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Hawker Beechcraft SEC Filing Reveals Challenges Ahead
As of April 16, Hawker Beechcraft had not released its 2011 financial report, but the obligatory 10-K form filed with the Securities and Exchange Commission paints a picture of a difficult road ahead for the company.
In a statement issued April 13 announcing the filing, CEO Steve Miller said the document reflects “the combined effect of the prolonged weakness in our market that has continued to affect our business and the heavy debt burden the company has operated under since 2007.”
Hawker Beechcraft, he said, “continues to work closely with its lenders to restructure the company’s balance sheet, and to do so as quickly as possible. In the coming weeks,” he added, “we expect to decide on a path forward for Hawker Beechcraft that will include a plan that will put the company on firm financial footing and better position Hawker Beechcraft for the future.”
On the other hand, the 216-page 10-K filing offers a blunter assessment as it discusses risk factors ahead, saying Hawker Beechcraft management has concluded “there is substantial doubt about our ability to continue as a going concern.”
The filing goes on to report that as of Dec. 31, 2011, Hawker Beechcraft had $2.334 billion in total indebtedness. In addition, it says the company has issued letters of credit totaling $51.2 million of the $75 million available under its synthetic letter of credit facility. Added to that is an additional $124.5 million senior tranche term loan to fund ongoing operations.
Should Hawker Beechcraft be unable to make payments or refinance its debt, or obtain new financing under the circumstances, the filing lists the following options:
“sales of assets”
“sales of equity”
“negotiations with our lenders to restructure the applicable debt and/or”
“seeking protection under Chapter 11 of the U.S. Bankruptcy Code.”
The 10-K points out that despite the current indebtedness level, Hawker Beechcraft and its subsidiaries may still be able to incur substantially more debt, but adds that this “could exacerbate the risk associated with our substantial indebtedness.” The filing also makes it clear that, “If new debt is added to our subsidiaries’ current debt levels, the related risks that we now face could intensify.”
Hawker Beechcraft Not In Control
While there are options, to what degree Hawker Beechcraft is captain of its own destiny remains a question. The 10-K filing explains that private-equity investment funds affiliated with Goldman Sachs Capital Partners and Onex Partners own essentially all of the company’s equity, and that a majority of members of its board of directors have been designated by these funds. As such, “they are able to substantially influence the appointment of management or entry into extraordinary transactions, including mergers and sales of assets.”
A look at business activity at Hawker Beechcraft’s business and general aviation segment is no less sobering. Sales, which were $2.31 billion in 2009, dropped to $1.735 billion in 2010 and last year topped out at $1.359 billion. Deliveries of both business and general aviation aircraft declined during the same period. Deliveries totaled 309 in 2009, dropped to 238 in 2010 and last year were 213 (including 15 King Air deliveries to the military, but not including delivery of 78 T-6 military trainers). As for the backlog, the total value shrank from $1.407 billion in 2010 to $1.130 billion in 2011. The company incurred losses last year totaling $632.8 million.
The company also expressed the intent to focus future research and development efforts on derivative models of its existing aircraft. It further said research expenditures, which were $107.3 million in 2009 and $101.1 million in 2010, were cut back to $94.3 million last year.
Aside information revealed in the 10-K filing, there was other news of Hawker Beechcraft’s predicament.
In March, the company announced it had entered into a forbearance agreement with lenders that some analysts described as another milepost en route to a filing for bankruptcy protection under Chapter 11. At best, it was seen as a holding action while the company works out a major restructuring strategy. In a media release, the company said it had “reached an agreement with certain lenders that will provide the company with approximately $120 million of additional liquidity.”
Last September Moody’s Investment Service downgraded Hawker Beechcraft’s credit rating from Caa2 to Caa3. On April 5 Moody’s announced it intended to further downgrade the credit rating to Ca from Caa3, and a limited default (LD) designation has been assigned.
More recently, on April 9, Standard & Poor’s downgraded Hawker Beechcraft’s corporate crediting rating to D based on the belief that it had missed an April 2 interest payment on its credit facility. It was also downgraded to CC On Forbearance Agreement, based on the likelihood of a selective default.
A Dispute with Airbus Continues
In May last year, an arbiter declared an award of $14.2 million against Hawker Beechcraft in a two-year-old dispute with Airbus. The European consortium had been contracted to provide Hawker fuselages, wings, track kits and spare parts under a 1998 airframe volume purchase and support agreement. Airbus claimed it had invested heavily to expand its production capacity to meet the demand from Hawker Beechcraft, but that in 2009 the Wichita-based OEM “unilaterally reduced the number of ship sets that it would purchase, in breach of its contractual obligations.” Airbus had been seeking damages of more than $60 million.
In March this year, Hawker Beechcraft filed an additional Request for Arbitration with the International Court of Arbitration of the International Chamber of Commerce (ICC) in Paris. In the filing Hawker Beechcraft claims it was Airbus that breached the 1998 agreement and initiates proceedings against Airbus Operations Ltd.
The response from Airbus and nomination of a co-arbiter are due within 30 days of receipt of the request for arbitration from the ICC.
Further muddying Hawker Beechcraft’s future outlook is the competition for a U.S. Air Force light air support (LAS) aircraft, in which the company has heavily promoted the AT-6, a modified version of its T-6 trainer. If fully realized, the contract could be worth nearly $1 billion.
Last fall, the Air Force announced it had selected another competitor, the Super Tucano, built by Brazilian OEM Embraer and backed by its U.S. partner Sierra Nevada. Hawker Beechcraft protested, going so far as to take its case to the U.S. Court of Claims and rally political support in Congress. Following an investigation, the Air Force revisited the selection process and set aside its decision, saying it would reissue the request for bids.
Meanwhile, Sierra Nevada filed a motion with the claims court on April 16, asking for “judicial review of the results of the Commander Directed Investigation in a still-pending lawsuit filed by Hawker Beechcraft Defense Company against the Air Force.
“We believe it is important to the goals of transparency, a fair and open competition and the integrity of the process that the court now review the results of the Air Force investigation and actions, including determining whether the agency’s proposed corrective actions were justified and reasonable,” said Sierra Nevada v-p of ISR business development Taco Gilbert.
The 10-K filing by Hawker Beechcraft in April contained some information about compensation for upper-level executives. Saying that Hawker Beechcraft established a pay-for-performance environment “by linking short-term incentive-based compensation to the achievement of financial and non-financial goals,” the company reported that it made no incentive award payouts for performance last year.
Further, while it did not provide base salary increases for named executive officers during 2011, effective Jan. 2, 2012, the company “restored the base salaries of certain named executive officers,” including former CEO and now president Bill Boisture and executive v-p of customers Shawn Vick to salary levels that were in effect before the 10-percent base salary reductions that occurred in 2010. Also, in March this year, the company increased the base salaries for Vick and general counsel and secretary Alexander Snyder “as a result of the expansion of their roles.”
The filing listed Boisture’s total compensation for 2011 as $747,127, a sharp drop from $3.6 million in 2010. Compensation in 2011 for other top Hawker Beechcraft executives ranged from $678,939 for Vick to $304,408 for former vice chairman James Maslowski.
When Hawker Beechcraft hired Robert “Steve” Miller as its new CEO in February this year, the employment agreement provided for an annual base salary of $1.5 million, a payment of $5 million representing his surrender of comparable value as a result of terminating his previous employment, and an annual performance bonus target of 100 percent of his salary with a maximum of 200 percent of his salary.
2011 Numbers Down
While Hawker Beechcraft had not released its 2011 financial report as of April 16, the company did provide some information to the General Aviation Manufacturers Association (GAMA) report for the year.
Hawker Beechcraft’s total of 198 civil aircraft deliveries (piston, turboprop and jet) in 2011 came in below the 214 deliveries listed for 2010, and billings in 2011 totaled $1.354 billion, short of the $1.583 billion recorded in 2010.
On the plus side, however, civil deliveries in the fourth quarter of 2011 totaled 85 aircraft, a substantial jump from 33 deliveries in the third quarter.
A Hawker Beechcraft spokeswoman also pointed out a number of positive highlights, among them:
Hawker Beechcraft aircraft accounted for 42 percent of the business turboprop aircraft and 34 percent of the medium jet market.
The King Air 350 continues to be one of the most delivered business turbine aircraft, with 49 deliveries in 2011.
With 78 T-6A Texas IIs delivered in 2011, Hawker Beechcraft lays claim to being the leading producer of military training aircraft in the world today.