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 June 30, 2004
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
37,415,468 shares were outstanding as of August 2, 2004.
1
BE AEROSPACE, INC.
Form 10-Q for the Quarter Ended June 30, 2004
Table of Contents
Page
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets
as of June 30, 2004 and December 31, 2003.........................3
b) Condensed Consolidated Statements of Operations for the
Three and Six Month Periods ended June 30, 2004 and June 30, 2003..4
c) Condensed Consolidated Statements of Cash Flows for the
Six Month Periods ended June 30, 2004 and June 30, 2003............5
d) Notes to Condensed Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................12
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, Use of Proceeds and Issuer Purchases of
Equity 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
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in millions, except share data)
June 30, 2004 December 31, 2003
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents (Note 3) $ 132.5 $ 147.6
Accounts receivable - trade, less allowance for doubtful
accounts of $2.8 (June 30, 2004)
and $2.2 (December 31, 2003) 91.1 80.3
Inventories, net 179.9 168.7
Other current assets 14.9 10.6
-------- --------
Total current assets 418.4 407.2
Property and equipment, net 101.7 103.8
Goodwill 364.1 352.7
Identifiable intangible assets, net 154.8 158.5
Other assets, net 29.3 30.3
-------- --------
$1,068.3 $1,052.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 154.6 $ 131.0
Current maturities of long-term debt 1.5 1.9
-------- --------
Total current liabilities 156.1 132.9
Long-term debt, net of current maturities 879.5 880.1
Other non-current liabilities 8.0 7.6
Commitments, contingencies and off-balance sheet arrangements (Note 4)
Stockholders' equity:
Preferred stock, $0.01 par value; 1.0 million shares
authorized; no shares outstanding -- --
Common stock, $0.01 par value; 100 million shares
authorized; 37.3 million (June 30, 2004) and
36.7 million (December 31, 2003) shares issued
and outstanding 0.4 0.4
Additional paid-in capital 416.9 413.8
Accumulated deficit (393.0) (383.0)
Accumulated other comprehensive income 0.4 0.7
-------- --------
Total stockholders' equity 24.7 31.9
-------- --------
$1,068.3 $1,052.5
======== ========
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
------------------------------ -----------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
--------------- -------------- -------------- --------------
Net sales $185.3 $151.8 $360.4 $306.5
Cost of sales 123.5 112.0 245.0 220.3
------ ------ ------ ------
Gross profit 61.8 39.8 115.4 86.2
Operating expenses:
Selling, general and administrative 29.9 26.1 58.6 54.6
Research, development and engineering 14.0 9.9 26.2 20.8
------ ------ ------ ------
Total operating expenses 43.9 36.0 84.8 75.4
------ ------ ------ ------
Operating earnings 17.9 3.8 30.6 10.8
Interest expense, net 19.9 17.2 39.7 34.0
------ ------ ------ ------
Loss before income taxes (2.0) (13.4) (9.1) (23.2)
Income taxes 0.4 0.7 0.9 1.7
------ ------ ------ ------
Net loss $ (2.4) $(14.1) $(10.0) $(24.9)
====== ====== ====== ======
Loss per common share:
Basic and diluted $(0.06) $(0.39) $(0.27) $(0.70)
====== ====== ====== ======
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
------------------------------------------
June 30, June 30,
2004 2003
-------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10.0) $(24.9)
Adjustments to reconcile net loss to net cash flows
provided by (used in) operating activities:
Depreciation and amortization 13.8 14.4
Non-cash employee benefit plan contributions 1.1 1.2
Loss on disposal of property and equipment -- 1.4
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (7.6) 3.2
Inventories (9.3) (2.3)
Other current assets and other assets (2.7) 8.5
Payables, accruals and other liabilities 17.9 (15.8)
------ ------
Net cash flows provided by (used in) operating activities 3.2 (14.3)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7.1) (7.3)
Proceeds from sale of property and equipment 0.2 2.3
Acquisitions, net of cash acquired (12.5) --
Other, net 0.1 (3.9)
------ ------
Net cash flows used in investing activities (19.3) (8.9)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under bank credit facilities -- (65.0)
Proceeds from issuances of common stock, net of expenses 2.0 0.5
Repayment of long-term debt (0.9) (0.6)
------ ------
Net cash flows provided by (used in) financing activities 1.1 (65.1)
------ ------
Effect of exchange rate changes on cash and cash equivalents (0.1) 1.3
------ ------
Net decrease in cash and cash equivalents (15.1) (87.0)
Cash and cash equivalents, beginning of period 147.6 156.9
------ ------
Cash and cash equivalents, end of period $132.5 $ 69.9
====== ======
Supplemental disclosures of cash flow information: Cash paid during period for:
Interest, net $ 38.2 $ 33.2
Income taxes, net $ -- $ 0.5
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 fiscal year ended December 31, 2003.
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.
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 Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss and net
loss per share for the three and six months ended June 30, 2004 and 2003,
respectively, would have been the pro forma amounts indicated in the
following table:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -----------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
--------------- -------------- -------------- --------------
Net loss as reported $ (2.4) $(14.1) $(10.0) $(24.9)
Expense per SFAS No. 123,
fair value method, net of
related tax effects 1.2 0.9 3.6 2.1
------ ------ ------ ------
Pro forma $ (3.6) $(15.0) $(13.6) $(27.0)
------ ------ ------ ------
Basic and diluted net loss per share:
As reported $(0.06) $(0.39) $(0.27) $(0.70)
====== ====== ====== ======
Pro forma $(0.10) $(0.42) $(0.37) $(0.76)
====== ====== ====== ======
Note 2. Goodwill and Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
the Company has completed the fair value analysis for goodwill and other
intangible assets as of December 31, 2003, and concluded that no impairment
existed. As of June 30, 2004, the Company believed that no indicators of
impairment existed. Aggregate amortization expense on identifiable
intangible assets was approximately $2.3 and $2.2 for the three months ended
June 30, 2004 and 2003, and $4.6 and $4.5 for the six months ended June 30,
2004 and 2003. Amortization expense is expected to be approximately $9.0 in
each of the next five fiscal years.
6
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions)
Changes to the original cost basis of goodwill during the six months
ended June 30, 2004 were primarily due to insignificant acquisitions and
immaterial foreign currency fluctuations.
Commercial Business
Aircraft Jet Distribution Total
-------------------- -------------------- -------------------- -----------
Balance as of December 31, 2003 $158.5 $88.1 $106.1 $352.7
Goodwill acquired 9.7 -- 1.9 11.6
Effect of foreign currency translation (0.2) -- -- (0.2)
------ ----- ------ ------
Balance as of June 30, 2004 $168.0 $88.1 $108.0 $364.1
====== ===== ====== ======
The following sets forth the intangible assets by major asset class, all
of which were acquired during acquisition transactions:
June 30, 2004 December 31, 2003
--------------------------------------- --------------------------------------
Net Net
Useful Life Original Accumulated Book Original Accumulated Book
(Years) Cost Amortization Value Cost Amortization Value
------------- ---------- --------------- ------------ ------------ -------------- ----------
Acquired technologies 4-30 $ 93.8 $19.0 $ 74.8 $ 93.8 $17.5 $ 76.3
Trademarks and patents 7-30 26.6 11.1 15.5 26.6 10.5 16.1
Trademarks (nonamortizing) -- 20.6 -- 20.6 20.6 -- 20.6
Technical qualifications,
plans and drawings 3-30 31.1 14.9 16.2 31.0 14.3 16.7
Replacement parts annuity
and product approvals 3-30 41.2 22.2 19.0 41.0 21.2 19.8
Covenants not to compete and
Other identified intangibles 3-10 20.8 12.1 8.7 20.3 11.3 9.0
------ ----- ------ ------ ----- ------
$234.1 $79.3 $154.8 $233.3 $74.8 $158.5
====== ===== ====== ====== ===== ======
Note 3. Long-Term Debt
The Company amended its $50.0 credit facility with JPMorgan Chase Bank
(the "Amended Bank Credit Facility") in February 2004. The amendment had the
effect of eliminating maintenance financial covenants consisting of an
interest coverage ratio, a leverage ratio and a minimum net worth test.
Under the Amended Bank Credit Facility there are no maintenance financial
covenants as long as cash and cash equivalents are above $25.0 and there are
no borrowings outstanding under this facility. If borrowings under the
Amended Bank Credit Facility are outstanding and if cash is less than $70,
the interest coverage ratio (as defined) must be at least 1.15:1 for the
trailing 12 month period. The Amended Bank Credit Facility expires in
February 2007, is collateralized by substantially all of the Company's
assets and contains customary affirmative covenants, negative covenants and
conditions of borrowings, all of which were met as of June 30, 2004.
At June 30, 2004, indebtedness under the Amended Bank Credit Facility
consisted of letters of credit aggregating approximately $11.6. Under the
terms of the Amended Bank Credit Facility, the Company is required to have
on deposit in a collateral account an amount equal to 102% of the face
amount of the letters of credit outstanding, or $11.8 of restricted cash as
of June 30, 2004. The Amended Bank Credit Facility bears interest ranging
from 250 to 400 basis points over the Eurodollar rate (approximately 5.3% as
of June 30, 2004). The amount available under the Amended Bank Credit
Facility was $38.4 as of June 30, 2004.
7
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions)
Long-term debt consists principally of our 8 1/2% senior notes, 8 7/8%
senior subordinated notes, 9 1/2% senior subordinated notes and 8% senior
subordinated notes. The $250 of 8% notes mature on March 1, 2008, the $200
of 9 1/2% notes mature on November 1, 2008, the $175 of 8 1/2% senior notes
mature on October 1, 2010 and the $250 of 8 7/8% notes mature on May 1,
2011. The senior subordinated notes are unsecured senior subordinated
obligations and are subordinated to all of our senior indebtedness. The
senior notes are senior to all of our subordinated indebtedness, but
subordinate to borrowings under our bank credit facility. Each of the 8%,
8 1/2%, 8 7/8% and 9 1/2% notes contains restrictive covenants, including
limitations on future indebtedness, restricted payments, transactions with
affiliates, liens, dividends, mergers and transfers of assets, all of which
were met as of June 30, 2004. A breach of these covenants, or the covenants
under our current or any future 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.
Note 4. Commitments, Contingencies and Off-Balance Sheet Arrangements
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 the consolidated balance sheet.
At June 30, 2004, future minimum lease payments under these arrangements,
the majority of which related to long-term real estate leases, approximated
$86.9.
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, and indemnities to other
parties to certain acquisition agreements. 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. Accordingly, no
expenses have been accrued for indemnities, commitments and guarantees.
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:
SIX MONTHS ENDED
-------------------------------------
June 30, June 30,
2004 2003
---------------- -----------------
Beginning balance $11.9 $8.9
Acquisitions 1.0 --
Charges to costs and expenses 4.3 3.2
Costs incurred (4.3) (2.6)
----- ----
Ending balance $12.9 $9.5
===== ====
8
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions)
Note 5. 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, Business Jet and Distribution. The Company's
Commercial Aircraft segment consists of eight principal operating units
while the Business Jet and Distribution segments consist of two and one
principal operating unit(s), respectively. Such operating units have been
aggregated for segment reporting purposes due to their similar nature. The
Company evaluates segment performance based on segment operating earnings or
loss.
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
customers.
The following table presents net sales and other financial information
by business segment:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------------- ------------- ------------- --------------
Net sales
Commercial Aircraft $128.4 $107.9 $254.6 $218.5
Distribution 37.1 25.8 70.9 51.5
Business Jet 19.8 18.1 34.9 36.5
------ ------ ------ ------
$185.3 $151.8 $360.4 $306.5
====== ====== ====== ======
Operating earnings (loss)
Commercial Aircraft $ 10.5 $ (6.6) $ 18.9 $ (5.6)
Distribution 7.0 4.4 13.3 8.7
Business Jet 0.4 (0.3) (1.6) 1.4
Divestiture settlement- net of charges -- 6.3 -- 6.3
------ ------ ------ ------
$ 17.9 $ 3.8 $ 30.6 $ 10.8
====== ====== ====== ======
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9
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except Share and Per Share Data)
Note 6. 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:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- ------------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
----------------- --------------- -------------- ---------------
Net loss $ (2.4) $(14.1) $(10.0) $(24.9)
Basic and diluted weighted average
common shares 37.0 35.8 37.0 35.6
Basic and diluted net loss per share $(0.06) $(0.39) $(0.27) $(0.70)
====== ====== ====== ======
The Company excluded potentially dilutive securities of 1.0 and 0.9
shares from the calculation of loss per share for the three and six months
ended June 30, 2004 as the effect of including these securities would be
anti-dilutive. There were no securities that qualified as dilutive for the
three and six months ended June 30, 2003.
Note 7. 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 SIX MONTHS ENDED
------------------------------ --------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---------------- ------------- ------------ -------------
Net loss $(2.4) $(14.1) $(10.0) $(24.9)
Other comprehensive earnings (loss):
Foreign exchange translation
adjustment (1.5) 3.8 (0.3) 5.1
----- ------ ------ ------
Comprehensive loss $(3.9) $(10.3) $(10.3) $(19.8)
===== ====== ====== ======
Note 8. Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities" and in December 2003, issued
Interpretation No. 46 (revised December 2003) "Consolidation of Variable
Interest Entities - An Interpretation of APB No. 51." In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN
No. 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the investors in the entity do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46 (R)
clarifies the application of Accounting Research Bulletin ("APB") No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance
its activities without subordinated financial support from other parties.
The adoption of FIN No. 46 and FIN No. 46(R) did not have an impact on the
Company's financial statements.
10
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions)
In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supersedes
SAB 101, "Revenue Recognition in Financial Statements." SAB 104 clarifies
existing guidance regarding revenues for contracts which contain multiple
deliverables to make it consistent with Emerging Issues Task Force ("EITF")
No. 00-21,"Accounting for Revenue Arrangements with Multiple Deliverables."
The adoption of SAB 104 did not have a material impact on our revenue
recognition policies, nor our financial position or results of operations.
[Remainder of page intentionally left blank]
11
BE AEROSPACE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars In Millions)
The following discussion and analysis addresses the results of our
operations for the three months ended June 30, 2004, as compared to our
results of operations for the three months ended June 30, 2003. The
discussion and analysis then addresses our results of operations for the six
months ended June 30, 2004, as compared to our results of operations for the
six months ended June 30, 2003. The discussion and analysis also addresses
our liquidity, financial condition and other matters.
The September 11, 2001 terrorist attacks severely impacted conditions in
the airline industry. According to industry sources, since such attacks most
major U.S. and a number of international carriers have substantially reduced
their flight schedules, parked or retired portions of their fleets, reduced
their workforces and implemented other cost reduction initiatives. The
airlines have further responded by decreasing domestic airfares. As a result
of the decline in both traffic and airfares following the September 11, 2001
terrorist attacks, and their aftermath, as well as other factors, such as
the weakened economy and increases in fuel costs, the world airline industry
lost a total of $30 billion in calendar 2001 - 2003, including $6.5 billion
in 2003. The airline industry crisis also caused 17 airlines worldwide to
declare bankruptcy or cease operations in the past two years. The onset of
war in Iraq and the Severe Acute Respiratory Syndrome (SARS) virus outbreak
during the first quarter of 2003 further adversely affected the world
airline industry. During 2004, the airlines have been faced with very high
fuel prices, making their return to profitability more difficult. More
recent trends indicate that while the non-U.S. industry appears to be making
a recovery, the U.S. airlines are expected to lose about $3 billion in 2004.
The business jet industry has also been experiencing a severe downturn,
driven by weak demand. During 2003, three business jet manufacturers reduced
or temporarily halted production of a number of aircraft types. Deliveries
of new business jets were down 32% during 2003 as compared to 2002, and are
expected to remain depressed for the foreseeable future, according to
industry forecasts.
As a result of the foregoing, the airlines have been seeking to conserve
cash in part by deferring or eliminating cabin interior refurbishment
programs and deferring or canceling aircraft purchases. This, together with
the reduction of new business jet production, has caused a substantial
contraction in our business, the extent and duration of which cannot be
determined at this time. 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 industry
improve. Additional events similar to those above could delay any recovery
in the industry. While management has completed what it believes is an
aggressive cost reduction plan to counter these difficult conditions, it
cannot guarantee that the plan will be successful.
This rapid decline in industry conditions caused us to implement a
facility consolidation and integration plan designed to re-align our
capacity and our cost structure with changed conditions in the airline
industry. The facility consolidation and integration plan, which was
completed as of December 31, 2003, included closing five facilities,
relocating 12 major production lines and reducing workforce by approximately
1,500 employees, net of several hundred employees that were hired and
trained to operate the relocated production lines. We believe these
initiatives will enable us to significantly expand profit margins even at
the current low level of revenues and even more so when industry conditions
improve and demand increases. The total cost of this program was
approximately $174.9, including $73.7 of cash charges. We believe the annual
cash savings arising from this consolidation program are approximately $60.
12
BE AEROSPACE, INC.
THREE MONTHS ENDED JUNE 30, 2004, AS COMPARED TO THE RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003
(Dollars In Millions, Except Per Share Data)
Sales for each of our segments are set forth in the following table:
THREE MONTHS ENDED
--------------------------------------------------
June 30, June 30,
2004 2003 Change
------------------------- ------------------------ ----------------
Commercial Aircraft $128.4 $107.9 19.0%
Distribution 37.1 25.8 43.8%
Business Jet 19.8 18.1 9.4%
------------------------- ------------------------ ----------------
Total Sales $185.3 $151.8 22.1%
========================= ======================== ================
Net sales for the three months ended June 30, 2004 were $185.3, an
increase of $33.5 or 22.1% as compared to the same period in the prior year.
Bookings for the quarter of approximately $285 were a record for any
quarter in our history and were about $70 or 33% greater than the same
period in the prior year. Backlog at June 30, 2004 of approximately $615,
was up 23% above the June 30, 2003 backlog of $500. During 2004, we were
selected by Thai and Malaysia Airlines, Qantas Airways and Emirates Airline
to design, manufacture and install luxurious first class cabin interiors for
their wide-body aircraft. The combined initial value of these four awards,
which aggregate over $225, exclusive of option aircraft, and for which
initial product deliveries are scheduled to begin in the second half of
2005, were the principal reasons for the backlog growth.
Sales during the quarter in the commercial aircraft segment were $128.4,
an increase of $20.5 or 19.0% as compared to the same period in the prior
year. The 19.0% year over year revenue growth was primarily driven by a
23.9% increase in the sale of seating products and a 41.5% increase in the
sale of refrigeration products. The distribution segment reported record
sales of $37.1, reflecting a 43.8% increase versus the same period in the
prior year. This revenue growth was driven by a broad-based increase in
demand for aftermarket aircraft fasteners and market share gains. In the
business jet segment, sales were up $1.7 or 9.4% compared to the same period
in the prior year. While conditions in the business jet industry appear to
have stabilized, new business jet deliveries are still at very low levels.
Our business jet segment will be the primary beneficiary of the
aforementioned four recently awarded international super first class
programs, for which initial product deliveries are scheduled to begin in
2005.
Gross profit for the quarter of $61.8 or 33.4% of sales increased by
$22.0 or 55.3%, as compared to gross profit of $39.8 or 26.2% of sales in
the second quarter of 2003. Foreign exchange negatively impacted year over
year financial comparisons by $2.1. We are subject to fluctuations in
foreign exchange rates due to significant sales from our European
facilities, substantially all of which are denominated in U.S. dollars,
while the corresponding labor, overhead costs and certain material costs are
denominated in British pounds or euros. Even after considering the negative
effects of foreign exchange, our gross margin for the quarter improved to
33.4% compared to 26.2% for the same period last year, reflecting the
significant cost savings from our cost reduction programs and an improved
product mix.
Selling, general and administrative expenses for the current quarter were
$29.9 or 16.1% of net sales, as compared to $26.1 or 17.2% of net sales for
the same period last year. During the second quarter of 2003, we received
$9.0 in connection with the resolution of the final matters related to the
1999 sale of our in-flight entertainment business, which was presented as a
reduction of selling, general and administrative expenses, offset by a $5.0
charge for the allowance for bad debts and impaired properties during the
period. As a result, selling, general and administrative expenses increased
by $3.8 compared to the same period last year.
13
Research, development and engineering expenses for the current quarter
were $14.0 or 7.6% of net sales, an increase of $4.1 as compared with $9.9
or 6.5% of sales last year. The increase in expenses compared to last year
was attributable to activities associated with product development for the
Airbus A380 aircraft, international super-first class programs, and other
new products.
We completed our consolidation program at the end of 2003. This effort,
which was developed in response to the rapid change in industry conditions
following the events of September 11, 2001, resulted in the reduction of
approximately 1,500 positions with targeted cost savings of $45. Annual cost
savings associated with this program are now estimated at approximately $60,
about equally split between operating expenses and manufacturing costs.
The following is a summary of our operating results by segment:
Operating earnings for the current quarter at our commercial aircraft
segment were $10.5 or 8.2% of sales, an increase of $17.1 and up from a
loss of $6.6 in the prior year. Foreign exchange negatively impacted
financial comparisons, on a year over year basis, by $2.1. The improved
operating results at the commercial aircraft segment were primarily
driven by a higher level of sales of seating products (23.9%) and
refrigeration products (41.5%) and substantially lower costs resulting
from our recently completed consolidation program.
Operating earnings in our distribution segment were $7.0 or 18.9% of
sales, an increase of $2.6 or 59.1% as compared to operating earnings of
$4.4 or 17.1% of sales in the prior year. The increase in distribution
segment operating earnings was due to higher sales volume as a result of
market share gains and a broad-based increase in demand for aftermarket
aircraft fasteners.
Operating earnings at our business jet segment were $0.4, an
improvement of $0.7 as compared to an operating loss of $0.3 in the
prior year. The increase in operating earnings was driven by the
increased sales volume, successful cost reduction initiatives and
improved product mix.
Despite the $2.1 impact of a weakened dollar on our financial results
for the quarter, consolidated operating earnings were $17.9 or 9.7% of
sales, an increase of $14.1 or 371% as compared to operating earnings of
$3.8 in the prior year. The substantial increase in operating earnings
was driven by the continuing turnaround at our commercial aircraft
segment combined with a broad based increase in sales and earnings at our
distribution segment and significant cost reductions resulting from our
consolidation program, which was completed during 2003.
Income taxes relate to taxes paid in foreign jurisdictions and has not
varied materially on a quarterly basis.
Our consolidated net loss for the quarter was $2.4 or $0.06 per share,
reflecting the $2.1 negative impact of foreign exchange and a $2.7 increase
in interest expense arising from the October 2003 sale of $175 of senior
notes, as compared with a consolidated loss of $14.1 or $0.39 per share last
year.
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14
SIX MONTHS ENDED JUNE 30, 2004, AS COMPARED TO THE RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(Dollars In Millions, Except Per Share Data)
Sales for each of our segments are set forth in the following table:
SIX MONTHS ENDED
--------------------------------------------------
June 30, June 30,
2004 2003 Change
------------------------- ------------------------ ----------------
Commercial Aircraft $254.6 $218.5 16.5%
Distribution 70.9 51.5 37.7%
Business Jet 34.9 36.5 (4.4%)
------------------------- ------------------------ ----------------
Total Sales $360.4 $306.5 17.6%
========================= ======================== ================
Net sales for the six months ended June 30, 2004 were $360.4, an increase
of $53.9 or 17.6% as compared to the same period in the prior year.
Sales during the six-month period at our commercial aircraft segment were
$254.6, an increase of $36.1 or 16.5% as compared to the same period in the
prior year. The 16.5% year over year revenue growth was primarily driven by
a 23.2% increase in the sale of seating products and a 40.0% increase in the
sale of refrigeration products. The distribution segment reported record
sales of $70.9, or 37.7% greater than the same period in the prior year. The
revenue growth at our distribution segment was driven by a broad-based
increase in demand for aftermarket aircraft fasteners and market share
gains. In the business jet segment, sales were down $1.6 or 4.4% compared to
the same period in the prior year.
Gross profit for the six-month period was $115.4 or 32.0% of sales and
increased by $29.2 or 33.9%, as compared to gross profit of $86.2 or 28.1%
of sales in the same period of 2003. Foreign exchange negatively impacted
financial comparisons on a year over year basis by $4.4. We are subject to
fluctuations in foreign exchange rates due to significant sales from our
European facilities, substantially all of which are denominated in U.S.
dollars, while the corresponding labor, overhead and certain material costs
are denominated in British pounds or euros. Even after considering the
negative effects of foreign exchange, our gross margin for the six-month
period improved to 32.0% compared to 28.1% for the same period last year,
reflecting the significant cost savings from our cost reduction programs and
an improved product mix.
Selling, general and administrative expenses for the six-month period
were $58.6 or 16.3% of net sales, as compared to $54.6 or 17.8% of net sales
last year. During the second quarter of 2003, we received $9.0 in connection
with the resolution of the final matters related to the 1999 sale of our
in-flight entertainment business, which was presented as a reduction of
selling, general and administrative expenses, offset by a $5.0 charge for
the allowance for bad debts and impaired properties during the period. As a
result, selling, general and administrative expenses for the six months
ended June 30, 2004 increased by $4.0 compared to the same period last year.
Research, development and engineering expenses for the six-month period
were $26.2 or 7.3% of net sales, an increase of $5.4 as compared with $20.8
or 6.8% of sales for the same period last year. The increase in expenses
compared to the same period last year was primarily attributable to
activities associated with product development for the Airbus A380 aircraft
and international super-first class programs.
We completed our consolidation program at the end of 2003. This effort,
which was developed in response to the rapid change in industry conditions
following the events of September 11, 2001, resulted in the reduction of
approximately 1,500 positions with targeted cost savings of $45. Annual cost
savings associated with this program are now estimated at approximately $60,
about equally split between operating expenses and manufacturing costs.
15
The following is a summary of our operating results by segment:
Operating earnings for the six-month period at our commercial
aircraft segment were $18.9 or 7.4% of sales, an increase of $24.5 over
the prior year's operating loss of $5.6. Foreign exchange negatively
impacted financial comparisons, on a year over year basis, by $4.4. The
increase in commercial aircraft segment operating earnings was driven by
ongoing manufacturing efficiencies, the higher level of sales and
improved product mix.
Operating earnings at our distribution segment were $13.3 or 18.8% of
sales, an increase of $4.6 or 52.9% as compared to operating earnings of
$8.7 or 16.9% of sales in the prior year. The increase in distribution
segment operating earnings was due to market share gains and a
broad-based increase in demand for aftermarket aircraft fasteners.
The operating loss of $1.6 at our business jet segment compares with
operating earnings of $1.4 in the prior year. The decrease in business
jet operating earnings reflects the lower level of revenues and the
resulting poor absorption of overhead costs during the first quarter of
2004. Our business jet segment operated at particularly low levels of
capacity utilization during the first quarter of 2004 as new business jet
production remained at low levels. Our business jet segment should be the
primary beneficiary of the aforementioned four recently awarded
international super first class programs, for which initial product
deliveries are scheduled to begin in 2005.
Despite the $4.4 impact of a weakened dollar on our financial results
for the six-month period, consolidated operating earnings were $30.6 or
8.5% of sales, an increase of $19.8 or 183.3% as compared to operating
earnings of $10.8 in the prior year. The substantial increase in
operating earnings was driven by the continuing turnaround at our
commercial aircraft segment combined with a broad based increase in sales
and earnings at our distribution segment and, importantly, significant
cost reductions resulting from our consolidation program, which was
completed during 2003.
Income taxes relate to taxes paid in foreign jurisdictions and has not
varied materially on a period over period basis.
Our consolidated net loss for the six-month period was $10.0 or $0.27 per
share, reflecting the $4.4 negative impact of foreign exchange and a $5.7
increase in interest expense arising from the October 2003 sale of $175 of
senior notes, as compared with a consolidated loss of $24.9 or $0.70 per
share last year.
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16
BE AEROSPACE, INC.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
Our liquidity requirements consist of working capital needs, 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 cash and cash equivalents,
accounts receivable, inventories, accounts payable and accrued expenses, which
fluctuate with the sales of our products. Our working capital was $262.3 as of
June 30, 2004, as compared to $274.3 as of December 31, 2003. We currently have
no bank borrowings outstanding and no debt principal payments due until 2008. At
June 30, 2004, bank credit available under our Amended Bank Credit Facility was
$38.4, compared to $42.6 at December 31, 2003.
At June 30, 2004, our cash and cash equivalents were $132.5, as compared to
$147.6 at December 31, 2003. Included in cash and cash equivalents at June 30,
2004 was $11.8 of restricted cash supporting our letters of credit under the
Amended Bank Credit Facility. There were no restrictions on cash as of December
31, 2003.
Cash Flows
The $15.1 net use of cash was due to a net loss of $10.0, two insignificant
acquisitions to extend our product offerings ($12.5), capital expenditures of
$7.1 and $1.7 of uses related to changes in our operating assets and
liabilities, offset by non-cash charges of $14.9 primarily related to
amortization and depreciation. Accounts payable and accrued liabilities
increased by $17.9 during the six months associated with the $19.6 increase in
accounts receivable, inventories, other current assets and other assets.
Capital Spending
Our capital expenditures were $7.1 and $7.3 during the six months ended
June 30, 2004 and June 30, 2003, respectively. The year over year decrease in
capital expenditures is in line with our expectation for annual capital
expenditures of approximately $15.0. 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
Amended 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
26 acquisitions for an aggregate purchase price of approximately $1 billion.
Following these acquisitions, we rationalized the businesses, reducing
headcount by nearly 4,500 employees and eliminating 22 facilities. 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,
9 1/2% Notes due 2008 and the Amended Bank Credit Facility.
Outstanding Debt and Other Financing Arrangements
During February 2004, we obtained an amendment to our credit facility with
JPMorgan Chase Bank (the "Amended Bank Credit Facility") to provide us with
additional financial flexibility. The amendment had the effect of eliminating
maintenance financial covenants consisting of an interest coverage ratio, a
leverage ratio and a minimum net worth test. Under the amended and restated
credit facility there are no maintenance financial covenants as long as cash is
above $25.0 and there are no borrowings outstanding under this facility. If
borrowings under the bank credit facility are outstanding and if cash is less
than $70.0, the interest coverage ratio (as defined) must be at least 1.15:1 for
the trailing 12 month period. The Amended Bank Credit Facility expires in
February 2007 and is collateralized by substantially all of our assets. At June
30, 2004, indebtedness under the bank credit facility consisted of letters of
credit aggregating approximately $11.6. Under the terms of the Amended Bank
Credit Facility, we are required to have on deposit in a collateral account an
amount equal to 102% of the face amount of the letters of credit outstanding, or
$11.8 as of June 30, 2004. Letters of credit of $2.0, $5.1 and $4.5 expire in
2004, 2005 and 2006, respectively. The amount available under the bank credit
facility was $38.4 as of June 30, 2004. The bank credit facility contains
customary affirmative covenants, negative covenants and conditions of
borrowings, all of which were met as of June 30, 2004.
17
Long-term debt consists principally of our 8 1/2% senior notes, 8 7/8%
senior subordinated notes, 9 1/2% senior subordinated notes and 8% senior
subordinated notes. The $250 of 8% notes mature on March 1, 2008, the $200 of
9 1/2% notes mature on November 1, 2008, the $175 of 8 1/2% senior notes mature
on October 1, 2010 and the $250 of 8 7/8% notes mature on May 1, 2011. The
senior subordinated notes are unsecured senior subordinated obligations and are
subordinated to all of our senior indebtedness. The senior notes are senior to
all of our subordinated indebtedness, but subordinate to borrowings under our
bank credit facility. Each of the 8%, 8 1/2%, 8 7/8% and 9 1/2% notes contains
restrictive covenants, including limitations on future indebtedness, restricted
payments, transactions with affiliates, liens, dividends, mergers and transfers
of assets, all of which we met as of June 30, 2004. A breach of these covenants,
or the covenants under our current or any future 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 Obligations
During the six month period ended June 30, 2004, there were no material
changes in the contractual obligations specified in our Annual Report on Form
10-K for the fiscal year ended December 31, 2003.
We believe that our cash flows, together with cash on hand provide us with
the ability to fund our operations, make planned capital expenditures and make
scheduled debt service payments for the foreseeable future. However, such cash
flows are dependent upon our future operating performance, which, in turn, is
subject to prevailing economic conditions and to financial, business and other
factors, including the conditions of our markets, some of which are beyond our
control. If, in the future, we cannot generate sufficient cash from operations
to meet our debt service obligations, we will need to refinance such debt
obligations, obtain additional financing or sell assets. We cannot assure you
that our business will generate cash from operations, or that we will be able to
obtain financing from other sources, sufficient to satisfy our debt service or
other requirements.
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 June 30, 2004, future minimum lease payments under these arrangements
approximated $86.9.
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, and indemnities to other parties to certain
acquisition agreements. 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.
18
Product Warranty Costs - Estimated costs related to product warranties are
accrued at the time products are sold. In estimating our future warranty
obligations, we consider various relevant factors, including our stated warranty
policies and practices, the historical frequency of claims and the cost to
replace or repair our products under warranty. The following table provides a
reconciliation of the activity related to our accrued warranty expense:
SIX MONTHS ENDED
----------------------------------
June 30, June 30,
2004 2003
-------------- ---------------
Beginning balance $11.9 $ 8.9
Acquisitions 1.0 --
Charges to costs and expenses 4.3 3.2
Costs incurred (4.3) (2.6)
----- -----
Ending balance $12.9 $ 9.5
===== =====
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 January 2003, the FASB issued Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities" and in December 2003, issued
Interpretation No. 46 (revised December 2003) "Consolidation of Variable
Interest Entities - An Interpretation of APB No. 51." In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN No.
46 requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 (R) clarifies the
application of Accounting Research Bulletin ("APB") No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
subordinated financial support from other parties. The adoption of FIN No. 46
and FIN No. 46(R) did not have an impact on our financial statements.
In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supersedes SAB
101, "Revenue Recognition in Financial Statements." SAB 104 clarifies existing
guidance regarding revenues for contracts which contain multiple deliverables to
make it consistent with Emerging Issues Task Force ("EITF") No.
00-21,"Accounting for Revenue Arrangements with Multiple Deliverables." The
adoption of SAB 104 did not have a material impact on our revenue recognition
policies, nor our financial position or results of operations.
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.
19
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 fiscal year ended December 31, 2003.
Revenue Recognition
Sales of products are recorded when the earnings process is complete. This
generally occurs when the products are shipped to the customer in accordance
with the contract or purchase order, risk of loss and title has passed to the
customer, collectibility is reasonably assured and pricing is fixed and
determinable. In instances where title does not pass to the customer upon
shipment, we recognize revenue upon delivery or customer acceptance, depending
on the terms of the sales contract.
Service revenues primarily consist of engineering activities and are
recorded when services are performed.
Historically, revenues and costs under certain long-term contracts are
recognized using contract accounting under the percentage-of-completion method.
The percentage-of-completion method requires the use of estimates of costs to
complete long-term contracts. The estimation of these costs requires judgment on
the part of management due to the duration of these contracts as well as the
technical nature of the products involved. Adjustments to these estimated costs
are made on a consistent basis. A provision for contract losses is recorded when
such facts are determinable. Revenues recognized under contract accounting
during the three and six months ended June 30, 2004 and 2003 were not material.
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 creditworthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain an allowance
for estimated credit losses based upon our historical experience and any
specific customer collection issues that we have identified. If the actual
uncollected amounts significantly exceed the estimated allowance, our operating
results would be significantly adversely affected. 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 to purchase or manufacture the
inventory or the current estimated market value of the inventory. Cost is
determined using the standard cost method for our manufacturing businesses and
the weighted average cost method for our distribution businesses. The inventory
balance, which includes the cost of raw material, purchased parts, labor and
production overhead costs, is recorded net of a reserve for excess, obsolete or
unmarketable inventories. We regularly review inventory quantities on hand and
record a reserve for excess and obsolete inventories based primarily on
historical usage and 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.
20
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 judgment regarding the existence of impairment indicators and
future cash flows related to intangible assets are based on operational
performance of our acquired businesses, expected changes in the global economy,
aerospace industry projections, discount rates 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 full
valuation allowance of $136.3 as of June 30, 2004, 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
revise these estimates in future periods we may need to adjust the 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 severely impacted conditions in the
airline industry. According to industry sources, since such attacks most major
U.S. and a number of international carriers have substantially reduced their
flight schedules, parked or retired portions of their fleets, reduced their
workforce and implemented other cost reduction initiatives. The airlines have
further responded by decreasing domestic airfares. As a result of the decline in
both traffic and airfares following the September 11, 2001 terrorist attacks,
and their aftermath, as well as other factors, such as the weakened economy and
increases in fuel costs, the world airline industry lost a total of $30 billion
in calendar 2001 - 2003, including $6.5 billion in 2003. The airline industry
crisis also caused 17 airlines worldwide to declare bankruptcy or cease
operations in the past two years. The onset of war in Iraq and the Severe Acute
Respiratory Syndrome (SARS) virus outbreak during the first quarter of 2003
further adversely affected the world airline industry. During 2004, the airlines
have been faced with very high fuel prices, making their return to profitability
more difficult. More recent trends indicate that while the non-U.S. industry
appears to be making a recovery, the U.S. airlines are expected to lose about
$3 billion in 2004.
The business jet industry has also been experiencing a severe downturn,
driven by weak demand. During 2003, three business jet manufacturers reduced or
temporarily halted production of a number of aircraft types. Deliveries of new
business jets were down 32% during 2003 as compared to 2002, and are expected to
remain depressed for the foreseeable future, according to industry forecasts.
21
As a result of the foregoing, the airlines have been seeking to conserve
cash in part by deferring or eliminating cabin interior refurbishment programs
and deferring or canceling aircraft purchases. This, together with the reduction
of new business jet production, has caused a substantial contraction in our
business, the extent and duration of which cannot be determined at this time. 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 industry improve. Additional events similar to those
above could delay any recovery in the industry. While management has completed
what it believes is an aggressive cost reduction plan to counter these difficult
conditions, it cannot guarantee that the plans 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, our 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 our 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, the SARS
outbreak and war in Iraq. These forward-looking statements include risks and
uncertainties, and our actual experience may differ materially from that
anticipated in such statements. Factors that might cause such a difference
include those discussed in our filings with the Securities and Exchange
Commission, including our most recent proxy statement and Form 10-K, as well as
future events that may have the effect of reducing our 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 reduce air travel demand (e.g. SARS), delays in, or unexpected
costs associated with, the integration of our acquired or recently consolidated
businesses, conditions in the airline industry, changing conditions in the
business jet industry, problems meeting customer delivery requirements, our
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.
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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 primarily in U.S. dollars and purchase raw
materials and components parts from foreign vendors primarily in British
pounds or euros. Accordingly, we are exposed to transaction gains and
losses that could result from fluctuations 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, we and our foreign subsidiaries may enter into foreign
currency exchange contracts to manage risk on transactions conducted in
foreign currencies. At June 30, 2004, we had no outstanding forward
currency exchange contracts. We did not enter into any other derivative
financial instruments.
Interest rates - At June 30, 2004, we had no adjustable rate debt and
fixed rate debt of $881.0. The weighted average interest rate for the
fixed rate debt was approximately 8.7% at June 30, 2004. If interest
rates were to increase by 10% above current rates, there would be no
impact on our financial statements due to the absence of variable rate
debt. We do not engage in transactions to hedge our exposure to changes
in interest rates.
As of June 30, 2004, we maintained a portfolio of securities
consisting mainly of taxable, interest-bearing deposits with weighted
average maturities of less than three months. If short-term interest
rates were to increase or decrease by 10%, we estimate interest income
would increase or decrease by approximately $0.1.
ITEM 4. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer have concluded
that, as of June 30, 2004, the end of the period covered by this report,
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) or 15d-15(e)) were effective, based on the evaluation of these
controls and procedures required by Exchange Act Rules 13a-15(b) or
15d-15(b). There were no changes in our company's internal control over
financial reporting that occurred during the second quarter of 2004 that
have materially affected, or are reasonably likely to materially affect,
our company's internal control over financial reporting.
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BE AEROSPACE, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Not applicable.
Item 2. Changes in Securities, Use of Proceeds and Issuer Not applicable.
Purchases of Equity Services
Item 3. Defaults Upon Senior Securities Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Annual meeting took place on June 24, 2004
1. Class I Directors elected - Jim C. Cowart, and Brian H. Rowe.
Directors whose term of office continued after meeting (Class II and
III) - Robert J. Khoury, David C. Hurley, Jonathan M. Schofield,
Richard G. Hamermesh, Amin J. Khoury, Wesley W. Marple, Jr.
2. Amended the 1994 Employee Stock Purchase Plan
The number of shares voted for, against and abstained/withheld were as follows:
Abstain/
For Against Withheld Unvoted
--------------- ------------- -------------- ------------
1. Election of Class I Directors
Jim C. Cowart 31,649,863 732,648 --
Brian H. Rowe 28,400,370 3,982,141 --
2. Proposal to amend the 1994 Employee Stock Purchase 20,888,629 1,880,381 100,598 --
Plan
Item 5. Other Information Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Chief Executive Officer*
31.2 Certification of Chief Financial Officer*
Exhibit 32 Section 1350 Certifications
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350*
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350*
b. Reports
On April 21, 2004, we furnished under Item 12 a Current Report
on Form 8-K with respect to earnings information for the fiscal
quarter ended March 31, 2004.
- ---------------
*Filed herewith.
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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: August 5, 2004 By: /s/ Robert J. Khoury
---------------------
Robert J. Khoury
President and
Chief Executive Officer
Date: August 5, 2004 By: /s/ Thomas P. McCaffrey
-----------------------
Thomas P. McCaffrey
Corporate Senior Vice President of
Administration and Chief Financial Officer
25