UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarterly Period Ended September 30, 2005
Commission File No. 0-18348
BE AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1209796
(State of Incorporation) (I.R.S. Employer Identification No.)
1400 Corporate Center Way
Wellington, Florida 33414
(Address of principal executive offices)
(561) 791-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES[X] NO[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES[X] NO[ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The registrant has one class of common stock, $0.01 par value, of which
58,735,471 shares were outstanding as of November 3, 2005.
1
BE AEROSPACE, INC.
Form 10-Q for the Quarter Ended September 30, 2005
Table of Contents
Page
----
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets
as of September 30, 2005 and December 31, 2004....................3
b) Condensed Consolidated Statements of Earnings for the
Three and Nine Months ended September 30, 2005 and
September 30, 2004................................................4
c) Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2005 and September 30, 2004.......5
d) Notes to Condensed Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........23
Item 4. Controls and Procedures.............................................23
Part II Other Information
Item 1. Legal Proceedings...................................................24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........24
Item 3. Defaults Upon Senior Securities.....................................24
Item 4. Submission of Matters to a Vote of Security Holders.................24
Item 5. Other Information...................................................24
Item 6. Exhibits............................................................24
Signatures..........................................................25
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in millions, except share data)
September 30, December 31,
2005 2004
----------------------- ----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 87.3 $ 76.3
Accounts receivable - trade, less allowance for doubtful accounts
($3.2 at September 30, 2005 and $2.8 at December 31, 2004) 121.5 91.6
Inventories, net 222.1 197.8
Other current assets 12.8 13.4
---------- ----------
Total current assets 443.7 379.1
Property and equipment, net 94.7 100.2
Goodwill 361.6 370.4
Identifiable intangible assets, net 142.7 151.4
Other assets, net 23.7 23.7
---------- ----------
$ 1,066.4 $ 1,024.8
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 173.8 $ 152.6
Current maturities of long-term debt 1.5 1.5
---------- ----------
Total current liabilities 175.3 154.1
Long-term debt, net of current maturities 678.1 678.6
Other non-current liabilities 6.7 9.3
Commitments, contingencies and off-balance sheet arrangements (Note 4)
Stockholders' equity:
Preferred stock, $0.01 par value; 1.0 million shares
authorized; no shares outstanding -- --
Common stock, $0.01 par value; 100.0 million shares
authorized; 58.5 million (September 30, 2005) and
56.6 million (December 31, 2004) shares issued
and outstanding 0.6 0.6
Additional paid-in capital 590.4 578.2
Accumulated deficit (382.5) (405.0)
Accumulated other comprehensive income (loss) (2.2) 9.0
----------- ------------
Total stockholders' equity 206.3 182.8
---------- ----------
$ 1,066.4 $ 1,024.8
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Dollars in millions, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
----------------------------------------- ----------------------------------
Net sales $ 217.1 $ 183.5 $ 621.2 $ 543.9
Cost of sales 140.5 123.4 403.8 368.4
-------- -------- -------- --------
Gross profit 76.6 60.1 217.4 175.5
Operating expenses:
Selling, general and administrative 34.0 29.8 97.8 88.4
Research, development and engineering 17.2 12.8 50.2 39.0
-------- -------- -------- --------
Total operating expenses 51.2 42.6 148.0 127.4
-------- -------- -------- --------
Operating earnings 25.4 17.5 69.4 48.1
Interest expense, net 14.8 19.7 44.9 59.4
-------- -------- -------- --------
Earnings (loss) before income taxes 10.6 (2.2) 24.5 (11.3)
Income taxes 0.6 0.5 2.0 1.4
-------- -------- -------- --------
Net earnings (loss) $ 10.0 $ (2.7) $ 22.5 $ (12.7)
======== ======== ======== ========
Net earnings (loss) per common share:
Basic $ 0.17 $ (0.07) $ 0.39 $ (0.34)
========= ======== ========= ========
Diluted $ 0.16 $ (0.07) $ 0.37 $ (0.34)
========= ======== ========= ========
Weighted average common shares:
Basic 58.2 37.5 57.4 37.1
Diluted 61.2 37.5 60.3 37.1
See accompanying notes to condensed consolidated financial statements.
4
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
NINE MONTHS ENDED
----------------------------------------------
September 30, September 30,
2005 2004
-------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 22.5 $ (12.7)
Adjustments to reconcile net earnings (loss) to net cash flows
provided by (used in) operating activities:
Depreciation and amortization 21.7 21.0
Provision for doubtful accounts 0.5 0.7
Non-cash employee benefit plan contributions 2.1 1.7
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (35.3) (11.0)
Inventories (26.8) (20.2)
Other current assets and other assets (3.5) (0.6)
Payables, accruals and other liabilities 28.3 20.2
------- -------
Net cash flows provided by (used in) operating activities 9.5 (0.9)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10.9) (10.7)
Proceeds from sale of property and equipment 0.2 0.5
Acquisitions, net of cash acquired -- (12.5)
Other, net 4.0 0.8
------- -------
Net cash flows used in investing activities (6.7) (21.9)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued 10.0 3.1
Repayment of long-term debt (0.3) (1.7)
------- -------
Net cash flows provided by financing activities 9.7 1.4
------- -------
Effect of foreign exchange rate changes on cash and cash equivalents (1.5) --
------- -------
Net increase (decrease) in cash and cash equivalents 11.0 (21.4)
Cash and cash equivalents, beginning of period 76.3 147.6
------- -------
Cash and cash equivalents, end of period $ 87.3 $ 126.2
======= =======
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest, net $ 39.0 $ 48.2
Income taxes, net $ 1.9 $ 1.4
See accompanying notes to condensed consolidated financial statements.
5
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars In Millions, Except Per Share Data)
Note 1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and are unaudited
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. All adjustments which,
in the opinion of management, are considered necessary for a fair
presentation of the results of operations for the periods shown, are of a
normal recurring nature and have been reflected in the condensed
consolidated financial statements. The results of operations for the periods
presented are not necessarily indicative of the results expected for the
full fiscal year or for any future period. The information included in these
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and accompanying notes included
in the BE Aerospace, Inc. (the "Company" or "B/E") Annual Report on Form
10-K for the fiscal year ended December 31, 2004.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts and related disclosures. Actual results could differ from those
estimates. Certain reclassifications have been made for consistent
presentation.
Accounting for Stock-Based Compensation - The Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for its stock option and stock
purchase plans. Accordingly, no compensation cost has been recognized for
its stock option and stock purchase plans. If the compensation cost for the
Company's stock option and stock purchase plans had been determined
consistent with Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company's net earnings
(loss) and net earnings (loss) per share for the three and nine months ended
September 30, 2005 and 2004, would have been the pro forma amounts indicated
in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
-------------------------------- ----------------------------------
Net earnings (loss) as reported $ 10.0 $ (2.7) $ 22.5 $ (12.7)
Less: Expense per SFAS No. 123,
fair value method, net of
related tax effects 1.3 1.4 4.0 5.0
------- ------- ------- -------
Pro forma net earnings (loss) $ 8.7 $ (4.1) $ 18.5 $ (17.7)
------- ------- ------- -------
Basic net earnings (loss) per share:
As reported $ 0.17 $ (0.07) $ 0.39 $ (0.34)
======== ======= ======== =======
Pro forma $ 0.15 $ (0.11) $ 0.32 $ (0.48)
======== ======= ======== =======
Diluted net earnings (loss) per share:
As reported $ 0.16 $ (0.07) $ 0.37 $ (0.34)
======== ======= ======== =======
Pro forma $ 0.14 $ (0.11) $ 0.31 $ (0.48)
======== ======= ======== =======
6
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except Per Share Data)
Note 2. Goodwill and Intangible Assets
------------------------------
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the Company has completed the fair value analysis for goodwill and other
intangible assets as of December 31, 2004, and concluded that no impairment
existed. As of September 30, 2005, the Company believed that no indicators
of impairment existed. Aggregate amortization expense on identifiable
intangible assets was approximately $2.5 and $2.4 for the three months ended
September 30, 2005 and 2004, respectively, and $7.3 and $7.0 for the nine
months ended September 30, 2005 and 2004, respectively. Amortization expense
is expected to be approximately $10 in each of the next five fiscal years.
Note 3. Long-Term Debt
--------------
The Company's $50.0 credit facility with JPMorgan Chase Bank (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 a level equal to or greater than 1.15:1
for the trailing 12-month period. The Amended Bank Credit Facility, which
expires in February 2007, is collateralized by substantially all of the
Company's assets and contains customary affirmative covenants, negative
covenants and conditions precedent for borrowings, all of which were met as
of September 30, 2005.
At September 30, 2005, 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. As of September 30, 2005, the interest rate
on any outstanding borrowings was approximately 6.8%. The amount available
for borrowing under the Amended Bank Credit Facility was $38.4 as of
September 30, 2005.
Long-term debt consists principally of the $175 8-1/2% senior notes, $250
8-7/8% senior subordinated notes and $250 8% senior subordinated notes. The
$175 8-1/2% senior notes mature on October 1, 2010, the $250 8% notes mature
on March 1, 2008, and the $250 8-7/8% notes mature on May 1, 2011. The
senior subordinated notes are unsecured senior subordinated obligations and
are subordinated to all senior indebtedness. The senior notes are unsecured
obligations and are senior to all subordinated indebtedness, but subordinate
to the Amended Bank Credit Facility. Each of the 8-1/2% senior notes, 8%
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 were met as of September 30, 2005. A
breach of these covenants, or the covenants under the Company's current
Amended Bank Credit Facility or any future bank credit facility, that
continues beyond any grace period can constitute a default, which can limit
the ability to borrow and can give rise to a right of the lenders to
terminate the applicable facility and/or require immediate repayment of any
outstanding debt.
Note 4. Commitments, Contingencies and Off-Balance Sheet Arrangements
-------------------------------------------------------------
Lease Commitments -- The Company finances its use of certain facilities
and equipment under committed lease arrangements provided by various
institutions. Since the terms of these arrangements meet the accounting
definition of operating lease arrangements, the aggregate sum of future
minimum lease payments is not reflected on the consolidated balance sheet.
At September 30, 2005, future minimum lease payments under these
arrangements, the majority of which related to the long-term real estate
leases, totaled approximately $92.1.
7
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except Per Share Data)
Indemnities, Commitments and Guarantees -- During its normal course of
business, the Company has made certain indemnities, commitments and
guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include non-infringement of patents
and intellectual property indemnities to the Company's customers in
connection with the delivery, design, manufacture and sale of its products,
indemnities to various lessors in connection with facility leases for
certain claims arising from such facility or lease, and indemnities to other
parties to certain acquisition agreements. The duration of these
indemnities, commitments and guarantees varies, and in certain cases is
indefinite. The Company believes that substantially all of these
indemnities, commitments and guarantees provide for limitations on the
maximum potential future payments the Company could be obligated to make.
However, the Company is unable to estimate the maximum amount of liability
related to its indemnities, commitments and guarantees because such
liabilities are contingent upon the occurrence of events which are not
reasonably determinable. Management believes that any liability for these
indemnities, commitments and guarantees would not be material to the
accompanying condensed consolidated financial statements. Accordingly, no
amounts have been accrued for indemnities, commitments and guarantees.
Product Warranty Costs - Estimated costs related to product warranties
are accrued at the time products are sold. In estimating its future warranty
obligations, the Company considers various relevant factors, including the
Company's stated warranty policies and practices, the historical frequency
of claims and the cost to replace or repair its products under warranty. The
following table provides a reconciliation of the activity related to the
Company's accrued warranty expense:
NINE MONTHS ENDED
---------------------------------------------
September 30, September 30,
2005 2004
---------------------------------------------
Beginning balance $ 13.2 $ 11.9
Acquisitions -- 1.0
Accruals for warranties issued during the period 6.7 6.9
Settlements made (6.2) (8.3)
-------------------- --------------------
Ending balance $ 13.7 $ 11.5
==================== ====================
Note 5. Segment Reporting
-----------------
The Company is organized based on the products and services it offers.
Under this organizational structure, the Company has three reportable
segments: Commercial Aircraft, Distribution and Business Jet. The Company's
Commercial Aircraft segment consists of eight principal operating units
while the Distribution and Business Jet segments consist of one and two
principal operating units, respectively. Such operating units have been
aggregated for segment reporting purposes due to their similar nature. The
Company evaluates segment performance based on segment operating earnings or
loss.
Each segment reports its results of operations and makes requests for
capital expenditures and acquisition funding to the Company's chief
operational decision-making group. This group is presently comprised of the
Chairman, the President and Chief Executive Officer, and the Senior Vice
President of Administration and Chief Financial Officer. Each operating
segment has separate management teams and infrastructures dedicated to
providing a full range of products and services to their customers.
8
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except Per Share Data)
The following table presents net sales and other financial information by
business segment:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
---------------- --------------- --------------- ----------------
Net sales
Commercial Aircraft $ 140.6 $ 126.0 $ 404.6 $ 380.6
Distribution 43.0 36.6 131.0 107.5
Business Jet 33.5 20.9 85.6 55.8
---------------- --------------- --------------- ----------------
$ 217.1 $ 183.5 $ 621.2 $ 543.9
================ =============== =============== ================
Operating earnings (loss)
Commercial Aircraft $ 14.0 $ 11.3 $ 37.2 $ 30.2
Distribution 8.7 6.2 26.5 19.5
Business Jet 2.7 -- 5.7 (1.6)
---------------- --------------- --------------- ----------------
$ 25.4 $ 17.5 $ 69.4 $ 48.1
================ =============== =============== ================
Note 6. Net Earnings (Loss) Per Common Share
------------------------------------
Basic net earnings (loss) per common share is computed using the
weighted average common shares outstanding during the period. Diluted net
earnings (loss) per common share is computed by using the average share
price during the period when calculating the dilutive effect of stock
options. Shares outstanding for the periods presented were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------ ---------------- ---------------- -----------------
Net earnings (loss) $ 10.0 $ (2.7) $22.5 $ (12.7)
====== ======== ===== =======
Basic weighted average common shares 58.2 37.5 57.4 37.1
Effect of dilutive stock options and stock purchases
under the employee stock purchase plan 3.0 -- 2.9 --
------ -------- ----- -------
Diluted weighted average common shares 61.2 37.5 60.3 37.1
====== ======== ===== =======
Basic net earnings (loss) per share $ 0.17 $ (0.07) $0.39 $ (0.34)
======= ======== ===== =======
Diluted net earnings (loss) per share $ 0.16 $ (0.07) $0.37 $ (0.34)
======= ======== ===== =======
The Company excluded potentially dilutive securities of 1.3 and 2.1
shares from the calculation of loss per share for the three and nine months
ended September 30, 2004 as the effect of including these securities would
have been anti-dilutive.
Note 7. Comprehensive Earnings (Loss)
----------------------------
Comprehensive earnings (loss) is defined as all changes in a company's
net assets except changes resulting from transactions with shareholders. It
differs from net earnings (loss) in that certain items currently recorded to
equity would be a part of comprehensive earnings (loss). The following table
sets forth the computation of comprehensive earnings (loss) for the periods
presented:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
----------------- ---------------- ----------------- ----------------
Net earnings (loss) $10.0 $ (2.7) $ 22.5 $ (12.7)
Other comprehensive earnings (loss):
Foreign exchange translation adjustment (1.5) 0.4 (11.2) 0.1
----- ------- ------ -------
Comprehensive earnings (loss) $ 8.5 $ (2.3) $ 11.3 $ (12.6)
===== ======= ====== =======
9
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except Per Share Data)
Note 8. Recent Accounting Pronouncements
--------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (Revised 2004) "Share-Based Payment" ("SFAS 123R"). The
Securities and Exchange Commission has ruled that SFAS No. 123R is effective
for publicly-traded companies for annual periods that begin 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 does not believe the
adoption of SFAS 151 will have a material impact on its consolidated
financial statements.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and
Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements" ("SFAS 154"). SFAS 154 changes the requirements for the
accounting for, and reporting of, a change in accounting principle.
Previously, most voluntary changes in accounting principles were required to
be recognized by way of a cumulative effect adjustment within net income
during the period of the change. SFAS 154 requires retrospective application
to prior periods' financial statements, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005; however, the Statement does not change
the transition provisions of any existing accounting pronouncements. The
Company does not believe adoption of SFAS 154 will have a material impact on
its consolidated financial statements.
[Remainder of page intentionally left blank]
10
BE AEROSPACE, INC.
------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars In Millions, Except Per Share Data)
OVERVIEW
The following discussion and analysis addresses the results of our
operations for the three months ended September 30, 2005, as compared to our
results of operations for the three months ended September 30, 2004. The
discussion and analysis then addresses our results of operations for the
nine months ended September 30, 2005, as compared to our results of
operations for the nine months ended September 30, 2004. In addition, the
discussion and analysis address our liquidity, financial condition and other
matters for these periods.
Based on our experience in the industry, we believe we are the world's
largest manufacturer of cabin interior products for commercial aircraft and
for business jets and a leading aftermarket distributor of aerospace
fasteners. We sell our manufactured products directly to virtually all of
the world's major airlines and airframe manufacturers and a wide variety of
business jet customers. In addition, based on our experience, we believe
that we have achieved leading global market positions in each of our major
product categories, which include:
o commercial aircraft seats, including an extensive line of first class,
business class, tourist class and regional aircraft seats;
o a full line of aircraft food and beverage preparation and storage
equipment, including coffeemakers, water boilers, beverage containers,
refrigerators, freezers, chillers and microwave, high heat convection
and steam ovens;
o both chemical and gaseous aircraft oxygen delivery systems and
protective breathing equipment;
o business jet and general aviation interior products, including an
extensive line of executive aircraft seats, direct and indirect
overhead lighting systems, oxygen delivery systems, air valve systems,
high-end furniture and cabinetry; and
o a broad line of aftermarket fasteners, covering over 100,000 stock
keeping units (SKUs).
We also design, develop and manufacture a broad range of cabin interior
structures and provide comprehensive aircraft cabin interior reconfiguration
and passenger-to-freighter conversion engineering services and component
kits.
We conduct our operations through strategic business units that have been
aggregated under three reportable segments: Commercial Aircraft,
Distribution and Business Jet.
Net sales by line of business for the three- and nine-month periods ended
September 30, 2005 and September 30, 2004 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------------------------------------------------------------------------
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
-------------------------- --------------------------------------------------- ------------------------
Net % of Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales Sales Net Sales
-------------------------------------------------------------------------------------------------------
Commercial aircraft $140.6 64.8% $126.0 68.7% $404.6 65.1% $380.6 70.0%
Distribution 43.0 19.8 36.6 19.9 131.0 21.1 107.5 19.8
Business jet 33.5 15.4 20.9 11.4 85.6 13.8 55.8 10.2
-------------------------------------------------------------------------------------------------------
Net sales $217.1 100.0% $183.5 100.0% $621.2 100.0% $543.9 100.0%
=======================================================================================================
11
Net sales by domestic and foreign operations for the three- and
nine-month periods ended September 30, 2005 and September 30, 2004 were as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------------------------------------------------------
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
--------------------------------------------------------------------------------------
Domestic $152.2 $125.3 $436.5 $364.0
Foreign 64.9 58.2 184.7 179.9
--------------------------------------------------------------------------------------
Total $217.1 $183.5 $621.2 $543.9
======================================================================================
Net sales by geographic segment (based on destination) for the three- and
nine-month periods ended September 30, 2005 and September 30, 2004 were as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------------------------------------------------------
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
----------------------------------------------------------------------------------------
Net % of Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales Sales Net Sales
United States $104.1 48.0% $98.3 53.6% $308.3 49.6% $285.5 52.5%
Europe 45.6 21.0 35.8 19.5 142.9 23.0 113.5 20.9
Asia 57.4 26.4 33.8 18.4 138.9 22.4 104.9 19.3
Rest of World 10.0 4.6 15.6 8.5 31.1 5.0 40.0 7.3
----------------------------------------------------------------------------------------
$217.1 100.0% $183.5 100.0% $621.2 100.0% $543.9 100.0%
========================================================================================
We have substantially expanded the size, scope and nature of our business
through a number of acquisitions. Between 1989 and 2001, we completed 24
acquisitions for an aggregate purchase price of approximately $1 billion.
Since 2001, we made two insignificant acquisitions. Essentially all of our
revenue growth since 2001 has been organic.
During the period from 1989 to 2000, we integrated the acquired
businesses, closed 17 facilities, reduced our workforce by 3,000 positions
and implemented common information technology platforms and lean
manufacturing initiatives company-wide. This integration effort resulted in
costs and charges totaling approximately $125.
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused us to implement a facility
consolidation and integration plan designed to re-align our capacity and
cost structure with changed conditions in the airline industry. The facility
consolidation and integration plan included closing five facilities and
reducing workforce by approximately 1,500 employees. We believe these
initiatives will enable us to continue to expand profit margins as industry
conditions and demand continue to improve, strengthen the global business
management focus on our core product categories and more effectively
leverage our resources. The total cost of this program was approximately
$175, including approximately $74 of cash charges.
New product development is a strategic initiative for our company. Our
customers regularly request that we engage in new product development and
enhancement activities. We believe that these activities, if properly
focused and managed, will protect and enhance our leadership position. We
believe our investments in research and development over the past several
years has been the driving force behind our ongoing market share gains.
Research, development and engineering spending have been approximately 6%-
8% of sales for the past several years, and is expected to remain at
approximately that level for the foreseeable future.
We also believe in providing our businesses with the tools required to
remain competitive. In that regard, we have invested, and will continue to
invest, in property and equipment that enhances our productivity. Over the
past three years, annual capital expenditures ranged from $11 - $17. Taking
into consideration our recent capital expenditure investments and current
industry conditions, we anticipate capital expenditures of approximately $20
- $23 over the next twelve months.
12
BE AEROSPACE, INC.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005, AS COMPARED
TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
(Dollars In Millions, Except Per Share Data)
Sales for each of our segments are set forth in the following table:
NET SALES
----------------------------------------------------
Three Months Ended September 30,
----------------------------------------------------
Percent
2005 2004 Change Change
----------------------------------------------------
Commercial aircraft $140.6 $126.0 $14.6 11.6%
Distribution 43.0 36.6 6.4 17.5
Business jet 33.5 20.9 12.6 60.3
----------------------------------------------------
Total $217.1 $183.5 $33.6 18.3%
====================================================
The commercial aircraft segment ("CAS") generated revenues of $140.6 in
the third quarter of 2005, up 11.6% versus the same period in the prior
year, primarily due to a higher volume of commercial aircraft passenger
cabin equipment and engineering, integration and certification services. The
distribution segment delivered strong revenue growth of 17.5% in the third
quarter of 2005, driven by a broad based increase in aftermarket demand for
aerospace fasteners and continued market share gains. In the business jet
segment, revenues increased by 60.3% in the third quarter of 2005,
reflecting the ongoing recovery within the business jet industry and initial
shipments of super first class products.
Gross profit for the third quarter of 2005 of $76.6, or 35.3% of sales,
increased by $16.5, or 27.5% on the 18.3% year-over-year increase in
revenues. Third quarter 2005 gross margin expanded by 250 basis points as
compared to the same period of the prior year. The increase in gross margin
was primarily driven by an improved mix of products sold and ongoing
manufacturing efficiencies.
Selling, general and administrative expenses in the third quarter of 2005
of $34.0, or 15.7% of sales, were up $4.2 versus selling, general and
administrative expenses in the same period in the prior year of $29.8, or
16.2% of sales, primarily due to the higher level of commissions and sales
incentives in the current period, as well as selling and marketing costs
associated with the 18.3% increase in revenues and the 63% increase in
backlog from September 30, 2004.
Research, development and engineering expenses of $17.2, or 7.9% of
sales, were up $4.4 versus the same period in the prior year due to a higher
level of spending associated with customer reimbursed engineering and
spending associated with new product development activities.
Operating earnings for the third quarter of 2005 of $25.4 increased by
45.1%, as compared to the same period last year. The operating margin of
11.7% in the current quarter was 220 basis points greater than the operating
margin realized in the third quarter of 2004. The substantial increase in
operating earnings was driven primarily by continued margin expansion at the
commercial aircraft segment, continued growth in revenues and earnings at
the distribution segment, as well as the substantial turnaround in
profitability at the business jet segment due to the higher volume of
shipments and ongoing manufacturing efficiencies.
The following is a summary of the change in operating earnings by
segment:
OPERATING EARNINGS
----------------------------------------------------
Three Months Ended September 30,
----------------------------------------------------
Percent
2005 2004 Change Change
--------------------------------------------------
Commercial aircraft $14.0 $11.3 $2.7 23.9%
Distribution 8.7 6.2 2.5 40.3
Business jet 2.7 -- 2.7 NM
--------------------------------------------------
Total $25.4 $17.5 $7.9 45.1%
==================================================
13
The CAS operating results and order book continued to improve during the
third quarter of 2005. Compared to the third quarter of 2004, CAS operating
earnings of $14.0 increased by 23.9% on an 11.6% increase in sales. The
operating margin expanded to 10.0%, a 100 basis point improvement over the
same period in the prior year. This margin expansion was primarily a result
of an improved mix of products sold and ongoing manufacturing efficiencies.
CAS bookings for the third quarter nearly tripled versus the same period
last year as backlog during the third quarter of 2005 reached record levels.
The distribution segment generated revenues of $43.0 in the third quarter
of 2005, which were 17.5% greater than the same period in the prior year.
Operating earnings at the distribution segment in the third quarter of 2005
were $8.7, 40.3% higher than the same period last year and represented a
20.2% operating margin, as compared to a 16.9% margin last year. The
distribution segment's strong performance was in spite of three lost days of
operations due to the hurricane activity in the current third quarter
period.
The business jet segment generated third quarter revenues of $33.5, up
60.3% as compared to the third quarter of 2004. Operating earnings at the
business jet segment during the quarter were $2.7 higher than operating
earnings reported in the same period last year. The substantial increase in
operating earnings reflects the higher level of revenues associated with an
improving business jet industry and operational improvements in the new
super first class product line, as well as expanding margins due to ongoing
manufacturing efficiencies and operating leverage at the higher level of
revenue.
Interest expense for the third quarter of 2005 of $14.8 was $4.9 lower
than interest expense recorded in the same period in the prior year.
Interest expense decreased in the third quarter of 2005 as a result of the
early retirement of $200 of senior subordinated notes during the fourth
quarter of 2004.
Income tax expense of $0.6 during the third quarter of 2005 increased
from income tax expense of $0.5 in the same period in the prior year. Income
taxes arise from earnings of foreign subsidiaries for which no net operating
loss carryforwards are available.
Net earnings for the third quarter of 2005 were $10.0 or $0.16 per
diluted share, a $12.7 or $0.23 per diluted share improvement as compared to
the same period of the prior year.
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14
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005, AS COMPARED
TO THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(Dollars In Millions, Except Per Share Data)
Sales for each of our segments are set forth in the following table:
NET SALES
----------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------
Percent
2005 2004 Change Change
----------------------------------------------------
Commercial Aircraft $404.6 $380.6 $24.0 6.3%
Distribution 131.0 107.5 23.5 21.9
Business Jet 85.6 55.8 29.8 53.4
----------------------------------------------------
Total $621.2 $543.9 $77.3 14.2%
====================================================
Net sales for the nine months ended September 30, 2005 were $621.2, an
increase of $77.3 or 14.2% as compared to the same period of the prior year.
Sales during the nine months ended September 30, 2005 at the CAS of
$404.6 were up 6.3% versus the same period in the prior year, primarily due
to a higher volume of commercial aircraft passenger equipment and
engineering, integration and certification services. The distribution
segment delivered strong revenue growth of 21.9%, driven by a broad based
increase in aftermarket demand for aerospace fasteners and continued market
share gains. In the business jet segment, revenues increased by 53.4%,
reflecting the ongoing recovery within the business jet industry and initial
shipments of super first class products.
Gross profit for the nine months ended September 30, 2005 of $217.4, or
35.0% of sales, increased by $41.9 compared to the same period in the prior
year, or 23.9% on the 14.2% increase in revenues. Gross margin for the nine
months ended September 30, 2005 expanded by 270 basis points as compared to
the same period of the prior year. The increase in gross margin was
primarily driven by an improved mix of products sold and ongoing
manufacturing efficiencies.
Selling, general and administrative expenses during the nine months ended
September 30, 2005 of $97.8, or 15.7% of sales, were up $9.4 versus selling,
general and administrative expenses in the same period in the prior year of
$88.4, or 16.3% of sales, primarily due to the higher level of commissions
and sales incentives in the current period, as well as costs associated with
the 14.2% increase in revenues. In connection with the resolution of two
legal matters during the second quarter of 2005, we received approximately
$1.8 of net reimbursed legal fees; such amounts were offset by increases in
our allowance for doubtful accounts, incentive compensation and severance,
which together aggregated approximately $1.6.
Research, development and engineering expenses during the nine months
ended September 30, 2005 of $50.2, or 8.1% of sales, were up $11.2 versus
the prior year due to a higher level of spending associated with customer
reimbursed engineering and spending associated with new product development
activities.
Operating earnings for the nine months ended September 30, 2005 of $69.4
increased by 44.3%, as compared to the same period last year. The operating
margin of 11.2% for the nine months ended September 30, 2005 was 240 basis
points greater than the operating margin realized in the same period of
2004. The substantial increase in operating earnings was driven by the
continuing margin expansion at the commercial aircraft segment, continued
growth in revenues and earnings at the distribution segment, as well as the
substantial turnaround in profitability at the business jet segment due to
the higher volume of shipments and ongoing manufacturing efficiencies.
15
The following is a summary of the change in operating earnings by segment:
OPERATING EARNINGS
----------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------
Percent
2005 2004 Change Change
----------------------------------------------------
Commercial aircraft $37.2 $30.2 $7.0 23.2%
Distribution 26.5 19.5 7.0 35.9
Business jet 5.7 (1.6) 7.3 NM
----------------------------------------------------
Total $69.4 $48.1 $21.3 44.3%
====================================================
CAS's operating results and order book continued to improve during the
nine months ended September 30, 2005. Compared to the same period of 2004,
CAS operating earnings of $37.2 increased by 23.2% on a 6.3% increase in
sales. The operating margin expanded to 9.2%, a 130 basis point improvement
over the prior year. This margin expansion was primarily a result of an
improved mix of products sold and ongoing manufacturing efficiencies.
The distribution segment generated record revenues of $131.0 for the nine
months ended September 30, 2005, which were 21.9% greater than the same
period in the prior year. Operating earnings at the distribution segment
were $26.5 million for the nine-month period, 35.9% higher than the same
period last year and represented a 20.2% operating margin, as compared to an
18.1% operating margin in the same period in the prior year. The expansion
of the operating margin reflects the operating efficiencies at the higher
revenue level, and was in spite of three lost days of operations due to the
hurricane activity in the third quarter of 2005.
The business jet segment generated revenues of $85.6 for the nine-month
period ended September 30, 2005, up 53.4% as compared to the same period of
2004. Operating earnings at the business jet segment for the nine months
ended September 30, 2005 were $7.3 higher than the same period last year.
The substantial increase in operating earnings reflects the higher level of
revenues associated with an improving business jet industry as well as
ongoing manufacturing efficiencies and operating leverage at the higher
level of revenues.
Interest expense for the nine-month period ended September 30, 2005 of
$44.9 was $14.5 lower than interest expense recorded in the same period in
the prior year. Interest expense decreased for the nine months ended
September 30, 2005 as a result of the early retirement of $200 of senior
subordinated notes during the fourth quarter of 2004.
Income tax expense of $2.0 during the nine-month period ended
September 30, 2005 increased from income tax expense of $1.4 in the same
period in the prior year. Income taxes arise from earnings of foreign
subsidiaries for which no net operating loss carryforwards are available.
Net earnings for the nine months ended September 30, 2005 were $22.5 or
$0.37 per diluted share, a $35.2 or $0.71 per diluted share improvement as
compared to the same period of the prior year.
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16
BE AEROSPACE, INC.
------------------
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
Our liquidity requirements consist of working capital needs, ongoing capital
expenditures and payments of interest and principal on our indebtedness. Our
primary requirements for working capital are directly related to the level of
our operations. Working capital primarily consists of accounts receivable and
inventories, which fluctuate with the sales of our products. Our working capital
was $268.4 as of September 30, 2005, as compared to $225.0 as of December 31,
2004. The increase in working capital from December 31, 2004 to September 30,
2005 was primarily due to an increased level of accounts receivable related to
our recent revenue growth, a higher level of inventories to support expected
further increases in revenues, offset somewhat by a higher level of accounts
payable and accrued liabilities arising from the higher revenue volume, and the
timing of interest payments. We currently have no bank borrowings outstanding
and no debt principal payments due until 2008. Our Amended Bank Credit Facility,
under which we have no borrowings, expires in February 2007.
At September 30, 2005, our cash and cash equivalents were $87.3, as compared
to $76.3 at December 31, 2004. The increase in cash and cash equivalents from
December 31, 2004 to September 30, 2005 was primarily due to net earnings during
the period, proceeds from common stock issued and by a somewhat higher level of
accounts payable and accrued liabilities arising from the higher revenue volume
and the timing of interest payments, offset by an increased level of accounts
receivable related to our recent revenue growth and a higher level of
inventories to support expected further increases in revenues.
Cash Flows
At September 30, 2005, our cash and bank credit available under our Amended
Bank Credit Facility was $125.7 compared to $114.7 at December 31, 2004. Cash
generated by operating activities was $9.5 for the nine months ended
September 30, 2005, as compared to cash used by operating activities of $0.9 in
the same period in the prior year. The primary source of cash during the nine
months ended September 30, 2005 was due to net earnings of $22.5, non-cash
charges of $24.3 primarily related to amortization and depreciation and a higher
level of accounts payable and accrued liabilities arising from the higher
revenue volume and the timing of interest payments. This source of cash was
offset somewhat by an increased level of accounts receivable ($35.3) related to
our recent revenue growth and a higher level of inventories ($26.8) to support
expected further increases in revenues.
Capital Spending
Our capital expenditures were $10.9 and $10.7 during the nine months ended
September 30, 2005 and 2004, respectively. We anticipate capital expenditures of
approximately $20 - $23 for the next twelve months. 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 Amended Bank
Credit Facility or any future bank credit facility, although there can be no
assurance that future bank credit facilities will be available. Between 1989 and
2001, we completed 24 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
Our $50.0 bank credit facility with JPMorgan Chase Bank ("Amended Bank
Credit Facility") has no maintenance financial covenants, other than maintaining
an Interest Coverage Ratio (as defined) of at least 1.15:1 for the trailing
12-month period. The Amended Bank Credit Facility expires in February 2007, 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
Amended Bank Credit Facility. At September 30, 2005, indebtedness under the
Amended Bank Credit Facility consisted of letters of credit aggregating
17
approximately $11.6. The amount available under the Amended Bank Credit Facility
was $38.4 as of September 30, 2005. The Amended Bank Credit Facility contains
customary affirmative covenants, negative covenants and conditions of
borrowings, all of which were met as of September 30, 2005.
Long-term debt consists principally of our $175 8-1/2% senior notes, $250
8-7/8% senior subordinated notes and $250 8% senior subordinated notes. The $175
8-1/2% senior notes mature on October 1, 2010, $250 8% notes mature on March 1,
2008, and the $250 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 Amended
Bank Credit Facility. Each of the $175 8-1/2% senior notes, $250 8% senior
subordinated notes and $250 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 September 30, 2005. A breach of these
covenants, or the covenants under our Amended Bank Credit Facility or any future
bank credit facility, that continues beyond any grace period can constitute a
default, which can limit the ability to borrow and can give rise to a right of
the lenders to terminate the applicable facility and/or require immediate
repayment of any outstanding debt.
Contractual Obligations
During the nine-month period ended September 30, 2005, there were no
material changes in the contractual obligations specified in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2004.
We believe that our cash flows, together with cash on hand and availability
under our Amended Bank Credit Facility, provide us with the ability to fund our
operations, make planned capital expenditures and make scheduled debt service
payments for at least the next twelve months. 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 offer assurance that our
business will generate cash from operations, or that we will be able to obtain
financing from other sources, sufficient to satisfy our debt service or other
requirements.
Off-Balance Sheet Arrangements
Lease Arrangements
- ------------------
We finance our use of certain facilities and equipment under committed lease
arrangements provided by various institutions. Since the terms of these
arrangements meet the accounting definition of operating lease arrangements, the
aggregate sum of future minimum lease payments is not reflected on our
consolidated balance sheet. At September 30, 2005, future minimum lease payments
under these arrangements, the majority of which related to the long-term real
estate leases, was approximately $92.1.
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. Accordingly, no amounts have been accrued for indemnities,
commitments and guarantees.
18
Product Warranty Costs
- ----------------------
For discussion of Product Warranty Costs, refer to Note 4 of our Condensed
Consolidated Financial Statements included in Part 1, Item 1, of this report.
Deferred Tax Assets
We established a valuation allowance related to the utilization of our
deferred tax assets because of uncertainties that preclude us from determining
that it is more likely than not that we will be able to generate taxable income
to realize such assets during the federal operating loss carryforward period,
which begins to expire in 2012. Such uncertainties include recent cumulative
losses, the highly cyclical nature of the industry in which we operate, risks
associated with our facility consolidation plan, our high degree of financial
leverage, risks associated with new product introductions, recent substantial
increases in the cost of fuel and its impact on our airline customers, and risks
associated with the integration of acquired businesses. We monitor these
uncertainties, as well as other positive and negative factors that may arise in
the future, as we assess the necessity for a valuation allowance for our
deferred tax assets.
RECENT ACCOUNTING PRONOUNCEMENTS
For discussion of Recent Accounting Pronouncements, refer to Note 8 of our
Condensed Consolidated Financial Statements included in Part 1, Item 1, of this
report.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies,
see Note 1 in the Notes to the Consolidated Financial Statements included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
Revenue Recognition
Sales of products are recorded when the earnings process is complete. This
generally occurs when the products are shipped to the customer in accordance
with the contract or purchase order, risk of loss and title has passed to the
customer, collectibility is reasonably assured and pricing is fixed and
determinable. In instances where title does not pass to the customer upon
shipment, we recognize revenue upon delivery or customer acceptance, depending
on the terms of the sales contract.
Service revenues primarily consist of engineering activities and are
recorded when services are performed.
Historically, revenues and costs under certain long-term contracts are
recognized using contract accounting under the percentage-of-completion method.
The percentage-of-completion method requires the use of estimates of costs to
complete long-term contracts. The estimation of these costs requires judgment on
the part of management due to the duration of these contracts as well as the
technical nature of the products involved. Adjustments to these estimated costs
are made on a consistent basis. A provision for contract losses is recorded when
such facts are determinable. Revenues recognized under contract accounting
during the three and nine months ended September 30, 2005 and 2004 were not
significant to our financial statements.
19
We sell our products primarily to airlines and aircraft manufacturers
worldwide, including occasional sales collateralized by letters of credit. 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, manufactured
parts, labor and production overhead costs, is recorded net of a reserve for
excess, obsolete or unmarketable inventories. We regularly review inventory
quantities on hand and record a reserve for excess and obsolete inventories
based primarily on historical usage and on our estimated forecast of product
demand and production requirements. As demonstrated since the events of
September 11, 2001, demand for our products can fluctuate significantly. Our
estimates of future product demand may prove to be inaccurate, in which case we
may have understated or overstated the provision required for excess and
obsolete inventories. In the future, if our inventories are determined to be
overvalued, we would be required to recognize such costs in our cost of goods
sold at the time of such determination. Likewise, if our inventories are
determined to be undervalued, we may have over-reported our costs of goods sold
in previous periods and would be required to recognize such additional operating
income at the time of sale.
Long-Lived Assets (including Tangible and Intangible Assets and Goodwill)
To conduct our global business operations and execute our strategy, we
acquire tangible and intangible assets, which affect the amount of future period
amortization expense and possible impairment expense that we may incur. The
determination of the value of such intangible assets requires management to make
estimates and assumptions that affect our consolidated financial statements. We
assess potential impairment to goodwill of a reporting unit and other intangible
assets on an annual basis or when there is evidence that events or changes in
circumstances indicate that the carrying amount of an asset may not be
recovered. Our judgment regarding the existence of impairment indicators and
future cash flows related to intangible assets are based on operational
performance of our acquired businesses, expected changes in the global economy,
aerospace industry projections, discount rates and other factors. Future events
could cause us to conclude that impairment indicators exist and that goodwill or
other acquired tangible or intangible assets associated with our acquired
businesses is impaired. Any resulting impairment loss could have an adverse
impact on our results of operations.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we
are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheets. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income, and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the consolidated statements of operations.
20
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 ($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.
DEPENDENCE UPON CONDITIONS IN THE AIRLINE INDUSTRY
The September 11, 2001 terrorist attacks severely impacted conditions in the
airline industry. According to industry sources, in the aftermath of the attacks
most major U.S. carriers 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 through 2004,
including $5 billion in 2004. The airline industry crisis also caused 21
airlines worldwide to declare bankruptcy or cease operations in the past four
years. Record fuel prices continue to negatively impact the airlines,
particularly in the U.S., where there is too much airline capacity and where the
airlines have very little ability to increase prices. During 2005, 4 U.S.
airlines filed for bankruptcy protection. The U.S. airlines are expected to lose
$9 - $10 billion in 2005.
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 factors, the U.S. 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 period from 2001 through 2003. Although the global
airline industry began to recover in late 2003 and our industry continues to
improve, additional events similar to those above could delay any sustained
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.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding implementation and expected
benefits of lean manufacturing and continuous improvement programs, our dealings
with customers and partners, the consolidation of facilities, reduction of our
workforce, integration of acquired businesses, ongoing capital expenditures, the
impact of the large number of indefinitely grounded aircraft on demand for our
products and our underlying assets, the adequacy of funds to meet our capital
requirements, the ability to refinance our indebtedness, if necessary, the
reduction of debt, the potential impact of new accounting pronouncements and the
impact on our business from the September 11, 2001 terrorist attacks, the SARS
outbreak and war in Iraq. These forward-looking statements include risks and
uncertainties, and our actual experience may differ materially from that
anticipated in such statements. Factors that might cause such a difference
include those discussed in our filings with the Securities and Exchange
Commission, including our most recent proxy statement and Form 10-K, as well as
future events that may have the effect of reducing our available operating
income and cash balances, such as unexpected operating losses, the impact of
rising fuel prices on our airline customers, outbreaks or escalations of
national or international hostilities, terrorist attacks, prolonged health
issues which reduce air travel demand (e.g. SARS), delays in, or unexpected
costs associated with, the integration of our
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acquired or recently consolidated businesses, conditions in the airline
industry, changing conditions in the business jet industry, problems meeting
customer delivery requirements, our success in winning new or expected
refurbishment contracts from customers, capital expenditures, cash expenditures
related to possible future acquisitions, facility closures, product transition
costs, labor disputes involving us, our significant customers or airframe
manufacturers, the possibility of a write-down of intangible assets, delays or
inefficiencies in the introduction of new products or fluctuations in currency
exchange rates. The forward-looking statements included in this report are made
only as of the date of this report and, except as required by federal securities
laws, we do not have any obligation to publicly update or revise any
forward-looking statements to reflect subsequent events or circumstances.
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BE AEROSPACE, INC.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of our
variable-rate debt.
Foreign currency - We have direct operations in Europe that receive
revenues from customers primarily in U.S. dollars and purchase raw
materials and component parts from foreign vendors primarily in British
pounds or euros. Accordingly, we are exposed to transaction gains and
losses that could result from fluctuations in foreign currency exchange
rates relative to the U.S. dollar. The largest foreign currency exposure
results from activity in British pounds and euros.
From time to time, we and our foreign subsidiaries may enter into
foreign currency exchange contracts to manage risk on transactions
conducted in foreign currencies. At September 30, 2005, we had no
outstanding forward currency exchange contracts. We did not enter into
any other derivative financial instruments during the period.
Interest rates - At September 30, 2005, we had no adjustable rate debt
outstanding and fixed rate debt of $679.6. The weighted average interest
rate for the fixed rate debt was approximately 8.5% at September 30,
2005. If interest rates were to increase by 10% above current rates,
there would be no impact on our financial statements due to the absence
of any outstanding variable rate debt. We do not engage in transactions
to hedge our exposure to changes in interest rates.
As of September 30, 2005, we maintained a portfolio of securities
consisting mainly of taxable, interest-bearing deposits with 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 $0.3.
ITEM 4. 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
September 30, 2005, 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 third quarter of 2005 that have
materially affected, or are reasonably likely to materially affect, our
company's internal control over financial reporting.
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BE AEROSPACE, INC.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not applicable.
Item 3. Defaults Upon Senior Securities Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders Not applicable.
Item 5. Other Information Not applicable.
Item 6. Exhibits
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.
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BE AEROSPACE, INC.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BE AEROSPACE, INC.
Date: November 7, 2005 By: /s/ Robert J. Khoury
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Robert J. Khoury
President and
Chief Executive Officer
Date: November 7, 2005 By: /s/ Thomas P. McCaffrey
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Thomas P. McCaffrey
Senior Vice President of
Administration and
Chief Financial Officer
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