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, 2005
[ ] 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 of (I.R.S. Employer Identification No.)
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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [X] No [ ].
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X].
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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ].
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 aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $901.5 million on June 30, 2005 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 14, 2006 was 75,623,489 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Proxy Statement to be filed with the
Commission in connection with the 2006 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
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INDEX
PART I
ITEM 1. Business.............................................................3
ITEM 1A. Risk Factors........................................................16
ITEM 1B. Unresolved Staff Comments...........................................21
ITEM 2. Properties..........................................................22
ITEM 3. Legal Proceedings...................................................23
ITEM 4. Submission of Matters to a Vote of Security Holders.................23
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities...................24
ITEM 6. Selected Financial Data.............................................25
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................27
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk..........38
ITEM 8. Financial Statements and Supplementary Data.........................38
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................38
ITEM 9A. Controls and Procedures.............................................38
ITEM 9B. Other Information...................................................41
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................41
ITEM 11. Executive Compensation..............................................45
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters..........................45
ITEM 13. Certain Relationships and Related Transactions......................45
ITEM 14. Principal Accountant Fees and Services..............................45
PART IV
ITEM 15. Exhibits and Financial Statement Schedules..........................46
Index to Exhibits...................................................47
Signatures..........................................................50
Index to Consolidated Financial Statements and Schedule............F-1
2
PART I
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," " "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 "Item 1A - Risk Factors",
respectively.
Unless otherwise indicated, the industry data contained in this Form 10-K is
from the January/February 2006 issue of the Airline Monitor, the October 31,
2005 and January 31, 2006 reports of the International Air Transport Association
(IATA), the Boeing Current Market Outlook 2005, the Airbus Industries Global
Market Forecast 2004-2023, JPMorgan Analyst Research Data (October 2005), The
Teal Group Research Data (September 2005), the NBAA 2004 Factbook or the General
Aviation Manufacturers' Association 2003 and 2004 Year-End Shipment Reports and
2005 Third Quarter Shipment Report.
ITEM 1. BUSINESS
INTRODUCTION
Our 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 super
first class, 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,
protective breathing equipment and lighting products;
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 140,000 Stock Keeping
Units (SKUs).
We also 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. Between 1989 and 2001, we completed 22 acquisitions, for an
aggregate purchase price of approximately $1 billion. 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. Since 2001 we
have not made any material acquisitions and our compound annual revenue growth
rate from 2002 - 2005 of 12% has been almost entirely organic.
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Our principal executive offices and corporate headquarters are located at
1400 Corporate Center Way, Wellington, Florida 33414 and our telephone number is
561-791-5000.
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 is periodically
upgraded or repaired, and requires a continual flow of spare parts, but may be
retrofitted only once or twice during the useful life of an aircraft.
Historically, approximately 60% of our fasteners are used in the aftermarket.
There is a direct relationship between demand for fastener products and fleet
size, aircraft utilization and an aircraft's age. Commercial aircraft must be
serviced at prescribed intervals which also drives the aftermarket demand for
aerospace 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 $1.2 billion, respectively, during calendar 2005.
Airline passenger traffic rebounded in 2004 and demonstrated strong continued
growth during 2005. Global air traffic growth in 2005 increased by approximately
8% over 2004, following a 15.3% increase in 2004 over 2003. Traffic growth
increased by 13.1% in the Middle East region, 8.9% in North America and 6.3% in
the Asia-Pacific region. 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 6% during 2005 as
compared to the prior year. The Middle East region led the industry with
capacity growth of 10.6%, followed by the North American region with capacity
growth of 8.0%, while the Asia Pacific carriers accounted for capacity growth of
5.8%.
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 $42 billion in calendar years 2001-2005, including approximately $7.4
billion in 2005. The substantial increase in fuel prices in 2005 together with
lack of pricing power in the U.S. market, was the primary reason for continued
industry losses in 2005. 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.
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The business jet industry also experienced a resurgence in demand beginning
in 2004 following a severe downturn in 2003. Approximately 750 aircraft were
delivered in 2005 (versus approximately 590 aircraft in 2004) and industry
experts expect deliveries of approximately 790 aircraft in 2006, an increase of
58% over the approximately 500 aircraft delivered in 2003. In addition, industry
sources estimate that approximately 7,700 business jets will be built during the
2003 through 2013 period 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. Our total bookings
during fiscal 2005 of approximately $1.2 billion were up over 33% as compared to
the prior year. Our backlog at December 31, 2005 was in excess of $1.1 billion,
an increase of over 57% as compared to our December 31, 2004 backlog, despite a
15.1% year-over-year increase in revenues. Substantially all of our backlog
growth during 2005 was generated by foreign carriers; and less than 10% of our
backlog at December 31, 2005 was with domestic airlines. Through December 31,
2005, the domestic airlines have been conserving cash, in part by deferring
cabin interior refurbishment programs and by deferring aircraft purchases.
However, we feel that the U.S. carriers will have to upgrade their international
fleets to compete on international routes. We believe there are substantial
growth opportunities for retrofit programs, particularly for the twin-aisle
aircraft that service international routes.
Other factors expected to affect the cabin interior products industry are the
following:
Existing Installed Base. Existing installed base of products 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 15,725
aircraft as of December 31, 2005. Additionally, based on industry sources, there
are approximately 12,975 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 $15.3 billion as of December 31, 2005.
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. According to the
Airline Monitor, worldwide air traffic is projected to grow at a compounded
average rate of 4.7% per year during the 2006-2021 period, increasing annual
revenue passenger miles from approximately 2.7 trillion in 2006 to approximately
5.4 trillion by 2021. 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 15-year
period ending 2021.
New Aircraft Deliveries. The number of new aircraft delivered each year is
generally regarded as cyclical in nature. According to the Airline Monitor, new
deliveries of large commercial jets increased to approximately 650 in 2005
(versus approximately 600 in 2004) and the approximate amount of new deliveries
are expected to increase to 840 in 2006, 920 in 2007, 985 in 2008 and 1,030 in
2009.
Wide-Body Aircraft Deliveries. The trend toward wide-body aircraft is
significant to us because wide-body aircraft require up to five to eight 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 approximately 23% of all new commercial
aircraft (excluding regional jets) delivered in 2005, and are expected to
increase to approximately 29% in 2009. Importantly, according to Airline
Monitor, over the 2007 to 2010 time period, approximately 1,100 wide-body and
super wide-body aircraft will be delivered by Boeing and Airbus. 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
luxurious super first class compartments, 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.
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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 recently introduced products include electric lie-flat first and business
class seats, narrow and wide-body economy class seats, convertible seats, full
face crew masks, Pulse Oxygen(TM) systems, 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.
We estimate that the commercial and business jet cabin interior products and
the aerospace-grade fastener distribution industries had combined annual sales
in excess of approximately $1.4 billion and $1.2 billion, respectively, during
calendar 2005. We estimate that the total worldwide installed base of commercial
and general aviation aircraft cabin interior products for the principal products
we manufacture was approximately $15.3 billion as of December 31, 2005.
Commercial Aircraft Industry
The commercial airline industry saw an upturn in air travel beginning in
2003, bringing global revenue passenger miles back to 2000 levels. According to
IATA, during 2005, the global airline industry expanded airline capacity by
approximately 6% in response to an approximate 8% increase in global air
traffic. We believe increases in passenger traffic, and associated increases in
airline capacity, are initially benefiting providers of aftermarket products and
services. As the new aircraft delivery cycle begins to gain momentum, increases
in original equipment manufacturer production rates are also expected. According
to the Airline Monitor, the approximate number of deliveries of new large
commercial aircraft are expected to grow to 840 in 2006 from 650 in 2005, and
then to 920 in 2007, 985 in 2008, and 1,030 in 2009. In addition, according to
the Airline Monitor, approximately 1,100 twin-aisle aircraft are expected to be
delivered during the 2007-2010 period, Airbus forecasts that twin-aisle aircraft
seats will grow from 38% of the total fleet in 2003 to approximately 50% of the
total fleet by 2023. An increase in twin-aisle aircraft is important to us as
twin-aisle aircraft require up to five-to-eight times the dollar value of
products of the type that we manufacture as compared to a single-aisle, or
narrow-body, aircraft and generate substantially more demand for spare parts and
upgrade products and services.
Business Jet Industry
The business jet industry also experienced a severe downturn following the
events of September 11, 2001, reaching a trough in 2003. However, in 2005
approximately 750 aircraft were delivered, which represented an increase of 26%
over 2004, and recent industry forecasts project significant near-term growth,
with total deliveries of approximately 790 aircraft in 2006, an increase of 58%
over the approximately 500 aircraft delivered in 2003. Industry sources estimate
that nearly 3,300 business jets will be built during the 2006 through 2010
period.
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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
$5.3 billion (for our principal products, valued at replacement prices) as
of December 31, 2005. 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 aftermarket products and services, including
spare parts, retrofits and refurbishment programs, from the original
supplier of their equipment. As a result, we expect our large installed
base to generate continued aftermarket revenue as airlines continue to
maintain, evolve and reconfigure their aircraft cabin interiors.
Operating Leverage and Low Cost Producer. Our ability to leverage our
manufacturing and engineering capabilities has allowed us to expand gross
and operating margins. As a result of our cost savings programs
implemented following the downturn in the airline industry in 2001, and
through our ongoing continuous improvement and lean manufacturing
programs, our overall gross margins have increased substantially. For
example, our gross margin for the fiscal year ended December 31, 2005 of
35.0% improved by 250 basis points over the fiscal year ended 2004,
reflecting ongoing manufacturing efficiencies and operating leverage at
the higher volume of sales. In addition, our operating earnings have been
increasing at a faster rate than our net sales. For example, for the year
ended December 31, 2005, operating earnings grew 45% over operating
earnings for the year ended December 31, 2004, as compared to net sales
growth of 15.1% during 2005.
Focus on Innovation and 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, 2005, we had 628 employees in
engineering, research, development and program management. We believe our
engineering, 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. Our
strong focus and continued investment in research and development, even
during the 2001-2003 industry downturn, allows us to compete favorably in
winning new business awards. For example, we believe our technological
leadership and new product development capabilities were a key factor in
our ability to grow our backlog to over $1.1 billion at December 31, 2005,
a 57% increase as compared to December 31, 2004. Backlog growth has been
driven primarily by international aftermarket demand for retrofit of
existing aircraft, including program awards in the emerging international
super first class cabin interiors market. We believe these and other
program awards, coupled with expected follow-on awards for other fleets of
existing aircraft for product commonality and competitive purposes, should
continue to drive sales growth and market share gains over the 2006-2010
period. Introduction of new products has also led to improvements in the
product mix of our current backlog, which, along with our continued focus
on lean manufacturing processes and additional operating leverage, is
expected to result in continued margin expansion.
Exposure to International Markets. Our overall net sales are diversified
across multiple geographic regions. For 2005, 53% of our net sales were to
customers located outside the United States, with approximately 23% of our
net sales coming from customers in the Asia, Pacific Rim and Middle East
regions. International sales as a percentage of total sales is expected to
increase significantly since the Asia, Pacific Rim and Middle East regions
account for approximately 31%, and 16%, respectively, of our current
backlog (of which we estimate approximately 47% is deliverable over the
next twelve months) and the domestic airlines account for less than 10% of
our total backlog at December 31, 2005. We believe this geographic
diversification makes us less susceptible to a downturn in a specific
geographic region and allows us to take advantage of regional growth
trends. For example, year over year air traffic growth rate in the Middle
East region of 13.1% during the fiscal year ended December 31, 2005 was
substantially greater than the 8.9% air traffic growth rate in North
America.
Diverse Product Offering and Broad Customer Base. In addition to serving
diverse geographic regions, we also provide a comprehensive line of
products and services to a broad customer base. For the fiscal year ended
December 31, 2005, no customer accounted for more than 10% of our net
sales and our top 10 customers only accounted for approximately 31% of net
sales. We have a broad range of over 200 principal customers, including
essentially all of the world's major airlines. During the fiscal year
ended December 31, 2005, approximately 5% of sales were to Boeing and
Airbus and approximately 10% were to business jet manufacturers for use in
new business jets. Our broad product offering and customer base make us
less susceptible to the loss of any one customer or program. We have
continued to expand our available products and services based on our
belief that the airline industry increasingly will seek an integrated
approach to the
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design, development, integration, installation, testing and sourcing of
aircraft cabin interiors. Based on our reputation for quality, service and
product innovation, we believe that we are well positioned to serve the
world's airlines and aircraft manufacturers and owners and operators of
business jets.
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, 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.
Growth Opportunities
We believe that we will benefit from the following industry trends:
Improving Airline Industry Conditions. Improving worldwide industry
conditions are resulting in increased demand for our products and
services, as demonstrated by the 33% increase in our bookings during
fiscal 2005 as compared to fiscal 2004. At December 31, 2005, our backlog
was over $1.1 billion, an increase of approximately 57% over our
December 31, 2004 backlog. A majority of the backlog growth over the
fiscal year ended December 31, 2005 was the result of international
aftermarket demand for the retrofit of existing aircraft. We expect demand
to further increase as industry conditions continue to improve over the
course of the next several years.
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 year ended December 31, 2005
and the fiscal year ended December 31, 2004, approximately 63% and 60% 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
revenues from original equipment manufactures. As worldwide air traffic
grows and airlines add capacity, initially by bringing grounded aircraft
back into service and by upgrading and repairing the cabin interiors of
existing active aircraft, we expect our aftermarket business to continue
to grow. According to IATA, during the fiscal year ended December 31,
2005, the global airline industry expanded airline capacity by 6% in
response to an 8% increase in global air traffic. During this same period,
we experienced a 20% increase in aftermarket revenues. In addition, as a
result of the severity of the economic downturn in the airline industry
following the terrorist attacks of September 11, 2001, many carriers,
particularly in the United States, deferred interior maintenance for a
number of years. We believe there are substantial growth opportunities for
retrofit programs for the twin-aisle aircraft that service international
routes and that the major U.S. airlines will need to invest in cabin
interiors for their international fleets or face the prospect of losing
market share on their international routes. Based on industry analysts'
expectations for airline traffic and our understanding of our customers'
cabin interior products requirements, we believe that global aftermarket
demand for commercial aircraft cabin interior products of the type that we
manufacture should grow at a compounded annual growth rate of
approximately 21% over the 2005-2008 period and that total global demand
(from both aftermarket and new aircraft) for commercial aircraft cabin
interior products of the type that we manufacture should grow at a
compounded annual growth rate of approximately 18.5% over this same
four-year period.
Record Backlog Driven by Aftermarket Demand from International Airlines
Retrofitting Existing Fleets. We believe that substantially all of the
major international airlines are in the process of upgrading their
existing fleets of twin-aisle aircraft. This activity is being driven by
both the age of the existing cabin interiors as well as the desire by many
of the leading international carriers to achieve a competitive advantage
by investing in cabin interior products that incorporate leading comfort
amenities and place a strong emphasis on pleasing aesthetics, quality and
finish in order to enhance their international passengers' flight
experience. As a result, we believe that the life-cycle of premium
products, such as our super first class suite of products, premium class
seating and mood lighting, will continue to compress as airlines make
investments in cabin interior products on a more frequent basis. For
example, during 2005 British Airways selected us to outfit their wide-body
fleet with our next generation horizontal lie-flat seats. In 2000, British
Airways revolutionized the airline industry by introducing the first
horizontal business class lie-flat seats (which were subsequently
installed
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on their wide-body fleet during 2001-2002). We believe British Airways'
decision to select our next generation horizontal lie-flat seats may
accelerate the retrofit cycle for premium class seating products for other
airlines operating wide-body aircraft serving international routes.
Through December 31, 2005 retrofit activity for the international airlines
with twin aisle aircraft has consisted of upgrading the premium class
seating, mood lighting and food and beverage preparation equipment for the
first and business class sections of their international fleets. These
international airlines are now beginning to address their coach class
retrofit requirements, which bodes well for future bookings and revenue
growth.
Growth of Wide-Body Aircraft Fleet. According to the Airline Monitor,
new deliveries of wide-body aircraft totaled 143 in 2005 and are expected
to total approximately 1,100 aircraft over the 2007-2010 period. Airbus
estimates that passenger seating on wide-body and super wide-body aircraft
will grow from 38% of seat placements currently, to 50% of seat placements
by 2023. We expect to benefit from this trend as wide-body aircraft
generally carry more than five-to-eight times the dollar value of products
of the type that we manufacture as compared to single-aisle, or
narrow-body, aircraft.
Growth of Worldwide Airline Fleet. As a result of the current and
projected growth in worldwide air traffic, deliveries of new aircraft are
expected to grow. According to the Airline Monitor, new deliveries of
large commercial aircraft grew to 650 aircraft in 2005 from 600 in 2004
the approximate amount of new deliveries and are expected to increase to
840 in 2006, 920 in 2007, 985 in 2008 and 1030 in 2009. The worldwide
fleet of passenger and cargo aircraft was approximately 17,425 as of
December 31, 2005 and, according to the Airline Monitor, is expected to
increase to 40,100 by December 31, 2025. As the size of the fleet expands,
demand should also grow for upgrade and refurbishment programs, for cabin
interior products and for maintenance products, including spares and
fasteners.
Growth in New Aircraft Introductions Lead to New Cabin Interior Product
Introductions and Major Retrofit Opportunities. Over the past two years,
16 customers have placed orders for 159 of the new Airbus A380 super
wide-body aircraft and 23 airlines have placed orders for 291 the new
Boeing 787 wide-body aircraft. Emirates Airline and Qantas Airways, which
together account for 40% of all A380 passenger aircraft 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. Additionally, Qantas Airways and Air
France have selected us to outfit their A380 Aircraft with next generation
lie-flat business class seats, and Singapore Airlines and several other
A380 customers have selected us to supply them with our newly-designed
oven, refrigeration and beverage maker products. We believe that a number
of airlines, including those that have already placed orders to date for
next generation wide-body aircraft, are also evaluating their existing
wide-body fleets to ensure that they can maintain fleet-wide commonality
of cabin interiors as they begin to take delivery of the new aircraft. For
example, Emirates Airline has now also selected us to outfit a number of
its Boeing 777 wide-body aircraft with our super first class cabin
interiors and new horizontal lie-flat business class seats, and Air France
has selected us to supply our new A380 business class seats on its Boeing
777 fleet. Although none of the airlines that placed orders for the new
Boeing 787 wide-body aircraft have begun to place orders for these cabin
interiors, we expect to be selected to outfit a significant portion of
these aircraft.
Growth in Business Jet and VIP Aircraft Markets. Business jet deliveries
increased by 26% in 2005 from deliveries in 2004 We expect several larger
business jet types, including the Boeing Business Jet, the Bombardier
Challenger, the Global Express and the Global 5000, the Gulfstream 450 and
550, the Falcon 900 and the Falcon 7x, the Airbus Corporate Jet, the
Cessna Citation X and the Cessna Citation XLS, to be significant
contributors to growth in new general aviation aircraft deliveries in the
future. Industry sources estimate that approximately 3,300 business jets
will be built during the 2006 through 2010 period, with over 38% projected
to be larger business jets. This is important to us because the typical
cost of cabin interior products manufactured for a small business jet is
approximately $160,000, 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, because the average age of the more than 13,000 general aviation
and VIP aircraft existing today is approximately 16 years, we believe
significant cabin interior retrofit and upgrade opportunities exist.
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. Because
nearly 60% of fastener demand is generated by the existing worldwide
fleet, demand for fasteners should increase over time as the fleet
expands, similar to the market for cabin interior products.
9
Business Strategy
Our business strategy is to maintain a leadership position and to best serve
our customers by:
o Offering broad and innovative products and services in the industry;
o Offering a broad range of engineering services, including design,
integration, installation and certification services, and aircraft
reconfiguration along with passenger to freighter conversion services;
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 general aviation airframe manufacturer and encompassing our
entire product line.
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.
The following is a summary of net sales for each of our segments:
Fiscal Year Ended December 31,
--------------------------------------------------------------------------
2005 2004 2003
--------------------- --------------------- ------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
-------- ------------ -------- ------------ --------- --------------
Commercial Aircraft
Seating $281.8 33.4% $251.4 34.3% $217.9 34.9%
Interior systems 164.9 19.5% 149.0 20.3% 137.5 22.0%
Engineering services,
structures and
components 103.3 12.3% 113.7 15.5% 99.9 16.0%
-------- ------------ -------- ------------ --------- --------------
Total Commercial Aircraft 550.0 65.2% 514.1 70.1% 455.3 72.9%
Distribution segment 173.9 20.6% 144.2 19.7% 103.7 16.6%
Business jet segment 120.2 14.2% 75.2 10.2% 65.4 10.5%
-------- ------------ -------- ------------ --------- --------------
Net sales $844.1 100.0% $733.5 100.0% $624.4 100.0%
===================== ===================== ========================
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, 2005 we had an aggregate installed base of
approximately 1.0 million aircraft seats valued at replacement prices of
approximately $2.7 billion.
First and Business Classes. Based upon major airlines' program selection and
our backlog, 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.
10
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 and kit upgrades.
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, 2005
we had an aggregate installed base of such equipment, valued at replacement
prices, of approximately $1.6 billion.
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 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. The Boeing 787 will be the first aircraft
equipped with a passenger oxygen system using our advanced "Pulse Oxygen"
technology. The Pulse Oxygen system delivers oxygen more efficiently than
traditional passenger systems and reduces overall system weight and fuel burn
and facilitates lower maintenance and cabin reconfiguration costs, when compared
to traditional oxygen systems.
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. Long-haul international flights can carry two flight crews and the
off-duty flight crew often utilize crew rest compartments to sleep during the
flight. A crew rest compartment is constructed utilizing lightweight cabin
interior materials and incorporates seating, electrical, heating,
11
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. In addition, China Southern recently selected us to
convert six of their A300-600 wide-body passenger aircraft to freighter
aircraft. Freighter conversions require sophisticated engineering capabilities
and very large and complex proprietary parts kits.
Distribution Segment
Through our M & M subsidiary, we believe we offer one of the broadest lines
of fasteners and inventory management services worldwide. Nearly 60% of our
fastener sales are to the aftermarket, and over 60% of our orders are shipped
within 24 hours of receipt. With over 140,000 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, 2005
we had an aggregate installed base of business jet equipment, valued at
replacement prices, of approximately $1.1 billion. In addition, we believe,
based on our experience in the industry, we are the leading manufacturer of
super first class cabin interior products for commercial wide-body aircraft.
Super first class products incorporate a broad range of amenities such as
luxurious first class cabins with appointments such as lie-flat seating,
mini-bars, closets, flat screen televisions and mood lighting.
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 $65.6 million $55.1 million and $44.7 million each of
the three years in the period ended December 31, 2005. We employed 628
professionals in engineering, research and development and program management as
of December 31, 2005. 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
12
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 82% of the purchases of products manufactured by our
Commercial Aircraft Segment (CAS) during the fiscal year ended December 31,
2005. 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.
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, 2005, our direct sales and marketing organization and
product support consisted of 310 persons. In addition, we currently retain 49
independent sales representatives. Our sales to non-U.S. customers were
approximately $445 million for the fiscal year ended December 31, 2005 and $357
million for the fiscal year ended December 31, 2004 or approximately 53% and
49%, respectively, of net sales during such periods. Approximately 84% and 83%
of our total revenues were derived from airlines and other commercial aircraft
operators during the fiscal year ended December 31, 2005 and the fiscal year
ended December 31, 2004, respectively. Approximately 63% of our revenues during
the fiscal year ended December 31, 2005 and 60% of our revenues for the fiscal
year ended December 31, 2004 were from refurbishment, spares and upgrade
programs. During the fiscal years ended December 31, 2005 and December 31, 2004,
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, 2005 was in excess of $1.1
billion as compared to approximately $700 million at December 31, 2004 and $500
million at December 31, 2003. Of our backlog at December 31, 2005, approximately
47% is scheduled to be deliverable within the next twelve months. While 18% of
our total backlog is with North American customers, less than 10% of our total
backlog is with North American airlines. Approximately 30% is with European
customers and approximately 31% is with Pacific-Rim customers and approximately
16% is
13
with Middle East customers. Our backlog includes backlog from all of our
businesses. Orders during the fiscal year ended December 31, 2005 of
approximately $1.2 billion increased by over 33% above the order level during
2004, and our backlog at December 31, 2005 increased by over 57% compared to the
backlog at December 31, 2004 despite a 15.1% year over year increase in
revenues.
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 Groupe Zodiac S.A. 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 Anixeter 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 applicable
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 166 U. S. patents and 123 international patents, as well as
66 U.S. patent applications and 80 foreign patent applications 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, 2005, we had approximately 3,980 employees. Approximately
68% of our employees are engaged in manufacturing/distribution operations, 16%
in engineering, research and development and program management 8% in sales,
marketing, and product support and 8% in finance, information technology, legal
and general administration. Unions represent approximately 16% of our worldwide
employees. One domestic labor contract representing approximately 6% of our
employees expires on April 30, 2006. The other labor contract with the only
other domestic union, which represents approximately 2% 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, 2005, December 31,
2004 and December 31, 2003, is set forth in note 12 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, our Proxy
Statement, 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.
ITEM 1A. 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, SARS and the onset of the Iraq war
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 approximately
$42 billion in calendar years 2001-2005, including approximately $7.4 billion in
2005. The airline industry crisis also caused 22 airlines worldwide to declare
bankruptcy or cease operations in the last four years.
As a result of the foregoing, the domestic 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 2001 through 2003 period. Although the global airline
industry began to recover in late 2003 and conditions continue to improve, and
the business jet industry is improving as well, additional events similar to
those described above or other events could cause a deterioration of conditions
in our industry or end the current business cycle. 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.
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 (FAA) 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.
16
From time to time these regulatory agencies propose new regulations. These
new regulations generally cause an increase in costs to comply with these
regulations. For example, when the FAA first enacted Technical Standard Order
C127 in March 1992, requiring that all seats on certain new generation
commercial aircraft installed after such date be certified to meet a number of
safety requirements, including the ability to withstand a 16 G Force, 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.
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.
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
the United Kingdom 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, China 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 net
sales for the past three fiscal years were to customers located outside the
United States and we expect this percentage to increase in the future.
In addition, we have a number of subsidiaries in foreign countries (primarily
in Europe), which have sales outside the United States. Approximately 30% and
32%, respectively, of our sales during the fiscal year ends December 31, 2005,
and 2004 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, 2005, we reported a cumulative foreign
currency translation loss of approximately $4.7 million 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
revenues are not denominated in the same currency as our expenses, our net
earnings could be materially adversely affected. For example, a portion of
labor, material and overhead costs for goods produced in our production
facilities in the United Kingdom and the Netherlands are incurred in British
pounds or euros, respectively, but the related sales revenues are generally
denominated in U.S. dollars. Changes in the value of the U.S. dollar or other
currencies 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.
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. 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 materially adversely affected.
Our foreign operations could also be subject to unexpected changes in
regulatory requirements, tariffs and other market barriers and political,
economic and social instability in the countries where we operate or sell our
products and offer our services. 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.
17
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, 2005,
goodwill and identified intangibles, net, represented approximately 35% of total
assets. Intangible assets consist principally of goodwill and other identified
intangible assets associated with our acquisitions. 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 explore and conduct discussions with many third parties regarding possible
acquisitions. Our ability to continue to achieve our goals may depend upon our
ability to effectively acquire and 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 materially
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
through the capital markets or arrange for additional bank financing in order to
consummate such acquisitions.
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, 2005, we had approximately $678.9 million of total
indebtedness outstanding, representing approximately 54% of total
capitalization, and $322.9 million of net indebtedness outstanding (total
indebtedness less cash and cash equivalents), representing approximately 36% of
net 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. In the future, our business may not
generate sufficient cash flow, or we may not be able to obtain funding, to
satisfy our debt service requirements. We had net losses for the fiscal years
ended December 31, 2004 and 2003, and our earnings were inadequate to cover
fixed charges at the end of each of these periods, and for the years ended
December 31, 2005, and 2004 our cash flows provided by operations were only
$12.6 million and $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.
18
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 or repay existing 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 agreement 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 may not have, or may not be
able to obtain, sufficient funds to make any required accelerated payments.
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 and the new products we may
develop 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 other products used in
this business.
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.
19
Our rights plan and the ability of our board of directors to issue preferred
stock may have the effect of discouraging a 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.
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 2003, the closing sale price of our common
stock has ranged from a low of $1.25 to a high of $ 24.99. 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.
20
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
21
ITEM 2. PROPERTIES
As of December 31, 2005, we had 12 principal operating facilities and one
administrative facility, which comprised an aggregate of approximately 1.4
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 141,000 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
Tucson, Arizona.................. Manufacturing 90,500 Leased
Distribution Miami, Florida................... Distribution 210,000 Leased
Corporate Wellington, Florida.............. Administrative 17,700 Owned
-----------
1,373,450
We believe that our facilities are suitable for their present intended
purposes and adequate for our present and anticipated level of operations.
[Remainder of page intentionally left blank]
22
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.
[Remainder of page intentionally left blank]
23
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 sales prices for the common stock as reported by Nasdaq.
Calendar Year Ended
December 31,
-------------------------------------------------
2005 2004
------------------- ---------------------
High Low High Low
-------------------------------------------------
(Amounts in Dollars)
-------------------------------------------------
First Quarter $13.10 $9.30 $ 7.71 $5.20
Second Quarter 16.48 10.15 8.00 5.72
Third Quarter 17.75 14.05 10.46 6.32
Fourth Quarter 22.46 16.06 11.98 7.90
On March 14, 2006 the last reported sale price of our common stock as
reported by Nasdaq was $24.41 per share. As of such date, based on information
provided to us by Computershare, 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 8-7/8% 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.
[Remainder of page intentionally left blank]
24
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share data)
The financial data for the years ended December 31, 2005, December 31,
2004, and December 31, 2003, the transition period ended December 31, 2002
and for the fiscal year ended February 23, 2002 have been derived from
financial statements that have been audited by our independent registered
public accounting firm. In 2002, we changed our fiscal year to a calendar
year, as a result, we have presented results for the fiscal year ended
February 23, 2002 and the ten-month transition periods ended December 31,
2001 and 2002. The financial data for the period from February 25, 2001 to
December 31, 2001 has been derived from unaudited financial statements. 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.
---------------------------------------- -------------------------- ---------------
Fiscal Ten-Month Fiscal
Year Ended Period Ended Year Ended
December 31, December 31, February 23,
---------------------------------------- -------------------------- ---------------
------------ ------------ ----------- ------------ ----------- ---------------
2005 2004 2003 2002 2001 2002
------------ ------------ ----------- ------------ ----------- ---------------
Statements of Operations Data:
Net sales................................... $ 844.1 $733.5 $ 624.4 $ 503.6 $ 582.6 $ 680.5
Cost of sales(a)............................ 548.5 494.8 453.6 352.3 464.4 530.1
-------- -------- -------- ------- --------- ---------
Gross profit................................ 295.6 238.7 170.8 151.3 118.2 150.4
Gross margin................................ 35.0% 32.5% 27.4% 30.0% 20.3% 22.1%
Operating expenses:
Selling, general and administrative(b).... 136.4 119.2 105.8 128.0 120.2 139.4
Research, development and engineering..... 65.6 55.1 44.7 34.1 36.7 43.5
------- ------- ------- ------- --------- ---------
Operating earnings (loss)................... 93.6 64.4 20.3 (10.8) (38.7) (32.5)
Operating margin............................ 11.1% 8.8% 3.3% NM NM NM
Interest expense, net....................... 59.3 76.1 70.6 57.3 48.8 60.5
Loss on debt extinguishment................. -- 8.8 1.2 -- 9.3 9.3
-------- ---------- -------- ------- --------- ---------
Earnings (loss) before income taxes......... 34.3 (20.5) (51.5) (68.1) (96.8) (102.3)
Income tax (benefit) expense ............... (50.3) 1.5 2.0 2.7 2.0 1.8
--------- -------- -------- ------- --------- ---------
Net earnings (loss)......................... $ 84.6 $ (22.0) $ (53.5) $ (70.8) $ (98.8) $ (104.1)
======== ======== ======== ======= ========= =========
Basic net earnings (loss) per share:
Net earnings (loss)......................... $ 1.44 $ (0.53) $ (1.49) $ (2.03) $ (3.05) $ (3.18)
========= ======= ======= ======= ========= =========
Weighted average common shares.............. 58.8 41.7 36.0 34.9 32.4 32.7
Diluted net earnings (loss) per share:
Net earnings (loss)......................... $ 1.39 $ (0.53) $ (1.49) $ (2.03) $ (3.05) $ (3.18)
========= ======= ======= ======= ========= =========
Weighted average common shares.............. 60.8 41.7 36.0 34.9 32.4 32.7
Balance Sheet Data (end of period):
Working capital............................. $ 573.4 $ 225.0 $ 274.3 $ 262.9 $ 295.6 $ 304.8
Goodwill, intangible and other assets, net.. 525.3 545.5 541.5 534.9 555.2 529.2
Total assets................................ 1,426.5 1,024.8 1,052.5 1,067.1 1,177.8 1,128.3
Long-term debt, net of current portion...... 677.4 678.6 880.1 836.0 853.7 853.5
Stockholders' equity........................ 569.6 182.8 31.9 69.3 142.6 121.1
25
SELECTED FINANCIAL DATA (continued)
Footnotes to Table
(a) Between 1989 and 2001, we completed 22 acquisitions 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
Year Ten Month Period Ten Month Period
Ended Ended Ended Fiscal Year Ended
December 31, December 31, December 31, February 23,
2003 2002 2001 2002
-------------------------------------------------------------------------------
Cash charges (severance, integration costs,
lease termination costs, relocation,
training, facility preparation) $19.9 $32.5 $ 17.1 $ 21.3
Write-down of property, plant, equipment,
inventory and other assets 10.9 7.0 62.9 62.9
Impaired intangible assets -- -- 20.4 20.4
----- ----- ------- ------
$30.8 $39.5 $ 100.4 $104.6
===== ===== ======= ======
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 ten-month period ended December 31, 2002.
26
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
business jets and a leading aftermarket distributor of aerospace fasteners. We
sell our 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:
Seating
-------
o commercial aircraft seats, including an extensive line of super first
class, first class, business class, tourist class and regional
aircraft seats;
Interior systems
----------------
o a full line of aircraft food and beverage preparation and storage
equipment, including coffeemakers, water boilers, beverage
containers, refrigerators, freezers, chillers and a line of ovens
which includes microwave, high heat convection and steam ovens;
o both chemical and gaseous aircraft oxygen delivery systems;
Business Jet products
---------------------
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
Aerospace Fasteners
-------------------
o a broad line of aerospace fasteners, covering over 140,000 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 refurbishment or upgrade programs for
the existing worldwide fleets of commercial and general aviation aircraft and
from the sale of our cabin interior equipment for new aircraft deliveries. For
fiscal 2005, fiscal 2004 and fiscal 2003 approximately 63%, 60% and 57%,
respectively, of our revenues were derived from the aftermarket, with the
remaining portions attributable to the sale of cabin interior equipment
associated with new aircraft deliveries. We believe our large installed base of
products, estimated to be approximately $5.3 billion as of December 31, 2005
(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 incumbent 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 December 31,
---------------------------------------------------------------------------
2005 2004 2003
--------------------- --------------------- --------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
--------------------- --------------------- --------------------------
Commercial Aircraft
Seating $281.8 33.4% $251.4 34.3% $217.9 34.9%
Interior systems 164.9 19.5% 149.0 20.3% 137.5 22.0%
Engineering services,
structures and components 103.3 12.3% 113.7 15.5% 99.9 16.0%
--------------------- --------------------- --------------------------
Total Commercial Aircraft 550.0 65.2% 514.1 70.1% 455.3 72.9%
Distribution segment 173.9 20.6% 144.2 19.7% 103.7 16.6%
Business jet segment 120.2 14.2% 75.2 10.2% 65.4 10.5%
--------- ----------- --------- ----------- --------- ---------------
Net sales $844.1 100.0% $733.5 100.0% $624.4 100.0%
========= =========== ========= =========== ========= ===============
27
Net sales by domestic and foreign operations were as follows:
Fiscal Year Ended December 31,
--------------------------------------------------------------------
2005 2004 2003
-------------------- ------------------- --------------------
United States operations $ 588.4 $ 495.7 $ 408.0
European operations 255.7 237.8 216.4
-------------------- ------------------- --------------------
Total $ 844.1 $ 733.5 $ 624.4
==================== =================== ====================
Net sales by geographic segment (based on destination) were as follows:
Fiscal Year Ended December 31,
----------------------------------------------------------------------------------------
2005 2004 2003
-------------------------------- -------------------------- ---------------------------
% of
Net Net Net % of Net % of
Sales Sales Sales Net Sales Sales Net Sales
------------------------------ -------------------------- -------------------------
United States $399.4 47.3% $376.5 51.3% $307.5 49.3%
Europe 202.2 24.0% 175.1 23.9% 168.4 27.0%
Asia 195.0 23.1% 143.3 19.5% 114.0 18.2%
Rest of World 47.5 5.6% 38.6 5.3% 34.5 5.5%
----------------- ------------ --------- --------------- ---------- --------------
Total $844.1 100.0% $733.5 100.0% $624.4 100.0%
================= ============ ========= =============== ========== ==============
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 protect and enhance our
leadership position. Research, development and engineering spending has been
approximately 7% - 8% of sales for the past several years and is expected to
remain at approximately the current spending level for the next year.
We also believe in providing our businesses with the tools required to remain
competitive. In that regard, we have invested in, and will continue to invest
in, property and equipment that enhances our productivity. Over the past three
years, annual capital expenditures have ranged from approximately $11 - $17.
Taking into consideration our record backlog, targeted capacity utilization
levels, recent capital expenditure investments and current industry conditions,
we expect that annual capital expenditures will be approximately $20 - $22 for
the next several years.
International airline competition for profitable international travelers and
improving worldwide industry conditions have resulted in increasing demand for
our products and services, as demonstrated by record bookings of approximately
$1.2 billion during fiscal 2005 which were up 33%, as compared to fiscal 2004.
At December 31, 2005, backlog was in excess of $1.1 billion, an increase of over
57% as compared to our December 31, 2004 backlog. 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 and
upgrade the cabin interiors of existing active aircraft, we expect our
aftermarket activities to continue to grow. According to IATA, during the year
ended December 31, 2005, the global airline industry expanded airline capacity
by approximately 6% in response to an approximately 8% increase in global air
traffic. 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 and upgrades. However, we feel that the U.S. carriers will
have to upgrade their international fleets to compete on international routes.
We believe there are substantial growth opportunities for retrofit programs,
particularly for the twin-aisle aircraft that service international routes.
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28
RESULTS OF OPERATIONS
Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
Net sales for the year ended December 31, 2005 were $844.1, an increase of
$110.6 or 15.1% as compared to the prior year. Sales in 2005 increased over the
2004 level due to a higher level of customer demand for products offered by each
of our three segments.
Net sales for each of our segments are set forth in the following table:
YEAR ENDED DECEMBER 31,
----------------------------
Percent
2005 2004 Change Change
------------------------------------------------------
Commercial Aircraft $550.0 $514.1 $35.9 7.0%
Distribution 173.9 144.2 29.7 20.6%
Business Jet 120.2 75.2 45.0 59.8%
------------------------------------------------------
Total Sales $844.1 $733.5 $110.6 15.1%
======================================================
CAS generated revenues of $550.0 in 2005, an increase of $35.9 or 7.0% as
compared to 2004, driven by a higher sales volume of commercial aircraft cabin
interior equipment and integration and engineering design and certification
services. The distribution segment generated revenues of $173.9 during 2005, an
increase of $29.7 or 20.6% compared to 2004, driven by a broad-based increase in
aftermarket demand for aerospace fasteners and continued market share gains. The
business jet segment generated revenues during 2005 of $120.2, an increase of
$45.0 or 59.8%, as compared to 2004 reflecting increased shipments of super
first class products and the ongoing recovery of the business jet industry.
Gross profit for 2005 of $295.6 increased by $56.9 or 23.8% on the 15.1%
increase in sales. Gross margin in 2005 of 35.0% increased by 250 basis as
compared to 2004. The increase in gross margin is primarily due to ongoing
manufacturing productivity initiatives and an improved mix of products sold.
Selling, general and administrative expenses during 2005 were $136.4 or 16.2%
of sales, as compared to $119.2 or 16.3% of sales in 2004. The year over year
increase is primarily attributable to higher commissions on increased sales
compared to 2004 as well as higher costs associated with the 15% increase in
revenues and the 57% increase in backlog. In connection with the resolution of
two legal matters during 2005, we received approximately $1.8 of net reimbursed
legal fees; such amounts were offset by $1.2 of costs associated with the
accelerated vesting of stock options.
Research, development and engineering expenses for the year were $65.6 or
7.8% of net sales, an increase of $10.5 as compared with $55.1 or 7.5% of sales
in 2004. The increase as compared to 2004 was attributable to a broad range of
activities associated with newly developed products for the Airbus A380
aircraft, the super first class suite of products, our lie-flat seating product
line, our Pulse Oxygen(TM) system and a number of other new product development
activities.
The following is a summary of operating earnings (loss) by segment:
YEAR ENDED DECEMBER 31,
----------------------------
Percent
2005 2004 Change Change
------------------------------------------------------
Commercial Aircraft $50.9 $39.8 $11.1 27.9%
Distribution 34.9 25.9 9.0 34.7%
Business Jet 7.8 (1.3) 9.1 NM
------------------------------------------------------
Total Sales $93.6 $64.4 $29.2 45.3%
======================================================
Operating earnings for 2005 at CAS were $50.9 or 9.3% of sales, an increase
of $11.1 or 27.9% as compared to 2004, and represent a 31% incremental operating
margin. CAS operating margin for 2005 was 9.3%, an increase of 160 basis points
as compared with 2004, reflecting the improved sales volume, product mix and
ongoing manufacturing efficiencies. The distribution segment generated operating
earnings of $34.9 during 2005, an
29
increase of $9.0 or 34.7% as compared to 2004. The business jet segment
generated operating earnings of $7.8 during 2005, an increase of $9.1 as
compared to the prior year. The business jet segment's 2005 incremental
operating margin of 20% reflects the initial shipments of super first class
products and as well as the impact of five lost days of operations,
and the subsequent overtime and expedite costs associated with hurricane
activity during 2005.
Consolidated operating earnings of $93.6 or 11.1% of sales increased by $29.2
or 45.3% as compared to operating earnings of $64.4 in 2004. The increase in
operating earnings in 2005 was primarily due to the 15.1% increase in sales and
a 230 basis point expansion in operating margin to 11.1% of sales. The 45%
increase in operating earnings was achieved in spite of substantially higher
product development and marketing expenditures to support the record level of
bookings and backlog.
Interest expense, net during 2005 of $59.3 decreased by $16.8 as compared to
2004. The decrease in interest expense was primarily due to the early retirement
of $200.0 of 9 1/2%senior subordinated notes in November 2004.
The company accelerated the recognition of its domestic deferred tax asset
during the fourth quarter of 2005, resulting in a tax benefit of approximately
$51.9 million. The deferred tax asset was recorded as a result of the company's
improving financial performance and outlook, as well as the expected $20 million
reduction in interest expense arising from the redemption of $250 million of the
company's 8% senior subordinated notes, which occurred in January 2006.
Our 2005 consolidated net earnings were $84.6 or $1.39 per diluted share,
reflecting the 45% increase in operating earnings and the $51.9 income tax
benefit. In 2004, we generated a consolidated loss of $22.0 or $0.53 per share.
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30
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 the mix of products
shipped in 2004.
Net sales for each of our segments are set forth in the following table:
YEAR ENDED DECEMBER 31,
------------------------------ Percent
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 aftermarket demand for aerospace 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
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.
31
The following is a summary of operating earnings (loss) by segment:
YEAR ENDED DECEMBER 31,
---------------------------- Percent
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 aftermarket demand for aerospace 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.
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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32
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 $573.4 as of December 31, 2005, as compared to $225.0 as of December 31,
2004. The increase in our December 31, 2005 working capital was primarily due to
the net proceeds of approximately $269 from our December 2005 common stock
offering, the proceeds of which were used to redeem our $250 principal amount of
8% Senior Subordinated Notes in January 2006.
At December 31, 2005, our cash and cash equivalents were $356.0, as compared
to $76.3 at December 31, 2004. The increase in cash and cash equivalents from
December 31, 2004 to December 31, 2005 was primarily due to the net proceeds of
approximately $269 from our December 2005 common stock offering, the proceeds of
which were used to redeem our $250 principal amount of 8% Senior Subordinated
Notes in January 2006.
Cash Flows
At December 31, 2005, our cash and bank credit available under our current
bank credit facility was $394.4 as compared to $114.7 at December 31, 2004. Cash
provided by operating activities was $12.6 for the year ended December 31, 2005
as compared to $0.3 during the year ended December 31, 2004. The primary sources
of cash provided by operating activities during 2005 were net earnings of $84.6
plus non-cash charges for depreciation and amortization of $28.6, less the net
non-cash impact from the recognition of our domestic deferred tax asset of
$23.9. The primary use of cash in operating activities during the year ended
December 31, 2005 was $82.3 of related to changes in our operating assets and
liabilities. The primary use of cash in operating activities 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. In January 2006, we redeemed our $250.0
of 8% Senior Subordinated Notes with the proceeds from our December 2005 common
stock offering.
The primary use of cash in investing activities during the year ended
December 31, 2005 was related to 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, 2004 was
related to an acquisition and capital expenditures for the implementation of new
information system enhancements and plant modernization.
Capital Spending
Our capital expenditures were $16.9 and $14.5 during the years ended
December 31, 2005 and 2004, respectively. We anticipate ongoing annual capital
expenditures of approximately $20 - $22 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. Between 1989 and 2001, we completed
22 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 currently outstanding 8 1/2% senior notes and 8 7/8% senior
subordinated notes and bank credit facilities.
Outstanding Debt and Other Financing Arrangements
Under our $50.0 amended and restated bank credit facility with JPMorgan Chase
Bank 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 (approximately 7.0% at December 31,
2005). At December 31, 2005, indebtedness under the bank credit facility
consisted of letters of credit aggregating approximately $11.6 and the amount
available under the bank credit facility was $38.4 as of December 31, 2005. The
credit facility contains customary affirmative covenants, negative covenants and
conditions of borrowings, all of which were met as of December 31, 2005.
33
Long-term debt at December 31, 2005 consisted principally of our 8 1/2% senior
notes, 8% senior subordinated notes and 8 7/8% senior subordinated notes. We
redeemed our 8% senior subordinated notes in January 2006. The $175 of 8 1/2%
senior notes mature on October 1, 2010, and the $250 of 8 7/8% notes mature on
May 1, 2011. The senior subordinated notes are unsecured senior subordinated
obligations and are subordinated to all of our senior indebtedness. The senior
notes are unsecured obligations and are senior to all of our subordinated
indebtedness, but subordinate to any secured borrowings under our bank credit
facility. Each of the 8 1/2% senior subordinated notes and 8 7/8% senior
subordinated notes contains, and the 8% senior subordinated notes contained,
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, 2005. 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, 2005. 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 2006 2007 2008 2009 2010 Thereafter Total
---------------------------------------------------------------------------------------
Bank credit facility $ -- $ -- $ -- $ -- $ -- $ -- $ --
Other long-term debt(1) 1.5 2.2 250.2 -- 175.0 250.0 678.9
Operating leases 13.9 13.5 12.4 8.5 6.2 40.2 94.7
Purchase obligations (2) 31.8 5.4 3.1 2.1 1.1 1.1 44.6
Future interest payments
on outstanding debt (3) 45.0 37.2 37.1 37.1 33.3 7.4 197.1
--------- -------- -------- --------- -------- -------- ----------
Total $ 92.2 $ 58.3 $ 302.8 $ 47.7 $ 215.6 $ 298.7 $ 1,015.3
======== ======= ======== ======== ======== ======== ==========
Commercial Commitments
Letters of Credit $ 11.6 $ -- $ -- $ -- $ -- $ -- $ 11.6
(1) $250.0 of 8% senior subordinated notes were redeemed in January 2006.
(2) 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.
(3) Approximately $7.2 of the 2006 interest payments relates to the 8%
senior subordinated notes which were redeemed in January 2006.
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.
34
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, 2005, future minimum lease payments
under these arrangements aggregated approximately $95.0.
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 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 Year Ended December 31,
--------------------------------------------------
2005 2004 2003
--------------------------------------------------
Balance at beginning of $ 13.2 $ 11.9 $ 8.9
year
Charges to costs and 13.6 6.5 6.7
expenses
Costs incurred (12.5) (6.2) (3.7)
Acquisitions -- 1.0 --
------- ------- -------
Balance at end of year $ 14.3 $ 13.2 $ 11.9
======= ======= =======
Deferred Tax Assets
We reversed a significant portion of our previously recorded valuation
allowance on our domestic deferred tax assets during the fourth quarter of 2005,
resulting in a tax benefit of approximately $51.9. The deferred tax asset was
recorded as a result of our improving financial performance and outlook, as well
as the expected $20.0 reduction in interest expense arising from the redemption
of $250.0 of our 8% senior subordinated notes, which occurred in January 2006.
We maintained a valuation allowance of $40.5 as of December 31, 2005 related
to our foreign net operating loss carryforward and our domestic capital loss
carryforward because of uncertainties that preclude us from determining that it
is more likely than not that we will be able to generate sufficient taxable
income to realize such assets during the applicable carryforward periods.
35
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board, ("FASB") issued
SFAS No. 123 (revised 2004) ("SFAS No. 123R"), "Share-Based Payment". This
Statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees (APB
25)". SFAS No. 123R addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. SFAS No. 123R eliminates the ability to
account for share-based compensation transactions using the intrinsic value
method under APB 25, and generally would require instead that such transactions
be accounted for using a fair-value-based method. SFAS No. 123R will be
effective for the Company beginning on January 1, 2006. We will use the modified
prospective application transition method and estimates that the adoption of
SFAS No. 123R will not have a material impact on its reported results of
operations due to the acceleration of vesting on all outstanding stock options
approved by us in December 2005 (see Note 10 to our consolidated financial
statements).
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143". FIN No. 47 clarifies the term conditional asset
retirement obligation as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations", and provides further guidance as to when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. Effective December 31, 2005, we adopted the provisions of
FIN No. 47, the adoption of which did not result in any impact to our results of
operations or financial position for the year ended December 31, 2005.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"), which replaces APB Opinion No. 120, "Accounting
Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements." SFAS No. 154 changes the requirements for accounting and reporting
a change in accounting principle, and applies to all voluntary changes in
accounting principles, as well as changes required by an accounting
pronouncement in the unusual instance it does not include specific transition
provisions. Specifically, SFAS No. 154 requires retrospective application to
prior periods' financial statements, unless it is impracticable to determine the
period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the effects of the change, the new accounting
principle must be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable and a corresponding adjustment must be made to the opening balance
of retained earnings for that period rather than being reported in an income
statement. When it is impracticable to determine the cumulative effect of the
change, the new principle must be applied as if it were adopted prospectively
from the earliest date practicable. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005. SFAS No. 154 does not change the transition provisions of any
existing pronouncements. We have evaluated the impact of SFAS No. 154 and we do
not expect the adoption of this Statement to have a significant impact on our
consolidated statement of operations or financial condition. We will apply SFAS
No. 154 in future periods, when applicable.
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 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
36
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.
We sell our products primarily to airlines and aircraft manufacturers
worldwide, including occasional sales collateralized by letters of credit. We
perform ongoing credit evaluations of our customers and maintain reserves for
estimated credit losses. Actual losses have been within management's
expectations. We apply judgment to ensure that the criteria for recognizing
sales are consistently applied and achieved for all recognized sales
transactions.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current creditworthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain an allowance
for estimated credit losses based upon our historical experience and any
specific customer collection issues that we have identified. If the actual
uncollected amounts significantly exceed the estimated allowance, our operating
results would be significantly adversely affected. While such credit losses have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same credit loss rates
that we have in the past.
Inventories
We value our inventories at the lower of cost to purchase or manufacture the
inventory or the current estimated market value of the inventory. Cost is
determined using the standard cost method for our manufacturing businesses and
the weighted average cost method for our distribution businesses. The inventory
balance, which includes the cost of raw material, purchased parts, labor and
production overhead costs, is recorded net of a reserve for excess, obsolete or
unmarketable inventories. We regularly review inventory quantities on hand and
record a reserve for excess and obsolete inventories based primarily on
historical usage and on our estimated forecast of product demand and production
requirements. As demonstrated since the events of September 11, 2001, demand for
our products can fluctuate significantly. Our estimates of future product demand
may prove to be inaccurate, in which case we may have understated or overstated
the provision required for excess and obsolete inventories. In the future, if
our inventories are determined to be overvalued, we would be required to
recognize such costs in our cost of goods sold at the time of such
determination. Likewise, if our inventories are determined to be undervalued, we
may have over-reported our costs of goods sold in previous periods and would be
required to recognize such additional operating income at the time of sale.
Long-Lived Assets (including Tangible and Intangible Assets and Goodwill)
To conduct our global business operations and execute our strategy, we
acquire tangible and intangible assets, which affect the amount of future period
amortization expense and possible impairment expense that we may incur. The
determination of the value of such intangible assets requires management to make
estimates and assumptions that affect our consolidated financial statements. We
assess potential impairment to goodwill of a reporting unit and other intangible
assets on an annual basis or when there is evidence that events or changes in
circumstances indicate that the carrying amount of an asset may not be
recovered. Our judgment regarding the existence of impairment indicators and
future cash flows related to intangible assets are based on operational
performance of our acquired businesses, expected changes in the global economy,
aerospace industry projections, discount rates and other factors. Future events
could cause us to conclude that impairment indicators exist and that goodwill or
other acquired tangible or intangible assets associated with our acquired
businesses is impaired. Any resulting impairment loss could have an adverse
impact on our results of operations.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we
are required to determine our income taxes in each of the jurisdictions in which
we operate. This process involves us calculating our actual current tax
37
together with assessing temporary differences resulting from differing treatment
of items, such as the treatment of accounting reserves, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheets. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income, and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the consolidated statements of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $40.5 as of December 31, 2005, due to uncertainties
related to our ability to utilize our deferred tax assets, primarily consisting
of foreign net operating loss and domestic capital loss carryforwards, 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.
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, 2005, 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, 2005, we had no adjustable rate debt and
fixed rate debt of $674.7. The weighted average interest rate for the fixed
rate debt was approximately 8.45% at December 31, 2005. 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, 2005, 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 $1.3.
ITEM 8. 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, 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 fourth quarter of 2005 that have materially
affected, or are reasonably likely to materially affect, our company's internal
control over financial reporting.
38
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, 2005. 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, 2005, 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/ Amin J. Khoury By: /s/ Thomas P. McCaffrey
---------------------------- ---------------------------------------
Amin J. Khoury Thomas P. McCaffrey
Chairman and Chief Executive Senior Vice President of Administration
Officer and Chief Financial Officer
March 6, 2006 March 6, 2006
39
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, 2005, 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, 2005, 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, 2005, 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 and financial statement schedule as of and for the year ended
December 31, 2005 of the Company and our report dated March 6, 2006 expressed an
unqualified opinion on those financial statements and financial statement
schedule.
/s/ Deloitte & Touche LLP
Costa Mesa, California
March 6, 2006
40
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, 2006. Officers of the Company are elected
annually by the Board of Directors.
Title Age Position
- ----- --- --------
Amin J. Khoury............ 66 Chairman of the Board and Chief Executive
Officer
Robert J. Khoury.......... 63 Director
Jim C. Cowart............. 54 Director*
Richard G. Hamermesh...... 58 Director
Brian H. Rowe............. 74 Director**
Jonathan M. Schofield..... 65 Director**
David C. Hurley........... 65 Director*
Wesley W. Marple, Jr...... 74 Director*
Michael B. Baughan........ 46 President and Chief Operating Officer
Thomas P. McCaffrey....... 51 Senior Vice President of Administration and
Chief Financial Officer
Robert A. Marchetti....... 63 Vice President and General Manager,
Distribution Segment
Mark D. Krosney........... 59 Vice President and General Manager,
Business Jet Segment
Edmund J. Moriarty........ 62 Vice President-Law, General Counsel and
Secretary
Jeffrey P. Holtzman....... 50 Vice President-Finance and Treasurer
Stephen R. Swisher........ 47 Vice President-Finance and Controller
- --------
* Member, Audit Committee
** Member, Stock Option and Compensation Committee
[Remainder of page intentionally left blank]
41
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. Effective December 31, 2005, with Mr. Robert J.
Khoury's retirement, Mr. Amin J. Khoury was appointed Chief Executive Officer.
Mr. Amin J. Khoury also served as the Company's 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 has been 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. From 1986 through March 2005, Mr. Khoury was also 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.
Jim C. Cowart has been a Director since November 1989. Since September 2005,
Mr. Cowart has been Chairman of EAG Holdings LLC, a provider of surface analysis
and materials characterization microanalytical services. 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. 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, Hexel Corporation, Ionatron,
Inc. and Genesee and Wyoming Railroad.
42
Wesley W. Marple, Jr. has been a Director since October 2003. Dr. Marple is
currently a Professor of Finance at Northeastern University. 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.
Robert J. Khoury has been a Director since July 1987, when he co-founded the
Company. On December 31, 2005, Mr. Khoury retired from service as the Company's
President and Chief Executive Officer, a position he held since August 2000.
From April 1996 through August 2000, he served as Vice Chairman. Mr. Khoury is
the brother of Amin J. Khoury.
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 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. Additionally, since October
2004, Mr. Rowe has served as Chairman of the Board of Landmark Aviation, an
aerospace company. Mr. Rowe is also on the boards of Turbo Combustor
Technologies, Inc. and Grand Prairie Accessory Services, LLC.
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.; Turbo Combustor Technology, Inc.; Douglas Machine; and is a
trustee of LIFT Trust.
Executive Officers
Michael B. Baughan has been President and Chief Operating Officer since
December 31, 2005. From July 2002 to December 31, 2005. Mr. Baughan served as
Senior Vice President and General Manager of Commercial Aircraft Segment. From
May 1999 to July 2002, Mr. Baughan was 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.
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.
Robert A. Marchetti has been Vice President and General Manager of Fastener
Distribution Segment since April 2002. From February 2001 to April 2002, Mr.
Marchetti was 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 Vice President and General Manager of Business Jet
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.
43
Edmund J. Moriarty has been Vice President-Law, General Counsel and Secretary
since November, 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. Cowart, 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, 2005, all Section 16(a) filing requirements applicable to our
officers, directors and greater-than-ten-percent beneficial owners were complied
with.
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
maintained on our website at www.beaerospace.com.
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44
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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45
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, 2005 and December 31, 2004
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Fiscal Years Ended December 31, 2005, 2004, and 2003
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended December 31, 2005, 2004, and 2003
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 31, 2005, 2004, and 2003
Notes to Consolidated Financial Statements for the Fiscal Years Ended
December 31, 2005, 2004, and 2003
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.
46
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 (4)
3.4 Certificate of Amendment of the Restated Certificate of Incorporation (13)
3.5 Amended and Restated By-Laws (14)
Exhibit 4 Instruments Defining the Rights of Security Holders, including
debentures
4.1 Specimen Common Stock Certificate (1)
4.2 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 (9)
4.3 Form of Note for the Registrant's 8 7/8% Senior Subordinated Notes and
Series B Subordinated Notes (9)
4.4 Rights Agreement between the Registrant and BankBoston, N.A., as rights
agent, dated as of November 12, 1998 (5)
4.5 Form of Note for the Registrant's 8 1/2% Series B Senior Notes (15)
4.6 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 (15)
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 (16)
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 (17)
10.3 Amendment No. 2 to the Amended and Restated Credit Agreement dated as of
December 5, 2005 between the Registrant, Lenders and JPMorgan Chase Bank,
N.A. (21)
Exhibit 10(iii) Management Contracts and Executive Compensation Plans, Contracts
and Arrangements
10.4 Amended and Restated Employment Agreement as of August 1, 2005 between the
Registrant and Amin J. Khoury. (20)
10.5 Amended and Restated Employment Agreement as of August 1, 2005 between the
Registrant and Robert J. Khoury. (20)
10.6 Amended and Restated Employment Agreement as of August 1, 2005 between the
Registrant and Thomas P. McCaffrey. (20)
10.7 Amended and Restated Employment Agreement dated as of December 31, 2005
between the Registrant and Michael B. Baughan.*
10.8 Employment Agreement dated as of January 15, 2001 between the Registrant
and Mark D. Krosney. (12)
10.9 Employment Agreement dated as of February 26, 2001 between the Registrant
and Robert A. Marchetti. (12)
10.10 Retirement Agreement dated as of December 31, 2005 between the Registrant
and Robert J. Khoury.*
10.11 Consulting Agreement dated as of December 31, 2005 between the Registrant
and Robert J. Khoury.*
10.12 Amended and Restated 1989 Stock Option Plan. (10)
10.13 Amendment No. 1 to Amended and Restated 1989 Stock Option Plan. (7)
10.14 1991 Directors' Stock Option Plan. (3)
10.15 United Kingdom 1992 Employee Share Option Scheme. (2)
10.16 1996 Stock Option Plan. (10)
10.17 Amendment No. 1 to the 1996 Stock Option Plan. (7)
10.18 Amendment No. 2 to the 1996 Stock Option Plan. (8)
10.19 2001 Stock Option Plan. (11)
10.20 2001 Directors' Stock Option Plan. (11)
10.21 1994 Employee Stock Purchase Plan (Amended and Restated as of January 19,
2000). (8)
10.22 Supplemental Executive Deferred Compensation Plan III. (6)
10.23 Group Executive Incentive Plan Chairman, CEO, SR. VPs - FY- 2005. (18)
47
10.24 Group Executive Incentive Plan Group Vice President - Distribution
Business - FY - 2005. (18)
10.25 Group Executive Incentive Plan Group Vice Presidents - FY - 2005. (18)
10.26 2005 Long-Term Incentive Plan (19)
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 (14)
Exhibit 21 Subsidiaries of the Registrant
21.1 Subsidiaries *
Exhibit 23 Consents of Experts and Counsel
23.1 Consent of Independent Registered Public Accounting Firm- 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.
(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-8 (No. 333-48010), filed with the Commission on May 26, 1992.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-60209), filed with the Commission on July 30, 1998.
(5) 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.
(6) 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.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-89145), filed with the Commission on October 15, 1999.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-30578), filed with the Commission on February 16, 2000.
(9) 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.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-14037), filed with the Commission on October 15, 1996.
(11) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-71442), filed with the Commission on October 11, 2001.
(12) 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.
(13) 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.
(14) 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.
48
(15) 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.
(16) 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.
(17) 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.
(18) Incorporated by reference to the Company's Current Report on Form 8-K
dated April 22, 2005, filed with the Commission on April 22, 2005.
(19) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 26, 2005, filed with the Commission on July 26, 2005.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005, filed with the Commission on
August 5, 2005.
(21) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 5, 2005, filed with the Commission on December 5, 2005.
[Remainder of page intentionally left blank]
49
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/ Amin J. Khoury
-----------------------------
Amin J. Khoury
Chairman and Chief Executive Officer
Date: March 15, 2006
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 and Chief Executive Officer March 15, 2006
- ---------------------------------------
Amin J. Khoury
Senior Vice President of Administration
and Chief Financial Officer
/s/ Thomas P. McCaffrey (principal financial and accounting officer) March 15, 2006
- ---------------------------------------
Thomas P. McCaffrey
/s/ Jim C. Cowart Director March 15, 2006
- ---------------------------------------
Jim C. Cowart
/s/ Richard G. Hamermesh Director March 15, 2006
- ---------------------------------------
Richard G. Hamermesh
/s/ David C. Hurley Director March 15, 2006
- ---------------------------------------
David C. Hurley
/s/ Robert J. Khoury Director March 15, 2006
- ---------------------------------------
Robert J. Khoury
/s/ Wesley W. Marple, Jr. Director March 15, 2006
- ---------------------------------------
Wesley W. Marple, Jr.
/s/ Brian H. Rowe Director March 15, 2006
- ---------------------------------------
Brian H. Rowe
/s/ Jonathan M. Schofield Director March 15, 2006
- ---------------------------------------
Jonathan M. Schofield
50
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, 2005 and December 31, 2004 F-3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Fiscal Years Ended December 31, 2005 and 2004, and 2003 F-4
Consolidated Statements of Stockholders' Equity F-5
for the Fiscal Years Ended December 31, 2005 , 2004, and 2003
Consolidated Statements of Cash Flows F-6
for the Fiscal Years Ended December 31, 2005 , 2004, and 2003
Notes to Consolidated Financial Statements F-7
for the Fiscal Years Ended December 31, 2005, 2004, and 2003
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-23
for the Fiscal Years Ended December 31, 2005, 2004, and 2003
[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, 2005 and
December 31, 2004, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity, and cash flows for each of
the three fiscal years in the period ended December 31, 2005. 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, 2005 and December 31, 2004, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 31, 2005, 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, 2005, 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 6, 2006, 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 6, 2006
F-2
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 2005 AND DECEMBER 31, 2004
- --------------------------------------------------------------------
(In millions, except share data)
December 31, December 31,
2005 2004
----------------- ----------------
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 356.0 $ 76.3
Accounts receivable - trade, less allowance for doubtful
accounts ($2.9 and $2.8 at December 31, 2005 and 2004, respectively) 131.9 91.6
Inventories, net 223.7 197.8
Deferred income tax asset, net 17.5 --
Other current assets 15.1 13.4
---------- ----------
Total current assets 744.2 379.1
Property and equipment, net 95.0 100.2
Goodwill 362.9 370.4
Identified intangibles, net 139.9 151.4
Deferred income tax asset, net 62.0 --
Other assets, net 22.5 23.7
---------- ----------
$ 1,426.5 $ 1,024.8
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 169.3 $ 152.6
Current portion of long-term debt 1.5 1.5
---------- ----------
Total current liabilities 170.8 154.1
Long-term debt, net of current portion 677.4 678.6
Deferred income tax liabilities, net 1.8 1.5
Other liabilities 6.9 7.8
Commitments, contingencies and off-balance-sheet arrangements (Note 7)
Stockholders' Equity:
Preferred stock, $0.01 par value; 1.0 million shares
authorized; no shares outstanding -- --
Common stock, $0.01 par value; 100.0 million shares
authorized; 74.3 million (December 31, 2005) and
56.6 million (December 31, 2004)
shares issues and outstanding 0.7 0.6
Additional paid-in capital 894.0 578.2
Accumulated deficit (320.4) (405.0)
Accumulated other comprehensive (loss) income (4.7) 9.0
---------- ----------
Total stockholders' equity 569.6 182.8
---------- ----------
$ 1,426.5 $ 1,024.8
========== ==========
See notes to consolidated financial statements
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- -----------------------------------------------------------
(In millions, except share data)
Fiscal Year Ended December 31,
-------------------------------------------------------------------
2005 2004 2003
Net sales $ 844.1 $ 733.5 $ 624.4
Cost of sales 548.5 494.8 453.6
--------- --------- ---------
Gross profit 295.6 238.7 170.8
Operating expenses:
Selling, general and administrative 136.4 119.2 105.8
Research, development and engineering 65.6 55.1 44.7
--------- --------- ---------
Total operating expenses 202.0 174.3 150.5
--------- --------- ---------
Operating earnings 93.6 64.4 20.3
Interest expense, net 59.3 76.1 70.6
Loss on debt extinguishment -- 8.8 1.2
--------- --------- ---------
Earnings (loss) before income taxes 34.3 (20.5) (51.5)
Income tax (benefit) expense (50.3) 1.5 2.0
--------- --------- ---------
Net earnings (loss) 84.6 (22.0) (53.5)
Other comprehensive income (loss):
Foreign exchange translation adjustment (13.7) 8.3 12.3
--------- --------- ---------
Comprehensive income (loss) $ 70.9 $ (13.7) $ (41.2)
========= ========= =========
Net earnings (loss) per share - basic $ 1.44 $ (0.53) $ (1.49)
========= ========= =========
Net earnings (loss) per share - diluted $ 1.39 $ (0.53) $ (1.49)
========= ========= =========
Weighted average common shares - basic 58.8 41.7 36.0
========= ========= =========
Weighted average common shares - diluted 60.8 41.7 36.0
========= ========= =========
See notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
- ------------------------------------------------------------
(In millions)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income (Loss) Equity
------ ------ ---------- ----------- ------------- -------------
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 common stock
under public offering 18.4 0.2 156.3 -- -- 156.5
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
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
Sale of common stock under
public offering 15.0 0.1 268.6 -- -- 268.7
Sale of stock under
employee stock purchase plan 0.2 -- 2.8 -- -- 2.8
Exercise of stock options 2.3 -- 13.5 -- -- 13.5
Employee benefit plan
matching contribution 0.2 -- 2.9 -- -- 2.9
Deferred income tax benefit
from share based payments -- -- 28.0 -- -- 28.0
Net earnings -- -- -- 84.6 -- 84.6
Foreign currency translation
adjustment -- -- -- -- (13.7) (13.7)
----- ------ -------- -------- ------- --------
Balance, December 31, 2005 74.3 $ 0.7 $ 894.0 $ (320.4) $ (4.7) $ 569.6
===== ====== ======== ======== ======= ========
See notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
- ------------------------------------------------------------
(In millions)
Fiscal Year Ended December 31,
--------------------------------------------------------
2005 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 84.6 $ (22.0) $ (53.5)
Adjustments to reconcile net earnings (loss) to
net cash flows provided by (used in) operating
activities:
Depreciation and amortization 28.6 28.4 28.3
Deferred income taxes (51.9) -- --
Excess tax benefits from share-based payments 28.0 -- --
Non-cash compensation 4.1 2.3 2.2
Provision for doubtful accounts 0.5 1.0 1.1
Loss on disposal of property and equipment 1.0 -- 1.6
Loss on debt extinguishment -- 8.8 1.2
Impairment of inventories -- -- 8.4
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (46.7) (7.0) (3.5)
Inventories (28.9) (25.6) (9.5)
Other assets (30.8) 2.5 13.6
Payables, accruals and other liabilities 24.1 11.9 (15.4)
-------- -------- --------
Net cash flows provided by (used in) operating activities 12.6 0.3 (25.5)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (16.9) (14.5) (11.2)
Acquisitions of businesses, net of cash acquired -- (12.5) (2.7)
Proceeds from sales of property and equipment -- 0.5 4.2
Other, net 1.6 (0.3) (0.9)
-------- -------- --------
Net cash flows used in investing activities (15.3) (26.8) (10.6)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of
expenses 285.1 162.3 1.4
Principal payments on long-term debt (0.9) (202.0) (2.3)
Payment of debt origination costs and prepayment costs -- (6.3) (6.1)
Proceeds from long-term debt -- -- 175.0
Repayments of bank credit facility -- -- (144.0)
-------- -------- --------
Net cash flows provided by (used in) financing activities 284.2 (46.0) 24.0
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (1.8) 1.2 2.8
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 279.7 (71.3) (9.3)
Cash and cash equivalents, beginning of year 76.3 147.6 156.9
-------- -------- --------
Cash and cash equivalents, end of year $ 356.0 $ 76.3 $ 147.6
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest, net $ 57.8 $ 76.9 $ 66.4
Income taxes, net 3.2 3.2 3.0
See notes to consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- -----------------------------------------------------------
(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.
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.
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.
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.
Inventories - The Company values inventory at the lower of cost (FIFO or
weighted average cost method) 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. Demand for the Company's products can fluctuate significantly.
F-7
Debt Issuance Costs - Costs incurred to issue debt are deferred and
amortized as interest expense over the term of the related debt.
Goodwill and Identified Intangible Assets - Under Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
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
4). 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 impairment loss was recorded during the fiscal years
ended December 31, 2005, 2004 or 2003.
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:
Fiscal Year Ended December 31,
---------------------------------------------------------------------------
2005 2004 2003
Balance at beginning of period $ 13.2 $ 11.9 $ 8.9
Charges to costs and expenses 13.6 6.5 6.7
Costs incurred (12.5) (6.2) (3.7)
Acquisitions -- 1.0 --
------ ------ ------
Balance at end of period $ 14.3 $ 13.2 $ 11.9
====== ====== ======
F-8
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.
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 years ended December 31, 2005, 2004 and 2003
would have changed to the pro forma amounts indicated in the following table:
Fiscal Year Ended December 31,
-----------------------------------------------------
2005 2004 2003
As reported
Net earnings (loss) $ 84.6 $ (22.0) $ (53.5)
Add: Stock-based compensation expense
included in reported net earnings, net
of tax effects 0.7 -- --
Deduct: Expense per SFAS No. 123,
fair value method, net of
related tax effects (5.6) (7.4) (3.3)
-------- -------- --------
Pro forma net earnings (loss) $ 79.7 $ (29.4) $ (56.8)
-------- -------- --------
Basic and diluted net earnings (loss) per share:
Net earnings (loss)
Per share - basic
As reported $ 1.44 $ (0.53) $ (1.49)
Proforma $ 1.36 $ (0.70) $ (1.58)
Net earnings (loss)
Per share - diluted
As reported $ 1.39 $ (0.53) $ (1.49)
Proforma $ 1.31 $ (0.70) $ (1.58)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions used for options granted during the fiscal years ended December 31,
2005, 2004 and 2003:
Fiscal Year Ended December 31,
---------------------------------------------
2005 2004 2003
Weighted average valuation assumptions:
Risk-free interest rate 4.1% 2.8% 3.0%
Dividend yield 0% 0% 0%
Volatility 65% 84% 91%
Expected life (years) 2.2 3.3 3.5
The weighted-average fair value of employee purchase rights granted pursuant
to the Company's Employee Stock Purchase Plan during fiscal 2005, 2004 and 2003
was $3.41, $1.96 and $1.08, respectively. The fair value of those purchase
rights at the date of grant was estimated using the Black-Scholes option pricing
model with the following weighted-average assumptions during fiscal 2005, 2004
and 2003:
Fiscal Year Ended December 31,
---------------------------------------------
2005 2004 2003
Weighted average valuation assumptions:
Risk-free interest rate 3.0% 1.3% 1.2%
Dividend yield 0% 0% 0%
Volatility 41% 68% 104%
Expected life (years) 0.5 0.5 0.5
F-9
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.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board, ("FASB") issued
SFAS No. 123 (revised 2004) ("SFAS No. 123R"), "Share-Based Payment". This
Statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS
No. 123R addresses the accounting for share-based payment transactions in which
an enterprise receives employee services in exchange for (a) equity instruments
of the enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R eliminates the ability to account for
share-based compensation transactions using the intrinsic value method under APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and generally would
require that such transactions be accounted for using a fair-value-based method.
SFAS No. 123R will be effective for the Company beginning on January 1, 2006.
The Company will use the modified prospective application transition method and
estimates that the adoption of SFAS No. 123R will not have a material impact on
its reported results of operations due to the acceleration of vesting on all
outstanding stock options approved by the Company in December 2005 (see Note
10).
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143". FIN No. 47 clarifies the term conditional asset
retirement obligation as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations", and provides further guidance as to when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. Effective December 31, 2005, the Company adopted the
provisions of FIN No. 47, the adoption of which did not result in any impact to
our results of operations or financial position for the year ended December 31,
2005.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"), which replaces APB Opinion No. 120, "Accounting
Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements." SFAS No. 154 changes the requirements for accounting and reporting
a change in accounting principle, and applies to all voluntary changes in
accounting principles, as well as changes required by an accounting
pronouncement in the unusual instance it does not include specific transition
provisions. Specifically, SFAS No. 154 requires retrospective application to
prior periods' financial statements, unless it is impracticable to determine the
period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the effects of the change, the new accounting
principle must be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable and a corresponding adjustment must be made to the opening balance
of retained earnings for that period rather than being reported in an income
statement. When it is impracticable to determine the cumulative effect of the
change, the new principle must be applied as if it were adopted prospectively
from the earliest date practicable. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005. SFAS No. 154 does not change the transition provisions of any
existing pronouncements. The Company has evaluated the impact of SFAS No. 154
and does not expect the adoption of this Statement to have a significant impact
on its consolidated statement of income or financial condition. The Company will
apply SFAS No. 154 in future periods, when applicable.
F-10
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using FIFO or 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, 2005 December 31, 2004
-------------------------------- ----------------------------
Purchased materials and component parts $ 59.8 $ 51.7
Work-in-process 18.5 16.2
Finished goods (primarily aftermarket fasteners) 145.4 129.9
-------- --------
$ 223.7 $ 197.8
======== ========
3. 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) 2005 2004
--------------- -------------------- --------------------
Land, buildings and improvements 10 - 30 $ 37.0 $ 37.4
Machinery 3 - 13 58.9 59.4
Tooling 3 - 10 19.6 19.8
Computer equipment and software 3 - 15 94.2 95.6
Furniture and equipment 2 - 10 9.6 9.9
------- -------
219.3 222.1
Less accumulated depreciation and amortization (124.3) (121.9)
------- -------
$ 95.0 $ 100.2
======= =======
Aggregate depreciation expense was approximately $18.8, $19.1 and $19.2 for
the fiscal years ended December 31, 2005, 2004 and 2003 respectively.
4. 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 through
business acquisition transactions:
December 31, 2005 December 31, 2004
--------------------------------------- ------------------------------------
Net Net
Useful Life Original Accumulated Book Original Accumulated Book
(Years) Cost Amortization Value Cost Amortization Value
-------------- ----------- --------------- ----------- ----------- -------------- ---------
Acquired technologies 4-30 $ 93.6 $23.4 $ 70.2 $ 94.1 $20.6 $ 73.5
Trademarks and patents 7-30 26.5 13.0 13.5 27.7 12.3 15.4
Trademarks (nonamortizing) -- 20.6 -- 20.6 20.6 -- 20.6
Technical qualifications, plans
and drawings 3-30 30.8 16.7 14.1 31.4 15.7 15.7
Replacement parts annuity
and product approvals 3-30 40.4 24.8 15.6 42.2 23.9 18.3
Covenant not to compete and
other identified intangibles 3-10 20.8 14.9 5.9 20.9 13.0 7.9
------- ------ ------- ------- ------ -------
$ 232.7 $ 92.8 $ 139.9 $ 236.9 $ 85.5 $ 151.4
======= ====== ======= ======= ====== =======
Aggregate amortization expense of intangible assets was approximately
$9.8, $9.3 and $9.1 for the fiscal years ended December 31, 2005, 2004 and 2003,
respectively. Amortization expense associated with identified intangible assets
is expected to be approximately $10.0 in each of the next five years.
F-11
Changes to the original cost basis of goodwill during the calendar year
ended December 31, 2005 were due foreign currency fluctuations. The changes in
the carrying amount of goodwill for the fiscal years ended December 31, 2005 and
2004 are as follows:
Commercial Business
Aircraft Distribution Jet Total
-------------------- -------------------- -------------------- --------------------
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
Effect of foreign currency translation (7.3) (0.2) -- (7.5)
-------- -------- -------- --------
Balance as of December 31, 2005 $166.8 $108.0 $ 88.1 $ 362.9
======== ======== ======== =======
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
December 31, December 31,
2005 2004
---------------- ----------------
Accounts payable $ 80.7 $ 75.0
Accrued salaries, vacation and related benefits 21.6 16.0
Accrued interest 14.1 14.1
Accrued product warranties 14.3 13.2
Other accrued liabilities 38.6 34.3
-------- --------
$ 169.3 $ 152.6
======== ========
6. LONG-TERM DEBT
Long-term debt consists of the following:
December 31, December 31,
2005 2004
---------------- ----------------
8 1/2% Senior Notes $ 175.0 $ 175.0
8% Senior Subordinated Notes 249.9 249.8
8 7/8% Senior Subordinated Notes 250.0 250.0
Other long-term debt 4.0 5.3
-------- --------
678.9 680.1
Less current portion of long-term debt (1.5) (1.5)
-------- --------
$ 677.4 $ 678.6
======== ========
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 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
F-12
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.
8% Senior Subordinated Notes
The 8% Senior Subordinated Notes (the "8% Notes") were senior unsecured
obligations of the Company. In January 2006, the Company redeemed the 8% Notes
at a redemption price equal to 100% of the principal amount, together with the
interest accrued through the redemption date, with the net proceeds of the
December 2005 common stock offering. The Company incurred a loss on debt
extinguishment of $1.8 related to unamortized debt issue costs, and fees and
expenses related to the redemption of the 8% Notes, which has been recorded in
the first quarter of 2006.
The 8 1/2% and 8 7/8% Notes contain, and the 8% Notes contained, 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, 2005.
Bank Credit Facilities
The Company has a $50.0 credit facility with JPMorgan Chase Bank (the
"Amended Bank Credit Facility"). 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, 2005.
At December 31, 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 (which, as of December 31, 2005, was approximately 7.0%). The
amount available for borrowing under the Amended Bank Credit Facility was $38.4
as of December 31, 2005.
Royal Inventum B.V., one of the Company's subsidiaries, has a revolving
credit agreement aggregating approximately $0.5 that renews annually. This
credit agreement is collateralized by accounts receivable and inventories. There
were no borrowings outstanding under Royal Invention B.V.'s credit agreement as
of December 31, 2005.
Maturities of long-term debt, are as follows:
Year Ending December 31,
------------------------
2006 $1.5
2007 2.2
2008 250.2
2009 --
2010 175.0
Thereafter 250.0
-----
Total $678.9
======
Interest expense amounted to $60.8 for the fiscal year ended December 31,
2005, $77.5 for the fiscal year ended December 31, 2004 and $71.6 for the fiscal
ended December 31, 2003, respectively.
F-13
7. 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 December 31, 2005, future
minimum lease payments under these arrangements approximated $94.7, of which
approximately $84.4 is related to facility leases.
Rent expense for the fiscal years ended December 31, 2005, 2004 and 2003 was
approximately $15.1, $15.4 and $14.0, respectively. Future payments under
operating leases with terms currently greater than one year are as follows:
Year Ending December 31,
------------------------
2006 $13.9
2007 13.5
2008 12.4
2009 8.5
2010 6.2
Thereafter 40.2
-----
Total $94.7
=====
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
Company's maximum potential future payments. 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 $0.9 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 retirement benefit equal to
the product of the years worked times 150% of the highest annual salary paid
over the period. Retirement compensation is payable in a lump sum, less any
prior distributions.
A second agreement provides for an officer to receive annual minimum
compensation of $0.4 per year through the two year period ending December 31,
2007, unless otherwise extended, and is adjusted annually for changes in the
consumer price index (as defined) or as determined by the Company's Board of
Directors.
A third agreement provides for an officer to receive annual minimum
compensation of $0.4 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 retirement compensation 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). The retirement compensation is payable in a lump sum, less any prior
distributions.
Retirement compensation has been accrued as provided for under the
above-mentioned employment agreements. Through December 31, 2005, the Company
fully funded these and other retirement 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 $2.4 expiring on
various dates through the year 2007. The Company's employment agreements
generally provide for certain protections in the event of a change of control.
F-14
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.
8. INCOME TAXES
The components of net earnings (loss) before incomes taxes were:
Fiscal Year Ended December 31,
-------------------------------------------------------------------------
2005 2004 2003
Earnings (loss) before income
taxes
United States $ 23.5 $ (9.3) $ (16.4)
Foreign 10.8 (11.2) (35.1)
------- ------- --------
Earnings (loss) before income
taxes $ 34.3 $ (20.5) $ (51.5)
======= ======= ========
Income tax (benefit) expense consists of the following:
Fiscal Year Ended December 31,
-------------------------------------------------------------------------
2005 2004 2003
Current:
Federal $ -- $ -- $ (0.9)
State -- 0.1 --
Foreign 1.6 1.4 2.9
---------- ------ ------
1.6 1.5 2.0
---------- ------ ------
Deferred:
Federal (48.7) -- --
State (3.2) -- --
Foreign -- -- --
---------- ------ ------
(51.9) -- --
---------- ------ ------
$ (50.3) $ 1.5 $ 2.0
========== ====== ======
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 Year Ended December 31,
------------------------------------------------------------------------
2005 2004 2003
Statutory federal income tax expense (benefit) $ 12.0 $ (7.2) $ (18.0)
U.S. State income taxes (2.1) 0.1 --
Dividend income from foreign affiliate 3.0 -- --
Foreign tax rate differential (2.2) 5.4 15.2
Non-deductible charges 1.3 0.5 1.5
Change in federal valuation allowance (62.3) 2.7 3.3
--------- -------- --------
$ (50.3) $ 1.5 $ 2.0
========= ======== ========
F-15
For the years ended December 31, 2003, and December 31, 2004, the Company
had recorded a valuation allowance to fully reserve its net deferred tax assets
based on the Company's assessment that the realization of the net deferred tax
assets did not meet the "more likely than not" criterion under SFAS No. 109,
"Accounting for Income Taxes". The Company reversed a significant portion of its
valuation allowance on its domestic deferred tax asset during the year ended
2005. The deferred tax asset was recorded as a result of the Company's improving
financial performance and outlook, as well as the expected $20 million reduction
in interest expense arising from the redemption of $250 million of the Company's
8% Notes, which occurred in January 2006.
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,
2005 2004 2003
-------------- ------------ ----------------
Deferred tax assets:
Inventory reserves $ 9.4 $ 8.3 $ 10.1
Warranty accruals 4.1 3.7 3.4
Accrued liabilities 6.5 13.4 10.4
Net operating loss carryforward 139.1 137.7 125.0
Federal capital loss carryforward 13.0 13.0 13.0
Federal research credit carryforward 3.7 3.7 3.7
Other 6.0 2.4 2.1
-------- -------- --------
181.8 182.2 167.7
-------- -------- --------
Deferred tax liabilities:
Acquisition accruals (11.7) (9.4) (8.4)
Intangible assets (39.1) (31.1) (5.0)
Depreciation (5.8) (7.6) (12.6)
Software development costs (7.0) (6.3) (5.4)
-------- -------- --------
(63.6) (54.4) (31.4)
-------- -------- --------
Net deferred tax asset before valuation allowance 118.2 127.8 136.3
Valuation allowance (40.5) (129.3) (136.3)
-------- --------- ---------
Net deferred tax asset/(liability) $ 77.7 $ (1.5) $ --
======== ========= =========
The Company maintained a valuation allowance of $40.5 as of December 31,
2005 primarily related to its foreign net operating loss carryforwards and its
domestic capital loss carryforward 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
applicable carryforward periods.
As of December 31, 2005, the Company had federal, state and foreign net
operating loss carryforwards of approximately $293, $204 and $76, respectively.
The federal and state net operating loss carryforwards begin to expire in 2012
and 2006, respectively. 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, 2005, the Company had a federal research tax credit
carryforward of approximately $3.7 which begins to expire in 2012.
The Company has not provided for any residual U.S. income taxes on the
approximately $58 of earnings from its foreign subsidiaries because such
earnings are intended to be indefinitely reinvested. Such residual U.S. income
taxes, if provided for, would not be material.
F-16
9. EMPLOYEE RETIREMENT PLANS
The Company sponsors and contributes to a qualified, defined contribution
Savings and Investment Plan covering substantially all U.S. employees. 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 100% of their pay, limited to $14.0
thousand per year. The Company matches to 50% of employee contributions, subject
to a maximum of 8% of an employee's base pay and through December 31, 2005, such
contributions were funded in Company stock. Total expense for the plan was $3.2,
$3.1 and $2.6 for the calendar years ended December 31, 2005, 2004, and 2003,
respectively. Participants vest 100% in the Company match after three years of
service.
10. STOCKHOLDERS' EQUITY
Earnings (Loss) Per Share. Basic earnings (loss) per common share is
determined by dividing net earnings (loss) applicable to common shareholders by
the weighted average number of shares of common stock outstanding. Diluted
earnings (loss) per share is determined by dividing net earnings (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
earnings (loss) per share for the fiscal years ended December 31, 2005, 2004 and
2003:
Fiscal Year Ended December 31,
---------------------------------------------------------------------
2005 2004 2003
Numerator - Net earnings (loss) $ 84.6 $ (22.0) $ (53.5)
======= ======= =======
Denominator:
Denominator for basic earnings (loss) per share -
Weighted average shares 58.8 41.7 36.0
Effect of dilutive securities -
Dilutive securities 2.0 -- --
------- ------- -------
Denominator for diluted earnings (loss) per share -
Adjusted weighted average shares 60.8 41.7 36.0
======= ======= =======
Basic net earnings (loss) per share $ 1.44 $(0.53) $(1.49)
======= ======= =======
Diluted net earnings (loss) per share $ 1.39 $(0.53) $(1.49)
======= ======= =======
The Company excluded potentially dilutive securities from the calculation of
net earnings (loss) per share of approximately 1.6 million and 0.4 million for
the fiscal years ended December 31, 2004 and 2003, respectively, because the
effect would have been antidilutive.
F-17
Stock Option Plans. The Company has a stock option plan under which shares
of the Company's common stock may be granted to key employees and directors of
the Company. The option plan provides for granting key employees options to
purchase the Company's common stock. Options are granted at the discretion of
the Compensation Committee of the Board of Directors. Options granted vest 25%
on the date of grant and 25% per year thereafter. In December 2005 the
Compensation Committee of the Board of Directors approved the acceleration of
the vesting of 1.9 million stock options, which represented all remaining
unvested stock options. The Company recorded a charge of $1.2 during the fourth
quarter as a result of the acceleration of the vesting of such stock options. By
accelerating the stock option vesting, the company expects to reduce non-cash
compensation by approximately $2.5 over the 2006-2008 plan period.
The following tables set forth options granted, canceled, forfeited and
outstanding:
December 31, 2005
-----------------
Options
------- Option Price Weighted Average
(in thousands) Per Share Price Per Share
--------- ---------------
Outstanding, beginning of period 7,071 $3.25 - $30.25 $ 7.99
Options granted 160 10.59 - 22.18 18.45
Options exercised (2,362) 3.25 - 17.75 5.73
Options forfeited (63) 4.43 - 29.88 11.06
-----
Outstanding, end of period 4,806 3.25 - 30.25 8.83
======
Exercisable at end of period 4,806 $3.25 - $30.25 $ 8.83
======
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
======
At December 31, 2005, 1,625,341 options were available for grant under the
Company's Option Plans.
Options Outstanding
at December 31, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Options Exercise Price Remaining Options Exercise Price
Exercise Price Outstanding Outstanding Contractual Life Exercisable Exercisable
-------------- ----------- -------------- ---------------- ----------- --------------
(in thousands) (years) (in thousands)
$ 3.25 - $5.59 1,823 $4.98 7.38 1,823 $ 4.98
6.59 - 8.44 1,239 7.09 6.84 1,239 7.09
8.75 - 12.00 1,236 10.56 8.54 1,236 10.56
16.25 - 30.25 508 22.68 3.96 508 22.68
The estimated per share fair value of options granted during the years
ended December 31, 2005, 2004 and 2003 was $4.52, $3.86 and $3.17, respectively.
F-18
In June 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.
11. 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
85% of the closing price at the end of each semi-annual stock purchase period.
The Company issued approximately 241,000, 576,000 and 742,000 shares of common
stock during the fiscal years ended December 31, 2005, 2004 and 2003,
respectively, pursuant to this plan at a weighted average price per share of
$11.45, $4.94 and $1.83, respectively.
12. 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 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 and
Chief Executive Officer, the President and Chief Operating 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:
YEAR ENDED DECEMBER 31, 2005
----------------------------------------------------------------------
Commercial Business
Aircraft Distribution Jet Consolidated
----------------------------------------------------------------------
Net sales $550.0 $173.9 $120.2 $ 844.1
Operating earnings 50.9 34.9 7.8 93.6
Total assets 948.6 284.3 193.6 1,426.5
Goodwill 166.8 108.0 88.1 362.9
Capital expenditures 12.8 1.1 3.0 16.9
Depreciation and amortization 23.2 2.2 3.2 28.6
F-19
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
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
Net sales for these business segments for the fiscal years ended
December 31, 2005, 2004 and 2003 are presented below:
Year Ended Year Ended Year Ended
December 31, 2005 December 31, 2004 December 31, 2003
----------------------- ------------------------ ----------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
-------------------------------------------------------------------------------------
Commercial aircraft $550.0 65.2% $514.1 70.1% $455.3 72.9%
Distribution 173.9 20.6% 144.2 19.7% 103.7 16.6%
Business jet 120.2 14.2% 75.2 10.2% 65.4 10.5%
----------------------- ------------------------ ----------------------------
Net sales $844.1 100.0% $733.5 100.0% $624.4 100.0%
======================= ======================== ============================
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, 2005, 2004 and, 2003. 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-20
The following table presents net sales and operating earnings (loss) for the
fiscal years ended December 31, 2005, 2004 and 2003 and identifiable assets as
of December 31, 2005, 2004 and 2003 by geographic area:
Fiscal Year Ended December 31,
-----------------------------------------------------------
2005 2004 2003
Net sales:
United States operations $ 588.4 $ 495.7 $ 408.0
European operations 255.7 237.8 216.4
---------- ---------- ----------
Total: $ 844.1 $ 733.5 $ 624.4
========== ========== ==========
Operating earnings (loss):
United States operations $ 72.1 $ 73.1 $ 53.6
European operations 21.5 (8.7) (33.3)
---------- ---------- ----------
Total: $ 93.6 $ 64.4 $ 20.3
========== ========== ==========
Identifiable assets:
United States operations $ 1,214.2 $ 804.6 $ 839.9
European operations 212.3 220.2 212.6
---------- ---------- ----------
Total: $ 1,426.5 $ 1,024.8 $ 1,052.5
========== ========== ==========
Geographic Destination
Export sales from the United States to customers in foreign countries
amounted to approximately $241.9, $179.3 and $151.0 in the fiscal years ended
December 31, 2005, 2004 and 2003, respectively.
Net sales by geographic segment (based on destination) were as follows:
Fiscal Year Ended December 31,
----------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------- ----------------------------- ------------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
--------------------------- ----------------------------- -----------------------------
United States $ 399.4 47.3% $ 376.5 51.3% $ 307.5 49.3%
Europe 202.2 24.0% 175.1 23.9% 168.4 27.0%
Asia 195.0 23.1% 143.3 19.5% 114.0 18.2%
Rest of World 47.5 5.6% 38.6 5.3% 34.5 5.5%
--------------------------- ----------------------------- -----------------------------
$ 844.1 100.0% $ 733.5 100.0% $ 624.4 100.0%
=========================== ============================= =============================
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 three-year period ended December 31, 2005.
13. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments at December 31, 2005 and 2004 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.
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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, 2005 and 2004 are as follows:
December 31, December 31,
2005 2004
------------------ ----------------
8 1/2% Notes $186.4 $192.5
8% Notes 250.0 248.8
8 7/8% Notes 262.5 260.0
The fair value information presented herein is based on pertinent
information available to management at December 31, 2005 and December 31, 2004,
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.
14. SELECTED QUARTERLY DATA (Unaudited)
Summarized quarterly financial data for the fiscal years ended December 31,
2005 and December 31, 2004 are as follows:
Year Ended December 31, 2005
---------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------------------------------
Net sales $ 196.5 $ 207.6 $ 217.1 $ 222.9
Gross profit 68.0 72.8 76.6 78.2
Net earnings 4.1 8.4 10.0 62.1(2)
Basic net earnings per share (1) 0.07 0.15 0.17 0.99
Diluted net earnings per share (1) 0.07 0.14 0.16 0.96
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)
(1) Net earnings (loss) per share is computed individually for each quarter
presented. Therefore, the sum of the quarterly net earnings (loss) per share
may not necessarily equal the total for the year.
(2) See Note 8 to the Consolidated Financial Statements regarding the reversal
of a significant portion of the deferred tax asset valuation allowance.
[Remainder of page intentionally left blank]
F-22
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
- ------------------------------------------------------------
(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, 2005 $ 2.8 $ 0.5 $(0.1) $ 0.3 $ 2.9
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
Reserve for obsolete inventories:
- --------------------------------
Fiscal year ended December 31, 2005 $ 26.9 $ 16.0 $(0.7) $ 15.1 $ 27.1
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
F-23