BE AEROSPACE, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended November 27, 1999
Commission File No. 0-18348
BE AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1209796
(State of Incorporation) (I.R.S. Employer Identification No.)
1400 Corporate Center Way
Wellington, Florida 33414-2105
(Address of principal executive offices)
(561) 791-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES[X] NO[ ]
The registrant has one class of common stock, $.01 par value, of which
24,872,948 shares were outstanding as of January 5, 2000.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
November 27, February 27,
1999 1999
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 32,429 $ 39,500
Accounts receivable - trade, less allowance for doubtful
accounts of $2,921 (November 27, 1999)
and $2,633 (February 27, 1999) 121,746 140,782
Inventories, net 136,179 119,247
Other current assets 32,738 14,086
------------ -----------
Total current assets 323,092 313,615
------------ -----------
Property and equipment, net 151,226 138,730
Intangibles and other assets, net 424,756 451,954
------------ -----------
$ 899,074 $ 904,299
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 69,355 $ 63,211
Accrued liabilities 110,548 97,065
Current portion of long-term debt 13,837 9,916
------------ -----------
Total current liabilities 193,740 170,192
------------ -----------
Long-term debt 599,086 583,715
Other liabilities 29,983 34,519
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares outstanding - -
Common stock, $.01 par value; 50,000,000 shares authorized;
24,872,948 (November 27, 1999) and 24,602,915
(February 27, 1999) shares issued and outstanding 249 246
Additional paid-in capital 249,170 245,809
Accumulated deficit (164,980) (124,077)
Accumulated other comprehensive loss (8,174) (6,105)
----------- ----------
Total stockholders' equity 76,265 115,873
----------- ----------
$ 899,074 $ 904,299
=========== ==========
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
Net sales $ 164,578 $ 195,751 $ 541,505 $ 492,094
Cost of sales 166,586 120,141 406,589 305,004
---------- ---------- ---------- -----------
Gross profit (loss) (2,008) 75,610 134,916 187,090
Operating expenses:
Selling, general and administrative 27,253 21,674 70,576 58,715
Research, development and engineering 16,740 16,085 40,265 40,827
Amortization 6,147 6,624 17,699 16,038
Acquisition-related expenses - - - 79,155
---------- ----------- ---------- -----------
Total operating expenses 50,140 44,383 128,540 194,735
---------- ----------- ---------- -----------
Operating earnings (loss) (52,148) 31,227 6,376 (7,645)
Equity in losses of unconsolidated subsidiary - - 1,289 -
Interest expense, net 13,890 11,370 39,707 27,816
---------- ---------- ---------- -----------
Earnings (loss) before income taxes (66,038) 19,857 (34,620) (35,461)
Income taxes - 3,376 6,283 7,428
---------- ----------- ---------- -----------
Net earnings (loss) $ (66,038) $ 16,481 $ (40,903) $ (42,889)
=========== =========== ========== ===========
Basic net earnings (loss) per common share $ (2.66) $ .61 $ (1.65) $ (1.72)
=========== =========== ========== ===========
Diluted net earnings (loss) per common share $ (2.66) $ .59 $ (1.65) $ (1.72)
=========== =========== ========== ===========
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Nine Months Ended
November 27, November 28,
1999 1998
Cash flows from operating activities:
Net loss $ (40,903) $ (42,889)
Adjustments to reconcile net loss to net cash flows
provided by (used in) operating activities:
Acquisition-related expenses - 79,155
Depreciation and amortization 31,863 29,278
Deferred income taxes (172) (73)
Non-cash employee benefit plan contributions 1,586 1,701
Changes in operating working capital, net of effects from
acquisitions:
Accounts receivable 19,041 (8,815)
Inventories (17,307) (57,511)
Other current assets (3,547) 2,201
Payables, accruals and current taxes 14,578 4,301
----------- ----------
Net cash flows provided by operating activities 5,139 7,348
----------- ----------
Cash flows from investing activities:
Capital expenditures (27,457) (27,786)
Change in intangible and other assets (6,622) (16,185)
Acquisitions, net of cash acquired - (351,647)
----------- ----------
Net cash flows used in investing activities (34,079) (395,618)
----------- ----------
Cash flows from financing activities:
Net borrowings under bank credit facilities 20,341 83,270
Proceeds from issuance of long-term debt - 200,000
Proceeds from issuances of stock, net of expenses 1,759 4,453
Principal payments on long-term debt - (30,097)
----------- ----------
Net cash flows provided by financing activities 22,100 257,626
----------- ----------
Effect of exchange rate changes on cash flows (231) 507
----------- ----------
Net decrease in cash and cash equivalents (7,071) (130,137)
Cash and cash equivalents, beginning of period 39,500 164,685
----------- ----------
Cash and cash equivalents, end of period $ 32,429 $ 34,548
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest, net $ 46,078 $ 19,937
Income taxes, net $ 2,163 $ 2,017
Schedule of non-cash transactions:
Fair market value of assets acquired in acquisitions $ - $ 414,854
Cash paid for businesses acquired in acquisitions $ - $ 353,583
Liabilities assumed and accrued acquisition costs
incurred in connection with acquisitions $ - $ 71,100
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 27, 1999 AND NOVEMBER 28, 1998
(UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Note 1. Basis of Presentation
The condensed consolidated financial statements of BE
Aerospace, Inc. and its wholly-owned subsidiaries (the "Company" or
"B/E") have been prepared by the Company and are unaudited pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information related to the Company's
organization, significant accounting policies and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of management, these unaudited
condensed consolidated financial statements reflect all material
adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of operations and
statements of financial position for the interim periods presented.
These results are not necessarily indicative of a full year's results
of operations. Certain reclassifications have been made to the
financial statements to conform to the November 27, 1999
presentation.
Although the Company believes that the disclosures provided
are adequate to make the information presented not misleading, these
unaudited interim condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended February 27, 1999.
Note 2. Acquisitions and Disposition
On April 13, 1998, the Company completed its acquisition of
Puritan-Bennett Aero Systems Co. ("PBASCO") for approximately $67,900
in cash and the assumption of approximately $9,200 of liabilities,
including related acquisition costs and certain liabilities arising
from the acquisition. PBASCO is a manufacturer of commercial aircraft
oxygen delivery systems and "WEMAC" air valve components and, in
addition, supplies overhead lights and switches, crew masks and
protective breathing devices for both commercial and general aviation
aircraft.
On April 21, 1998, the Company acquired substantially all of
the assets of Aircraft Modular Products ("AMP") for approximately
$117,300 in cash and the assumption of approximately $12,800 of
liabilities, including related acquisition costs and certain
liabilities arising from the acquisition. AMP is a manufacturer of
cabin interior products for general aviation (business jet) and
commercial-type VIP aircraft, providing a broad line of products
including seating, sidewalls, bulkheads, credenzas, closets, galley
structures, lavatories, tables and sofas, along with related spare
parts.
On August 7, 1998, the Company acquired all of the capital
stock of SMR Aerospace, Inc. and its affiliates, SMR Developers LLC
and SMR Associates (together, "SMR") for an aggregate purchase price
of approximately $141,500 in cash and the assumption of approximately
$32,600 of liabilities, including related acquisition costs and
certain liabilities arising from the acquisition. The Company paid
for the acquisition of SMR by issuing four million shares (the "SMR
Shares") of Company stock (then valued at approximately $30 per
share) to the former stockholders of SMR and paying them $2,000 in
cash. The Company also paid $22,000 in cash to the employee stock
ownership plan ("ESOP") of a subsidiary of SMR Aerospace to purchase
the minority equity interest in such subsidiary held by the ESOP. The
Company agreed to register for sale the SMR Shares with the
Securities and Exchange Commission. If the net proceeds from the sale
of the shares, which included the $2,000 in cash already paid, was
less than $120,000, the Company agreed to pay such difference in cash
to the selling stockholders. Because of the market price for the
Company's common stock and the Company's payment obligation to the
selling stockholders described above, the Company decided to
repurchase the SMR Shares with approximately $118,000 of the proceeds
from the sale of 9 1/2% Senior Subordinated Notes instead of
registering the shares for sale (the $118,000 payment represents the
net proceeds of $120,000 the Company was obligated to pay the selling
stockholders, less the $2,000 in cash the Company already paid them).
SMR provides design, integration, installation and
certification services for commercial aircraft passenger cabin
interiors. SMR provides a broad range of interior reconfiguration
services that allow airlines to change the size of certain classes of
service, modify and upgrade the seating, install telecommunications or
entertainment options, relocate galleys, lavatories, and overhead bins
and install crew rest compartments. SMR is also a supplier of
structural design and integration services, including airframe
modifications for passenger-to-freighter conversions. In addition, SMR
provides a variety of niche products and components that are used for
reconfigurations and conversions. SMR's services are performed
primarily on an aftermarket basis and its customers include major
airlines such as United Airlines, Japan Airlines, British Airways, Air
France, Cathay Pacific and Qantas, as well as Airborne Express,
Federal Express and Boeing.
On September 3, 1998, the Company acquired substantially all
of the galley equipment assets and certain property and assumed
related liabilities of C.F. Taylor Interiors Limited and acquired the
common stock of C.F. Taylor (Wokingham) Limited (collectively "CF
Taylor"), both wholly owned subsidiaries of EIS Group PLC, for a total
cash purchase price of approximately $25,100, subject to adjustments,
and the assumption of approximately $16,500 of liabilities, including
related acquisition costs and certain liabilities arising from the
acquisition. CF Taylor is a manufacturer of galley equipment for both
narrow- and wide-body aircraft, including galley structures, crew
rests and related spare parts.
As a result of the acquisitions of PBASCO, AMP and SMR, the
Company recorded a charge aggregating $79,155 for the write-off of
acquired in-process research and development and acquisition-related
expenses associated with these and other transactions.
The Company determined that these projects ranged from 25% -
95% complete at November 27, 1999 and estimates that the cost to
complete these projects will aggregate approximately $5,300 and be
incurred over a three year period.
The acquisitions of PBASCO, AMP, SMR and CF Taylor (the "1999
Acquisitions") have been accounted for using purchase accounting.
On February 25, 1999, the Company sold a 51% interest in its
In-Flight Entertainment ("IFE") subsidiary (the "IFE Sale") to a
wholly-owned subsidiary of Sextant Avionique SA for an initial sale
price of $62,000 (subject to adjustment based on the actual results of
operations during the two years following the IFE Sale). As a result
of the IFE Sale, the Company accounted for its remaining 49% interest
in IFE using the equity method of accounting.
On October 5, 1999, the Company completed the sale of its
remaining 49% equity interest in IFE to Sextant. Total consideration
for 100% of its equity interest in IFE, intra-entity obligations and
for the provision of marketing, product and technical consulting
services will range from a minimum of $93,600 up to $123,300
(inclusive of the $62,000 received in February 1999 for the sale of a
51% interest in IFE). Terms of the agreement provide for the Company
to receive payments of approximately $15,800 on the first and second
anniversary of the closing of this transaction. The third and final
payment will be based on the actual sales and booking performances
over the period from March 1, 1999 to December 31, 2001. The Company
intends to use the proceeds from this transaction to reduce
indebtedness. There was no gain or loss on the sale of the 49% equity
interest and any ultimate gain on the sale of the 51% equity interest
is dependent on the actual results of operations during the two years
following the IFE Sale.
Note 3. Comprehensive Income (Loss)
Comprehensive income (loss) is defined as all changes in a
company's net assets except changes resulting from transactions with
shareholders. It differs from net income (loss) in that certain items
currently recorded to equity would be a part of comprehensive income
(loss). The following table sets forth the computation of
comprehensive income (loss) for the periods presented:
Three Months Ended Nine Months Ended
--------------------------- --------------------------
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
---- ---- ---- ----
Net earnings (loss) $ (66,038) $ 16,481 $ (40,903) $ (42,889)
Other comprehensive income:
Foreign exchange translation adjustment 385 (606) (2,069) (191)
---------- --------- ---------- ---------
Comprehensive income (loss) $ (65,653) $ 15,875 $ (42,972) $ (43,080)
========== ========= ========== =========
Note 4. Segment Reporting
The Company is organized based on customer-focused operating
groups operating in a single segment. Each group reports its results
of operations and makes requests for capital expenditures and
acquisition funding to the Company's chief operation decision-making
group. This group is presently comprised of the Chairman, the
President and the Chief Executive Officer, and the Corporate Senior
Vice President of Administration and Chief Financial Officer. Under
this organizational structure, the Company's operating groups were
aggregated into two reportable segments: the Aircraft Cabin Interior
Products and Services segment and the In-Flight Entertainment segment.
The Aircraft Cabin Interior Products and Services segment ("ACIPS") is
comprised of four operating groups: the Seating Products Group, the
Interior Systems Group, the Flight Structures and Integration Group
and the Services Group, each of which have separate management teams
and infrastructures dedicated to providing a full range of products to
their commercial and general aviation operator customers. Each of
these groups demonstrates similar economic performance and utilizes
similar distribution methods and manufacturing processes. Customers
are supported by a single worldwide after-sale service organization.
As described in Note 2, the Company sold a 51% interest in IFE on
February 25, 1999 and its remaining 49% interest in IFE on October 5,
1999. IFE was a separate, reportable segment. The Company evaluates
the performance of its operating segments based primarily on sales,
gross profit before special costs and charges, operating earnings
before special costs and charges, and working capital management.
The following table presents sales and other financial
information by business segment for the three month and nine month
periods ended:
Three Months Ended Nine Months Ended
November 27, 1999 November 27, 1999
------------------ ------------------
ACIPS ACIPS
----- -----
Net sales $ 164,578 $ 541,505
Gross profit (loss) (2,008) 134,916
Operating earnings (loss)
as reported (52,148) 6,376
Operating earnings before
special costs and charges 20,152 78,676
Working capital 129,352 129,352
Three Months Ended Nine Months Ended
November 28, 1998 November 28, 1998
------------------------------- ---------------------------------
ACIPS IFE TOTAL ACIPS IFE TOTAL
----- --- ----- ----- --- -----
Net sales $ 180,576 $ 15,175 $ 195,751 $ 432,565 $ 59,529 $ 492,094
Gross profit 72,557 3,053 75,610 169,796 17,294 187,090
Operating earnings (loss)
as reported 34,103 (2,876) 31,227 4,224 (11,869) (7,645)
Operating earnings (loss)
before special costs
and charges 34,103 (2,876) 31,227 75,839 (4,329) 71,510
Working capital 195,427 30,307 225,734 195,427 30,307 225,734
Note 5. Earnings (Loss) Per Common Share
Basic net earnings (loss) per common share is computed using
the weighted average common shares outstanding during the period.
Diluted net earnings (loss) per common share is computed by using the
average share price during the period when calculating the dilutive
effect of stock options. Shares outstanding for the periods presented
were as follows:
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
---- ---- ---- ----
Weighted average common shares outstanding 24,835 27,195 24,757 24,946
Dilutive effect of employee stock - 571 -
---------- ---------- ---------- ----------
Diluted shares outstanding 24,835 27,766 24,757 24,946
========== ========== ========== ==========
Note 6. Restructuring Charge
During the fourth quarter of fiscal 1999, the Company began to
implement a restructuring plan designed to lower its cost structure
and improve its long-term competitive position. This plan includes
consolidating seven facilities reducing the total number from 21 to
14, reducing its employee base by approximately 8% and rationalizing
its product offerings. The restructuring costs and charges are
comprised of $61,089 related to impaired inventories and property,
plant and equipment as a result of the rationalization of its product
offerings, plus severance and related separation costs, lease
termination and other costs of $4,949. The Company anticipates that it
will be substantially complete with this restructuring by the end of
the current fiscal year.
The assets impacted by this program include inventories,
factories, warehouses, assembly operations, administration facilities
and machinery and equipment.
The following table summarizes the utilization of the
restructuring accrual:
Balance at Balance at
Feb. 27, 1999 Utilized Nov. 27, 1999
----------------------------------------------
Severance, lease termination and other costs $ 4,298 1,895 $ 2,403
Impaired inventories, property and equipment 19,911 11,323 8,588
----------------------------------------------
$ 24,209 13,218 $10,991
==============================================
Note 7. Cost of Sales and Operating Expenses
During the latter part of fiscal 1999 and throughout fiscal 2000,
the Company's operating results have been negatively impacted by
operating inefficiencies at its seating products group. The operating
inefficiencies have resulted in delayed deliveries to customers,
increased re-work of seating products, claims for warranty, penalties,
out of sequence charges, substantial increases in air freight and other
expedite-related costs. Late customer deliveries have resulted in
certain airlines diverting seating programs to other manufacturers and
the deferral of other seating programs.
During the current quarter, the Company incurred approximately
$22,500 of costs associated with claims for penalties, out of sequence
charges and warranties related to its poor delivery performance as
described above. All of these costs have been included as a component
of cost of sales in the accompanying statement of operations.
During the three months ended November 27, 1999, the Company
completed a review of its businesses, and has decided to discontinue
certain product and service offerings. This product line
rationalization will reduce the number of facilities by two, and is
expected to result in a headcount reduction of approximately 700. The
total cost of this product and service line rationalization is expected
to be approximately $35,700, of which $32,600 was accrued during the
current quarter. Approximately $29,800 of this accrual was included in
cost of sales with the balance charged to selling, general and
administrative expenses in the accompanying statement of operations.
The balance of this charge of approximately $3,100 is expected to be
included as a component of cost of sales during the fourth quarter of
this fiscal year.
The following summarizes the penalties, out of sequence claims
and product line rationalization charges included in the accompanying
statement of operations:
Cost of Operating
Sales Expenses Total
----- -------- -----
Penalties, warranty and out of sequence claims $ 22,500 - $ 22,500
Product and service line rationalization costs-cash 4,900 2,800 7,700
Product and service line rationalization costs-non cash 24,900 - 24,900
-------- ------ --------
Total special costs $ 52,300 $2,800 $ 55,100
======== ====== ========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following discussion and analysis addresses the results of the
Company's operations for the three months ended November 27, 1999, as
compared to the Company's results of operations for the three months
ended November 28, 1998. The discussion and analysis then addresses the
results of the Company's operations for the nine months ended November
27, 1999, as compared to the Company's results of operations for the nine
months ended November 28, 1998. The discussion and analysis then
addresses the liquidity and financial condition of the Company and other
matters.
For comparability purposes, the Company has provided additional
pro forma information giving effect to each of the acquisitions (the
"1999 Acquisitions") and disposition (the "IFE Sale") the Company
completed during fiscal 1999, exclusive of any acquisition-related
expenses, as if they all occurred at the beginning of the year.
THREE MONTHS ENDED NOVEMBER 27, 1999, AS COMPARED TO THE RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 28, 1998
Net sales for the three-month period ended November 27, 1999 of
$164,578 were $31,173 and 15.9% less than sales of $195,751 for the
comparable period in the prior year. The decrease in sales is primarily
due to the impact of the sale of the Company's IFE business. On a pro
forma basis, sales decreased by $15,998, or 8.9%. The decrease in pro
forma sales is primarily due to a lower level of seating, service and
galley structures revenues.
Gross profit (loss) was $(2,008) or (1.2)% of sales for the three
months ended November 27, 1999. This was $77,618, or 102.7%, less than
the comparable period in the prior year of $75,610, which represented
38.6% of sales. The decrease in gross profit in the current period is
primarily attributable to the poor performance of the Company's seating
products group.
During the latter part of fiscal 1999 and throughout fiscal 2000,
the Company's operating results were negatively impacted by operating
inefficiencies at its seating products group. The operating
inefficiencies have resulted in delayed deliveries to customers,
increased re-work of seating products, claims for warranty, penalties,
out of sequence charges, substantial increases in air freight and other
expedite-related costs. Late customer deliveries have resulted in certain
airlines diverting seating programs to other manufacturers and the
deferral of other seating programs.
The current quarter's decrease in revenues, coupled with the
operating inefficiencies described above have negatively impacted the
current quarter's results of operations by approximately $17,200, which
has been presented as a component of cost of sales and operating
expenses. In addition, claims for penalties, out of sequence charges, and
warranties related to its poor delivery performance during the current
period aggregating approximately $22,500, were incurred during the
quarter and been included as a component of cost of sales in the
accompanying statement of operations. Further, during the current
quarter, the Company announced that it will discontinue certain product
and service offerings. This product and service line rationalization will
reduce the number of facilities by two, and is expected to result in a
headcount reduction of approximately 700. The total cost of this product
and service line rationalization is expected to be approximately $35,700,
of which $32,600 was accrued during the current quarter. Approximately
$29,800 of this accrual was included in cost of sales with the balance
charged to selling, general and administrative expenses in the
accompanying statement of operations. The balance of this charge of
approximately $3,100 is expected to be included as a component of cost of
sales during the fourth quarter of this fiscal year.
The aggregate impact of these operating inefficiencies, penalties,
and product line rationalization costs was to increase cost of sales and
operating expenses by approximately $72,300 during fiscal 2000. Future
margin expansion will largely depend on the success of the seating
business in four areas: achieving planned efficiencies for
recently-introduced products, optimizing its manufacturing processes with
the new management information system, successfully implementing lean
manufacturing techniques and rationalizing facilities and personnel.
While management expects its seating operations to improve over the next
six months, there can be no assurance that the improvements will occur or
that the future negative impact of operational inefficiencies will not be
material.
While management expects its seating operations to improve over
the next six months, there can be no assurance that the improvements will
occur or that the negative impact of operational inefficiencies will not
be material.
Selling, general and administrative expenses were $27,253 or 16.6%
of sales for the current quarter ended November 27, 1999 as compared to
$21,674 or 11.1% of sales in the prior year. The increase in selling,
general and administrative expenses is primarily attributable to product
and service line rationalization costs and related expenses.
Research, development and engineering expenses were $16,740 or
10.2% of sales for the three months ended November 27, 1999, an increase
of $655 over the comparable period in the prior year of $16,085 or 8.2%
of sales. Research, development and engineering expenses as a percent of
sales increased during the current quarter primarily due to the
inefficiencies at the Company's seating products group.
The Company generated an operating loss of $(52,148), or (31.7)%
of sales as compared to operating earnings of $31,227 or 16% during the
comparable period in the prior year. The operating loss in the current
period is the result of the manufacturing inefficiencies and related
costs described above.
Interest expense, net was $13,890 for the three months ended
November 27, 1999, or $2,520 greater than interest expense of $11,370 for
the comparable period in the prior year. The increase in interest expense
is due to the increase in the Company's long-term debt used, primarily,
to finance the 1999 Acquisitions.
The loss before income taxes in the current quarter was $(66,038),
as compared to earnings before income taxes of $19,857 in the prior
year's comparable period. Due to the current period loss, there was no
income tax expense for the quarter ended November 27, 1999 as compared to
$3,376 in the prior year's comparable period. The Company recorded a net
loss and net loss per share of $(66,038) and $(2.66) (basic and diluted),
respectively, as compared to net earnings and diluted net earnings per
share in the prior year of $16,481 and $.59 respectively. On a pro forma
basis, net earnings and net earnings per share in the prior year were
$17,561 and $.63 (diluted), respectively.
NINE MONTHS ENDED NOVEMBER 27, 1999, AS COMPARED TO THE RESULTS OF
OPERATIONS FOR THE NINE MONTHS ENDED NOVEMBER 28, 1998
Net sales for the fiscal 2000 nine-month period were $541,505, an
increase of $49,411 or 10.0% over the comparable period in the prior
year. The year over year increase in sales is primarily attributable to a
higher level of seating sales in the first half of the year together with
higher sales of general aviation and interior systems product sales in
fiscal 2000 over the prior year, offset by a lower level of galley
structures sales and the sale of the IFE business. On a pro forma basis,
sales increased by $36,719 or 7.3%.
Gross profit was $134,916 (24.9% of sales) for the nine months
ended November 27, 1999. This was $52,174 or 27.9%, lower than the
comparable period in the prior year of $187,090, which represented 38.0%
of sales. The decrease in gross profit in fiscal 2000 is primarily
attributable to the poor performance of the company's seating products
group as described above.
During the latter part of fiscal 1999 and throughout fiscal 2000,
the Company's operating results were negatively impacted by operating
inefficiencies at its seating products group. The operating
inefficiencies have resulted in delayed deliveries to customers,
increased re-work of seating products, claims for warranty, penalties,
out of sequence charges, substantial increases in air freight and other
expedite-related costs. Late customer deliveries have resulted in certain
airlines diverting seating programs to other manufacturers and the
deferral of other seating programs.
The current quarter's decrease in revenues, coupled with the
operating inefficiencies described above have negatively impacted the
current quarter's results of operations by approximately $17,200, which
has been presented as a component of cost of sales and operating
expenses. In addition, claims for penalties, out of sequence charges, and
warranties related to its poor delivery performance during the current
period aggregating approximately $22,500, were incurred during the
quarter and been included as a component of cost of sales in the
accompanying statement of operations. Further, during the nine months
ended November 27, 1999, the Company announced that it will discontinue
certain product and service offerings. This product and service line
rationalization will reduce the number of facilities by two, and is
expected to result in a headcount reduction of approximately 700. The
total cost of this product and service line rationalization is expected
to be approximately $35,700, of which $32,600 was accrued during the
current quarter. Approximately $29,800 of this accrual was included in
cost of sales with the balance charged to selling, general and
administrative expenses in the accompanying statement of operations. The
balance of this charge of approximately $3,100 is expected to be included
as a component of cost of sales during the fourth quarter of this fiscal
year.
The aggregate impact of these operating inefficiencies, penalties,
and product line rationalization costs was to increase cost of sales and
operating expenses by approximately $72,300 during fiscal 2000. Future
margin expansion will largely depend on the success of the seating
business in four areas: achieving planned efficiencies for
recently-introduced products, optimizing its manufacturing processes with
the new management information system, successfully implementing lean
manufacturing techniques and rationalizing facilities and personnel.
While management expects its seating operations to improve over the next
six months, there can be no assurance that the improvements will occur or
that the negative impact of operational inefficiencies will not be
material.
Selling, general and administrative expenses during the current
period were $70,576 or $11,861 higher than the prior year. Severance and
other facility consolidation costs associated with the charges described
above, together with increased operating expenses during the quarter at
the Company's seating products group for consultants, and increased MIS
training costs and related expenses were the principal reasons for the
increase.
Research, development and engineering expenses were $40,265 (7.4%
of sales) for the nine months ended November 27, 1999, a decrease of $562
over the comparable period in the prior year.
Amortization expense for the nine months ended November 27, 1999 of
$17,699 was $1,661 greater than the amount recorded in the comparable
period in the prior year. The increase is due to the 1999 Acquisitions.
Based on management's assumptions, a portion of the 1999
Acquisitions' purchase price was allocated to purchased research and
development that had not reached technological feasibility and had no
future alternative use. During the first nine months of fiscal 1999, the
Company recorded a charge of $79,155 for the write-off of the acquired
in-process research and development and acquisition-related expenses.
The Company generated operating earnings of $6,376 (1.2% of sales)
for the nine months ended November 27, 1999, as compared to an operating
loss of $(7,645) in the comparable period of the prior year. Pro forma
operating earnings for the nine month period in fiscal 1999 were $77,291.
Interest expense, net was $39,707 for the nine months ended
November 27, 1999, or $11,891 greater than interest expense of $27,816
for the comparable period in the prior year and is due to the increase in
the Company's long-term debt used, in part, to finance the 1999
Acquisitions.
The net loss for the nine months ended November 27, 1999 was
$(40,903) or $(1.65) per share (diluted), as compared to a net loss of
$(42,889) or $(1.72) per share (diluted), for the comparable period in
the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements consist of working capital
needs, on-going capital expenditures and scheduled payments of interest
and principal on its indebtedness. B/E's primary requirements for working
capital have been directly related to accounts receivable and inventory
levels as a result of both acquisitions and revenue growth. B/E's working
capital was $129,352 as of November 27, 1999, as compared to $143,423 as
of February 27, 1999.
At November 27, 1999, the Company's cash and cash equivalents were
$32,429, as compared to $39,500 at February 27, 1999. Cash provided by
operating activities was $5,139 for the nine months ended November 27,
1999. The primary source of cash during the nine months ended November
27, 1999 was non-cash charges for depreciation and amortization of
$31,863, a decrease in accounts receivable of $19,041 and an increase in
payables, accruals and current taxes of $14,578, offset by a net loss of
$40,903 and use of cash of $20,854 related to increases in inventories
and other current assets.
The Company's capital expenditures were $27,457 and $27,786
during the nine months ended November 27, 1999 and November 28, 1998,
respectively. The gross increase in capital expenditures was primarily
attributable to (1) acquisitions completed during fiscal 1999, (2) the
purchase of previously leased facilities, (3) the development of a new
management information system to replace the Company's existing systems,
many of which were inherited in acquisitions and (4) expenditures for
plant modernization. The Company anticipates on-going annual capital
expenditures of approximately $28,000 for the next several years.
The Company has credit facilities with The Chase Manhattan Bank
(the "Bank Credit Facility"). The Bank Credit Facility consists of a
$100,000 revolving credit facility (of which $50,000 may be utilized for
acquisitions) and an acquisition facility of $34,200. The revolving credit
facility expires in April 2004 and the acquisition facility is amortizable
over five years beginning in August 1999. The Bank Credit Facility is
collateralized by the Company's accounts receivable, inventories and by
substantially all of its other personal property. Indebtedness under the
existing Bank Credit Facility consisted of revolving credit facility
outstanding borrowings of $19,000 (bearing interest at LIBOR plus 1%, or
approximately 6.5%), letters of credit aggregating approximately $2,853
and outstanding borrowings under the acquisition
facility aggregating $34,200 (bearing interest at LIBOR plus 1.0%, or
approximately 7.1%) as of November 27, 1999. The Bank Credit Facility was
amended on December 21, 1999 and contains customary affirmative covenants,
negative covenants and conditions of borrowing, all of which were met by
the Company as of November 27, 1999.
The Company believes that the cash flow from operations and
availability under the Bank Credit Facility will provide adequate funds
for its working capital needs, planned capital expenditures and debt
service requirements through the term of the Bank Credit Facility. The
Company believes that it will be able to refinance the Bank Credit
Facility prior to its termination, although there can be no assurance that
it will be able to do so. The Company's ability to fund its operations,
make planned capital expenditures, make scheduled payments and refinance
its indebtedness depends on its future operating performance and cash
flow, which, in turn, are subject to prevailing economic conditions and to
financial, business and other factors, some of which are beyond its
control.
Deferred Tax Assets
The Company has established a valuation allowance related to the
utilization of its deferred tax assets because of uncertainties that
preclude it from determining that it is more likely than not that it will
be able to generate taxable income to realize such assets during the
operating loss carryforward period, which begins to expire in 2011. Such
uncertainties include recent cumulative losses by the Company, the highly
cyclical nature of the industry in which it operates, economic conditions
in Asia which is impacting the airframe manufacturers and the airlines,
the Company's high degree of financial leverage, risks associated with
the implementation of its integrated management information system, risks
associated with its seat manufacturing operations and risks associated
with the integration of acquisitions. The Company monitors these
uncertainties, as well as other positive and negative factors that may
arise in the future, as it assesses the necessity for a valuation
allowance for its deferred tax assets.
Year 2000 Costs
The "Year 2000" ("Y2K") issue is the result of computer programs
using two digits rather than four to define the applicable year. Because
of this programming convention, software, hardware or firmware may
recognize a date using "00" as the year 1900 rather than the year 2000.
Use of non-Y2K compliant programs could result in system failures,
miscalculations or errors causing disruptions of operations or other
business problems, including, among others, a temporary inability to
process transactions and invoices or engage in similar normal business
activities.
B/E Technology Initiatives Program. The Company has experienced
substantial growth as a result of having completed 15 acquisitions since
1989. Essentially all of the acquired businesses were operating on
separate information systems, using different hardware and software
platforms. In fiscal 1997, the Company analyzed its systems, both
pre-existing and acquired, for Y2K compliance with a view to replacing
non-compliant systems and creating an integrated Y2K compliant system. In
addition, the Company has developed a comprehensive program to address
the Y2K issue with respect to the following non-system areas: (1) network
switching, (2) the Company's non-information technology systems (such as
buildings, plant, equipment and other infrastructure systems that may
contain embedded microcontroller technology) and (3) the status of major
vendors, third-party network service providers and other material service
providers (insofar as they relate to the Company's business). As
explained below, the Company's efforts to assess its systems as well as
non-system areas related to Y2K compliance involve: (1) a wide-ranging
assessment of the Y2K problems that may affect the Company, (2) the
development of remedies to address the problems discovered in the
assessment phase and (3) testing of the remedies.
Assessment Phase. The Company has identified substantially all of its
major hardware and software platforms in use as well as the relevant
non-system areas described above. The Company has determined its systems
requirements on a company-wide basis and has begun the implementation of
an enterprise resource planning ("ERP") system, which is intended to be a
single system database onto which all the Company's individual systems
will be migrated. In relation thereto, the Company has signed contracts
with substantially all of its significant hardware, software and other
equipment vendors and third-party network service providers related to
Y2K compliance.
Remediation and Testing Phase. In implementing the ERP system, the
Company undertook and has completed a remediation and testing phase of
all internal systems, LANs, WANs and PBXs. This phase was intended to
address potential Y2K problems of the ERP system in relation to both
information technology and non-information technology systems and then to
demonstrate that the ERP software was Y2K compliant. ERP system software
was selected and applications implemented by a team of internal users,
outside system integrator specialists and ERP application experts. The
ERP system was tested between June 1997 and March 1998 by this team of
experts. To date, ten locations have been fully implemented on the ERP
system. This company-wide solution has been deployed in a manner designed
to meet full implementation for all remaining non-Y2K compliant sites.
Program to Assess and Monitor Progress of Third Parties. As noted above,
B/E has also undertaken an action plan to assess and monitor the progress
of third-party vendors in resolving Y2K issues. To date, the Company has
(1) obtained guidance from outside counsel to ensure legal compliance,
(2) generated correspondence to each of its third-party vendors to assess
the Y2K readiness of these vendors and (3) contracted a `Vendor Y2K'
fully automated tracking program to track all correspondence to/from
vendors, to track timely responses via an automatic computer generated
`trigger' to provide an electronic folder for easy reference and
retention and to specifically track internally identified `critical'
vendors. The Company is also currently developing an internal
consolidated database of the Company's vendors. To date, approximately
90% of the Company's critical vendors have responded. The Company is
directly contacting those vendors who have not responded and will
evaluate the feasibility of establishing second source parts to other
vendors, where possible.
Contingency Plans. The Company is analyzing contingency plans to handle
the worst-case Y2K scenarios that the Company believes reasonably could
occur and, if necessary, intends to develop a timetable for completing
such contingency plans.
Costs Related to the Y2K Issue. The Company has incurred approximately
$41,000 in costs related to the implementation of the ERP system and for
routine replacement of hardware and software. The Company currently
estimates the total ERP implementation, including routine replacement of
hardware and software, will cost approximately $49,000 and a portion of
the costs have and will be capitalized to the extent permitted under
generally accepted accounting principles.
Risks Related to the Y2K Issue. The Company's efforts to be Y2K compliant
are intended to minimize the adverse effects of the Y2K issue on the
Company's business and operations. Difficulties in implementing the ERP
system or failure by the Company to fully implement the ERP system or the
failure of its major vendors, third-party network service providers, and
other material service providers and customers to adequately address
their respective Y2K issues in a timely manner would have a material
adverse effect on the Company's business, results of operations and
financial condition. The Company's capital requirements may differ
materially from the foregoing estimate as a result of regulatory,
technological and competitive developments (including market developments
and new opportunities) in the Company's industry.
Fiscal 1999 Acquisitions
During fiscal 1999, the Company completed four major acquisitions
and two smaller transactions. In April 1998, the Company acquired
Puritan-Bennett Aero Systems Co., a manufacturer of commercial aircraft
oxygen systems, "WEMAC" air valve components, overhead lights and
switches, crew masks and protective breathing devices for both general
aviation and commercial aircraft. Also during April 1998, the Company
acquired Aircraft Modular Products, a manufacturer of business jet
seating, cabinetry and structures. In August 1998, the Company acquired
SMR Aerospace, Inc. and its affiliates, which is a leading supplier of
design, integration, installation and certification services for the
reconfiguration of aircraft allowing an airline to modify or upgrade the
seating arrangements, install telecommunications, move galley structures
or modify overhead containers or sidewalls, etc. SMR also manufactures
and installs crew rest compartments, and performs the engineering
required to make structural modifications and supplies the kits necessary
for the conversion of passenger to freighter aircraft. In September 1998,
the Company acquired CF Taylor, a leading manufacturer of galley
equipment for both narrow and wide-body aircraft, including galley
structures, crew rests.
Fiscal 1999 Disposition
In February 1999, the Company sold a 51% interest in its
In-Flight Entertainment subsidiary (the "IFE Sale") to a wholly-owned
subsidiary of Sextant Avionique SA for an initial sale price of $62,000
(subject to adjustment based on the actual results of operations during
the two years following the IFE Sale). See Note 2 to the unaudited
interim condensed consolidated financial statements for the period ended
November 27, 1999.
Fiscal 2000 Disposition
On October 5, 1999, the Company announced that it had entered into an
agreement to sell its remaining 49% equity interest in IFE to Sextant.
Total consideration for 100% of its equity interest in IFE, and for the
provision of marketing, product and technical consulting services will
range from a minimum of $83,300 up to $123,300 (inclusive of the $62,000
received in February 1999 for the sale of a 51% interest in IFE - see
Note 2). Terms of the agreement provide for the Company to receive
payments of approximately $15,800 on the first and second anniversary of
the closing of this transaction. The third and final payment will be
based on the actual sales and booking performances over the period from
March 1, 1999 to December 31, 2001. The Company intends to use the
proceeds from this transaction to reduce indebtedness.
Fiscal 1999 Restructuring Plan
During the fourth quarter of fiscal 1999, the Company began to
implement a restructuring plan designed to lower its cost structure and
improve its long-term competitive position. This plan includes
eliminating seven of its principal facilities, reducing the total number
from 21 to 14, reducing its employee base by approximately eight percent
and rationalizing its product offerings. The Company identified seven
facilities, four domestic and three in Europe, for consolidation. The
consolidation activities commenced during the first quarter of fiscal
2000 and will be substantially complete by the end of the fiscal year.
When fully implemented, management expects that this program will
generate pretax savings of approximately $15,000 - $20,000 annually.
The worldwide reduction in facilities, personnel and product
offerings is expected to aid the Company in several ways. It will
strengthen the global business management focus on the core product
categories, achieve a more effective leveraging of resources and improve
the Company's ability to rapidly react to changing business conditions.
The rationalization of product offerings, which was brought about as a
result of the 1999 Acquisitions and the large number of new product
introductions during the past year, will provide an on-going benefit of a
generally lower cost structure.
The assets impacted by this program include factories, warehouses,
assembly operations, administration facilities, machinery and equipment
and inventories. Management anticipates that the Company will continue to
incur pressure on its gross margins during the upcoming year as it
achieves learning-curve efficiencies associated with the introduction of
new products in volume for the first time and as it implements its
integrated management information system throughout the Company, and such
costs could be material.
Seating Manufacturing Inefficiencies
During the latter part of fiscal 1999 and throughout fiscal 2000,
the Company's operating results were negatively impacted by operating
inefficiencies at its seating products group. The operating
inefficiencies have resulted in delayed deliveries to customers,
increased re-work of seating products, claims for warranty, penalties,
out of sequence charges, substantial increases in air freight and other
expedite-related costs. Late customer deliveries have resulted in certain
airlines diverting seating programs to other manufacturers and the
deferral of other seating programs.
The current quarter's decrease in revenues, coupled with the
operating inefficiencies described above have negatively impacted the
current quarter's results of operations by approximately $17,200, which
has been presented as a component of cost of sales and operating
expenses. In addition, claims for penalties, out of sequence charges, and
warranties related to its poor delivery performance during the current
period aggregating approximately $22,500, were incurred during the
quarter and been included as a component of cost of sales in the
accompanying statement of operations. Further, during the current
quarter, the Company announced that it will discontinue certain product
and service offerings. This product and service line rationalization will
reduce the number of facilities by two, and is expected to result in a
headcount reduction of approximately 700. The total cost of this product
and service line rationalization is expected to be approximately $35,700,
of which $32,600 was accrued during the current quarter. Approximately
$29,800 of this accrual was included in cost of sales with the balance
charged to selling, general and administrative expenses in the
accompanying statement of operations. The balance of this charge of
approximately $3,100 is expected to be included as a component of cost of
sales during the fourth quarter of this fiscal year.
The aggregate impact of these operating inefficiencies, penalties,
and product line rationalization costs was to increase cost of sales and
operating expenses by approximately $72,300 during fiscal 2000. Future
margin expansion will largely depend on the success of the seating
business in four areas: achieving planned efficiencies for
recently-introduced products, optimizing its manufacturing processes with
the new management information system, successfully implementing lean
manufacturing techniques and rationalizing facilities and personnel.
While management expects its seating operations to improve over the next
six months, there can be no assurance that the improvements will occur or
that the negative impact of operational inefficiencies will not be
material.
Dependence upon Conditions in the Airline Industry
The Company's principal customers are the world's commercial
airlines. As a result, the Company's business is directly dependent upon
the conditions in the highly cyclical and competitive commercial airline
industry. In the late 1980s and early 1990s, the world airline industry
suffered a severe downturn, which resulted in record losses and several
air carriers seeking protection under bankruptcy laws. As a consequence,
during such period, airlines sought to conserve cash by reducing or
deferring scheduled cabin interior refurbishment and upgrade programs and
by delaying purchases of new aircraft. This led to a significant
contraction in the commercial aircraft cabin interior products industry
and a decline in our business and profitability. Since early 1994, the
airlines have experienced a turnaround in operating results, leading the
domestic airline industry to record operating earnings during calendar
years 1995 through 1998. This financial turnaround has, in part, been
driven by record
load factors, rising fare prices and declining fuel costs. The airlines
have substantially improved their balance sheets through cash generated
from operations and the sale of debt and equity securities. As a result,
the levels of airline spending on refurbishment and new aircraft
purchases have expanded. However, due to the volatility of the airline
industry and the current general economic and financial turbulence, the
current profitability of the airline industry may not continue and the
airlines may not be able to maintain or increase expenditures on cabin
interior products for either existing fleet or new aircraft.
In addition, the airline industry is undergoing a process of
consolidation and significantly increased competition. Such consolidation
could result in a reduction of future aircraft orders as overlapping
routes are eliminated and airlines seek greater economies through higher
aircraft utilization. Increased airline competition may also result in
airlines seeking to reduce costs by promoting greater price competition
from airline cabin interior products manufacturers, thereby adversely
affecting our revenues and margins.
Recently, turbulence in the financial and currency markets of many
Asian countries has led to uncertainty with respect to the economic
outlook for these countries. Although not all carriers have been affected
by the current economic events in the Pacific Rim, certain carriers,
including non-Asian carriers that have substantial Asian routes, could
cancel or defer their existing orders. In addition, Boeing has announced
that in light of the continued severe economic conditions in Asia, it
will be substantially scaling back production of a number of aircraft
types, including particularly wide-body aircraft which require up to five
times the dollar content for B/E's products as compared to narrow-body
aircraft.
This report includes forward-looking statements which involve
risks and uncertainties. The Company's actual experience may differ
materially from that anticipated in such statements. Factors that might
cause such a difference include, but are not limited to, those discussed
in the Company's most recent proxy statement and "Risk Factors" contained
in Exhibit 99 of the Company's Annual Report on Form 10-K for the fiscal
year ended February 27, 1999, as well as future events that may have the
effect of reducing the Company's available operating income and cash
balances, such as unexpected operating losses, delays in the integration
of the Company's acquired businesses, conditions in the airline industry,
customer delivery requirements, new or expected refurbishments, capital
expenditures, cash expenditures related to possible future acquisitions,
delays in the implementation of the Company's integrated management
information system, labor disputes involving the Company, its significant
customers or airframe manufacturers, delays or inefficiencies in the
introduction of new products or fluctuations in currency exchange rates.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
During the nine months ended November 27, 1999, there were no
material changes to the disclosure about market risk included in the
Company's Annual Report on Form 10-K for the fiscal year ended February
27, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Not applicable.
Item 2. Changes in Securities Not applicable.
Item 3. Defaults Upon Senior Securities Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders Not applicable.
Item 5. Other Information None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
1. Exhibit 10.8a Amendment No. 1 to the Chase Manhattan Bank
credit facility
2. Exhibit 10.8b Amendment No. 2 to the Chase Manhattan Bank
credit facility
3. Exhibit 10.8c Agreement with Thomson-CSF Sextant, Inc.
for the sale of a 49% interest in the
Company's In-Flight Entertainment ("IFE")
business
4. Exhibit 27 Financial Data Schedule for the nine months
ended November 27, 1999
b. Reports on Form 8-K
1. March 3, 1999 Sale of a 51% interest in the Company's IFE
business
2. March 12, 1999 Sale of a 51% interest in the Company's IFE
business
3. November 18, 1999 Resignation of Paul E. Fulchino, President
and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BE AEROSPACE, INC.
Date: January 7, 2000 By: /s/ Robert J. Khoury
--------------------------------
President and
Chief Executive Officer
Date: January 7, 2000 By: /s/ Thomas P. McCaffrey
-----------------------------
Corporate Senior Vice President
of Administration and Chief
Financial Officer