UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarterly Period Ended September 30, 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
78,358,171 shares were outstanding as of November 3, 2006.
1
BE AEROSPACE, INC.
Form 10-Q for the Quarter Ended September 30, 2006
Table of Contents
Page
----
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets as of September
30, 2006 and December 31, 2005...............................3
b) Condensed Consolidated Statements of Earnings for the
Three and Nine Months Ended September 30, 2006 and
September 30, 2005...........................................4
c) Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2006 and
September 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.............................14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................................27
Item 4. Controls and Procedures.........................................27
Part II Other Information
Item 1. Legal Proceedings...............................................28
Item 1A. Risk Factors.....................................................28
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds........................................................28
Item 3. Defaults Upon Senior Securities.................................28
Item 4. Submission of Matters to a Vote of Security Holders.............28
Item 5. Other Information...............................................28
Item 6. Exhibits........................................................29
Signatures......................................................30
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in Millions, Except Share Data)
September 30, December 31,
2006 2005
---------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 99.1 $ 356.0
Accounts receivable - trade, less allowance for doubtful 157.3 131.9
accounts ($4.5 at September 30, 2006 and $2.9 at
December 31, 2005)
Inventories, net 373.3 223.7
Deferred income taxes, net 17.5 17.5
Other current assets 14.9 15.1
---------- ----------
Total current assets 662.1 744.2
---------- ----------
Property and equipment, net 104.2 95.0
Goodwill 451.0 362.9
Identifiable intangible assets, net 156.5 139.9
Deferred income taxes, net 69.5 62.0
Other assets, net 21.1 22.5
---------- ----------
$ 1,464.4 $ 1,426.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 232.4 $ 169.3
Current maturities of long-term debt 4.6 1.5
---------- ----------
Total current liabilities 237.0 170.8
---------- ----------
Long-term debt, net of current maturities 549.2 677.4
Deferred income taxes, net 2.3 1.8
Other non-current liabilities 7.1 6.9
Commitments, contingencies and off-balance sheet
arrangements (Note 6)
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; 78.2 million (September 30, 2006) and
74.3 million (December 31, 2005) shares issued
and outstanding 0.8 0.7
Additional paid-in capital 921.4 894.0
Accumulated deficit (256.6) (320.4)
Accumulated other comprehensive income (loss) 3.2 (4.7)
---------- ----------
Total stockholders' equity 668.8 569.6
---------- ----------
$ 1,464.4 $ 1,426.5
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In Millions, Except Per Share Data)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -----------------------------------
September 30, September 30,
------------------------------------- -----------------------------------
2006 2005 2006 2005
------------------------------------- -----------------------------------
Net sales $ 287.9 $ 217.1 $ 806.6 $ 621.2
Cost of sales 187.1 140.5 522.9 403.8
-------- --------- -------- --------
Gross profit 100.8 76.6 283.7 217.4
Gross profit percentage 35.0% 35.3% 35.2% 35.0%
Operating expenses:
Selling, general and administrative 39.7 34.0 116.1 97.8
Research, development and .
engineering 22.2 17.2 62.3 50.2
-------- --------- -------- --------
Total operating expenses 61.9 51.2 178.4 148.0
-------- --------- -------- --------
Operating earnings 38.9 25.4 105.3 69.4
Operating earnings percentage 13.5% 11.7% 13.1% 11.2%
Interest expense, net 9.7 14.8 27.9 44.9
Debt prepayment costs 17.0 -- 18.8 --
-------- --------- -------- --------
Earnings before income taxes 12.2 10.6 58.6 24.5
Income tax (benefit) provision (19.2) 0.6 (5.3) 2.0
-------- --------- -------- --------
Net earnings $ 31.4 $ 10.0 $ 63.9 $ 22.5
======== ========= ======== ========
Net earnings per common share:
Basic $ 0.40 $ 0.17 $ 0.83 $ 0.39
======== ========= ======== ========
Diluted $ 0.40 $ 0.16 $ 0.82 $ 0.37
======== ========= ======== ========
Weighted average common shares:
Basic 77.7 58.2 76.8 57.4
Diluted 78.6 61.2 77.9 60.3
See accompanying notes to condensed consolidated financial statements.
4
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Millions)
NINE MONTHS ENDED
----------------------------------------------
September 30, September 30,
2006 2005
-------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 63.9 $ 22.5
Adjustments to reconcile net earnings to net cash flows
provided by operating activities:
Depreciation and amortization 21.4 21.7
Provision for doubtful accounts 1.6 0.5
Non-cash compensation 1.0 2.1
Deferred income taxes (10.0) --
Debt prepayment costs 18.8 --
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable (4.7) (35.3)
Inventories (111.7) (26.8)
Other current assets and other assets 4.7 (3.5)
Payables, accruals and other liabilities 36.8 28.3
------- -------
Net cash flows provided by operating activities 21.8 9.5
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15.9) (10.9)
Acquisitions, net of cash acquired (145.3) --
Other, net -- 4.2
------- -------
Net cash flows (used in) investing activities (161.2) (6.7)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued 25.2 10.0
Debt facility costs and tender offer costs (18.9) --
Proceeds from long-term debt 374.2 --
Principal payments on long-term debt (499.3) (0.3)
Borrowings on line of credit 150.0 --
Repayments on line of credit (150.0) --
------- -------
Net cash flows (used in) provided by financing activities (118.8) 9.7
------- -------
Effect of foreign exchange rate changes on cash and cash equivalents 1.3 (1.5)
------- -------
Net (decrease) increase in cash and cash equivalents (256.9) 11.0
Cash and cash equivalents, beginning of period 356.0 76.3
------- -------
Cash and cash equivalents, end of period $ 99.1 $ 87.3
======= =======
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest, net $ 32.6 $ 39.0
Income taxes, net $ 2.0 $ 1.9
See accompanying notes to condensed consolidated financial statements.
5
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars In Millions, Except Share and 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. Business Combinations
---------------------
The Company completed two acquisitions during the quarter ended
September 30, 2006. The acquisitions were accounted for as purchases under
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." The assets purchased and liabilities assumed for these
acquisitions have been reflected in the accompanying balance sheet as of
September 30, 2006. Results of operations for the acquisitions are included
in the accompanying statement of earnings from the respective dates of
acquisition.
Draeger Aerospace GmbH
On July 26, 2006, the Company acquired Draeger Aerospace GmbH
(Draeger), from Cobham PLC of Dorset, England for approximately $78.0 in
cash.
Draeger manufactures components and integrated systems to supply
chemical and gaseous oxygen systems for both civil and military aircraft.
The integration of Draeger with the Company's existing oxygen systems
business will provide for a broadening of our oxygen systems product line
and an expansion of our customer base.
The Company has not yet completed an allocation of the purchase price
for Draeger. The estimated excess of the purchase price over the fair value
of the identifiable net tangible assets acquired approximates $59.0 of which
$23.0 has been allocated to intangible assets and $36.0 is included in
goodwill.
New York Fasteners Corp.
On September 1, 2006, the Company acquired New York Fasteners Corp.
(New York Fasteners), a privately-held company, for approximately $67.0 in
cash.
New York Fasteners is a distributor of aerospace fasteners and
hardware primarily to the military sector. The integration of New York
Fasteners into the Company's distribution segment is expected to create
procurement and operations synergies and significantly expand the Company's
overall penetration into the military sector.
The Company has not yet completed an allocation of the purchase price
for New York Fasteners. The estimated excess of the purchase price over the
fair value of the identifiable net tangible assets acquired approximates
$47.0 and is included in goodwill.
6
Consolidated proforma revenues, giving effect to the New York Fasteners
and Draeger acquisitions as if they had occurred on January 1, 2006, for the
three and nine month periods ended September 30, 2006 were approximately
$301.9 and $867.0, respectively. Consolidated proforma revenues, giving
effect to the New York Fasteners and Draeger acquisitions as if they had
occurred on January 1, 2005, for the three and nine month periods ended
September 30, 2005 were $236.0 and $658.1, respectively. The Draeger and
New York Fasteners acquisitions did not materially impact the Company's
operating earnings or net earnings for the periods presented.
Note 3. 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:
September 30, 2006 December 31, 2005
----------------------------- ----------------------------
Purchased materials and component parts $ 85.1 $ 59.8
Work-in-process 24.1 18.5
Finished goods (primarily aftermarket fasteners) 264.1 145.4
------ ------
$373.3 $223.7
====== ======
Note 4. 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 September 30, 2006, the Company believed that no indicators
of impairment existed. Aggregate amortization expense on identifiable
intangible assets was approximately $2.6 and $2.5 for the three months ended
September 30, 2006 and 2005, respectively, and $7.5 and $7.3 for the nine
months ended September 30, 2006 and 2005, respectively. At September 30,
2006, based on preliminary estimates, approximately $23.0 of the Draeger
purchase price has been allocated to identifiable intangible assets. Subject
to the final allocation of the purchase price for the Draeger and New York
Fasteners acquisitions, the Company expects to report amortization expense
of approximately $11.0 in each of the next five fiscal years.
Note 5. Long-Term Debt
--------------
On July 26, 2006 and, as amended and restated, on August 24, 2006, the
Company entered into a new senior secured credit facility (the "Senior
Secured Credit Facility"), consisting of a five-year, $200.0 revolving
credit facility and a six-year, $300.0 term loan. The 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, including commitments from lenders. The Senior Secured Credit
Facility replaced the Company's existing $50.0 revolving credit facility
that it had entered into in February 2004. The Company completed a cash
tender offer and consent solicitation for $174.9 aggregate principal amount
of 8-1/2% senior notes using available cash on hand and from borrowings
under the Senior Secured Credit Facility. The Company recorded a loss on
extinguishment of $17.0 related to unamortized debt issue and facility costs
and fees and expenses related to the repurchase of the 8-1/2% senior notes.
Revolving credit borrowings under the Senior Secured Credit Facility
would currently bear interest at an annual rate equal to the London
interbank offered rate (LIBOR) plus 175 basis points. There are no
borrowings outstanding on the revolver of the Senior Secured Credit Facility
at September 30, 2006. Term loan borrowings under new senior secured credit
facility bear interest at an annual rate equal to LIBOR plus 175 basis
points (7.16% at September 30, 2006).
The Senior Secured Credit Facility contains an interest coverage ratio
(as defined therein) maintenance financial covenant that currently must be
maintained at a level greater than 2.00 to 1 through December 31, 2006 and
2.25 to 1 through maturity of the term loan. The Senior Secured Credit
Facility also contains a total leverage ratio covenant (as defined therein)
which limits net debt to a 4.50 to 1 multiple of EBITDA (as defined therein)
through December 31, 2006 and to 4.25 to 1 through maturity. The Senior
Secured Credit Facility is collateralized by substantially all of the
Company's assets and contains customary affirmative covenants, negative
covenants and conditions precedent for borrowings, all of which were met as
of September 30, 2006.
7
At September 30, 2006, long-term debt consisted principally of $300.0
borrowings under the Senior Secured Credit Facility and $250.0 8-7/8% senior
subordinated notes due 2011. 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 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 September 30, 2006. A breach of these
covenants, or the covenants under the Company's Senior Secured 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 $250 of
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, using the net proceeds of the December 2005 common stock offering. The
Company recorded 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 6. 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 condensed consolidated
balance sheet. At September 30, 2006, future minimum lease payments under
these arrangements, the majority of which related to the long-term real
estate leases, totaled $93.8.
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
significant amounts have been accrued for indemnities, commitments and
guarantees.
Product Warranty Costs - Estimated costs related to product warranties
are accrued at the time products are sold. In estimating its future warranty
obligations, the Company considers various relevant factors, including the
Company's stated warranty policies and practices, the historical frequency
of claims and the cost to replace or repair its products under warranty. The
following table provides a reconciliation of the activity related to the
Company's accrued warranty expense:
NINE MONTHS ENDED
---------------------------------------------
September 30, September 30,
2006 2005
-------------------- --------------------
Beginning balance $ 14.3 $ 13.2
Accruals for warranties issued
during the period 9.6 6.7
Settlements made (6.7) (6.2)
-------------------- --------------------
Ending balance $ 17.2 $ 13.7
==================== ====================
8
Note 7. 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 Standards 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, with expected maturities
similar to the expected term of the option, in effect at the time of grant.
Expected volatility is based on both the implied volatilities from traded
options on the Company's stock and historical volatility on the Company's
stock measured over the expected life of the option.
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 the Company's 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 nine months ended September 30, 2006
and 49,500 options were granted during the nine months ended September 30,
2005. The following table illustrates the effects of options and employee
purchase rights granted prior to September 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 nine months of fiscal 2005.
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, 2005 September 30, 2005
------------------ ------------------
As reported
Net earnings $10.0 $ 22.5
Deduct: Share-based employee
compensation, fair value method, net
of related tax effects (1.6) (5.0)
------- --------
Pro forma net earnings $8.4 $17.5
======= ========
Basic and diluted net earnings per share:
Net earnings
Per share - basic
9
As reported $ 0.17 $ 0.39
Pro forma $ 0.14 $ 0.30
Net earnings
Per share - diluted
As reported $ 0.16 $ 0.37
Pro forma $ 0.14 $ 0.29
Assumptions used to estimate the value of the options are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, 2005 September 30, 2005
------------------ ------------------
Options:
Risk-free interest rate 4.0% 3.7%
Dividend yield 0% 0%
Volatility 67% 68%
Expected life (years) 2.2 2.1
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
nine months ended September 30, 2005 was $5.74 per share. 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, exercised, forfeited and
outstanding during the nine months ended September 30, 2006:
Options Weighted Average
(in thousands) Price Per Share
-------------- ---------------
Outstanding at January 1, 2006 4,806 $8.83
Options granted -- --
Options exercised (3,250) $7.21
Options forfeited ( 6) $8.38
------
Outstanding at September 30, 2006 1,550 $12.57
======
Exercisable at September 30, 2006 1,550 $12.57
======
Options Outstanding at September 30, 2006
-----------------------------------------
Weighted Average
Options Exercise Price Weighted Average
Range of Outstanding Outstanding and Remaining
Exercise Price and Exercisable Exercisable Contractual Life
-------------- --------------- ----------- ----------------
(in thousands) (years)
$ 4.08 - $5.59 344 $ 5.12 6.72
6.59 - 9.70 238 7.32 5.45
10.42 - 10.42 363 10.42 8.15
10.59 - 20.81 358 15.58 4.73
21.50 - 30.25 247 26.82 3.49
10
The Company issues new shares of common stock upon exercise of stock
options. During the nine months ended September 30, 2006, 3.3 million stock
options were exercised with an aggregate intrinsic value of $56.5 determined
as of the date of option exercise. The aggregate intrinsic value of
outstanding options as of September 30, 2006 was $14.6.
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.
During the quarter ended September 30, 2006 the Company granted 510,460
shares of restricted stock with a fair market value at the date of grant
date of $12.6. An additional grant of 7,960 shares was made on March 31,
2006, with a fair market value at the date of grant of $0.2. Compensation
cost is being recognized on a straight-line basis over the four year cliff
vesting period of the restricted shares and all shares are expected to vest.
Share based compensation of $0.5 was recognized during the quarter ended
September 30, 2006 related to these share grants. Unrecognized compensation
related to these grants was $12.3 at September 30, 2006.
Note 8. Segment Reporting
-----------------
The Company is organized based on the products and services it offers.
Following the acquisitions described in Note 2, the Company expanded its
reportable segments from three reporting segments to five reporting
segments: Seating Products, Interior Systems, Engineering Services,
Distribution and Business Jet. Previously, the Company included the Seating
Products, Interior Systems and Engineering Services segments in its
Commercial Aircraft segment. The following prior period information has
been restated to conform to the current period presentation.
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 NINE MONTHS ENDED
------------------------------------ --------------------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------------------------------ --------------------------------------
Net sales
Seating Products $98.8 $74.4 $283.0 $207.6
Interior Systems 72.4 51.2 192.2 153.8
Engineering Services 17.7 15.0 49.5 43.2
Distribution 64.3 43.0 173.0 131.0
Business Jet 34.7 33.5 108.9 85.6
------------------------------------ --------------------------------------
$287.9 $217.1 $806.6 $621.2
==================================== ======================================
Operating Earnings
Seating Products $11.3 $7.6 $26.8 $16.3
Interior Systems 13.8 8.3 36.1 26.0
Engineering Services 0.7 (1.9) 0.1 (5.1)
Distribution 12.9 8.7 36.5 26.5
Business Jet 0.2 2.7 5.8 5.7
------------------------------------ --------------------------------------
$38.9 $25.4 $105.3 $69.4
==================================== ======================================
Interest Expense 9.7 14.8 27.9 44.9
Loss on Debt Extinguishment 17.0 -- 18.8 --
------------------------------------ --------------------------------------
Earnings Before Income Taxes $12.2 $10.6 $58.6 $24.5
==================================== ======================================
11
The following table presents capital expenditures by business segment:
------------------------------------ --------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------ --------------------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------------------------------ --------------------------------------
Capital Expenditures
Seating Products $1.8 $0.7 $5.7 $2.6
Interior Systems 1.3 0.9 3.8 2.5
Engineering Services 0.3 0.3 1.0 0.7
Distribution 0.6 0.8 1.9 1.9
Business Jet 1.1 1.1 3.5 3.2
------------------------------------ --------------------------------------
$5.1 $3.8 $15.9 $10.9
==================================== ======================================
The following tables present total assets by business segment:
--------------------------------------
September 30, December 31,
2006 2005
--------------------------------------
Total Assets
Seating Products $230.7 $223.0
Interior Systems 380.5 326.7
Engineering Services 117.1 169.1
Distribution 494.3 421.0
Business Jet 241.8 286.7
--------------------------------------
$1,464.4 $1,426.5
======================================
Corporate assets (including cash and cash equivalents) of $201.3 and
$462.1 at September 30, 2006 and December 31, 2005, respectively,
have been allocated to the above segments based on each segment's
respective percentage of total assets.
Note 9. 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 and restricted
shares. Shares outstanding for the periods presented were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
---------------------------------- ----------------------------------
Net earnings $31.4 $10.0 $63.9 $22.5
===== ===== ===== =====
Basic weighted average common shares 77.7 58.2 76.8 57.4
(in millions)
Effect of dilutive stock options and stock
purchases under the employee stock .6 3.0 1.0 2.9
purchase plan (in millions)
Effect of restricted shares issued (in millions) .3 -- .1 --
----- ----- ----- -----
Diluted weighted average common shares (in millions) 78.6 61.2 77.9 60.3
===== ===== ===== =====
Basic net earnings per share $0.40 $0.17 $0.83 $0.39
===== ===== ===== =====
Diluted net earnings per share $0.40 $0.16 $0.82 $0.37
===== ===== ===== =====
12
Note 10. 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 NINE MONTHS ENDED
---------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
---------------------------------- ----------------------------------
Net earnings $31.4 $10.0 $63.9 $22.5
Other comprehensive earnings:
Foreign exchange translation adjustment (0.1) (1.5) 7.9 (11.2)
----- ---- ----- -----
Comprehensive earnings $31.3 $8.5 $71.8 $11.3
===== ==== ===== =====
Note 11. 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.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements"
(SFAS 157). SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The adoption of SFAS 157 is not
expected to have a material impact on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Post Retirement Plans "(SFAS 158).
SFAS 158 is effective for the end of the fiscal year ending after December
15, 2006. The adoption of SFAS 158 is not expected to have a material impact
on the Company's financial statements.
In September 2006, the SEC issued SAB No. 108, "Guidance re: the Use of a
Cumulative Effect Adjustment to Correct Immaterial Misstatements" (SAB 108).
Registrants are required to apply the provisions of SAB 108 no later than
the annual financial statements for their first fiscal year ending after
November 15, 2006. The application of SAB 108 is not expected to have a
material impact on the Company's financial statements.
[Remainder of page intentionally left blank]
13
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 September 30, 2006, as compared to our
results of operations for the three months ended September 30, 2005. The
discussion and analysis then addresses our results of operations for the
nine months ended September 30, 2006, as compared to our results of
operations for the nine months ended September 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 microwave, high heat, convection
and steam ovens;
o both chemical and gaseous aircraft oxygen delivery, distribution and
storage 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 five reportable segments: Seating Products, Interior
Systems, Engineering Services, Distribution and Business Jet.
Net sales by reportable segment for the three and nine month periods
ended September 30, 2006 and September 30, 2005 were as follows:
---------------------------------------- ---------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------- ---------------------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
---------------------------------------- ---------------------------------------
Net % of Net Net % of Net Net % of Net Net % of Net
Sales Sales Sales Sales Sales Sales Sales Sales
---------------------------------------- ---------------------------------------
Seating Products $98.8 34.3% $74.4 34.3% $283.0 35.1% $207.6 33.4%
Interior Systems 72.4 25.2% 51.2 23.6% 192.2 23.8% 153.8 24.8%
Engineering 17.7 6.1% 15.0 6.9% 49.5 6.1% 43.2 7.0%
Services
Distribution 64.3 22.3% 43.0 19.8% 173.0 21.5% 131.0 21.0%
Business Jet 34.7 12.1% 33.5 15.4% 108.9 13.5% 85.6 13.8%
---------------------------------------- ---------------------------------------
$287.9 100.0% $217.1 100.0% $806.6 100.0% $621.2 100.0%
======================================== =======================================
14
Net sales by domestic and foreign operations for the three and nine month
periods ended September 30, 2006 and September 30, 2005 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------- ------------------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
---------------------------------------- ------------------------------------
Domestic $190.2 $152.2 $527.9 $436.5
Foreign 97.7 64.9 278.7 184.7
---------------------------------------- ------------------------------------
Total $287.9 $217.1 $806.6 $621.2
======================================== ====================================
Net sales by geographic area (based on destination) for the three and
nine month periods ended September 30, 2006 and September 30, 2005 were as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------ ------------------------------------------------
September 30, 2006 September 30, 2005 September 30, 2006 September 30, 2005
------------------------------------------ ------------------------------------------------
Net % of Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales Sales Net Sales
------------------------------------------ ------------------------------------------------
United States $126.4 43.9% $104.1 48.0% $342.7 42.5% $308.3 49.6%
Europe 72.6 25.2% 45.6 21.0% 225.9 28.0% 142.9 23.0%
Asia 59.2 20.6% 57.4 26.4% 172.2 21.3% 138.9 22.4%
Rest of World 29.7 10.3% 10.0 4.6% 65.8 8.2% 31.1 5.0%
------------------------------------------ ------------------------------------------------
$287.9 100.0% $217.1 100.0% $806.6 100.0% $621.2 100.0%
========================================== ================================================
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. Until the third quarter of
2006, essentially all of our revenue growth since 2001 had been organic.
During the third quarter of 2006, we acquired Draeger GmbH ("Draeger")
and New York Fasteners Corp. ("New York Fasteners") for, in the aggregate,
approximately $145 million in cash. 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
Germany's Air Force in-service oxygen systems. The integration of Draeger
with our existing oxygen business will allow us to offer one of the broadest
oxygen system product lines in the industry. New York Fasteners is a
distributor of a wide variety of aerospace fasteners and hardware primarily
to the military sector. The integration of New York Fasteners into our
distribution segment is expected to significantly expand our overall
penetration into the military sector.
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 $28 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 $360 during the third quarter of fiscal 2006. At September
30, 2006, backlog was in excess of $1,600, which represents an increase of
approximately 60%, compared to our backlog at September 30, 2005. 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
15
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.
[Remainder of page intentionally left blank]
16
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006, AS COMPARED
TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
(Dollars In Millions, Except Per Share Data)
Sales for each of our segments are set forth in the following table:
NET SALES
(dollars in millions)
---------------------------------------------------------------------------------------
Three Months Ended September 30,
---------------------------------------------------------------------------------------
Percent
2006 2005 Change Change
---------------------------------------------------------------------------------------
Seating products $98.8 $74.4 $24.4 32.8%
Interior systems 72.4 51.2 21.2 41.4%
Engineering services 17.7 15.0 2.7 18.0%
Distribution 64.3 43.0 21.3 49.5%
Business jet 34.7 33.5 1.2 3.6%
---------------------------------------------------------------------------------------
Total $287.9 $217.1 $70.8 32.6%
Net sales for the three months ended September 30, 2006 were $287.9, an
increase of $70.8 or 32.6% as compared to the same period in the prior year.
The increase in sales volume for the seating products, interior systems and
engineering services segments was driven by a higher level of retrofit activity,
demand created by new aircraft deliveries and market share gains. Interior
systems segment's revenue growth rate, exclusive of the impact of the Draeger
acquisition, was 22.7%. The distribution segment delivered revenue growth of
49.5% in the third quarter of 2006, primarily due to a broad-based increase in
aftermarket demand for aerospace fasteners and continued market share gains.
Distribution segment's revenue growth rate, exclusive of the impact of the New
York Fasteners acquisition, was 35.5%. Business jet segment revenues increased
by 3.6% in the third quarter of 2006, reflecting strong business jet deliveries,
which was offset by a lower level of super first class revenues due primarily to
delivery delays of Airbus' A380. The recent acquisitions of Draeger (interior
systems) and New York Fasteners (distribution) accounted for approximately $16
of the consolidated revenue growth; revenue growth exclusive of these
acquisitions during the current quarter was approximately 25.5%.
Gross profit for the third quarter of 2006 of $100.8, or 35.0% of sales,
increased by $24.2 or 31.6%, as compared to the same period last year. Third
quarter 2006 gross margin decreased by 30 basis points as compared to the same
period of the prior year. The decrease in gross margin was primarily due to the
very poor absorption of overhead costs due to delays in Airbus A380 deliveries,
which negatively impacted gross profit and gross margin by approximately $2.3
and 80 basis points, respectively. Gross margin for the current three-month
period, exclusive of the Draeger and New York Fastener acquisitions, was 35.2%.
Selling, general and administrative expenses in the third quarter of 2006
were $39.7, or 13.8% of sales, versus $34.0, or 15.7% of sales, in the same
period in the prior year reflecting the higher level of selling, marketing and
product support costs ($2.0), the recent acquisitions of Draeger and New York
Fasteners ($1.6) and increased compensation, benefits and commissions ($2.6)
associated with the 32.6% increase in revenues and the over 60% increase in
backlog from September 30, 2005. Selling, general and administrative expenses as
a percentage of sales decreased by 190 basis points reflecting the operating
leverage in our business.
Research, development and engineering expenses for the current quarter were
$22.2, or 7.7% of sales, versus $17.2 or 7.9% of sales in the same period in the
prior year and reflect the higher level of spending associated with customer
specific engineering, as well as new product development activities (primarily
at the seating products and interior systems segments). During the three months
ended September 30,
17
2006 we applied for fourteen U.S. and foreign patents compared to nine during
the same period in the prior year.
Operating earnings for the third quarter of 2006 of $38.9 increased by
$13.5, or 53.2%, as compared to the same period last year. The third quarter
operating margin of 13.5% expanded by 180 basis points. The substantial increase
in operating earnings was driven primarily by continued revenue growth ($70.8)
earnings growth ($13.5) and margin expansion in the seating products, interior
systems, engineering services and distribution segments. The consolidated 180
basis point expansion in operating margin was achieved despite very poor
absorption of overhead costs due to delays in Airbus A380 deliveries, which
negatively impacted business jet segment's operating results by approximately
$2.3 and caused an 80 basis point reduction of consolidated operating margin.
The following is a summary of operating earnings performance by
segment:
OPERATING EARNINGS
---------------------------------------------------------------------------------------
Three Months Ended September 30,
($ in millions)
---------------------------------------------------------------------------------------
Percent
2006 2005 Change Change
---------------------------------------------------------------------------------------
Seating products $11.3 $7.6 $3.7 48.7%
Interior systems 13.8 8.3 5.5 66.3%
Engineering services 0.7 (1.9) 2.6 NM
Distribution 12.9 8.7 4.2 48.3%
Business jet 0.2 2.7 (2.5) NM
---------------------------------------------------------------------------------------
Total $38.9 $25.4 $13.5 53.2%
Operating earnings at the seating products segment of $11.3 in the third
quarter of 2006 increased by $3.7, or 48.7%, versus the same period in the prior
year. The seating products operating margin for the quarter expanded to 11.4%, a
120 basis point improvement over the same period in the prior year. Operating
earnings at the interior systems segment of $13.8 in the third quarter of 2006
were $5.5, or 66.3%, greater than the same period in the prior year. The margin
expansion in the seating products and interior systems segments was primarily
the result of ongoing manufacturing efficiencies and operating leverage at the
higher sales level. The engineering services segment generated operating
earnings of $0.7, an improvement of $2.6 versus the same period in the prior
year, reflecting the somewhat higher sales volume ($2.7), ongoing manufacturing
efficiencies and product mix.
The distribution segment generated record revenues of $64.3 in the third
quarter of 2006, an increase of $21.3, or 49.5%, versus the same period in the
prior year. Distribution segment operating earnings in the third quarter of 2006
were $12.9, which was 48.3% greater than the same period last year and
represented a 20.1% operating margin.
The business jet segment generated third quarter revenues of $34.7, an
increase of 3.6% as compared to the third quarter of 2005. Operating earnings at
the business jet segment during the quarter of $0.2 were $2.5 less than
operating earnings in the same period last year. The lower level of operating
earnings at the business jet segment resulted from very poor absorption of
overhead costs due to delays in Airbus A380 deliveries, which negatively
impacted the segment's operating results by approximately $2.3.
Interest expense for the third quarter of 2006 was $9.7, $5.1 lower than
interest expense recorded in the same period in the prior year, primarily due to
the January 2006 redemption of the $250 of aggregate principal amount of senior
subordinated notes due 2008. We also repurchased approximately $175.0 of senior
notes and incurred $17.0 of debt prepayment costs during the three months ended
September 30, 2006.
Earnings before income tax benefit of $12.2 increased by $1.6, as compared
to the prior year's pre-tax earnings of $10.6. The increase was due to the
$13.5, or 53.2% increase in operating earnings and the $5.1 decrease in interest
expense, offset by debt prepayment costs of $17.0. Exclusive of debt
18
prepayment charge earnings before income taxes would have been $29.2, an
approximate tripling of pre-tax earnings as compared to the prior year.
We recognized a significant portion of our U.K. deferred tax asset during
the third quarter of 2006, resulting in a tax benefit of approximately $22.9.
The deferred tax asset was recorded as a result of the improving financial
performance and outlook for our U.K. operations. The income tax benefit for the
current quarter was $19.2, reflecting income tax expense of $3.7 based upon 30%
of earnings before income taxes, all of which was offset by the recognition of
the deferred tax asset described above of $22.9. The 2006 effective tax rate of
30% differs from our expected worldwide tax rate of approximately 35% and
reflects the financial statement benefit arising from the realization of our
U.K. net operating loss carryforward during the third quarter of 2006. The 2005
effective tax rate of 5.7% differs from our expected worldwide tax rate of
approximately 35% and reflects, for financial reporting purposes, the
realization of the entire US and a portion of the foreign net operating loss
carryforwards during 2005. At September 30, 2006, the Company had net operating
loss carryforwards in the United States and United Kingdom of approximately $261
and $72, respectively, available to offset future taxable income.
Net earnings for the third quarter of 2006 were $31.4 or $0.40 per diluted
share based on approximately 78.6 fully diluted shares, versus net earnings of
$10.0, or $0.16 per diluted share based on 61.2 diluted shares for the same
period in the prior year.
[Remainder of page intentionally left blank]
19
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006, AS COMPARED
TO THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
(Dollars In Millions, Except Per Share Data)
Sales for each of our segments are set forth in the following table:
NET SALES
---------------------------------------------------------------------------------------
Nine Months Ended September 30,
($ in millions)
---------------------------------------------------------------------------------------
Percent
2006 2005 Change Change
---------------------------------------------------------------------------------------
Seating products $283.0 $207.6 $75.4 36.3%
Interior systems 192.2 153.8 38.4 25.0%
Engineering services 49.5 43.2 6.3 14.6%
Distribution 173.0 131.0 42.0 32.1%
Business jet 108.9 85.6 23.3 27.2%
---------------------------------------------------------------------------------------
Total $806.6 $621.2 $185.4 29.8%
Net sales for the nine months ended September 30, 2006 were $806.6, an
increase of $185.4, or 29.8%, as compared to the same period in the prior year.
The increase in sales volume for the seating products, interior systems, and
engineering services segments was driven by a higher level of retrofit activity,
demand created by new aircraft deliveries, and market share gains. Interior
systems segment's revenue growth rate exclusive of the impact of the Draeger
acquisition was 18.4%. The distribution segment delivered revenue growth of
32.1% in 2006, primarily due to a broad-based increase in aftermarket demand for
aerospace fasteners and continued market share gains. Distribution segment's
revenue growth rate exclusive of the impact of the New York Fasteners
acquisition was 27.2%. Business jet segment revenues increased by 27.2% in 2006,
reflecting strong business jet deliveries, offset by a lower level of super
first class revenues due primarily to A380 delivery delays. The recent
acquisitions of Draeger (interior systems) and New York Fasteners (distribution)
accounted for approximately $16 of the consolidated revenue growth; revenue
growth during the nine months, exclusive of these acquisitions was approximately
27.3%.
Gross profit during 2006 of $283.7, or 35.2%, of sales, increased by $66.3
or 30.5%, as compared to the same period last year. The 2006 gross margin
increased by 20 basis points as compared to the same period of the prior year.
The gross margin expansion was negatively impacted by very poor absorption of
overhead costs due to delays in Airbus A380 deliveries, which reduced gross
profit and gross margin by approximately $2.3 and 30 basis points, respectively.
Selling, general and administrative expenses in 2006 was $116.1, or 14.4% of
sales, versus $97.8 or 15.7% of sales in the same period in the prior year
reflecting the higher level of selling, marketing and product support costs
($3.2), the recent acquisitions of Draeger and New York Fasteners ($1.6), and
higher salaries, benefits, incentive compensation and commissions $(10.0)
associated with the 29.8% increase in revenues and the over 60% increase in
backlog from September 30, 2005. Selling, general and administrative expense for
the nine months ended September 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 130
basis points, reflecting the operating leverage in our business.
Research, development and engineering expenses for the nine months were
$62.3, or 7.7% of sales, versus $50.2 or 8.1% of sales in the same period in the
prior year and reflect the higher level of spending associated with customer
specific engineering, and new product development activities, (primarily at the
seating products and interior systems segments). During the nine months ended
September 30, 2006 we applied for fifty two U.S. and foreign patents versus
seventeen during the same period in the prior year.
20
Operating earnings of $105.3 for the first nine months of 2006 were $35.9 or
51.7% greater than the same period last year, due to both the 29.8% revenue
growth and a 190 basis point expansion in operating margin to 13.1% of sales.
The substantial increase in operating earnings was driven primarily by continued
revenue growth ($185.4), earnings growth ($35.9) and margin expansion in the
seating products, interior systems, engineering services and business jet
segments. The consolidated 190 basis point expansion in operating margin was in
spite of very poor absorption of overhead costs due to delays in the A380
deliveries, which negatively impacted business jet segment's operating results
by approximately $2.3 and caused a 25 basis point reduction of operating
earnings.
The following is a summary of operating earnings performance by
segment:
OPERATING EARNINGS
---------------------------------------------------------------------------------------
Nine Months Ended September 30,
($ in millions)
---------------------------------------------------------------------------------------
Percent
2006 2005 Change Change
---------------------------------------------------------------------------------------
Seating products $26.8 $16.3 $10.5 64.4%
Interior systems 36.1 26.0 10.1 38.8%
Engineering services 0.1 (5.1) 5.2 NM
Distribution 36.5 26.5 10.0 37.7%
Business jet 5.8 5.7 0.1 1.8%
---------------------------------------------------------------------------------------
Total $105.3 $69.4 $35.9 51.7%
For the nine months ended September 30, 2006, seating products operating
earnings of $26.8 increased by $10.5, or 64.4% as compared to the same period in
the prior year, due to both a 36.3% increase in revenue and a 160 basis point
expansion in operating margin to 9.5% of sales. Operating earnings at the
interior systems segment of $36.1 increased by $10.1, or 38.8%, as compared to
the same period in the prior year, due to both a 25.0% increase in revenue and a
190 basis point expansion in operating margin to 18.8% of sales. The margin
expansion at both the seating products and interior systems segments was
primarily due to ongoing manufacturing efficiencies and operating leverage at
the higher sales volume. The operating results at the engineering services
segment improved by $5.2 as compared to the same period in the prior year due to
higher sales volume, better product mix and operational efficiencies. The
distribution segment's operating earnings of $36.5 during the nine months ended
September 30, 2006 increased by $10.0 or 37.7% on a 32.1% increase in sales,
reflecting further operating efficiencies at the higher sales level. The
operating margin at the distribution segment, exclusive of the New York Fastener
acquisition, was 21.6%. The business jet segment's operating earnings were $5.8
in the current nine-month period, essentially unchanged from the prior year.
Interest expense for the first nine months of 2006 was $27.9 and was $17.0
lower than interest expense recorded in the same period in the prior year,
primarily due to the January 2006 redemption of our $250 of senior subordinated
notes due 2008. We also repurchased approximately $175.0 of senior notes and
incurred $18.8 of debt prepayment costs during the nine months ended September
30, 2006.
Earnings before income taxes were $58.6, which reflected $18.8 of debt
prepayment costs, compared to pre-tax earnings of $24.5 for the prior year. The
large increase was due to the $35.9 or 51.7% increase in operating earnings and
the $17.0 decrease in interest expense which was partially offset by $18.8 of
debt prepayment costs.
We recognized a significant portion of our U.K. deferred tax asset during
2006, resulting in a tax benefit of approximately $22.9. The deferred tax asset
was recorded as a result of the improving financial performance and outlook for
our U.K. operations. Income tax benefit for the current year was $5.3,
reflecting income tax expenses of $17.6, based upon 30% of earnings before
income taxes, all of which was offset by the recognition of our deferred tax
asset described above of $22.9. The 2006 effective tax rate of 30% differs from
our expected worldwide tax rate of approximately 35% and reflects the financial
statement benefit arising from the realization of our U.K. net operating loss
carryforward as actually
21
realized during the period. The 2005 effective tax rate of 4.7% differs from our
expected worldwide tax rate of approximately 35% and reflects, for financial
reporting purposes, the realization of both the US and U.K. net operating loss
carryforward during 2005. At September 30, 2006 the Company had net operating
loss carryforwards in the United States and United Kingdom of approximately $261
and $72, respectively, available to offset future taxable income.
Net earnings for the nine months ended September 30, 2006 were $63.9, or
$0.82 per diluted share based on approximately 77.9 million fully diluted
shares, versus net earnings of $22.5, or $0.37 per diluted share based on 60.3
million diluted shares for the same period in the prior year.
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22
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 $425.1 as of September 30, 2006, as compared to $573.4 as of December 31,
2005. The decrease in working capital from December 31, 2005 to September 30,
2006 was primarily due the redemption of the $250.0 aggregate principal amount
of 8% subordinated notes in January 2006 with the net proceeds of an issuance of
common stock in December 2005. Other factors impacting the change in working
capital include an increased level of accounts receivable ($25.4) related to our
recent revenue growth of 30%, a $149.6 increase in inventories, offset by a
$63.1 increase in accounts payable. Nearly $75.0 of the inventory growth was due
to investments to provide a broader range of products to a rapidly expanding
customer base in our distribution business. The balance of the inventory growth
was due to our 30% revenue growth, the outlook for future revenue growth, the
recent Draeger acquisition as well as to support the 60% increase in our
backlog. At September 30, 2006, there was $300.0 in term debt outstanding under
the Senior Secured Credit Facility. As more fully described below, during the
third quarter of 2006, in connection with the acquisitions of Draeger and New
York Fasteners, we completed a tender offer for our 8 1/2% senior notes,
established a new bank credit facility and amended our existing Amended Bank
Credit Facility. There are no debt principal payments due on the remaining $.06
of 8 1/2% senior notes until 2010 and the $250.0 aggregate principal amount of 8
7/8% senior subordinated notes until 2011.
Cash Flows
At September 30, 2006, our cash and revolving credit facility available
under our Senior Secured Credit Facility was $193.7 compared to $394.4 at
December 31, 2005. Cash generated by operating activities was $21.8 for the nine
months ended September 30, 2006, as compared to $9.5 in the same period in the
prior year. The primary sources of cash during the nine months ended September
30, 2006 were net earnings of $85.3 (as adjusted for depreciation and
amortization of $21.4) and a higher level of accounts payable and accrued
liabilities arising from the higher revenue volume. These sources of cash were
offset by the higher level of inventories ($111.7) discussed above.
Capital Spending
Our capital expenditures were $15.9 and $10.9 during the nine months ended
September 30, 2006 and 2005, respectively. We anticipate capital expenditures of
approximately $33 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 Senior Secured
Bank Credit Facility. 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. As
discussed in Note 2, during the quarter ended September 30, 2006 we completed
two acquisitions for $145 in cash.
Outstanding Debt and Other Financing Arrangements
Long-term debt at September 30, 2006 consisted principally of our 8 7/8%
senior subordinated notes due 2011 and $300.0 of bank term debt. 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 contain 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.
23
During the third quarter of 2006 we completed, a cash tender offer and
consent solicitation for $174.9 aggregate principal amount of 8 1/2% senior
notes using available cash on hand and from borrowings under the Senior Secured
Credit Facility as described below.
During the third quarter of 2006, we amended our existing senior secured
credit facility, to provide us with a five-year, $200.0 revolving credit
facility and a six-year, $300.0 term loan. The amended senior secured credit
facility also provides us the ability to add additional term loans in the amount
of up to $75.0 upon satisfaction of certain customary conditions and lender
commitment. Proceeds from the term loan were used to repay borrowings under the
revolving line of credit and to finance the acquisition of New York Fasteners.
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% of the 8 1/2% senior notes repurchased in
the tender offer. Term loan borrowings under the new senior secured credit
facility bear interest at an annual rate equal to LIBOR plus 175 basis points,
representing an initial interest rate of 7.2%.
Contractual Obligations
During the nine-month period ended September 30, 2006, we redeemed our 8%
senior subordinated notes due 2008, repurchased our 8 1/2 % senior notes and
amended our senior secured credit facility. The following chart reflects our
known contractual obligations and commercial commitments as of September 30,
2006. Commercial commitments include lines of credit, guarantees and other
potential cash outflows resulting from a contingent event that requires
performance by us or our subsidiaries pursuant to a funding commitment.
Contractual Obligations 2006 2007 2008 2009 2010 Thereafter Total
Long-term debt and other
non-current liabilities $ -- $2.9 $4.1 $3.4 $3.4 $542.5 $556.3
Operating leases 4.1 15.2 13.9 9.8 8.1 42.7 93.8
Purchase obligations (1) 6.7 8.9 3.9 2.1 1.6 1.5 24.7
Future interest payment on
outstanding debt (2) 14.0 44.5 44.4 44.4 44.3 44.3 235.9
----------------------------------------------------------------------------------
Total $24.8 $71.5 $66.3 $59.7 $57.4 $631.0 $910.7
==================================================================================
Commercial Commitments
Letters of Credit $6.3 $-- $-- $ -- $ -- $ -- $6.3
==================================================================================
(1) Occasionally we enter into purchase commitments for production
materials and other items, which are reflected in the table above. We
also enter into unconditional purchase obligations with various vendors
and suppliers of goods and services in the normal course of operations
through purchase orders or other documentation or are undocumented
except for an invoice. Such obligations are generally outstanding for
periods less than a year and are settled by cash payments upon delivery
of goods and services and are not reflected in the total unconditional
purchase obligations presented in this line item.
(2) Interest payments include estimated amounts due on the $300.0 term loan
based on the actual rate of interest at September 30, 2006. Actual
interest payments will fluctuate based on the terms of the Senior
Secured Credit Facility and market rate fluctuations.
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.
24
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 $93.8 at September 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 U.S. 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 the $250.0 aggregate principal amount of 8%
senior subordinated notes due 2008, which occurred in January 2006.
During the quarter ended September 30, 2006 we reversed $22.9 of a valuation
allowance which was recorded against our U.K. deferred tax asset. The deferred
tax asset was recorded as a result of our improved performance and outlook for
our U.K. operations.
We maintained a valuation allowance of approximately $16.8 as of September
30, 2006 primarily related to our domestic capital loss carryforwards and our
foreign operating loss carryforwards 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 the tax benefits associated with
such assets during the applicable carryforward periods.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of Recent Account Pronouncements, refer to Note 11 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.
25
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 in Note 1 to
Notes to the Consolidated Financial Statements included in our Annual Report on
Form 10-K for the fiscal year ended 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 sought 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.
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
26
be considered only after carefully reading the risk factors in our Annual Report
on Form 10-K and this entire Form 10-Q.
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 September 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 September 30, 2006, we had adjustable rate debt totaling
$300.0 and fixed rate debt of $250.1. The weighted average interest rate for
the adjustable and fixed rate debt was approximately 7.16% and 8.88%,
respectively, at September 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 approximately $2.2. We do not
engage in transactions intended to hedge our exposure to changes in interest
rates.
As of September 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 $0.5.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness, as of
September 30, 2006, of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the Company's periodic filings with the Securities
and Exchange Commission.
Internal Control over Financial Reporting
There were no changes in our Company's internal control over financial
reporting that occurred during the third quarter of 2006 that have materially
affected, or are reasonably likely to materially affect, our Company's internal
control over financial reporting.
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27
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 Not applicable.
Item 5. Other Information
Over the past year, the Compensation Committee of the Board of
Directors, working together with its independent compensation
consultant and management, has evaluated various alternatives for long
term incentive compensation and has concluded that restricted stock is
the most appropriate long term incentive for the Company at this time.
The Board of Directors recently adopted a policy regarding the grant
of restricted stock to management. Under this policy, to the extent
annual equity awards are granted in a particular year, the committee
will approve the grants at a meeting during the third or fourth
quarter (including the employees who will receive grants and the
dollar value of such grants) and the grants will be effective on
November 15th of each year (or, if November 15th is not a business
day, the first business day thereafter).
On November 1, 2006, the compensation committee approved grants of
restricted stock to approximately 185 of our managers pursuant to our
2005 Long Term Incentive Plan. These grants will be effective on
November 15, 2006 provided that such individuals remain employed in
good standing on such date. The restricted stock will be evidenced by
our standard restricted stock award agreements approved by the
committee on such date, forms of which are filed as exhibits 10.1,10.2
and 10.3 herewith. In particular, the restricted stock will vest in
accordance with the following schedule:
o 50% on the second anniversary of grant;
o 25% on the third anniversary of grant; and
o 25% on the fourth anniversary of grant.
The Compensation Committee anticipates that these awards will serve as
a long term incentive, and as such, are generally not expected to be
awarded on an annual basis.
In addition, in order to apply a more consistent approach to the
vesting of restricted stock awards, on November 6, 2006, the
Compensation Committee amended the vesting schedule of all outstanding
restricted stock awards to conform with the above vesting schedule.
Previously the outstanding restricted stock awards were scheduled to
vest in full on the fourth anniversary of the date of grant. The
awards that were amended include the grants to Messrs. Amin J. Khoury
and Thomas P. McCaffrey on July 31, 2006, as described in our Current
Report on Form 8-K dated August 3, 2006 and a grant to Werner
Lieberherr for 18,340 shares on July 5, 2006.
28
Item 6. Exhibits
Exhibit 3 Articles of Incorporation and Bylaws
3.1 Certificate of Amendment of the Restated Certificate of
Incorporation*
Exhibit 10 Material Contracts
10.1 Standard Form of Executive Restricted Stock Award Agreement*
10.2 Form of Restricted Stock Award Agreement for Thomas P.
McCaffrey*
10.3 Form of Restricted Stock Award Agreement for Amin J. Khoury*
10.4 1994 Employee Stock Purchase Plan (Amended and Restated as of
January 1, 2006)*
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.
29
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: November 7, 2006 By: /s/ Amin J. Khoury
------------------------------------------
Amin J. Khoury
Chairman and
Chief Executive Officer
Date: November 7, 2006 By: /s/ Thomas P. McCaffrey
------------------------------------------
Thomas P. McCaffrey
Senior Vice President of
Administration and Chief Financial Officer
30