[SHEARMAN & STERLING LLP LETTERHEAD]
July 28, 2006
By Fax (202-772-9369), Federal Express and EDGAR
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Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 3720
100 F Street, N.E.
Washington, D.C. 20549
Attention: John Cash
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BE Aerospace, Inc.
Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 2005 (File No. 0-18348)
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Dear Mr. Cash:
On behalf of our client, BE Aerospace, Inc. (the "Company"), we hereby
acknowledge receipt of the letter dated July 13, 2006 (the "Comment Letter")
from the staff (the "Staff") of the Securities and Exchange Commission (the
"Commission") relating to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005 (File No. 0-18348) (the "Form 10-K").
On behalf of the Company, we submit this letter in response to the Comment
Letter dated July 13, 2006. For ease of reference, we have reproduced the text
of the comment from the Staff contained in the Comment Letter, followed by the
Company's response. For your convenience, we have also included the captions
used in the Comment Letter.
Note 12 - Segments Reporting, page F-19
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We note your response to prior comment eight and appreciate the additional
information that you have provided. We have the following additional comments:
CONFIDENTIAL TREATMENT OF CERTAIN PORTIONS OF
THIS RESPONSE LETTER MARKED BY "*" HAS BEEN
REQUESTED BY BE AEROSPACE, INC. PURSUANT TO RULE 83
Securities and Exchange Commission
Division of Corporation Finance
John Cash
July 28, 2006
Page 2
o Based on the information provided to us and the disclosures provided in
your Form 10-K, it remains unclear to us that the operating segments
within your Commercial Aircraft segment qualify for aggregation under
paragraph 17 of SFAS 131. We believe that gross profit margins are the
strongest indicator of the operating segments' economic
characteristics. We note that the gross profit margins for your three
operating segments are consistently varied on an actual and adjusted
basis. Given the differences in these historic gross margins, it is
unclear how they can be considered similar. Additionally, the fact that
these margins have remained consistent within each operating segment
would appear to indicate that the expectations over the long term is
that they would continue to approximate historic levels, and we request
additional information to support any assertions that these gross
margins will converge, and remain converged, in the future. Please
advise.
The Company believes that the margins for its three operating segments within
the Commercial Aircraft ("CAS") segment, Seating Products ("Seating"),
Engineering Services, Structures and Components ("Engineering") and Interior
Systems ("Interior Systems") operating segments are similar and will converge in
future periods. As the Company noted in its letter to the Staff dated June 29,
2006 (the "June 29 Letter"), ***.
The following table is based on the Company's 2006 five-year plan and sets forth
the expected revenues and gross margin for the Seating, Engineering and Interior
Systems operating segments aggregated within the CAS reporting segment for the
five-year period ending December 31, 2010:
($ in millions)
2006 2007 2008 2009 2010
----------------------------------------
Seating:
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Revenues $*** $*** $*** $*** $***
Gross margin ***% ***% ***% ***% ***%
Engineering:
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Revenues $*** $*** $*** $*** $***
Gross margin ***% ***% ***% ***% ***%
($ in millions)
2006 2007 2008 2009 2010
----------------------------------------
Interior Systems:
- -----------------
Revenues $*** $*** $*** $*** $***
Gross margin ***% ***% ***% ***% ***%
CONFIDENTIAL TREATMENT OF CERTAIN PORTIONS OF
THIS RESPONSE LETTER MARKED BY "*" HAS BEEN
REQUESTED BY BE AEROSPACE, INC. PURSUANT TO RULE 83
Securities and Exchange Commission
Division of Corporation Finance
John Cash
July 28, 2006
Page 3
Commercial Aircraft Segment:
- ---------------------------
Revenues $*** $*** $*** $*** $***
Gross margin ***% ***% ***% ***% ***%
The expected compounded annual revenue growth rate for Seating and Engineering
operating segments during the 2006-2010 period is forecasted to be approximately
***% and ***%, respectively. As reflected above, as the Company's market share
in the Seating and Engineering operating segments expand, its margins for these
segments will be positively impacted and increase over time. The expected
compounded annual growth rate for revenue at the Company's Interior Systems
operating segment is ***, which corresponds with ***. While the Company's
current market share in the Interior Systems segment is strong, the Company does
not expect to experience similar growth in the gross margins of its Interior
Systems operating segment.
Our forecasted growth rates for each of the Company's CAS operating segments are
supported by the Company's backlog and expected follow-on orders. The expected
compounded annual growth rates of ***% and ***% at the Company's Seating and
Engineering operating segments are reflective of recent market share gains, as
more fully described in the customer level detail in the June 29 Letter, and
anticipated follow-on orders as airlines expand their retrofit programs.
Airlines typically make decisions to change their cabin interiors once every
five to seven years, initially by retrofitting their existing fleets and
subsequently outfitting their new aircraft additions with the same cabin
interior products. Once the selection of a cabin interior supplier has been made
it is unusual for an airline to make a change until the next retrofit cycle.
Additionally, the Company expects substantial orders over the next several years
as its new customers begin to place orders for aircraft that are expected to be
delivered over the 2007-2011 period. As a result, the Company expects the
Seating and Engineering operating segments revenue growth rate to be greater
than global demand. The expected gross margin improvement at Engineering in 2007
is due to both the expected higher level of revenues and the mix of products
sold, and is consistent with the gross margin realized by Engineering prior to
September 11, 2001.
The Company expects revenues at the Interior Systems segment will grow at a rate
***. The combination of the relatively small size of the global Interior Systems
market, together with the Company's already substantial market shares,
effectively limits the growth expectations for this product offering. The
expected stronger revenue growth rate at Seating and Engineering over this
five-year period together with ongoing lean initiatives and continuous
improvement programs are expected to expand gross margins at Seating and
Engineering by *** and ***, respectively, by 2010. This compares with an
expected *** basis point gross margin expansion at the Interior Systems
operating segment.
As noted above, the Company has been awarded significant premium class seating
retrofit programs from major international airlines over the 2004 through 2006
period. These programs
CONFIDENTIAL TREATMENT OF CERTAIN PORTIONS OF
THIS RESPONSE LETTER MARKED BY "*" HAS BEEN
REQUESTED BY BE AEROSPACE, INC. PURSUANT TO RULE 83
Securities and Exchange Commission
Division of Corporation Finance
John Cash
July 28, 2006
Page 4
have driven Seating and Engineering gross margins (as adjusted) from ***% and
***%, respectively, in 2003 to an expected ***% and ***%, respectively, in 2006.
During the same period the Company expects its Interior Systems margins to
increase from ***% in 2003 to an expected ***% in 2006.
Over the past 18 months the Company's backlog has about doubled, from $700
million at December 31, 2004 to in excess of $1.4 billion at June 30, 2006, and
we expect to report further backlog growth during the balance of 2006. ***
The expected gross margins at Seating, Engineering and Interior Systems and the
total Commercial Aircraft Segment for the years ending December 31, 2005 versus
the December 31, 2010 are set forth below:
2005 2010
---- ----
Seating ***% ***%
Engineering ***% ***%
Interior Systems ***% ***%
-------------
Commercial Aircraft Segment ***% ***%
We believe that aggregating the three CAS operating segments does not result in
any meaningfully different operating results, and there are no operating losses
which are masked by the aggregation. ***
The Company believes these factors coupled with the qualitative factors in
paragraph 17 of SFAS 131, Disclosure About Segments of an Enterprise and Related
Information ("SFAS 131"), provide the basis for aggregation of the Company's
three operating segments in its CAS reporting segment. Please also refer to the
discussion of qualitative factors which we included in the June 29 Letter.
o Please provide us with an analysis of the operating segments
and any aggregation within your Distribution and Business Jet
reportable segments, similar to the analysis you have provided
for your Commercial Aircraft reportable segment.
The Company's Distribution Segment, consists of the Company's fastener
distribution operations through which it operates one central operating facility
with several forward stock locations. Each location utilizes a same database of
aerospace fastener inventory and distributes parts from shared inventory
stocking locations. Furthermore, inventory is procured on a centralized basis
and marketed to the same customers by a common sales force. All locations share
a state-of-the-art information system and are supported by centrally-located
purchasing, inventory management and administrative personnel. Based on these
facts, the Company
CONFIDENTIAL TREATMENT OF CERTAIN PORTIONS OF
THIS RESPONSE LETTER MARKED BY "*" HAS BEEN
REQUESTED BY BE AEROSPACE, INC. PURSUANT TO RULE 83
Securities and Exchange Commission
Division of Corporation Finance
John Cash
July 28, 2006
Page 5
believes that it has appropriately reported its fastener distribution operations
as a single reportable segment.
The CAS and Distribution reportable segments comprised approximately 80% of
consolidated revenues and 92% of operating earnings in 2005, and approximately
84% of consolidated revenues and 88% of consolidated operating earnings for the
quarter ended March 31, 2006. Since presenting these two segments meets the 75%
test in paragraph 20 of SFAS 131, we believe that the grouping of the remaining
Business Jet product line as a single segment is appropriate. ***
As requested, we have included a summary of the revenues and margins for
Business Jet product lines in Appendix 1.
o To help us better understand your segment presentation, please
provide us with a representative set of the reports reviewed
by your CODM group for purposes of allocating resources and
assessing performance for your segments for the most recently
ended fiscal quarter.
The information used by the Company's CODM group for the purposes of allocating
resources and assessing segment performance for the quarter ended March 31, 2006
is set forth at Appendix 2. The Company's CODM group makes resource allocation
decisions primarily based on comparative segment-level statements of operations,
balance sheets and cash flow statements. While financial information is
available and provided to the CODM on a site level basis (which is used by site
level managers), performance evaluation and decisions regarding the allocation
of resources is made at the reportable segment level. This is borne out by the
reliance upon the enclosed segment level income statements, balance sheets and
cash flow statements. ***
The Company is organized on a segment basis. Key functions, such as Human
Resources, Finance, Marketing, Engineering and Product Support are overseen on a
segment, not a site or product line basis. In addition, decisions regarding the
allocation of incentive compensation are based on segment performance and
allocated within a segment by segment management.
Our CODM group assesses financial performance and allocates financial and
operational resources on a segment basis.
We read in Note 6 to your March 31, 2006 Form 10-Q that your Commercial Aircraft
segment consists of eight principal operating units and your other reportable
segments consist of one or two principal operating units. We also read that you
have aggregated these operating units for segment reporting purposes due to
their similar nature. Please tell us, and revise future filings to clarify, if
these operating units are operating segments as defined by SFAS 131. If
CONFIDENTIAL TREATMENT OF CERTAIN PORTIONS OF
THIS RESPONSE LETTER MARKED BY "*" HAS BEEN
REQUESTED BY BE AEROSPACE, INC. PURSUANT TO RULE 83
Securities and Exchange Commission
Division of Corporation Finance
John Cash
July 28, 2006
Page 6
so, please reconcile the number of operating units to the number of operating
segments that you have advise us that you have.
The operating units referred to in Note 6 of our Quarterly Report on Form 10Q
for the period ended March 31, 2006 Form 10-Q represent the number of principal
manufacturing facilities. The Company manufactures certain of its product lines
at multiple facilities, which is the reason for the difference between the
number of facilities disclosed in the Company's filings and the operating
segments discussed with the Staff. The Company will clarify the description in
future filings to differentiate between facilities and operating segments.
________________________________
The Company respectfully requests that the Staff consider the following key
points as they relate to the Company's aggregation of operating segments for
financial reporting purposes:
o ***
o ***
o Each of the three CAS operating segments has the same
customers, the same manufacturing methods, the same marketing
process, the same product support processes, the same quality
processes and a shared segment management team.
o The CODM group relies on reportable segment information for
evaluating performance and allocating capital and operational
resources.
Thank you for your assistance in reviewing this response to the Staff's Comment
Letter. Please direct all questions or comments regarding this letter to Tom
McCaffrey, the Company's Chief Financial Officer, at 561-791-5000 or me at
212-848-8414.
Very truly yours,
/s/ Lona Nallengara
Lona Nallengara
cc: Mindy Hooker - Securities and Exchange Commission
Jennifer Thompson - Securities and Exchange Commission
Thomas P. McCaffrey - BE Aerospace, Inc
Gregory J. Palme - Deloitte & Touche LLP
Rohan S. Weerasinghe - Shearman & Sterling LLP
CONFIDENTIAL TREATMENT OF CERTAIN PORTIONS OF
THIS RESPONSE LETTER MARKED BY "*" HAS BEEN
REQUESTED BY BE AEROSPACE, INC. PURSUANT TO RULE 83
Appendix 1
The Business Jet Segment consists of the following product lines: (a) seating
products targeted primarily to individual business jet customers, which
represented ***% of 2005 segment revenues and ***% of 2005 consolidated
revenues, (b) direct and indirect lighting which represented ***% of 2005
segment revenues and ***% of 2005 consolidated revenues, (c) air valves, oxygen
delivery systems and other products which represented ***% of 2005 segment sales
and ***% of 2005 consolidated revenues and (d) cabinetry which represented ***%
of 2005 segment revenues and less than ***% of 2005 consolidated revenues. None
of the product lines meets the quantitative criteria of paragraph 18 of SFAS 131
which would require presentation as a reportable segment as of December 31, 2005
(nor are any expected to rise to that level over the five-year period ending
December 31, 2010).
The following is a summary of the sales and gross margins for the Company's
Business Jet Segment for the 2001-2005 period:
Historical (actual)
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
Seating Products
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Revenue growth rate *** *** *** *** ***
Gross margin *** *** *** *** ***
Direct and Indirect Lighting
- ----------------------------
Revenue growth rate *** *** *** *** ***
Gross margin *** *** *** *** ***
Air valves, oxygen delivery
systems and other
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Revenue growth rate *** *** *** *** ***
Gross margin *** *** *** *** ***
Cabinetry
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Revenue growth rate *** *** *** *** ***
Gross margin *** *** *** *** ***
Total
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Revenue growth rate *** *** *** *** ***
Gross margin *** *** *** *** ***
CONFIDENTIAL TREATMENT OF CERTAIN PORTIONS OF
THIS RESPONSE LETTER MARKED BY "*" HAS BEEN
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Historical (as adjusted)
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
Seating Products
- ----------------
Revenue growth rate *** *** *** *** ***
Gross margin *** *** *** *** ***
Direct and Indirect Lighting
- ----------------------------
Revenue growth rate *** *** *** *** ***
Gross margin *** *** *** *** ***
Air valves, oxygen delivery
systems and other
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Revenue growth rate *** *** *** *** ***
Gross margin *** *** *** *** ***
Cabinetry
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Revenue growth rate *** *** *** *** ***
Gross margin *** *** *** *** ***
Total
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Revenue growth rate *** *** *** *** ***
Gross margin *** *** *** *** ***
The following is a summary of the expected sales and gross margins for the
Company's Business Jet Segment for the 2006-2010 period:
2006 2007 2008 2009 2010
---- ---- ---- ---- ----
($ in thousands)
Seating Products
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Revenues *** *** *** *** ***
Gross margin *** *** *** *** ***
Direct and Indirect Lighting
- ----------------------------
Revenues *** *** *** *** ***
Gross margin *** *** *** *** ***
Air valves, oxygen delivery
systems and all other
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Revenues *** *** *** *** ***
Gross margin *** *** *** *** ***
Cabinetry
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Revenues *** *** *** *** ***
Gross margin *** *** *** *** ***
Total
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Revenues *** *** *** *** ***
Gross margin *** *** *** *** ***
CONFIDENTIAL TREATMENT OF CERTAIN PORTIONS OF
THIS RESPONSE LETTER MARKED BY "*" HAS BEEN
REQUESTED BY BE AEROSPACE, INC. PURSUANT TO RULE 83
Appendix 2
***
CONFIDENTIAL TREATMENT OF CERTAIN PORTIONS OF
THIS RESPONSE LETTER MARKED BY "*" HAS BEEN
REQUESTED BY BE AEROSPACE, INC. PURSUANT TO RULE 83