United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-18348
BE AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1209796
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1400 Corporate Center Way, Wellington, Florida 33414
(Address of principal executive offices) (Zip Code)
(561) 791-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
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 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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 aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $282.8 million on June 30, 2004 based on the
closing sales price of the registrant's common stock as reported on the Nasdaq
National Market as of such date, which is the last business day of the
registrant's most recently completed second fiscal quarter.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of March 7, 2005 was 56,894,217 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Proxy Statement to be filed with the
Commission in connection with the 2005 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
1
INDEX
PART I
ITEM 1. Business.............................................................3
ITEM 2. Properties..........................................................17
ITEM 3. Legal Proceedings...................................................18
ITEM 4. Submission of Matters to a Vote of Security Holders.................18
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities...................19
ITEM 6. Selected Financial Data.............................................20
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................22
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk..........40
ITEM 8. Consolidated Financial Statements and Supplementary Data............40
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................40
ITEM 9A. Controls and Procedures.............................................40
ITEM 9B. Other Information...................................................43
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................43
ITEM 11. Executive Compensation..............................................47
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.....................................47
ITEM 13. Certain Relationships and Related Transactions......................47
ITEM 14. Principal Accountant Fees and Services..............................47
PART IV
ITEM 15. Exhibits and Financial Statement Schedules..........................48
Index to Exhibits...................................................49
Signatures..........................................................52
Index to Consolidated Financial Statements and Schedule............F-1
2
PART I
Because we changed our fiscal year to a calendar year, this report contains
results for a ten-month transition period from February 24, 2002 to December 31,
2002. References to the "transition period" in this report are to the transition
period beginning February 24, 2002 and ending on December 31, 2002. References
to a "fiscal year" in this report are to the fiscal years ending December 31,
2003 and December 31, 2004.
Certain disclosures included in this Form 10-K constitute forward-looking
statements that are subject to risks and uncertainties. Where possible, we have
identified these statements by the use of terms such as "may," "will," "should,"
"expect," "anticipate," "believe," "estimate," "intend," and similar words,
although some forward-looking statements are expressed differently. Our actual
results could differ materially from those described in the forward-looking
statements due to a number of risks and uncertainties. These forward-looking
statements and risks and uncertainties are more fully explained under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Forward-Looking Statements" and "Risk Factors", respectively.
Unless otherwise indicated, the industry data contained in this Form 10-K is
from the January 2005 issue of the Airline Monitor, the 2004 Airbus Industrie
Global Market Forecast, the 2004 Boeing Current Market Outlook, the General
Aviation Manufacturers' Association 2005 Annual Industry Review and Aircraft
Shipment Reports, the 2004 NBAA Business Aviation Fact Book, the Teal Group,
Forecast International or other publicly available sources.
ITEM 1. BUSINESS
INTRODUCTION
The Company
General
Based on our experience in the industry, we believe we are the world's
largest manufacturer of cabin interior products for commercial aircraft and
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 general aviation
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 fasteners, consisting of over 100,000 Stock Keeping
Units (SKUs).
We also design, develop and manufacture a broad range of cabin interior
structures, including crew rests, and provide comprehensive aircraft cabin
interior reconfiguration and passenger-to-freighter conversion engineering
services and component kits.
We were organized as a corporation in Delaware in 1987. We have
substantially expanded the size, scope and nature of our business as a result of
a number of acquisitions. Since 1989, we have completed 26 acquisitions,
including two small acquisitions at a cost of $12.5 million during fiscal 2004,
one small acquisition at a cost of $2.7 million during fiscal 2003 and one
acquisition during the transition period ended December 31, 2002. The aggregate
purchase price of these 26 acquisitions was approximately $1 billion, and we
believe these acquisitions enabled us to position ourselves as a preferred
global supplier to our customers. In addition, we have undertaken three major
facility and product line consolidation efforts, eliminating 22 facilities,
since 1992. We also implemented lean manufacturing and continuous improvement
programs which, together with our information technology investments, have
significantly improved our productivity and allowed us to expand gross and
operating margins prior to the events of September 11, 2001. We have been able
to maintain these programs despite significant decreases in revenues resulting
from the downturn in industry conditions following the events of
September 11, 2001.
3
Industry Overview
The commercial and business jet aircraft cabin interior products industries
encompass a broad range of products and services, including aircraft seating
products, passenger entertainment and service systems, food and beverage
preparation and storage systems, oxygen delivery systems, lavatories, lighting
systems, evacuation equipment, overhead bins, as well as passenger-to-freighter
conversions, interior reconfiguration and a variety of other engineering design,
integration, installation, retrofit and certification services.
Historically, the airline cabin interior products industry has derived
revenues from five sources:
o New installation programs in which airlines purchase new equipment to
outfit newly purchased aircraft;
o Retrofit programs in which airlines purchase new interior furnishings to
overhaul the interiors of aircraft already in service;
o Refurbishment programs in which airlines purchase components and services
to improve the appearance and functionality of their cabin interior
equipment;
o Equipment to upgrade the functionality or appearance of the aircraft
interior; and
o Replacement spare parts.
The retrofit and refurbishment cycles for commercial aircraft cabin interior
products differ by product category. Aircraft seating typically has a
refurbishment cycle of one to two years and a retrofit cycle of four to eight
years. Food and beverage preparation and storage equipment are periodically
upgraded or repaired, and require a continual flow of spare parts, but may be
retrofitted only once or twice during the useful life of an aircraft.
Historically, over 60% of our fasteners are used in the aftermarket. There
is a direct relationship between demand for fastener products and fleet size,
utilization and an aircraft's age. Commercial aircraft must be serviced at
prescribed intervals which also drives the demand for aftermarket fasteners.
Revenues for aerospace fastener products have been derived from the
following sources:
o Demand for aerospace fasteners on new build aircraft for the original
equipment manufacturers (OEMs) and their prime suppliers;
o Demand for structural modifications, cabin interior modifications and
passenger-to-freighter conversions; and
o Mandated maintenance and replacement of specified parts.
We estimate that the commercial and business jet cabin interior products
industry and aerospace-grade fastener distribution industry had annual sales in
excess of $1.4 billion and $1.0 billion, respectively, during calendar 2004.
Airline passenger traffic rebounded in 2004. Global air traffic growth in
2004 increased by 15.3% over 2003. Traffic growth increased by 24.8% in the
Middle East region, 20.5% in the Asia-Pacific region and 14.8% in North America.
The airline industry responded to the strong year over year increases in
passenger traffic with corresponding additions to global capacity. Global
capacity increased by approximately 12.1% during 2004 as compared to the prior
year. The Middle East region lead the industry with capacity growth of 21.6%,
followed by the Asia-Pacific region with capacity growth of 15.5%, while the
North American carriers accounted for capacity growth of 11.0%.
The decline in air traffic following the September 11, 2001 terrorist
attacks through the first half of 2003, combined with declining airfares, a
weakened economy and rising fuel costs, resulted in global airline industry
losses totaling $35 billion in calendar years 2001-2004, including $5 billion in
2004. The substantial increase in fuel prices in 2004 together with lack of
pricing power in the U.S. market, was the primary reason for continued industry
losses in 2004. According to the International Air Transport Association (IATA),
each dollar per barrel added to the average price of Brent oil over a one year
period adds $1 billion to the industry's costs.
4
The business jet industry also experienced a severe downturn in 2003, 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, and deliveries of new business jets were down 33% during 2003
as compared to 2001. However, recent industry forecasts indicate that 2003 was
the trough year in the business jet delivery cycle, with total deliveries of 518
aircraft. Industry sources forecast the business jet industry to continue its
recovery at a moderate pace through 2005 and accelerate thereafter.
Approximately 591 aircraft were delivered in 2004 and industry experts expect
deliveries of 632 aircraft in 2005, 728 in 2006 and 712 in 2007. In addition,
industry sources estimate that approximately 7,700 business jets will be built
between 2003 and 2013 with a value of more than $115 billion.
Since the second half of 2003, we have experienced an increase in demand for
our products from the large foreign international carriers. In addition, our
total bookings during fiscal 2004 were up over 35% as compared to the prior
year. Our backlog at December 31, 2004 was in excess of $700 million, an
increase of over 40% as compared to the backlog at December 31, 2003, despite a
17.5% year over year increase in revenues. Requests for quotation (RFQ) for
products of the type which we produce at December 31, 2004 were in excess of
$1.3 billion. Substantially all of the backlog growth and requests for quotation
during 2004 were generated by foreign carriers; less than 10% of our backlog at
December 31, 2004 was with domestic airlines. We believe the domestic airlines
have been conserving cash in part by deferring cabin interior refurbishment
programs and by deferring aircraft purchases. We continue to expect that the
major U.S. airlines will need to invest in cabin interiors for their
international wide-body fleets or face the prospect of losing market share on
their international routes.
Other factors expected to affect the cabin interior products industry are
the following:
Existing Installed Base. Existing installed product base typically generates
continued retrofit, refurbishment and spare parts revenue as airlines maintain
their aircraft interiors. According to industry sources, the world's active
commercial passenger aircraft fleet consisted of approximately 15,000 aircraft
as of December 31, 2004, including 4,378 aircraft with fewer than 120 seats,
7,450 aircraft with between 120 and 240 seats and 3,172 aircraft with more than
240 seats. Furthermore, based on industry sources, there are approximately
12,974 business jets currently in service. Based on such fleet numbers, we
estimate that the total worldwide installed base of commercial and general
aviation aircraft cabin interior products, valued at replacement prices, was
approximately $16.9 billion as of December 31, 2004.
Growth in Worldwide Fleet. The expansion of the worldwide fleet is expected
to generate additional revenues from new installation programs, while the
increase in the size of the installed base is expected to generate additional
and continued retrofit, refurbishment and spare parts revenue. Although
worldwide air traffic declined during 2001 to 2003 for the reasons described
above, according to the Airline Monitor, worldwide air traffic is projected to
grow at a compounded average rate of 5.3% per year during the 2005-2020 period,
increasing annual revenue passenger miles from approximately 2.3 trillion in
2004 to approximately 5.3 trillion by 2020. Industry experts expect that the
worldwide installed seat base, which we consider a good indicator for potential
growth in the aircraft cabin interior products industry, will approximately
double over the 16-year period ending 2020.
New Aircraft Deliveries. The number of new aircraft delivered each year is
generally regarded as cyclical in nature. It appears that 2003 was the trough
year in the new aircraft delivery cycle, with deliveries of 575 new aircraft,
down from 669 in 2002 and 833 in 2001. According to the Airline Monitor, new
deliveries of large commercial jets increased to 602 in 2004 and are expected to
increase to 680 in 2005, 760 in 2006, 790 in 2007 and 815 in 2008.
Wide-Body Aircraft Deliveries. The trend toward wide-body aircraft is
significant to us because wide-body aircraft will require up to five times the
dollar value content for our products as compared to narrow-body aircraft.
Deliveries of wide-body, long haul aircraft constitute an increasing share of
total new aircraft deliveries and are an increasing percentage of the worldwide
fleet. Wide-body aircraft represented 22% of all new commercial aircraft
(excluding regional jets) delivered in 2004, and are expected to increase to 29%
in 2008. Wide-body aircraft currently carry up to three or four times the number
of seats as narrow-body aircraft, and because of multiple classes of service,
including large first class and business class configurations, our average
revenue per aircraft on a wide-body aircraft is substantially higher than on a
narrow-body aircraft. Aircraft cabin crews on wide-body aircraft flight today
may make and serve between 300 and 900 meals and may brew and serve more than
2,000 cups of coffee and 400 glasses of wine on a single flight. In addition, in
the 2006 - 2008 time period a significant percentage of wide-body deliveries are
expected to be comprised of Airbus A380 aircraft, which require substantially
more cabin interior products than any wide-body aircraft flying today, and is
believed to be approximately 35% larger than a Boeing 747.
5
Growth in Passenger-to-Freighter Conversion Business. Industry sources
project that the size of the worldwide freighter fleet will almost double over
the next twenty years, with almost 3,000 aircraft being added. Industry sources
also estimate that 2,200 of these aircraft are expected to come from converting
commercial passenger jets to use as freighters.
New Product Development. The aircraft cabin interior products companies are
engaged in intensive product development and marketing efforts for both new
features on existing products and totally new products. These products include a
broad range of amenities such as luxurious first class cabins with appointments
such as lie-flat seating, mini-bars, closets, flat screen TVs and mood lighting.
Other products recently introduced include electric lie-flat first and business
class seats, narrow and wide-body economy class seats, convertible seats, full
face crew masks, gaseous passenger oxygen systems, a full range of business and
executive jet seating and LED lighting products, protective breathing equipment,
oxygen generating systems, new food and beverage preparation and storage
equipment, kevlar barrier nets, de-icing systems and crew rests.
Engineering Services Markets. Historically, the airlines have relied
primarily on their own in-house engineering resources to provide engineering,
design, integration and installation services, as well as services related to
repairing or replacing cabin interior products that have become damaged or
otherwise non-functional. As cabin interior product configurations have become
increasingly sophisticated and the airline industry increasingly competitive,
the airlines have begun to outsource these services in order to increase
productivity and reduce costs and overhead. Outsourced services include:
o Complete interior integration;
o Engineering design, integration, project management, installation and
certification services;
o Modifications and reconfigurations for commercial aircraft including
passenger-to-freighter conversions and related kits; and
o Services related to the support of product upgrades.
Competitive Strengths
We believe that we have a strong competitive position attributable to a
number of factors, including the following:
Large Installed Base. We have a large installed base of commercial and
general aviation cabin interior products, estimated to be approximately $4.9
billion (valued at replacement prices) as of December 31, 2004. Based on our
experience in the industry, we believe our installed base is substantially
larger than that of our competitors. We believe that our large installed base is
a strategic advantage as airlines tend to purchase spare parts and retrofits and
refurbishment programs from the supplier of the existing equipment. As a result,
we expect our large installed base to generate continued retrofit, refurbishment
and spare parts revenue as airlines continue to maintain and reconfigure their
aircraft cabin interiors.
Low-Cost Producer. We believe, based on our experience in the industry, that
we are among the industry's lowest-cost producers. We achieved this status
through a series of cost savings programs, including most recently a significant
facility consolidation and integration plan implemented following the
September 11, 2001 terrorist attacks which involved us closing five facilities
and reducing our workforce by approximately 1,500 employees. We believe this
latest facility consolidation and integration plan, representing a reduction in
facilities and workforce of approximately 30% from September 11, 2001 levels has
eliminated approximately $60 million of annual cash costs from our business. We
believe that our factories have the capacity to generate annual revenues of up
to approximately $1 billion without substantial additional capital investment.
While our gross margins have not yet returned to the level achieved for the last
full fiscal year ended February 24, 2001, prior to the events of September 11,
2001, our gross margin for the year ended December 31, 2004 of 32.5% improved by
510 basis points over the prior year, primarily reflecting the significant cost
savings from our recently completed facility consolidation program.
6
Technological Leadership/New Product Development. We believe, based on our
experience in the industry, that we are a technological leader, with the largest
research and development organization in the cabin interior products industry.
As of December 31, 2004, we had approximately 500 employees in engineering,
research and program management. We believe our research and development effort
and our on-site technicians at both the airlines and airframe manufacturers
enable us to play a leading role in developing and introducing innovative
products to meet emerging industry trends and thereby gain early entrant
advantages. Throughout the recent industry downturn, we continued to invest in
research and development with expenditures of $55.1 million in 2004,
representing 7.5% of net sales, $44.7 million in 2003, representing 7.2% of net
sales and $34.1 million in the transition period ending December 31, 2002,
representing 6.8% of net sales, resulting in the continued development and
launch of new products and services. We believe our technological leadership and
new product development capabilities were a key factor in our recent successes
in the emerging international super first class cabin interiors market, in which
we recently were awarded programs valued at up to $250 million. In addition, we
launched several new products such as our Mini-Pod(R) lie-flat seats,
Spectrum(R) seats, Endura(R) beverage maker and new LED lighting systems, which
we expect will continue to drive sales growth in 2005 and beyond. Introduction
of new products has also led to improvements in the product mix of our current
backlog, which, along with our cost reduction programs, is expected to result in
continued expansion of our gross margins.
Experience with Complex Regulatory Environment. The airline industry is
heavily regulated. The Federal Aviation Administration prescribes standards and
licensing requirements for aircraft components, including virtually all
commercial airline and general aviation cabin interior products, and licenses
component repair stations within the United States. Comparable agencies, such as
the U.K. Civil Aviation Authority and the Japanese Civil Aviation Board, for
example, regulate these matters in other countries. In order to sell a subject
product or service, it is necessary to obtain the required licenses for the
product or service under these various regulations. In addition, designing new
products to meet existing regulatory requirements and retrofitting installed
products to comply with new regulatory requirements can be both expensive and
time consuming. We have a long history of experience with the complex regulatory
environment in which we operate and believe this enables us to efficiently
obtain the required approvals for new products and services.
Combination of Manufacturing and Cabin Interior Design, Program Management
and Integration Services. We have continued to expand our products and services,
believing that the airline industry increasingly will seek an integrated
approach to the design, development, integration, installation, testing and
sourcing of aircraft cabin interiors. We believe that we are the only company
which both manufactures a broad, technologically-advanced line of cabin interior
products and offers cabin interior design, program management and integration
capabilities. Based on our established reputation for quality, service and
product innovation, we believe that we are well positioned to serve the world's
major airlines as well as the world's major manufacturers, owners and operators
of business jets.
Diverse Markets and Broad Customer Base. Serving diverse customers and
worldwide markets reduces our dependence on particular customers or geographic
segments. For the year ended December 31, 2004, no customer accounted for more
than 10% of our net sales and our top 10 customers accounted for approximately
34% of net sales. Approximately 83% of our net sales were directly to airlines
and other customers, 10% were to business jet manufacturers and 7% were to
original equipment manufacturers. In addition to this customer diversification,
there is further diversification by geographic region. For the past three years
49% of our net sales were to customers located outside the United States, with
approximately 18% of our net sales for the same period coming from customers in
the Asia-Pacific region. International sales as a percentage of total sales is
expected to increase significantly since the Asia-Pacific and Middle East
regions account for approximately 58% of our current backlog. We believe this
geographic diversification makes us less susceptible to downturns in specific
geographic regions and allows us to take advantage of regional growth trends.
For example, air traffic in the Asia-Pacific and Middle East regions, which
experienced a much less severe downturn than in North America over the past
three years, was up 20.5% and 24.8%, respectively, during 2004.
7
Growth Opportunities
We believe that we will benefit from the following trends in the aerospace
industry:
Worldwide Air Traffic Growth and Airline Capacity Additions Drive Resurgence
in Aftermarket Activities. Our substantial installed base provides significant
ongoing revenues from replacements, upgrades, repairs and the sale of spare
parts. For the fiscal years ended December 31, 2004 and December 31, 2003,
approximately 60% and 57% of our revenues, respectively, were derived from
aftermarket activities. In addition, aftermarket revenues are generally driven
by aircraft usage, and as such, they have historically tended to recover more
quickly than OEM revenues. As worldwide air traffic grows and airlines add
capacity, initially by bringing grounded aircraft back into service and
upgrading and repairing the cabin interiors of existing active aircraft, we
expect our aftermarket activities to grow. According to IATA, during the year
ended December 31, 2004, the global airline industry expanded airline capacity
by approximately 12% in response to an approximately 15% increase in global air
traffic. During this same period, we experienced a 24% increase in aftermarket
revenues. In addition, as a result of the severity of the post-September 11,
2001 downturn, many carriers, particularly in the United States, have deferred
interior maintenance. We believe that the resulting wear and tear on cabin
interiors is creating substantial growth opportunities as a result of pent-up
demand for retrofit programs.
New Aircraft Introductions Lead to New Product Introductions and Major
Retrofit Opportunities. Over the past two years, 11 airlines have placed orders
for 119 of the new Airbus A380 wide-body aircraft and 8 airlines have placed
orders for 126 of the new Boeing 787 wide-body aircraft. Emirates Airline and
Qantas Airways, which together account for 46% of all A380 airline orders to
date, have selected us to outfit their A380 aircraft with luxurious super first
class cabin interiors, including individual passenger compartments, electrically
controlled lie flat seating, luxurious cabinetry and various state of the art
lighting products. These airlines, along with the other carriers that have
placed orders to date for these next generation wide-body aircraft, are also
evaluating their existing wide-body fleets to try to maintain fleet-wide
commonality of their cabin interiors as they begin to take delivery of the new
aircraft. Based on discussions to date with several of these carriers and based
on our experience with the introduction of other wide-body aircraft, we expect
the vast majority of these airlines will place retrofit orders for their
existing wide-body aircraft over the next several years and we hope to be
selected to retrofit some of these aircraft.
Expansion of Worldwide Fleet and Shift toward Wide-Body Aircraft. As a
result of growth in worldwide traffic, the worldwide airline fleet is expected
to grow, both through reactivation of grounded aircraft and new deliveries.
According to the Airline Monitor, new deliveries of large commercial aircraft
grew to 602 aircraft in 2004 from 575 in 2003, and are expected to increase to
680 in 2005, 760 in 2006, 790 in 2007 and 815 in 2008. Approximately 29% of
these aircraft are expected to be wide-body aircraft in 2008. According to the
Airline Monitor, new deliveries of wide-body aircraft totaled 135 in 2004 and
are expected to increase to 162 in 2005, 167 in 2006, 190 in 2007 and 230 in
2008. Wide-body aircraft currently carry up to up to three or four times the
number of seats as narrow-body aircraft, and because of multiple classes of
service, including large first class and business class configurations, our
average revenue per aircraft on a wide-body aircraft is substantially higher
than on a narrow-body aircraft. Wide-body aircraft outfitted with international
super first class compartments will have significantly higher average revenue
per aircraft than wide-body aircraft outfitted with traditional cabin interior
furnishings. As the size of the fleet expands, demand should also grow for
upgrade and refurbishment programs and for cabin interior products, including
spares and fasteners.
Opportunity to Substantially Expand our Addressable Markets through our
Fastener Distribution Business. Our fastener distribution business leverages our
key strengths, including marketing and service relationships with most of the
world's airlines and airframe manufacturers. As over 60% of our fastener demand
is generated by the existing worldwide fleet, demand for fasteners should
increase over time as the fleet expands, in a manner similar to the market for
cabin interior products.
8
Business Jet and VIP Aircraft Fleet Expansion and Related Retrofit
Opportunities. Although business jet deliveries have declined over the
2002 - 2003 period, several larger business jet types, including the Boeing
Business Jet, the Bombardier Challenger, the Global Express, the Gulfstream 450
and 550, the Falcon 900, the Airbus Corporate Jet, the Cessna Citation X and the
Cessna Citation XLS, are expected to be significant contributors to the growth
in new general aviation aircraft deliveries going forward. Industry sources
indicate that approximately 7,700 business jets will be built between 2003 and
2013 with a value of more than $115 billion, and approximately 50% of these jets
are projected to be the larger business jet types mentioned above. This is
important to us because the typical cost of cabin interior products manufactured
for a small business jet is approximately $162,000; whereas the interior
furnishings for a larger business jet such as the Boeing Business Jet could
range up to approximately $1.4 million. Advances in engine technology and
avionics and the continued development of fractional ownership of executive
aircraft are also important growth factors for the business jet market. In
addition, with the general aviation and VIP aircraft fleet consisting of
approximately 13,000 aircraft with an average age of approximately 16 years, we
believe significant cabin interior retrofit and upgrade opportunities exist.
Opportunity in Market for Passenger-to-Freighter Conversions. Industry
sources project that the size of the worldwide freighter fleet will almost
double over the next twenty years, with almost 3,000 aircraft being added.
Industry sources also estimate that 2,200 of these aircraft are expected to come
from converting commercial passenger jets to use as freighters.
Improving Business Conditions. Improving worldwide industry conditions have
already resulted in increasing demand for our products and services, as
demonstrated by an increase in bookings of over 35% during fiscal 2004, as
compared to fiscal 2003. At December 31, 2004, backlog was in excess of $700
million, an increase of over 40% as compared to the backlog levels at December
31, 2003, and active RFQs were in excess of $1.3 billion. We expect demand to
further increase as industry conditions continue to improve over the course of
the next several years. As a result of the steps we have taken to respond to the
industry downturn, including the consolidation of our facilities, we believe we
are well positioned to experience enhanced earnings power throughout this
recovery period due to our substantial operating leverage. We believe that our
factories have the capacity to generate annual revenues of up to approximately
$1 billion without substantial additional capital investment.
Business Strategy
Our business strategy is to maintain a leadership position and to best serve
our customers by:
o Offering the broadest and most innovative products and services in the
industry;
o Offering the broadest range of engineering services in the industry,
including design, integration, installation and certification services
and aircraft reconfiguration along with passenger-to-freighter conversion
capabilities;
o Pursuing the highest level of quality in every facet of our operations,
from the factory floor to customer support;
o Aggressively pursuing initiatives of continuous improvement of our
manufacturing operations to reduce cycle time, lower cost, improve
quality and expand our margins; and
o Pursuing a worldwide marketing and product support approach focused by
airline and commercial and general aviation airframe manufacturer and
encompassing our entire product line.
9
Products and Services
We conduct our operations through strategic business units that have been
aggregated under three reportable segments: the Commercial Aircraft,
Distribution and Business Jet segments.
Fiscal Year Ended Fiscal Year Ended Ten-Month Period Ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------------- ---------------------- --------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
--------- ------------ --------- ----------- --------- --------------
Commercial aircraft segment
Seating $251.4 34.3% $217.9 34.9% $144.6 28.7%
Interior systems 149.0 20.3% 137.5 22.0% 116.0 23.0%
Engineering services and
engineered structures
and components 113.7 15.5% 99.9 16.0% 93.9 18.7%
--------- ------------ --------- ----------- --------- --------------
Total commercial aircraft 514.1 70.1% 455.3 72.9% 354.5 70.4%
Distribution segment 144.2 19.7% 103.7 16.6% 78.0 15.5%
Business jet segment 75.2 10.2% 65.4 10.5% 71.1 14.1%
--------- ------------ --------- ----------- --------- -------------
Net sales $733.5 100.0% $624.4 100.0% $503.6 100.0%
========= ============ ========= =========== ========= =============
Commercial Aircraft Segment
Seating
We believe, based on our experience in the industry, that we are the world's
leading manufacturer of aircraft seats, offering a wide selection of first
class, business class, tourist class and regional seats. A typical seat
manufactured and sold by us includes the seat frame, cushions, armrests, tray
table and a variety of optional features such as adjustable lumbar supports,
footrests, reading lights, head/neck supports, oxygen masks and telephones. We
estimate that as of December 31, 2004 we had an aggregate installed base of
approximately 1.0 million aircraft seats valued at replacement prices of
approximately $2.2 billion.
First and Business Classes. Based upon major airlines' program selection and
orders on hand, we believe we are the leading worldwide manufacturer of premium
class seats. Our line of first class sleeper seats incorporates full electric
actuation, an electric ottoman, privacy panels and sidewall-mounted tables. Our
business class seats incorporate features from over 25 years of seating design.
The business class seats include electrical or mechanical actuation, PC power
ports, telephones, leg rests, adjustable lumbar cushions, four-way adjustable
headrests and fiberoptic reading lights. The first and business class products
are substantially more expensive than tourist class seats due to these luxury
appointments.
Tourist Class and Regional Jet Seats. We believe, based on our experience in
the industry, that we are a leading worldwide manufacturer of tourist class
seats and regional aircraft seats. We believe our next-generation coach class
seat, Spectrum(R), has become the industry's most popular seat platform for
single-aisle aircraft since its launch in late 2002. We believe the seat
improves comfort and offers significantly improved passenger living space as
well as benefiting the airlines with simplified maintenance and spare parts
purchasing. Spectrum(R) was engineered for use across the entire single-aisle
aircraft fleet, including regional jets.
Spares. Aircraft seats require regularly scheduled maintenance in the course
of normal passenger use. Airlines depend on seat manufacturers and secondary
suppliers to provide spare parts and kit upgrade programs. As a result, a
significant market exists for spare parts.
Interior Systems
We believe, based on our experience in the industry, that we are the leading
manufacturer of interior systems for both narrow and wide-body aircraft,
offering a broad selection of coffee and beverage makers, water boilers, ovens,
liquid containers, refrigeration equipment, oxygen delivery systems and a
variety of other interior components. We estimate that as of December 31, 2004
we had an aggregate installed base of such equipment, valued at replacement
prices, of approximately $1.8 billion.
10
Coffee Makers. We believe, based on our experience in the industry, that we
are the leading manufacturer of aircraft coffee makers. We manufacture a broad
line of coffee makers, including the recently introduced Endura(R) beverage
maker, coffee warmers and water boilers, and a Combi Unit(R) which will both
brew coffee and boil water for tea while utilizing 25% less electrical power
than traditional 5,000-watt water boilers. We also manufacture a
cappuccino/espresso maker.
Ovens. We believe, based on our experience in the industry, that we are the
leading manufacturer of a broad line of specialized ovens, including high-heat
efficiency ovens, high-heat convection and steam ovens and warming ovens. Our
DS Steam Oven uses a method of preparing in-flight food by maintaining constant
temperature and moisture in the food. It addresses the airlines' need to provide
a wider range of food offerings than can be prepared by convection ovens.
Refrigeration Equipment. We believe, based on our experience in the
industry, that we are the worldwide industry leader in the design, manufacture
and supply of commercial aircraft refrigeration equipment. We manufacture a
self-contained wine and beverage chiller, refrigerators/freezers and air
chilling systems.
Oxygen Delivery Systems. We believe, based on our experience in the
industry, that we are a leading manufacturer of oxygen delivery systems for both
commercial and business jet aircraft. We are the only manufacturer with the
capability to fully integrate overhead passenger service units with either
chemical or gaseous oxygen equipment. Our oxygen equipment has been approved for
use on all Boeing and Airbus aircraft and is also found on essentially all
general aviation and VIP aircraft.
Engineered Interior Structures, Components and Assemblies. We believe, based
on our experience in the industry, that we are a leader in designing and
manufacturing galley structures, crew rest compartments and related components.
Engineering Design, Integration, Installation and Certification Services. We
believe, based on our experience in the industry, that we are a leader in
providing engineering, design, integration, installation and certification
services for commercial aircraft passenger cabin interiors. We also offer our
customers in-house capabilities to design, manage, integrate, test and certify
reconfigurations and modifications for commercial aircraft and to manufacture
related products, including engineering kits and interface components. We
provide a broad range of interior reconfiguration services which allow airlines
to change the size of certain classes of service, modify and upgrade the
seating, install telecommunications and entertainment equipment, relocate
galleys, lavatories and overhead bins, and install crew rest compartments.
Crew Rest Compartments. We believe, based on our experience in the industry,
that we are a leader in the design, certification and manufacture of crew rest
compartments. The flight crew utilizes crew rest compartments to sleep during
long-haul international flights. A crew rest compartment is constructed
utilizing lightweight cabin interior materials and incorporates electrical,
heating, ventilation and air conditioning and lavatory systems.
Aerospace Components and Assemblies. We believe, based on our experience in
the industry, that we are a leading manufacturer of complex high-quality
machined and fabricated metal components, assemblies and kits for aerospace and
defense customers with demanding end-use applications. Our major products
consist of gears, gearboxes, pistons and piston assemblies and standard
hydraulic fittings. Additionally, we fabricate structural components and related
items for fuselage, wing and payload sections including wing skin and fuel tank
enclosure parts for commercial aircraft. Through these manufacturing activities
we also provide our customers with significant engineering, materials and
technical expertise.
Passenger-to-Freighter Conversions. We believe, based on our experience in
the industry, that we are a leading supplier of structural design and
integration services, including airframe modifications for
passenger-to-freighter conversions. In addition, we believe we are the leading
provider of Boeing 767 passenger-to-freighter conversions and have performed
conversions for Boeing 747-200 Combi Unit(R), Boeing 747-200 (door only) and
Airbus A300 B4 aircraft. Freighter conversions require sophisticated engineering
capabilities and very large and complex proprietary parts kits.
11
Distribution Segment
Through our M & M subsidiary, we believe we offer one of the broadest lines
of fasteners and inventory management services worldwide. Over 60% of our
fastener sales are to the aftermarket, and over 60% of our orders are shipped
the same day that they are received. With over 100,000 SKUs and next-day
service, we serve as a distributor for essentially every major aerospace
fastener manufacturer. Our service offerings include inventory management and
replenishment, electronic data interchange, special packaging and bar-coding,
quality assurance testing and purchasing assistance. Our seasoned purchasing and
sales team, coupled with state-of-the-art information technology and automated
retrieval systems, provide the basis for our reputation for high quality and
overnight delivery.
Business Jet Segment
We believe, based on our experience in the industry, that we are the leading
manufacturer of a broad product line of furnishings for business jets. Our
products include a complete line of business jet seating and sofa products,
direct and indirect lighting, air valves and oxygen delivery systems as well as
sidewalls, bulkheads, credenzas, closets, galley structures, lavatories and
tables. We have the capability to provide complete interior packages, including
all design services, all interior components and program management services for
executive aircraft interiors. We believe we are the preferred supplier of
seating products and direct and indirect lighting systems for essentially every
general aviation airframe manufacturer. We estimate that as of December 31, 2004
we had an aggregate installed base of such equipment, valued at replacement
prices, of approximately $877 million.
Research, Development and Engineering
We work closely with commercial airlines to improve existing products and
identify customers' emerging needs. Our expenditures in research, development
and engineering totaled $55.1 million for fiscal year ended December 31, 2004,
$44.7 million for the fiscal year ended December 31, 2003 and $34.1 million for
the transition period ended December 31, 2002. We employed 522 professionals in
engineering, research and development and program management as of December 31,
2004. We believe, based on our experience in the industry, that we have the
largest engineering organization in the cabin interior products industry, with
mechanical, electrical, electronic and software design skills, as well as
substantial expertise in materials composition and custom cabin interior layout
design and certification.
Marketing and Customers
We market and sell our commercial aircraft products directly to virtually
all of the world's major airlines and airframe manufacturers. Airlines select
manufacturers of cabin interior products primarily on the basis of custom design
capabilities, product quality and performance, on-time delivery, after-sales
customer service, product support and price. We believe that our large installed
base, our timely responsiveness in connection with the custom design,
manufacture, delivery and after-sales customer service and product support of
our products and our broad product line and stringent customer and regulatory
requirements all present barriers to entry for potential new competitors in the
cabin interior products market.
We believe that airlines prefer our integrated worldwide marketing approach,
which is focused by airline and encompasses our entire product line. Led by a
senior executive, teams representing each product line serve designated airlines
that together accounted for 61% of the purchases of products manufactured by our
Commercial Aircraft Group during the fiscal year ended December 31, 2004. Our
teams have developed customer-specific strategies to meet each airline's product
and service needs. We also staff "on-site" customer engineers at major airlines
and airframe manufacturers to represent our entire product line and work closely
with the customers to develop specifications for each successive generation of
products required by the airlines. These engineers help customers integrate our
wide range of cabin interior products and assist in obtaining the applicable
regulatory certification for each particular product or cabin configuration.
Through our on-site customer engineers, we expect to be able to more efficiently
design and integrate products that address the requirements of our customers. We
provide program management services, integrating all on-board cabin interior
equipment and systems, including installation and Federal Aviation
Administration certification, allowing airlines to substantially reduce costs.
We believe that we are one of the only suppliers in the commercial aircraft
cabin interior products industry with the size, resources, breadth of product
line and global product support capability to operate in this manner.
12
We market our business jet products directly to all of the world's general
aviation airframe manufacturers, modification centers and operators. Business
jet owners typically rely upon the airframe manufacturers and completion centers
to coordinate the procurement and installation of their interiors. Business jet
owners select manufacturers of business jet products on a basis similar to
commercial aircraft interior products: customer design capabilities, product
quality and performance, on-time delivery, after-sales customer service, product
support and price. We believe that potential new competitors would face a number
of barriers to entering the cabin interior products market. Barriers to entry
include regulatory requirements, our large installed product base, our custom
design capability, manufacturing capability, delivery, and after-sales customer
service, product support and our broad product line.
We market our aerospace fasteners directly to the airlines, completion
centers, general aviation airframe manufacturers, first-tier suppliers to the
airframe manufacturers, the airframe manufacturers and other distributors. We
believe that our key competitive advantages are the breadth of our product
offerings and our ability to deliver on a timely basis. We believe that our
broad product offerings of aerospace fasteners and our ability to deliver
products on a next day basis and our core competencies in product information
management, purchasing and logistics management provide strong barriers to
entry.
Our program management approach assigns a program manager to each
significant contract. The program manager is responsible for all aspects of the
specific contract and profitability, including managing change orders,
negotiating related non-recurring engineering charges and monitoring the
progress of the contract through its scheduled delivery dates. We believe that
our customers benefit substantially from our program management approach,
including better on-time delivery and higher service levels. We also believe our
program management approach results in better customer satisfaction.
As of December 31, 2004, our direct sales and marketing organization and
product support consisted of 241 persons, plus 49 independent sales
representatives. Our sales to non-U.S. customers were approximately $357 million
for the fiscal year ended December 31, 2004 and $317 million for the fiscal year
ended December 31, 2003 or approximately 49% and 51%, respectively, of net sales
during such periods. Approximately 83% and 74% of our total revenues were
derived from airlines and other commercial aircraft operators during the fiscal
year ended December 31, 2004 and the fiscal year ended December 31, 2003,
respectively. Approximately 60% of our revenues during the fiscal year ended
December 31, 2004 and 57% of our revenues for the fiscal year ended December 31,
2003 were from refurbishment, spares and upgrade programs. During the fiscal
years ended December 31, 2004 and December 31, 2003, no single customer
accounted for more than 10% of our consolidated sales. The portion of our
revenues attributable to particular customers varies from year to year with the
airlines' scheduled purchases of new aircraft and for retrofit and refurbishment
programs for their existing aircraft.
Backlog
We estimate that our backlog at December 31, 2004 was in excess of $700
million as compared to approximately $500 million at December 31, 2003 and $450
million at December 31, 2002. Of our backlog at December 31, 2004, approximately
44% is scheduled to be deliverable within the next twelve months. While 27% of
our total backlog is with North American customers, less than 10% of our total
backlog is with North American airlines. Approximately 14% is with European
customers and approximately 58% is with Asian Pacific and Middle East customers
(including Australia and New Zealand). Our backlog includes backlog from all of
our businesses. Orders during the fiscal year ended December 31, 2004 increased
by over 35% above the order level during the same period in 2003, and our
backlog at December 31, 2004 increased by over 40% compared to the backlog at
December 31, 2003 despite a 17.5% year over year increase in revenues.
13
Customer Service
We believe that our customers place a high value on customer service and
product support and that this service is a critical differentiating factor in
our industry. The key elements of such service include:
o Rapid response to requests for engineering design, proposal requests and
technical specifications;
o Flexibility with respect to customized features;
o On-time delivery;
o Immediate availability of spare parts for a broad range of products; and
o Prompt attention to customer problems, including on-site customer
training.
Customer service is particularly important to airlines due to the high cost
to the airlines of late delivery, malfunctions and other problems.
Warranty and Product Liability
We warrant our products, or specific components thereof, for periods ranging
from one to ten years, depending upon product and component type. We establish
reserves for product warranty expense after considering relevant factors such as
our stated warranty policies and practices, historical frequencies of claims to
replace or repair products under warranty and recent sales and claims trends.
Actual warranty costs reduce the warranty reserve as they are incurred. We
periodically review the adequacy of accrued product warranty reserves and
revisions of such reserves are recognized in the period in which such revisions
are determined.
We also carry product liability insurance. We believe that our insurance
should be sufficient to cover product liability claims.
Competition
The commercial aircraft cabin interior products market is relatively
fragmented, with a number of competitors in each of the individual product
categories. Due to the global nature of the commercial aerospace industry,
competition comes from both U.S. and foreign manufacturers. However, as aircraft
cabin interiors have become increasingly sophisticated and technically complex,
airlines have demanded higher levels of engineering support and customer service
than many smaller cabin interior products suppliers can provide. At the same
time, airlines have recognized that cabin interior product suppliers must be
able to integrate a wide range of products, including sophisticated electronic
components, such as video and live broadcast TV, particularly in wide-body
aircraft. We believe that the airlines' increasing demands will result in a
consolidation of the remaining suppliers. We have participated in this
consolidation through strategic acquisitions and internal growth and we intend
to continue to participate in the consolidation.
Our principal competitors for seating products are Group Zodiac S.A. and
Keiper Recaro GmbH. Our primary competitors for interior systems products are
Britax PLC, JAMCO and Intertechnique. Our principal competitors in the
passenger-to-freighter conversion business include Boeing Airplane Services,
Elbe Flugzeugwerk GmbH, a division of EADS, Israel Aircraft Industries, Pemco
World Air Services and Aeronavili. Our principal competitors for other product
and service offerings in our engineered interior structures, components and
assemblies include TIMCO, JAMCO, Britax PLC and Driessen Aircraft Interior
Systems. The market for business jet products is highly fragmented, consisting
of numerous competitors, the largest of which is Decrane Aircraft Holdings. Our
primary competitors in the fastener distribution market are Honeywell Hardware
Products Group, Wesco Aircraft Hardware, C.J. Fox and Pentacon.
14
Manufacturing and Raw Materials
Our manufacturing operations consist of both the in-house manufacturing of
component parts and sub-assemblies and the assembly of our designed component
parts that are purchased from outside vendors. We maintain state-of-the-art
facilities, and we have an ongoing strategic manufacturing improvement plan
utilizing lean manufacturing processes. We constantly strive for continuous
improvement from implementation of these plans for each of our product lines. We
have implemented common information technology platforms company-wide, as
appropriate. These activities should lower our production costs, shorten cycle
times and reduce inventory requirements and at the same time improve product
quality, customer response and profitability. We do not believe we are
materially dependent on any single supplier or assembler for any of our raw
materials or specified and designed component parts and, based upon the existing
arrangements with vendors, our current and anticipated requirements and market
conditions, we believe that we have made adequate provisions for acquiring raw
materials.
Government Regulation
The Federal Aviation Administration (FAA) prescribes standards and licensing
requirements for aircraft components, and licenses component repair stations
within the United States. Comparable agencies regulate such matters in other
countries. We hold several FAA component certificates and perform component
repairs at a number of our U.S. facilities under FAA repair station licenses. We
also hold an approval issued by the U.K. Civil Aviation Authority to design,
manufacture, inspect and test aircraft seating products in Leighton Buzzard,
England and to manufacture and ship from our Kilkeel, Northern Ireland facility.
We also have the necessary approvals to design, manufacture, inspect, test and
repair our interior systems products in Nieuwegein, the Netherlands.
In March 1992, the FAA adopted Technical Standard Order C127, or TSO C127,
requiring that all seats on certain new generation commercial aircraft installed
after such date be certified to meet a number of new safety requirements,
including the ability to withstand a 16G force. We have developed over 32
different seat models that meet the TSO C127 seat safety regulations, have
successfully completed thousands of tests to comply with TSO C127 and, based on
our installed base of 16G seats, are the recognized industry leader.
On October 4, 2002, the FAA published a Supplemental Notice of Proposed Rule
Making (SNPRM). This SNPRM proposed extending the current requirement for
"enhanced safety" seats (16G seats) on aircraft designs registered after 1988 to
all aircraft. This proposed rule would require that older design aircraft be
retrofitted with new enhanced safety "16G" seats over a multi-year basis. The
public comment period for the proposed retrofit rule closed on March 3, 2003.
The date for final rule making and any changes to the details of the rule will
be based on the comments received and the priority assigned to this proposal by
the FAA.
In November 2002, our seating group became the first passenger seating
supplier to sign a Partnership for Safety Plan (PSP) with the FAA. Based on
established qualifications of personnel and systems, the PSP provides us with
increased authority to approve test plans and reports, and to witness tests. The
PSP provides us with a number of business benefits including greater planning
flexibility, simplified scheduling and greater program control and eliminates
variables such as FAA workload and priorities.
Environmental Matters
Our operations are subject to extensive and changing federal, state and
foreign laws and regulations establishing health and environmental quality
standards, including those governing discharges of pollutants into the air and
water and the management and disposal of hazardous substances and wastes. We may
be subject to liability or penalties for violations of those standards. We are
also subject to laws and regulations, such as the Federal Superfund law and
similar state statutes, governing remediation of contamination at facilities
that we currently or formerly owned or operated or to which we send hazardous
substances or wastes for treatment, recycling or disposal. We believe that we
are currently in compliance, in all material respects, with all environmental
laws and regulations. However, we could become subject to future liabilities or
obligations as a result of new or more stringent interpretations of existing
laws and regulations. In addition, we may have liabilities or obligations in the
future if we discover any environmental contamination or liability relating to
our facilities or operations.
Patents
We currently hold 155 U. S. patents and 110 international patents, covering
a variety of products. We believe that the termination, expiration or
infringement of one or more of such patents would not have a material adverse
effect on us.
15
Employees
As of December 31, 2004, we had approximately 3,500 employees. Approximately
69% of our employees are engaged in manufacturing/distribution operations, 15%
in engineering, research and development and program management and 16% in
sales, marketing, product support and general administration. Unions represent
approximately 18% of our worldwide employees. One domestic labor contract
representing 3% of our employees expires on April 30, 2006. The other labor
contract with the only other domestic union, which represents approximately 6%
of our employees, runs through May 2007. We consider our employee relations to
be good.
Financial Information About Segments and Foreign and Domestic Operations
Financial and other information by segment and relating to foreign and
domestic operations for the fiscal year ended December 31, 2004 and December 31,
2003 and the ten-month transition period ended December 31, 2002, is set forth
in note 14 to our consolidated financial statements.
Available Information
Our filings with the Securities and Exchange Commission (the SEC), including
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports, are available free of charge on our
website as soon as reasonably practicable after they are filed with, or
furnished to, the SEC. Our Internet website is located at
http://www.beaerospace.com. Information included in or connected to our website
is not incorporated by reference in this annual report.
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16
ITEM 2. PROPERTIES
As of December 31, 2004, we had 11 principal operating facilities and one
administrative facility, which comprised an aggregate of approximately 1.2
million square feet of space. The following table describes the principal
facilities and indicates the location, function, approximate size and ownership
status of each location.
Facility
Size
Segment Location Purpose (Sq. Feet) Ownership
- -------------------------------------- --------------------------------- ---------------- ------------ ---------------------
Commercial Aircraft Winston-Salem, North Carolina.... Manufacturing 264,800 Leased
Leighton Buzzard, England........ Manufacturing 114,000 Owned
Kilkeel, Northern Ireland........ Manufacturing 110,500 Leased/Owned
Anaheim, California.............. Manufacturing 98,000 Leased
Lenexa, Kansas................... Manufacturing 80,000 Leased
Nieuwegein, the Netherlands...... Manufacturing 47,350 Leased
Marysville, Washington........... Engineering
Services/
Manufacturing 110,000 Leased
Westminster, California.......... Manufacturing 70,000 Leased
Business Jet Miami, Florida................... Manufacturing 110,000 Leased
Holbrook, New York............... Manufacturing 20,100 Leased
Distribution Miami, Florida................... Distribution 210,000 Leased
Corporate Wellington, Florida.............. Administrative 17,700 Owned
---------
1,252,450
We believe that our facilities are suitable for their present intended
purposes and adequate for our present and anticipated level of operations.
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17
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in various legal actions arising in the normal course of
business, the outcomes of which, in the opinion of management, neither
individually nor in the aggregate are likely to result in a material adverse
effect on our business, results of operations or financial condition.
There are no material pending legal proceedings, other than the ordinary
routine litigation incidental to the business discussed above, to which we or
any of our subsidiaries are a party or of which any of our property is the
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of the fiscal year covered by this Form 10-K, we did
not submit any matters to a vote of security holders, through the solicitation
of proxies or otherwise.
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18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the Nasdaq National Market under the symbol
"BEAV." The following table sets forth, for the periods indicated, the range of
high and low per share closing sales prices for the common stock as reported by
Nasdaq.
Calendar Year Ended
December 31,
-------------------------------------------------
2004 2003
------------------- ---------------------
High Low High Low
-------------------------------------------------
(Amounts in Dollars)
---------- -------- ----------- ---------
First Quarter $ 7.37 $5.30 $3.89 $1.25
Second Quarter 7.58 5.93 3.76 1.60
Third Quarter 11.58 6.46 5.62 2.67
Fourth Quarter 11.88 8.58 6.15 4.27
On March 7, 2005 the last reported sale price of our common stock as
reported by Nasdaq was $12.64 per share. As of such date, based on information
provided to us by The Bank of New York, our transfer agent, we had approximately
1,000 registered holders and because many of these shares are held by brokers
and other institutions on behalf of the beneficial holders, we are unable to
estimate the number of beneficial shareholders represented by these holders of
record. We have not paid any cash dividends in the past, and we have no present
intention of doing so in the immediate future. Our Board of Directors intends,
for the foreseeable future, to retain any earnings to reduce indebtedness and
finance our future growth, but expects to review our dividend policy regularly.
The indentures, governing our 8% and 8-7/8% senior subordinated notes and 8-1/2%
senior notes, as well as our amended and restated bank credit facility, permit
the declaration of cash dividends only in certain circumstances described
therein.
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19
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share data)
Effective as of February 24, 2001, we acquired Alson Industries, Inc., T.L.
Windust Machine, Inc., Maynard Precision, Inc. and DMGI, Inc. During fiscal
2002, we acquired M&M Aerospace Hardware, Inc., Nelson Aero Space, Inc. and
Denton Jet Interiors, Inc. We also made one acquisition during the transition
period ended December 31, 2002, one acquisition during fiscal 2003, and two
acquisitions during fiscal 2004. Results for each of these acquisitions are
included in our operations in the financial data below since the date of
acquisition. The financial data as of December 31, 2004, December 31, 2003, the
transition period ended December 31, 2002 and for the fiscal years ended
February 23, 2002 and February 24, 2001 have been derived from financial
statements that have been audited by our independent registered public
accounting firm. The financial data for calendar 2002 and for the period from
February 25, 2001 to December 31, 2001 has been derived from unaudited financial
statements. Effective January 1, 2003, the Company adopted SFAS No. 145
"Rescissions of FASB Statements No. 4, 44, and 64, amendment of FASB Statement
No. 13, and Technical Corrections" and, accordingly, has reclassified certain
amounts from extraordinary item to loss on debt extinguishment in the summary
financial data below. The following financial information is qualified by
reference to, and should be read in conjunction with, our historical financial
statements, including notes thereto, which are included in Item 15 of this Form
10-K.
---------------------------------- --------------------- ----------------------
Calendar Ten-Month Fiscal
Year Ended Period Ended Year Ended
---------------------------------- --------------------- ----------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Feb. 23, Feb. 24,
2004 2003 2002 2002 2001 2002 2001(d)
---------------------------------- --------------------- ----------------------
Statements of Operations Data:
Net sales................................. $ 733.5 $ 624.4 $ 601.5 $ 503.6 $ 582.6 $ 680.5 $666.4
Cost of sales(a).......................... 494.8 453.6 417.9 352.3 464.4 530.1 416.6
-------- -------- -------- -------- -------- -------- ------
Gross profit.............................. 238.7 170.8 183.6 151.3 118.2 150.4 249.8
Gross margin.............................. 32.5% 27.4% 30.5% 30.0% 20.3% 22.1% 37.5%
Operating expenses:
Selling, general and administrative(b).. 119.2 105.8 147.2 128.0 120.2 139.4 124.2
Research, development and engineering... 55.1 44.7 40.8 34.1 36.7 43.5 48.9
-------- ------- ------- -------- ------- -------- ------
Operating earnings (loss)................. 64.4 20.3 (4.4) (10.8) (38.7) (32.5) 76.7
Operating margin.......................... 8.8% 3.3% NM NM NM NM 11.5%
Interest expense, net..................... 76.1 70.6 69.0 57.3 48.8 60.5 54.2
Loss on debt extinguishment(c)............ 8.8 1.2 -- -- 9.3 9.3 --
-------- -------- -------- -------- -------- -------- ------
(Loss) earnings before income taxes....... (20.5) (51.5) (73.4) (68.1) (96.8) (102.3) 22.5
Income taxes ............................. 1.5 2.0 2.7 2.7 2.0 1.8 2.2
-------- -------- -------- -------- -------- -------- ------
Net (loss) earnings....................... $ (22.0) $ (53.5) $ (76.1) $ (70.8) $ (98.8) $ (104.1) $ 20.3
======== ======== ======== ======== ======== ======== ======
Basic net (loss) earnings per share:
Net (loss) earnings....................... $ (0.53) $ (1.49) $ (2.19) $ (2.03) $ (3.05) $ (3.18) $ 0.80
======== ======== ======== ======== ======== ======== ======
Weighted average common shares............ 41.7 36.0 34.8 34.9 32.4 32.7 25.4
Diluted net (loss) earnings per share:
Net (loss) earnings....................... $ (0.53) $ (1.49) $ (2.19) $ (2.03) $ (3.05) $ (3.18) $ 0.78
======== ======== ======== ======== ======== ======== ======
Weighted average common shares............ 41.7 36.0 34.8 34.9 32.4 32.7 25.9
Balance Sheet Data (end of period):
Working capital........................... $ 225.0 $ 274.3 $ 262.9 $ 262.9 $ 295.6 $ 304.8 $174.9
Goodwill, intangible and other assets, net 545.5 541.5 534.9 534.9 555.2 529.2 433.4
Total assets.............................. 1,024.8 1,052.5 1,067.1 1,067.1 1,177.8 1,128.3 936.0
Long-term debt, net of current portion.... 678.6 880.1 836.0 836.0 853.7 853.5 603.8
Stockholders' equity...................... 182.8 31.9 69.3 69.3 142.6 121.1 135.3
20
SELECTED FINANCIAL DATA (continued)
Footnotes to Table
(a) We have acquired 26 businesses since 1989 for an aggregate purchase price
of nearly $1 billion. We have incurred and expensed approximately $310
during the period from 1989 to 2001 related to acquisitions, integration
of such acquisitions, consolidation of 17 facilities and reduction of
approximately 3,000 employees. We incurred and expensed approximately
$175 of such costs (including approximately $74 of cash costs) since the
terrorist attacks of September 11, 2001, increasing the number of
facilities consolidated to 22, and our headcount reductions to
approximately 4,500 employees. This program was completed during 2003.
We incurred costs related to this program as follows:
Fiscal Fiscal Ten-Month Ten-Month
Year Year Year Period Period
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
2004 2003 2002 2002 2001
------------ ------------ ------------ ------------ ------------
Cash charges (severance,
integration costs, lease
termination costs,
relocation, training,
facility preparation) $ -- $19.9 $36.7 $32.5 $ 17.1
Write-down of property, plant,
equipment, inventory and
other assets -- 10.9 7.0 7.0 62.9
Impaired intangible assets -- -- -- -- 20.4
----- ----- ----- ----- ------
$ -- $30.8 $43.7 $39.5 $100.4
===== ===== ===== ===== ======
The consolidation and integration costs have been included as a component
of cost of sales.
We also incurred acquisition-related expenses of $6.8 during the fiscal
year ended February 23, 2002, which have been included as a component of
selling, general and administrative expenses.
(b) In February 2003, we received an adverse arbitration award related to the
amounts due us from the Thales Group, which reduced the amount due by
$29.5. This non-cash charge is included in selling, general and
administrative expenses in the calendar year and ten-month period ended
December 31, 2002.
(c) A loss on debt extinguishment of $8.8 for unamortized debt issuance
costs, redemption premiums and expenses related to early retirement for
our 9 1/2% senior subordinated notes due November 1, 2008 has been
included in our statement of operations for fiscal 2004. A loss on debt
extinguishment of $1.2 for unamortized debt issue costs associated with
the downsizing of our bank credit facility following the sale of $175.0
of senior notes in October 2003 has been included in our statement of
operations for fiscal 2003. A loss on debt extinguishment of $9.3 for
unamortized debt issue costs, redemption premiums and expenses related to
the early retirement of our 9 7/8% senior subordinated notes due
February 1, 2006 has been included in our consolidated statement of
operations for the fiscal year ended February 23, 2002.
(d) Our operating results during fiscal 2001 were negatively impacted by
costs related to acquisitions and the termination of a proposed initial
public offering by our subsidiary Advanced Thermal Sciences. These items
reduced our net earnings by $8.3.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in millions, except per share data)
OVERVIEW
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 aerospace distributor of 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 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 generally derive our revenues from the refurbishment or upgrade programs
for the existing worldwide fleets of commercial and general aviation aircraft
and new aircraft deliveries. For fiscal 2004, fiscal 2003 and the ten month
transition period ended December 31, 2002, approximately 60%, 57% and 60%,
respectively, of our revenues were derived from the aftermarket, with the
remaining portions attributable to new aircraft deliveries. We believe our large
installed base of products, estimated to be approximately $4.9 billion as of
December 31, 2004 (valued at replacement prices), gives us a significant
advantage over our competitors in obtaining orders both for spare parts and for
refurbishment programs, principally due to the tendency of the airlines to
purchase equipment for such programs from the original supplier.
We conduct our operations through strategic business units that have been
aggregated under three reportable segments: the Commercial Aircraft,
Distribution and Business Jet segments.
Net sales by line of business were as follows:
------------------------ ------------------------ --------------------------------
Fiscal Year Ended Fiscal Year Ended Ten-Month Period Ended
December 31, 2004 December 31, 2003 December 31, 2002
------------------------ ------------------------ --------------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
---------- ------------- --------- -------------- ------------- ------------------
Commercial aircraft segment
Seating $251.4 34.3% $217.9 34.9% $144.6 28.7%
Interior systems 149.0 20.3% 137.5 22.0% 116.0 23.0%
Engineering services and
engineered structures
and components 113.7 15.5% 99.9 16.0% 93.9 18.7%
---------- ------------- --------- -------------- ------------- ------------------
Total commercial aircraft 514.1 70.1% 455.3 72.9% 354.5 70.4%
Distribution segment 144.2 19.7% 103.7 16.6% 78.0 15.5%
Business jet segment 75.2 10.2% 65.4 10.5% 71.1 14.1%
---------- ------------- --------- -------------- ------------- ------------------
Net sales $733.5 100.0% $624.4 100.0% $503.6 100.0%
========== ============= ========= ============== ============= ==================
22
Net sales by domestic and foreign operations were as follows:
Fiscal Fiscal Ten-Month Period
Year Ended Year Ended Ended
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ----------------
United States operations $495.7 $408.0 $362.4
Europe operations 237.8 216.4 141.2
------------ ------------ ----------------
Total $733.5 $624.4 $503.6
============ ============ ================
Net sales by geographic segment (based on destination) were as follows:
Fiscal Year Ended Fiscal Year Ended Ten-Month Period Ended
December 31, 2004 December 31, 2003 December 31, 2002
---------------------------- --------------------------- -----------------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
----------- ---------------- ----------- --------------- -------------- --------------------
United States $376.5 51.3% $307.5 49.3% $269.8 53.6%
Europe 175.1 23.9% 168.4 27.0% 121.0 24.0%
Asia 143.3 19.5% 114.0 18.2% 79.0 15.7%
Rest of World 38.6 5.3% 34.5 5.5% 33.8 6.7%
----------- ---------------- ----------- --------------- -------------- --------------------
Total $733.5 100.0% $624.4 100.0% $503.6 100.0%
=========== ================ =========== =============== ============== ====================
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 and one acquisition during the transition period ended December 31, 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
substantially expand profit margins as industry conditions continue to improve
and demand increases, 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, 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 $17 for the next few years.
23
Improving worldwide industry conditions have already resulted in increasing
demand for our products and services, as demonstrated by an increase in bookings
of approximately over 35% during fiscal 2004, as compared to fiscal 2003. At
December 31, 2004, backlog was in excess of $700 million, an increase of over
40% as compared to the backlog levels at December 31, 2003, and active RFQs were
in excess of $1.3 billion. We expect demand to further increase as industry
conditions continue to improve over the course of the next several years. As
worldwide air traffic grows and airlines add capacity, initially by bringing
grounded aircraft back into service and upgrading and repairing the cabin
interiors of existing active aircraft, we expect our aftermarket activities to
grow. According to IATA, during the year ended December 31, 2004, the global
airline industry expanded airline capacity by approximately 12% in response to
an approximately 15% increase in global air traffic. During this same period, we
experienced a 24% increase in aftermarket revenues. In addition, as a result of
the severity of the post-September 11, 2001 downturn, many carriers,
particularly in the United States, have deferred interior maintenance. We
believe that the resulting wear and tear on cabin interiors is creating
substantial growth opportunities as a result of pent-up demand for retrofit
programs.
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24
RESULTS OF OPERATIONS
Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003
Net sales for the year ended December 31, 2004 were $733.5, an increase of
$109.1 or 17.5% as compared to the prior year. Sales in 2004 increased over the
2003 level due to a higher level of units shipped as well as mix of products
shipped in 2004.
Net sales for each of our segments are set forth in the following table:
YEAR ENDED DECEMBER 31,
-----------------------------
2004 2003 Change
-------------- -------------- ----------------
Commercial Aircraft $514.1 $455.3 12.9%
Distribution 144.2 103.7 39.1%
Business Jet 75.2 65.4 15.0%
-------------- -------------- ----------------
Total Sales $733.5 $624.4 17.5%
============== ============== ================
Sales during 2004 at our commercial aircraft segment were $514.1, an
increase of $58.8 or 12.9% as compared to the prior year. The 12.9% 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 $144.2, or 39.1% greater than 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 $9.8 or 15.0%, compared to severely
depressed sales of the prior year as a result of the impact of the unusually low
number of business jet deliveries in 2003. Revenues in 2004 and 2003 reflected a
large amount of low margin completion center work as business jet deliveries,
although improving, remained depressed throughout 2004.
Gross profit for the year was $238.7 or 32.5% of sales and increased by
$67.9 or 39.8%, as compared to gross profit of $170.8 or 27.4% of sales last
year. The improvement in gross profit resulted from our cost reduction program,
an improved product mix and manufacturing efficiencies realized from the higher
level of revenues. Foreign exchange negatively impacted financial comparisons on
a year over year basis by $6.3. 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.
Selling, general and administrative expenses during 2004 were $119.2 or
16.3% of sales. Selling, general and administrative expenses in 2003 were $105.8
or 16.9% of net sales. Selling, general and administrative expenses in the prior
year included a $6.3 net reduction in such costs related to the Sextant
settlement and insurance rebates received during 2003. The balance ($7.1) of the
year over year increase is primarily attributable to higher commissions on
higher sales, higher incentive compensation and acquisition related costs.
Research, development and engineering expenses for the year were $55.1 or
7.5% of net sales, an increase of $10.4 as compared with $44.7 or 7.2% of sales
last year. The increase in expenses compared to last year was primarily
attributable to activities associated with newly developed products for the
Airbus A380 aircraft, the international super first class suite of products and
other certain other customer funded new product development activities.
We completed our consolidation program at the end of 2003. This effort,
which was initiated 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 (30% of
total workforce). Annual cost savings associated with this program, which were
initially targeted at $45, are now estimated at approximately $60, about equally
split between operating expenses and manufacturing costs.
25
The following is a summary of operating earnings (loss) by segment:
YEAR ENDED DECEMBER 31,
-----------------------------
2004 2003 Change
-------------- -------------- ----------------
Commercial aircraft $39.8 $ 7.3 445.2%
Distribution 25.9 16.9 53.3%
Business jet (1.3) (10.2) NM
Divestiture settlement, net of charges -- 6.3 NM
-------------- -------------- ----------------
Total $64.4 $20.3 217.2%
============== ============== ================
Operating earnings for 2004 at our commercial aircraft segment were $39.8 or
7.7% of sales, an increase of $32.5 over the prior year. The increase in
commercial aircraft segment operating earnings was driven by our facility
consolidation and cost reduction program, ongoing manufacturing productivity
initiatives, the higher level of sales and improved product mix. Foreign
exchange negatively impacted financial comparisons, on a year over year basis,
by $7.0.
The distribution segment delivered revenues of $144.2, an increase of 39.1%
over the prior year. Revenue growth was driven by market share gains and a
broad-based increase in demand for aftermarket fasteners, driven primarily by
increases in passenger traffic and attendant increases in capacity. Operating
earnings at the distribution segment were $25.9 or 18.0% of sales, an increase
of $9.0 or 53.3% as compared to operating earnings of $16.9 or 16.3% of sales in
the prior year. The increase in distribution segment operating margin was due to
operating leverage at the higher level of sales.
The 2004 operating loss of $1.3 at the business jet segment compares
favorably with a $10.2 operating loss in the prior year. The $8.9 improvement in
operating earnings reflects $6.9 of consolidation charges in 2003 (compared to
none in 2004), more efficient operations, better absorption of fixed costs and
improved product mix. The business jet segment should be the primary beneficiary
of five recently awarded international super first class programs, for which
initial product deliveries are scheduled to begin in 2005.
Consolidated operating earnings were $64.4 or 8.8% of sales, an increase of
$44.1 or 217.2% as compared to operating earnings of $20.3 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 late 2003. The weakened dollar negatively impacted operating
earnings by $7.0 during 2004.
Interest expense, net during 2004 of $76.1 increased by $5.5 over interest
expense incurred during 2003 of $70.6. The increase in interest expense, net was
due to the issuance of $175.0 of 8.5% senior notes in 2003, partially offset by
the early retirement of $200.0 of senior subordinated notes in November 2004.
We incurred an $8.8 charge during 2004 related to the early retirement of
$200.0 of 9.5% senior subordinated notes in November 2004. We expect to incur
interest expense of approximately $60.0 during 2005.
Income tax expense of $1.5 during 2004 decreased from income tax expense of
$2.0 during 2003. Income taxes arise on the earnings of foreign subsidiaries for
which no net operating loss carryforwards are available.
The 2004 consolidated net loss was $22.0 or $0.53 per share, reflecting an
$8.8 charge related to the early retirement of long term debt, the $7.0 negative
impact of foreign exchange, $1.7 of acquisition related costs and a $5.5
increase in interest expense, net, as compared with a consolidated loss of $53.5
or $1.49 per share last year.
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26
RESULTS OF OPERATIONS
Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002
Net sales for the year ended December 31, 2003 were $22.9 or 3.8% higher,
compared to the prior year.
Net sales for each of our segments are set forth in the following table:
Year Year
Ended % of Ended % of Year-over-Year
Dec. 31, 2003 Net Sales Dec. 31, 2002 Net Sales Change
----------------- -------------- ----------------- --------------- -----------------------
Commercial Aircraft $455.3 72.9% $420.8 70.0% $34.5 8.2%
Distribution 103.7 16.6% 96.5 16.0% 7.2 7.5%
Business Jet 65.4 10.5% 84.2 14.0% (18.8) (22.3)%
----------------- -------------- ----------------- --------------- ---------- ------------
Total $624.4 100.0% $601.5 100.0% $22.9 3.8%
================= ============== ================= =============== ========== ============
Sales within the commercial aircraft segment were up $34.5 or 8.2% in 2003
compared to the prior year. Substantially all of the commercial aircraft segment
revenue growth during 2003 was driven by increased aftermarket demand for seats.
Distribution sales in 2003 were up $7.2 or 7.5% compared to the prior year due
to market share gains. In the business jet segment, sales were down $18.8 or
22.3% compared to the prior year, reflecting the 32% decline in deliveries of
new business jets.
Gross profit was $170.8 or 27.4% of net sales for the year ended December
31, 2003, compared to $183.6 or 30.5% of net sales in 2002. The decrease in
gross profit was primarily due to poor operating results at our business jet
segment throughout 2003, weaker margins at our commercial aircraft segment due
to product mix during the first half of 2003 and an approximately $8.0 adverse
impact from the weakening U.S. dollar versus the British pound. We are subject
to fluctuations in foreign exchange rates due to significant sales from our
European facilities, substantially all of which are currently denominated in
U.S. dollars, while the corresponding labor, material and overhead costs are
denominated in British pounds or euros.
Research, development and engineering expenses were $44.7 or 7.2% of net
sales in 2003 as compared with $40.8 or 6.8% of net sales for the prior year.
The increase in expenses was primarily attributable to new product development
programs associated with the launch of the Airbus A380 aircraft.
Selling, general and administrative expenses were $105.8 or 16.9% of net
sales for the year ended December 31, 2003, down $41.4 compared to $147.2 or
24.5% of net sales in 2002. Such costs in 2002 included a $29.5 non-cash
write-off related to the Sextant litigation.
During 2003, we received $9.0 in connection with the resolution of final
matters related to the 1999 sale of our In-Flight Entertainment business. The
benefit was offset by charges totaling $7.0 primarily related to inventories,
increasing our allowance for bad debts, and impairment charges to reduce
properties held for sale to estimated current values.
Our initiative to resize our company to better adapt to the dramatic change
in industry conditions, by reducing excess capacity and lowering our cost
structure was completed in 2003. In the process, we closed five facilities,
relocated 12 major production lines and reduced workforce by approximately 1,500
employees or 30%. Total consolidation costs in 2003 were approximately $31, of
which $11 was non-cash. This compares to $44 of such costs in 2002, of which $7
were non-cash costs. Such costs were included in cost of sales in both periods.
27
Operating earnings of $20.3 in 2003 were $24.7 greater than in 2002, which
included a $29.5 non-cash charge related to the Sextant litigation. Operating
earnings of $20.3 reflect $30.8 of consolidation costs, including $10.9 of
non-cash charges, as compared to consolidation costs of $43.7 in 2002. The
commercial aircraft segment operating earnings improved by $8.4 on a $34.5
increase in revenues. Operating earnings at our distribution segment increased
to $18.0 in 2003 on sales of $103.7, which were up 7% year-over-year. The
business jet segment generated a $9.5 operating loss, an $18.4 decrease from the
prior year, on an $18.8 or 22% decrease in revenues.
Interest expense, net was $70.6 for the year ended December 31, 2003, or
$1.6 greater than interest expense of $69.0 for the prior year. The increase in
interest expense was due to the increase in debt following our October 2003 sale
of senior notes.
We recorded a $1.2 loss on debt extinguishment during 2003 in connection
with the downsizing of our revolving credit facility following our October 2003
notes offering.
Net loss was $53.5 or $1.49 per share for the year ended December 31, 2003
as compared to a net loss of $76.1 or $2.19 per share for the prior year.
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28
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 accounts receivable and
inventories, which fluctuate with the sales of our products. Our working capital
was $225.0 as of December 31, 2004, as compared to $274.3 as of December 31,
2003. The decrease in working capital from December 31, 2003 to December 31,
2004 was primarily due to the repayment of our $200.0 aggregate principal amount
9 1/2% senior subordinated notes with the net proceeds from our October 2004
common stock offering and approximately $50.0 of available cash.
At December 31, 2004, our cash and cash equivalents were $76.3, as compared
to $147.6 at December 31, 2003 and $156.9 at December 31, 2002. The decrease in
cash and cash equivalents from December 31, 2003 to December 31, 2004 was
primarily due to the early retirement of long term debt ($50.0) and an $18.2 net
increase in working capital.
Cash Flows
At December 31, 2004, our cash and bank credit available under our current
bank credit facility was $114.7 compared to $190.2 at December 31, 2003. Cash
provided by operating activities was $0.3 for the year ended December 31, 2004
as compared to cash used in operating activities of $25.5 during the year ended
December 31, 2003. The primary use of cash during the year ended December 31,
2004 was the net loss of $22.0 and $18.2 of uses related to changes in our
operating assets and liabilities, offset by non-cash charges from amortization
and depreciation of $28.4 and the $8.8 loss on debt extinguishment. The primary
use of cash during the year ended December 31, 2003 was the net loss of $53.5
and $0.7 of uses related to changes in our operating assets and liabilities,
offset by non-cash charges from amortization and depreciation of $28.3.
The primary use of cash from investing activities during the year ended
December 31, 2004 was related to acquisitions and capital expenditures for the
implementation of new information system enhancements and plant modernization.
The primary use of cash from investing activities during the year ended
December 31, 2003 was related to capital expenditures for the implementation of
new information system enhancements and plant modernization.
Capital Spending
Our capital expenditures were $14.5 and $11.2 during the years ended
December 31, 2004 and 2003, respectively. We anticipate ongoing annual capital
expenditures of approximately $17 for the next several years. We have no
material commitments for capital expenditures. We have, in the past, generally
funded our capital expenditures from cash from operations and funds available to
us under bank credit facilities. We expect to fund future capital expenditures
from cash on hand, from operations and from funds available to us under our
current or any future 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, reduced
headcount by approximately 4,500 employees and eliminated 22 facilities. We have
financed these acquisitions primarily through issuances of debt and equity
securities, including our outstanding 8 1/2% senior notes, 8% senior
subordinated notes and 8 7/8% senior subordinated notes and bank credit
facilities.
Outstanding Debt and Other Financing Arrangements
During 2004, we obtained two amendments to our bank credit facility with
JPMorgan Chase Bank to provide us with additional financial flexibility. The
amendments had the effect of eliminating maintenance financial covenants
consisting of a leverage ratio and a minimum net worth test. Under the amended
and restated bank credit facility there are no maintenance financial covenants,
other than maintaining an interest coverage ratio (as defined in the bank credit
facility) of at least 1.15:1 for the trailing 12-month period. The bank credit
facility expires in February 2007, is collateralized by substantially all of our
assets and bears interest at rates ranging from 250 to 400 basis points over the
Eurodollar rate as defined in the bank credit facility. At December 31, 2004,
indebtedness under the bank credit facility consisted of letters of credit
aggregating approximately $11.6. The amount available under the bank credit
facility was $38.4 as of December 31, 2004. The credit facility contains
customary affirmative covenants, negative covenants and conditions of
borrowings, all of which were met as of December 31, 2004.
29
Long-term debt consists principally of our 8 1/2% senior notes, 8 7/8%
senior subordinated notes and 8% senior subordinated notes. The $175 of 8 1/2%
senior notes mature on October 1, 2010, $250 of 8% notes mature on March 1,
2008, 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 unsecured
obligations and are senior to all of our subordinated indebtedness, but
subordinate to our secured borrowings under our bank credit facility. Each of
the 8% senior notes, 8 1/2% senior subordinated notes and 8 7/8% senior
subordinated 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 December
31, 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
The following charts reflect our known contractual obligations and
commercial commitments as of December 31, 2004. Commercial commitments include
lines of credit, guarantees and other potential cash outflows resulting from a
contingent event that requires performance by us or our subsidiaries pursuant to
a funding commitment.
Contractual Obligations 2005 2006 2007 2008 2009 Thereafter Total
----------- ---------- ----------- ------------- ------------ --------------- -----------------
Bank credit facility $ -- $ -- $ -- $ -- $ -- $ -- $ --
Other long-term debt 1.5 3.0 0.5 250.1 -- 425.0 680.1
Operating leases 13.4 12.3 12.4 10.7 7.7 34.4 90.9
Purchase obligations (1) 22.8 2.1 -- -- -- -- 24.9
Future interest payments
on outstanding debt 57.8 57.8 57.2 40.4 37.1 40.7 291.0
----- ----- ----- ------ ----- ------ --------
Total $95.5 $75.2 $70.1 $301.2 $44.8 $500.1 $1,086.9
===== ===== ===== ====== ===== ====== ========
Commercial Commitments
Letters of Credit $ 7.1 $ 4.5 $ -- $ -- $ -- $ -- $ 11.6
(1) Occasionally we enter into purchase commitments for production materials
and other items, which are reflected in the table above. We also enter into
unconditional purchase obligations with various vendors and suppliers of
goods and services in the normal course of operations through purchase
orders or other documentation or are undocumented except for an invoice.
Such obligations are generally outstanding for periods less than a year and
are settled by cash payments upon delivery of goods and services and are
not reflected in the total unconditional purchase obligations presented in
this line item.
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.
Sale-Leaseback
In September 2002, we entered into two sale-leaseback transactions involving
four of our facilities. Under the transactions, the facilities were sold for
$27.0, net of transaction costs and have been leased back for periods ranging
from 15 to 20 years. The leasebacks have been accounted for as operating leases.
The future lease payments have been included in the above tables. A gain of $4.8
resulting from the sale has been deferred and is being amortized to rent expense
over the initial term of the leases.
30
Off-Balance-Sheet Arrangements
Lease Arrangements
We finance our use of certain equipment under committed lease arrangements
provided by various financial 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 December 31, 2004, future minimum lease payments
under these arrangements approximated $90.9.
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.
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:
Fiscal Fiscal Transition
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ -------------
Balance at beginning of period $11.9 $ 8.9 $11.3
Acquisitions 1.0 -- --
Charges to costs and expenses 6.5 6.7 2.5
Costs incurred (6.2) (3.7) (4.9)
----- ----- -----
Balance at end of period $13.2 $11.9 $ 8.9
===== ===== =====
Deferred Tax Assets
The Company established a valuation allowance of $129.3 as of December 31,
2004 related to its deferred tax assets because of uncertainties that preclude
it from determining that it is more likely than not that the Company will be
able to generate sufficient taxable income to realize such assets during the
federal operating loss carryforward period.
31
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised 2004) "Share-Based Payment" ("SFAS 123R"). SFAS 123R is
applicable for all interim and fiscal periods beginning after June 15, 2005.
SFAS 123R sets accounting requirements for share-based compensation to
employees, requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation
issued to employees and disallows the use of the intrinsic value method of
accounting for stock compensation. We are currently evaluating the impact that
this statement will have on our results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs"
("SFAS 151") which requires abnormal amounts of inventory costs related to idle
facility, freight handling and wasted material expenses to be recognized as
current period charges. Additionally, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The standard is effective for fiscal years
beginning after June 15, 2005. We believe the adoption of SFAS 151 will not have
a material impact on our consolidated 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.
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. Since we
do not have any variable interest entities, the adoption of FIN No. 46 and
FIN No. 46(R) did not have an impact on our financial statements.
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 to the Notes to the Consolidated Financial Statements.
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.
32
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 fiscal 2004, fiscal 2003 and the 2002 transition period were not
significant to our financial statements.
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.
33
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 $129.3 as of December 31, 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.
RISK FACTORS
Risks Relating to Our Business
We are directly dependent upon the conditions in the airline and business
jet industries and a severe and prolonged downturn could negatively impact our
results of operations
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 increases in fuel costs
and heightened competition from low-cost carriers, the world airline industry
lost a total of $35 billion in calendar years 2002 - 2004, including $5 billion
in 2004. The airline industry crisis also caused 17 airlines worldwide to
declare bankruptcy or cease operations in the past three years.
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. While deliveries of new business jets increased in
2004 as compared to 2003, deliveries were down 33% during 2003, as compared to
2001. Business jet deliveries are expected to slowly increase over the next
several years, reaching 712 by 2007. The rate at which the business jet industry
recovers is dependent on corporate profits, the number of used jets on the
market and other factors, which could slow the rate of recovery.
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, caused a substantial contraction in our business
during the 2001 through 2003 period. Although the global airline industry began
to recover in late 2003 and our industry continues to be in the early stages of
a recovery, additional events similar to those above could delay any recovery in
the industry. While management has developed and implemented what it believes is
an aggressive cost reduction plan to counter these difficult conditions, it
cannot guarantee that the plans are adequate or will be successful.
34
Our substantial indebtedness will require that a significant portion of our
cash flow be used for debt service, which will limit our ability to use our
cash flow for other areas of our business and could adversely affect the
holders of our securities
As of December 31, 2004, we had approximately $680.1 million of total
indebtedness outstanding, representing approximately 79% of total
capitalization, and $603.8 million of net indebtedness outstanding (total
indebtedness less cash and cash equivalents), representing approximately 77% of
total capitalization. Subject to the limits contained in our existing bank
credit facility and the indentures governing our outstanding senior and senior
subordinated notes, we could also incur substantial additional indebtedness in
the future.
As a result of our substantial indebtedness, we have substantial debt
service obligations that could have significant consequences to us, including:
o limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of those funds to
fund debt service obligations;
o limiting our ability to obtain additional financing to fund our growth
strategy, working capital requirements, capital expenditures,
acquisitions, debt service requirements or other general corporate
requirements;
o increasing our vulnerability to adverse economic and industry conditions;
and
o increasing our exposure to interest rate increases because borrowings
under our current bank credit facility are, and borrowings under any
future bank credit facility could be, at variable interest rates.
Our ability to satisfy our debt service obligations will depend upon, among
other things, our future operating performance and our ability to refinance
indebtedness when necessary. Each of these factors is to a large extent
dependent on economic, financial, competitive, and other factors 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, obtain
additional financing or sell assets. We cannot assure you that our business will
generate cash flow, or that we will be able to obtain funding, sufficient to
satisfy our debt service requirements. We had net losses for the fiscal years
ended December 31, 2004 and 2003, the ten-month transition period ended
December 31, 2002 and the fiscal year ended February 23, 2002, and our earnings
were inadequate to cover fixed charges at the end of each of these periods and
for the year ended December 31, 2004, our cash flows provided by operations
were only $0.3 million. In addition to the debt service requirements of our
outstanding indebtedness, we have other demands on our cash resources,
including, among others, capital expenditures and operating expenses.
We have significant financial and operating restrictions in our debt
instruments that may have an adverse effect on our operations
The indentures governing our outstanding senior and senior subordinated
notes contain numerous financial and operating covenants that limit our ability
to incur additional indebtedness, to create liens or other encumbrances, to make
certain payments and investments, including dividend payments, to engage in
transactions with affiliates, to engage in sale-leaseback transactions, to
guarantee indebtedness and to sell or otherwise dispose of assets and merge or
consolidate with other entities. Agreements governing future indebtedness could
also contain significant financial and operating restrictions. Our current bank
credit facility contains customary affirmative and negative covenants. A failure
to comply with the obligations contained in any current or future agreements
governing our indebtedness, including our indentures, could result in an event
of default under our current or any future bank credit facility, or such
indentures, which could permit acceleration of the related debt and acceleration
of debt under other instruments that may contain cross-acceleration or
cross-default provisions. We are not certain whether we would have, or be able
to obtain, sufficient funds to make any such required accelerated payments.
The airline industry is heavily regulated and failure to comply with
applicable laws could reduce our sales, or require us to incur additional costs
to achieve compliance, which could reduce our results of operations
The Federal Aviation Administration prescribes standards and licensing
requirements for aircraft components, including virtually all commercial airline
and general aviation cabin interior products, and licenses component repair
stations within the United States. Comparable agencies, such as the U.K. Civil
Aviation Authority and the Japanese Civil Aviation Board, regulate these matters
in other countries. If we fail to obtain a required license for one of our
products or services or lose a license previously granted, the sale of the
subject product or service would be prohibited by law until such license is
obtained or renewed. In addition, designing new products to meet existing
regulatory requirements and retrofitting installed products to comply with new
regulatory requirements can be both expensive and time consuming.
35
From time to time these regulatory agencies propose new regulations. These
new regulations generally cause an increase in costs to comply therewith. For
example, when the FAA first enacted Technical Standard Order C127 in March 1992,
all seating companies were required to meet these new rules. Compliance with
this rule required industry participants to spend millions of dollars on
engineering, plant and equipment to comply with the regulation. A number of
smaller seating companies decided that they did not have the resources,
financial or otherwise, to comply with these rules and they either sold their
businesses or ceased operations.
To the extent the FAA implements rule changes in the future, we may incur
additional costs to achieve compliance.
There are risks associated with our facility consolidation and integration
program; failure of our combined operations to perform as expected could lead
to a loss of revenues and customers
We have recently completed a comprehensive facility consolidation and
integration plan designed to reduce our capacity and fixed costs consistent with
current demand and anticipated demand. This plan involved shutting five
principal facilities and transferring the operations to other facilities while
maintaining an ongoing business for the transferred operations. If the results
of implementing this plan are not as we expected, our costs may be higher than
we currently anticipate or we may incur delays in delivering products to our
customers or the quality of such products may suffer. This may adversely impact
our results of operations and financial condition. While the facility
consolidation program is now complete, there can be no assurance that the
results of the implementation of this plan will continue to be as we expected or
that we will not incur liabilities as a result thereof.
The airline industry is subject to extensive health and environmental
regulation, any violation of which could subject us to significant liabilities
and penalties
We are subject to extensive and changing federal, state and foreign laws and
regulations establishing health and environmental quality standards, and may be
subject to liability or penalties for violations of those standards. We are also
subject to laws and regulations governing remediation of contamination at
facilities currently or formerly owned or operated by us or to which we have
sent hazardous substances or wastes for treatment, recycling or disposal. We may
be subject to future liabilities or obligations as a result of new or more
stringent interpretations of existing laws and regulations. In addition, we may
have liabilities or obligations in the future if we discover any environmental
contamination or liability at any of our facilities, or at facilities we may
acquire.
We compete with a number of established companies, some of which have
significantly greater financial, technological and marketing resources than we
do, and we may not be able to compete effectively with these companies
We compete with numerous established companies. Some of these companies,
particularly in the passenger-to-freighter conversion business, have
significantly greater financial, technological and marketing resources than we
do. Our ability to be an effective competitor will depend on our ability to
remain the supplier of retrofit and refurbishment products and spare parts on
the commercial fleets on which our products are currently in service. It will
also depend on our success in causing our products to be selected for
installation in new aircraft, including next-generation aircraft, and in
avoiding product obsolescence. Our ability to maintain or expand our market
position in the passenger-to-freighter conversion business will depend on our
success in being selected to convert specific aircraft, our ability to maintain
and enhance our engineering design, our certification and program management
capabilities and our ability to manufacture a broader range of structural
components, connectors and fasteners used in this business.
There are risks inherent in international operations that could have a material
adverse effect on our business operations
While the majority of our operations are based domestically, we have
significant manufacturing operations based internationally with facilities in
England, Ireland and the Netherlands and each of our facilities sells to
airlines all over the world. Our customers are located primarily in North
America, Europe and the Asia/Pacific Rim region, including Australia and New
Zealand, and we also have customers in most other geographic regions, including
South America and the Middle East. As a result, 40% or more of our consolidated
sales for the past three fiscal years were to customers located outside the
United States.
36
In addition, we have a number of subsidiaries in foreign countries
(primarily in Europe), which have sales outside the United States. Approximately
32% and 35%, respectively, of our sales during the fiscal year ended
December 31, 2004 and the fiscal year ended December 31, 2003 came from our
foreign operations. Fluctuations in the value of foreign currencies affect the
dollar value of our net investment in foreign subsidiaries, with these
fluctuations being included in a separate component of stockholders' equity. At
December 31, 2004, we reported a cumulative foreign currency translation amount
of $9.0 in stockholders' equity as a result of foreign currency adjustments and
we may incur additional adjustments in future periods. In addition, operating
results of foreign subsidiaries are translated into U.S. dollars for purposes of
our statement of operations at average monthly exchange rates. Moreover, to the
extent that our sales are not denominated in the currency of the country of
product origin, our margins could be adversely affected. For example, labor,
material and overhead costs for goods produced in our Holland, England and
Ireland production facilities are incurred in British pounds or euros, but the
related sales revenues are generally denominated in U.S. dollars. Changes in the
value of the U.S. dollar or other currencies consequently could result in
fluctuations in foreign currency translation amounts or the U.S. dollar value of
transactions and, as a result, our net earnings could be materially adversely
affected. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Historically we have not engaged in hedging transactions. However, we may
engage in hedging transactions in the future to manage or reduce our foreign
exchange risk. However, our attempts to manage our foreign currency exchange
risk may not be successful and, as a result, our results of operations and
financial condition could be adversely affected.
Our foreign operations could also be subject to unexpected changes in
regulatory requirements, tariffs and other market barriers and political and
economic instability in the countries where we operate. The impact of any such
events that may occur in the future could subject us to additional costs or loss
of sales, which could materially adversely affect our operating results.
Our total assets include substantial intangible assets. The write-off of a
significant portion of unamortized intangible assets would negatively affect
our results of operations
Our total assets reflect substantial intangible assets. At December 31,
2004, goodwill and identified intangibles, net, represented approximately 51% of
total assets. Intangible assets consist principally of goodwill and other
identified intangible assets associated with our acquisitions. In accordance
with SFAS No. 142, the goodwill and trademark intangible assets with indefinite
lives that were being amortized over periods ranging from 30 to 40 years are no
longer amortized. On at least an annual basis, we assess whether there has been
an impairment in the value of goodwill and other intangible assets with
indefinite lives. If the carrying value of the asset exceeds the estimated fair
value of the related business, an impairment is deemed to have occurred. In this
event, the amount is written down accordingly. Under current accounting rules,
this would result in a charge to operating earnings. Any determination requiring
the write-off of a significant portion of unamortized goodwill and identified
intangible assets would negatively affect our results of operations and total
capitalization, which could be material.
If we make acquisitions, they may be less successful than we expect, which
could have a material adverse effect on our financial condition
We may consider future acquisitions, some of which could be material to us.
We continually explore and conduct discussions with many third parties regarding
possible acquisitions, although we have no current intentions of pursuing or
making any material acquisitions in the near future. Our ability to continue to
achieve our goals may depend upon our ability to effectively integrate such
companies, to achieve cost efficiencies and to manage these businesses as part
of our company. We may not be successful in implementing appropriate
operational, financial and management systems and controls to achieve the
benefits expected to result from these acquisitions. Our efforts to integrate
these businesses could be adversely affected by a number of factors beyond our
control, such as regulatory developments, general economic conditions, increased
competition and the loss of certain customers resulting from the acquisitions.
In addition, the process of integrating these businesses could cause
difficulties for us, including an interruption of, or loss of momentum in, the
activities of our existing business and the loss of key personnel and customers.
Further, the benefits that we anticipate from these acquisitions may not
develop. Depending upon the acquisition opportunities available, we also may
need to raise additional funds or arrange for additional bank financing in order
to consummate such acquisitions.
37
Provisions in our charter documents may discourage potential acquisitions of
our company, even those which the holders of a majority of our common stock
may favor
Our restated certificate of incorporation and by-laws contain provisions
that may have the effect of discouraging a third party from making an
acquisition of us by means of a tender offer, proxy contest or otherwise. Our
restated certificate of incorporation and by-laws:
o classify the board of directors into three classes, with directors of
each class serving for a staggered three-year period;
o provide that directors may be removed only for cause and only upon the
approval of the holders of at least two-thirds of the voting power of our
shares entitled to vote generally in the election of such directors;
o require at least two-thirds of the voting power of our shares entitled to
vote generally in the election of directors to alter, amend or repeal the
provisions relating to the classified board and removal of directors
described above;
o permit the board of directors to fill vacancies and newly created
directorships on the board;
o restrict the ability of stockholders to call special meetings; and
o contain advance notice requirements for stockholder proposals.
Our rights plan and the ability of our board of directors to issue preferred
stock may have the effect of discouraging a tender offer or other takeover
attempt not previously approved by the board of directors
Our board of directors has declared a dividend of one preferred share
purchase right for each share of common stock outstanding. A right will also be
attached to each share of common stock subsequently issued. The rights will have
certain anti-takeover effects. If triggered, the rights would cause substantial
dilution to a person or group of persons that acquires more than 15.0% of our
common stock on terms not approved by our board of directors. The rights could
discourage or make more difficult a merger, tender offer or other similar
transaction.
Under our restated certificate of incorporation, our board of directors also
has the authority to issue preferred stock in one or more series and to fix the
powers, preferences and rights of any such series without stockholder approval.
The board of directors could, therefore, issue, without stockholder approval,
preferred stock with voting and other rights that could adversely affect the
voting power of the holders of common stock and could make it more difficult for
a third party to gain control of us. In addition, under certain circumstances,
Section 203 of the Delaware General Corporation Law makes it more difficult for
an "interested stockholder," or generally a 15% stockholder, to effect various
business combinations with a corporation for a three-year period unless
previously approved by our board of directors.
You may not receive cash dividends on our shares of common stock
We have never paid a cash dividend and do not plan to pay cash dividends on
our common stock in the foreseeable future. We intend to retain our earnings to
finance the development and expansion of our business and to repay indebtedness.
Also, our ability to declare and pay cash dividends on our common stock is
restricted by covenants in our outstanding notes. Our current bank credit
facility also contains customary covenants, which include covenants restricting
our ability to declare and pay cash dividends.
38
If the price of our common stock continues to fluctuate significantly, you
could lose all or part of any investment in our common stock
The price of our common stock is subject to sudden and material increases
and decreases, and decreases could adversely affect investments in our common
stock. For example, since the beginning of 2002, the closing price of our common
stock has ranged from a low of $1.25 to a high of $13.59. The price of our
common stock could fluctuate widely in response to:
o our quarterly operating results;
o changes in earnings estimates by securities analysts;
o changes in our business;
o changes in the market's perception of our business;
o changes in the businesses, earnings estimates or market perceptions of
our competitors or customers;
o changes in airline industry or business jet industry conditions;
o changes in general market or economic conditions; and
o changes in the legislative or regulatory environment.
In addition, the stock market has experienced extreme price and volume
fluctuations in recent years that have significantly affected the quoted prices
of the securities of many companies, including companies in our industry. The
changes often appear to occur without regard to specific operating performance.
The price of our common stock could fluctuate based upon factors that have
little or nothing to do with our company and these fluctuations could materially
reduce our stock price.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 31E of the Securities
Exchange Act of 1934. Forward-looking statements include all statements that do
not relate solely to historical or current facts, including statements regarding
implementation and expected benefits of lean manufacturing and continuous
improvement plans, 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, SARS outbreak and war in Iraq and the impact on our
business of the recent increases in passenger traffic and projected increases in
passenger traffic and the size of the airline fleet. 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, under the heading "Risk Factors" in this 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 in 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.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are cautioned not to unduly rely on such forward-looking statements when
evaluating the information presented herein. These statements should be
considered only after carefully reading this entire Form 10-K.
39
ITEM 7A. 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
component parts from foreign vendors primarily in British pounds or euros.
Accordingly, we are exposed to transaction gains and losses that could
result from changes in foreign currency exchange rates relative to the U.S.
dollar. The largest foreign currency exposure results from activity in
British pounds and Euros.
From time to time, we and our foreign subsidiaries may enter into foreign
currency exchange contracts to manage risk on transactions conducted in
foreign currencies. At December 31, 2004, we had no outstanding forward
currency exchange contracts. In addition, we have not entered into any other
derivative financial instruments.
Interest Rates - At December 31, 2004, we had no adjustable rate debt and
fixed rate debt of $680.1. The weighted average interest rate for the fixed
rate debt was approximately 8.5% at December 31, 2004. If interest rates
were to increase by 10% above current rates, the impact on our financial
statements would be to reduce pretax income by a negligible amount. We do
not engage in transactions intended to hedge our exposure to changes in
interest rates.
As of December 31, 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 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this section is set forth beginning from page
F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our principal executive officer and our principal financial officer, after
evaluating, together with management, the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of December 31, 2004, the end of the period
covered by this report, have concluded that, as of such date, our disclosure
controls and procedures were adequate and effective to ensure that material
information relating to our company and our consolidated subsidiaries would be
made known to them by others within those entities.
Internal Control over Financial Reporting
There were no changes in our company's internal control over financial
reporting that occurred during the fourth quarter of 2004 that have materially
affected, or are reasonably likely to materially affect, our company's internal
control over financial reporting.
40
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of BE Aerospace, Inc. and its subsidiaries (the "Company") is
responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Internal control over financial reporting
is a process designed by, or under the supervision of the Company's principal
executive and principal financial officers, and effected by the Company's board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
company's financial statements for external purposes in accordance with
generally accepted accounting principles.
The Company's internal control over financial reporting includes those
policies and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004. In making
this assessment, the Company's management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control - Integrated Framework. Based on its assessment, management
believes that, as of December 31, 2004, the Company's internal control over
financial reporting is effective.
The registered public accounting firm that audited the financial statements
included in this annual report has issued an attestation report on management's
assessment of the Company's internal control over financial reporting.
By: /s/ Robert J. Khoury By: /s/ Thomas P. McCaffrey
-------------------- -----------------------
Robert J. Khoury Thomas P. McCaffrey
President and Chief Senior Vice President of
Executive Officer Administration and
March 9, 2005 Chief Financial Officer
March 9, 2005
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BE Aerospace, Inc.
We have audited management's assessment, included in the accompanying BE
Aerospace, Inc. Management's Annual Report on Internal Control Over Financial
Reporting, that BE Aerospace, Inc. and its subsidiaries (the "Company")
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material aspects, based on the criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2004 of the Company and our
report dated March 9, 2005 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte & Touche LLP
Costa Mesa, California
March 9, 2005
42
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our directors and
executive officers as of March 1, 2005. Officers of the Company are elected
annually by the Board of Directors.
Title Age Position
Amin J. Khoury 65 Chairman of the Board
Robert J. Khoury 62 President, Chief Executive Officer and Director
Jim C. Cowart 53 Director
Richard G. Hamermesh 57 Director*
Brian H. Rowe 73 Director**
Jonathan M. Schofield 64 Director**
David C. Hurley 65 Director*
Wesley W. Marple, Jr 73 Director*
Thomas P. McCaffrey 50 Senior Vice President of Administration and
Chief Financial Officer
Michael B. Baughan 45 Senior Vice President and General Manager,
Commercial Aircraft Products Group
Robert A. Marchetti 62 Group Vice President and General Manager,
Fastener Distribution Group
Mark D. Krosney 58 Group Vice President and General Manager,
Business Jet Group
Edmund J. Moriarty 61 Corporate Vice President-Law,
General Counsel and Secretary
Jeffrey P. Holtzman 49 Vice President-Finance and Treasurer
Stephen R. Swisher 46 Vice President-Finance and Controller
- --------
* Member, Audit Committee
** Member, Stock Option and Compensation Committee
[Remainder of page intentionally left blank]
43
Director Classification
Our Restated Certificate of Incorporation provides that the Board of
Directors is to be divided into three classes, each nearly as equal in number as
possible, so that each director (in certain circumstances after a transitional
period) will serve for three years, with one class of directors being elected
each year. The Board is currently comprised of two Class I Directors (Brian H.
Rowe and Jim C. Cowart), three Class II Directors (Robert J. Khoury, David C.
Hurley and Jonathan M. Schofield) and three Class III Directors (Amin J. Khoury,
Wesley W. Marple, Jr. and Richard G. Hamermesh). The terms of the Class I, Class
II and Class III Directors expire at the end of each respective three-year term
and upon the election and qualification of successor directors at annual
meetings of stockholders held at the end of each fiscal year. Our executive
officers are elected annually by the Board of Directors following the annual
meeting of stockholders and serve at the discretion of the Board of Directors.
Current Directors
Amin J. Khoury has been the Company's Chairman of the Board since July 1987
when he founded the Company and was Chief Executive Officer until April 1, 1996.
Since 1986 Mr. Khoury has been a director of Synthes, Inc., the world's leading
manufacturer and marketer of orthopedic trauma implants and a leading global
manufacturer and marketer of cranial-maxillofacial and spine implants. Since
July 1994, Mr. Khoury was elected a member of the board of directors and is
currently the lead independent director of Brooks Automation, Inc., the world's
leading supplier of integrated automation solutions for the global
semiconductor, data storage and flat panel display manufacturing industries.
Since 1986 Mr. Khoury has also been Chairman of the Board of Applied Extrusion
Technologies, Inc., a leading North American producer of oriented polypropylene
films for consumer products, labeling and packaging. On December 1, 2004,
Applied Extrusion Technologies filed a voluntary, prepackaged plan of
reorganization under Chapter 11 of the U.S. Bankruptcy Code pursuant to a
previously announced plan of recapitalization and was reorganized into a private
company on March 8, 2005. Mr. Khoury is the brother of Robert J. Khoury.
Robert J. Khoury has been a Director since July 1987, when he co-founded the
Company. He currently serves as President and Chief Executive Officer. From
April 1996 through August 2000, he served as Vice Chairman. Mr. Khoury is a
board member of Mar-Test, Inc., a leading test lab for low cycle fatigue
testing. Mr. Khoury is the brother of Amin J. Khoury.
Jim C. Cowart has been a Director since November 1989. Since September 2004,
Mr. Cowart has been Chairman and Chief Executive Officer of Auriga Medical
Products GmbH, a distributor of medical devices. He is a Principal of Cowart &
Co. LLC and Auriga Partners, Inc., private capital firms that provide strategic
planning, competitive analysis, financial relations and other services. From
August 1999 to May 2001, he was Chairman of QualPro Corporation, an aerospace
components manufacturing company, and from February 1998 to November 2000,
Mr. Cowart was Chairman and CEO of E-Com Architects, Inc., a computer software
company. From January 1993 to November 1997, he was the Chairman and CEO of
Aurora Electronics Inc. Previously, Mr. Cowart was a founding general partner of
Capital Resource Partners, a private investment capital manager, and he held
various positions in investment banking and venture capital with Lehman
Brothers, Shearson Venture Capital and Kidder, Peabody & Co.
Richard G. Hamermesh has been a Director since July 1987. Dr. Hamermesh is
currently a Professor of Management Practice at the Harvard Business School.
From 1987 to 2001, he was a co-founder and a Managing Partner of The Center for
Executive Development, an executive education and development-consulting firm.
Prior to this, from 1976 to 1987, Dr. Hamermesh was a member of the faculty of
the Harvard Business School. He is also an active investor and entrepreneur,
having participated as a principal, director and investor in the founding and
early stages of more than 15 organizations.
David C. Hurley has been a Director since June 2003. Mr. Hurley is currently
the Vice Chairman of PrivatAir, a corporate aviation services company based in
Geneva, Switzerland, where he served as Chief Executive Officer from 2000 to
February 2003. Prior to 2000, Mr. Hurley was the Chairman and Chief Executive
Officer of Flight Services Group (FSG), a corporate aircraft management and
sales company, which he founded in 1984 and which was acquired by PrivatAir in
2000. Before founding FSG, Mr. Hurley served as Senior Vice President of
Domestic and International Sales for Canadair Challenger. He is currently a
member of the board of directors of the Smithsonian Institution's National Air
and Space Museum, the Corporate Angel Network, the Wings Club, Aerosat, Inc. and
Capital Route Limited.
44
Wesley W. Marple, Jr. has been a Director since October 2003. Dr. Marple is
currently a Professor of Finance at Northeastern University. He was a Ford
Foundation Fellow and member of the faculty at the Harvard Business School
before joining Northeastern's College of Business Administration in 1966. He
returned to the Harvard Business School as a Visiting Professor during the
1980-81 academic year. Dr. Marple has been a member and past chairman of the
Financial Advisory Board of the Commonwealth of Massachusetts. He was a trustee
of Eastern Utilities Associates and of several Scudder mutual funds. He has
served as a consultant to many companies including Arthur D. Little, Sears
Roebuck, IBM and Honeywell. Dr. Marple currently is Chairman of the Board of
Directors of the Biddeford Internet Corporation, a director of the Hult
International Business School, and a director of the New Hampshire Electric
Cooperative.
Brian H. Rowe has been a Director since July 1995. He is currently Chairman
Emeritus of GE Aircraft Engines, a principal business unit of the General
Electric Company, where he also served as Chairman from September 1993 through
January 1995 and as President from 1979 through 1993. Since February 2001,
Mr. Rowe has acted as Chairman of Atlas Air, an air cargo carrier, where he has
served as a director since March 1995. Since 1995, Mr. Rowe is also a director
of Textron, Inc., a manufacturer of aircraft, automobile components, systems and
components for commercial aerospace and defense industries, and a provider of
financial services.
Jonathan M. Schofield has been a Director since April 2001. From December
1992 through February 2000, Mr. Schofield served as Chairman of the Board and
CEO of Airbus Industrie of North America, Inc., a subsidiary of Airbus
Industrie, a manufacturer of large civil aircraft, and served as Chairman from
February 2000 until his retirement in March 2001. From 1989 until he joined
Airbus, Mr. Schofield was President of United Technologies International
Corporation. Mr. Schofield is currently a member of the board of directors of
Aviall, Inc. and SS&C Technologies, Inc., and is a trustee of LIFT Trust.
Executive Officers
Thomas P. McCaffrey has been Senior Vice President of Administration and
Chief Financial Officer since May 1993. From August 1989 through May 1993,
Mr. McCaffrey was a Director with Deloitte & Touche LLP, and from 1976 through
1989 served in several capacities, including Audit Partner, with
Coleman & Grant LLP.
Michael B. Baughan has been Senior Vice President and General Manager of
Commercial Aircraft Products since July 2002. From May 1999 to July 2002,
Mr. Baughan was Group Vice President and General Manager of Seating Products.
From September 1994 to May 1999, Mr. Baughan was Vice President, Sales and
Marketing for Seating Products. Prior to 1994, Mr. Baughan held various
positions including President of AET Systems, Manager of Strategic Initiatives
at The Boston Company (American Express) and Sales Representative at Dow
Chemical Company.
Robert A. Marchetti has been Group Vice President and General Manager of
Fastener Distribution Group since April 2002. From February 2001 to April 2002,
Mr. Marchetti was Group Vice President of Machined Products Group. From 1997 to
January 2001 Mr. Marchetti was with Fairchild Corporation's Fasteners Division
with his last position being Senior Vice President and Chief Operating Officer.
From 1990 to 1997, Mr. Marchetti served as a corporate officer of UNC Inc. where
he held several senior positions, Corporate VP of Marketing, President of
Tri-Remanufacturing and Chief Operating Officer of the Accessory Overhaul
Division. From 1989 to 1990, he served as President of AWA Incorporated. From
1986 through 1989, Mr. Marchetti was Vice President of Marketing at General
Electric Aircraft Engines and he was General Manager for a Component Repair
Division. Prior to that he held several sales and general management positions
from 1965 through 1986 with Copperweld Corporation and Carlisle Corporation.
Mark D. Krosney has been Group Vice President and General Manager of
Business Jet Group since January 2001. From February 1996 through December 2000,
Mr. Krosney was Vice President of Engineering for Seating Products. From 1994 to
1996, Mr. Krosney served as General Manager for A.W. Chesterton. From 1992 to
1994, Mr. Krosney was with Johnson Controls, Automotive System Group, where his
last position was General Manager of the Seat Mechanisms Group. Prior to that he
was with United Technologies Corporation for 22 years, where he held positions
as Divisional Director of Technology for Control Systems, Director of Product
Development and Marketing of Diesel Systems and member of the Senior Committee
for UTC Corporation.
45
Edmund J. Moriarty has been Corporate Vice President-Law, General Counsel
and Secretary since November 16, 1995. From 1991 to 1995, Mr. Moriarty served as
Vice President and General Counsel to Rollins, Inc., a national service company.
From 1982 through 1991, Mr. Moriarty served as Vice President and General
Counsel to Old Ben Coal Company, a wholly owned coal subsidiary of The Standard
Oil Company.
Jeffrey P. Holtzman has been Vice President-Finance and Treasurer since
August 1999. Mr. Holtzman has been a Vice President since November 1996 and
Treasurer since September 1993. From June 1986 to July 1993, Mr. Holtzman served
in several capacities at FPL Group, Inc., including Assistant Treasurer and
Manager of Financial Planning. Mr. Holtzman previously worked for Mellon Bank,
Gulf Oil Corporation and Ernst & Young LLP.
Stephen R. Swisher has been Vice President-Finance and Controller since
August 1999. Mr. Swisher has been Controller since 1996 and served as Director
of Finance from 1994 to 1996. Prior to 1994, Mr. Swisher held various positions,
including Accounting Manager at Burger King Corporation and Audit Manager with
Deloitte & Touche LLP.
Audit Committee
We have a separately-designated standing Audit Committee established in
accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended. Messrs. Hamermesh, Hurley and Dr. Marple currently serve as members of
the Audit Committee. Under the current SEC rules and the rules of the Nasdaq,
all of the members are independent. Our Board of Directors has determined that
Dr. Marple is an "audit committee financial expert" in accordance with current
SEC rules. Dr. Marple is also independent, as that term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons who own more than ten percent
of a registered class of our equity securities, to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities. Officers,
directors and greater-than-ten-percent shareholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and, with respect to our officers and directors, written
representations that no other reports were required, during the fiscal year
ended December 31, 2004, all Section 16(a) filing requirements applicable to our
officers, directors and greater-than-ten-percent beneficial owners were complied
with except that due to administrative errors, a Form 4 filed by Mr. Hamermesh
with respect to the purchase of 1,000 shares was filed late.
In making the above statements, we have relied on the written
representations of our directors and officers and copies of the reports that
have been filed with the SEC.
Code of Ethics
We have adopted a code of ethics, or Code of Business Conduct, to comply
with the rules of the SEC and Nasdaq. The Code of Business Conduct applies to
our directors, officers and employees worldwide, including our principal
executive officer and senior financial officers. A copy of our Code of Business
Conduct is filed as Exhibit 14.1 to this Form 10-K.
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46
ITEM 11. EXECUTIVE COMPENSATION
Information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated by reference herein. The Compensation Committee
Report and the Performance Graph included in the Proxy Statement are not
incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information set forth under the captions "Security Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information" in
the Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated by reference herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information set forth under the caption "Principal Accountant Fees and
Services" in the Proxy Statement is incorporated by reference herein.
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47
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of report on Form 10-K
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2004 and December 31, 2003
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Fiscal Years Ended December 31, 2004 and 2003, and for the
Ten-Month Transition Period ended December 31, 2002
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended December 31, 2004 and 2003, and for the Ten-Month Transition
Period Ended December 31, 2002
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 31, 2004 and 2003, and for the Ten-Month Transition Period
Ended December 31, 2002
Notes to Consolidated Financial Statements for the Fiscal Years Ended
December 31, 2004 and 2003, and for the Ten-Month Transition Period
Ended December 31, 2002
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other consolidated financial statement schedules are omitted
because such schedules are not required or the information required has
been presented in the aforementioned consolidated financial statements.
3. Exhibits - The exhibits listed in the following "Index to Exhibits" are
filed with this Form 10-K or incorporated by reference as set forth
below.
(b) The exhibits listed in the "Index to Exhibits" below are filed with this
Form 10-K or incorporated by reference as set forth below.
(c) Additional Financial Statement Schedules - None.
48
INDEX TO EXHIBITS
Exhibit
Number Description
Exhibit 3 Articles of Incorporation and By-Laws
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Certificate of Amendment of the Restated Certificate of Incorporation (2)
3.3 Certificate of Amendment of the Restated Certificate of Incorporation (5)
3.4 Certificate of Amendment of the Restated Certificate of Incorporation (17)
3.5 Amended and Restated By-Laws (18)
Exhibit 4 Instruments Defining the Rights of Security Holders,
including debentures
4.1 Specimen Common Stock Certificate (1)
4.2 Form of Note for the Registrant's 9 1/2% Senior Subordinated Notes (7)
4.3 Indenture dated November 2, 1998 between The Bank of New York, as
trustee, and the Registrant relating to the Registrant's
9 1/2% Senior Subordinated Notes (7)
4.4 Form of Note for the Registrant's 8% Series B Senior Subordinated
Notes (3)
4.5 Indenture dated February 13, 1998 for the Registrant's issue of
8% Senior Subordinated Notes (3)
4.6 Indenture dated April 17, 2001 between The Bank of New York, as
trustee, and the Registrant relating to the Registrant's 8 7/8% Senior
Subordinated Notes and Series B 8 7/8% Senior Subordinated Notes (11)
4.7 Form of Note for the Registrant's 8 7/8% Senior Subordinated Notes and
Series B Subordinated Notes (11)
4.8 Rights Agreement between the Registrant and BankBoston, N.A., as
rights agent, dated as of November 12, 1998 (6) 4.9 Form of Note for
the Registrant's 8 1/2% Series B Senior Notes (19) 4.10 Indenture
dated October 7, 2003 between The Bank of New York, as trustee, and
the Registrant relating to the Registrant's 8 1/2% Senior Notes and
Series B Senior Notes (19)
Exhibit 10(i) Material Contracts
10.1 Amended and Restated Credit Agreement dated as of February 12, 2004
between the Registrant, Lenders, JP Morgan Securities Inc. and
JPMorgan Chase Bank (22)
10.2 Amendment No. 1 to the Amended and Restated Credit Agreement dated as
of October 26, 2004 between the Registrant, Lenders, JP Morgan
Securities Inc. and JPMorgan Chase Bank (23)
Exhibit 10(iii) Management Contracts and Executive Compensation Plans,
Contracts and Arrangements
10.3 Amended and Restated Employment Agreement as of September 14, 2001
Between the Registrant and Amin J. Khoury. (12)
10.4 Amendment No. 1 to Amended and Restated Employment Agreement dated
May 15, 2002 between the Registrant and Amin J. Khoury. (16)
10.5 Amended and Restated Employment Agreement as of September 14, 2001
Between the Registrant and Robert J. Khoury. (12)
10.6 Amendment No. 1 to Amended and Restated Employment Agreement dated
May 15, 2002 between the Registrant and Robert J. Khoury. (16)
10.7 Amended and Restated Employment Agreement as of September 14, 2001
Between the Registrant and Thomas P. McCaffrey. (12)
10.8 Amendment No. 1 to Amended and Restated Employment Agreement dated
September 14, 2001 between the Registrant and Thomas P. McCaffrey. (15)
10.9 Amendment No. 2 to Amended and Restated Employment Agreement dated
May 15, 2002 between the Registrant and Thomas P. McCaffrey. (16)
10.10 Employment Agreement dated as of May 28, 1999 between the Registrant
and Michael B. Baughan. (16)
10.11 Employment Agreement dated as of January 15, 2001 between the
Registrant and Mark D. Krosney. (16)
10.12 Employment Agreement dated as of February 26, 2001 between the
Registrant and Robert A. Marchetti. (16)
10.13 Amended and Restated 1989 Stock Option Plan. (13)
49
10.14 Amendment No. 1 to Amended and Restated 1989 Stock Option Plan. (9)
10.15 1991 Directors' Stock Option Plan. (4)
10.16 United Kingdom 1992 Employee Share Option Scheme. (2)
10.17 1996 Stock Option Plan. (13)
10.18 Amendment No. 1 to the 1996 Stock Option Plan. (9)
10.19 Amendment No. 2 to the 1996 Stock Option Plan. (10)
10.20 2001 Stock Option Plan. (14)
10.21 2001 Directors' Stock Option Plan. (14)
10.22 1994 Employee Stock Purchase Plan (Amended and Restated as of
January 19, 2000). (10)
10.23 Supplemental Executive Deferred Compensation Plan III. (8)
10.24 Amendment No. 3 to Amended and Restated Employment Agreement dated
March 24, 2003 between the Registrant and Thomas P. McCaffrey (18)
10.25 Amendment No. 4 to Amended and Restated Employment Agreement dated
April 30, 2003 between the Registrant and Thomas P. McCaffrey (20)
10.26 Amendment No. 5 to Amended and Restated Employment Agreement dated
October 20, 2003 between the Registrant and Thomas P. McCaffrey (21)
10.27 Amendment No. 2 to Amended and Restated Employment Agreement dated
October 20, 2003 between the Registrant and Amin J. Khoury (21)
10.28 Amendment No. 2 to Amended and Restated Employment Agreement dated
October 20, 2003 between the Registrant and Robert J. Khoury (21)
Exhibit 12 Statements re computation of ratios
12.1 Statement of computation of ratio of earnings to fixed charges*
Exhibit 14 Code of Ethics
14.1 Code of Business Conduct (18)
Exhibit 21 Subsidiaries of the Registrant
21.1 Subsidiaries *
Exhibit 23 Consents of Experts and Counsel
23.1 Independent Accountants - Deloitte & Touche LLP*
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*
- ------------------
* Filed herewith.
50
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended (No. 33-33689), filed with the Commission on
March 7, 1990.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended (No. 333-54146), filed with the Commission on
November 3, 1992.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-4 (No. 333-47649), filed with the Commission on March 10, 1998.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 333-48010), filed with the Commission on May 26, 1992.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 333-60209), filed with the Commission on July 30, 1998.
(6) Incorporated by reference to the Company's Current Report on
Form 8-K dated November 12, 1998, filed with the Commission on
November 18, 1998.
(7) Incorporated by reference to the Company's Registration Statement on
Form S-4 (No. 333-67703), filed with the Commission on
January 13, 1999.
(8) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 29, 1999, filed with the
Commission on July 9, 1999.
(9) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 333-89145), filed with the Commission on
October 15, 1999.
(10) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 333-30578), filed with the Commission on
February 16, 2000.
(11) Incorporated by reference to the Company's Registration Statement on
Form S-4 (No. 333-62674) as filed with the Commission on June 8, 2001.
(12) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 25, 2001, filed with
the Commission on October 9, 2001.
(13) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 333-14037), filed with the Commission on
October 15, 1996.
(14) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 333-71442), filed with the Commission on
October 11, 2001.
(15) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended November 24, 2001, filed with
the Commission on January 8, 2002.
(16) Incorporated by reference to the Company's Annual Report on
Form 10-K/A for the fiscal year ended February 23, 2002, filed
with the Commission on May 29, 2002.
(17) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 333-112493), as amended, filed with the
Commission on February 5, 2004.
(18) Incorporated by reference to the Company's Transition Report on
Form 10-K for the ten-month transition period ended December 31, 2002,
filed with the Commission March 26, 2003.
(19) Incorporated by reference to the Company's Registration Statement on
Form S-4 (No. 333-109954), as amended, filed with
the Commission on October 24, 2003.
(20) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003, filed with
the Commission on May 8, 2003.
(21) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003, filed with
the Commission on November 10, 2003.
(22) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003, filed with
the Commission on March 12, 2004.
(23) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004, filed
with the Commission on November 5, 2004.
[Remainder of page intentionally left blank]
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Robert J. Khoury
--------------------
Robert J. Khoury
President and Chief Executive Officer
Date: March 11, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Amin J. Khoury Chairman March 11, 2005
- ---------------------------------------
Amin J. Khoury
/s/ Robert J. Khoury President and Chief Executive Officer March 11, 2005
- ---------------------------------------
Robert J. Khoury
Senior Vice President of Administration
and Chief Financial Officer
/s/ Thomas P. McCaffrey (principal financial and accounting officer) March 11, 2005
- ---------------------------------------
Thomas P. McCaffrey
/s/ Jim C. Cowart Director March 11, 2005
- ---------------------------------------
Jim C. Cowart
/s/ Richard G. Hamermesh Director March 11, 2005
- ---------------------------------------
Richard G. Hamermesh
/s/ David C. Hurley Director March 11, 2005
- ---------------------------------------
David C. Hurley
/s/ Wesley W. Marple, Jr. Director March 11, 2005
- ---------------------------------------
Wesley W. Marple, Jr.
/s/ Brian H. Rowe Director March 11, 2005
- ---------------------------------------
Brian H. Rowe
/s/ Jonathan M. Schofield Director March 11, 2005
- ---------------------------------------
Jonathan M. Schofield
52
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2004 and December 31, 2003 F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
for the Fiscal Years Ended December 31, 2004 and 2003, and for the
Ten-Month Transition Period Ended December 31, 2002
Consolidated Statements of Stockholders' Equity F-5
for the Fiscal Years Ended December 31, 2004 and 2003, and for the
Ten-Month Transition Period Ended December 31, 2002
Consolidated Statements of Cash Flows F-6
for the Fiscal Years Ended December 31, 2004 and 2003, and for the
Ten-Month Transition Period Ended December 31, 2002
Notes to Consolidated Financial Statements F-7
for the Fiscal Years Ended December 31, 2004 and 2003, and for the
Ten-Month Transition Period Ended December 31, 2002
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-24
for the Fiscal Years Ended December 31, 2004 and 2003, and for the
Ten-Month Transition Period Ended December 31, 2002
[Remainder of page intentionally left blank]
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
BE Aerospace, Inc.
Wellington, Florida
We have audited the accompanying consolidated balance sheets of BE
Aerospace, Inc. and subsidiaries (the "Company") as of December 31, 2004 and
December 31, 2003, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity, and cash flows for the fiscal year
ended December 31, 2004, for the fiscal year ended December 31, 2003 and the
ten-month transition period from February 24, 2002 to December 31, 2002. Our
audits also included the financial statement schedule listed in item 15(a)(2).
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of BE Aerospace, Inc. and
subsidiaries as of December 31, 2004 and December 31, 2003, and the results of
their operations and their cash flows for the fiscal year ended December 31,
2004, the fiscal year ended December 31, 2003 and the ten-month transition
period from February 24, 2002 to December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 9, 2005, expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ Deloitte & Touche LLP
Costa Mesa, California
March 9, 2005
F-2
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 2004 AND DECEMBER 31, 2003
(In millions, except share data)
December 31, December 31,
2004 2003
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 76.3 $ 147.6
Accounts receivable - trade, less allowance for doubtful
accounts ($2.8 at December 31, 2004 and $2.2 at December 31, 2003) 91.6 80.3
Inventories, net 197.8 168.7
Other current assets 13.4 10.6
-------- --------
Total current assets 379.1 407.2
Property and equipment, net 100.2 103.8
Goodwill 370.4 352.7
Identified intangibles, net 151.4 158.5
Other assets, net 23.7 30.3
-------- --------
$1,024.8 $1,052.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 152.6 $ 131.0
Current portion of long-term debt 1.5 1.9
-------- --------
Total current liabilities 154.1 132.9
-------- --------
Long-term debt, net current portion 678.6 880.1
Other liabilities 9.3 7.6
Commitments, contingencies and off-balance-sheet arrangements (Note 9)
Stockholders' Equity:
Preferred stock, $0.01 par value; 1.0 million shares
authorized; no shares outstanding -- --
Common stock, $0.01 par value; 100.0 million shares
authorized; 56.6 million (December 31, 2004) and
36.7 million (December 31, 2003)
shares issued and outstanding 0.6 0.4
Additional paid-in capital 578.2 413.8
Accumulated deficit (405.0) (383.0)
Accumulated other comprehensive income 9.0 0.7
-------- --------
Total stockholders' equity 182.8 31.9
-------- --------
$1,024.8 $1,052.5
======== ========
See notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004 AND 2003, AND
FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002
(In millions, except per share data)
Fiscal Year Fiscal Year Transition
Ended Ended Period Ended
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Net sales $733.5 $624.4 $503.6
Cost of sales 494.8 453.6 352.3
------ ------ ------
Gross profit 238.7 170.8 151.3
Operating expenses:
Selling, general and administrative 119.2 105.8 128.0
Research, development and engineering 55.1 44.7 34.1
------ ------ ------
Total operating expenses 174.3 150.5 162.1
------ ------ ------
Operating earnings (loss) 64.4 20.3 (10.8)
Interest expense, net 76.1 70.6 57.3
Loss on debt extinguishment 8.8 1.2 --
------ ------ ------
Loss before income taxes (20.5) (51.5) (68.1)
Income taxes 1.5 2.0 2.7
------ ------ ------
Net loss (22.0) (53.5) (70.8)
Other comprehensive income:
Foreign exchange translation adjustment 8.3 12.3 14.2
------ ------ ------
Comprehensive loss $(13.7) $(41.2) $(56.6)
====== ====== ======
Basic and diluted net loss per share $(0.53) $(1.49) $(2.03)
====== ====== ======
Weighted average common shares 41.7 36.0 34.9
====== ====== ======
See notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004 AND 2003, AND
FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002
(In millions)
Accumulated
Common Stock Additional Other Total
------------ Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income (Loss) Equity
------------------- ---------- ----------- ------------- -------------
Balance, February 23, 2002 34.4 $0.3 $405.3 $(258.7) $(25.8) $121.1
Sale of stock under
employee stock purchase plan 0.3 -- 1.8 -- -- 1.8
Exercise of stock options 0.2 -- 1.3 -- -- 1.3
Employee benefit plan
matching contribution 0.3 -- 1.7 -- -- 1.7
Net loss -- -- -- (70.8) -- (70.8)
Foreign currency translation
adjustment -- -- -- -- 14.2 14.2
---- ---- ------ ------- ------ ------
Balance, December 31, 2002 35.2 0.3 410.1 (329.5) (11.6) 69.3
Sale of stock under
employee stock purchase plan 0.7 0.1 1.3 -- -- 1.4
Exercise of stock options 0.1 -- 0.2 -- -- 0.2
Employee benefit plan
matching contribution 0.7 -- 2.2 -- -- 2.2
Net loss -- -- -- (53.5) -- (53.5)
Foreign currency translation
adjustment -- -- -- -- 12.3 12.3
---- ---- ------ ------- ------ ------
Balance, December 31, 2003 36.7 0.4 413.8 (383.0) 0.7 31.9
Sale of stock under
employee stock purchase plan 0.6 -- 2.9 -- -- 2.9
Exercise of stock options 0.6 -- 2.9 -- -- 2.9
Employee benefit plan
matching contribution 0.3 -- 2.3 -- -- 2.3
Sale of common stock
under public offering 18.4 0.2 156.3 -- -- 156.5
Net loss -- -- -- (22.0) -- (22.0)
Foreign currency translation
adjustment -- -- -- -- 8.3 8.3
---- ---- ------ ------- ------ ------
Balance, December 31, 2004 56.6 $0.6 $578.2 $(405.0) $ 9.0 $182.8
==== ==== ====== ======= ====== ======
See notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004 AND 2003, AND
FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002
(In millions)
Fiscal Fiscal Ten-Month
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(22.0) $ (53.5) $ (70.8)
Adjustments to reconcile net loss to
net cash flows provided by (used in) operating activities: 8.8 1.2 --
Loss on debt extinguishment
Depreciation and amortization 28.4 28.3 24.7
Provision for doubtful accounts 1.0 1.1 0.8
Loss on disposal of property and equipment -- 1.6 0.5
Impairment of inventories -- 8.4 7.0
Non-cash employee benefit plan contributions 2.3 2.2 1.8
Legal settlement -- -- 29.5
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable (7.0) (3.5) 22.2
Inventories (25.6) (9.5) (8.5)
Other assets 2.5 13.6 (4.8)
Payables, accruals and other liabilities 11.9 (15.4) (15.9)
------ ------- -------
Net cash flows provided by (used in) operating activities 0.3 (25.5) (13.5)
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired (12.5) (2.7) (6.5)
Capital expenditures (14.5) (11.2) (17.4)
Proceeds from sales of property and equipment 0.5 4.2 33.4
Other, net (0.3) (0.9) (2.6)
------ ------- -------
Net cash flows (used in) provided by investing activities (26.8) (10.6) 6.9
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of bank credit facility -- (144.0) (1.0)
Proceeds from issuance of common stock, net of expenses 162.3 1.4 3.0
Payment of debt origination costs and prepayment costs (6.3) (6.1) --
Principal payments on long-term debt (202.0) (2.3) (3.3)
Proceeds from long-term debt -- 175.0 2.0
------ ------- -------
Net cash flows (used in) provided by financing activities (46.0) 24.0 0.7
------ -------- -------
Effect of exchange rate changes on cash and cash equivalents 1.2 2.8 3.3
------ -------- -------
Net decrease in cash and cash equivalents (71.3) (9.3) (2.6)
Cash and cash equivalents, beginning of period 147.6 156.9 159.5
------ ------- -------
Cash and cash equivalents, end of period $ 76.3 $ 147.6 $ 156.9
====== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest, net $ 76.9 $ 66.4 $ 68.1
Income taxes, net 3.2 3.0 2.4
See notes to consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004 AND 2003, AND
FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002
(In millions, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation - BE Aerospace, Inc. and its wholly
owned subsidiaries (the "Company" or "B/E") designs, manufactures, sells and
services commercial aircraft and business jet cabin interior products consisting
of a broad range of seating products, interior systems, including structures as
well as all food and beverage storage and preparation equipment and distributes
aerospace fasteners. The Company's principal customers are the operators of
commercial and business jet aircraft and aircraft manufacturers. As a result,
the Company's business is directly dependent upon the conditions in the
commercial airline, business jet and aircraft manufacturing industries. The
accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America.
In October 2002, the Company changed its year-end from the last Saturday in
February to December 31, effective with the transition period beginning on
February 24, 2002 and ending on December 31, 2002. References to the "transition
period" in these consolidated financial statements are to the transition period
beginning February 24, 2002 and ending on December 31, 2002.
Consolidation - The accompanying consolidated financial statements include
the accounts of BE Aerospace, Inc. and its wholly owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
Financial Statement Preparation - The preparation of the consolidated
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 of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Certain
reclassifications have been made to the prior years' financial statements to
conform to the December 31, 2004 presentation.
Revenue Recognition - Sales of parts, assembled products and equipment are
recorded on the date of shipment and passage of title or, if required, upon
acceptance by the customer. Service revenues are recorded when services are
performed. Revenues and costs under certain long-term contracts are recognized
using contract accounting under the percentage-of-completion method. The
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 of contract losses is recorded when
such facts are determinable. Revenues recognized under contract accounting
during fiscal 2004, fiscal 2003 and the 2002 transition period were not
significant to the Company's financial statements. The Company sells its
products primarily to airlines worldwide, including occasional sales
collateralized by letters of credit. The Company performs ongoing credit
evaluations of its customers and maintains reserves for estimated credit losses.
Income Taxes - The Company provides deferred income taxes for temporary
differences between amounts of assets and liabilities recognized for financial
reporting purposes and such amounts recognized for income tax purposes. Deferred
income taxes are computed using enacted tax rates that are expected to be in
effect when the temporary differences reverse. A valuation allowance related to
a deferred tax asset is recorded when it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
Cash Equivalents - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Accounts Receivable - The Company performs ongoing credit evaluations of its
customers and adjusts credit limits based upon payment history and the
customer's current creditworthiness, as determined by review of their current
credit information. The Company continuously monitors collections and payments
from its customers and maintains a provision for estimated credit losses based
upon historical experience and any specific customer collection issues that have
been identified. Credit losses have historically been within management's
expectations and the provisions established.
F-7
Inventories - The Company values inventory at the lower of cost or market.
The Company regularly reviews inventory quantities on hand and records a
provision for excess and obsolete inventory based primarily on an estimated
forecast of product demand and production requirements. As demonstrated during
the calendar years ended December 31, 2004 and December 31, 2003 and during the
transition period ended December 31, 2002, demand for the Company's products can
fluctuate significantly.
Debt Issuance Costs - Costs incurred to issue debt are deferred and
amortized as interest expense over the term of the related debt using the
straight-line method, which approximates the effective interest method.
Goodwill and Identified Intangible Assets - Under Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
acquired intangible assets must be separately identified. Goodwill and other
intangible assets with indefinite lives are not amortized, but are reviewed at
least annually for impairment. Acquired intangible assets with definite lives
are amortized over their individual useful lives. In addition to goodwill,
intangible assets with indefinite lives consist of the M & M trademark. Patents
and other intangible assets are amortized using the straight-line method over
periods ranging from three to thirty years (see Note 6). On at least an annual
basis, management assesses whether there has been any impairment in the value of
goodwill by comparing the fair value to the net carrying value of reporting
units. If the carrying value exceeds its estimated fair value, an impairment
loss would be recognized if the implied fair value of goodwill was less than its
carrying value. In this event, the asset is written down accordingly. In
accordance with SFAS No. 142, the Company completed step one of the impairment
tests and fair value analysis for goodwill and other intangible assets,
respectively, and there were no impairments or impairment indicators present and
no loss was recorded during the calendar years ended December 31, 2004 and
December 31, 2003 and the ten-month transition period ended December 31, 2002.
Long-Lived Assets - The Company assesses potential impairments to its
long-lived assets when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recovered. An
impairment loss is recognized when the undiscounted cash flows expected to be
generated by an asset (or group of assets) is less than its carrying amount. Any
required impairment loss is measured as the amount by which the asset's carrying
value exceeds its fair value and is recorded as a reduction in the carrying
value of the related asset and a charge to operating results.
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:
F-8
Fiscal Fiscal Transition
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2004 2003 2002
---------------------- ---------------------- ----------------------
Balance at beginning of period $11.9 $ 8.9 $11.3
Acquisitions 1.0 -- --
Charges to costs and expenses 6.5 6.7 2.5
Costs incurred (6.2) (3.7) (4.9)
----- ----- -----
Balance at end of period $13.2 $11.9 $ 8.9
===== ===== =====
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 purchase plans.
Accordingly, no compensation cost has been recognized for its stock option plans
and stock purchase plan. Had compensation cost for the Company's stock option
plans and stock purchase plan been determined consistent with SFAS No. 123, the
Company's net loss and net loss per share for the fiscal year ended December 31,
2004, for the fiscal year ended December 31, 2003 and for the transition period
ended December 31, 2002 would have changed to the pro forma amounts indicated in
the following table:
Fiscal Fiscal Transition
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2004 2003 2002
------------------- ------------------- -------------------
As reported
Net loss $(22.0) $(53.5) $(70.8)
Deduct: Expense per SFAS No. 123,
fair value method, net of
related tax effects 7.4 3.3 5.8
------------------- ------------------- -------------------
Pro forma $(29.4) $(56.8) $(76.6)
------------------- ------------------- -------------------
Basic and diluted net loss per share:
As reported $(0.53) $(1.49) $(2.03)
Pro forma $(0.70) $(1.58) $(2.19)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for options granted during the fiscal year ended December 31,
2004, the fiscal year ended December 31, 2003 and for the transition period
ended December 31, 2002:
Fiscal Fiscal Transition
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2004 2003 2002
------------------- ------------------- -------------------
Weighted average valuation assumptions:
Risk-free interest rate 2.8% 3.0% 3.7%
Dividend yield 0% 0% 0%
Volatility 84% 91% 96%
Expected life (years) 3.3 3.5 3.5
Research and Development - Research and development expenditures are
expensed as incurred.
Foreign Currency Translation - The assets and liabilities of subsidiaries
located outside the United States are translated into U.S. dollars at the rates
of exchange in effect at the balance sheet dates. Revenue and expense items are
translated at the average exchange rates prevailing during the period. Gains and
losses resulting from foreign currency transactions are recognized currently in
income, and those resulting from translation of financial statements are
accumulated as a separate component of stockholders' equity. The Company's
European subsidiaries utilize the British pound or the euro as their local
functional currency.
F-9
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised 2004) "Share-Based Payment" ("SFAS 123R"). SFAS 123R is
applicable for all interim and fiscal periods beginning after June 15, 2005.
SFAS 123R sets accounting requirements for share-based compensation to
employees, requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation
issued to employees and disallows the use of the intrinsic value method of
accounting for stock compensation. The Company is currently evaluating the
impact that this statement will have on its results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs"
("SFAS 151"), which requires abnormal amounts of inventory costs related to idle
facility, freight handling and wasted material expenses to be recognized as
current period charges. Additionally, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The standard is effective for fiscal years
beginning after June 15, 2005. The Company believes the adoption of SFAS 151
will not have a material impact on its consolidated 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 the Company's revenue
recognition policies, nor its financial position or results of operations.
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. Since the Company
does not have any variable interest entities, the adoption of FIN No. 46 and
FIN No. 46(R) did not have an impact on the Company's financial statements.
2. DISPOSITION
In-Flight Entertainment Business
In February 1999, the Company completed the sale of a 51% interest in its
In-Flight Entertainment ("IFE") business to Sextant Avionique, Inc. ("Sextant"),
a wholly owned subsidiary of Sextant Avionique, S.A. (the "IFE Sale") for
approximately $62.0 in cash. In October 1999, the Company completed the sale of
its remaining 49% equity interest in IFE to Sextant. Terms of the agreement
provided for the Company to receive two payments totaling $31.4, and a third
payment based on actual sales and bookings as defined in the agreement (the "IFE
obligations"). Sextant had not made any of the payments related to the IFE
obligations in accordance with the terms of the purchase and sale agreement. The
Company initiated arbitration proceedings to compel payment. Sextant
counterclaimed against the Company, claiming various breaches of the IFE Sale
agreements. In February 2003, an arbitration panel resolved the dispute by
awarding BE Aerospace, Inc. a net amount of $7.8. In connection with this
decision, the Company recorded a charge of $29.5 in the accompanying
consolidated statement of operations for the transition period ended
December 31, 2002. This charge represented the difference between the
balance of the IFE obligations receivable and the net amount awarded to the
Company as of December 31, 2002. During 2003, the Company received $9.0 in
connection with the final matters related to this dispute, which was recorded as
a reduction of selling, general and administrative expenses.
F-10
3. FACILITY CONSOLIDATIONS AND OTHER SPECIAL CHARGES
The September 11, 2001 terrorist attacks have severely impacted conditions
in the airline industry. Sharply lower demand from the airline customer base
affected the Company's financial results. The lower demand reflects the current
downturn in the airline industry, which is the most severe ever experienced.
High airline operating costs, weak air travel and low ticket prices have damaged
many carriers' financial condition. Prior to the September 11, 2001 terrorist
attacks, airline profits were already being adversely affected by increases in
pilot and other airline wages, higher fuel prices and the softening of the
global economy. Air travel dropped significantly following the 2001 terrorist
attacks, further weakening many airlines' financial condition.
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused the Company to implement a facility
consolidation and integration plan designed to realign its capacity and cost
structure with changed conditions in the airline industry. In November 2001, the
Company began implementing a facility consolidation plan that consisted of
closing five principal facilities and reducing its workforce by about 1,000
employees. As a result, during fiscal 2002, the Company recorded a charge of
$98.9 which included cash expenses of approximately $15.6 and non-cash charges
totaling approximately $62.9 associated with the write-down of fixed assets and
other assets of $27.3, and inventory of $35.6 and $20.4 associated with the
impairment of related intangible assets. The $15.6 of cash charges related to
involuntary severance and benefit programs for approximately 1,000 employees,
lease termination costs and preparing facilities for disposal and sale. In
addition, the Company incurred approximately $5.7 of consolidation costs
associated with the facilities and personnel consolidation program, which were
expensed as incurred. These costs and charges, which aggregate $104.6, have been
included in cost of sales for the fiscal year ended February 23, 2002.
Industry conditions continued to worsen during the fall of 2002 as the
airlines deferred retrofit programs and continued to lower their purchases of
spare parts. In addition, the business jet manufacturers announced further
production cuts and additional plant shutdowns. In response to these worsening
conditions, the Company revised its consolidation plan to encompass a total
personnel reduction of 1,500 employees.
During the transition period ended December 31, 2002, the Company incurred a
total of approximately $39.5 of charges and consolidation costs associated with
the facilities and personnel consolidation and integration program, which have
been expensed as incurred as a component of cost of sales. The charges and
consolidation costs included $6.0 of costs associated with additional personnel
reductions and a $7.0 charge related to inventories that became obsolete due to
the increase in parked aircraft that are not expected to return to active
service. Cash requirements related to facility consolidation activities were
funded from cash in banks.
The consolidation program was complete as of December 31, 2003. Through
December 31, 2003, the Company closed five facilities and paid approximately
$10.4 in severance related to the 1,500 headcount reductions. Through December
31, 2003, the Company incurred approximately $174.9 of costs, including
approximately $73.7 of cash costs. Cash requirements related to facility
consolidation activities were funded from cash in banks and the Company's credit
facilities.
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average cost method. Finished goods and work-in-process
inventories include material, labor and manufacturing overhead costs.
Inventories consist of the following:
December 31, 2004 December 31, 2003
----------------- -----------------
Purchased materials and component parts $ 51.7 $ 52.9
Work-in-process 16.2 18.5
Finished goods (primarily aftermarket fasteners) 129.9 97.3
------ ------
$197.8 $168.7
====== ======
F-11
5. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated and amortized
generally on the straight-line method over their estimated useful lives of two
to thirty years (or the lesser of the term of the lease as to leasehold
improvements, as appropriate). Property and equipment consist of the following:
Useful Life December 31, December 31,
(Years) 2004 2003
--------------- -------------------- --------------------
Land, buildings and improvements 10 - 50 $ 37.4 $ 33.1
Machinery 3 - 13 59.4 57.1
Tooling 3 - 10 19.8 18.5
Computer equipment and software 3 - 15 95.6 90.6
Furniture and equipment 2 - 10 9.9 10.1
------- -------
222.1 209.4
Less accumulated depreciation and amortization (121.9) (105.6)
------- -------
$ 100.2 $ 103.8
======= =======
6. GOODWILL AND INTANGIBLE ASSETS
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
Company's goodwill and indefinite life intangible assets are not amortized, but
are subject to an annual impairment test. The following sets forth the
intangible assets by major asset class, all of which were acquired during
business acquisition transactions:
December 31, 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 $ 94.1 $20.6 $ 73.5 $ 93.8 $17.5 $ 76.3
Trademarks and patents 7-30 27.7 12.3 15.4 26.6 10.5 16.1
Trademarks (nonamortizing) -- 20.6 -- 20.6 20.6 -- 20.6
Technical qualifications, plans
and drawings 3-30 31.4 15.7 15.7 31.0 14.3 16.7
Replacement parts annuity
and product approvals 3-30 42.2 23.9 18.3 41.0 21.2 19.8
Covenant not to compete and
other identified intangibles 3-10 20.9 13.0 7.9 20.3 11.3 9.0
------ ----- ------ ------ ----- ------
$236.9 $85.5 $151.4 $233.3 $74.8 $158.5
====== ===== ====== ====== ===== ======
Aggregate amortization expense on intangible assets was approximately $9.3,
$9.1 and $7.5 for the fiscal years ended December 31, 2004 and 2003 and for the
ten-month transition period ended December 31, 2002, respectively. Amortization
expense associated with identified intangible assets is expected to be
approximately $9.0 in each of the next five years.
Changes to the original cost basis of goodwill during the calendar year
ended December 31, 2004 were due to two insignificant acquisitions and foreign
currency fluctuations. The changes in the carrying amount of goodwill for the
fiscal years ended December 31, 2004 and 2003 are as follows:
Commercial Business
Aircraft Distribution Jet Total
-------------------- -------------------- -------------------- --------------------
Balance as of December 31, 2002 $169.2 $ 88.2 $87.3 $344.7
Reclassification(1) (17.9) 17.9 -- --
Goodwill acquired 2.7 -- -- 2.7
Goodwill adjustment on acquisition -- -- 0.8 0.8
Effect of foreign currency translation 4.5 -- -- 4.5
------ ------ ----- ------
Balance as of December 31, 2003 158.5 106.1 88.1 352.7
Goodwill acquired 10.6 1.9 -- 12.5
Effect of foreign currency translation 5.0 0.2 -- 5.2
------ ------ ----- ------
Balance as of December 31, 2004 $174.1 $108.2 $88.1 $370.4
====== ====== ===== ======
(1) During fiscal 2003 the Company reclassified one location from
Commercial Aircraft to Distribution.
F-12
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
December 31, December 31,
2004 2003
---------------------- ---------------------
Accounts payable $ 75.0 $ 59.0
Accrued salaries, vacation and related benefits 16.0 16.0
Accrued interest 14.1 17.0
Accrued product warranties 13.2 11.9
Accrued acquisition and restructuring expenses -- 2.9
Other accrued liabilities 34.3 24.2
------ ------
$152.6 $131.0
====== ======
8. LONG-TERM DEBT
Long-term debt consists of the following:
December 31, December 31,
2004 2003
---------------------- ----------------------
8 1/2% Senior Notes $175.0 $175.0
8% Senior Subordinated Notes 249.8 249.7
8 7/8% Senior Subordinated Notes 250.0 250.0
9 1/2% Senior Subordinated Notes -- 200.0
Other long-term debt 5.3 7.3
------ ------
680.1 882.0
Less current portion of long-term debt (1.5) (1.9)
------ ------
$678.6 $880.1
====== ======
8 1/2% Senior Notes
The 8 1/2% Senior Notes (the "8 1/2% Notes") are senior unsecured
obligations of the Company, senior to all subordinated indebtedness, but
subordinate to any secured indebtedness of the Company and mature on October 1,
2010. Interest on the 8 1/2% Notes is payable semiannually in arrears on April 1
and October 1 of each year. The 8 1/2% Notes are redeemable at the option of the
Company, in whole or in part, on or after October 1, 2007, at predetermined
redemption prices together with accrued and unpaid interest through the date of
redemption. Upon a change of control (as defined), each holder of the 8 1/2%
Notes may require the Company to repurchase such holder's 8 1/2% Notes at 101%
of the principal amount thereof, plus accrued interest to the date of such
purchase.
8% Senior Subordinated Notes
The 8% Senior Subordinated Notes (the "8% Notes") are unsecured senior
subordinated obligations of the Company, subordinated to any senior indebtedness
of the Company and mature on March 1, 2008. Interest on the 8% Notes is payable
semiannually in arrears on March 1 and September 1 of each year. The 8% Notes
are redeemable at the option of the Company, in whole or in part, at par
together with accrued and unpaid interest through the date of redemption. Upon a
change of control (as defined), each holder of the 8% Notes may require the
Company to repurchase such holder's 8% Notes at 101% of the principal amount
thereof, plus accrued interest to the date of such purchase.
8 7/8% Senior Subordinated Notes
The 8 7/8% Notes are unsecured senior subordinated obligations of the
Company, subordinated to any senior indebtedness and mature on May 1, 2011.
Interest on the 8 7/8% Notes is payable semiannually in arrears on May 1 and
November 1 of each year. The 8 7/8% Notes are redeemable, at the option of the
Company, in whole or in part, at any time on or after May 1, 2006, at
predetermined redemption prices together with accrued and unpaid interest
through the date of redemption. Upon a change in control (as defined), each
holder of the 8 7/8% Notes may require the Company to repurchase such holder's
8 7/8% Notes at 101% of the principal amount thereof, plus accrued interest to
the date of such purchase.
F-13
9 1/2% Senior Subordinated Notes
The 9 1/2% Senior Subordinated Notes (the "9 1/2% Notes") were senior
unsecured obligations of the Company. In November 2004, the Company redeemed the
9 1/2% Notes at a redemption price equal to 103.167% of the principal amount,
together with the accrued interest to the redemption date, with the net proceeds
of a common stock offering and cash on hand. The Company incurred loss on debt
extinguishment of $8.8 related to unamortized debt issue costs, redemption
premiums and fees and expenses related to the redemption of the 9 1/2% Notes.
The 8% Notes, 8 1/2% Notes and 8 7/8% Notes contain certain restrictive
covenants, including limitations on future indebtedness, restricted payments,
transactions with affiliates, liens, dividends, mergers and transfers of assets,
all of which were met by the Company as of December 31, 2004.
Bank Credit Facilities
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
December 31, 2004.
At December 31, 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 December 31, 2004, was approximately 6.4%). The
amount available for borrowing under the Amended Bank Credit Facility was $38.4
as of December 31, 2004.
B/E Aerospace (UK) Limited, one of the Company's subsidiaries, has a
revolving line of credit agreement aggregating approximately $7.7 that renews
annually. This credit agreement is collateralized by accounts receivable and
inventory of B/E Aerospace (UK) Limited. There were no borrowings outstanding
under the credit agreement as of December 31, 2004.
Royal Inventum B.V., one of the Company's subsidiaries, has a revolving
credit agreement aggregating approximately $0.7 that renews annually. This
credit agreement is collateralized by accounts receivable and inventory of the
Netherlands entity. There were no borrowings outstanding under the credit
agreement as of December 31, 2004.
Maturities of long-term debt are as follows:
Year Ending December 31,
2005 $ 1.5
2006 3.0
2007 0.5
2008 250.1
2009 --
Thereafter 425.0
------
Total $680.1
======
Interest expense amounted to $77.5 for the calendar year ended December
31, 2004, $71.6 for the calendar year ended December 31, 2003 and $60.7 for the
transition period ended December 31, 2002, respectively.
F-14
9. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS
Sale-Leaseback Transaction - During 2002, the Company entered into two
sale-leaseback transactions involving four of its facilities. Under the terms of
the sale-leaseback agreements, the facilities were sold for $27.0, net of
transaction costs, and have been leased back for initial periods ranging from 15
to 20 years. The leasebacks have been accounted for as operating leases. A gain
of $4.8 resulting from the sales has been deferred and is being amortized on a
straight-line basis to rent expense over the initial term of the leases.
Lease Commitments - The Company finances its use of certain facilities and
equipment under committed lease arrangements provided by various institutions.
Since the terms of these arrangements meet the accounting definition of
operating lease arrangements, the aggregate sum of future minimum lease payments
is not reflected on the consolidated balance sheet. At December 31, 2004, future
minimum lease payments under these arrangements approximated $90.9, of which
approximately $76.9 is related to facility leases.
Rent expense for the calendar years ended December 31, 2004 and December 31,
2003 and for the transition period ended December 31, 2002 was approximately
$15.4, $14.0 and $13.5, respectively. Future payments under operating leases
with terms currently greater than one year are as follows:
Year Ending December 31,
2005 $13.4
2006 12.3
2007 12.4
2008 10.7
2009 7.7
Thereafter 34.4
-----
$90.9
=====
Litigation - The Company is a defendant in various legal actions arising in
the normal course of business, the outcomes of which, in the opinion of
management, neither individually nor in the aggregate are likely to result in a
material adverse effect on the Company's financial statements.
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. Substantially all of
these indemnities, commitments and guarantees provide for limitations on the
maximum potential future payments the Company could be obligated to make. The
Company has not recorded any significant liability for these indemnities,
commitments and guarantees in the accompanying consolidated balance sheets.
Employment Agreements - The Company has employment and compensation
agreements with three key officers of the Company. Agreements for one of the
officers provides for the officer to earn a minimum of $854 thousand per year
through a three-year period ending from any date after which it is measured,
adjusted annually for changes in the consumer price index (as defined) or as
determined by the Company's Board of Directors, as well as a deferred
compensation benefit equal to the product of the years worked times 150% of the
highest annual salary paid over the period. Such deferred compensation is
payable in a lump sum, less any prior distributions.
A second agreement provides for the officer to receive annual minimum
compensation of $792 thousand per year through a three-year period ending from
any date after which it is measured, adjusted annually for changes in the
consumer price index (as defined) or as determined by the Company's Board of
Directors, as well as a deferred compensation benefit equal to the product of
the years worked times the highest annual salary paid over the period. In all
other respects, this officer's employment agreement contains similar provisions
to those described above in the first agreement.
F-15
A third agreement provides for an officer to receive annual minimum
compensation of $415 thousand per year through a three-year period ending from
any date after which it is measured, adjusted annually for changes in the
consumer price index (as defined) or as determined by the Company's Board of
Directors, as well as a deferred compensation benefit equal to the product of
the number of years worked times one-half of this officer's average highest
three years' annual salary (as defined). Such deferred compensation is payable
in a lump sum, less any prior distributions.
Deferred compensation for these three officers has been accrued as provided
for under the above-mentioned employment agreements. Through December 31, 2004,
the Company fully funded these and other deferred compensation obligations, all
of which were maintained in grantor trusts on behalf of the individuals. In
addition, the Company has employment agreements with certain other key members
of management that provide for aggregate minimum annual base compensation of
$3.3 expiring on various dates through the year 2005. The Company's employment
agreements generally provide for certain protections in the event of a change of
control. These protections generally include the payment of severance and
related benefits under certain circumstances in the event of a change of
control, and for the Company to reimburse such officers for the amount of any
excise taxes associated with such benefits.
10. INCOME TAXES
The components of loss before incomes taxes were:
Fiscal Fiscal Transition
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2004 2003 2002
------------ ------------- ------------
Loss before income taxes
United States $ (9.3) $(16.4) $(36.1)
Non-United States (11.2) (35.1) (32.0)
------ ------ ------
Loss before income taxes $(20.5) $(51.5) $(68.1)
====== ====== ======
Income tax expense (benefit) consists of the following:
Fiscal Fiscal Transition
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Current:
Federal $ -- $(0.9) $ --
State 0.1 -- --
Foreign 1.4 2.9 2.7
---- ----- ----
1.5 2.0 2.7
---- ----- ----
Deferred:
Federal -- -- --
State -- -- --
Foreign -- -- --
---- ----- ----
-- -- --
---- ----- ----
$1.5 $ 2.0 $2.7
==== ===== ====
F-16
The difference between income tax expense and the amount computed by
applying the statutory U.S. federal income tax rate (35%) to the pretax loss
consists of the following:
Fiscal Fiscal Transition
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2004 2003 2002
----------- ------------ ------------
Statutory federal income tax benefit $(7.2) $(18.0) $(23.8)
U.S. State income taxes 0.1 -- --
Foreign tax rate differential 5.4 15.2 13.9
Non-deductible charges 0.5 1.5 0.7
Change in federal valuation allowance 2.7 3.3 11.9
----- ------ ------
$ 1.5 $ 2.0 $ 2.7
===== ====== ======
The tax effects of temporary differences and carryforwards that give rise to
deferred income tax assets and liabilities consist of the following:
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Deferred tax assets:
Inventory reserves $ 8.3 $ 10.1 $ 9.3
Warranty accruals 3.7 3.4 2.9
Accrued liabilities 13.4 10.4 12.9
Net operating loss carryforward 137.7 125.0 99.9
Federal capital loss carryforward 13.0 13.0 13.0
Federal research credit carryforward 3.7 3.7 7.1
Other 2.4 2.1 2.9
------ ------- -------
182.2 167.7 148.0
------ ------- -------
Deferred tax liabilities:
Acquisition accruals (9.4) (8.4) (10.2)
Intangible assets (31.1) (5.0) 4.0
Depreciation (7.6) (12.6) (11.9)
Software development costs (6.3) (5.4) (5.5)
------ ------- -------
(54.4) (31.4) (23.6)
------ ------- -------
Net deferred tax asset before valuation allowance 127.8 136.3 124.4
Valuation allowance (129.3) (136.3) (124.4)
------ ------- -------
Net deferred tax liability $ (1.5) $ -- $ --
====== ======= =======
The Company established a valuation allowance of $129.3 as of December 31,
2004 related to its deferred tax assets because of uncertainties that preclude
it from determining that it is more likely than not that the Company will be
able to generate sufficient taxable income to realize such assets during the
federal operating loss carryforward period.
As of December 31, 2004, the Company had federal, state and foreign net
operating loss carryforwards of $278.3, $195.6 and $88.6, respectively. The
federal and state net operating loss carryforwards begin to expire in 2012 and
2005, respectively. Approximately $45.9 of the Company's net operating loss
carryforward is related to the exercise of stock options, and the tax effect of
such net operating losses will be credited to additional paid-in capital rather
than income tax expense, if utilized. In addition, the Company has a federal
capital loss carryover of approximately $29.5 which is scheduled to expire in
2008.
As of December 31, 2004, the Company had a federal research tax credit
carryforward of $3.7. This credit begins to expire in 2012.
The Company has not provided for any residual federal income taxes on the
approximately $49.0 of earnings from its Netherlands subsidiaries. The Company
is currently evaluating its dividend policy in light of the American Jobs
Creation Act. Due to the Company's net operating loss position, such residual
U.S. income taxes, if provided for, would not be material.
F-17
The Company's United Kingdom tax returns for the years ended February 26,
2000 and February 24, 2001 are currently under examination by the Inland
Revenue. Management believes that the resolution of this examination will not
have a material adverse effect on either the Company's results of operations or
financial position.
11. EMPLOYEE RETIREMENT PLANS
The Company sponsors and contributes to a qualified, defined contribution
Savings and Investment Plan covering substantially all U.S. employees. The
Company also sponsors and contributes to nonqualified deferred compensation
programs for certain other employees. The Company has invested in
corporate-owned life insurance policies to assist in funding this program. The
cash surrender values of these policies and other investments associated with
these plans are maintained in an irrevocable rabbi trust and are recorded as
assets of the Company. In addition, the Company and its subsidiaries participate
in government-sponsored programs in certain European countries. In general, the
Company's policy is to fund these plans based on legal requirements, tax
considerations, local practices and investment opportunities.
The BE Aerospace Savings and Investment Plan was established pursuant to
Section 401(k) of the Internal Revenue Code. Under the terms of the plan,
covered employees may contribute up to 15% of their pay, limited to $14.0
thousand per year. The Company match is equal to 50% of employee contributions,
subject to a maximum of 8% of an employee's base pay and is generally funded in
Company stock. Total expense for the plan was $3.1, $2.6 and $2.1 for the
calendar years ended December 31, 2004 and 2003 and for the transition period
ended December 31, 2002, respectively. Participants vest 100% in the Company
match after three years of service.
12. STOCKHOLDERS' EQUITY
Loss Per Share. Basic loss per common share is determined by dividing loss
applicable to common shareholders by the weighted average number of shares of
common stock outstanding. Diluted loss per share is determined by dividing loss
applicable to common shareholders by the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding (all related to
outstanding stock options discussed below).
The following table sets forth the computation of basic and diluted net loss
per share for the calendar year ended December 31, 2004, for the calendar year
ended December 31, 2003 and for the transition period ended December 31, 2002:
Fiscal Fiscal Transition
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2004 2003 2002
---------------------- ---------------------- ----------------------
Numerator - Net loss $(22.0) $(53.5) $(70.8)
======= ====== ======
Denominator:
Denominator for basic loss per share -
Weighted average shares 41.7 36.0 34.9
Effect of dilutive securities -
Employee stock options -- -- --
------ ------ ------
Denominator for diluted loss per share -
Adjusted weighted average shares 41.7 36.0 34.9
====== ====== ======
Basic net loss per share $(0.53) $(1.49) $(2.03)
====== ====== ======
Diluted net loss per share $(0.53) $(1.49) $(2.03)
====== ====== ======
The Company excluded potentially dilutive securities from the calculation of
loss per share of approximately 1.6 million, 0.4 million and 0.8 million for the
fiscal year ended December 31, 2004, for the fiscal year ended December 31, 2003
and for the transition period ended December 31, 2002, respectively, because the
effect would have been antidilutive.
F-18
Stock Option Plans. The Company has various stock option plans, including
the Amended and Restated 1989 Stock Option Plan, the 1991 Directors Stock Option
Plan, the 1992 Share Option Scheme and the Amended and Restated 1996 Stock
Option Plan (collectively, the "Option Plans"), under which shares of the
Company's common stock may be granted to key employees and directors of the
Company. The Option Plans provide for granting key employees options to purchase
the Company's common stock. Options are granted at the discretion of the Stock
Option and Compensation Committee of the Board of Directors. Options granted
vest 25% on the date of grant and 25% per year thereafter.
The following tables set forth options granted, canceled, forfeited and
outstanding:
December 31, 2004
-----------------
Options Option Price Weighted Average
(in thousands) Per Share Price Per Share
-------------- ------------ ----------------
Outstanding, beginning of period 4,483 $3.25 - $30.25 $ 7.55
Options granted 3,639 5.59 - 11.52 7.66
Options exercised (582) 4.08 - 9.04 5.04
Options forfeited (469) 4.08 - 29.88 10.21
-----
Outstanding, end of period 7,071 3.25 - 30.25 7.67
======
Exercisable at end of period 3,910 $3.25 - $30.25 $ 7.99
======
December 31, 2003
-----------------
Options Option Price Weighted Average
(in thousands) Per Share Price Per Share
-------------- ------------ ----------------
Outstanding, beginning of period 7,994 $3.25 - $30.25 $12.50
Options granted 80 3.47 - 5.51 4.47
Options exercised (28) 4.08 - 4.43 4.21
Options forfeited (3,563) 4.08 - 30.25 18.93
------
Outstanding, end of period 4,483 3.25 - 30.25 7.55
======
Exercisable at end of period 3,289 $3.25 - $30.25 $8.64
======
December 31, 2002
-----------------
Options Option Price Weighted Average
(in thousands) Per Share Price Per Share
-------------- ------------ ----------------
Outstanding, beginning of period 7,059 $4.08 - $31.50 $14.41
Options granted 1,432 3.25 - 9.70 4.42
Options exercised (203) 4.08 - 12.00 6.31
Options forfeited (294) 4.08 - 31.50 17.15
-----
Outstanding, end of period 7,994 3.25 - 30.25 12.50
======
Exercisable at end of period 5,420 $3.25 - $30.25 $15.59
======
At December 31, 2004, 727,932 options were available for grant under the
Company's Option Plans.
Options Outstanding
at December 31, 2004
- -------------------------------------------------------------------------------
Weighted
Weighted Average Weighted
Range of Options Average Remaining Options Average
Exercise Price Outstanding Exercise Price Contractual Life Exercisable Exercise Price
-------------- -------------- -------------- ---------------- ------------- --------------
(in thousands) (years) (in thousands)
$ 3.25 - $4.43 2,158 $ 4.24 7.27 1,813 $ 4.22
5.18 - 6.59 2,229 6.00 9.08 499 6.01
6.75 - 10.42 1,937 9.48 7.83 1,017 8.87
10.70 - 30.25 747 17.87 5.33 581 19.88
The estimated fair value of options granted during the fiscal year ended
December 31, 2004, the fiscal year ended December 31, 2003 and during the
transition period ended December 31, 2002, was $3.86 per share, $3.17 per share
and $3.54 per share, respectively.
F-19
On June 23, 2003, pursuant to a plan approved by its shareholders, the
Company launched an option exchange offer pursuant to which employees and
non-employee directors of the Company and its subsidiaries were given the
opportunity to exchange certain of their stock options granted under the
Company's equity plans with an exercise price equal to, or in excess of, $12.00.
The offer was a three-for-one exchange whereby the Company granted one new
option to purchase one share of common stock for every three eligible options
tendered in the offer. The offer closed on July 22, 2003, at which time
2,837,596 options held by 106 employees were canceled. In accordance with the
terms of the offer, the Company granted an aggregate of 941,162 new options to
the participating employees on January 26, 2004. Each new option has an exercise
price of $6.59, which was the closing price of the Company's common stock on the
trading day immediately preceding the date of grant. The options were generally
granted under the same plan, and have substantially the same terms, as the
eligible options for which they were exchanged. All new options granted to
employees vest in four equal number installments with 25% vesting on the date of
grant and on each of the first, second and third anniversaries of the date of
grant. All new options granted to non-employee directors vest in four equal
annual installments on each of the first through fourth anniversaries of the
date of grant.
13. EMPLOYEE STOCK PURCHASE PLAN
The Company has established a qualified Employee Stock Purchase Plan, the
terms of which allow for qualified employees (as defined) to participate in the
purchase of designated shares of the Company's common stock at a price equal to
the lower of 85% of the closing price at the beginning or end of each
semi-annual stock purchase period. The Company issued approximately 576,000,
742,000 and 261,000 shares of common stock during calendar 2004, calendar 2003
and the transition period ended December 31, 2002, respectively, pursuant to
this plan at an average price per share of $4.94, $1.83 and $6.49, respectively.
14. 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, Distribution and Business Jet. The Company's Commercial
Aircraft segment consists of eight operating facilities while the Distribution
and Business Jet segments consist of one and two principal operating facilities,
respectively.
Each segment reports its results of operations and makes requests for
capital expenditures and acquisition funding to the Company's chief operational
decision-making group. This group is presently comprised of the Chairman, the
President and Chief Executive Officer, and the Senior Vice President of
Administration and Chief Financial Officer. Each operating segment has separate
management teams and infrastructures dedicated to providing a full range of
products and services to their commercial, business jet and
aircraft-manufacturing customers.
The following table presents net sales and other financial information by
business segment:
FISCAL YEAR ENDED DECEMBER 31, 2004
----------------------------------------------------------------------
Commercial Business
Aircraft Distribution Jet Consolidated
----------------- ------------------ ------------------ --------------
Net sales $514.1 $144.2 $ 75.2 $ 733.5
Operating earnings (loss) 39.8 25.9 (1.3) 64.4
Total assets 594.1 263.0 167.7 1,024.8
Goodwill 174.1 108.2 88.1 370.4
Capital expenditures 11.8 1.3 1.4 14.5
Depreciation and amortization 23.2 2.0 3.2 28.4
F-20
FISCAL YEAR ENDED DECEMBER 31, 2003
----------------------------------------------------------------------
Commercial Business
Aircraft Distribution Jet Consolidated
----------------- ------------------ ------------------ --------------
Net sales $455.3 $103.7 $ 65.4 $ 624.4
Operating earnings (loss) 11.8 18.0 (9.5) 20.3
Total assets 658.4 234.2 159.9 1,052.5
Goodwill 158.5 106.1 88.1 352.7
Capital expenditures 8.9 0.9 1.4 11.2
Depreciation and amortization 23.0 1.9 3.4 28.3
TRANSITION PERIOD ENDED DECEMBER 31, 2002
----------------------------------------------------------------------
Commercial Business
Aircraft Distribution Jet Consolidated
----------------- ------------------ ------------------ --------------
Net sales $354.5 $ 78.0 $ 71.1 $ 503.6
Operating earnings (loss) (32.9) 14.5 7.6 (10.8)
Total assets 700.9 195.7 170.5 1,067.1
Goodwill 169.2 88.2 87.3 344.7
Capital expenditures 12.0 0.5 4.9 17.4
Depreciation and amortization 19.9 1.2 3.6 24.7
Net sales for similar classes of products or services within these business
segments for the fiscal year ended December 31, 2004, for the fiscal year ended
December 31, 2003 and for the transition period ended December 31, 2002 are
presented below:
Fiscal Year Ended Fiscal Year Ended Ten-Month Period Ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------------- ------------------------ ----------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
--------- ------------- ----------- ------------ ------------- --------------
Commercial aircraft:
Seating $251.4 34.3% $217.9 34.9% $144.6 28.7%
Interior systems 149.0 20.3% 137.5 22.0% 116.0 23.0%
Engineering services and
engineered structures
and components 113.7 15.5% 99.9 16.0% 93.9 18.7%
--------- ------------- ----------- ------------ ------------- --------------
514.1 70.1% 455.3 72.9% 354.5 70.4%
Distribution 144.2 19.7% 103.7 16.6% 78.0 15.5%
Business jet 75.2 10.2% 65.4 10.5% 71.1 14.1%
--------- ------------- ----------- ------------ ------------- --------------
Net sales $733.5 100.0% $624.4 100.0% $503.6 100.0%
========= ============= =========== ============ ============= ==============
Geographic Origination
The Company operated principally in two geographic areas, the United States
and Europe (primarily the United Kingdom), during the fiscal years ended
December 31, 2004 and 2003 and the transition period ended December 31, 2002.
There were no significant transfers between geographic areas during these
periods. Identifiable assets are those assets of the Company that are identified
with the operations in each geographic area.
F-21
The following table presents net sales and operating earnings (loss) for the
fiscal year ended December 31, 2004, for the fiscal year ended December 31, 2003
and transition period ended December 31, 2002 and identifiable assets as of
December 31, 2004, December 31, 2003 and December 31, 2002 by geographic area:
Fiscal Fiscal Transition
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2004 2003 2002
------------------ ---------------- ----------------
Net sales:
United States operations $ 495.7 $ 408.0 $ 362.4
European operations 237.8 216.4 141.2
-------- -------- --------
Total: $ 733.5 $ 624.4 $ 503.6
======== ======== ========
Operating earnings (loss):
United States operations $ 73.1 $ 53.6 $ 13.9
European operations (8.7) (33.3) (24.7)
-------- -------- --------
Total: $ 64.4 $ 20.3 $ (10.8)
======== ======== ========
Identifiable assets:
United States operations $ 804.6 $ 839.9 $ 861.9
European operations 220.2 212.6 205.2
-------- -------- --------
Total: $1,024.8 $1,052.5 $1,067.1
======== ======== ========
Geographic Destination
Export sales from the United States to customers in foreign countries
amounted to approximately $179.3, $151.0 and $111.5 in the fiscal year ended
December 31, 2004, the fiscal year ended December 31, 2003 and the transition
period ended December 31, 2002, respectively.
Net sales by geographic segment (based on destination) were as follows:
Fiscal Year Ended Fiscal Year Ended Ten-Month Period Ended
December 31, 2004 December 31, 2003 December 31, 2002
---------------------------- --------------------------- -----------------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
----------- ---------------- ----------- --------------- -------------- --------------------
United States $376.5 51.3% $307.5 49.3% $269.8 53.6%
Europe 175.1 23.9% 168.4 27.0% 121.0 24.0%
Asia 143.3 19.5% 114.0 18.2% 79.0 15.7%
Rest of World 38.6 5.3% 34.5 5.5% 33.8 6.7%
----------- ---------------- ----------- --------------- -------------- --------------------
$733.5 100.0% $624.4 100.0% $503.6 100.0%
=========== ================ =========== =============== ============== ====================
Major customers (i.e., customers representing more than 10% of net sales)
change from year to year depending on the level of refurbishment activity and/or
the level of new aircraft purchases by such customers. There were no major
customers in the two-year period ended December 31, 2004 or the transition
period ended December 31, 2002.
15. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments at December 31, 2004 and December 31, 2003 is made in accordance
with the requirements of SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts have been determined by
the Company using available market information and appropriate valuation
methodologies; however, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
F-22
The carrying amounts of cash and cash equivalents, accounts
receivable-trade, and accounts payable are a reasonable estimate of their fair
values as interest is based upon floating market rates. The fair values of the
Company's Notes as of December 31, 2004 and 2003 are as follows:
December 31, December 31,
2004 2003
------------------ ----------------
8 1/2% Notes $192.5 $187.3
8% Notes 248.8 232.5
8 7/8% Notes 260.0 241.3
9 1/2% Notes -- 194.0
The fair value information presented herein is based on pertinent
information available to management at December 31, 2004 and December 31, 2003,
respectively. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these consolidated financial
statements since that date, and current estimates of fair value may differ
significantly from the amounts presented herein.
16. SELECTED QUARTERLY DATA (Unaudited)
Summarized quarterly financial data for the fiscal years ended December 31,
2004 and December 31, 2003 are as follows:
Fiscal Year Ended December 31, 2004
---------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------- ----------------- ----------------- ----------------
Net sales $175.1 $185.3 $183.5 $189.6
Gross profit 53.6 61.8 60.1 63.2
Net loss (7.6) (2.4) (2.7) (9.3)
Basic net loss per share (1) (0.21) (0.06) (0.07) (0.17)
Diluted net loss per share (1) (0.21) (0.06) (0.07) (0.17)
Fiscal Year Ended December 31, 2003
---------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------- ----------------- ----------------- ----------------
Net sales $154.7 $151.8 $154.5 $163.4
Gross profit 46.4 39.8 45.1 39.5
Net loss (10.8) (14.1) (9.1) (19.5)
Basic net loss per share (1) (0.31) (0.39) (0.25) (0.53)
Diluted net loss per share (1) (0.31) (0.39) (0.25) (0.53)
(1) Earnings per share is computed individually for each quarter presented:
therefore, the sum of the quarterly loss per share may not necessarily
equal the total for the year.
[Remainder of page intentionally left blank]
F-23
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004 AND 2003, AND
FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002
(In millions)
BALANCE BALANCE
AT BEGINNING WRITE-OFFS/ AT END
OF PERIOD EXPENSES OTHER DISPOSALS OF PERIOD
------------------- --------------- -------------- ---------------- --------------
DEDUCTED FROM ASSETS:
Allowance for doubtful accounts:
- -------------------------------
Fiscal year ended December 31, 2004 $ 2.2 $1.0 $ 0.2 $ 0.6 $ 2.8
Fiscal year ended December 31, 2003 3.9 1.1 (0.1) 2.7 2.2
Transition period ended December 31, 2002 4.9 0.8 (0.1) 1.7 3.9
Reserve for obsolete inventories:
- --------------------------------
Fiscal year ended December 31, 2004 $27.3 $3.8 $ 1.5 $ 5.7 $26.9
Fiscal year ended December 31, 2003 29.0 9.1 0.7 11.5 27.3
Transition period ended December 31, 2002 27.9 9.3(1) 4.7 12.9(1) 29.0
(1) Excludes $7.0 of inventory impairments associated with the Company's
facility consolidation and integration plan during the transition period
ended December 31, 2002.
F-24