingly. A provision for warranties on products delivered is made on the basis of our historical experience and identified warranty issues. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. The majority of our agreements include a three-year warranty.

The following is a roll-forward of amounts accrued for warranty reserve included in Current and Long-term liabilities:


	Warranty
	Reserve
	(in millions)
Balance at December 31, 2006	$	6.8
Warranty costs incurred		(0.4	)
Warranties issued		0.8

Balance at December 31, 2007	$	7.2

Warranty costs incurred		(0.3	)
Warranties issued		0.9

Balance at June 29, 2008	$	7.8

Note 7 – Environmental Contingencies

We accrue environmental liabilities when we determine we are responsible for remediation costs, it is probable that a liability has been incurred and such liability amounts are reasonably estimable. When only a range of amounts is estimated and no amount within the range is more probable than another, the minimum amount in the range is recorded in other current and non-current liabilities.

The acquisition agreement between Northrop Grumman Corporation and Vought transferred certain pre-existing (as of July 24, 2000) environmental liabilities to us. We are liable for the first $7.5 million and 20% of the amount between $7.5 million and $30 million for environmental costs incurred relating to pre-existing matters as of July 24, 2000. Pre-existing environmental liabilities exceeding our $12 million liability limit remain the responsibility of Northrop Grumman Corporation under the terms of the acquisition agreement, to the extent they are identified within 10 years from the acquisition date. Thereafter, to the extent environmental remediation is required for hazardous materials including asbestos, urea formaldehyde foam insulation or lead-based paints, used as construction materials in, on, or otherwise affixed to structures or improvements on property acquired from Northrop Grumman Corporation, we would be responsible. We have no material outstanding or unasserted asbestos, urea formaldehyde foam insulation or lead-based paint liabilities, including on property acquired from Northrop Grumman Corporation.

We acquired the Nashville, Tennessee facility from Textron Inc. in 1996. In connection with that acquisition, Textron agreed to indemnify us for up to $60 million against any pre-closing environmental liabilities with regard to claims made within ten years of the date on which the facility was acquired, including with respect to a solid waste landfill located onsite that was closed pursuant to a plan approved by the Tennessee Division of Solid Waste Management. Although that indemnity was originally scheduled to expire in August 2006, we believe that the agreement may continue to provide indemnification for certain pre-closing environmental liabilities incurred beyond that expiration date. While there are no currently pending environmental claims relating to the Nashville facility, there is no assurance that environmental claims will not arise in the future, or that such claims will be subject to indemnification.

The following is a roll-forward of amounts accrued for environmental liabilities included in Current and Long-term liabilities:


	Environmental
	Liability
	(in millions)
Balance at January 1, 2007	$	4.1
Environmental costs incurred		(0.3	)

Balance at December 31, 2007		3.8
Environmental costs incurred		(0.3	)

Balance at June 29, 2008	$	3.5

Note 8 – Other Non-Current Liabilities

Other non-current liabilities consisted of the following:


	June 29,		December 31,
	2008		2007
	(in millions)
Deferred income from the sale of Hawthorne facility (a)	$	52.6	$	52.6
State of South Carolina grant monies (b)		62.6		66.7
State of Texas grant monies		35.0		35.0
Deferred worker’s compensation		15.2		15.6
Accrued warranties		7.2		6.6
Other		4.6		4.7

Total other non-current liabilities	$	177.2	$	181.2


(a)		In July 2005, we sold our Hawthorne facility and concurrently signed an agreement to lease back a certain portion of the facility from July 2005 to December 2010, with two additional five-year renewal options. Due to certain contractual obligations, which require our continuing involvement in the facility, this transaction has been recorded as a financing transaction and not as a sale. The cash received in July 2005 of $52.6 million was recorded as a deferred liability on our balance sheet in other non-current liabilities. This liability will remain on our balance sheet until the related contractual obligations are fulfilled or the obligations expire.

(b)		With the activation of the South Carolina plant in June 2006, we began recognizing a portion of the State of South Carolina grant monies as a reduction of depreciation expense, which amounted to $1.7 million and $1.6 million for the six months ended June 29, 2008 and July 1, 2007, respectively. Additionally, during the six month period ended June 29, 2008, we made a required distribution of state grant proceeds of $2.4 million to our former joint venture, Global Aeronautica. See Note 12 — Investment in Joint Venture.

Note 9 – Income Taxes

Effective January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

Because we are in a cumulative net operating loss position, there was no material impact to our consolidated financial position at the date of adoption. The cumulative effects of applying this interpretation resulted in an unrecognized tax benefit of $5.5 million as of December 31, 2007, which caused a reduction of the net operating loss deferred tax asset and a corresponding reduction in the valuation allowance. There was no material change to our unrecognized tax benefits position during the six months ended June 29, 2008. We do not believe that the total amount of unrecognized tax benefits will significantly decrease or increase as of December 31, 2008.

We recognize any accrued interest and penalties related to unrecognized tax benefits in federal income tax expense. As of June 29, 2008, we had no material amounts of interest and penalties accrued related to unrecognized tax benefits.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are subject to examination by the Internal Revenue Service in the U.S. federal tax jurisdiction for the 2000-2007 tax years. We are also subject to examination in various state jurisdictions for the 2000-2007 tax years.

During the six month period ended July 1, 2007, we incurred an $0.8 million expense related to the alternative minimum tax (“AMT”), which arose because of a limitation on the amount of net operating losses available to offset projected taxable income. During the six months ended June 29, 2008, we did not incur an expense related to the AMT. Other than AMT, we have not recorded a federal income tax provision for any period presented because the amount provided for federal income taxes are offset by reductions in our valuation allowance. State income taxes are reported as part of Selling, general and administrative expenses.

Note 10 – Stockholders’ Equity

As of June 29, 2008, we maintained two stock option plans and one incentive award plan under which we have issued share-based awards to our employees and our directors.

2001/2003 Stock Option Plans

During 2001, we adopted the Amended and Restated 2001 Stock Option Plan of Vought Aircraft Industries, Inc., under which 1,500,000 shares of common stock were reserved for issuance for the purpose of providing incentives to employees and directors (the “2001 Stock Option Plan”). Options granted under the plan generally vest within 10 years, but were subject to accelerated vesting based on the ability to meet company performance targets. The incentive options granted to our employees are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code. At June 29, 2008, options granted and outstanding from the 2001 Stock Option Plan to employees and directors amounted to 562,490 shares of which 493,470 are vested and exercisable.

In connection with the acquisition of Aerostructures in 2003, Vought assumed a similar stock option plan maintained by Aerostructures (the “2003 Stock Option Plan). Outstanding options granted under that plan, which had been fully vested pursuant prior to the acquisition, were exchanged for 217,266 of Vought stock options. No new options have been granted under the 2003 Stock Option Plan. At June 29, 2008, all outstanding options under that plan had expired.

A summary of stock option activity for the six month period ended June 29, 2008 is as follows:


						Weighted
						Average
				Weighted		Remaining
				Average		Contractual
				Exercise		Term
	Options			Price		(in years)
Outstanding at December 31, 2007		661,479		$	14.57
Granted		—			—
Forfeited or expired		(98,989	)		11.07
Exercised		—			—

Outstanding at June 29, 2008		562,490		$	15.19		3.7

Vested or expected to vest (a)		562,490			15.19		3.7

Exercisable at June 29, 2008		493,470		$	14.57		3.7


(a)		Represents outstanding options reduced by expected forfeitures. Expected forfeitures assumed under SFAS 123 were zero.

Shares Held in Rabbi Trust

A rabbi trust is a grantor trust, typically established to fund deferred compensation for management. In 2000, we set up a rabbi trust in connection with certain income deferrals made at that time by a number of our then-executives. Shares of company stock were contributed to the rabbi trust in order to fund the obligations to those executives in connection with those deferrals. Our stock held in the trust is recorded at historical cost, and the corresponding deferred compensation liability is recorded at the current fair value of our common stock. Common stock held in the rabbi trust is classified in equity as “Shares held in rabbi trust.” During the three and six month periods ended June 29, 2008, no activity occurred in the rabbi trust account and 158,322 shares remain held in the rabbi trust.

2006 Incentive Plan

During 2006, we adopted the Vought Aircraft Industries, Inc. 2006 Incentive Award Plan (the “2006 Incentive Plan”), under which 2,000,000 shares of common stock are reserved for issuance for the purposes of providing awards to employees and directors. Since inception, these awards have been issued in the form of stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and restricted shares.

Stock Appreciation Rights (SARs)

A summary of SARs activity for the six month period ended June 29, 2008 is as follows:


						Weighted
						Average
				Weighted		Remaining
				Average		Conractual
				Exercise		Term
	SARs			Price		(in years)
Outstanding at December 31, 2007		972,750		$	10.00		8.9
Granted		—			—
Forfeited or expired		(23,400	)		10.00
Exercised		(21,775	)		10.00

Outstanding at June 29, 2008		927,575		$	10.00		8.4

Vested or expected to vest (a)		774,156			10.00		8.4

Exercisable at June 29, 2008		413,686		$	10.00		8.4


(a)		Represents outstanding SARs reduced by expected forfeitures.

During the six month period ended June 29, 2008, the exercise of SARs resulted in the issuance of 9,470 shares of common stock.

Restricted Stock Units (RSUs)

RSUs are awards of stock units that can be converted into common stock. In general, the awards are eligible to vest over a four-year period if certain performance goals are met. No RSUs will vest if the performance goals are not met. Certain awards, granted to the CEO and CFO, vest on the first occurrence of a change in control or a date specified by the agreement.

A summary of RSUs activity for six months ended June 29, 2008 is as follows:


				Grant-date
	RSUs			Fair-Value
Outstanding at December 31, 2007		574,421		$	9.12
Granted		58,840			23.85
Forfeited or expired		(12,500	)		8.79
Converted		—			—

Outstanding at June 29, 2008		620,761		$	10.52

Vested or expected to vest (a)		496,092

Vested at June 29, 2008		107,583		$	9.36


(a)		Represents outstanding RSUs reduced by expected forfeitures.

Restricted Shares

During the six month period ended June 29, 2008, we granted 9,432 restricted shares to outside directors as compensation for their services. These restricted shares will vest over the course of 2008. The restricted shares were valued at the fair value of our common stock at the date of issuance.

Note 11 – Stock-Based Compensation

As described in Note 10 — Stockholders’ Equity, we maintain two stock option plans and one incentive award plan under which we have issued equity-based awards to our employees and our directors. During 2007 and 2008, in accordance with SFAS 123(R), we recognized total compensation expense for all awards as follows:


	Stock Compensation Expense
	Three Months Ended				Six Months Ended
	June 29, 2008		July 1, 2007		June 29, 2008		July 1, 2007
	(in millions)
Stock Options	$	—	$	—	$	—	$	—
Stock appreciation rights (SARs)		0.2		0.5		0.4		0.9
Restricted stock units (RSUs)		0.5		0.5		0.9		0.8
Restricted shares		0.1		—		0.1		0.1

Total stock compensation expense	$	0.8	$	1.0	$	1.4	$	1.8

The terms and assumptions used in calculating stock compensation expense for each category of equity-based awards are included below.

Stock Options

Stock options have been granted for a fixed number of shares to employees and directors with an exercise price equal to no less than the fair value of the shares at the date of grant. We have adopted SFAS 123(R) Share-based Payment (SFAS 123(R)) and elected to apply the “modified prospective” method. SFAS 123(R) requires us to value stock options granted prior to its adoption under the fair value method and expense these amounts over the stock options’ remaining vesting period. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. No additional stock options have been granted since our adoption of SFAS 123(R). The assumptions used in our fair value calculation were as follows:


Expected dividend yield		0	%
Risk free interest rate		3.9% – 4.4	%
Expected term	6 years

The risk free interest rate is based on the U.S. treasury yield curve on the date of grant for the expected term of the option. The expected life of our stock options was based on the vesting term of the options. We recorded $6,335 and $12,670 of stock compensation expense during the three and six months ended June 29, 2008, respectively, and the same amounts in the three and six months ended July 1, 2007.

SARs

The fair value of each SAR is estimated on the date of grant using the Black-Scholes valuation model and based on a number of assumptions including expected term, volatility and interest rates. We do not have publicly traded equity and our history is short, so we have no reliable historical data to estimate the expected term effectively. Therefore, in compliance with SAB 107, we used a temporary “simplified method” to estimate our expected term. Based on the guidance of SFAS 123(R), expected volatility was derived from an index of historical volatilities from several companies that conduct business in the aerospace industry. The risk free interest rate is based on the U.S. treasury yield curve on the date of grant for the expected term of the option. Our estimated forfeiture rate was 11% as of July 1, 2007 but was adjusted to the current level of 26% during the third quarter of 2007.

The assumptions used in our calculations of fair value for the six month period ended July 1, 2007 were as follows:


	2007
Stock price	$	8.79
Strike price	$	10.00
Expected term	6.25 years
Risk free interest rate		4.76 – 5.02	%
Expected volatility		53 – 54	%
Dividend rate		0	%

During the six month period ended June 29, 2008, no SARs were granted. As of June 29, 2008, we had $0.8 million of unrecognized compensation cost remaining.

RSUs

The value of each RSU awarded is the same as the fair market value of our common stock at the date of grant in accordance with SFAS 123(R). Because we do not have publicly traded equity, an independent third party valuation firm computes the fair value of our common stock. Our estimated forfeiture rate was 11% as of July 1, 2007 but was adjusted to the current level of 26% during the third quarter of 2007. However, no forfeiture rate was used in our calculation of the grants to the CEO and CFO that vest upon the first occurrence of a change in control or a date specified in the agreement, due to our assumption that they will remain employed until the vesting of these awards. As of June 29, 2008, we had $2.6 million of unrecognized compensation cost remaining.

Restricted Shares

The restricted shares granted during the six month period ended June 29, 2008 are scheduled to vest during 2008. Those shares were valued at the fair value of our common stock at the date of issuance. We recognized stock compensation expense of approximately $56,000 and $10,000 for the three month periods ended June 29, 2008 and July 1, 2007, respectively. For the six month periods ended June 29, 2008 and July 1, 2007, we recognized stock compensation expense of approximately $112,000 and $47,000, respectively.

Note 12 – Investment in Joint Venture

In April 2005, we entered into a joint venture agreement with Alenia North America (“Alenia”), a subsidiary of Finmeccanica SpA, to form a limited liability company called Global Aeronautica, LLC (“Global Aeronautica”), which integrates major components of the fuselage and performs related testing activities for the Boeing 787 program. We and Alenia, each had a 50% interest in Global Aeronautica.

On June 10, 2008, we sold our entire equity interest in Global Aeronautica to Boeing for $55 million and as a result, recorded a $47.1 million gain on the sale during the three and six month periods ended June 29, 2008. In future periods, our results of operations will not be impacted by this joint venture.

Note 13 – Long-Term Debt

On May 6, 2008, we entered into a joinder agreement with Lehman Brothers Commercial Bank, Lehman Commercial Paper Inc., JPMorgan Chase Bank, N.A., Goldman Sachs Credit Partners L.P., Lehman Brothers Inc. and J.P. Morgan Securities Inc. (the “Incremental Lenders”) whereby the Incremental Lenders agreed to fund an incremental facility (the “Incremental Facility”), pursuant to which we borrowed an additional $200.0 million of term loans pursuant to our existing senior secured credit facilities. We received proceeds, net of discount, fees and expenses, of approximately $184.6 million from the Incremental Facility. We expect to use remaining amounts for general corporate purposes.

As of June 29, 2008, $612.0 million of debt principal is outstanding under our senior secured credit facilities. The $602.5 million balance reflected on the Consolidated Balance Sheet is net of $9.5 million of unamortized original issue discount associated with the Incremental Facility. The interest rates per annum applicable to the Incremental Facility are, at our option, the ABR or Eurodollar Base Rate plus, in each case, an applicable margin equal to 3.00% for ABR loans and 4.00% for Eurodollar Base Rate loans, subject to a Eurodollar Base Rate floor of 3.50%. Our effective interest rate on the Incremental Facility for the three and six month periods ended June 29, 2008 was 9.6%.

Except for amortization and interest rate, the terms of the Incremental Facility, including mandatory prepayments, representations and warranties, covenants and events of default, are the same as those applicable to the existing term loans under our senior secured credit facilities. The term loans under the Incremental Facility will be repayable in equal quarterly installments of $470,000 starting in September 2008, with the balance due on December 22, 2011.

Note 14 – Related Party Transactions

A management agreement between us and our controlling stockholder, The Carlyle Group, requires us to pay an annual fee of $2.0 million for various management services. We incurred fees of $0.5 million and $1.0 million for the three and six month periods ended June 29, 2008 and July 1, 2007, respectively.

Since 2002, we have had an ongoing commercial relationship with Wesco Aircraft Hardware Corp. (“Wesco”), a distributor of aerospace hardware and provider of inventory management services. Wesco currently provides aerospace hardware to us pursuant to long-term contracts. The most recent of these agreements was entered into on December 19, 2007 in connection with the expiration of one of our pre-existing long-term contracts with Wesco, and following a competitive re-procurement of that work package. On September 29, 2006, The Carlyle Group acquired a majority stake in Wesco, and as a result, we are both now under common control of The Carlyle Group through its affiliated funds. In addition, three of our directors, Messrs. Squier, Clare and Palmer, also serve on the board of directors of Wesco. The Carlyle Group will indirectly benefit from their economic interest in Wesco from its contractual relationships with us. The total amount paid to Wesco pursuant to our contracts with Wesco for the three month periods ended June 29, 2008 and July 1, 2007 was approximately $8.1 million and $4.6 million, respectively. Approximately, $15.1 million and $7.6 million was paid to Wesco pursuant to our contracts with Wesco for the six month periods ended June 29, 2008 and July 1, 2007.

As previously disclosed in Exhibit 10.2 of Form 8-K filed with the SEC on February 6, 2006, upon the retirement in the first quarter of 2006 of Tom Risley (“Mr. Risley”), our former Chief Executive Officer, we entered into a consulting agreement with Mr. Risley for a minimum fee of $36,000 plus expenses, with a total payout plus expenses not to exceed $200,000. The total fees and expenses incurred under that agreement were $43,800 through the expiration of the agreement on February 28, 2007. Of that total, approximately $9,000 was incurred during the six month period ended July 1, 2007.

Vought Aircraft Industries, Inc.
Consolidating Balance Sheet
June 29, 2008
(dollars in millions, except par value per share) (Unaudited)


				Guarantor			Intercompany
	Vought			Subsidiaries			Eliminations			Total
Assets
Current assets:
Cash and cash equivalents	$	243.6		$	0.2		$	—		$	243.8
Trade and other receivables		114.6			6.6			—			121.2
Intercompany receivable		22.8			9.0			(31.8	)		—
Inventories		321.5			14.9			—			336.4
Other current assets		9.2			0.3			—			9.5

Total current assets		711.7			31.0			(31.8	)		710.9

Property, plant and equipment, net		507.5			8.6			—			516.1
Goodwill		464.0			63.7			—			527.7
Identifiable intangible assets, net		33.0			—			—			33.0
Debt origination costs, net and other assets		15.6			—			—			15.6
Investment in affiliated company		74.4			—			(74.4	)		—


Total assets	$	1,806.2		$	103.3		$	(106.2	)	$	1,803.3


Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable, trade	$	135.9		$	4.7		$	—		$	140.6
Intercompany payable		9.0			22.8			(31.8	)		—
Accrued and other liabilities		68.8			0.1			—			68.9
Accrued payroll and employee benefits		43.6			1.3			—			44.9
Accrued post-retirement benefits-current		47.2			—			—			47.2
Accrued pension-current		0.3			—			—			0.3
Current portion of long-term bank debt		5.9			—			—			5.9
Accrued contract liabilities		185.2			—			—			185.2


Total current liabilities		495.9			28.9			(31.8	)		493.0

Long-term liabilities:
Accrued post-retirement benefits		435.2			—			—			435.2
Accrued pension		345.2			—			—			345.2
Long-term bank debt, net of current portion		596.6			—			—			596.6
Long-term bond debt		270.0			—			—			270.0
Other non-current liabilities		177.2			—			—			177.2


Total liabilities		2,320.1			28.9			(31.8	)		2,317.2

Stockholders’ equity (deficit):
Common stock, par value $.01 per share; 50,000,000 shares authorized, 24,798,382 issued and outstanding at June 29, 2008		0.3			—			—			0.3
Additional paid-in capital		418.9			80.3			(80.3	)		418.9
Shares held in rabbi trust		(1.6	)		—			—			(1.6	)
Accumulated deficit		(487.0	)		(5.9	)		5.9			(487.0	)
Accumulated other comprehensive loss		(444.5	)		—			—			(444.5	)

Total stockholders’ equity (deficit)	$	(513.9	)	$	74.4		$	(74.4	)	$	(513.9	)

Total liabilities and stockholders’ equity (deficit)	$	1,806.2		$	103.3		$	(106.2	)	$	1,803.3

Vought Aircraft Industries, Inc.
Consolidating Balance Sheet
December 31, 2007
(dollars in millions, except par value per share)


				Guarantor			Intercompany
	Vought			Subsidiaries			Eliminations			Total
Assets
Current assets:
Cash and cash equivalents	$	75.1		$	0.5		$	—		$	75.6
Trade and other receivables		75.3			6.1			—			81.4
Intercompany receivable		24.1			7.3			(31.4	)		—
Inventories		347.0			15.8			—			362.8
Other current assets		5.9			0.5			—			6.4

Total current assets		527.4			30.2			(31.4	)		526.2

Property, plant and equipment, net		498.7			8.3			—			507.0
Goodwill		464.0			63.7			—			527.7
Identifiable intangible assets, net		40.1			—			—			40.1
Debt origination costs, net and other assets		11.5			—			—			11.5
Investment in affiliated company		72.5			—			(72.5	)		—
Investment in joint venture		8.4			—			—			8.4


Total assets	$	1,622.6		$	102.2		$	(103.9	)	$	1,620.9


Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable, trade	$	174.3		$	4.4		$	—		$	178.7
Intercompany payable		7.3			24.1			(31.4	)		—
Accrued and other liabilities		73.9			0.2			—			74.1
Accrued payroll and employee benefits		47.2			1.0			—			48.2
Accrued post-retirement benefits-current		47.2			—			—			47.2
Accrued pension-current		0.7			—			—			0.7
Current portion of long-term bank debt		4.0			—			—			4.0
Accrued contract liabilities		230.4			—			—			230.4


Total current liabilities		585.0			29.7			(31.4	)		583.3

Long-term liabilities:
Accrued post-retirement benefits		482.0			—			—			482.0
Accrued pension		361.2			—			—			361.2
Long-term bank debt, net of current portion		409.0			—			—			409.0
Long-term bond debt		270.0			—			—			270.0
Other non-current liabilities		181.2			—			—			181.2


Total liabilities		2,288.4			29.7			(31.4	)		2,286.7

Stockholders’ equity (deficit):

Common stock, par value $.01 per share; 50,000,000 shares authorized, 24,768,991 issued and outstanding at December 31, 2007		0.3			—			—			0.3

Additional paid-in capital		417.4			80.3			(80.3	)		417.4
Shares held in rabbi trust		(1.6	)		—			—			(1.6	)
Accumulated deficit		(595.0	)		(7.8	)		7.8			(595.0	)
Accumulated other comprehensive loss		(486.9	)		—			—			(486.9	)

Total stockholders’ equity (deficit)	$	(665.8	)	$	72.5		$	(72.5	)	$	(665.8	)

Total liabilities and stockholders’ equity (deficit)	$	1,622.6		$	102.2		$	(103.9	)	$	1,620.9

Vought Aircraft Industries, Inc.
Consolidating Statement of Operations
Three Months Ended June 29, 2008
(in millions) (Unaudited)


				Guarantor		Intercompany
	Vought			Subsidiaries		Eliminations			Totals
Revenue	$	467.1		$	19.6	$	(6.0	)	$	480.7

Costs and expenses

Cost of sales		366.6			16.5		(6.0	)		377.1
Selling, general and administrative expenses		54.0			1.7		—			55.7

Total costs and expenses		420.6			18.2		(6.0	)		432.8


Operating income		46.5			1.4		—			47.9

Other income (expense)
Interest income		0.9			—		—			0.9
Other gain		47.1			—		—			47.1
Equity in loss of joint venture		(0.2	)		—		—			(0.2	)
Interest expense		(16.4	)		—		—			(16.4	)
Equity in income (loss) of consolidated subsidiaries		1.4			—		(1.4	)		—

Income (loss) before income taxes		79.3			1.4		(1.4	)		79.3
Income tax expense		—			—		—			—

Net income (loss)	$	79.3		$	1.4	$	(1.4	)	$	79.3

Vought Aircraft Industries, Inc.
Consolidating Statement of Operations
Three Months Ended July 1, 2007
(in millions) (Unaudited)


				Guarantor		Intercompany
	Vought			Subsidiaries		Eliminations			Totals
Revenue	$	415.2		$	14.4	$	(2.0	)	$	427.6

Costs and expenses
Cost of sales		314.7			13.1		(2.0	)		325.8
Selling, general and administrative expenses		58.4			1.3		—			59.7

Total costs and expenses		373.1			14.4		(2.0	)		385.5


Operating income (loss)		42.1			—		—			42.1

Other income (expense)
Interest income		0.9			—		—			0.9
Other gain (loss)		—			—		—			—
Equity in loss of joint venture		(0.4	)		—		—			(0.4	)
Interest expense		(15.7	)		—		—			(15.7	)
Equity in income (loss) of consolidated subsidiaries		—			—		—			—

Income (loss) before income taxes		26.9			—		—			26.9
Income taxes		0.8			—		—			0.8

Net income (loss)	$	26.1		$	—	$	—		$	26.1

Vought Aircraft Industries, Inc.
Consolidating Statement of Operations
Six Months Ended June 29, 2008
(in millions) (Unaudited)


				Guarantor		Intercompany
	Vought			Subsidiaries		Eliminations			Totals
Revenue	$	880.1		$	37.1	$	(11.1	)	$	906.1

Costs and expenses

Cost of sales		682.2			32.3		(11.1	)		703.4
Selling, general and administrative expenses		107.1			2.9		—			110.0

Total costs and expenses		789.3			35.2		(11.1	)		813.4


Operating income		90.8			1.9		—			92.7

Other income (expense)
Interest income		1.0			—		—			1.0
Other gain		47.1			—		—			47.1
Equity in loss of joint venture		(0.6	)		—		—			(0.6	)
Interest expense		(32.2	)		—		—			(32.2	)
Equity in income (loss) of consolidated subsidiaries		1.9			—		(1.9	)		—

Income (loss) before income taxes		108.0			1.9		(1.9	)		108.0
Income tax expense		—			—		—			—

Net income (loss)	$	108.0		$	1.9	$	(1.9	)	$	108.0

Vought Aircraft Industries, Inc.
Consolidating Statement of Operations
Six Months Ended July 1, 2007
(in millions) (Unaudited)


				Guarantor			Intercompany
	Vought			Subsidiaries			Eliminations			Totals
Revenue	$	783.4		$	29.0		$	(4.1	)	$	808.3

Costs and expenses
Cost of sales		593.4			29.0			(4.1	)		618.3
Selling, general and administrative expenses		111.2			2.5			—			113.7

Total costs and expenses		704.6			31.5			(4.1	)		732.0


Operating income (loss)		78.8			(2.5	)		—			76.3

Other income (expense)
Interest income		2.2			—			—			2.2
Other loss		(0.1	)		—			—			(0.1	)
Equity in loss of joint venture		(0.7	)		—			—			(0.7	)
Interest expense		(31.6	)		—			—			(31.6	)
Equity in income (loss) of consolidated subsidiaries		(2.5	)		—			2.5			—

Income (loss) before income taxes		46.1			(2.5	)		2.5			46.1
Income taxes		0.8			—			—			0.8

Net income (loss)	$	45.3		$	(2.5	)	$	2.5		$	45.3

Vought Aircraft Industries, Inc.
Consolidating Cash Flow Statement
Six Months Ended June 29, 2008
(in millions) (Unaudited)


				Guarantor			Intercompany
	Vought			Subsidiaries			Eliminations			Total
Operating activities
Net income (loss)	$	108.0		$	1.9		$	(1.9	)	$	108.0
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		32.1			0.7			—			32.8
Stock compensation expense		1.4			—			—			1.4
Equity in losses of joint venture		0.6			—			—			0.6
(Gain)/Loss from asset disposals		(48.5	)		—			—			(48.5	)
Income from investments in consolidated subsidiaries		(1.9	)		—			1.9			—
Changes in current assets and liabilities:
Trade and other receivables		(39.3	)		(0.5	)		—			(39.8	)
Intercompany accounts receivable		1.3			(1.7	)		0.4			—
Inventories		25.5			0.9			—			26.4
Other current assets		(3.3	)		0.2			—			(3.1	)
Accounts payable, trade		(38.4	)		0.3			—			(38.1	)
Intercompany accounts payable		1.7			(1.3	)		(0.4	)		—
Accrued payroll and employee benefits		(3.6	)		0.3			—			(3.3	)
Accrued and other liabilities		(5.5	)		(0.1	)		—			(5.6	)
Accrued contract liabilities		(45.2	)		—			—			(45.2	)
Other assets and liabilities—long-term		(23.3	)		—			—			(23.3	)

Net cash provided by (used in) operating activities		(38.4	)		0.7			—			(37.7	)
Investing activities
Capital expenditures		(31.8	)		(1.0	)		—			(32.8	)
Proceeds from sale of joint venture		55.0			—			—			55.0

Net cash provided by (used in) investing activities		23.2			(1.0	)		—			22.2
Financing activities
Proceeds from short-term bank debt		153.0			—			—			153.0
Payments on short-term bank debt		(153.0	)		—			—			(153.0	)
Proceeds from Incremental Facility		184.6			—			—			184.6
Payments on long-term bank debt		(1.0	)		—			—			(1.0	)
Proceeds from sale of common stock		0.1			—			—			0.1

Net cash provided by (used in) financing activities		183.7			—			—			183.7

Net decrease in cash and cash equivalents		168.5			(0.3	)		—			168.2
Cash and cash equivalents at beginning of period		75.1			0.5			—			75.6

Cash and cash equivalents at end of period	$	243.6		$	0.2		$	—		$	243.8

Vought Aircraft Industries, Inc.
Consolidating Cash Flow Statement
Six Months Ended July 1, 2007
(in millions) (Unaudited)


				Guarantor			Intercompany
	Vought			Subsidiaries			Eliminations			Total
Operating activities
Net income (loss)	$	45.3		$	(2.5	)	$	2.5		$	45.3
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		29.6			0.8			—			30.4
Stock compensation expense		1.8			—			—			1.8
Equity in losses of joint venture		0.7			—			—			0.7
Loss from asset disposals		0.5			0.1			—			0.6
Income from investments in consolidated subsidiaries		2.5			—			(2.5	)		—
Changes in current assets and liabilities:
Trade and other receivables		(29.9	)		(3.0	)		—			(32.9	)
Intercompany accounts receivable		(2.5	)		(0.3	)		2.8			—
Inventories		(13.0	)		(0.7	)		—			(13.7	)
Other current assets		(1.4	)		—			—			(1.4	)
Accounts payable, trade		(10.4	)		3.2			—			(7.2	)
Intercompany accounts payable		0.3			2.5			(2.8	)		—
Accrued payroll and employee benefits		(9.7	)		0.2			—			(9.5	)
Accrued and other liabilities		13.7			(0.6	)		—			13.1
Accrued contract liabilities		1.4			—			—			1.4
Other assets and liabilities—long-term		(27.0	)		0.1			—			(26.9	)

Net cash provided by (used in) operating activities		1.9			(0.2	)		—			1.7
Investing activities
Capital expenditures		(30.7	)		(0.3	)		—			(31.0	)
Proceeds from sale of assets		23.1			—			—			23.1
Investment in joint venture		(14.0	)		—			—			(14.0	)

Net cash used in investing activities		(21.6	)		(0.3	)		—			(21.9	)
Financing activities
Payments on long-term bank debt		(2.0	)		—			—			(2.0	)
Payments on capital leases		(0.3	)		(0.3	)		—			(0.6	)

Net cash used in financing activities		(2.3	)		(0.3	)		—			(2.6	)

Net decrease in cash and cash equivalents		(22.0	)		(0.8	)		—			(22.8	)
Cash and cash equivalents at beginning of period		92.5			0.9			—			93.4

Cash and cash equivalents at end of period	$	70.5		$	0.1		$	—		$	70.6

Note 16 – Fair Value Measurements

We adopted SFAS 157, “Fair Value Measurements” on January 1, 2008, for our financial assets and financial liabilities. SFAS 157 defines fair value, provides guidance for measuring fair value and requires certain disclosures. The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

	•		Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

	•		Level 2: Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

	•		Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

Our deferred compensation liability to former executives is based on the fair value of our common stock. As of June 29, 2008, the fair value determination of the $3.8 million deferred compensation liability involves level 3 inputs. However, the value of this liability has not substantially changed since December 31, 2007.

Note 17 – Comprehensive Income

Comprehensive income consisted of the following:


	For the Three Months Ended					For the Six Months Ended
	June 29,			July 1,		June 29,		July 1,
	2008			2007		2008		2007
	(in millions)
Net income	$	79.3		$	26.1	$	108.0	$	45.3
Comprehensive income (loss), net of tax
Pension		(5.1	)		1.3		4.8		5.9
OPEB		40.1			—		37.6		—

Total comprehensive income	$	114.3		$	27.4	$	150.4	$	51.2

We remeasured some of our benefit plans as of March 31, 2008 resulting in an increase to other comprehensive income for the period. For more information on the impact of this remeasurement, see Note 5 — Pension and Other Post-retirement Benefits.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our results of operations, financial condition and liquidity in conjunction with our interim unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis including information with respect to our plans and strategies for our business, statements regarding the industry outlook, our expectations regarding the future performance of our business, and the other non-historical statements contained herein are forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.” You should also review the “Risk Factors” section of this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the three month period ended March 30, 2008 and our Annual Report on Form 10-K for the year ended December 31, 2007 for a discussion of important factors that could cause actual results to differ materially from the results described herein or implied by such forward-looking statements.

Overview

We are a leading global manufacturer and developer of aerostructures serving commercial, military and business jet aircraft. Our products are used on many of the largest and longest running programs in the aerospace industry. We are also a key supplier on newer platforms with high growth potential. We generate approximately 50% of our revenues from the commercial aircraft market but are also diversified across the military and business jet markets, which provide the balance of our revenues.

Our customer base consists of the leading aerospace original equipment manufacturers (“OEMs”), including Airbus, Bell Helicopter, Boeing, Cessna, Gulfstream, Hawker Beechcraft, Lockheed Martin, Northrop Grumman and Sikorsky, as well as the U.S. Air Force. We generate approximately 80% of our revenues from our three largest customers, Airbus, Boeing and Gulfstream.

Although the majority of our revenues are generated by sales in the U.S. market, we generate approximately 15% of our revenue from sales outside of the United States.

Most of our revenues are generated under long-term contracts. Our customers typically place orders well in advance of required deliveries, which gives us considerable visibility with respect to our future revenues. These advance orders also generally create a significant backlog for us, which was approximately $3.8 billion at June 29, 2008. Our calculation of backlog includes only firm orders for commercial and business jet programs and funded orders for government programs, which causes our backlog to be substantially lower than the estimated aggregate dollar value of our contracts and may not be comparable to others in the industry.

For our commercial and business jet programs, changes in the economic environment and the financial condition of airlines may cause our customers to increase or decrease deliveries, adjusting firm orders that would affect our backlog. For our military aircraft programs, the Department of Defense and other government agencies have the right to terminate both our contracts and/or our customers’ contracts either for default or, if the government deems it to be in its best interest, for convenience.

The market for our commercial, military and business jet programs has historically been cyclical. While the commercial, military and business jet markets are currently experiencing a period of increased production, as discussed below, our business could be adversely affected by significant changes in the U.S. or global economy or changes to the current needs of the U.S. military.

Commercial Aircraft. Sales to the commercial aircraft market are directly and significantly affected by the financial health of the commercial airline industry, passenger and cargo air traffic, the introduction of new aircraft models, and the availability and profile of used aircraft. During the past three years we have benefited from increased demand for our commercial aircraft products and we expect to continue to benefit from this increased demand for our commercial aircraft products in future periods. Although the commercial aerospace industry is in a cycle of increased production, our business could be adversely affected by significant changes in the U.S. or global economy that affect the commercial airline industry, including high fuel prices and disruption of the global credit markets.

Military Aircraft. Sales to the military aircraft market are driven by U.S. national defense spending and procurement funding decisions, global geopolitical conditions and current operational use of the existing military aircraft fleet. Due to the current and anticipated pace of military operations in the Middle East and the U.S. military’s need to more rapidly repair or replace its existing fleet of equipment, we expect that spending for defense procurement should remain robust for at least the next several years. We believe that this will result in continued growth in our rotorcraft programs since they are some of the key equipment being used in the Middle East. Historically, the majority of our military revenues and a significant portion of our total revenue have been generated from our C-17 program. We currently have firm orders from Boeing to support C-17 production through 2009. On June 30, 2008, President Bush signed a bill to provide funding for 15 additional C-17 aircraft. We had previously received authorization from Boeing to initiate orders for long lead material for these 15 aircraft. Once we receive firm orders from Boeing on these aircraft, C-17 production will be extended through 2010. However, our business could be adversely impacted if the U.S. Congress does not fund additional C-17 aircraft and Boeing decides not to fund beyond their current commitment.

Business Jet Aircraft. Sales to the business jet aircraft market are driven by long-term economic expansion, the increasing inconvenience of commercial airline travel, growing international acceptance and demand for business jet travel, increased fractional ownership of business jets and the introduction of new business jet models. During the past three years we have benefited from increased demand for our business jet products and we believe business jet deliveries will remain strong over the next several years. As a major supplier to the top-selling Gulfstream IV and V, Citation X, Hawker 800 and the recently announced Citation Columbus 850 programs, we believe we are well positioned in key segments of the business jet market. Nevertheless, the business jet industry is subject to many of the same risks as the commercial aircraft industry and our business could be adversely affected by significant changes in the U.S. or global economy.

Recent Developments

On May 19, 2008, we announced the signing of a contract with Cessna for engineering design, tooling and production of the wing for its new Citation Columbus 850 business jet. The contract is a life of program contract and has a potential value of more than $1 billion through 2020. The Citation Columbus is a large cabin, intercontinental aircraft with a target range of 4,000 nautical miles at Mach .80 carrying eight passengers.

Previously, the U.S. Air Force announced that the Northrop Grumman/EADS entrant was selected for the KC-45A tanker program, the replacement for the KC-135, and that the KC-45A will be based on a modified version of the Airbus A330 airframe. Boeing subsequently filed a protest regarding the Air Force’s decision to select the A330 airframe over Boeing’s entrant in the contract competition, which is based on a modified version of Boeing’s commercial 767 airframe. On June 18, 2008, the GAO found in Boeing’s favor on a number of issues related to its protest and, on June 18, 2008, Defense Secretary Robert Gates announced that the Air Force would reopen the bidding process on the contract. To the extent that the KC-45A will be based on modified versions of either the A330 or the 767 commercial airframe, we do not expect our results of operations will be materially affected by the ultimate selection of either over the other because we provide aerostructures for both of these commercial aircraft.

Basis of Presentation

The following provides a brief description of some of the items that appear in our financial statements and general factors that impact these items. It is our practice to close our books and records based on a thirteen-week quarter, which can lead to different period end dates for comparative purposes. The interim financial statements and tables of financial information included herein are labeled based on that convention. This practice only affects interim periods, as our fiscal years end on December 31.

Revenue and Profit Recognition. We record revenue and profit on our long-term contracts using a percentage of completion method with units-of-delivery as our basis to measure progress toward completing the contract. Under this method of accounting, revenue on a contract is recorded as the units are delivered and accepted during the period at an amount equal to the contractual selling price of those units. The costs recorded on a contract under the units-of-delivery method are equal to the total costs at completion divided by the total units to be delivered. As our contracts can span multiple years, we often segment the contracts into production lots for the purposes of accumulating and allocating cost. Profit is recognized as the difference between revenue for the units delivered and the estimated costs for the units delivered.

Amounts representing contract change orders or claims are only included in revenue when such change orders or claims have been settled with our customer and to the extent that units have been delivered. Additionally, some of our contracts contain terms or provisions, such as price re-determination or price escalation, which are included in our estimate of contract value when the amounts can be reliably estimated and their realization is reasonably assured.

The impact of revisions in estimates is recognized on the cumulative catch-up basis in the period in which such revisions are made. Changes in our estimates of contract value or profit can impact revenue and/or cost of sales. For example, in the case of a customer settlement of a pending change order or claim, we may recognize additional revenue and/or margin depending on the production lot’s stage of completion. Provisions for anticipated losses on contracts are recorded in the period in which they become evident (“forward losses”).

For a further discussion of our revenue recognition policy, see ''— Critical Accounting Policies and Estimates — Revenue and Profit Recognition.’’

Cost of sales. Cost of sales includes direct production costs such as labor (including fringe benefits), material costs, manufacturing and engineering overhead and production tooling costs. Examples of costs included in overhead are costs related to quality assurance, information technology, indirect labor and fringe benefits, depreciation and amortization and other support costs such as supplies and utilities.

Selling, general and administrative expenses. Selling, general and administrative expenses include expenses for executive management, program management, business management, human resources, accounting, treasury, and legal. The major cost elements of selling, general and administrative expenses include salary and wages, fringe benefits, stock compensation expense, travel and supplies. In addition, these expenses include period expenses for non-recurring program development, such as the 787 start up costs, research and development, and other non-recurring activities, as well as costs that are not allowed under U.S. Government contract terms.

Interest expense, net. Interest expense, net reflects interest income and expense, and includes the effects of any interest rate swaps, the amortization of capitalized debt origination costs and the amortization of the original issue discount on the Incremental Facility.

Other gain (loss). Other gain (loss) represents miscellaneous items unrelated to our core operations. On June 10, 2008, we sold our entire equity interest in Global Aeronautica to Boeing for $55 million and as a result, recorded a $47.1 million gain on the sale during the three and six month periods ended June 29, 2008.

Equity in loss of joint venture. Equity in loss of joint venture reflected our share of the loss from Global Aeronautica, a joint venture in which we formerly participated. As a result of the sale described above, in future periods, our results of operations will not be impacted by this joint venture.

Income Tax Expense. Income tax expense represents federal income tax provided on our net book income. State income tax is included as part of Selling, general and administrative expenses. For a further discussion of our income tax provision, please see Note 9 — Income Taxes.

Results of Operations


	Three Months			Three Months						Six Months			Six Months
	Ended			Ended						Ended			Ended
	June 29, 2008			July 1, 2007			$ Change			June 29, 2008			July 1, 2007			$ Change
	(in millions)
Revenue:
Commercial	$	237.4		$	210.2		$	27.2		$	452.6		$	404.0		$	48.6
Military		157.5			141.8			15.7			295.4			256.3			39.1
Business Jet		85.8			75.6			10.2			158.1			148.0			10.1

Total revenue	$	480.7		$	427.6		$	53.1		$	906.1		$	808.3		$	97.8
Costs and expenses:
Cost of sales		377.1			325.8			51.3			703.4			618.3			85.1
Selling, general and administrative		55.7			59.7			(4.0	)		110.0			113.7			(3.7	)

Total costs and expenses	$	432.8		$	385.5		$	47.3		$	813.4		$	732.0		$	81.4

Operating income		47.9			42.1			5.8			92.7			76.3			16.4
Interest expense, net		(15.5	)		(14.8	)		(0.7	)		(31.2	)		(29.4	)		(1.8	)
Other gain/(loss)		47.1			—			47.1			47.1			(0.1	)		47.2
Equity in loss of joint venture		(0.2	)		(0.4	)		0.2			(0.6	)		(0.7	)		0.1
Income tax expense		—			(0.8	)		0.8			—			(0.8	)		0.8

Net Income	$	79.3		$	26.1		$	53.2		$	108.0		$	45.3		$	62.7

Comparison of Results of Operations for the Three Months Ended June 29, 2008 and July 1, 2007

Revenues. Revenue for the three months ended June 29, 2008 was $480.7 million, an increase of $53.1 million, or 12%, compared with the same period in the prior year. When comparing the second quarter of 2008 with the same period in the prior year:

	•		Commercial revenue increased $27.2 million, or 13%. Revenue for our Boeing programs increased $21.0 million primarily due to non-recurring sales for the 747-8 program and increased deliveries on the 787 program. In addition, revenue for our Airbus programs increased $6.2 million primarily due to higher deliveries.

	•		Military revenue increased $15.7 million, or 11%, primarily due to higher delivery rates on the H-60 and the V-22 programs, as well as price increases on the H-60 program.

	•		Business Jet revenue increased $10.2 million, or 13%, primarily due to increased deliveries on Gulfstream products.

Cost of sales. Cost of sales for the three months ended June 29, 2008 was $377.1 million or 78% of revenue, an increase of $51.3 million compared with $325.8 million or 76% of revenue for the same period in the prior year. The increase in costs is primarily driven by costs associated with the increased revenue discussed above. The increase in cost of sales as a percentage of revenue was primarily driven by the mix of sales with the growth in revenue coming primarily from lower margin programs.

Selling, general and administrative expenses. Selling, general and administrative expenses (“SG&A”) decreased $4.0 million to $55.7 million during the three month period ended June 29, 2008 principally due to a reduction in non-recurring expenses related to the 787 program during the period partially offset by the timing of the absorption of SG&A to programs.

Other gain (loss). Other gain (loss) for the three month period ended June 29, 2008 represents the $47.1 million gain from the sale of our entire equity interest in Global Aeronautica.

Interest expense, net. Interest expense, net for the three month period ended June 29, 2008 was $15.5 million, an increase of $0.7 million compared with $14.8 million for the same period in the prior year. Interest expense increased largely due to borrowings under the Incremental Facility.

Comparison of Results of Operations for the Six Months Ended June 29, 2008 and July 1, 2007

Revenues. Revenue for the six month period ended June 29, 2008 was $906.1 million, an increase of $97.8 million, or 12%, compared with the same period in the prior year. When comparing the first six months of 2008 with the same period in the prior year:

	•		Commercial revenue increased $48.6 million, or 12%. Revenue for our Boeing programs increased $32.1 million primarily due to non-recurring sales for the 747-8 program and initial deliveries on the 787 program. In addition, revenue for our Airbus programs increased $16.5 million primarily due to higher deliveries.

	•		Military revenue increased $39.1 million, or 15%, primarily due to higher delivery rates on the H-60 and the V-22 programs, as well as price increases on the H-60 program.

	•		Business Jet revenue increased $10.1 million, or 7%, primarily due to increased deliveries on Gulfstream products.

Cost of sales. Cost of sales for the six month period ended June 29, 2008 was $703.4 million or 78% of revenue, an increase of $85.1 million compared with $618.3 million or 76% of revenue in the same period in the prior year. The increase in costs is primarily driven by costs associated with the increased revenue discussed above. Additionally, during the first quarter of 2008, we released purchase accounting reserves of $22.6 million for the 747 program to reflect the scheduled completion of the deliveries for the 747-400 model, which resulted in a partial offset to the aforementioned increased costs. The increase in cost of sales as a percentage of revenue was also impacted by the mix of sales with the growth in revenue coming primarily from lower margin programs.

Selling, general and administrative expenses. SG&A decreased $3.7 million to $110.0 million during the six month period ended June 29, 2008 primarily due to a reduction in the non-recurring expenses related to the 787 program during the period partially offset by the timing of the absorption of SG&A to programs.

Interest expense, net. Interest expense, net for the six month period ended June 29, 2008 was $31.2 million, an increase of $1.8 million compared with $29.4 million for the same period in the prior year. Interest expense increased primarily due to higher borrowings on the revolving portion of the senior secured credit facilities during the six month period ended June 29, 2008 compared with no revolver borrowings during the same period in the 2007 and borrowings under the Incremental Facility. As of June 29, 2008, there were no borrowings under the revolving portion of our senior secured credit facilities.

Other gain (loss). Other gain (loss) for the six month period ended June 29, 2008 represents the $47.1 million gain from the sale of our entire equity interest in Global Aeronautica.

Critical Accounting Policies

Our financial statements have been prepared in conformity with GAAP. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information. Actual results could differ materially from those estimates.

Revenue Recognition

The majority of our sales are made pursuant to written contractual arrangements or “contracts” to design, develop and manufacture aerostructures to the specifications of the customer under firm fixed price contracts. These contracts are within the scope of the American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, (SOP 81-1) and revenue and costs on contracts are recognized using percentage-of-completion methods of accounting based on units-of-delivery. Under the units-of-delivery percentage of completion method, revenue on a contract is recorded as the units are delivered and accepted during the period at an amount equal to the contractual selling price of those units. The costs recorded on a contract under the units-of-delivery method are equal to the total costs at completion divided by the total units to be delivered. Profit is recognized as the difference between revenue for the units delivered and the estimated costs for the units delivered.

Additionally, some contracts contain provisions for revenue sharing, price re-determination or cost and/or performance incentives. Such amounts or incentives are included in contract value when the amounts can be reliably estimated and their realization is reasonably assured. The impact of revisions in cost estimates is recognized on a cumulative catch-up basis in the period in which the revisions are made. Provisions for anticipated losses on contracts are recorded in the period in which they become evident (“forward losses”) and are first offset against costs that are included in inventory, with any remaining amount reflected in accrued contract liabilities in accordance with SOP 81-1. Revisions in contract estimates, if significant, can materially affect our results of operations and cash flows, as well as our valuation of inventory. Furthermore, certain contracts are combined or segmented for revenue recognition in accordance with SOP 81-1.

Advance payments and progress payments received on contracts-in-process are first offset against related contract costs that are included in inventory, with any remaining amount reflected in current liabilities.

Accrued contract liabilities consisted of the following:


	June 29,		December 31,
	2008		2007
	(in millions)
Advances and progress billings	$	159.8	$	182.9
Forward loss		20.8		18.3
Other		4.6		29.2

Total accrued contract liabilities	$	185.2	$	230.4

Goodwill

Goodwill by reporting unit is tested for impairment at least annually in accordance with the provisions of SFAS 142. Under SFAS 142, the first step of the goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit with its carrying value. We have concluded that we are a single reporting unit. Accordingly, all assets and liabilities are used to determine our carrying value. Since we currently have an accumulated deficit, there have been no impairment charges recognized for the six month period ended June 29, 2008 and July 1, 2007.

For this testing we use an independent valuation firm to assist in the estimation of enterprise fair value using standard valuation techniques such as discounted cash flow, market multiples and comparable transactions. The discounted cash flow fair value estimates are based on management’s projected future cash flows and the estimated weighted average cost of capital. The estimated weighted average cost of capital is based on the risk-free interest rate and other factors such as equity risk premiums and the ratio of total debt and equity capital.

Post-Retirement Plans.

The liabilities and net periodic cost of our pension and other post-retirement plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, the expected long-term rate of asset return, the assumed average rate of compensation increase and rate of growth for medical costs. The actuarial assumptions used to calculate these costs are reviewed annually. Assumptions are based upon management’s best estimates, after consulting with outside investment advisors and actuaries, as of the annual measurement date.

The assumed discount rate utilized is based on a point in time estimate as of our December 31 annual measurement date or as of remeasurement dates as needed. This rate is determined based upon on a review of yield rates associated with long-term, high quality corporate bonds as of the measurement date and use of models that discount projected benefit payments using the spot rates developed from the yields on selected long-term, high quality corporate bonds.

The assumed expected long-term rate of return on assets is the weighted average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation (“PBO”). The expected average long-term rate of return on assets is based principally on the counsel of our outside investment advisors and was projected at 8.5%. This rate is based on actual historical returns and anticipated long-term performance of individual asset classes with consideration given to the related investment strategy. This rate is utilized principally in calculating the expected return on plan assets component of the annual pension expense. To the extent the actual rate of return on assets realized over the course of a year differs from the assumed rate, that year’s annual pension expense is not affected. The gain or loss reduces or increases future pension expense over the average remaining service period of active plan participants expected to receive benefits.

The assumed average rate of compensation increase represents the average annual compensation increase expected over the remaining employment periods for the participating employees. This rate is estimated to be 4% and is utilized principally in calculating the PBO and annual pension expense. In addition to our defined benefit pension plans, we provide certain healthcare and life insurance benefits for certain eligible retired employees. Such benefits were unfunded as of December 31, 2007 and June 29, 2008. Employees achieve eligibility to participate in these contributory plans upon retirement from active service if they meet specified age and years of service requirements. Election to participate for some employees must be made at the date of retirement. Qualifying dependents at the date of retirement are also eligible for medical coverage. Current plan documents reserve our right to amend or terminate the plans at any time, subject to applicable collective bargaining requirements for represented employees.

From time to time, we have made changes to the benefits provided to various groups of plan participants. Premiums charged to most retirees for medical coverage prior to age 65 are based on years of service and are adjusted annually for changes in the cost of the plans as determined by an independent actuary. In addition to this medical inflation cost-sharing feature, the plans also have provisions for deductibles, co-payments, coinsurance percentages, out-of-pocket limits, schedules of reasonable fees, preferred provider networks, coordination of benefits with other plans, and a Medicare carve-out.

In accordance with SFAS No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans—an Amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158) we recognized the funded status of our benefit obligation in its statement of financial position as of December 31, 2007. This funded status was remeasured for some plans as of March 31, 2008. The funded status was measured as the difference between the fair value of the plan’s assets and the PBO or accumulated postretirement benefit obligation of the plan. For more information on the impact of this remeasurement, see Note 5 — Pension and Other Post-retirement Benefits.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. We adopted SFAS No. 157 for our financial assets and liabilities on January 1, 2008 and it has not materially affected our financial statements. The FAS 157 requirements for certain non-financial assets and liabilities have been deferred until the first quarter of 2009 in accordance with Financial Accounting Standards Board Staff Position (FSP) 157-2. See Note 15 — Fair Value Measurements for a summary of the assets and liabilities that are measured at fair value as of June 29, 2008.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with GAAP. SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of SFAS No. 162 to have a material impact on our consolidated financial statements.

Liquidity and Capital Resources

Liquidity is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. The primary sources of our liquidity include cash flow from operations and borrowing capacity through our credit facility and the long-term capital markets. Our liquidity requirements and working capital needs depend on a number of factors, including the level of delivery rates under our contracts, the level of developmental expenditures related to new programs, growth and contractions in the business cycles, contributions to our pension plans as well as interest and debt payments. Our liquidity requirements fluctuate from period to period as a result of changes in the rate and amount of our investments in our programs, changes in delivery rates under existing contracts and production associated with new contracts. In upcoming periods our 787 program will be a key driver of our liquidity and working capital requirements as we continue our investment in, and increase our production rate under that program. On April 9, 2008, Boeing announced that initial deliveries of the 787 program had been rescheduled to the third quarter of 2009 rather than early 2009. Subsequent to this announcement Boeing provided us an updated delivery schedule, which reduces the number of deliveries we will make to them in the near term. We believe we will be able to effectively manage our costs and work with our suppliers and Boeing to mitigate the impact of this schedule change on our financial position. However, future delays could have a material adverse effect on our financial condition, results of operations and cash flows.

For certain aircraft programs, milestone or advance payments finance working capital, which helps to improve our liquidity. In addition, we may, in the ordinary course of business, settle outstanding claims with customers or suppliers or we may receive payments for previously unnegotiated change orders. Settlement of pending claims can have a significant impact on our results of operations and cash flows. We recently reached an interim settlement regarding certain pending claims related to our 787 program. These claims related to non-recurring costs we incurred in developing the program as well as increases in our expected production costs due to aircraft design changes. In addition, we received advance payments of approximately $122.0 million from Boeing in March 2008, which will be liquidated as shipments occur. We are continuing our discussions with Boeing on future pricing considerations with an objective of resolving such considerations in a timely manner.

We believe that cash flow from operations, cash and cash equivalents on hand and funds available under the revolving portion of our credit facility will provide adequate funds for our ongoing working capital and capital expenditure needs and near term debt service obligations to allow us to meet our current contractual commitments for at least the next twelve months. However, we expect to need additional funding from the customer or other third party sources to participate in the future derivatives of the 787 or other 787 contract modifications requested by Boeing. Our ability to refinance our indebtedness or obtain additional sources of financing will be affected by economic conditions and financial, business and other factors, some of which are beyond our control. Management has implemented and continues to implement cost savings initiatives that we expect should have a positive impact on the future cash flows needed to satisfy our long-term cash requirements.

On July 2, 2003, we issued $270.0 million of 8% Senior Notes due 2011 (“Senior Notes”) with interest payable on January 15 and July 15 of each year, beginning January 15, 2004. We may redeem the notes in full or in part by paying premiums specified in the indenture governing our outstanding Senior Notes. The notes are senior unsecured obligations guaranteed by all of our existing and future domestic subsidiaries.

We entered into $650 million of senior secured credit facilities pursuant to a credit agreement dated December 22, 2004. Our senior secured credit facilities are comprised of a $150 million six year revolving loan (“Revolver”), a $75 million synthetic letter of credit facility and a $425 million seven year term loan B. The term loan amortizes at $1.0 million per quarter with a final payment at the maturity date of December 22, 2011.

On May 6, 2008, we entered into a joinder agreement with Lehman Brothers Commercial Bank, Lehman Commercial Paper Inc., JPMorgan Chase Bank, N.A., Goldman Sachs Credit Partners L.P., Lehman Brothers Inc. and J.P. Morgan Securities Inc. (the “Incremental Lenders”) whereby the Incremental Lenders agreed to fund an incremental facility (the “Incremental Facility”), pursuant to which we borrowed an additional $200.0 million of term loans pursuant to our existing senior secured credit facilities. We received net proceeds of approximately $184.6 million from the Incremental Facility, which was used to pay fees and expenses associated with the Incremental Facility and for general corporate purposes.

After the incurrence of the indebtedness under the Incremental Facility, $612.0 million is outstanding under our senior secured credit facilities. The interest rates per annum applicable to the Incremental Facility are, at our option, the ABR or Eurodollar Base Rate plus, in each case, an applicable margin equal to 3.00% for ABR loans and 4.00% for Eurodollar Base Rate loans, subject to a Eurodollar Base Rate floor of 3.50%.

Except for amortization and interest rate, the terms of the Incremental Facility, including mandatory prepayments, representations and warranties, covenants and events of default, are the same as those applicable to the existing term loans under our senior secured credit facilities and all references to our senior secured credit facilities shall include the Incremental Facility. The term loans under the Incremental Facility will be repayable in equal quarterly installments of $470,000 starting in September 2008, with the balance due on December 22, 2011.

As of June 29, 2008, we had no borrowings outstanding under the Revolver, although we borrowed and repaid $153.0 million during the six month period ended June 29, 2008. We had long-term debt principal of approximately $882.0 million, which included $612.0 million incurred under our senior secured credit facilities and $270.0 million of Senior Notes. In addition, we had $46.8 million in outstanding letters of credit under the $75 million synthetic facility.

Under the credit agreement, we have the option to convert up to $25 million of the letter of credit facility to outstanding term loans, which would also be subject to the same terms and conditions as the outstanding term loans made as of December 2004. We are obligated to pay an annual commitment fee on the unused portion of our senior secured credit facilities of 0.5% or less, based on our leverage ratio.

Credit Agreements and Debt Covenants. The agreements governing our debt contain customary affirmative and negative covenants for facilities of this type, including limitations on our indebtedness, liens, investments, distributions, mergers and acquisitions, dispositions of assets, subordinated debt and transactions with affiliates. The credit agreement also requires that we maintain certain financial covenants including a leverage ratio, the requirement to maintain minimum interest coverage ratios, as defined in the agreement, and a limitation on our capital spending levels. The Senior Notes indenture also contains various restrictive covenants, including the incurrence of additional indebtedness unless the debt is otherwise permitted under the indenture. As of June 29, 2008, we were in compliance with the covenants in the indenture governing our outstanding Senior Notes and credit facilities.

Our $850 million senior secured credit facilities (including our Incremental Facility) are material to our financial condition and results of operations because those facilities are our primary source of liquidity for working capital. The indenture governing our outstanding Senior Notes is material to our financial condition because it governs a significant portion of our long-term capitalization while restricting our ability to conduct our business.

Our senior secured credit facilities use Adjusted EBITDA to determine our compliance with two financial maintenance covenants. See “Non-GAAP Financial Measures” below for a discussion of Adjusted EBITDA and reconciliation of that non-GAAP financial measure to net cash provided by (used in) operating activities. We are required not to permit our consolidated total leverage ratio, or the ratio of funded indebtedness (net of cash) at the end of each quarter to Adjusted EBITDA for the twelve months ending on the last day of that quarter, to exceed 4.25:1.00 for fiscal periods ending during 2008, 4.00:1.00 for fiscal 2009, 3.75:1.00 for fiscal 2010 and 3.50:1.00 thereafter. We also are required not to permit our consolidated net interest coverage ratio, or the ratio of Adjusted EBITDA for the twelve months ending on the last day of a quarter to our consolidated net interest expense for the twelve months ending on the same day, to be less than 3.50:1.00 for periods ending during 2008 and thereafter. Each of these covenants is tested quarterly, and our failure to comply could result in a default and, potentially, an event of default under our senior secured credit facilities. If not cured or waived, an event of default could result in acceleration of this indebtedness. Our credit facilities also use Adjusted EBITDA to determine the interest rates on our borrowings, which are based on the consolidated total leverage ratio described above. Changes in our leverage ratio may result in increases or decreases in the interest rate margin applicable to loans under our senior secured credit facilities. Accordingly, a change in our Adjusted EBITDA could increase or decrease our cost of funds. The actual results of the total leverage ratio and net interest coverage ratio for the six month period ended June 29, 2008 were 2.33:1.00 and 4.95:1.00, respectively.

The indenture governing our outstanding Senior Notes contains a covenant that restricts our ability to incur additional indebtedness unless, among other things, we can comply with a fixed charge coverage ratio. We may incur additional indebtedness only if, after giving pro forma effect to that incurrence, our ratio of Adjusted EBITDA to total consolidated debt less cash on hand for the four fiscal quarters ending as of the most recent date for which internal financial statements are available meet certain levels or we have availability to incur such indebtedness under certain baskets in the indenture. Accordingly, Adjusted EBITDA is a key factor in determining how much additional indebtedness we may be able to incur from time to time to operate our business.

Non-GAAP Financial Measures. Periodically we disclose to investors Adjusted EBITDA, which is a non-GAAP financial measure that our management uses to assess our compliance with the covenants in our senior secured credit agreement, our ongoing ability to meet our obligations and manage our levels of indebtedness. Adjusted EBITDA is calculated in accordance with our senior secured credit agreement and includes adjustments that are material to our operations but that our management does not consider reflective of our ongoing core operations. Pursuant to our senior secured credit agreement, Adjusted EBITDA is calculated by making adjustments to our net income (loss) to eliminate the effect of our (1) net income tax expense, (2) net interest expense, (3) any amortization or write-off of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with indebtedness, (4) depreciation and amortization expense, (5) any extraordinary, unusual or non-recurring expenses or losses (including losses on sales of assets outside of the ordinary course of business, non-recurring expenses associated with the 787 program and certain expenses associated with our facilities consolidation efforts) net of any extraordinary, unusual or non-recurring income or gains, (6) any other non-cash charges, expenses or losses, restructuring and integration costs, (7) stock-option based compensation expenses and (8) all fees and expenses paid pursuant to our Management Agreement with Carlyle. See Note 14 – Related Party Transactions.

Adjusted EBITDA for the three month period ended June 29, 2008 was $71.0 million, a decrease of $12.4 million from the same period in the prior year. For the six month period ended June 29, 2008, adjusted EBITDA was $150.3 million, a decrease of $7.3 million from the same period in the prior year. The following table is a reconciliation of the non-GAAP measure from our cash flows from operations:


	For the Three Months Ended						For the Six Months Ended
	June 29,			July 1,			June 29,			July 1,
	2008			2007			2008			2007
Net cash provided by (used in) operating activities	$	(22.5	)	$	(18.1	)	$	(37.7	)	$	1.7
Interest expense, net		15.5			14.8			31.2			29.4
Income tax expense (benefit)		—			0.8			—			0.8
Stock compensation expense		(0.8	)		(1.0	)		(1.4	)		(1.8	)
Equity in losses of joint venture		(0.2	)		(0.4	)		(0.6	)		(0.7	)
(Gain) Loss from asset sales and other losses		48.8			(0.2	)		48.5			(0.6	)
Non-cash interest expense		(1.5	)		(0.6	)		(2.3	)		(1.4	)
787 tooling amortization		0.8			—			0.8			—
Changes in operating assets and liabilities		70.8			61.1			132.0			77.1

EBITDA	$	110.9		$	56.4		$	170.5		$	104.5

Non-recurring investment in Boeing 787 (1)		5.5			25.9			22.0			49.7
Unusual charges & other non-recurring program costs (2)		2.1			(0.6	)		4.0			0.1
(Gain) Loss on disposal of property, plant and equipment (3)		(48.9	)		0.2			(48.6	)		0.6
Other (4)		1.4			1.5			2.4			2.7

Adjusted EBITDA	$	71.0		$	83.4		$	150.3		$	157.6


(1)		Non recurring investment in Boeing 787—The Boeing 787 program, described elsewhere in this quarterly report, is a significant new program for our operations, and has required substantial start-up costs in recent periods as we built a new facility in South Carolina and invested in new manufacturing technologies dedicated to the program. These start-up investment costs are recognized in our financial statements over several periods due to their magnitude and timing. We expect that our current start-up costs in the Boeing 787 program will decline significantly as the start-up phase of the program and our current related contractual commitments will be substantially completed during the next few months. In the future, subject to potential program modifications by our customer, including development of derivatives and delivery rate increases, we could have additional start-up costs required. Our credit agreement excludes our significant start-up investment in the Boeing 787 program because it represents an unusual significant investment in a major new program that is not indicative of ongoing core operations, and accordingly the investment that has been expensed during the period is added back to Adjusted EBITDA. Also included is our loss in our joint venture with Global Aeronautica. Our share of Global Aeronautica’s net loss was $0.2 million and $0.4 million for the three month periods ended June 29, 2008 and July 1, 2007, respectively, and $0.6 million and $0.7 million for the six month periods ended June 29, 2008 and July 1, 2007, respectively. On June 10, 2008, we sold our entire equity interest in Global Aeronautica to Boeing and as a result, recorded a $47.1 million gain on the sale during the three and six month periods ended June 29, 2008. In future periods, our adjusted EBITDA calculation will not be impacted by this joint venture. For more information, please refer to Note 12 – Investment in Joint Venture to our interim unaudited condensed consolidated financial statements.


(2)		Unusual charges and other non-recurring program costs—Our senior secured credit agreement excludes our expenses for unusual events in our operations and non-recurring costs that are not indicative of ongoing core operating performance, and accordingly the charges that have been expensed during the period are added back to Adjusted EBITDA.

		For the three month periods ended June 29, 2008 and July 1, 2007, we incurred $2.1 million and $(0.6) million, respectively, of non-recurring costs primarily related to a facilities rationalization initiative.

		For the six month periods ended June 29, 2008 and July 1, 2007, we incurred $4.0 million and $0.1 million, respectively, of non-recurring costs primarily related to a facilities rationalization initiative.

(3)		(Gain) Loss on disposal of property, plant and equipment (“PP&E”) and other assets — On occasion, where the asset is no longer needed for our business and ceases to offer sufficient value or utility to justify our retention of the asset, we choose to sell PP&E at a loss. These losses reduce our results of operations for the period in which the asset was sold. Similarly, in some cases, we sell assets at an amount in excess of book value. For example, during the three and six month periods ended June 29, 2008, we recorded a $47.1 million gain on the sale of our equity interest in Global Aeronautica to Boeing. Our credit agreement provides that those gains and losses are reflected as an adjustment in calculating Adjusted EBITDA.

(4)		Other—Includes non-cash stock expense and related party management fees. Our credit agreement provides that these expenses are reflected as an adjustment in calculating Adjusted EBITDA.

We believe that each of the adjustments made in order to calculate Adjusted EBITDA is meaningful to investors because it gives them the ability to assess our compliance with the covenants in our senior secured credit agreement, our ongoing ability to meet our obligations and manage our levels of indebtedness.

The use of Adjusted EBITDA as an analytical tool has limitations and you should not consider it in isolation, or as a substitute for analysis of our results of operations as reported in accordance with GAAP. Some of these limitations are:

	•		it does not reflect our cash expenditures, or future requirements, for all contractual commitments;

	•		it does not reflect our significant interest expense, or the cash requirements necessary to service our indebtedness;

	•		it does not reflect cash requirements for the payment of income taxes when due;

	•		it does not reflect working capital requirements;

	•		although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

	•		it does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, but may nonetheless have a material impact on our results of operations.

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or as an alternative to net income or cash flow from operations determined in accordance with GAAP. Management compensates for these limitations by not viewing Adjusted EBITDA in isolation, and specifically by using other GAAP measures, such as cash flow provided by (used in) operating activities and capital expenditures, to measure our liquidity. Our calculation of Adjusted EBITDA may not be comparable to the calculation of similarly titled measures reported by other companies.

Cash Flow Summary


	For the Six Months Ended
	June 29,			July 1,
	2008			2007			Change
	(in millions)
Net income (loss)	$	108.0		$	45.3		$	62.7
Non-cash items		(13.7	)		33.5			(47.2	)
Changes in working capital		(132.0	)		(77.1	)		(54.9	)

Net cash provided by (used in) operating activities		(37.7	)		1.7			(39.4	)
Net cash provided by (used in) investing activities		22.2			(21.9	)		44.1
Net cash provided by (used in) financing activities		183.7			(2.6	)		186.3

Net increase (decrease) in cash and cash equivalents		168.2			(22.8	)		191.0
Cash and cash equivalents at beginning of period		75.6			93.4			(17.8	)

Cash and cash equivalents at end of period	$	243.8		$	70.6		$	173.2

Net cash used in operating activities for the six month period ended June 29, 2008 was $37.7 million, a change of $39.4 million compared to net cash provided by operating activities of $1.7 million for the same period in 2007. The change primarily resulted from timing of payments received from customers in 2008.

Net cash provided by investing activities for the six months ended June 29, 2008 was $22.2 million, a change of $44.1 million compared to net cash used in investing activities of $21.9 million for the same period in 2007. This improvement is due to a $31.9 million increase in proceeds provided by the sale of assets and a $14.0 million decrease in contributions to Global Aeronautica, partially offset by a $1.8 million increase in capital spending.

Net cash provided by financing activities for the six months ended June 29, 2008 was $183.7 million, a change of $186.3 million compared to net cash used in financing activities of $2.6 million for the same period in 2007. The change primarily resulted from the $184.6 million in net proceeds provided by borrowings under the Incremental Facility.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements as of June 29, 2008.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of our operating and financing activities, we are exposed to various market risks that may affect our consolidated results of operations and financial position. These market risks include fluctuations in interest rates, which impact the amount of interest we must pay on our variable-rate debt. Other than the interest rate swaps described below, financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash investments and trade accounts receivable.

Trade accounts receivable include amounts billed and currently due from customers, amounts currently due but, not yet billed, certain estimated contract changes, claims in negotiation that are probable of recovery, and amounts retained by the customer pending contract completion. We continuously monitor collections and payments from customers. Based upon historical experience and any specific customer collection issues that have been identified, we record a provision for estimated credit losses, as deemed appropriate.

While such credit losses have historically been within our expectations, we cannot guarantee that we will continue to experience the same credit loss rates in the future.

We maintain cash and cash equivalents with various financial institutions and perform periodic evaluations of the relative credit standing of those financial institutions. We have not experienced any losses in such accounts and believe that we are not exposed to any significant credit risk on cash and cash equivalents.

Some raw materials and operating supplies are subject to price and supply fluctuations caused by market dynamics. Our strategic sourcing initiatives are focused on mitigating the impact of commodity price risk. We have long-term supply agreements with a number of our major suppliers. We, as well as our supply base, are experiencing delays in the receipt of and price increases on metallic raw materials. Through 2008, we forecast that these raw material price increases will slow considerably. However, based upon market shift conditions and industry analysis we expect price increases to return in 2009 and beyond due to increased infrastructure demand in China and Russia, and increased aluminum and titanium usage in an ever wider range of global products. We generally do not employ forward contracts or other financial instruments to hedge commodity price risk, however, we are reviewing a full range of business options focused on strategic risk management for all raw material commodities.

Our suppliers’ failure to provide acceptable raw materials, components, kits and subassemblies would adversely affect our production schedules and contract profitability. We maintain an extensive qualification and performance surveillance system to control risk associated with such supply base reliance. We are dependent on third parties for all information technology services. To a lesser extent, we also are exposed to fluctuations in the prices of certain utilities and services, such as electricity, natural gas, chemical processing and freight. We utilize a range of long-term agreements and strategic aggregated sourcing to optimize procurement expense and supply risk in these categories.

Interest Rate Risks

From time to time, we may enter into interest rate swap agreements or other financial instruments in the normal course of business for purposes other than trading. These financial instruments are used to mitigate interest rate or other risks, although to some extent they expose us to market risks and credit risks.

We control the credit risks associated with these instruments through the evaluation of the creditworthiness of the counter parties. In the event that a counter party fails to meet the terms of a contract or agreement then our exposure is limited to the current value, at that time, of the interest rate differential, not the full notional or contract amount. Management believes that such contracts and agreements have been executed with creditworthy financial institutions. As such, we consider the risk of nonperformance to be remote.

In the past, we have entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate debt. Under these agreements, we exchanged floating rate interest payments for fixed rate payments periodically over the term of the swap agreements. We may continue to manage market risk with respect to interest rates by entering into hedge agreements, as we have done in the past.

Management performs a sensitivity analysis to determine how market rate changes will affect the fair value of any market risk sensitive hedge positions and all other debt that we will bear. Such an analysis is inherently limited in that it represents a singular, hypothetical set of assumptions. Actual market movements may vary significantly from our assumptions. Fair value sensitivity is not necessarily indicative of the ultimate cash flow or earnings effect we would recognize from the assumed market rate movements. We are exposed to cash flow risk due to changes in interest rates with respect to the entire $612.0 million of variable rate debt currently outstanding under our senior secured credit facilities. A one-percentage point increase in interest rates on our variable-rate indebtedness would decrease our annual pre-tax income by approximately $6.1 million. While there was no debt outstanding under our revolving credit facility at June 29, 2008, any future borrowings would be subject to the same type of variable rate risks. All of our remaining debt is at fixed rates; therefore, changes in market interest rates under these instruments would not significantly impact our cash flows or results of operations.

Foreign Currency Risks

We are subject to limited risks associated with foreign currency exchange rates due to our contracted business with foreign customers and suppliers. As purchase prices and payment terms under the relevant contracts are denominated in U.S. dollars, our exposure to losses directly associated with changes in foreign currency exchange rates is not material. However, because the strength of the U.S. dollar has declined significantly in relation to many foreign currencies, some of our foreign suppliers have experienced exchange-rate related losses. If the U.S. dollar does not strengthen or if it continues to decline, we may be forced by our foreign suppliers and customers to renegotiate the terms of their respective contracts, which could have a significant impact to our margins and results of operations.

Utility Price Risks

We have exposure to utility price risks as a result of volatility in the cost and supply of energy and in natural gas prices. To minimize this risk, we have entered into fixed price contracts at certain of our manufacturing locations for a portion of their energy usage for periods of up to three years. Although these contracts would reduce the risk to us during the contract period, future volatility in the supply and pricing of energy and natural gas could have an impact on our consolidated results of operations. A 1% increase (decrease) in our monthly average utility costs would increase (decrease) our cost of sales by approximately $0.3 million for the year.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Our Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 29, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, we are party to various lawsuits, legal proceedings and claims arising out of our business. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of these proceedings, even if determined adversely, would not have a material adverse effect on our business, financial condition or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007 except for the following risk factors:

Our substantial indebtedness could prevent us from fulfilling our obligations under our outstanding senior notes and our senior secured credit facilities.

We have a significant amount of indebtedness. As of June 29, 2008, our total indebtedness was $882.0 million, excluding unused commitments under the revolving credit facility in our senior secured credit facilities. Our substantial indebtedness could have important consequences for us and investors in our securities. For example, it could:

	•		make it more difficult for us to satisfy our obligations with respect to our outstanding debt;

	•		increase our vulnerability to general adverse economic and industry conditions;

	•		require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;

	•		limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

	•		restrict us from making strategic acquisitions or exploiting business opportunities;

	•		place us at a competitive disadvantage compared to our competitors that have less debt; and

	•		limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds, dispose of assets or pay cash dividends.

In addition, a substantial portion of our debt bears interest at variable rates. If market interest rates increase, variable-rate indebtedness will create higher debt service requirements and it may become necessary for us to dedicate a larger portion of cash flow to service such indebtedness. To the extent we have not entered into hedging arrangements, we are exposed to cash flow risk due to changes in interest rates with respect to the entire $612.0 million of variable-rate indebtedness under our senior secured credit facilities.

A one-percentage point increase in interest rates on our variable-rate indebtedness would decrease our annual pre-tax income by approximately $6.1 million.

We may be adversely affected if we are unable to maintain effective internal controls that ensure timely and reliable external financial reporting.

We are annually required to provide a report from management to our shareholders on our internal control over financial reporting that includes an assessment of the effectiveness of these controls. Additionally, in connection with management’s assessment, we will be required to obtain an attestation report from an independent registered public accounting firm on their assessment of the operating effectiveness of our internal controls. Internal control over financial reporting has inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate because of changed conditions, and fraud. Because of these inherent limitations, internal control over financial reporting might not prevent or detect all misstatements or fraud. If we cannot maintain and execute adequate internal control over financial reporting or implement required new or improved controls that provide reasonable assurance of the reliability of the financial reporting and preparation of our financial statements for external use, we could suffer harm to our reputation, fail to meet our public reporting requirements on a timely basis, or be unable to properly report on our business and the results of our operations.

For the period ending March 30, 2008 our management determined that we had a material weakness related to our financial close and reporting process. This material weakness related to the timely review and adjustment of purchase accounting reserves, which if not identified could have led to a material misstatement in our financial statements. Our remaining purchase accounting reserves were immaterial at March 30, 2008. As a result, we do not believe that our internal control over financial reporting continues to be affected by the identified material weakness. However, we cannot assure you that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional significant deficiencies or material weaknesses that could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting required under Sarbanes-Oxley.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the six month period ended June 29, 2008, we issued an aggregate of 9,432 shares of our common stock or less than 1% of the aggregate amount of common stock outstanding, to our members of our Board of Directors in reliance on Section 4(2) of the Securities Act.

During the six month period ended June 29, 2008, we issued an aggregate of (i) 9,470 shares of our common stock in connection with the exercise of SARs originally granted in accordance with Rule 701 of the Securities Act and (ii) 6,299 shares of our common stock in connection with the exercise of stock options originally granted in reliance on section 4(2) of the Securities Act.


		Page
	PART I – FINANCIAL INFORMATION

Item 1	Interim Unaudited Condensed Consolidated Financial Statements		4
	Consolidated Balance Sheets		4
	Consolidated Statements of Operations		5
	Consolidated Statements of Cash Flows		6
	Notes to the Interim Unaudited Condensed Consolidated Financial Statements		7

Item 2	Management’s Discussion And Analysis Of Financial Condition And Results Of Operations		28

Item 3	Quantitative And Qualitative Disclosures About Market Risk		42

Item 4	Controls And Procedures		44

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		44

Item 1A	Risk Factors		44

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		45

Item 3	Defaults Upon Senior Securities		46

Item 4	Submission of Matters to a Vote of Security Holders		46

Item 5	Other Information		46

Item 6	Exhibits		47

	Signatures		48
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906


(31.1)*		Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

(31.2)*		Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

(32.1)*		Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

(32.2)*		Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.


		Vought Aircraft Industries, Inc.


		(Registrant)

August 11, 2008		/s/ KEITH HOWE

(Date)		Vice President and Chief Financial Officer

August 11, 2008		/s/ WENDY HARGUS

(Date)		Interim Principal Accounting Officer


Date: August 11, 2008
		/s/ ELMER DOTY

		Elmer Doty
		President and Chief Executive Officer

1.		I have reviewed this quarterly report on Form 10-Q of Vought Aircraft Industries, Inc.;

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 the 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

	(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: August 11, 2008
		/s/ KEITH HOWE

		Keith Howe
		Vice President and Chief Financial Officer

(1)		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.