Hawker expects $482 million in losses

Hawker Beechcraft expects to record $482 million in losses when it reports its 2011 financial statement, which will be filed by mid-April, the company said Monday in a filing with the Securities and Exchange Commission.

The filing was an extension to file its 2011 financial statement, called a Form 10-K, late. Hawker will now file the statement on or before April 16, the company said.

The report was due Friday.

The losses include restructuring and non-cash intangible “asset impairment” charges of $304.9 million for last year, compared to about $173.9 million for 2010, it said.

One analyst said operating losses appear to be about $85 million of the total losses reported.

The figures are preliminary and could change, since management hasn’t completed the financial reporting process, it said.

The company also did not make interest payments due Monday on its bonds. It has a 30-day grace period to pay before it is considered in default.

Hawker Beechcraft wasn’t able to file by last week’s deadline without “unreasonable effort and expense” because it is devoting substantial resources to negotiate with its senior lenders and other creditors, the filing said, “in light of ongoing adverse economic and industry conditions.”

Hawker also was plagued by delays in producing financial information because of glitches in the implementation of an upgraded “enterprise resource planning” software system, and management has not completed the year-end closing and financial reporting process, it said.

The company expects that this month’s financial report will include an explanation from its independent public accounting firm expressing “substantial doubt about its ability to continue as a going concern,” the filing said.

Hawker Beechcraft has struggled with massive debt taken on when Onex and Goldman Sachs bought the aircraft manufacturer from Raytheon Inc. in 2007 for $3.3 billion, at the top of the business jet market. The industry has suffered from the downturn in the market.

Sources told Reuters last week that the company is in the midst of negotiating a pre-arranged bankruptcy with its largest lenders, which include Centerbridge Partners, Angelo Gordon and Capital Research & Management, the report said, quoting people familiar with the matter.

Analysts have said they believe it’s a matter of when, and not whether, the company will file for Chapter 11 restructuring.

Hawker Beechcraft was in violation of its financial covenants under its credit agreement with primary lenders as of Dec. 31, the company said in Monday’s filing.

Last week, the company announced it had obtained additional liquidity from certain lenders to give the company time and flexibility to restructure its balance sheet.

As part of that agreement, lenders also granted the company relief from certain existing loan covenants, Steve Miller, Hawker Beechcraft CEO, said in the statement Monday.

"We continue to work closely with our lenders toward a comprehensive recapitalization that will resolve these issues and better position the company for the future," Miller said.

“What has not changed — and what will not change in any scenario — is Hawker Beechcraft’s commitment and ability to build, sell and service the best airplanes for our civilian and military customers,” he said in the statement.

That could give the company enough breathing room to negotiate a restructuring, said Malcolm Harris, a professor of finance at Friends University.

“There is plenty of reason to believe the company’s troubles are external, not internal,” Harris said. “As long as the senior lenders judge the company is being aggressive in pursuing sales and controlling cost, which it appears to us they are, they will conclude that they will recover more of their loans with Hawker Beechcraft alive than dead.”

The market is in “awful shape,” Harris said. “I think it’s in the interest of senior debt holders to keep Hawker Beechcraft going (until the general aviation market turns around). Their debt is worth a lot more with Hawker Beechcraft being a going concern.”

Hawker Beechcraft has hired business advisers Alvarez & Marsal to help fix its software system and improve performance and functionality, the report said. Development of the plan will be done in the second quarter of this year.

The company also has had difficulties with staff retention, it said, and has hired financial advisers to help with additional work associated with the negotiations with secured creditors and other key stakeholders.

Effective this month, it began an enhanced compensation plan for non-executives, including accounting and finance personnel, the filing said. And it continues to recruit qualified accounting and finance personnel.

The company will have roughly six weeks to negotiate a restructuring, said one analyst, who wished not to be named because it’s against his company’s policy to speak with the media.

“Lots of things can happen,” he said.

Onex and Goldman Sachs could inject new equity into the company. And lenders could reduce the amount of their senior loans.

The analyst suspects that Hawker Beechcraft is making an effort to work with debt holders in an attempt to avoid bankruptcy.

“I would expect them to try to make one effort at that,” he said. “But they don’t have too long to do it.”

That will take a lot of cooperation from those who hold the notes, he said.

Whether a restructuring will involve stretching out the time frame for debt servicing or reducing principal or writing down unsecured debt is not clear, said Harris, with Friends University.

“The problem facing Steve Miller is just not that the firm is burning through cash,” Harris said. “Hanging over his head like a Damascene sword is the fact that $2 billion plus of debt all comes due in the next three years. As Sam Johnson once said, ‘There’s nothing like the gallows for concentrating the mind.’ ”

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