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 March 31, 2003
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[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES[X] NO[ ]
The registrant has one class of common stock, $0.01 par value, of which
35,832,209 shares were outstanding as of May 6, 2003.
1
BE AEROSPACE, INC.
FORM 10-Q for the Quarter Ended March 31, 2003
Table of Contents
Page
----
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets
as of March 31, 2003 and December 31, 2002..........................3
b) Condensed Consolidated Statements of Operations for the
three months ended March 31, 2003 and March 31, 2002................4
c) Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and March 31, 2002................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 and Use of Proceeds.............................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)
March 31, 2003 December 31, 2002
-------------------------- -------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 75.9 $ 156.9
Accounts receivable - trade, less allowance for doubtful
accounts of $3.8 (March 31, 2003)
and $3.9 (December 31, 2002) 81.2 73.8
Inventories, net 171.9 163.2
Other current assets 17.4 22.8
--------- ----------
Total current assets 346.4 416.7
Property and equipment, net 111.6 115.5
Goodwill 345.2 344.7
Identifiable intangible assets, net 162.9 165.2
Other assets, net 25.9 25.0
--------- ----------
$ 992.0 $ 1,067.1
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65.6 $ 67.3
Accrued liabilities 69.5 69.6
Current maturities of long-term debt 1.9 16.9
--------- ----------
Total current liabilities 137.0 153.8
Long-term debt, net of current maturities 786.1 836.0
Other non-current liabilities 7.8 8.0
Commitments, contingencies and off-balance sheet arrangements (Note 7)
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; 35.7 million (March 31, 2003) and
35.2 million (December 31, 2002) shares issued
and outstanding 0.4 0.3
Additional paid-in capital 411.3 410.1
Accumulated deficit (340.3) (329.5)
Accumulated other comprehensive loss (10.3) (11.6)
---------- ----------
Total stockholders' equity 61.1 69.3
--------- ----------
$ 992.0 $ 1,067.1
========= ==========
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
--------------------------------
March 31, March 31,
2003 2002
-------------- -------------
Net sales $ 154.7 $ 146.0
Cost of sales 108.3 96.9
-------- --------
Gross profit 46.4 49.1
Operating expenses:
Selling, general and administrative 28.5 28.6
Research, development and engineering 10.9 9.8
-------- --------
Total operating expenses 39.4 38.4
-------- --------
Operating earnings 7.0 10.7
Interest expense, net 16.8 16.6
-------- --------
Loss before income taxes (9.8) (5.9)
Income taxes 1.0 --
-------- --------
Net loss $ (10.8) $ (5.9)
======== ========
Loss per common share:
Basic and diluted $ (0.31) $ (0.17)
======== ========
See accompanying notes to condensed consolidated financial statements.
4
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
THREE MONTHS ENDED
---------------------------------------------
March 31, 2003 March 31, 2002
-------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10.8) $ (5.9)
Adjustments to reconcile net loss to net cash flows
provided by operating activities:
Depreciation and amortization 7.3 10.0
Non-cash employee benefit plan contributions 0.6 0.6
Changes in operating assets and liabilities:
Accounts receivable (7.4) 5.4
Inventories (9.3) (2.8)
Other current assets 5.6 32.1
Payables, accruals and other liabilities (0.9) (25.5)
------- -------
Net cash flows (used in) provided by operating activities (14.9) 13.9
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3.6) (2.9)
Proceeds from real estate sales 2.3 --
Change in intangible and other assets (1.1) 2.2
------- -------
Net cash flows used in investing activities (2.4) (0.7)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under bank credit facilities (65.0) --
Proceeds from issuances of common stock, net of expenses 0.5 0.1
Principal payments on long-term debt -- (0.1)
------- -------
Net cash flows used in financing activities (64.5) --
------- -------
Effect of exchange rate changes on cash flows 0.8 (0.3)
------- -------
Net (decrease) increase in cash and cash equivalents (81.0) 12.9
Cash and cash equivalents, beginning of period 156.9 139.3
------- -------
Cash and cash equivalents, end of period $ 75.9 $ 152.2
======= =======
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest, net $ 11.6 $ 11.6
Income taxes, net $ 0.5 $ 0.3
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 the consolidated financial statements and accompanying notes included
in the BE Aerospace, Inc. (the "Company" or "B/E") Annual Report on Form
10-K for the ten-month transition period ended December 31, 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.
In October 2002, the Company changed its fiscal year end from the last
Saturday in February to December 31, effective with the transition period
ended on December 31, 2002. The Company reported the transition period in
the Company's Annual Report on Form 10-K for the period ended December 31,
2002 during March 2003.
Accounting for Stock-Based Compensation - The Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
and related Interpretations in accounting for its stock option and stock
purchase plans. Accordingly, no compensation cost has been recognized for
its stock option and stock purchase plans. Had compensation cost for the
Company's stock option and stock purchase plans been determined consistent
with SFAS No. 123, the Company's net loss and net loss per share for the
three months ended March 31, 2003 and March 31, 2002, respectively, would
have been the pro forma amounts indicated in the following table:
THREE MONTHS ENDED
---------------------- ---------------------
March 31, 2003 March 31, 2002
---------------------- ---------------------
As reported
Net loss $ (10.8) $ (5.9)
Expense per SFAS
No. 123, fair value method, net of
related tax effects 1.2 1.8
------- -------
Pro forma $ (12.0) $ (7.7)
------- -------
Basic and diluted net loss per share:
As reported $ (0.31) $ (0.17)
======= =======
Pro forma $ (0.34) $ (0.22)
======= =======
6
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 2. Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 No. 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 January 1,
2003 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 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 a commitment to a
restructuring plan as set forth under the nullified guidance. The Company
adopted SFAS No. 146 on January 1, 2003 with no material impact to its
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS
No. 123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
adoption of SFAS No. 148 on January 1, 2003 did not have a material impact
on the Company's financial statements (as the Company has no plans to adopt
the fair value method).
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees and Indebtedness of Others", an interpretation
of FIN No. 5, 57 and 107, and rescission of FIN No. 34, "Disclosure of
Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, while the provisions of the
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The adoption of the
recognition provisions of FIN No. 45 did not have a material impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Entities", an interpretation of Accounting Research Bulletin No. 51. FIN No.
46 requires that variable interest entities be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or is entitled to receive a majority of the
entity's residual returns or both. FIN No. 46 also requires disclosures
about variable interest entities that companies are not required to
consolidate but in which a company has a significant variable interest. The
consolidation requirements of FIN No. 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation
requirements for entities established prior to January 31, 2003 will apply
in the interim period beginning after June 15, 2003 and the disclosure
requirements will apply in all financial statements issued after January 31,
2003. The Company adopted FIN No. 46 on January 31, 2003 with no material
impact on its consolidated financial statements (as the Company does not
currently have any variable interest entities).
7
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 3. Industry Conditions
The September 11, 2001 terrorist attacks have severely impacted
conditions in the airline industry. Sharply lower demand from the Company's
airline customer base continues to adversely affect the Company's financial
results. The current downturn in the airline industry is the most severe
ever experienced. High airline operating costs, weak air travel and low
ticket prices have damaged many carriers' financial condition. Prior to the
September 11, 2001 terrorist attacks, airline profits were already being
adversely affected by increases in pilot and other airline wages, higher
fuel prices and the softening of the global economy. Air travel dropped
significantly following the 2001 terrorist attacks, further weakening many
airlines' financial condition. To cut costs, carriers worldwide have reduced
fleet sizes, parking or idling about 2,200 aircraft, or 15% of their fleets,
as of December 2002. In an attempt to stimulate air travel, airlines have
decreased domestic airfares to levels not seen since 1988. Reflecting the
reduction in air travel and fares, North American airline revenue has
dropped 24% since 2000.
As a result of these factors, the U.S. airline industry incurred losses
of approximately $18 billion over the two years ended December 31, 2002. The
airline industry crisis caused two major domestic airlines, US Airways and
United Airlines, to file for protection under Chapter 11 of the United
States Bankruptcy Act and industry experts believe other major domestic
carriers may be required to do so as well. In addition, Air Canada and
Hawaiian Airlines have filed for bankruptcy protection and at least one
smaller domestic carrier, National Airlines, has ceased operations entirely.
The foregoing factors have resulted in an approximate 30% reduction in
demand for the Company's products.
The onset of war in Iraq and the Severe Acute Respiratory Syndrome (SARS)
virus during the first quarter of 2003 have caused most major carriers to
experience sharply lower air travel. The reduced air travel is forcing
carriers worldwide to make further cuts in capacity and workforce. Ten
thousand airline jobs were eliminated during the first week of the war in
Iraq. U.S. airlines reported trans-Atlantic and trans-Pacific traffic down
20 percent in late March and April 2003. Carriers serving the Pacific Rim
are experiencing substantially lower traffic and advance bookings. In
response, airlines such as Northwest Airlines, Cathay Pacific, Qantas,
Singapore Airlines and Japan Airlines have cut flights by as much as 25
percent on certain routes in Asia. Estimates indicate that the U.S. airlines
alone could lose nearly $11 billion during calendar 2003 as a result of the
combined impact of these recent events.
The business jet industry has also been experiencing a severe downturn.
Several business jet manufacturers recently announced plans to further
reduce production of new business jets. Industry sources expect new business
jet deliveries to be at least 20 percent lower for calendar 2003 as compared
to calendar 2002, and about 35 percent lower compared to 2001. In the second
half of the current year, industry sources expect about 250 new business jet
deliveries, about 33 percent lower than last year, and an annualized
decrease of about 45 percent as compared to the 900 new aircraft delivered
in 2001.
The airlines are seeking to conserve cash, in part by deferring or
eliminating cabin interior refurbishment programs and deferring or canceling
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. Further, the reduction in new business jet production will
negatively impact demand for the Company's products. The Company expects
these adverse industry conditions to have a material adverse impact on its
results of operations and financial condition until such time as conditions
in the commercial airline and business jet industries improve. While
management has developed and has been implementing 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. (See
Note 4.)
8
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 4. Facility Consolidations and Other Special Charges
The industry conditions described in Note 3 have caused the Company to
undertake a facility consolidation and integration plan designed to re-align
its capacity and cost structure with changed conditions in the airline
industry. In November 2001, the Company began implementing a facility
consolidation and integration plan that consisted of closing five principal
facilities and reducing its workforce by about 1,000 employees. The Company
recorded cash and noncash charges in November 2001 related to involuntary
severance and benefit programs for approximately 1,000 employees, lease
termination costs, preparing facilities for disposal and sale and to adjust
certain assets which were impaired by the rapid change in industry
conditions.
Industry conditions continued to worsen during the fall of 2002 as the
airlines deferred retrofit programs and continued to lower their purchases
of spare parts. In addition, the business jet manufacturers announced
further production cuts and additional plant shutdowns. In November 2002 in
response to these worsening conditions, the Company incurred costs
associated with a revised consolidation plan that encompassed a personnel
reduction of 1,400 employees. Also during November 2002, the Company
recorded a charge related to inventories that became obsolete due to the
increase in parked aircraft that are not expected to return to active
service.
During the three months ended March 31, 2003, the Company determined that
deteriorating industry conditions warranted a further expansion of its cost
reduction program. The Company has incurred a total of approximately $6.8 of
costs associated with its facilities and personnel consolidation and
integration program during the quarter, which have been expensed as incurred
as a component of cost of sales ($5.6 was incurred during the three months
ended March 31, 2002). Cash requirements related to facility consolidation
activities were funded from cash in banks.
Since the events of September 2001 and the ensuing downtown in the
airline and business jet industry, the Company has recorded approximately
$112.0 in charges and $39.0 in facility consolidation and integration costs.
The Company expects that it will incur up to approximately $10.0 of
additional such costs during the remainder of calendar 2003. The total
estimated cost of the consolidation effort is expected to be approximately
$160.0, of which approximately $70.0 are cash costs. The Company paid $2.9
of previously accrued facility consolidation costs leaving $0.9 of such
costs accrued as of March 31, 2003.
[Remainder of page intentionally left blank]
9
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 5. Goodwill and Intangible Assets
Effective February 24, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." As a result of adopting SFAS No. 142, the
Company's goodwill and certain indefinite-lived 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:
March 31, 2003 December 31, 2002
--------------------------------------- ---------------------------------------
Net Net
Useful Life Original Accumulated Book Original Accumulated Book
(Years) Cost Amortization Value Cost Amortization Value
------------- ---------- --------------- ------------ ------------- -------------- ----------
Acquired technologies 4-30 $ 93.3 $15.2 $ 78.1 $ 93.2 $14.4 $ 78.8
Trademarks and patents 7-30 24.9 8.9 16.0 26.0 8.5 17.5
Trademarks (nonamortizing) -- 20.6 -- 20.6 19.4 -- 19.4
Technical qualifications,
plans 3-30 26.1 13.0 13.1 26.1 12.8 13.3
and drawings
Replacement parts annuity
and product approvals 3-30 39.2 18.7 20.5 39.2 18.2 21.0
Covenant not to compete and
other identified intangibles 3-10 24.6 10.0 14.6 24.8 9.6 15.2
------- ----- ------- ------- ----- -------
$ 228.7 $ 65.8 $162.9 $ 228.7 $63.5 $ 165.2
======= ====== ====== ======= ===== =======
Aggregate amortization expense on intangible assets was approximately
$2.3 for the three months ended March 31, 2003 and 2002. In accordance with
SFAS No. 142, the Company has completed the fair value analysis for goodwill
and other intangible assets as of December 31, 2002; and there were no
impairment or impairment indicators present and no loss was recorded.
Additionally, no impairment indicators were present as of March 31, 2003.
Amortization expense is expected to be approximately $9.0 in each of the
next five fiscal years.
Changes to the original cost basis of goodwill during the three months
ended March 31, 2003 was due to foreign currency fluctuations. The change in
the carrying amount of goodwill for the three months ended March 31, 2003 is
as follows:
Total
--------------------
Balance as of December 31, 2002 $ 344.7
Effect of foreign currency translation 0.5
-------
Balance as of March 31, 2003 $ 345.2
=======
SFAS No. 142, which required the discontinuation of goodwill
amortization, became effective for the Company on February 24, 2002. A
reconciliation of reported net loss to net loss adjusted to reflect the
adoption of SFAS No. 142 in the three months ended March 31, 2003 and March
31, 2002 are as follows:
THREE MONTHS ENDED
-----------------------------------------------
March 31, 2003 March 31, 2002
----------------------- -----------------------
Net loss:
As reported $ (10.8) $ (5.9)
Goodwill amortization, net of taxes -- 1.5
-------- -------
As adjusted $ (10.8) $ (4.4)
======= =======
Basic and diluted loss per common share:
As reported $ (0.31) $ (0.17)
======= =======
As adjusted $ (0.31) $ (0.13)
======= =======
10
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 6. Long-Term Debt
In January and March 2003, the Company obtained amendments to the $150.0
credit facility with J.P. Morgan Chase (the "Amended Bank Credit Facility").
The Amended Bank Credit Facility reduced the total commitments to $135.0
during January 2003 (of which $30.0 may be utilized for acquisitions). The
Amended Bank Credit Facility provides for another $15.0 reduction in
facility size to $120.0 at December 31, 2004. The Amended Bank Credit
Facility expires in August 2006 and is collateralized by substantially all
of the Company's assets. At March 31, 2003, indebtedness under the Amended
Bank Credit Facility consisted of letters of credit aggregating
approximately $5.6 and outstanding borrowings aggregating to $79.0 (bearing
interest ranging from 200 to 350 basis points over the Eurodollar rate, or
approximately 5.0% as of March 31, 2003). The amount available under the
Amended Bank Credit Facility was $50.4 as of March 31, 2003. The Amended
Bank Credit Facility contains customary affirmative covenants, negative
covenants and conditions of borrowings, all of which were met as of March
31, 2003. The Company presented the $15.0 reduction in commitments as
short-term debt at December 31, 2002.
Note 7. Commitments, Contingencies and Off-Balance Sheet Arrangements
Sale-Leaseback Transaction -- During September 2002, the Company entered
into two sale-leaseback transactions involving four of its facilities. Under
the transactions, the facilities were sold for $27.0, net of transaction
costs and have been leased back for periods ranging from 15 to 20 years. The
leasebacks have been accounted for as operating leases. A gain of $4.8
resulting from the sales have been deferred and is being amortized to rent
expense over the initial term of the leases.
Lease Commitments -- The Company finances its use of certain facilities
and equipment under committed lease arrangements provided by various
institutions. Since the terms of these arrangements meet the accounting
definition of operating lease arrangements, the aggregate sum of future
minimum lease payments is not reflected on our consolidated balance sheet.
At March 31, 2003, future minimum lease payments under these arrangements
approximated $52.1. The Company also has various other agreements whose
future minimum lease payments approximated $27.3 at March 31, 2003.
Legal Settlement -- In February 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") for approximately $62.0 in cash. In October 1999, the
Company completed the sale of its remaining 49% equity interest in IFE to
Sextant. Terms of the agreement provided for the Company to receive two
payments totalling $31.4, and a third payment based on actual sales and
bookings as defined in the agreement (the "IFE obligations"). Sextant had
not made any of the payments related to the IFE obligations in accordance
with the terms of the purchase and sale agreement. The Company initiated
arbitration proceedings to compel payment. Sextant counterclaimed against
the Company, claiming various breaches of the IFE Sale agreements. In
February 2003, an arbitration panel resolved the dispute by awarding BE
Aerospace a net amount of $7.8, which was collected during the quarter ended
March 31, 2003.
Indemnities, Commitments and Guarantees -- During its normal course of
business, the Company has made certain indemnities, commitments and
guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include non-infringement of patents
and intellectual property indemnities to the Company's customers in
connection with the delivery, design, manufacture and sale of its products,
indemnities to various lessors in connection with facility leases for
certain claims arising from such facility or lease, indemnities to other
parties to certain acquisition agreements and indemnities to directors and
officers of the Company to the maximum extent permitted under the laws of
the State of Delaware. The duration of these indemnities, commitments and
guarantees varies, and in certain cases, is indefinite. The Company believes
that substantially all of these indemnities, commitments and guarantees
provide for limitations on the maximum potential future payments the
Company could be obligated to make. However, the Company is unable to
estimate the maximum amount of liability related to its indemnities,
commitments and guarantees because such liabilities are contingent upon the
occurrence of events which are not reasonably determinable. Management
believes that any liability for these indemnities, commitments and
guarantees would not be material to the accompanying condensed consolidated
financial statements.
11
Product Warranty Costs - Estimated costs related to product warranties
are accrued at the time products are sold. In estimating its future warranty
obligations, the Company considers various relevant factors, including the
Company's stated warranty policies and practices, the historical frequency
of claims and the cost to replace or repair its products under warranty. The
following table provides a reconciliation of the activity related to the
Company's accrued warranty expense:
Charges to Costs
December 31, 2002 Costs and Expenses Incurred March 31, 2003
---------------------------- --------------------------- -------------- -------------------
Product warranty $8.9 $1.9 $(1.2) $9.6
Note 8. 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. The Company evaluates segment performance based on segment
operating income (loss) excluding facility consolidation and personnel
transition costs.
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
-------------------------------------
March 31, March 31,
2003 (A) 2002 (B)
----------------- -------------------
Commercial Aircraft Products
Net sales $ 110.6 $ 103.1
Operating earnings 1.0 4.8
Business Jet Products
Net sales 18.4 20.4
Operating earnings 1.7 2.4
Fastener Distribution
Net sales 25.7 22.5
Operating earnings 4.3 3.5
Consolidated
Net sales 154.7 146.0
Operating earnings 7.0 10.7
(A) Amounts include facility and personnel transition costs of $6.8 for the
three months ended March 31, 2003. These costs were incurred at the
Commercial Aircraft Products ($6.7) and Business Jet Products ($0.1)
business segments.
(B) Amounts include facility and personnel transition costs of $5.6 for the
three months ended March 31, 2002. These costs were incurred at the
Commercial Aircraft Products ($5.0), Business Jet Products ($0.5) and
Fastener Distribution ($0.1) business segments.
12
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 9. Net Loss Per Common Share
Basic net loss per common share is computed using the weighted average
common shares outstanding during the period. Diluted net 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 (in millions):
THREE MONTHS ENDED
-------------------------------------
March 31, March 31,
2003 2002
------------------ ------------------
Weighted average common shares outstanding 35.4 34.5
Dilutive effect of employee stock options -- --
---- ----
Diluted shares outstanding 35.4 34.5
==== =====
Note 10. Comprehensive Loss
Comprehensive loss is defined as all changes in a company's net assets
except changes resulting from transactions with shareholders. It differs
from net loss in that certain items currently recorded to equity would be a
part of comprehensive loss. The following table sets forth the computation
of comprehensive loss for the periods presented:
THREE MONTHS ENDED
--------------------------------------
March 31, March 31,
2003 2002
------------------ -------------------
Net loss $ (10.8) $ (5.9)
Other comprehensive earnings (loss):
Foreign exchange translation adjustment 1.3 (1.2)
------- ------
Comprehensive loss $ (9.5) $ (7.1)
======= ======
[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 SHARE DATA)
The following discussion and analysis addresses the results of the
Company's operations for the three months ended March 31, 2003, as compared
to the Company's results of operations for the three months ended March 31,
2002. The discussion and analysis also addresses the liquidity and financial
condition of the Company and other matters.
AIRLINE INDUSTRY CRISIS, BUSINESS JET INDUSTRY CHANGES
AND THEIR IMPACT ON THE COMPANY
The airline industry was severely impacted by the events of September 11,
2001 (See "Dependence Upon Conditions in the Airline Industry" below). In
November 2001, we began to implement a facility consolidation plan designed
to re-align our capacity and cost structure with changed conditions in the
airline industry. This plan consisted of closing five principal facilities
and reducing our workforce by about 1,000 employees.
Industry conditions continued to worsen during the fall of 2002 as the
airlines continued to lower their purchases of spare parts and defer
retrofit programs. In addition, the business jet manufacturers announced
significant production cuts. We revised our consolidation plan during
November 2002 to encompass 1,400 employees in response to the change in
conditions, and to provide for inventories that were impaired due to the
growing number of parked aircraft that are not expected to return to the
active fleet.
The onset of war in Iraq and the Severe Acute Respiratory Syndrome (SARS)
virus outbreak during the first quarter of 2003 have caused most major
carriers to experience sharply lower air travel. The reduced air travel is
forcing carriers worldwide to make further cuts in capacity and workforce.
Ten thousand airline jobs were eliminated during the first week of the war
in Iraq. U.S. airlines reported trans-Atlantic and trans-Pacific traffic
down 20 percent in late March and April 2003. Carriers serving the Pacific
Rim are experiencing substantially lower traffic and advance bookings. In
response, airlines such as Northwest Airlines, Cathay Pacific, Qantas,
Singapore Airlines and Japan Airlines have cut flights by as much as 25
percent on certain routes in Asia. Estimates indicate that the U.S. airlines
alone could lose nearly $11 billion during calendar 2003 as a result of the
combined impact of these recent events.
The business jet industry has also been experiencing a severe downturn.
Several business jet manufacturers recently announced plans to further
reduce production of new business jets. Industry sources expect new business
jet deliveries to be at least 20 percent lower for calendar 2003 as compared
to calendar 2002, and about 35 percent lower compared to 2001. In the second
half of the current year, industry sources expect about 250 new business jet
deliveries, about 33 percent lower than last year, and an annualized
decrease of about 45 percent as compared to the 900 new aircraft delivered
in 2001.
The airlines are seeking to conserve cash, in part by deferring or
eliminating cabin interior refurbishment programs and deferring or canceling
aircraft purchases. This has caused a substantial contraction in our
business, the extent and duration of which cannot be determined at this
time. Further, the reduction in new business jet production will negatively
impact demand for our products. We expect these adverse industry conditions
to have a material adverse impact on our results of operations and financial
condition until such time as conditions in the commercial airline and
business jet industries 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.
We have recorded approximately $112.0 in charges and $39.0 in facility
consolidation and integration costs since October 2001. We expect to incur
future transition and consolidation costs totalling up to approximately
$10.0 during the second and third quarters of calendar 2003. The total
estimated cost of the consolidation effort is approximately $160.0
(approximately $70.0 are cash costs).
14
BE AEROSPACE, INC.
THREE MONTHS ENDED MARCH 31, 2003, AS COMPARED TO THE RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
Consolidated net sales for the three months ended March 31, 2003, were
$154.7, which is $8.7 or 6.0% greater than net sales of $146.0 for the same
period in the prior year. Sales for both periods were negatively impacted by
the airline industry crisis. Management estimates that sales are down
approximately 30 percent compared to annualized pre-September 2001 levels,
adjusted for acquisitions.
Sales within the commercial aircraft products segment were $110.6 or 7.3%
greater than sales in the same period in the prior year, which was also
negatively impacted by the events of September 11, 2001. Sales within the
business jet segment were $18.4 or 9.8% lower than the prior year due to
lower levels of deliveries of business jets. First quarter fastener
distribution sales were $25.7 or 14.2% higher than the prior year due to
market share gains.
Gross profit was $46.4, or 30.0% of net sales, for the quarter ended
March 31, 2003 compared to $49.1, or 33.6% in the same period of the prior
year, including $6.8 and $5.6 of facility consolidation and integration
costs in each of the respective quarters. The period over period decrease in
gross margin was primarily due to facility consolidation and integration
costs in the current quarter, poor operating performance during the
wind-down period at our Dafen facility, costs associated with the start-up
of our seat component plastics operations and higher unabsorbed overhead
costs at certain operations. The facility consolidation and integrations
costs consist of severance and other employee costs and expenses of
operating facilities scheduled for closure and the costs of integrating
transferred operations into the remaining facilities.
Selling, general and administrative expenses were $28.5 or 18.4% of net
sales for the three-month period as compared to $28.6 or 19.6% of net sales
during the same period in the prior year.
Research, development and engineering expenses were $10.9 or 7.0% of net
sales for the three months ended March 31, 2003, as compared with $9.8 or
6.7% of sales for the same period in the prior year. The increase in
expenses was attributable to development activities associated with an
Airbus A380 new product development program.
Due to the factors cited above, the Company generated operating earnings
of $7.0 or 4.5% of net sales for the current quarter, including the $6.8 of
facility consolidation and integration program expenses. This was $3.7 or
34.6% lower than operating earnings of $10.7 or 7.3% of net sales for the
same period in the prior year.
Interest expense, net was $16.8 for the quarter ended March 31, 2003, or
$0.2 greater than interest expense of $16.6 for the same period in the prior
year.
Income tax expense for the current three-month period was $1.0 as
compared to no expense in the same period in the prior year. The increase
was due to taxes on foreign earnings that cannot be offset with domestic tax
loss carryforwards.
Net loss was $10.8 or $0.31 per share for the current quarter as compared
to a net loss of $5.9 or $0.17 per share for the same period last year.
[Remainder of page intentionally left blank]
15
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 programs,
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 consists of accounts
receivable and inventories, which fluctuate with the sales of our products. Our
working capital was $209.4 as of March 31, 2003, as compared to $262.9 as of
December 31, 2002. The decrease in working capital is primarily due to the $65.0
paydown of our Amended Bank Credit Facility which is classified as long-term
debt. Of this $65.0 paydown, $50.0 may be reborrowed in the future, subject to
the terms of our Amended Bank Credit Facility (as defined below).
At March 31, 2003, our cash and cash equivalents were $75.9, as compared to
$156.9 at December 31, 2002. This decrease in cash was primarily due to a $15.0
use of cash to provide for the amortization of the Amended Bank Credit Facility
principal balance, a voluntary $50.0 payment to reduce the outstanding balance
of our Amended Bank Credit Facility and other changes in working capital.
Cash Flows
At March 31, 2003, our cash and cash equivalents were $75.9, as compared to
$156.9 at December 31, 2002. Cash used in operating activities was $14.9 for the
three months ended March 31, 2003. The primary use of cash was a net loss of
$10.8 and $12.0 of uses related to changes in our operating assets and
liabilities offset by non-cash charges from amortization and depreciation of
$7.3.
During the three months ended March 31, 2003, we used $15.0 of cash for the
required amortization of the Amended Bank Credit Facility. We also used
approximately $50.0 of cash to reduce the bank credit facility indebtedness
during the period ended March 31, 2003, all of which may be reborrowed in the
future, subject to the terms of the Amended Bank Credit Facility.
Capital Spending
Our capital expenditures were $3.6 and $2.9 during the three months ended
March 31, 2003 and March 31, 2002, respectively. The period over period increase
in capital expenditures is in line with our expectation for annual capital
expenditures of approximately $15.0 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, from operations and from funds available to us under our
Amended Bank Credit Facility. In addition, since 1989, we have completed 23
acquisitions for an aggregate purchase price of approximately $980.0. Following
these acquisitions, we rationalized the businesses, reducing headcount by nearly
4,400 employees and eliminating 22 facilities. The cost of these actions through
March 31, 2003 was approximately $332, the cash portion of which was
approximately $201. 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 Amended Bank
Credit Facility.
[Remainder of page intentionally left blank]
16
BE AEROSPACE, INC.
Outstanding Debt and Other Financing Arrangements
In January and March 2003, we obtained amendments to the $150.0 credit
facility with J.P. Morgan Chase (the "Amended Bank Credit Facility"). The
Amended Bank Credit Facility reduced the total commitments to $135.0 during
January 2003 (of which $30.0 may be utilized for acquisitions). The Amended Bank
Credit Facility provides for another $15.0 reduction in facility size to $120.0
at December 31, 2004. The Amended Bank Credit Facility expires in August 2006
and is collateralized by substantially all of our assets. At March 31, 2003,
indebtedness under the Amended Bank Credit Facility consisted of outstanding
borrowings of $79.0 (bearing interest ranging from 200 to 350 basis points over
the Eurodollar rate, or approximately 5.0% at March 31, 2003) and letters of
credit aggregating approximately $5.6. Other than the $15.0 reduction in
facility size at December 31, 2004, the Amended Bank Credit Facility requires no
principal payments or other reductions until 2006. The amount available under
the Amended Bank Credit Facility was $50.4 as of March 31, 2003. The Amended
Bank Credit Facility contains customary affirmative covenants, negative
covenants and conditions of borrowing, which were met as of March 31, 2003. The
interest cost on the Amended Bank Credit Facility may increase or decrease in
the event of certain changes to our financial leverage ratios.
Long-term debt consists principally of our 8% Notes, 8 7/8% Notes and 9 1/2%
Notes (the "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 Notes contain
restrictive covenants, including limitations on future indebtedness, restricted
payments, transactions with affiliates, liens, dividends, mergers and transfers
of assets, which were met by us as of March 31, 2003. 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 March 31, 2003. 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 2003 2004 2005 2006 2007 Thereafter Total
------------ ------------ ---------- ---------- ----------- ------------- -------------
Long-term debt $ 1.9 $17.6 $ 0.7 $ 64.8 $ 3.3 $ 699.7 $788.0
Operating leases 8.3 7.8 6.9 6.1 6.0 44.3 79.4
------ ----- ----- ------ ------ -------- ------
Total $ 10.2 $25.4 $ 7.6 $ 70.9 $ 9.3 $ 744.0 $867.4
====== ===== ===== ====== ====== ======== ======
Commercial Commitments
Letters of Credit $ 5.6 $ -- $ -- $ -- $ -- $ -- $ 5.6
We believe that our cash flows provide us with the 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.
Sale-Leaseback
During September 2002, we entered into two sale-leaseback transactions
involving four of our facilities. Under the transactions, the facilities were
sold for $27.0, net of transaction costs and have been leased back for periods
ranging from 15 to 20 years. The leasebacks have been accounted for as operating
leases. The future lease payments have been included in the above tables. A gain
of $4.8 resulting from the sale has been deferred and is being amortized to rent
expense over the initial term of the leases.
17
BE AEROSPACE, INC.
Off-Balance Sheet Arrangements - Lease Arrangements
We finance our use of certain equipment under committed lease arrangements
provided by various institutions. Since the terms of these arrangements meet the
accounting definition of operating lease arrangements, the aggregate sum of
future minimum lease payments is not reflected on our consolidated balance
sheet. At March 31, 2003, future minimum lease payments under these arrangements
approximated $52.1. We also have various other agreements whose future minimum
lease payments approximated $27.3 at March 31, 2003.
Indemnities, Commitments and Guarantees
During the normal course of business, we made certain indemnities,
commitments and guarantees under which we may be required to make payments in
relation to certain transactions. These indemnities include non-infringement of
patents and intellectual property indemnities to our customers in connection
with the delivery, design, manufacture and sale of our products, indemnities to
various lessors in connection with facility leases for certain claims arising
from such facility or lease, indemnities to other parties to certain acquisition
agreements and indemnities to our directors and officers to the maximum extent
permitted under the laws of the State of Delaware. The duration of these
indemnities, commitments and guarantees varies, and in certain cases, is
indefinite. We believe that substantially all of our indemnities, commitments
and guarantees provide for limitations on the maximum potential future payments
we could be obligated to make. However, we are unable to estimate the maximum
amount of liability related to our indemnities, commitments and guarantees
because such liabilities are contingent upon the occurrence of events which are
not reasonably determinable. Management believes that any liability for these
indemnities, commitments and guarantees would not be material to our
accompanying condensed consolidated financial statements.
Product Warranty Costs - Estimated costs related to product warranties are
accrued at the time products are sold. In estimating its future warranty
obligations, the Company considers various relevant factors, including the
Company's stated warranty policies and practices, the historical frequency of
claims and the cost to replace or repair its products under warranty. The
following table provides a reconciliation of the activity related to the
Company's accrued warranty expense:
Charges to Costs
December 31, 2002 Costs and Expenses Incurred March 31, 2003
---------------------------- --------------------------- -------------- --------------------
Product warranty $8.9 $1.9 $(1.2) $9.6
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 we 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 April 2002, the Financial Accounting Standards Board ("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 No. 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. We adopted SFAS No. 145 on January 1, 2003 with no material impact
to our consolidated financial statements.
18
BE AEROSPACE, INC.
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 a commitment to a restructuring plan as set forth under
the nullified guidance. We adopted SFAS No. 146 on January 1, 2003 with no
material impact to our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123." This
Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We adopted SFAS No. 148 on
January 1, 2003 with no material impact on our financial statements (as we have
no plans to adopt the fair value method).
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others", an interpretation of FIN No. 5,
57 and 107, and rescission of FIN No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others". FIN No. 45 elaborates on the disclosures to be made by
the guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
while the provisions of the disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. We
adopted FIN No. 45 with no material impact on our consolidated financial
statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Entities", an interpretation of Accounting Research Bulletin No. 51. FIN No. 46
requires that variable interest entities be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. FIN No. 46 also requires disclosures about variable
interest entities that companies are not required to consolidate but in which a
company has a significant variable interest. The consolidation requirements of
FIN No. 46 apply immediately to variable interest entities created after January
31, 2003. The consolidation requirements for entities established prior to
January 31, 2003 will apply in the interim period beginning after June 15, 2003
and the disclosure requirements will apply in all financial statements issued
after January 31, 2003. We adopted the provisions of FIN No. 46 during the first
quarter of calendar 2003 with no material impact on our consolidated financial
statements (as we do not currently have any variable interest entities).
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations is 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 our
Annual Report on Form 10-K for the ten-month transition period ended December
31, 2002.
19
BE AEROSPACE, INC.
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. We sell our products primarily to airlines and
aircraft manufacturers worldwide, including occasional sales collateralized by
letters of credit. We perform ongoing credit evaluations of our customers and
maintain 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.
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 inventories at the lower of cost or market. We regularly review
inventory quantities on hand and record a provision for excess and obsolete
inventories based primarily on our estimated forecast of product demand and
production requirements. As demonstrated since the events of September 11, 2001,
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 inventories. In the
future, if our inventories are 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 inventories are 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 goodwill of a reporting unit and other intangible
assets 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.
20
BE AEROSPACE, INC.
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 $124.4 million as of March 31, 2003, 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
jurisdictions 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 an additional valuation allowance which could materially impact our
financial position and results of operations.
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 U.S. carriers
have substantially reduced their flight schedules. Airlines worldwide have
parked or retired approximately 15% of their fleets. During 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 24% since 2000. 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,
totalling in excess of $7 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.
As a result of these factors, the U.S. airline industry incurred losses
aggregating approximately $18 billion over the two years ended December 31,
2002. The airline industry crisis caused two major domestic airlines, US Airways
and United Airlines, to file for protection under Chapter 11 of the United
States Bankruptcy Act and industry experts believe other major domestic carriers
may be required to do so as well. In addition, Air Canada and Hawaiian Airlines
have filed for bankruptcy protection and at least one smaller domestic carrier,
National Airlines, has ceased operations entirely.
The onset of war in Iraq and the Severe Acute Respiratory Syndrome (SARS)
virus outbreak during the first quarter of 2003 have caused most major carriers
to experience sharply lower air travel in March and April 2003, compared to
prior-year figures, which were already depressed by the events of September 11,
2001 and the industry downturn. Estimates indicate that the U.S. airlines alone
could lose nearly $11 billion during calendar 2003 as a result of the combined
impact of these recent events.
21
BE AEROSPACE, INC.
U.S. airlines reported trans-Atlantic and trans-Pacific traffic down 20
percent in late March and April 2003. The reduced air travel is forcing carriers
worldwide to make further cuts in capacity and workforce. Ten thousand airline
jobs were eliminated in the first week of the war in Iraq. Carriers serving the
Pacific Rim are experiencing substantially lower traffic and advance bookings.
In response, airlines such as Northwest Airlines, Cathay Pacific, Qantas,
Singapore Airlines and Japan Airlines have cut flights by as much as 25 percent
on certain routes in Asia. The business jet industry has also been experiencing
a severe downturn. Several business jet airframe manufacturers recently
announced plans to further reduce production of new business jets. Industry
sources expect new business jet deliveries to be at least 20 percent lower for
calendar 2003 as compared to calendar 2002, and about 35 percent lower compared
to 2001. In the second half of the current year, industry sources expect about
250 new business jet deliveries, about 33 percent lower than last year and an
annualized decrease of about 45 percent as compared to the 900 new aircraft
delivered in 2001.
Accordingly, the airlines are seeking to conserve cash in part by deferring
or eliminating cabin interior refurbishment programs and deferring or canceling
aircraft purchases. This has caused a substantial contraction in our business,
the extent and duration of which cannot be determined at this time. Further, the
reduction in new business jet production will negatively impact demand for our
products. We expect these adverse industry conditions to have a material adverse
impact on our results of operations and financial condition until such time as
conditions in the commercial airline and business jet industries improve. While
management has developed and has been implementing 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.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, 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 and the impact on our business from the September 11,
2001 terrorist attacks. 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, 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, outbreaks or
escalations of national or international hostilities, terrorist attacks,
prolonged health issues which reduces air travel demand (e.g. SARS), 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 components 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 March 31, 2003, we had no outstanding
forward currency exchange contracts. We did not enter into any other
derivative financial instruments.
Interest rates - At March 31, 2003, we had adjustable rate debt of $79.0
and fixed rate debt of $699.7. The weighted average interest rate for the
adjustable and fixed rate debt was approximately 5.0% and 8.7%,
respectively, at March 31, 2003. If interest rates were to increase by
10% above current rates, the estimated net impact on our financial
statements would be to reduce pretax income annually by approximately
$0.3. We do not engage in transactions to hedge our exposure to changes
in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures - Our principal
executive officer and our principal financial officer, after evaluating,
together with management, the effectiveness of our disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c))
within 90 days of the date of filing this report, have concluded that, as
of such date, our disclosure controls and procedures were adequate and
effective to ensure that material information relating to our Company and
its consolidated subsidiaries would be made known to them by others
within those entities.
Change in internal controls - There were no significant changes in our
internal controls or in other factors that could significantly affect our
disclosure controls and procedures subsequent to the date of their
evaluation, nor were there any significant deficiencies or material
weaknesses in our internal controls. As a result, no corrective actions
were required or undertaken.
[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 and Use of Proceeds 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 Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10(i) Material Contracts
10.1 Amendment No. 4 to Amended and Restated Employment Agreement
dated April 30, 2003 between the Registrant
and Thomas P. McCaffrey.*
Exhibit 99 Additional Exhibits
99.1 Section 906 Certification*
b. Reports
Form 8-K, dated and filed January 7, 2003 under Item 9, includes the
certification of the chief executive officer and chief financial offer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Form 8-K, dated January 23, 2003 and filed January 24, 2003 under
Items 5 and 7, includes a press release containing information on
Amendment No. 2 to the Bank Credit Facility.
Form 8-K, dated and filed February 11, 2003 under Items 5 and 7,
includes a press release announcing the decision from an arbitration
panel related to the dispute with The Thales Group.
Form 8-K, dated and filed March 5, 2003 under Items 5, 7 and 9,
includes a press release containing earnings information.
- ---------------
*Filed herewith.
[Remainder of page intentionally left blank]
24
BE AEROSPACE, INC.
SIGNATURES
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: May 7, 2003 By: /s/ Robert J. Khoury
--------------------
Robert J. Khoury
President and
Chief Executive Officer
Date: May 7, 2003 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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 7, 2003 By: /s/ Robert J. Khoury
--------------------
Robert J. Khoury
President and
Chief Executive Officer
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 respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 7, 2003 By: /s/ Thomas P. McCaffrey
-----------------------
Thomas P. McCaffrey
Corporate Senior Vice
President of Administration
and Chief Financial Officer
27