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 August 24, 2002
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
(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, $0.01 par value, of which
35,920,415 shares were outstanding as of October 3, 2002.
1
BE AEROSPACE, INC.
FORM 10-Q for the Quarter Ended August 24, 2002
Table of Contents
Page
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets
at August 24, 2002 and August 25, 2001..............................3
b) Condensed Consolidated Statements of Operations for the
three and six months ended August 24, 2002 and August 25, 2001......4
c) Condensed Consolidated Statements of Cash Flows for the
six months ended August 24, 2002 and August 25, 2001................5
d) Notes to Condensed Consolidated Financial Statements................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............23
Item 4. Controls and Procedures...............................................23
Part II Other Information
Item 1. Legal Proceedings.....................................................24
Item 2. Changes in Securities.................................................24
Item 3. Defaults Upon Senior Securities.......................................24
Item 4. Submission of Matters to a Vote of Security Holders...................24
Item 5. Other Information.....................................................24
Item 6. Exhibits and Reports on Form 8-K......................................24
Signatures............................................................25
Certifications........................................................26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in millions, except share data)
August 24, February 23,
2002 2002
---------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 147.5 $ 159.5
Accounts receivable - trade, less allowance for doubtful
accounts of $3.4 (August 24, 2002)
and $4.9 (February 23, 2002) 98.7 93.3
Inventories, net 162.7 157.0
Other current assets 49.6 46.6
--------- ---------
Total current assets 458.5 456.4
Property and equipment, net 141.6 142.7
Goodwill 345.8 333.1
Other intangible assets, net 163.2 172.9
Other assets, net 24.3 23.2
--------- ---------
$ 1,133.4 $ 1,128.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 62.8 $ 48.1
Accrued liabilities 90.2 102.2
Current portion of long-term debt 3.3 1.3
--------- ---------
Total current liabilities 156.3 151.6
Long-term debt 850.2 853.5
Other liabilities 1.6 2.1
Stockholders' Equity:
Preferred stock, $0.01 par value; 1.0 million shares
authorized; no shares outstanding -- --
Common stock, $0.01 par value; 100.0 million shares authorized;
34.8 million (August 24, 2002), 34.4 million (February 23, 2002)
shares issued and outstanding 0.3 0.3
Additional paid-in capital 408.3 405.3
Accumulated deficit (266.4) (258.7)
Accumulated other comprehensive loss (16.9) (25.8)
--------- ---------
Total stockholders' equity 125.3 121.1
--------- ---------
$ 1,133.4 $ 1,128.3
========= =========
See accompanying notes to condensed consolidated financial statements.
3
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in millions, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- -------------------------------
August 24, August 25, August 24, August 25,
2002 2001 2002 2001
---------------- --------------- --------------- ---------------
Net sales $154.8 $179.1 $309.1 $355.9
Cost of sales 105.8 110.1 207.1 221.0
------ ------ ------ ------
Gross profit 49.0 69.0 102.0 134.9
Operating expenses:
Selling, general and administrative 28.9 34.3 57.4 65.5
Research, development and engineering 9.6 11.0 18.7 23.1
------ ------ ------ ------
Total operating expenses 38.5 45.3 76.1 88.6
------ ------ ------ ------
Operating earnings 10.5 23.7 25.9 46.3
Interest expense, net 16.7 13.8 33.6 27.8
------ ------ ------ ------
(Loss) earnings before income taxes
and extraordinary item (6.2) 9.9 (7.7) 18.5
Income taxes -- 1.0 -- 1.8
------ ------ ------ ------
(Loss) earnings before extraordinary item (6.2) 8.9 (7.7) 16.7
Extraordinary item, net of tax -- -- -- 9.3
------ ------ ------ ------
Net (loss) earnings $ (6.2) $ 8.9 $(7.7) $ 7.4
====== ====== ====== ======
Basic net (loss) earnings per common share:
(Loss) earnings before extraordinary item $(0.18) $ 0.28 $(0.22) $ 0.54
Extraordinary item -- -- -- (0.30)
------ ------ ------ ------
Net (loss) earnings per common share $(0.18) $ 0.28 $(0.22) $ 0.24
====== ====== ====== ======
Diluted net (loss) earnings per common share:
(Loss) earnings before extraordinary item $(0.18) $ 0.27 $(0.22) $ 0.52
Extraordinary item -- -- -- (0.29)
------ ------ ------ ------
Net (loss) earnings per common share $(0.18) $ 0.27 $(0.22) $ 0.23
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
4
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
SIX MONTHS ENDED
----------------------------------
August 24, August 25,
2002 2001
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $ (7.7) $ 7.4
Adjustments to reconcile net (loss) earnings to net cash flows
provided by operating activities:
Extraordinary item -- 9.3
Depreciation and amortization 14.5 24.0
Non-cash employee benefit plan contributions 1.1 1.0
Loss on disposal of property and equipment 1.1 --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (3.5) (7.1)
Inventories (2.7) 3.5
Other current assets (2.5) (4.3)
Accounts payable 13.6 (5.9)
Accrued liabilities (13.4) 3.9
--------- --------
Net cash flows provided by operating activities 0.5 31.8
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (4.5) (48.5)
Capital expenditures (8.7) (6.5)
Changes in intangible and other assets (1.4) (16.0)
--------- --------
Net cash flows used in investing activities (14.6) (71.0)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under bank credit facilities (1.0) (66.7)
Proceeds from issuances of stock, net of expenses 1.9 57.2
Principal payments on long-term debt (0.9) (101.8)
Proceeds from long-term debt -- 244.9
--------- --------
Net cash flows provided by (used in) financing activities -- 133.6
--------- --------
Effect of exchange rate changes on cash flows 2.1 --
--------- --------
Net (decrease) increase in cash and cash equivalents (12.0) 94.4
Cash and cash equivalents, beginning of period 159.5 60.3
--------- --------
Cash and cash equivalents, end of period $ 147.5 $ 154.7
========= ========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest, net $ 34.1 $ 23.1
Income taxes, net $ 1.5 $ 1.1
See accompanying notes to condensed consolidated financial statements.
5
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and are unaudited
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. All adjustments, which,
in the opinion of management, are considered necessary for a fair
presentation of the results of operations for the periods shown, are of a
normal recurring nature and have been reflected in the condensed
consolidated financial statements. The results of operations for the periods
presented are not necessarily indicative of the results expected for the
full fiscal year or for any future period. The information included in these
condensed consolidated financial statements should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in this report and the consolidated financial
statements and accompanying notes included in the BE Aerospace, Inc. (the
"Company" or "B/E") Annual Report on Form 10-K/A for the year ended February
23, 2002.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts and related disclosures. Actual results could differ from those
estimates.
Certain reclassifications have been made for consistent presentation.
Note 2. Comprehensive Earnings (Loss)
-----------------------------
Comprehensive earnings (loss) is defined as all changes in a company's
net assets except changes resulting from transactions with shareholders. It
differs from net earnings (loss) in that certain items currently recorded to
equity would be a part of comprehensive earnings (loss). The following table
sets forth the computation of comprehensive earnings (loss) for the periods
presented:
THREE MONTHS ENDED SIX MONTHS ENDED
August 24, August 25, August 24, August 25,
2002 2001 2002 2001
-------------- -------------- -------------- ------------
Net (loss) earnings $(6.2) $ 8.9 $(7.7) $ 7.4
Other comprehensive (loss) earnings:
Foreign exchange translation adjustment 5.1 3.2 8.9 (0.7)
----- ------ ----- -----
Comprehensive (loss) earnings $(1.1) $ 12.1 $ 1.2 $ 6.7
===== ====== ===== =====
6
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 3. Segment Reporting
-----------------
The Company is organized based on the products and services it offers.
Under this organizational structure, the Company has three reportable
segments: Commercial Aircraft Products, Business Jet Products and Fastener
Distribution. The Company's Commercial Aircraft Products segment consists of
eight principal operating units while the Business Jet Products and Fastener
Distribution segments consist of two and one principal operating units,
respectively.
Each segment reports its results of operations and makes requests for
capital expenditures and acquisition funding to the Company's chief
operational decision-making group. This group is presently comprised of the
Chairman, the President and Chief Executive Officer, and the Corporate
Senior Vice President of Administration and Chief Financial Officer. Each
operating segment has separate management teams and infrastructures
dedicated to providing a full range of products and services to their
commercial, business jet and aircraft manufacturing customers.
The following table presents net sales and other financial information
by business segment:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------- -----------------------------------
August 24, August 25, August 24, August 25,
2002 2001 2002 2001
-------------- ----- -------------- --------------- ---- --------------
Commercial Aircraft Products
Net sales $ 110.5 $ 154.0 $ 217.6 $ 308.6
Operating earnings 13.7 (A) 20.4 25.7 (A) 40.8
Business Jet Products
Net sales 21.1 25.1 43.9 47.3
Operating earnings 4.6 (A) 3.3 9.4 (A) 5.5
Fastener Distribution
Net sales 23.2 -- 47.6 --
Operating earnings 3.5 -- 8.4 --
Consolidated
Net sales 154.8 179.1 309.1 355.9
Operating earnings 21.8 (A) 23.7 43.5 (A) 46.3
(A) Amounts exclude facility and personnel transition costs of $11.3 and
$17.6 for the three and six months ended August 24, 2002, respectively.
Including the transition costs, operating earnings for the Commercial
Aircraft Products and Business Jet Products business segments were $3.3
and $3.7, respectively, for the three months ended August 24, 2002, and
$9.1 and $8.4 for the six months ended August 24, 2002. The Company's
operating earnings, including transition costs, were $10.5 and $25.9 for
the three months and six months ended August 24, 2002, respectively.
7
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 4. Net (Loss) Earnings Per Common Share
------------------------------------
Basic net (loss) earnings per common share is computed using the
weighted average common shares outstanding during the period. Diluted net
(loss) earnings 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 SIX MONTHS ENDED
-------------------------- -------------------------
August 24, August 25, August 24, August 25,
2002 2001 2002 2001
---- ---- ---- ----
Weighted average common shares outstanding 34.8 32.2 34.7 30.9
Dilutive effect of employee stock options -- 1.0 -- 1.2
---- ---- ---- ----
Diluted shares outstanding 34.8 33.2 34.7 32.1
==== ==== ==== ====
Note 5. Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 establishes
accounting standards for the recognition and measurement of an asset
retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002, with early adoption permitted.
The Company plans to adopt SFAS No. 143 on February 23, 2003. The Company is
currently evaluating the provisions of SFAS No. 143 but expects that the
provisions of SFAS No. 143 will not have a material impact on its
consolidated results of operations and financial position upon adoption.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144") which
addresses the financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of" and became effective on February 24, 2002. The adoption of
SFAS No. 144 did not have a material impact on the Company's consolidated
results of operations and financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145, among other things, requires gains and
losses on extinguishment of debt to be classified as part of continuing
operations rather than treated as extraordinary, as previously required in
accordance with SFAS 4. SFAS No. 145 also modifies accounting for subleases
where the original lessee remains the secondary obligor and requires certain
modifications to capital leases to be treated as sale-leaseback
transactions. The Company plans to adopt SFAS No. 145 on February 23, 2003
with no material impact on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies the
guidance previously provided under Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Among other things, SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when
the liability is incurred as opposed to when there is commitment to a
restructuring plan as set forth under the nullified guidance. The Company
plans to adopt SFAS No. 146 on February 23, 2003 for future restructurings,
but expects no material impact on its consolidated financial statements.
8
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 6. Goodwill and Intangible Assets
------------------------------
Effective February 24, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." As a result of adopting SFAS No. 142, the Company's goodwill and
certain intangible assets are no longer amortized, but are subject to an
annual impairment test. In accordance with the implementation of SFAS No.
142, the historical cost and accumulated amortization of certain developed
technologies were reset with no impact to the consolidated financial
statements. The following sets forth the intangible assets by major asset
class, all of which were acquired during acquisition transactions:
August 24, 2002 February 23, 2002
------------ -------------------------------------- -------------------------------------
Net Net
Useful Life Original Accumulated Book Original Accumulated Book
(Years) Cost Amortization Value Cost Amortization Value
------------ ---------- ---------------- ---------- ----------- -------------- ----------
Acquired technologies 4-30 $ 93.2 $13.4 $ 79.8 $108.7 $27.2 $ 81.5
Trademarks and patents 7-30 25.4 7.8 17.6 24.6 6.8 17.8
Trademarks (nonamortizing) 19.4 -- 19.4 19.4 -- 19.4
Technical qualifications, plans
and drawings 3-30 25.8 12.2 13.6 25.5 11.5 14.0
Replacement parts annuity
and product approvals 3-30 38.5 17.2 21.3 37.6 15.9 21.7
Covenant not to compete and
other identified intangibles 3-10 20.5 9.0 11.5 30.6 12.1 18.5
------ ----- ------ ------ ----- -------
$222.8 $59.6 $163.2 $246.4 $73.5 $ 172.9
====== ===== ====== ====== ===== =======
In connection with the implementation of SFAS No. 142, the historical
cost and accumulated amortization of certain acquired technologies were
reset with no impact to the consolidated financial statements. Changes to
the original cost basis of intangible assets during the six month period
ended August 24, 2002 were due to the reclassification of assembled
workforce to goodwill and foreign currency fluctuations.
Aggregate amortization expense on intangible assets was approximately
$2.3 and $4.4 for the three and six months ended August 24, 2002,
respectively. In accordance with SFAS No. 142, the Company has completed
step one of the transitional impairment tests and fair value analysis for
goodwill and other intangible assets, respectively, and there was no
impairment indicators present and no loss was recorded during the respective
three and six month periods. Amortization expense is expected to be
approximately $8.9 in each of the next five fiscal years.
Changes to the original cost basis of intangible assets during the six
months ended August 24, 2002 were due to the reclassification of assembled
workforce to goodwill and foreign currency fluctuations. The changes in the
carrying amount of goodwill for the six months ended August 24, 2002 are as
follows:
Total
------
Balance as of February 23, 2002 $333.1
Additions 2.0
Reclassification of assembled workforce 8.5
Impairment losses --
Effect of foreign currency translation 2.2
------
Balance as of August 24, 2002 $345.8
======
9
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
A reconciliation of reported earnings before extraordinary item to
earnings before extraordinary item adjusted to reflect the adoption of SFAS
No. 142 in the three and six months ended August 25, 2001 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ---------------------
August 25, 2001 August 25, 2001
----------------------- ---------------------
Earnings before extraordinary item:
As reported $ 8.9 $ 16.7
Goodwill amortization, net of taxes 2.3 4.3
------- -------
As adjusted $ 11.2 $ 21.0
======= =======
Basic earnings per share before extraordinary item:
As reported $ 0.28 $ 0.54
As adjusted $ 0.35 $ 0.65
Diluted earnings per share before extraordinary item:
As reported $ 0.27 $ 0.52
As adjusted $ 0.34 $ 0.63
A reconciliation of reported net earnings to net earnings adjusted to
reflect the adoption of SFAS No. 142 in the three and six months ended
August 25, 2001 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ----------------------
August 25, 2001 August 25, 2001
----------------------- ----------------------
Net earnings:
As reported $ 8.9 $ 7.4
Goodwill amortization, net of taxes 2.3 4.3
------ ------
As adjusted $ 11.2 $ 11.7
====== ======
Basic earnings per share:
As reported $ 0.28 $ 0.24
As adjusted $ 0.35 $ 0.38
Diluted earnings per share:
As reported $ 0.27 $ 0.23
As adjusted $ 0.34 $ 0.36
Note 7. Long-Term Debt
--------------
On April 17, 2001 the Company sold $250.0 of 8 7/8% Senior Subordinated
Notes (the "8 7/8% Notes") due 2011. The proceeds from this offering, net of
debt issue costs, were approximately $242.8. Approximately $105.0 of the
proceeds were used to redeem the Company's 9 7/8% Senior Subordinated Notes
(the "9 7/8% Notes") due 2006 and approximately $66.7 of the proceeds were
used to repay balances outstanding under the Company's bank credit facility,
which was then terminated.
On April 17, 2001 the Company called for redemption its 9 7/8% Notes due
2006. The 9 7/8% Notes were redeemed at a price equal to 104.97% of the
principal amount, together with the accrued interest through the redemption
date. The Company deposited with the trustee on April 17, 2001 funds in an
amount sufficient to redeem the 9 7/8% Notes on the redemption date. Upon
deposit of these funds, the indenture governing the 9 7/8% Notes was
discharged. The Company incurred an extraordinary charge of $9.3 (net of
tax) for unamortized debt issue costs, redemption premiums and fees and
expenses related to the repurchase of the 9 7/8% Notes.
10
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
In August 2001, the Company established a new bank credit facility
consisting of a $150.0 revolving credit facility that expires in August
2006. The bank credit facility is collateralized by the Company's accounts
receivable, inventories and by substantially all of its other personal
tangible property. On August 24, 2002, indebtedness under the existing bank
credit facility consisted of outstanding borrowings of $144.0 (bearing
interest at LIBOR plus 3.0%) and letters of credit aggregating approximately
$5.6. The bank credit facility requires no principal payments until 2006.
The bank credit facility, which was amended on December 14, 2001 to provide
additional flexibility in its financial covenants, contains customary
affirmative covenants, negative covenants and conditions of borrowing, all
of which were met as of August 24, 2002. The interest rate margin on the
bank credit facility may increase or decrease in the event of certain
changes to the Company's financial leverage ratios.
Note 8. Equity Offering
---------------
On May 16, 2001, as part of a 5.75 million share offering, the Company
completed the sale of approximately 2.8 million primary shares of common
stock at a price of $19.50 per share. The remaining approximately 2.9
million shares of the Company's common stock represented shares that
previously were issued to former owners of the four companies acquired by
the Company effective February 24, 2001. These shares were sold on behalf of
the former owners as part of the offering, for which the former owners
received approximately $53.1 million. The Company received approximately
$50.3 million, net of estimated offering costs, from the sale of the 2.8
million shares.
Note 9. Acquisitions and Disposition
----------------------------
Effective May 8, 2001, the Company acquired the outstanding common stock
of Nelson Aero Space, Inc. for approximately $20.0. Effective July 18, 2001,
the Company acquired the outstanding common stock of Denton Jet Interiors,
Inc. for approximately $16.0. Both of the transactions have been accounted
for using purchase accounting. The assets purchased and liabilities assumed
have been reflected in the accompanying balance sheet as of February 23,
2002.
On September 14, 2001, the Company acquired M & M Aerospace Hardware,
Inc. ("M & M") for $184.7. M & M is a leading distributor of aftermarket
aerospace fasteners. The M & M acquisition was completed by issuing to the
former shareholders a total of approximately 1.9 million shares of B/E stock
valued at $32.7, paying them $152.0 in cash which includes the assumption of
current liabilities of approximately $8.8. The Company financed this
acquisition through cash on hand and approximately $100.0 of borrowings
under its bank credit facility. This transaction has been accounted for
using purchase accounting and has been included in the Company's operations
since the date of acquisition.
The following pro forma unaudited financial data for the three months
and six months ended August 25, 2001 is presented to illustrate the
estimated effects of the fiscal 2002 acquisitions as if the transactions had
occurred as of the beginning of the period.
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
August 25, 2001 August 25, 2001
--------------------- ---------------------
Net sales $ 208.0 $ 416.8
Net earnings before extraordinary item 12.2 24.5
Diluted net earnings per share before extraordinary item 0.35 0.72
Net earnings 12.2 15.2
Diluted earnings per share 0.35 0.45
11
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
On February 25, 1999, the Company completed the sale of a 51% interest
in its In-Flight Entertainment ("IFE") business to Sextant Avionique, Inc.
("Sextant"), a wholly-owned subsidiary of Sextant Avionique, S.A. (the "IFE
Sale"). The Company sold its 51% interest in IFE for $62.0 in cash. Terms of
the purchase agreement provided for the final price for the 51% interest to
be determined on the basis of operating results for the IFE business over
the two-year period ending February 28, 2001. The Company used substantially
all of the proceeds from the IFE Sale to repay a portion of its bank line of
credit. On October 5, 1999, the Company completed the sale of its remaining
49% equity interest in IFE to Sextant and this sale did not result in a
significant gain. Total consideration for 100% of its equity interest in
IFE, intra-entity obligations and the provision of marketing, product and
technical consulting services will range from a minimum of $93.6 up to
$123.3 (inclusive of the $62.0 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 $15.7 on October 5, 2000 and 2001, (the "IFE
obligations") which are included in other current assets net, in the
accompanying financial statements as of August 24, 2002. A 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 IFE obligations are
guaranteed by Thomson-CSF, a parent company of Sextant Avionique, S.A..
Sextant has not made any of the payments due to BE Aerospace, Inc. under the
terms of the purchase and sale agreement. The Company has initiated
arbitration proceedings to compel payment. Sextant has counterclaimed
against the Company, claiming various breaches of the IFE Sale agreements.
The Company expects that this will be resolved and the amount collected
during fiscal 2003.
Note 10. Recent Industry Conditions
--------------------------
The September 11, 2001 terrorist attacks have severely impacted
conditions in the airline industry. For the first time in the history of
commercial aviation, all domestic airlines were grounded for a period of
three days. According to industry sources, since resuming service, most
major US carriers have substantially reduced their flight schedules, parking
or retiring approximately 15% of their fleets. During August 2002, several
U.S. airlines announced further fleet downsizing, workforce reductions and
other cost reduction initiatives. The airlines have further responded by
decreasing domestic airfares to levels not seen since 1988. Domestic airline
revenues are down 12% for the first eight months of calendar 2002 compared
to the same period last year. As a result of the double-digit decline in
both traffic and airfares following the September 11, 2001 terrorist
attacks, and their aftermath, as well as other factors, such as the
weakening economy, the U.S. airline industry incurred the largest loss in
its history in calendar 2001, totaling in excess of $6 billion, net of a $5
billion cost infusion from the federal government to offset these losses
stemming from the shutdown of the nation's airspace following the events of
September 11, 2001. Industry experts now expect that the U.S. airline
industry losses in calendar 2002 may exceed those realized in 2001.
Accordingly, the airlines are seeking to conserve cash in part by deferring
or eliminating cabin interior refurbishment programs and canceling or
deferring aircraft purchases. This has caused a substantial contraction in
the Company's business, the extent and duration of which cannot be
determined at this time.
The Company's principal customers are the world's commercial airlines.
During the six years ended with calendar 2000, the airlines significantly
strengthened their balance sheets and enhanced their liquidity as a result
of improved profitability, debt and equity financings and closely managed
fleet expansion. However, increases in pilot and other airline wages,
coupled with higher fuel prices and the softening of the global economy were
already negatively impacting airline profitability prior to the events of
September 11, 2001. The combined impact of the recent recession and the
events of September 11, 2001 has negatively impacted discretionary airline
spending for cabin interior refurbishments and upgrades and new aircraft
purchases. The Company expects that this will have a material adverse impact
on its results of operations and financial condition until such time as
conditions in the airline industry improve. While management has developed
and begun to implement what it believes is an aggressive cost reduction plan
to counter these difficult conditions, it cannot guarantee that the plans
are adequate or will be successful.
The airline industry is also 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.
12
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 11. Facility Consolidation and Other Special Charges
------------------------------------------------
The industry conditions described above have caused the Company to
implement a facility consolidation plan designed to re-align its capacity
and cost structure with changed conditions in the airline industry. The
Company is implementing a plan to close five facilities and reduce its
workforce by about 1,000 employees. As a result, the Company recorded a
charge of $98.9, which included cash expenses of approximately $15.6 during
the quarter ended November 24, 2001.
The cash charges relate to involuntary severance and benefit programs for
approximately 1,000 employees, lease termination costs and preparing
facilities for disposal and sale. As of August 24, 2002, the Company had
terminated more than 1,000 employees. Through August 24, 2002, the Company
paid approximately $10.0 related to severance, termination benefits and
other cash costs related to this consolidation program.
In addition, during the three months and six months ended August 24,
2002, the Company revised its consolidation plan by increasing its targeted
headcount reductions to 1,200 and it incurred approximately $11.3 and $17.6,
respectively, of transition costs associated with the facilities and
personnel consolidation program, which have been expensed as incurred as a
component of cost of sales. Cash requirements related to facility
consolidation activities were funded from operations and bank borrowings.
Pretax cash outlays related to transition expenses are expected to aggregate
approximately $22.0 during fiscal 2003.
The following table summarizes the facility consolidation costs activity
during the six months ended August 24, 2002:
Balance at
February 23, Dispositions/ Paid Balance at
2002 Reclassifications In Cash August 24, 2002
--------------- ---------------------- --------------- ---------------
Accrued liability for severance, lease
termination and other costs $ 12.5 $ 1.4 $ (8.3) $ 5.6
Impaired inventories, property and equipment 12.1 (8.8) -- 3.3
--------------- ---------------------- --------------- ---------------
$ 24.6 $ (7.4) $ (8.3) $ 8.9
=============== ====================== =============== ===============
[Remainder of page intentionally left blank]
13
BE AEROSPACE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The following discussion and analysis addresses the results of the
Company's operations for the three months ended August 24, 2002, as compared
to the Company's results of operations for the three months ended August 25,
2001. The discussion and analysis then addresses the results of the
Company's operations for the six months ended August 24, 2002, as compared
to the Company's results of operations for the six months ended August 25,
2001. The discussion and analysis also addresses the liquidity and financial
condition of the Company and other matters.
See Note 3 for additional information regarding reportable segments.
THREE MONTHS ENDED AUGUST 24, 2002, AS COMPARED TO THE RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 25, 2001
Revenues were negatively impacted by the severe decline in industry
conditions following the terrorist attacks of September 11, 2001. Net sales
for the three months ended were $154.8, which is $24.3 or 13.6% less than
net sales of $179.1 for the comparable period in the prior year. However, on
a proforma basis, revenues declined by approximately $53.2 or 25.6%.
Proforma figures treat companies acquired during fiscal 2002 as though
acquired at the beginning of fiscal 2002. Sales within the commercial
aircraft products segment were $43.5 or 28.2% lower than sales in the prior
year due to the recession in the airline industry and the further downturn
in industry conditions following the events of September 11, 2001.
Gross profit was $60.3, or 39.0% of net sales for the quarter, excluding
facility transition expenses of $11.3, as compared to $69.0 or 38.5% of net
sales in the comparable quarter in the prior year. Including such costs,
gross profit was $49.0 or 31.7% of net sales, which was $20.0 lower than the
prior year. The lower gross profit was due to the lower revenue level and
facility and personnel transition costs. There were no comparable facility
transition expenses in the comparable prior period. Transition costs are the
expenses of operating facilities scheduled for closure and integrating
transferred operations into the remaining facilities. Under generally
accepted accounting principles, such costs must be treated as normal
expenses until plant shutdown has been completed. The improvement in the
gross margin before such costs was primarily due to impact of our facility
consolidation efforts, and lean manufacturing and continuous improvement
programs.
Selling, general and administrative expenses were $28.9 or 18.7% of net
sales for the three month period as compared to $34.3 or 19.2% of net sales
during the comparable period in the prior year. On a proforma basis, such
costs would have been $39.7 last year. The $10.8 year over year decrease in
comparable selling, general and administrative expenses resulted from $5.5
of savings realized from facility closures and austerity measures and $5.3
reduction in amortization resulting from the adoption of SFAS No. 142.
Research, development and engineering expenses were $9.6 or 6.2% of net
sales for the three months ended August 24, 2002, as compared with $11.0 or
6.1% of sales for the comparable period in the prior year. The year over
year decrease in research, development and engineering expenses is primarily
attributable to the facility consolidation program and austerity measures we
implemented in response to weak airline performance caused by the recession
and the September 11, 2001 terrorist attacks.
The Company generated operating earnings of $21.8 or 14.1% of net sales
for the current quarter, excluding facility transition expenses of $11.3.
This was $1.9 or 8.0% lower than operating earnings of $23.7 or 13.2% of net
sales for the comparable period in the prior year. Including such costs,
operating earnings were $10.5 or 6.8% of net sales for the current quarter,
which was $13.2 lower than the prior year. The $53.2 decrease in revenues,
on a proforma basis, resulted in $20.1 less gross profit than last year on a
comparable basis, including facility transition expenses in the current
quarter. Our austerity measures and the impact of SFAS No. 142 generated a
$12.2 reduction in operating expenses that resulted in $21.8 of operating
earnings, a decrease of $7.9 on a comparable year over year basis.
14
BE AEROSPACE, INC.
Interest expense, net was $16.7 for the quarter ended August 24, 2002, or
$2.9 greater than interest expense of $13.8 for the same period in the prior
year. The increase in interest expense is due to the increase in outstanding
debt due to last year's financing activities and acquisitions, net of
interest earned on our cash balances.
Income tax expense for the current three month period was $0.0 as
compared to $1.0 in the same period in the prior year.
Earnings before facility transition expenses were $4.6 (net of income
taxes of $0.5), or $0.13 per share for the current quarter. Including such
costs, our net loss for the current quarter was ($6.2) or ($0.18) per share
as compared to net earnings of $8.9 or $0.27 per share (diluted) for the
comparable period in the prior year.
[Remainder of page intentionally left blank]
15
BE AEROSPACE, INC.
SIX MONTHS ENDED AUGUST 24, 2002, AS COMPARED TO THE RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 25, 2001
Revenues were negatively impacted by the severe decline in industry
conditions following the terrorist attacks of September 11, 2001. Net sales
for the six months ended were $309.1, which is $46.8 or 13.1% less than net
sales of $355.9 for the comparable period in the prior year. However, on a
proforma basis, revenues declined by approximately $107.7 or 25.8%. Proforma
figures treat companies acquired during fiscal 2002 as though acquired at
the beginning of fiscal 2002. Sales within the commercial aircraft products
segment were $91.0 or 29.5% lower than sales in the prior year due to the
recession in the airline industry and the further downturn in industry
conditions following the events of September 11, 2001.
Gross profit was $119.6, or 38.7% of net sales for the six months ended
August 24, 2002, excluding facility transition expenses of $17.6, as
compared to $134.9 or 37.9% of net sales in the comparable period in the
prior year. Including such costs, gross profit was $102.0 or 33.0% of net
sales, which was $32.9 lower than the prior year. The lower gross profit was
due to the lower revenue level and facility and personnel transition costs.
There were no comparable facility transition expenses in the comparable
prior period. Transition costs are the expenses of operating facilities
scheduled for closure and integrating transferred operations into the
remaining facilities. Under generally accepted accounting principles, such
costs must be treated as normal expenses until plant shutdown has been
completed. The improvement in the gross margin before such costs was
primarily due to impact of our facility consolidation efforts, and lean
manufacturing and continuous improvement programs.
Selling, general and administrative expenses were $57.4 or 18.6% of net
sales for the six month period as compared to $65.5 or 18.4% of net sales
during the comparable period in the prior year. On a proforma basis, such
costs would have been $76.1 last year. The $18.7 year over year decrease in
comparable selling, general and administrative expenses resulted from a $7.9
of savings realized from facility closures and austerity measures and $10.8
reduction in amortization resulting from the adoption of SFAS No. 142.
Research, development and engineering expenses were $18.7 or 6.0% of net
sales for the six months ended August 24, 2002, as compared with $23.1 or
6.5% of sales for the comparable period in the prior year. The year over
year decrease in research, development and engineering expenses is primarily
attributable to the facility consolidation program and austerity measures we
implemented in response to weak airline performance caused by the recession
and the September 11, 2001 terrorist attacks.
The Company generated operating earnings of $43.5 or 14.1% of net sales
for the current six month period, excluding facility transition expenses of
$17.6. This was $2.8 or 6.0% lower than operating earnings of $46.3 or 13.0%
of net sales for the comparable period in the prior year. Including such
costs, operating earnings were $25.9 or 8.4% of net sales for the current
six month period, which was $20.4 lower than the prior year. The $107.7
decrease in revenues, on a proforma basis, resulted in $39.3 less gross
profit than last year on a comparable basis, including facility transition
expenses in the current six month period. Our austerity measures and the
impact of SFAS No. 142 generated a $23.1 reduction in operating expenses
that resulted in $43.5 of operating earnings, a decrease of $16.2 on a
comparable year over year basis.
Interest expense, net was $33.6 for the six months ended August 24,
2002, or $5.8 greater than interest expense of $27.8 for the same period in
the prior year. The increase in interest expense is due to the increase in
outstanding debt due to last year's financing activities and acquisitions,
net of interest earned on our cash balances.
Income tax expense for the current six month period was $0.0 as compared
to $1.8 in the same period in the prior year.
16
BE AEROSPACE, INC.
Earnings before facility transition expenses were $8.9 (net of income
taxes of $1.0), or $0.25 per share for the six month period. Including such
costs, our net loss for the six months was ($7.7) or ($0.22) per share. The
Company incurred an extraordinary charge of $9.3 (net of tax) during the
quarter ended May 26, 2001 related to the early redemption of its 9 7/8%
senior subordinated notes and repayment of its bank credit facility. As a
result, the Company reported net earnings before extraordinary item of $16.7
or $0.52 per share (diluted) or $7.4 or $0.23 per share (diluted) after
extraordinary item for the six month period ended August 25, 2001.
[Remainder of page intentionally left blank]
17
BE AEROSPACE, INC.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
Our liquidity requirements consist of working capital needs, cash
requirements for our facility consolidation and personnel reduction program,
ongoing capital expenditures and payments of interest and principal on our
indebtedness. Our primary requirements for working capital are directly related
to the level of our operations; working capital, primarily accounts receivable
and inventories, fluctuate with the demand for our products. Our working capital
was $302.2 as of August 24, 2002, as compared to $304.8 as of February 23, 2002.
At August 24, 2002, our cash and cash equivalents were $147.5, as compared
to $159.5 at February 23, 2002. This decrease in cash is primarily attributable
to the 13.1% lower level of revenues that resulted in $15.3 in lower gross
profit, which was partially offset by a $12.5 reduction in operating expenses
following our aggressive cost reduction programs and lower amortization.
We hold a promissory note from Thomson -- CSF Holding Corporation, a
subsidiary of The Thales Group (a publicly traded French Company with over $9
billion in sales). We are currently involved in a dispute with Thales over
certain terms of a purchase and sale agreement in connection with our sale in
Fiscal 2000 of our in-flight entertainment business. Thomson -- CSF Holding
Corporation failed to make payments on the promissory notes issued to us in
connection with the sale when due, and in December 2000 we initiated arbitration
proceedings against Thales and its parent Thomson. These obligations to us are
guaranteed by Thomson -- CSF Sextant, Inc. The arbitration against Thales and
Thomson is expected to be resolved during fiscal 2003.
Cash Flows
Cash provided by operating activities was $0.5 for the six months ended
August 24, 2002. The primary source of cash was a net loss of ($7.7) offset by
non-cash charges from amortization and depreciation of $14.5, a $13.6 increase
in accounts payable, offset by a reduction in accrued liabilities of $13.4.
Capital Spending
Our capital expenditures were $8.7 and $6.5 during the six months ended
August 24, 2002 and August 25, 2001, respectively. The year over year increase
in capital expenditures is in line with our expectation for annual capital
expenditures of approximately $15.0-$19.0 for the next several years. We have no
material commitments for capital expenditures. We have, in the past, generally
funded our capital expenditures from cash from operations and funds available to
us under our bank credit facility. We expect to fund future capital expenditures
from cash on hand and from operations and from funds available to us under our
bank credit facility. In addition, since 1989, we have completed 23 acquisitions
for an aggregate purchase price of approximately $975.5. In addition, following
these acquisitions, we have rationalized the businesses, reducing headcount by
nearly 4,200 employees and eliminating 22 facilities. The cost of these actions
was approximately $302.9, of which approximately $175 was cash expenses, through
August 24, 2002. We have financed these acquisitions primarily through issuances
of debt and equity securities, including our outstanding 8% Notes due 2008, 8
7/8% Notes due 2011 and the 9 1/2% Notes due 2008 and the bank credit facility.
Outstanding Debt and Other Financing Arrangements
In August 2001, we established a new bank credit facility consisting of a
$150.0 revolving credit facility that expires in August 2006. The bank credit
facility is collateralized by our accounts receivable, inventories and by
substantially all of our other personal property. At August 24, 2002,
indebtedness under the existing bank credit facility consisted of revolving
credit facility outstanding borrowings of $144.0 (bearing interest at LIBOR plus
3.0%) and letters of credit aggregating approximately $5.6. The bank credit
facility requires no principal payments until 2006. The bank credit facility,
which contains customary affirmative covenants, negative covenants and
conditions of borrowing, all of which were met as of August 24, 2002. The
interest rate margin on the bank credit facility may increase or decrease in the
event of certain changes to our financial leverage ratios.
18
BE AEROSPACE, INC.
Long-term debt consists principally of our 8% Notes, 8 7/8% Notes and 9 1/2%
Notes. The $250.0 of 8% Notes mature on March 1, 2008, the $250.0 of 8 7/8%
Notes mature on May 1, 2011 and the $200.0 of 9 1/2% Notes mature on November 1,
2008. The notes are unsecured senior subordinated obligations and are
subordinated to all of our senior indebtedness. Each of the 8% Notes, 8 7/8%
Notes and 9 1/2% Notes contain restrictive covenants, including limitations on
future indebtedness, restricted payments, transactions with affiliates, liens,
dividends, mergers and transfers of assets, all of which were met by us as of
August 24, 2002. A breach of such covenants, or the covenants under our bank
credit facility, that continues beyond any grace period can constitute a
default, which can limit the ability to borrow and can give rise to a right of
the lenders to terminate the applicable facility and/or require immediate
repayment of any outstanding debt.
Contractual and Other Obligations
The following charts reflect our contractual obligations and commercial cash
commitments as of August 24, 2002. Commercial commitments include lines of
credit, guarantees and other potential cash outflows resulting from a contingent
event that requires performance by us or our subsidiaries pursuant to a funding
commitment.
Contractual Obligations Fiscal Fiscal Fiscal Fiscal Fiscal
Total 2003 2004 2005 2006 2007 Thereafter
------------- ------------ ------------ --------- ---------- ----------- -------------
Long-term debt $853.5 $ 1.3 $ 4.3 $0.6 $0.1 $147.8 $699.4
Operating leases 26.8 4.4 6.6 4.0 3.2 2.6 6.0
Capital lease obligations 0.1 0.1 -- -- -- -- --
------ ------ ----- ---- ---- ------ ------
Total $880.4 $ 5.8 $10.9 $4.6 $3.3 $150.4 $705.4
====== ===== ===== ==== ==== ====== ======
Commercial Commitments
Letters of Credit $ 5.6 $ 5.6 $ -- $ -- $ -- $ -- $ --
We believe that the cash flow from operations, which provides us with our
ability to fund our operations, make planned capital expenditures, make
scheduled payments and refinance our indebtedness, depends on our future
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors, some of which are
beyond our control.
Deferred Tax Assets
We established a valuation allowance related to the utilization of our
deferred tax assets because of uncertainties that preclude us from determining
that it is more likely than not that it will be able to generate taxable income
to realize such assets during the federal operating loss carryforward period,
which begins to expire in 2012. Such uncertainties include recent cumulative
losses, the highly cyclical nature of the industry in which we operate, risks
associated with our facility consolidation plan, our high degree of financial
leverage, risks associated with new product introductions, recent increases in
the cost of fuel and its impact on our airline customers, and risks associated
with the integration of acquired businesses. We monitor these uncertainties, as
well as other positive and negative factors that may arise in the future, as we
assess the necessity for a valuation allowance for our deferred tax assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 establishes accounting standards for
the recognition and measurement of an asset retirement obligation and its
associated asset retirement cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002, with early
adoption permitted. The Company plans to adopt SFAS No. 143 on February 23,
2003. The Company is currently evaluating the provisions of SFAS No. 143 but
expects that the provisions of SFAS No. 143 will not have a material impact on
its consolidated results of operations and financial position upon adoption.
19
BE AEROSPACE, INC.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," ("SFAS No. 144") which addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" and became
effective on February 24, 2002. The adoption of SFAS No. 144 did not have a
material impact on the Company's consolidated results of operations and
financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, requires gains and losses on
extinguishments of debt to be classified as part of continuing operations rather
than treated as extraordinary, as previously required in accordance with SFAS 4.
SFAS No. 145 also modifies accounting for subleases where the original lessee
remains the secondary obligor and requires certain modifications to capital
leases to be treated as sale-leaseback transactions. The Company adopted SFAS
No. 145 on April 1, 2002 with no material impact to its consolidated financial
statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies the guidance
previously proved under Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity (including Certain Costs Incurred in a Restructuring)." Among other
things, SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred as
opposed to when there is commitment to a restructuring plan as set forth under
the nullified guidance. The Company plans to adopt SFAS No. 146 on February 22,
2003 for future restructurings, but expects no material impact on its
consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies,
see Note 1 in the Notes to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K/A for the fiscal year ended February 23,
2002.
Revenue Recognition
Sales of products are recorded on the date of shipment and passage of title,
or if required, upon acceptance by the customer. Service revenues are recorded
when services are performed. Revenues and costs under certain long-term
contracts are recognized using contract accounting under the
percentage-of-completion method. The Company sells its products primarily to
airlines and aircraft manufacturers worldwide, including occasional sales
collateralized by letters of credit. The Company performs ongoing credit
evaluations of its customers and maintains reserves for estimated credit losses.
Actual losses have been within management's expectations.
We apply judgment to ensure that the criteria for recognizing sales are
consistently applied and achieved for all recognized sales transactions.
20
BE AEROSPACE, INC.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current credit worthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past.
Inventories
We value our inventory at the lower of cost or market. We regularly review
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and
production requirements. As demonstrated during fiscal 2002, demand for our
products can fluctuate significantly. Our estimates of future product demand may
prove to be inaccurate, in which case we may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if our
inventory is determined to be overvalued, we would be required to recognize such
costs in our cost of goods sold at the time of such determination. Likewise, if
our inventory is determined to be undervalued, we may have over-reported our
costs of goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale.
Long-Lived Assets (including Tangible and Intangible Assets and Goodwill)
To conduct our global business operations and execute our strategy, we
acquire tangible and intangible assets, which affect the amount of future period
amortization expense and possible impairment expense that we may incur. The
determination of the value of such intangible assets requires management to make
estimates and assumptions that affect our consolidated financial statements. We
assess potential impairment to intangible assets of a reporting unit on an
annual basis or when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recovered. Our
judgments regarding the existence of impairment indicators and future cash flows
related to intangible assets are based on operational performance of our
acquired businesses, market conditions and other factors. Future events could
cause us to conclude that impairment indicators exist and that goodwill or other
acquired tangible or intangible assets associated with our acquired businesses
is impaired. Any resulting impairment loss could have an adverse impact on our
results of operations.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we
are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheets. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the consolidated statements of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $106.3 million as of August 24, 2002, due to
uncertainties related to our ability to utilize some of our deferred tax assets,
primarily consisting of certain net operating income losses carried forward,
before they expire. The valuation allowance is based on our estimates of taxable
income by jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that actual results differ
from these estimates or we adjust these estimates in future periods we may need
to establish additional valuation allowance which could materially impact our
financial position and results of operations.
21
BE AEROSPACE, INC.
DEPENDENCE UPON CONDITIONS IN THE AIRLINE INDUSTRY
The September 11, 2001 terrorist attacks have severely impacted conditions
in the airline industry. For the first time in the history of commercial
aviation, all domestic airlines were grounded for a period of three days.
According to industry sources, since resuming service, most major US carriers
have substantially reduced their flight schedules, parking or retiring
approximately 15% of their fleets. During August 2002, several U.S. airlines
announced further fleet downsizing, workforce reductions and other cost
reduction initiatives. The airlines have further responded by decreasing
domestic airfares to levels not seen since 1988. Domestic airline revenues are
down 12% for the first eight months of calendar 2002 compared to the same period
last year. As a result of the double-digit decline in both traffic and airfares
following the September 11, 2001 terrorist attacks, and their aftermath, as well
as other factors, such as the weakening economy, the U.S. airline industry
incurred the largest loss in its history in calendar 2001, totaling in excess of
$6 billion, net of a $5 billion cash infusion from the federal government to
offset these losses stemming from the shutdown of the nation's airspace
following the events of September 11, 2001. Industry experts now expect that the
U.S. airline industry losses in calendar 2002 may exceed those realized in 2001.
Accordingly, the airlines are seeking to conserve cash in part by deferring or
eliminating cabin interior refurbishment programs and canceling or deferring
aircraft purchases. This has caused a substantial contraction in the Company's
business, the extent and duration of which cannot be determined at this time.
The Company's principal customers are the world's commercial airlines.
During the six years ended with calendar 2000, the airlines significantly
strengthened their balance sheets and enhanced their liquidity as a result of
improved profitability, debt and equity financings and closely managed fleet
expansion. However, increases in pilot and other airline wages, coupled with
higher fuel prices and the softening of the global economy were already
negatively impacting airline profitability prior to the events of September 11,
2001. The combined impact of the recent recession and the events of September
11, 2001 has negatively impacted discretionary airline spending for cabin
interior refurbishments and upgrades and new aircraft purchases. The Company
expects that this will have a material adverse impact on its results of
operations and financial condition until such time as conditions in the airline
industry improve. While management has developed and begun to implement what it
believes is a sound plan to counter these difficult conditions, it cannot
guarantee that the plans are adequate or will be successful.
The airline industry is also 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.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including statements
regarding implementation and expected benefits of lean manufacturing and
continuous improvement programs, the Company's dealings with customers and
partners, the consolidation of facilities, reduction of our workforce,
integration of acquired businesses, ongoing capital expenditures, the impact of
the large number of indefinitely grounded aircraft on demand for our products
and our underlying assets, the adequacy of funds to meet the Company's capital
requirements, the ability to refinance our indebtedness, if necessary, the
reduction of debt, the potential impact of new accounting pronouncements, the
impact on our business from the September 11, 2001 terrorist attacks and the
resolution of the Company's arbitration against Thales. These forward-looking
statements include risks and uncertainties, and the Company's actual experience
may differ materially from that anticipated in such statements. Factors that
might cause such a difference include those discussed in the Company's filings
with the Securities and Exchange Commission, including its most recent proxy
statement and Form 10-K/A, 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, the impact of rising fuel prices on our airline
customers, delays in, or unexpected costs associated with, the integration of
our acquired businesses, conditions in the airline industry, problems meeting
customer delivery requirements, the Company's success in winning new or expected
refurbishment contracts from customers, capital expenditures, cash expenditures
related to possible future acquisitions, facility closures, product transition
costs, labor disputes involving us, our significant customers or airframe
manufacturers, the possibility of a write-down of intangible assets, delays or
inefficiencies in the introduction of new products or fluctuations in currency
exchange rates.
22
BE AEROSPACE, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of our
variable-rate debt.
Foreign currency - We have direct operations in Europe that receive
revenues from customers in various currencies and purchase raw materials
and component parts from foreign vendors in various currencies.
Accordingly, we are exposed to transaction gains and losses that could
result from changes in foreign currency exchange rates relative to the
U.S. dollar. The largest foreign currency exposure results from activity
in British pounds and Euros.
From time to time, the Company and its foreign subsidiaries may enter
into foreign currency exchange contracts to manage risk on transactions
conducted in foreign currencies. At August 24, 2002, we had no
outstanding forward currency exchange contracts. We did not enter into
any other derivative financial instruments.
Interest Rates - At August 24, 2002, we had adjustable rate debt of
$144.0 and fixed rate debt of $699.6. The weighted average interest rate
for the adjustable and fixed rate debt was approximately 5.2% and 8.7%,
respectively, at August 24, 2002. If interest rates were to increase by
10% above current rates, the estimated impact on our financial statements
would be to reduce pretax income annually by approximately $0.5. We do
not engage in transactions to hedge our exposure to changes in interest
rates.
ITEM 4. CONTROLS AND PROCEDURES
The period covered by this report ended on August 24, 2002. Therefore,
pursuant to SEC Release Nos. 33-8124 and 34-46427, the information required
by Item 307 of Regulation S-K is not required to be included in this report.
[Remainder of page intentionally left blank]
23
BE AEROSPACE, INC.
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
Annual meeting took place on August 26, 2002
1. Class II Directors elected - Robert J. Khoury and Jonathan M. Schofield
2. Directors whose term of office continued after meeting
(Class I and III) - Jim C. Cowart, Richard G. Hamermesh, Amin J. Khoury
and Brian H. Rowe
3. Amended the 2001 Stock Option Plan
4. Amended the 1994 Employee Stock Purchase Plan
Abstain/
For Against Withheld Unvoted
-------------------- -------------- ------------- ----------------
1. Election of Class II Directors
Robert J. Khoury 25,988,619 -- 5,904,991 --
Jonathan M. Schofield 30,014,582 -- 1,879,028 --
2. Proposal to amend the
2001 Stock Option Plan 24,391,620 7,434,173 67,817 --
3. Proposal to amend the 1994
Employee Stock Purchase Plan 29,852,444 1,963,144 78,022 --
4. Proposal to adopt the
MacBride Principles 1,950,134 23,744,888 480,500 5,718,088
Item 5. Other Information - None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - None.
b. Reports on Form 8-K
Form 8-K, dated and filed September 18, 2002, includes a press release
containing earnings release information including certain unaudited
financial information.
[Remainder of page intentionally left blank]
24
BE AEROSPACE, INC.
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: October 7, 2002 By: /s/ Robert J. Khoury
---------------------------------------
Robert J. Khoury
President and
Chief Executive Officer
Date: October 7, 2002 By: /s/ Thomas P. McCaffrey
---------------------------------------
Thomas P. McCaffrey
Corporate Senior Vice President of
Administration and Chief
Financial Officer
25
BE AEROSPACE, INC.
CERTIFICATIONS
I, Robert J. Khoury, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BE Aerospace, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrants as of, and for, the periods presented in
this quarterly report.
Date: October 7, 2002 By: /s/ Robert J. Khoury
--------------------
Robert J. Khoury
President and
Chief Executive Officer
EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5, and 6 of
the Certifications as set forth in the Form 10-Q pursuant to Rules 13a-14
and 15d-14 of the Exchange Act have been omitted, consistent with the
Transition Provisions of SEC Exchange Act Release No. 34-46427, because
this Quarterly Report on Form 10-Q covers a period ending before the
Effective Date of Rules 13a-14 and 15d-14.
26
BE AEROSPACE, INC.
CERTIFICATIONS
I, Thomas P. McCaffrey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BE Aerospace, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respect the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: October 7, 2002 By: /s/ Thomas P. McCaffrey
-----------------------
Thomas P. McCaffrey
Corporate Senior Vice President of
Administration and Chief
Financial Officer
EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5, and 6 of
the Certifications as set forth in the Form 10-Q pursuant to Rules 13a-14
and 15d-14 of the Exchange Act have been omitted, consistent with the
Transition Provisions of SEC Exchange Act Release No. 34-46427, because
this Quarterly Report on Form 10-Q covers a period ending before the
Effective Date of Rules 13a-14 and 15d-14.
27