UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarterly Period Ended June 30, 2006
Commission File No. 0-18348
BE AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1209796
(State of Incorporation) (I.R.S. Employer Identification No.)
1400 Corporate Center Way
Wellington, Florida 33414
(Address of principal executive offices)
(561) 791-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES[X] NO[ ]
Indicate by check mark whether the registrant is 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. (check
one): 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 registrant has one class of common stock, $0.01 par value, of which
78,167,857 shares were outstanding as of August 2, 2006.
1
BE AEROSPACE, INC.
Form 10-Q for the Quarter Ended June 30, 2006
Table of Contents
Page
----
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets
as of June 30, 2006 and December 31, 2005......................3
b) Condensed Consolidated Statements of Earnings for the
Three and Six Months Ended June 30, 2006 and June 30, 2005.....4
c) Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2006 and June 30, 2005...............5
d) Notes to Condensed Consolidated Financial Statements...........6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......23
Item 4. Controls and Procedures..........................................23
Part II Other Information
Item 1. Legal Proceedings................................................24
Item 1A. Risk Factors.....................................................24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......24
Item 3. Defaults Upon Senior Securities..................................24
Item 4. Submission of Matters to a Vote of Security Holders..............24
Item 5. Other Information................................................24
Item 6. Exhibits.........................................................25
Signatures.......................................................26
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in Millions, Except Share Data)
June 30, December 31,
2006 2005
--------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 134.8 $ 356.0
Accounts receivable - trade, less allowance for doubtful accounts
($3.8 at June 30, 2006 and $2.9 at December 31, 2005) 145.6 131.9
Inventories, net 285.3 223.7
Deferred income taxes, net 17.5 17.5
Other current assets 19.1 15.1
----------- -----------
Total current assets 602.3 744.2
----------- -----------
Property and equipment, net 98.3 95.0
Goodwill 365.9 362.9
Identifiable intangible assets, net 136.1 139.9
Deferred income taxes, net 50.9 62.0
Other assets, net 19.5 22.5
----------- -----------
$ 1,273.0 $ 1,426.5
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 198.6 $ 169.3
Current maturities of long-term debt 1.7 1.5
----------- -----------
Total current liabilities 200.3 170.8
----------- -----------
Long-term debt, net of current maturities 427.1 677.4
Deferred income taxes, net 2.3 1.8
Other non-current liabilities 7.0 6.9
Commitments, contingencies and off-balance sheet arrangements (Note 5)
Stockholders' equity:
Preferred stock, $0.01 par value; 1.0 million shares
authorized; no shares outstanding -- --
Common stock, $0.01 par value; 200.0 million shares
authorized; 77.6 million (June 30, 2006) and
74.3 million (December 31, 2005) shares issued
and outstanding 0.8 0.7
Additional paid-in capital 920.3 894.0
Accumulated deficit (287.9) (320.4)
Accumulated other comprehensive income (loss) 3.1 (4.7)
----------- -----------
Total stockholders' equity 636.3 569.6
----------- -----------
$ 1,273.0 $ 1,426.5
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Dollars in Millions, Except Per Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- ------------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
-------------------------------- ------------------------------
Net sales $ 271.5 $ 207.6 $ 518.7 $ 404.1
Cost of sales 175.1 134.8 335.8 263.3
-------- -------- -------- --------
Gross profit 96.4 72.8 182.9 140.8
Gross profit percentage 35.5% 35.1% 35.3% 34.8%
Operating expenses:
Selling, general and administrative 39.4 32.1 76.4 63.8
Research, development and engineering 21.7 16.6 40.1 33.0
-------- -------- -------- --------
Total operating expenses 61.1 48.7 116.5 96.8
-------- -------- -------- --------
Operating earnings 35.3 24.1 66.4 44.0
Operating earnings percentage 13.0% 11.6% 12.8% 10.9%
Interest expense, net 8.7 15.0 18.2 30.1
Loss on debt extinguishment -- -- 1.8 --
-------- -------- -------- --------
Earnings before income taxes 26.6 9.1 46.4 13.9
Income taxes 7.9 0.7 13.9 1.4
-------- -------- -------- --------
Net earnings $ 18.7 $ 8.4 $ 32.5 $ 12.5
======== ======== ======== ========
Net earnings per common share:
Basic $ 0.24 $ 0.15 $ 0.43 $ 0.22
======== ======== ======== ========
Diluted $ 0.24 $ 0.14 $ 0.42 $ 0.21
======== ======== ======== ========
Weighted average common shares:
Basic 77.5 57.1 76.4 57.0
Diluted 78.1 60.1 77.6 59.8
See accompanying notes to condensed consolidated financial statements.
4
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Millions)
SIX MONTHS ENDED
----------------------------------------------
June 30, June 30,
2006 2005
-------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 32.5 $ 12.5
Adjustments to reconcile net earnings to net cash flows
provided by (used in) operating activities:
Depreciation and amortization 14.0 14.4
Provision for doubtful accounts 0.9 0.4
Non-cash compensation 0.4 1.4
Deferred income taxes 11.1 --
Loss on debt extinguishment 1.8 --
Changes in operating assets and liabilities:
Accounts receivable (11.4) (18.6)
Inventories (59.2) (24.5)
Other current assets and other assets (1.7) 1.9
Payables, accruals and other liabilities 25.5 10.1
------- -------
Net cash flows provided by (used in) operating activities 13.9 (2.4)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10.8) (7.1)
Proceeds from sale of property and equipment -- 0.8
Other, net (0.1) 3.0
-------- -------
Net cash flows used in investing activities (10.9) (3.3)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued 24.7 5.9
Repayment of long-term debt (250.2) (0.2)
------- -------
Net cash flows (used in) provided by financing activities (225.5) 5.7
-------- -------
Effect of foreign exchange rate changes on cash and cash equivalents 1.3 (1.3)
------- -------
Net decrease in cash and cash equivalents (221.2) (1.3)
Cash and cash equivalents, beginning of period 356.0 76.3
------- -------
Cash and cash equivalents, end of period $ 134.8 $ 75.0
======= =======
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest, net $ 26.0 $ 28.9
Income taxes, net $ 1.3 $ 1.0
See accompanying notes to condensed consolidated financial statements.
5
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars In Millions, Except Per Share Data)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and are unaudited
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. All adjustments which,
in the opinion of management, are considered necessary for a fair
presentation of the results of operations for the periods shown, are of a
normal recurring nature and have been reflected in the condensed
consolidated financial statements. The results of operations for the periods
presented are not necessarily indicative of the results expected for the
full fiscal year or for any future period. The information included in these
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and accompanying notes included
in the BE Aerospace, Inc. (the "Company" or "B/E") Annual Report on Form
10-K for the fiscal year ended December 31, 2005.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts and related disclosures. Actual results could differ from those
estimates.
Note 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:
June 30, 2006 December 31, 2005
----------------------------- ---------------------------
Purchased materials and component parts $ 71.0 $ 59.8
Work-in-process 16.4 18.5
Finished goods (primarily aftermarket fasteners) 197.9 145.4
-------- --------
$ 285.3 $ 223.7
======== ========
Note 3. Goodwill and Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the Company has completed the fair value analysis for goodwill and other
intangible assets as of December 31, 2005, and concluded that no impairment
existed. As of June 30, 2006, the Company believed that no indicators of
impairment existed. Aggregate amortization expense on identifiable
intangible assets was approximately $2.5 and $2.4 for the three months ended
June 30, 2006 and 2005, respectively, and $4.9 and $4.8 for the six months
ended June 30, 2006 and 2005, respectively. Amortization expense is expected
to be approximately $10.0 in each of the next five fiscal years.
Note 4. Long-Term Debt
The Company's $50.0 credit facility with JPMorgan Chase Bank, N.A. (the
"Amended Bank Credit Facility") has no maintenance financial covenants other
than an Interest Coverage Ratio (as defined in the Amended Bank Credit
Facility) that must be maintained at a level equal to or greater than 1.15:1
for the trailing 12-month period. The Amended Bank Credit Facility, which
expires in February 2007, is collateralized by substantially all of the
Company's assets and contains customary affirmative covenants, negative
covenants and conditions precedent for borrowings, all of which were met as
of June 30, 2006. As more fully described in Note 11, in July 2006, the
Company repurchased $174.9 of its $175 8-1/2% senior notes in a cash tender
offer, terminated its Amended Bank Credit Facility, and established new bank
credit facilities.
At June 30, 2006, indebtedness under the Amended Bank Credit Facility
consisted of letters of credit aggregating approximately $6.3. As of June
30, 2006, the interest rate on the outstanding
6
letters of credit was approximately 2.5%. The amount available for borrowing
under the Amended Bank Credit Facility was $43.7 as of June 30, 2006.
The Amended Bank Credit Facility bears interest ranging from 250 to 400
basis points over the Eurodollar rate. (Eurodollar rate approximated 5.5% at
June 30, 2006)
At June 30, 2006, long-term debt consisted principally of the $175 8-1/2%
senior notes due 2010 and $250 8-7/8% senior subordinated notes due 2011.
The $175 8-1/2% senior notes mature on October 1, 2010 and the $250 8-7/8%
senior subordinated notes mature on May 1, 2011. The senior subordinated
notes are unsecured senior subordinated obligations and are subordinated to
all senior indebtedness. The senior notes are unsecured obligations and are
senior to all subordinated indebtedness, but subordinate to the Amended Bank
Credit Facility to the extent the Company's assets collateralize borrowings
under the Amended Bank Credit Facility. The 8-1/2% senior notes and 8-7/8%
senior subordinated notes contain restrictive covenants, including
limitations on future indebtedness, restricted payments, transactions with
affiliates, liens, dividends, mergers and transfers of assets, all of which
were met as of June 30, 2006. A breach of these covenants, or the covenants
under the Company's new credit facilities or any future bank credit
facility, that continues beyond any grace period can constitute a default,
which can limit the Company's 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.
The 8% senior subordinated notes due 2008 were senior unsecured
obligations of the Company. In January 2006, the Company redeemed the 8%
senior subordinated 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 recorded in the first quarter of 2006 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% senior subordinated notes.
Note 5. 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 June 30, 2006, future minimum lease payments under these arrangements,
the majority of which related to the long-term real estate leases, totaled
approximately $92.1.
Indemnities, Commitments and Guarantees -- During its normal course of
business, the Company has made certain indemnities, commitments and
guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include non-infringement of patents
and intellectual property indemnities to the Company's customers in
connection with the delivery, design, manufacture and sale of its products,
indemnities to various lessors in connection with facility leases for
certain claims arising from such facility or lease, and indemnities to other
parties to certain acquisition agreements. The duration of these
indemnities, commitments and guarantees varies, and in certain cases is
indefinite. The Company believes that substantially all of these
indemnities, commitments and guarantees provide for limitations on the
maximum potential future payments the Company could be obligated to make.
However, the Company is unable to estimate the maximum amount of liability
related to its indemnities, commitments and guarantees because such
liabilities are contingent upon the occurrence of events which are not
reasonably determinable. Management believes that any liability for these
indemnities, commitments and guarantees would not be material to the
accompanying condensed consolidated financial statements. Accordingly, no
amounts have been accrued for indemnities, commitments and guarantees.
Product Warranty Costs - Estimated costs related to product warranties
are accrued at the time products are sold. In estimating its future warranty
obligations, the Company considers various relevant factors, including the
Company's stated warranty policies and practices, the historical frequency
of claims and the cost to replace or repair its products under warranty. The
following table provides a reconciliation of the activity related to the
Company's accrued warranty expense:
7
SIX MONTHS ENDED
---------------------------------------------
June 30, June 30,
2006 2005
-------------------- --------------------
Beginning balance $ 14.3 $ 13.2
Accruals for warranties issued during the 6.0 4.3
period
Settlements made (4.9) (4.1)
-------------------- --------------------
Ending balance $ 15.4 $ 13.4
==================== ====================
Note 6. Accounting for Stock-Based Compensation
Effective January 1, 2006, the Company began accounting for share-based
compensation arrangements in accordance with the provisions of Financial
Accounting Standard Board (FASB) Statement No. 123(R), "Share-Based Payment"
(SFAS 123(R)). Under SFAS 123(R), share-based compensation cost is measured
on the date of grant, based on the fair value of the award, and is
recognized over the requisite service period.
The Company uses the Black-Scholes valuation method to measure fair
value. The Black-Scholes valuation calculation requires the Company to
estimate key assumptions such as expected term, volatility and forfeiture
rates to determine the award's fair value. The estimate of these key
assumptions is based on historical information and judgment regarding market
factors and trends. The expected term of options granted is derived from
historical data on employee exercise and post-vesting employment termination
behavior. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of
grant. Expected volatility is based on both the implied volatilities from
traded options on our stock and historical volatility on our stock.
The Company previously applied Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations and provided the required pro forma disclosures of SFAS No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). For options
granted prior to January 1, 2006 and valued in accordance with SFAS 123, the
expected volatility used to estimate the fair value of the options was based
solely on the historical volatility on our stock. The Company used the
graded vested method for expense attribution and recognized options
forfeitures as they occurred as allowed by SFAS 123.
The Company adopted the fair value recognition provisions of SFAS 123(R)
using the modified prospective transition method. Under the modified
prospective transition method, prior periods are not restated for the
effects of adopting SFAS 123(R). Commencing with the first quarter of fiscal
year 2006, compensation cost includes all share-based payments granted
subsequent to January 1, 2006, based on the grant date fair value estimated
in accordance with the provisions of SFAS 123(R). No compensation cost has
been recognized for share-based payments granted prior to January 1, 2006 as
the vesting of all remaining unvested awards were accelerated in December
2005.
The Black-Scholes option valuation model requires the input of highly
subjective assumptions, including the expected life of the stock-based award
and stock price volatility. The assumptions utilized represent management's
best estimates, but these estimates involve inherent uncertainties and the
application of management's judgment. As a result, if other assumptions had
been used, the Company's recorded and pro forma stock-based compensation
expense could have been materially different from that depicted below. In
accordance with SFAS 123(R), the Company is required to estimate the
expected forfeiture rate at the grant date and recognize expense for those
shares expected to vest. The expected forfeiture rate is periodically
updated to reflect actual forfeitures.
No options were granted during the six months ended June 30, 2006 and
29,500 options were granted during the six months ended June 30, 2005. The
following table illustrates the effects of options and employee purchase
rights granted prior to June 30, 2005 on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS
123(R) in the first and second quarters of fiscal 2005.
8
THREE MONTHS SIX MONTHS
ENDED ENDED
June 30, 2005 June 30, 2005
------------- -------------
As reported
Net earnings $ 8.4 $ 12.5
====== ======
Add: APB 25 share-based compensation
expense included in reported net
earnings, net of tax effects -- --
Deduct: Share-based employee
compensation, fair value method, net
of related tax effects (1.9) (3.4)
------ ------
Pro forma net earnings $ 6.5 $ 9.1
====== ======
Basic and diluted net earnings per share:
Net earnings
Per share - basic
As reported $ 0.15 $ 0.22
Pro forma $ 0.11 $ 0.16
Net earnings
Per share - diluted
As reported $ 0.14 $ 0.21
Pro forma $ 0.11 $ 0.15
The Company has established a qualified Employee Stock Purchase Plan.
Prior to January 1, 2006, the terms of this plan allowed for qualified
employees (as defined) to participate in the purchase of designated shares
of the Company's common stock at a price equal to the lower of 85% of the
closing price at the beginning or end of each semi-annual stock purchase
period. Subsequent to January 1, 2006, the purchase price is equal to 85% of
the closing price at the end of each semi-annual stock purchase period. The
value of employee purchase rights granted pursuant to the Company's Employee
Stock Purchase Plan during the six months ended June 30, 2005 was $5.74. The
fair value of those purchase rights represents the difference between the
closing price of the Company's shares on June 30, 2005 and the purchase
price of the shares.
The following tables set forth options granted, canceled, forfeited and
outstanding during the six months ended June 30, 2006:
Weighted
Options Average
(in thousands) Price Per Share
-------------- ---------------
Outstanding at January 1, 2006 4,806 $8.83
Options granted -- --
Options exercised (3,190) $7.16
Options forfeited ( 6) $8.38
------
Outstanding at June 30, 2006 1,610 $12.46
======
Exercisable at June 30, 2006 1,610 $12.46
======
Options Outstanding at June 30, 2006
------------------------------------
Weighted Average
Exercise Price
Options Outstanding Weighted Average
Range of Outstanding and Remaining
Exercise Price and Exercisable Exercisable Contractual Life
-------------- --------------- ----------- ----------------
(in thousands) (years)
$ 3.39 - $5.59 366 $5.11 6.98
6.59 - 9.70 244 7.34 5.70
10.42 - 10.42 378 10.42 8.40
10.59 - 20.81 375 15.55 4.86
21.50 - 30.25 247 26.82 3.74
9
The Company issues new shares of common stock upon exercise of stock
options. During the six months ended June 30, 2006, 3.2 million stock
options were exercised with an aggregate intrinsic value of $55.7 million
determined as of the date of option exercise. The aggregate intrinsic value
of outstanding options as of June 30, 2006 was $17.8 million.
Prior to the adoption of SFAS 123(R), the Company presented all tax
benefits resulting from the exercise of stock options as operating cash
flows in the Statement of Cash Flows. SFAS 123(R) requires the cash flows
resulting from the tax benefits from tax deductions in excess of deferred
tax asset (hypothetical and actual) recorded for stock compensation costs
(excess tax benefits) to be classified as financing cash flows.
Note 7. Segment Reporting
The Company is organized based on the products and services it offers.
Under this organizational structure, the Company has three reportable
segments: Commercial Aircraft, Distribution and Business Jet. The Company's
Commercial Aircraft segment consists of three operating units while the
Distribution and Business Jet segments consist of one and two principal
operating units, respectively. Such operating units have been aggregated for
segment reporting purposes due to their similar nature. The Company
evaluates segment performance based on segment operating earnings or loss.
Each segment reports its results of operations and makes requests for
capital expenditures and acquisition funding to the Company's chief
operational decision-making group. This group is presently comprised of the
Chairman 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 customers.
The following table presents net sales and operating earnings by
business segment:
--------------------------- -------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- -------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------- ------------- ------------ ------------
Net sales
Commercial Aircraft $ 182.1 $ 136.4 $ 335.8 $ 264.0
Distribution 55.0 45.0 108.7 88.0
Business Jet 34.4 26.2 74.2 52.1
------------- ------------- ------------ ------------
$ 271.5 $ 207.6 $ 518.7 $ 404.1
============= ============= ============ ============
Operating earnings
Commercial Aircraft $ 21.7 $ 14.2 $ 37.2 $ 23.2
Distribution 11.8 9.0 23.6 17.8
Business Jet 1.8 0.9 5.6 3.0
------------- ------------- ------------ ------------
$ 35.3 $ 24.1 $ 66.4 $ 44.0
============= ============= ============ ============
Interest Expense $ 8.7 $ 15.0 $ 18.2 $ 30.1
Loss on Debt Extinguishment -- -- 1.8 --
------------- ------------- ------------ ------------
Earnings before income taxes $ 26.6 $ 9.1 $ 46.4 $ 13.9
============= ============= ============ ============
10
Note 8. Net Earnings Per Common Share
Basic net earnings per common share is computed using the weighted
average common shares outstanding during the period. Diluted net earnings
per common share is computed by using the average share price during the
period when calculating the dilutive effect of stock options. Shares
outstanding for the periods presented were as follows:
THREE MONTHS ENDED SIX MONTH ENDED
----------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------- --------------- -------------- ------------
Net earnings $ 18.7 $ 8.4 $ 32.5 $ 12.5
Basic weighted average common shares (in millions) 77.5 57.1 76.4 57.0
Effect of dilutive stock options and stock purchases
under the employee stock purchase plan (in millions) 0.6 3.0 1.2 2.8
------- ------- ------- -------
Diluted weighted average common shares 78.1 60.1 77.6 59.8
====== ======= ======= =======
Basic net earnings per share $ 0.24 $ 0.15 $ 0.43 $ 0.22
====== ======= ======= =======
Diluted net earnings per share $ 0.24 $ 0.14 $ 0.42 $ 0.21
====== ======= ======= =======
Note 9. Comprehensive Earnings
Comprehensive earnings is defined as all changes in a company's net
assets except changes resulting from transactions with shareholders. It
differs from net earnings in that certain items currently recorded to equity
would be a part of comprehensive earnings. The following table sets forth
the computation of comprehensive earnings for the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
--------------- ---------------- ----------------- -------------
Net earnings $ 18.7 $ 8.4 $ 32.5 $ 12.5
Other comprehensive earnings:
Foreign exchange translation adjustment 6.6 (6.3) 8.0 (9.7)
------ ------- ------- -------
Comprehensive earnings $ 25.3 $ 2.1 $ 40.5 $ 2.8
====== ======= ======= =======
Note 10. Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments - An Amendment of FASB Statements No. 133 and
140" (SFAS 155). SFAS 155 is effective for all financial instruments
acquired or issued after the beginning of an entity's first fiscal year that
begins after September 15, 2006. The adoption of SFAS 155 is not expected to
have a material impact on the Company's financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48) which clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in
accordance with FASB Statement No. 109, "Accounting for Income Taxes". This
pronouncement recommends a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or
expected to be taken in the Company's tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure requirements for uncertain tax
positions. The accounting provisions of FIN 48 will be effective for the
Company beginning January 1, 2007. The Company is in the process of
evaluating the effect, if any, the adoption of FIN 48 will have on its
financial statements.
11
Note 11. Subsequent Events
On July 26, 2006, the Company acquired Draeger Aerospace GmbH (Draeger),
from Cobham PLC of Dorset, England for approximately $80.0. The acquisition
was funded with cash on hand. Draeger manufactures components and integrated
systems to supply oxygen systems for both civil and military aircraft, with
well-established strengths in both chemical and gaseous oxygen systems.
Draeger is the prime contractor for oxygen systems for the Eurofighter
Typhoon, and provides maintenance and repair services for the German air
force's in-service oxygen systems.
On July 10, 2006, the Company commenced a cash tender offer and consent
solicitation for all of its $175.0 aggregate principal amount of 8-1/2%
senior notes. On July 21, 2006, the Company received the requisite consents
from holders of the 8-1/2% senior notes to amend the indenture governing the
notes to, among other things, eliminate substantially all of the restrictive
covenants, certain events of default and other related provisions. On July
26, 2006, the Company accepted for payment and paid for $174.9 aggregate
principal amount of the 8-1/2% senior notes using available cash on hand and
borrowings under the new senior secured credit facility (described below).
On July 26, 2006, in connection with the tender offer and consent
solicitation, the Company entered into a new senior secured credit facility,
consisting of a five-year, $150.0 revolving credit facility and a
seven-year, $75.0 term loan with J.P. Morgan Securities Inc., UBS Securities
LLC and Credit Suisse Securities (USA) LLC, as Joint Lead Arrangers and
Joint Bookrunners, and JPMorgan Chase Bank, N.A., as Administrative Agent.
The new senior secured credit facility also provides for the ability of the
Company to add additional term loans in the amount of up to $75.0 upon
satisfaction of certain customary conditions. The new senior secured credit
facility replaces the Company's existing $50.0 revolving credit facility
that it had entered into in February 2004 and which would have matured in
2007.
Revolving credit borrowings under the new senior secured credit facility
will initially bear interest at an annual rate equal to the London interbank
offered rate (LIBOR) plus 175 basis points, representing an initial interest
rate of 7.2% as compared to 8.5% under the 8-1/2% senior notes repurchased
in the tender offer. Term loan borrowings under the new senior secured
credit facility will initially bear interest at an annual rate equal to
LIBOR plus 200 basis points, representing an initial interest rate of 7.4%.
[Remainder of page intentionally left blank]
12
BE AEROSPACE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars In Millions, Except As Noted And Per Share Data)
OVERVIEW
The following discussion and analysis addresses the results of our
operations for the three months ended June 30, 2006, as compared to our
results of operations for the three months ended June 30, 2005. The
discussion and analysis then addresses our results of operations for the six
months ended June 30, 2006, as compared to our results of operations for the
six months ended June 30, 2005. In addition, the discussion and analysis
addresses our liquidity, financial condition and other matters for these
periods.
Based on our experience in the industry, we believe that we are the
world's largest manufacturer of cabin interior products for commercial
aircraft and for business jets and a leading aftermarket distributor of
aerospace fasteners. We sell our manufactured products directly to virtually
all of the world's major airlines and airframe manufacturers and a wide
variety of business jet customers. In addition, based on our experience, we
believe that we have achieved leading global market positions in each of our
major product categories, which include:
o commercial aircraft seats, including an extensive line of first class,
business class, tourist class and regional aircraft seats;
o a full line of aircraft food and beverage preparation and storage
equipment, including coffeemakers, water boilers, beverage containers,
refrigerators, freezers, chillers and microwaves, high heat convection
and steam ovens;
o both chemical and gaseous aircraft oxygen delivery systems and
protective breathing equipment;
o business jet and general aviation interior products, including an
extensive line of executive aircraft seats, direct and indirect
overhead lighting systems, oxygen delivery systems, air valve systems,
high-end furniture and cabinetry; and
o a broad line of aerospace fasteners, covering over 140,000 stock
keeping units (SKUs).
We also design, develop and manufacture a broad range of cabin interior
structures and provide comprehensive aircraft cabin interior reconfiguration
and passenger-to-freighter conversion engineering services and component
kits.
We conduct our operations through strategic business units that have been
aggregated under three reportable segments: Commercial Aircraft,
Distribution and Business Jet.
Net sales by reportable segment for the three and six month periods ended
June 30, 2006 and June 30, 2005 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------ ------------------------------------------------
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
---------------------- ------------------- ----------------------- ------------------------
Net % of Net % of Net % of Net % of
--- ---- --- ---- --- ---- --- ----
Sales Net Sales Sales Net Sales Sales Net Sales Sales Net Sales
----- --------- ----- --------- ----- --------- ----- ---------
--------- ------------ -------- ---------- ----------- ----------- ----------- ------------
Commercial $ 182.1 67.1% $136.4 65.7% $ 335.8 64.7% $264.0 65.3%
aircraft
Distribution 55.0 20.2% 45.0 21.7% 108.7 21.0% 88.0 21.8%
Business jet 34.4 12.7% 26.2 12.6% 74.2 14.3% 52.1 12.9%
-------- ------ ----- ------ ------- ------ ------ ------
Net sales $ 271.5 100.0% $207.6 100.0% $ 518.7 100.0% $404.1 100.0%
======= ====== ====== ====== ======= ====== ====== ======
13
Net sales by domestic and foreign operations for the three and six month
periods ended June 30, 2006 and June 30, 2005 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------ --------------------- --------------- ---------------
Domestic $167.6 $144.0 $337.7 $284.3
Foreign 103.9 63.6 181.0 119.8
------------------ --------------------- --------------- ---------------
Total $271.5 $207.6 $518.7 $404.1
------------------ --------------------- --------------- ---------------
Net sales by geographic area (based on destination) for the three and six
month periods ended June 30, 2006 and June 30, 2005 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- -------------------- ----------------------- ------------------------
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
--------------------- -------------------- ----------------------- ------------------------
Net % of Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales Sales Net Sales
--------- ----------- ------- ------------ ----------- ----------- ---------- -------------
United States $113.1 41.7% $102.1 49.2% $216.3 41.7% $204.2 50.5%
Europe 81.2 29.9 52.7 25.4 153.3 29.6 97.3 24.1
Asia 54.3 20.0 41.2 19.8 113.0 21.8 81.5 20.2
Rest of World 22.9 8.4 11.6 5.6 36.1 6.9 21.1 5.2
--------- ----------- ------- ------------ ----------- ----------- ---------- -------------
$271.5 100.0% $207.6 100.0% $518.7 100.0% $404.1 100.0%
========= =========== ======= ============ =========== =========== ========== =============
Between 1989 and 2001, we substantially expanded the size, scope and
nature of our business through 24 acquisitions, for an aggregate purchase
price of approximately $1 billion. During the 2001 through June 2006 period,
we did not make any significant acquisitions. Essentially all of our revenue
growth since 2001 has been organic.
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 will protect and
enhance our leadership position. We believe our investments in research and
development over the past several years have been the driving force behind
our ongoing market share gains. Research, development and engineering
spending have been approximately 7% - 8% of sales for the past several years
and are expected to remain at approximately that 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, and will continue to
invest, in property and equipment that enhances our productivity. Over the
past three years, annual capital expenditures ranged from $11 - $17. Taking
into consideration our record backlog, targeted capacity utilization levels,
recent capital expenditure investments and current industry conditions, we
anticipate increased capital expenditures of approximately $25 over the next
twelve months.
International airline competition for higher margin international
travelers and improving worldwide industry conditions have resulted in
increasing demand for our products and services, as demonstrated by bookings
of approximately $375 during the second quarter of fiscal 2006. At June 30,
2006, backlog was in excess of $1.45 billion, an increase of approximately
75% as compared to our June 30, 2005 backlog. We expect continuing strong
demand for the next several years as industry conditions continue to
improve. 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. The U.S. carriers
have just begun the process of upgrading their international fleets and we
believe there are substantial additional growth opportunities with domestic
airlines for retrofit programs, particularly for the twin-aisle aircraft
that service international routes.
14
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2006, AS COMPARED
TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005
(Dollars In Millions, Except Per Share Data)
Sales for each of our segments are set forth in the following table:
NET SALES
-----------------------------------------------------------------------------------
Three Months Ended June 30,
---------------------------------------
Percent
2006 2005 Change Change
-----------------------------------------------------------------------------------
Commercial aircraft $182.1 $136.4 $45.7 33.5%
Distribution 55.0 45.0 10.0 22.2
Business jet 34.4 26.2 8.2 31.3
-----------------------------------------------------------------------------------
Total $271.5 $207.6 $63.9 30.8%
===================================================================================
Net sales for the three months ended June 30, 2006 were $271.5, an
increase of $63.9 or 30.8% as compared to the same period in the prior year.
The commercial aircraft segment ("CAS") generated revenues of $182.1 in
the second quarter of 2006, an increase of $45.7 million, or 33.5%, versus
the same period in the prior year. Revenues at CAS increased due to a higher
level of aftermarket activity and an increase in new aircraft deliveries.
Nearly 90% of the increase was due to a higher volume of commercial aircraft
passenger cabin equipment. The distribution segment delivered strong revenue
growth of 22.2% in the second quarter of 2006, versus the same period in the
prior year, driven by a broad based increase in aftermarket demand for
aerospace fasteners and continued market share gains. In the business jet
segment, revenues increased by 31.3% in the second quarter of 2006 versus
the same period in the prior year, reflecting a higher level of business jet
interior products revenues, consistent with the ongoing recovery in the
business jet industry.
Gross profit for the second quarter of 2006 of $96.4, or 35.5% of sales,
increased by $23.6, or 32.4% of sales, as compared to the same period last
year. Second quarter 2006 gross margin expanded by 40 basis points as
compared to the same period of the prior year. The increase in gross margin
was primarily driven by ongoing manufacturing efficiencies offset somewhat
by lower margins on our super first class products. The gross margin on
super first class products is improving as we gain more experience on this
new product line, but we are still below our overall average product gross
margin for the business jet segment.
Selling, general and administrative expenses in the second quarter of
2006 of $39.4, or 14.5% of sales, versus $32.1, or 15.5% of sales, in the
same period in the prior year reflects the higher level of selling and
marketing costs ($1.2), increased compensation and benefits ($3.7), and a
higher level of legal and professional fees ($1.4) associated with the 30.8%
increase in revenues and the 75% increase in backlog from June 30, 2005.
Selling, general and administrative expenses for the three months ended June
30, 2005 were reduced by $1.8 of net reimbursed legal fees in connection
with the resolution of two legal matters. Selling, general and
administrative expenses as a percentage of sales decreased by 100 basis
points, reflecting the operating leverage in our business.
Research, development and engineering expenses for the current quarter
of $21.7, or 8.0% of sales, versus $16.6, or 8.0% of sales, in the same
period in the prior year reflect the higher level of spending associated
with customer specific engineering, and new product development activities
associated with the B787 Dreamliner and the A380 aircraft and various other
business jet and commercial aircraft cabin interior products under
development. During the three months ended June 30, 2006, we applied for 20
U.S. and foreign patents versus 4 during the same period in the prior year.
Operating earnings for the second quarter of 2006 of $35.3 increased by
$11.2, or 46.5%, as compared to the same period in the prior year. The
operating margin of 13.0% in the current quarter was 140 basis points
greater than the operating margin realized in the second quarter of 2005.
The substantial increase in operating earnings was driven primarily by
continued revenue and earnings growth and margin expansion in each of our
commercial aircraft, distribution and business jet segments.
15
The following is a summary of the change in operating earnings by segment:
OPERATING EARNINGS
----------------------------------------------------------------------------
Three Months Ended June 30,
-----------------------------------------
Percent
2006 2005 Change Change
---------------------- ------------------ ---------------------- -----------
Commercial aircraft $21.7 $14.2 $7.5 52.8%
Distribution 11.8 9.0 2.8 31.1
Business jet 1.8 0.9 0.9 100.0
---------------------- ------------------ ---------------------- -----------
Total $35.3 $24.1 $11.2 46.5%
====================== ================== ====================== ===========
CAS operating earnings of $21.7 increased by $7.5, or 52.8%, versus the
same period in the prior year. CAS operating margin for the current quarter
expanded to 11.9%, a 150 basis point improvement over the same period in the
prior year. This margin expansion was primarily a result of ongoing
manufacturing efficiencies and operating leverage at the higher level of
sales. Nearly 72% of the increase in CAS revenue was due to a higher sales
volume of commercial aircraft cabin interior equipment. CAS backlog at June
30, 2006 reached another record level.
The distribution segment generated revenues of $55.0, an increase of
$10.0, or 22.2%, versus the same period in the prior year. Operating
earnings at the distribution segment in the second quarter of 2006 were
$11.8, which was 31.1% greater than the same period last year, and
represented a 21.5% operating margin. This margin expansion was primarily a
result of strong operating efficiencies at the higher level of sales.
The business jet segment generated second quarter revenues of $34.4, an
increase of 31.3% as compared to the second quarter of 2005. Operating
earnings at the business jet segment during the quarter of $1.8 were $0.9
higher than operating earnings reported in the same period last year. The
increase in operating earnings reflects the higher level of revenues
associated with increased production volumes of business jet cabin interior
products consistent with the ongoing recovery in the business jet industry.
Interest expense for the second quarter of 2006 of $8.7 was $6.3 lower
than interest expense recorded in the same period in the prior year as a
result of the early retirement of $250 of senior subordinated notes during
the first quarter of 2006.
Earnings before income taxes of $26.6, which were nearly three times
higher than the prior year's pre-tax earnings of $9.1, increased due to the
$11.2, or 46.5%, increase in operating earnings and the $6.3 decrease in
interest expense.
Income taxes for the current quarter were $7.9, or approximately 30% of
earnings before income taxes, and were $7.2 million greater than income
taxes in the same period in the prior year. The 2006 effective tax rate of
30% (7.7% in 2005) differs from expected tax rate of 35% due to the
realization of tax benefits from net operating loss carryforwards. The 2006
tax rate differs from the 2005 tax rate due to the recognition of our
domestic deferred tax asset during 2005.
Net earnings for the second quarter of 2006 were $18.7, or $0.24 per
diluted share, based on approximately 78.1 million diluted shares, versus
net earnings of $8.4 million, or $0.14 per diluted share, based on 60.1
million diluted shares in the prior year.
16
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006, AS COMPARED TO
THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005
(Dollars In Millions, Except Per Share Data)
Sales for each of our segments are set forth in the following table:
NET SALES
-----------------------------------------------------------------------------------
Six Months Ended June 30,
---------------------------------------
Percent
2006 2005 Change Change
-----------------------------------------------------------------------------------
Commercial aircraft $335.8 $264.0 $71.8 27.2%
Distribution 108.7 88.0 20.7 23.5
Business jet 74.2 52.1 22.1 42.4
-----------------------------------------------------------------------------------
Total $518.7 $404.1 $114.6 28.4%
===================================================================================
Net sales for the six months ended June 30, 2006 were $518.7, an
increase of $114.6, or 28.4%, as compared to the same period in the prior
year.
CAS generated revenues of $335.8 in the first six months of 2006, up
27.2% versus the same period in the prior year. Over 90% of the revenue
growth was due to a higher volume of commercial aircraft passenger cabin
equipment. The distribution segment delivered strong revenue growth of 23.5%
in the first half of 2006, versus the same period in the prior year, driven
by a broad based increase in aftermarket demand for aerospace fasteners and
continued market share gains. In the business jet segment, revenues
increased by 42.4% in the first half of 2006, versus the same period in the
prior year, reflecting increased shipments of super first class seating and
cabinetry products and the strong recovery in the business jet industry.
Gross profit for the first six months of 2006 of $182.9, or 35.3% of
sales, increased by $42.1 as compared to the same period in the prior year.
Gross margin for the first six months of 2006 expanded by 50 basis points as
compared to the same period of the prior year. The increase in gross margin
was primarily driven by ongoing manufacturing efficiencies offset somewhat
by lower margins on our super first class products. The margin on super
first class products is improving as we gain more experience on this new
product line, but we are still below our overall average product gross
margin for the business jet segment.
Selling, general and administrative expenses in the first six months of
2006 of $76.4, or 14.7% of sales, versus $63.8, or 15.8% of sales, in the
same period in the prior year reflects the higher level of selling and
marketing costs ($1.2), increased compensation and benefits ($5.4), and a
higher level of legal and professional fees ($2.0) associated with the 28.4%
increase in revenues and the 75% increase in backlog from June 30, 2005.
Selling, general and administrative expenses for the six months ended June
30, 2005 were reduced by $1.8 of net reimbursed legal fees in connection
with the resolution of two legal matters. Selling, general and
administrative expenses as a percentage of sales decreased by 120 basis
point reflecting the operating leverage in our business.
Research, development and engineering expenses of $40.1, or 7.7% of
sales, versus $33.0, or 8.2% of sales, in the same period in the prior year
reflect a higher level of spending associated with customer specific
engineering and new product development activities associated with the B787
Dreamliner and the A380 aircraft and various other business jet and
commercial aircraft cabin interior products. For example, during the first
six months of 2006 we introduced sixteen new direct and indirect lighting
products.
Operating earnings for the first half of 2006 of $66.4 increased by
$22.4, or 50.9%, as compared to operating earnings of $44.0 or 10.9% of
sales, in the same period last year. The operating margin of 12.8% in the
current six-month period was 190 basis points greater than the operating
margin realized in the first half of 2005. The substantial increase in
operating earnings was driven primarily by continued revenue and earnings
growth and margin expansion in each of our commercial aircraft, distribution
and business jet segments.
17
The following is a summary of the change in operating earnings by segment:
OPERATING EARNINGS
----------------------------------------------------------------------------
Six Months Ended June 30,
-----------------------------------------
Percent
2006 2005 Change Change
----------------------------------------------------------------------------
Commercial aircraft $37.2 $23.2 $14.0 60.3%
Distribution 23.6 17.8 5.8 32.6
Business jet 5.6 3.0 2.6 86.7
----------------------------------------------------------------------------
Total $66.4 $44.0 $22.4 50.9%
============================================================================
CAS operating earnings of $37.2 increased by $14.0, or 60.3%, versus the
same period in the prior year due to both the strong revenue growth and a
230 basis point improvement in operating margin to 11.1% of sales versus the
same period in the prior year. The margin expansion was primarily a result
of ongoing manufacturing efficiencies and operating leverage at the higher
sales volume. Nearly 80% of the increase in CAS revenue was due to a higher
sales volume of commercial aircraft cabin interior equipment. CAS backlog
during the second quarter of 2006 reached record levels.
The distribution segment generated revenues of $108.7 in the first half
of 2006, which were 23.5% greater than the same period in the prior year.
Operating earnings at the distribution segment of $23.6 during the six
months ended June 30, 2006 increased by 32.6%, or a 23.5% increase in sales,
reflecting strong operating efficiencies at the higher sales volume.
The business jet segment generated revenues of $74.2, up 42.4% as
compared to the same period in 2005. Operating earnings at the business jet
segment during the first six months of $5.6 were $2.6 higher than operating
earnings reported in the same period last year. The increase in operating
earnings reflects the higher level of revenues associated with increased
production volumes of business jet cabin interior products consistent with
the strong recovery in the business jet industry as well as a higher level
of super first class product shipments.
Interest expense for the first half of 2006 of $18.2 was $11.9 lower
than interest expense recorded in the same period in the prior year as a
result of the early retirement of $250 of senior subordinated notes during
the first quarter of 2006. We recorded a $1.8 charge in the first quarter of
2006 related to this debt prepayment.
Earnings before income taxes was $46.4, as compared to the prior year's
earnings before income taxes of $13.9, and was due to the $22.4, or 50.9%,
increase in operating earnings and the $11.9 decrease in interest expense,
offset by the $1.8 of debt prepayment costs.
Income taxes for the first six months of 2006 were $13.9, or $12.5
greater than income taxes in the same period in the prior year. The 2006
effective tax rate of 30% (10% in 2005) differs from expected tax rate of
35% due to the realization of tax benefits from net operating loss
carryforwards. The 2006 tax rate differs from the 2005 tax rate due to the
recognition of our domestic deferred tax asset during 2005.
Net earnings for the first half of 2006 were $32.5, or $0.42 per diluted
share, an increase of $20.0, or $0.21 per diluted share, versus $0.21 per
diluted share in the same period of the prior year.
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 consists primarily
of accounts receivable and inventories, which fluctuate with the sales of
our products. Our working capital was $402.0 as of June 30, 2006, as
compared to $573.4 as of December 31, 2005. The decrease in working capital
from December 31, 2005 to June 30, 2006 was primarily due the $250.0
prepayment of 8% senior subordinated notes in January 2006 with $250.0 of
the net proceeds of an issuance of common stock in
18
December 2005. Other factors impacting the change in working capital include
an increased level of accounts receivable ($13.7) related to our recent
revenue growth of 30.8%, a higher level of inventories ($61.6) to support
the 75% year-over-year increase in backlog, offset somewhat by a higher
level of accounts payable ($29.3). At June 30, 2006, there were no bank
borrowings outstanding and no debt principal payments due on our senior or
senior subordinated notes until 2010. As more fully described below, in July
2006, we commenced a tender offer for our 8-1/2% senior notes, established a
new bank credit facility and terminated our existing Amended Bank Credit
Facility.
Cash Flows
At June 30, 2006, our cash and bank credit available under our Amended
Bank Credit Facility was $178.5, compared to $394.4 at December 31, 2005.
Cash generated by operating activities was $13.9 for the six months ended
June 30, 2006, as compared to cash used by operating activities of $2.4 in
the same period in the prior year. The primary sources of cash during the
six months ended June 30, 2006 were net earnings of $32.5, non-cash charges
of $14.0 primarily related to amortization and depreciation and a higher
level of accounts payable and accrued liabilities arising from the higher
revenue volume and the timing of interest payments. These sources of cash
were offset by an increased level of accounts receivable ($11.4) related to
our recent revenue growth and a higher level of inventories ($59.2) to
support the expected 75% year-over-year increase in backlog.
Capital Spending
Our capital expenditures were $10.8 and $7.1 during the six months ended
June 30, 2006 and 2005, respectively. We anticipate capital expenditures of
approximately $25 for the next twelve months. We have no material
commitments for capital expenditures. We have, in the past, generally funded
our capital expenditures from cash from operations and funds available to us
under bank credit facilities. We expect to fund future capital expenditures
from cash on hand, from operations and from funds available to us under our
Amended Bank Credit Facility or any future bank credit facility, although
there can be no assurance that future bank credit facilities will be
available. Between 1989 and 2001, we completed 24 acquisitions for an
aggregate purchase price of approximately $1 billion. Following these
acquisitions, we rationalized the businesses, reduced headcount by
approximately 4,500 employees and eliminated 22 facilities. We have financed
these acquisitions primarily through issuances of debt and equity
securities, including our currently outstanding 8-7/8% senior subordinated
notes and our bank credit facilities.
Outstanding Debt and Other Financing Arrangements
Long-term debt at June 30, 2006 consisted principally of our 8-1/2%
senior notes due 2010 and 8-7/8% senior subordinated notes due 2011. The
$250 of 8-7/8% senior subordinated notes mature on May 11, 2011 and are
unsecured senior subordinated obligations and are subordinated to all of our
senior indebtedness. The 8-7/8% senior subordinated notes contains
restrictive covenants, including limitations on future indebtedness,
restricted payments, transactions with affiliates, liens, dividends, mergers
and transfers of assets. 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 our ability to borrow
and can give rise to a right of the lenders to terminate the applicable bank
credit facility and/or a right of the debt holders to require immediate
repayment of any outstanding debt.
On July 10, 2006, the Company commenced a cash tender offer and consent
solicitation for all of its $175.0 aggregate principal amount of 8-1/2%
senior notes. On July 21, 2006, the Company received the requisite consents
from holders of the 8-1/2% senior notes to amend the indenture governing the
notes to, among other things, eliminate substantially all of the restrictive
covenants, certain events of default and other related provisions. On July
26, 2006, the Company accepted for payment and paid for $174.9 aggregate
principal amount of the 8-1/2% senior notes using available cash on hand and
from borrowings under the new senior secured credit facility as described
below.
On July 26, 2006, the Company entered into a new senior secured credit
facility, consisting of a five-year, $150.0 revolving credit facility and a
seven-year, $75.0 term loan with J.P. Morgan Securities Inc., UBS Securities
LLC and Credit Suisse Securities (USA) LLC, as Joint Lead Arrangers and
Joint Bookrunners, and JPMorgan Chase Bank, N.A., as Administrative Agent.
The new senior secured credit facility also provides for the ability of the
Company to add additional term loans in the amount of up to $75.0 upon
satisfaction of certain customary conditions. The new senior secured credit
facility
19
replaces the Company's existing $50.0 revolving credit facility that it had
entered into in February 2004 and which would have matured in 2007.
Revolving credit borrowings under the new senior secured credit facility
will initially bear interest at an annual rate equal to the London interbank
offered rate (LIBOR) plus 175 basis points, representing an initial interest
rate of 7.2% as compared to 8.5% under the 8-1/2% senior notes repurchased
in the tender offer. Term loan borrowings under the new senior secured
credit facility will initially bear interest at an annual rate equal to
LIBOR plus 200 basis points, representing an initial interest rate of 7.4%.
Contractual Obligations
During the six-month period ended June 30, 2006, there were no material
changes in the contractual obligations specified in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2005 other than the
repayment of the 8% senior subordinated notes 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 at least the next twelve
months. However, such cash flows are dependent upon our future operating
performance, which, in turn, is subject to prevailing economic conditions
and to financial, business and other factors, including the conditions of
our markets, some of which are beyond our control. If, in the future, we
cannot generate sufficient cash from operations to meet our debt service
obligations, we will need to refinance such debt obligations, obtain
additional financing or sell assets. We cannot 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.
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. Future minimum lease payments
under these arrangements aggregated approximately $92.1 at June 30, 2006.
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.
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. The deferred tax asset was recorded as a result of our improving
financial performance and outlook, as well as the $20.0 reduction in
interest expense arising from the redemption of $250.0 of our 8% senior
subordinated notes, which occurred in January 2006.
20
We maintained a valuation allowance of approximately $40.8 million as of
June 30, 2006 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.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of Recent Account Pronouncements, refer to Note 10 of
our Condensed Consolidated Financial Statements included in Part 1, Item 1
of this report.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amount
of assets and liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions
or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in
materially different results under different assumptions and conditions. We
believe that our critical accounting policies are limited to those described
Note 1 to Notes to the Consolidated Financial Statements included in our
Annual Report on Form 10-K for the fiscal year December 31, 2005. There have
been no changes to our critical accounting policies since December 31, 2005.
DEPENDENCE UPON CONDITIONS IN THE AIRLINE INDUSTRY
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 through 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.
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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 our Annual Report on 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 the risk
factors in our Annual Report on Form 10-K and this entire Form 10-Q.
[Remainder of page intentionally left blank]
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of our
variable-rate debt.
Foreign currency - We have direct operations in Europe that receive revenues
from customers primarily in U.S. dollars, and we 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 June 30, 2006, we had no outstanding forward currency
exchange contracts. In addition, we have not entered into any other
derivative financial instruments.
Interest Rates - At June 30, 2006, we had no adjustable rate debt and fixed
rate debt of $428.8. The weighted average interest rate for the fixed rate
debt was approximately 8.71% at June 30, 2006. If interest rates on variable
rate debt 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 June 30, 2006, we maintained a portfolio of securities consisting
mainly of taxable, interest-bearing deposits with weighted average maturities of
less than three months. If short-term interest rates were to increase or
decrease by 10%, we estimate interest income would increase or decrease by
approximately $0.7.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our principal executive officer and our principal financial officer, after
evaluating, together with management, the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of June 30, 2006, the end of the period
covered by this report, have concluded that, as of such date, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed by us in reports filed under the Securities Exchange Act of 1934, as
amended, is accumulated and communicated to our management, including our
principal executive officer and our principal financial officer, to allow timely
decision regarding required disclosure and have been designed, and our
disclosure controls and procedures are effective, to give reasonable assurance
that the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
Internal Control over Financial Reporting
There were no changes in our company's internal control over financial
reporting that occurred during the second quarter of 2006 that have materially
affected, or are reasonably likely to materially affect, our company's internal
control over financial reporting.
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23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Not applicable.
Item 1A. Risk Factors
There have been no material changes in our risk
factors from those discussed in our Annual Report on Form
10-K for the fiscal year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds Not applicable.
Item 3. Defaults Upon Senior Securities Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Annual meeting took place on June 28, 2006.
1. Class III Directors elected - Richard G. Hamermesh
and Amin J. Khoury. Directors whose term of office
continued after meeting (Class I and II) - Jim C.
Cowart, Brian H. Rowe, David C. Hurley, Robert J.
Khoury and Jonathan M. Schofield.
2. Amended the 2005 Long-Term Incentive Plan
3. Amended the certificate of incorporation
The number of shares voted for, against and abstained/withheld were as follows:
Abstain
For Against Withheld Unvoted
--------------------------------------------------------------------
1. Election of Class III Directors 69,138,756 3,394,329 -- --
Richard G. Hamermesh
Amin J. Khoury 70,371,143 2,161,942 -- --
2. Proposed to amend the 2005
Long-Term Incentive Plan 58,281,400 6,548,297 521,270 7,182,118
3. Proposal to amend the certificate of
incorporation 63,422,273 9,077,741 33,071 --
Item 5. Other Information Not applicable.
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Item 6. Exhibits
Exhibit 3 Articles of Incorporation and Bylaws
3.1 Certificate of Amendment of the Restated Certificate of
Incorporation*
Exhibit 31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Chief Executive Officer*
31.2 Certification of Chief Financial Officer*
Exhibit 32 Section 1350 Certifications
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350*
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350*
- ---------------
*Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BE AEROSPACE, INC.
Date: August 7, 2006 By: /s/ Amin J. Khoury
------------------------------------------
Amin J. Khoury
Chairman and
Chief Executive Officer
Date: August 7, 2006 By: /s/ Thomas P. McCaffrey
------------------------------------------
Thomas P. McCaffrey
Senior Vice President of
Administration and Chief Financial Officer
26