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 September 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
56,223,422 shares were outstanding as of November 3, 2004.
1
BE AEROSPACE, INC.
Form 10-Q for the Quarter Ended September 30, 2004
Table of Contents
Page
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets
as of September 30, 2004 and December 31, 2003................3
b) Condensed Consolidated Statements of Operations for the
Three and Nine Month Periods ended September 30, 2004
and September 30, 2003........................................4
c) Condensed Consolidated Statements of Cash Flows for the
Nine Month Periods ended September 30, 2004
and September 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.......24
Item 4. Controls and Procedures..........................................24
Part II Other Information
Item 1. Legal Proceedings................................................25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......25
Item 3. Defaults Upon Senior Securities..................................25
Item 4. Submission of Matters to a Vote of Security Holders..............25
Item 5. Other Information................................................25
Item 6. Exhibits.........................................................25
Signatures.......................................................26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in millions, except share data)
September 30, 2004 December 31, 2003
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 126.2 $ 147.6
Accounts receivable - trade, less allowance for doubtful
accounts of $3.1 (September 30, 2004)
and $2.2 (December 31, 2003) 93.8 80.3
Inventories, net 190.7 168.7
Other current assets 15.0 10.6
-------- --------
Total current assets 425.7 407.2
Property and equipment, net 100.1 103.8
Goodwill 367.2 352.7
Identifiable intangible assets, net 152.5 158.5
Other assets, net 27.6 30.3
-------- --------
$1,073.1 $1,052.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 159.8 $ 131.0
Current maturities of long-term debt (Note 9) 45.3 1.9
-------- --------
Total current liabilities 205.1 132.9
Long-term debt, net of current maturities (Note 9) 835.0 880.1
Other non-current liabilities 9.0 7.6
Commitments, contingencies and off-balance sheet arrangements (Note 4)
Stockholders' equity: (Note 9)
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; 37.8 million (September 30, 2004) and
36.7 million (December 31, 2003) shares issued
and outstanding 0.4 0.4
Additional paid-in capital 418.5 413.8
Accumulated deficit (395.7) (383.0)
Accumulated other comprehensive income 0.8 0.7
-------- --------
Total stockholders' equity 24.0 31.9
-------- --------
$1,073.1 $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 NINE MONTHS ENDED
-------------------------------------- --------------------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------------ ------------------- ------------------- ------------------
Net sales $183.5 $154.5 $543.9 $461.0
Cost of sales 123.4 109.4 368.4 329.7
------ ------ ------ ------
Gross profit 60.1 45.1 175.5 131.3
Operating expenses:
Selling, general and administrative 29.8 25.1 88.4 79.7
Research, development and engineering 12.8 11.7 39.0 32.5
------ ------ ------ ------
Total operating expenses 42.6 36.8 127.4 112.2
------ ------ ------ ------
Operating earnings 17.5 8.3 48.1 19.1
Interest expense, net 19.7 16.9 59.4 50.9
------ ------ ------ ------
Loss before income taxes (2.2) (8.6) (11.3) (31.8)
Income taxes 0.5 0.5 1.4 2.2
------ ------ ------ ------
Net loss $ (2.7) $ (9.1) $(12.7) $(34.0)
====== ====== ====== ======
Loss per common share:
Basic and diluted $(0.07) $(0.25) $(0.34) $(0.95)
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
4
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
NINE MONTHS ENDED
---------------------------------------------
September 30, September 30,
2004 2003
-------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12.7) $(34.0)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 21.0 21.4
Non-cash employee benefit plan contributions 1.7 1.7
Loss on disposal of property and equipment -- 1.4
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (10.3) (6.7)
Inventories (20.2) (0.3)
Other current assets and other assets (0.6) 11.0
Payables, accruals and other liabilities 20.2 (15.7)
------ ------
Net cash flows used in operating activities (0.9) (21.2)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10.7) (8.8)
Proceeds from sale of property and equipment 0.5 2.3
Acquisitions, net of cash acquired (12.5) (2.7)
Other, net 0.8 (3.3)
------ ------
Net cash flows used in investing activities (21.9) (12.5)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under bank credit facilities -- (65.0)
Proceeds from issuances of common stock, net of expenses 3.1 1.4
Repayment of long-term debt (1.7) (0.6)
------ ------
Net cash flows provided by (used in) financing activities 1.4 (64.2)
------ ------
Effect of exchange rate changes on cash and cash equivalents -- 1.4
------ ------
Net decrease in cash and cash equivalents (21.4) (96.5)
Cash and cash equivalents, beginning of period 147.6 156.9
------ ------
Cash and cash equivalents, end of period $126.2 $ 60.4
====== ======
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest, net $ 48.2 $ 44.3
Income taxes, net $ 1.4 $ 1.5
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. If the compensation cost for the
Company's stock option and stock purchase plans had 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 nine months ended September 30, 2004
and 2003, respectively, would have been the pro forma amounts indicated in
the following table:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- --------------------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------------- ------------------- ------------------- ------------------
Net loss as reported $ (2.7) $ (9.1) $(12.7) $(34.0)
Expense per SFAS No. 123,
fair value method, net of
related tax effects 1.4 0.8 5.0 2.9
------ ------ ------ ------
Pro forma $ (4.1) $ (9.9) $(17.7) $(36.9)
------ ------ ------ ------
Basic and diluted net loss per share:
As reported $(0.07) $(0.25) $(0.34) $(0.95)
====== ====== ====== ======
Pro forma $(0.11) $(0.27) $(0.48) $(1.03)
====== ====== ====== ======
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 September 30, 2004, the Company believed that no indicators
of impairment existed. Aggregate amortization expense on identifiable
intangible assets was approximately $2.4 and $2.3 for the three months ended
September 30, 2004 and 2003, and $7.0 and $6.8 for the nine months ended
September 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 nine months
ended September 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 10.8 -- 1.9 12.7
Effect of foreign currency translation 1.8 -- -- 1.8
------ ----- ------ ------
Balance as of September 30, 2004 $171.1 $88.1 $108.0 $367.2
====== ===== ====== ======
The following sets forth the intangible assets by major asset class, all
of which were acquired during acquisition transactions:
September 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 $ 93.7 $19.8 $ 73.9 $ 93.8 $17.5 $ 76.3
Trademarks and patents 7-30 26.7 11.5 15.2 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 15.2 15.9 31.0 14.3 16.7
Replacement parts annuity
and product approvals 3-30 41.2 22.8 18.4 41.0 21.2 19.8
Covenants not to compete and
other identified intangibles 3-10 21.0 12.5 8.5 20.3 11.3 9.0
------ ----- ------ ------ ----- ------
$234.3 $81.8 $152.5 $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 and October 2004. The
amendments had the effect of eliminating financial covenants consisting of a
leverage ratio and a minimum net worth test. The Amended Bank Credit
Facility has no maintenance financial covenants other than an Interest
Coverage Ratio (as defined in the Amended Bank Credit Facility) that must be
maintained at levels equal to or greater than 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 precedent
for borrowings, all of which were met as of September 30, 2004.
At September 30, 2004, indebtedness under the Amended Bank Credit
Facility consisted of letters of credit aggregating approximately $11.6. The
Amended Bank Credit Facility bears interest ranging from 250 to 400 basis
points over the Eurodollar rate (which, as of September 30, 2004, was
approximately 5.8%). The amount available for borrowing under the Amended
Bank Credit Facility was $38.4 as of September 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 September 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. On October 8, 2004, the Company gave notice to redeem on
November 8, 2004 all of its 9 1/2% senior subordinated notes (see Note 9).
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 September 30, 2004, future minimum lease payments under these
arrangements, the majority of which related to long-term real estate leases,
totaled approximately $84.0.
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:
NINE MONTHS ENDED
------------------------------------------
September 30, September 30,
2004 2003
--------------------- ------------------
Beginning balance $11.9 $ 8.9
Acquisitions 1.0 --
Charges to costs and expenses 6.9 4.4
Costs incurred (8.3) (3.1)
--------------------- ------------------
Ending balance $11.5 $10.2
===================== ==================
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 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 NINE MONTHS ENDED
---------------------------------- ---------------------------------------
September September September September
30, 2004 30, 2003 30, 2004 30, 2003
--------------- ---------------- ----------------- ------------------
Net sales
Commercial Aircraft $126.0 $113.7 $380.6 $332.2
Distribution 36.6 26.3 107.5 77.8
Business Jet 20.9 14.5 55.8 51.0
--------------- ---------------- ----------------- ------------------
$183.5 $154.5 $543.9 $461.0
=============== ================ ================= ==================
Operating earnings (loss)
Commercial Aircraft $ 11.3 $ 5.8 $ 30.2 $ 0.2
Distribution 6.2 3.9 19.5 12.6
Business Jet -- (1.4) (1.6) --
Divestiture settlement- net of charges -- -- -- 6.3
--------------- ---------------- ----------------- ------------------
$ 17.5 $ 8.3 $ 48.1 $ 19.1
=============== ================ ================= ==================
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9
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except 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 NINE MONTHS ENDED
------------------------------------- --------------------------------------
September September September September
30, 2004 30, 2003 30, 2004 30, 2003
-------------------- ---------------- ------------------ -------------------
Net loss $ (2.7) $ (9.1) $(12.7) $(34.0)
====== ====== ====== ======
Basic and diluted weighted average
common shares 37.5 36.2 37.1 35.8
Basic and diluted net loss per share $(0.07) $(0.25) $(0.34) $(0.95)
====== ====== ====== =======
The Company excluded potentially dilutive securities of 1.3 million and
2.1 million shares, respectively, from the calculation of loss per share for
the three and nine months ended September 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 nine months ended September 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 NINE MONTHS ENDED
----------------------------------- --------------------------------------
September September September September
30, 2004 30, 2003 30, 2004 30, 2003
-------------------- -------------- ------------------ -------------------
Net loss $(2.7) $(9.1) $(12.7) $(34.0)
Other comprehensive earnings (loss):
Foreign exchange translation
adjustment 0.4 -- 0.1 5.1
----- ----- ------ ------
Comprehensive loss $(2.3) $(9.1) $(12.6) $(28.9)
===== ===== ====== ======
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.
Note 9. Issuance of Common Stock, Early Retirement of Debt
In October 2004, the Company completed an equity offering in which it
sold 18.4 million shares of common stock and generated net proceeds of
approximately $156. The Company intends to use the net proceeds from this
offering, along with approximately $50 of cash, to redeem the $200 aggregate
principal amount at maturity of 9 1/2% senior subordinated notes at a price
equal to 103.167%. The Company has given notice to redeem all of its
outstanding 9 1/2% senior subordinated notes. Upon completion of this debt
retirement, the Company's net debt to capital will be reduced to
approximately 78% and annual cash interest expense will decrease by $19. As
of September 30, 2004, the Company's total long-term debt was approximately
$835 with no maturities of long-term debt until 2008, other than the 9 1/2%
senior subordinated notes to be redeemed on November 8, 2004. The Company
has classified as current debt $43.7 of the 9 1/2% senior subordinated
notes that will be redeemed from cash in banks. The Company will record a
charge of approximately $9 in the fourth quarter associated with this early
retirement of debt, which consists of a call premium of approximately $6.5
and unamortized debt issue costs of approximately $2.5.
[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)
OVERVIEW
The following discussion and analysis addresses the results of our
operations for the three months ended September 30, 2004, as compared to our
results of operations for the three months ended September 30, 2003. The
discussion and analysis also addresses our results of operations for the
nine months ended September 30, 2004, as compared to our results of
operations for the nine months ended September 30, 2003. In addition, the
discussion and analysis addresses our liquidity, financial condition and
other matters for these periods.
Based on our experience in the industry, we believe we are the world's
largest manufacturer of cabin interior products for commercial aircraft and
for business jets and a leading aftermarket distributor of aerospace
fasteners. We sell our manufactured products directly to virtually all of
the world's major airlines and airframe manufacturers and a wide variety of
business jet customers. In addition, based on our experience, we believe
that we have achieved leading global market positions in each of our major
product categories, which include:
o commercial aircraft seats, including an extensive line of first class,
business class, tourist class and regional aircraft seats;
o a full line of aircraft food and beverage preparation and storage
equipment, including coffeemakers, water boilers, beverage containers,
refrigerators, freezers, chillers and microwave, high heat convection
and steam ovens;
o both chemical and gaseous aircraft oxygen delivery systems;
o business jet and general aviation interior products, including an
extensive line of executive aircraft seats, direct and indirect
overhead lighting systems, oxygen delivery systems, air valve systems,
high-end furniture and cabinetry; and
o a broad line of aftermarket fasteners, covering over 100,000 stock
keeping units (SKUs).
We also design, develop and manufacture a broad range of cabin interior
structures and provide comprehensive aircraft cabin interior reconfiguration
and passenger-to-freighter conversion engineering services and component
kits.
We conduct our operations through strategic business units that have been
aggregated under three reportable segments: Commercial Aircraft,
Distribution and Business Jet.
Net sales by line of business for the nine-month periods ended September
30, 2004 and September 30, 2003 were as follows:
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
-------------------- --------------------
Net % of Net % of
Sales Net Sales Sales Net Sales
------- --------- ------- -----------
Commercial Aircraft $380.6 70.0% $332.2 72.0%
Distribution 107.5 19.8% 77.8 16.9%
Business jet 55.8 10.2% 51.0 11.1%
-------- --------- ------- ----------
Net Sales $543.9 100.0% $461.0 100.0%
======== ========= ======= ==========
12
Net sales by domestic and foreign operations for the nine-month periods
ended September 30, 2004 and September 30, 2003 were as follows:
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
-------------------- --------------------
United States $364.0 $297.6
Europe 179.9 163.4
--------------------- ---------------------
Total $543.9 $461.0
===================== =====================
Net sales by geographic segment (based on destination) for the nine-month
periods ended September 30, 2004 and September 30, 2003 were as follows:
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
--------------------- --------------------
Net % of Net % of
Sales Net Sales Sales Net Sales
--------- ----------- -------- -----------
United States $285.5 52.5% $230.6 50.0%
Europe 113.5 20.9% 121.7 26.4%
Asia 104.9 19.3% 82.0 17.8%
Rest of World 40.0 7.3% 26.7 5.8%
--------- ----------- -------- -----------
$543.9 100.0% $461.0 100.0%
========= =========== ======== ===========
We have substantially expanded the size, scope and nature of our business
through a number of acquisitions. Since 1989, we have completed 26
acquisitions, including two acquisitions during fiscal 2004, one acquisition
during fiscal 2003, one acquisition during the transition period ended
December 31, 2002 and three during fiscal 2002, for an aggregate purchase
price of approximately $1 billion, in order to position ourselves as the
preferred global supplier to our customers.
During the period from 1989 to 2000, we integrated the acquired
businesses, closing 17 facilities, reducing our workforce by 3,000 positions
and implementing common information technology platforms and lean
manufacturing initiatives company-wide. This integration effort resulted in
costs and charges totaling approximately $125.
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused us to implement a facility
consolidation and integration plan designed to re-align our capacity and
cost structure with changed conditions in the airline industry. The facility
consolidation and integration plan included closing five facilities and
reducing workforce by approximately 1,500 employees. We believe these
initiatives will enable us to continue to expand profit margins as industry
conditions and demand continue to improve, strengthen the global business
management focus on our core product categories and more effectively
leverage our resources. The total cost of this program was approximately
$175, including approximately $74 of cash charges.
New product development is a strategic initiative for our company. Our
customers regularly request that we engage in new product development and
enhancement activities. We believe that these activities, if properly
focused and managed, will protect and enhance our leadership position.
Research, development and engineering spending have been approximately 6%-7%
of sales for the past several years, and is expected to remain at that level
for the foreseeable future.
We also believe in providing our businesses with the tools required to
remain competitive. In that regard, we have invested, and will continue to
invest, in property and equipment that enhances our productivity. Over the
past three years, annual capital expenditures ranged from $11-$17. Taking
into consideration our recent capital expenditure investments, current
industry conditions and the recent acquisitions, we expect that annual
capital expenditures will be approximately $15-$17 for the next few years.
13
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004,
AS COMPARED TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED SEPTEMBER 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
-------------------------------------------------- ----------------
September 30, September 30, Percent
2004 2003 Change
------------------------- ------------------------ ----------------
Commercial Aircraft $126.0 $113.7 10.8%
Distribution 36.6 26.3 39.2%
Business Jet 20.9 14.5 44.1%
------------------------- ------------------------ ----------------
Total Sales $183.5 $154.5 18.8%
========================= ======================== ================
Net sales for the three months ended September 30, 2004 were $183.5, an
increase of $29.0 or 18.8% as compared to the prior year.
Bookings for the quarter of approximately $185 were $26, or 16% greater,
than the prior year. Backlog at September 30, 2004 of approximately $615 was
up 23% above the September 30, 2003 backlog of $500 despite the 18.8%
increase in sales. 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. Requests for proposal, which we believe is a forward
looking indicator of future spending plans by our customers, stood at over
$1.5 billion at September 30, 2004.
Sales during the quarter in the commercial aircraft segment were $126.0,
an increase of $12.3 or 10.8% as compared to the same period in the prior
year. The 10.8% year over year revenue growth was primarily driven by
increased sales of seating products and food and beverage preparation
and refrigeration equipment. The distribution segment reported sales
of $36.6, reflecting a 39.2% 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 $20.9, an increase of $6.4 or 44.1% as compared to the
severely depressed sales in the same period in the prior year due to the
unusually low level of business jet deliveries in 2003. Revenues in 2004
reflect a large volume of lower margin completion center work as business
jet deliveries, although improved, remain at depressed 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 $60.1 increased by $15.0 or 33.3%, as
compared to gross profit of $45.1 in the third quarter of 2003. Foreign
exchange negatively impacted financial comparisons by $1.2. 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. Despite the negative
effect of foreign exchange, our gross margin for the quarter of 32.8%
improved by 360 basis points over the same period in the prior year,
reflecting the significant cost savings from our cost reduction program, an
improvement in product mix and manufacturing efficiencies realized at the
higher volume of sales.
Selling, general and administrative expenses for the current quarter of
$29.8 or 16.2% of sales, were essentially unchanged from the level of
spending in the immediately preceding quarter of $29.9, but up $4.7 over the
same period in the prior year. The year over year increase in spending is
attributable to insurance rebates in 2003 (none in 2004), increased
incentive compensation and wage increases, foreign currency gains that
reduced expenses in 2003, and the impact of recent acquisitions in the
current year.
14
Research, development and engineering expenses for the current quarter of
$12.8 or 7.0% of net sales increased by $1.1 over the 2003 expense level of
$11.7, or 7.6% of sales. The increase in expenses compared to the same
period last year was attributable to new product development activities for
a range of new products as well as spending related to the Airbus A380
aircraft and various 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 30% of our production sites and 1,500 employee positions.
Annual cost savings associated with this program, which were initially
targeted at $45, are now estimated at $60, and are about equally split
between operating expenses and manufacturing costs.
The following is a summary of our operating results by segment:
The commercial aircraft segment continued its turnaround in the third
quarter. Operating results at commercial aircraft were driven by solid
increases in sales of seating products and food and beverage preparation
and refrigeration equipment and lower costs arising from our
recently completed consolidation program. Operating earnings for this
segment of $11.3 increased by $5.5 or 95% on a $12.3 or 11% increase in
revenues. The operating margin improved by 390 basis points to 9.0% of
sales as compared to 5.1% in the third quarter of 2003.
The distribution segment delivered revenues of $36.6, an increase of
39% over the third quarter of the prior year. Revenue growth was driven
by market share gains and a broad-based increase in demand for
aftermarket fasteners, driven in large part by increases in airline
passenger traffic and attendant increases in capacity. Operating earnings
for this segment of $6.2 or 16.9% of sales, were $2.3 or 59% greater than
operating earnings of $3.9 or 14.8% of sales in the third quarter of
2003.
The business jet segment generated revenues of $20.9, up 44% over
severely depressed sales of $14.5 in the third quarter of 2003. The
increase in revenues reflects both the ongoing recovery in the business
jet industry as well as the unusually low level of new business jet
deliveries in the prior year. The business jet segment operated at an
approximate break-even level of operations during the current quarter, or
$1.4 better than the third quarter of 2003.
Despite the $1.3 impact of a weakened dollar on our financial results for
the quarter, consolidated operating earnings were $17.5 or 9.5% of sales, an
increase of $9.2 or 111% as compared to operating earnings of $8.3 in the
same period in the prior year. The substantial increase in operating
earnings was driven by the continuing turnaround at our commercial aircraft
segment, a broad based increase in sales and earnings at our distribution
segment, a higher level of sales of business jet projects and significant
cost savings resulting from our cost reduction program, which was completed
during 2003.
Income taxes relate to taxes incurred in foreign jurisdictions and have
not varied materially on a quarterly basis.
Our consolidated net loss for the quarter reflects the $1.3 negative
impact of foreign exchange and a $2.8 increase in interest expense arising
from the October 2003 sale of $175 of senior notes. We reported a net loss
of $2.7 or $0.07 per share as compared to a net loss of $9.1 or $0.25 per
share in the same period in the prior year.
15
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004,
AS COMPARED TO THE RESULTS OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2003
(Dollars In Millions, Except Per Share Data)
Sales for each of our segments are set forth in the following table:
NINE MONTHS ENDED
-------------------------------------------------- ----------------
September 30, September 30, Percent
2004 2003 Change
------------------------- ------------------------ ----------------
Commercial Aircraft $380.6 $332.2 14.6%
Distribution 107.5 77.8 38.2%
Business Jet 55.8 51.0 9.4%
------------------------- ------------------------ ----------------
Total Sales $543.9 $461.0 18.0%
========================= ======================== ================
Net sales for the nine months ended September 30, 2004 were $543.9, an
increase of $82.9 or 18% as compared to the prior year.
Sales during the nine-month period at our commercial aircraft segment
were $380.6, an increase of $48.4 or 14.6% as compared to the same period in
the prior year. The 14.6% year over year revenue growth was primarily driven
by increased sales of seating products and food and beverage preparation
and refrigeration equipment. The distribution segment reported
record sales of $107.5, or 38.2% 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 up $4.8 or 9.4%
compared to the severely depressed sales of the same period in the prior
year as a result of the impact of the unusually low number of business jet
deliveries in 2003. Revenues in 2004 reflect a large amount of lower margin
completion center work as business jet deliveries, although improved, remain
at depressed levels.
Gross profit for the nine-month period was $175.5 or 32.3% of sales and
increased by $44.2 or 33.7%, as compared to gross profit of $131.3 or 28.5%
last year. The improvement in gross profit resulted from the significant
cost savings from our cost reduction program, an improvement in product mix
and manufacturing efficiencies and better overhead absorption at the higher
level of revenues. Foreign exchange negatively impacted financial
comparisons on a period over period basis by $5.3.
Selling, general and administrative expenses for the current nine-month
period were $88.4 or 16.3% of net sales. Selling, general and administrative
expenses in the same period in 2003 were $79.7 or 17.3% of net sales.
Selling, general and administrative expenses in the prior year included a
$6.0 net reduction in such costs related to the Sextant settlement and
insurance rebates received during 2003. The balance ($2.7) of the year over
year increase is primarily attributable to higher incentive compensation and
recent acquisitions.
Research, development and engineering expenses for the nine-month period
were $39.0 or 7.2% of net sales, an increase of $6.5 as compared with $32.5
or 7.0% of sales last year. The increase in expenses compared to last year
was primarily attributable to activities associated with product development
for the Airbus A380 aircraft, international super first class programs and
various other new product development activities.
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 30% of our production sites and 1,500 employee positions.
Annual cost savings associated with this program, which were initially
targeted at $45, are now estimated at $60, and are about equally split
between operating expenses and manufacturing costs.
16
The following is a summary of our operating results by segment:
Operating earnings for the nine-month period at our commercial
aircraft segment were $30.2 or 7.9% of sales, an increase of $30.0 over
the same period in the prior year. The increase in commercial aircraft
segment operating earnings was driven by our successfully implemented
cost reduction program, ongoing manufacturing efficiencies, the higher
level of sales and improved product mix. Foreign exchange negatively
impacted financial comparisons on a year over year basis by $5.7.
Operating earnings at our distribution segment were $19.5 or 18.1% of
sales, an increase of $6.9 or 54.8% as compared to operating earnings of
$12.6 or 16.2% of sales in the prior year. The increase in distribution
segment operating earnings was due to strong revenue growth driven by
market share gains and a broad-based increase in demand for aftermarket
aircraft fasteners.
The operating loss of $1.6 at the business jet segment compares with
break-even operating results in the same period in the prior year. The
decrease in business jet operating earnings reflects the poor absorption
of overhead costs during the first quarter of 2004. The 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. During 2004, the business jet segment generated
significant sales of lower margin completion center work, which also
negatively impacted margins. The business jet segment should be the
primary beneficiary of the four aforementioned recently awarded
international super first class programs, for which initial product
deliveries are scheduled to begin in the second half of 2005.
Consolidated operating earnings were $48.1 or 8.8% of sales, an increase
of $29.0 or 151.8% as compared to operating earnings of $19.1 in the same
period 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 late 2003. The weakened
dollar negatively impacted operating earnings by $5.7 during the current
nine-month period.
Income taxes which relate to taxes incurred in foreign jurisdictions
decreased by $0.8 from prior year.
Our consolidated net loss for the nine-month period was $12.7 or $0.34
per share, reflecting the $5.7 negative impact of foreign exchange and a
$8.5 increase in interest expense arising from the October 2003 sale of $175
of senior notes, as compared with a consolidated loss of $34.0 or $0.95 per
share during the same period last year.
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17
LIQUIDITY AND CAPITAL RESOURCES
(Dollars in Millions)
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 and the timing of our interest
payments. Our working capital was $220.6 as of September 30, 2004, as compared
to $274.3 as of December 31, 2003. We currently have no bank borrowings
outstanding and no principal payments due on our outstanding debt until 2008,
other than the 9 1/2% senior subordinated notes to be redeemed on November 8,
2004. Working capital at September 30, 2004 decreased from the December 31, 2003
levels primarily due to normal fluctuations in working capital and the
classification as current debt of $43.7 of our 9 1/2% senior subordinated
notes that will be redeemed from cash in banks.
Total cash and availability under our revolving credit facility at September
30, 2004 was approximately $165, our cash in banks was $126.2 and working
capital was $64.3. As adjusted to show the effect of the receipt of the net
proceeds of $156.3 from our October equity offering and the intended retirement
of our 9 1/2% senior subordinated notes, as of September 30, 2004, our cash in
banks would have been approximately $76.2, our working capital would have been
$214.3 and our cash and availability under our bank credit facility would have
been approximately $115.
At September 30, 2004, our cash and cash equivalents were $126.2, as
compared to $147.6 at December 31, 2003. This decrease in cash and cash
equivalents was primarily associated with two insignificant acquisitions to
extend our product offerings ($12.5), changes in operating assets and
liabilities ($10.9) and capital expenditures ($10.7).
Cash Flows
The $21.4 net use of cash was due to a net loss of $12.7, two insignificant
acquisitions to extend our product offerings of $12.5, capital expenditures of
$10.7 and uses related to changes in our operating assets and liabilities of
$10.9, offset by non-cash charges of $22.7 primarily related to amortization and
depreciation. Accounts payable and accrued liabilities increased by $20.2 during
the nine months associated with the $31.1 increase in accounts receivable,
inventories, other current assets and other assets.
Capital Spending
Our capital expenditures were $10.7 and $8.8 during the nine months ended
September 30, 2004 and September 30, 2003, respectively. The year over year
increase 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.
18
Outstanding Debt and Other Financing Arrangements
During February and October 2004, we obtained amendments to our credit
facility with JPMorgan Chase Bank (the "Amended Bank Credit Facility") to
provide us with additional financial flexibility. These amendments have the
effect of eliminating maintenance financial covenants consisting of a leverage
ratio and a minimum net worth test. Under the Amended Bank Credit Facility there
are no maintenance financial covenants other than maintaining an interest
coverage ratio (as defined) of 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 September 30, 2004, indebtedness under
the bank credit facility consisted of letters of credit aggregating
approximately $11.6. 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 September 30, 2004. The bank credit facility contains customary
affirmative covenants, negative covenants and conditions of borrowings, all of
which were met as of September 30, 2004.
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% mature due 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 September 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.
In October 2004, we gave notice to redeem on November 8, 2004 all of the 9
1/2% senior subordinated notes due in 2008 at a price equal to 103.167% of par.
We intend to use the net proceeds from our recently completed equity offering of
approximately $156 plus $50 of cash in banks to retire this indebtedness. We
will record a charge of approximately $9 in the fourth quarter of 2004
associated with this early retirement of debt, which consists of a call premium
of approximately $6.5 and unamortized debt issue costs of approximately $2.5.
Contractual Obligations
During the nine-month period ended September 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.
19
Off-Balance Sheet Arrangements
Lease Arrangements
We finance our use of certain equipment and operating facilities 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 September 30, 2004, future
minimum lease payments due through 2022 under these arrangements totaled
approximately $84.0.
Indemnities, Commitments and Guarantees
During the normal course of business, we make 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 vary, and in certain cases are 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 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:
NINE MONTHS ENDED
--------------------------------------------
September 30, September 30,
2004 2003
-------------------- --------------------
Beginning balance $11.9 $ 8.9
Acquisitions 1.0 --
Charges to costs and expenses 6.9 4.4
Costs incurred (8.3) (3.1)
-------------------- --------------------
Ending balance $11.5 $10.2
==================== ====================
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.
20
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.
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 nine months ended September 30, 2004 and 2003 were not
material.
21
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.
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.
22
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 September 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, in the aftermath of the attacks
most major U.S. and a number of international carriers substantially reduced
their flight schedules, parked or retired portions of their fleets, reduced
their workforces and implemented other cost reduction initiatives. U.S. airlines
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 increasing fuel costs and
heightened competition from low-cost carriers, the world airline industry lost a
total of approximately $30 billion in calendar years 2001-2003, including $6.5
billion in 2003. Such losses have continued into 2004. The airline industry
crisis also caused 18 airlines worldwide to declare bankruptcy or cease
operations since September 11, 2001. Accordingly, the airlines have been seeking
to conserve cash in part by deferring or eliminating major cabin interior
refurbishment programs and deferring or canceling aircraft purchases.
The business jet industry has also been experiencing a severe downturn,
driven by weak economic conditions and poor corporate profits. 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.
As a result of the foregoing factors, there has been 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 and business jet
industries show sustained improvement. 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 continue to be sufficient.
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 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, the impact on our
business from the September 11, 2001 terrorist attacks, the SARS outbreak and
war in Iraq and the redemption of our 9 1/2% senior subordinated notes due 2008.
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,
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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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 September 30, 2004, we had no outstanding forward
currency exchange contracts. We did not enter into any other derivative
financial instruments.
Interest rates - At September 30, 2004, we had no adjustable rate debt
and fixed rate debt of $880.3. The weighted average interest rate for the
fixed rate debt was approximately 8.7% at September 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 September 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 $0.2.
ITEM 4. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer have concluded
that, as of September 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 third 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. Unregistered Sales of Equity 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
a. Exhibits
Exhibit 10(i) Material Contracts
10.1 Amendment No. 1 to the Amended and Restated Credit Agreement
dated as of October 26, 2004 between the Registrant, Lenders
and JPMorgan Chase Bank.*
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 July 22, 2004, we furnished under Item 12 a Current Report on Form
8-K with respect to earnings information for the fiscal quarter ended
June 30, 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: November 5, 2004 By: /s/ Robert J. Khoury
--------------------
Robert J. Khoury
President and
Chief Executive Officer
Date: November 5, 2004 By: /s/ Thomas P. McCaffrey
-----------------------
Thomas P. McCaffrey
Senior Vice President of Administration
and Chief Financial Officer
26