BE AEROSPACE, INC.
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 May 25, 2002
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[ ]
The registrant has one class of common stock, $0.01 par value, of which
35,690,534 shares were outstanding as of June 25, 2002.
BE AEROSPACE, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data)
May 25, February 23,
2002 2002
----------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 144.8 $ 159.5
Accounts receivable - trade, less allowance for doubtful
accounts of $4.1 (May 25, 2002)
and $4.9 (February 23, 2002) 92.4 93.3
Inventories, net 160.2 157.0
Other current assets 48.4 46.6
---------- ---------
Total current assets 445.8 456.4
---------- ---------
Property and equipment, net 143.0 142.7
Goodwill 342.2 333.1
Other intangible assets, net 165.7 172.9
Other assets, net 23.8 23.2
---------- ---------
$ 1,120.5 $ 1,128.3
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 58.7 $ 48.1
Accrued liabilities 80.7 102.2
Current portion of long-term debt 1.3 1.3
---------- ---------
Total current liabilities 140.7 151.6
---------- ---------
Long-term debt 852.2 853.5
Other liabilities 1.8 2.1
Stockholders' equity:
Preferred stock, $0.01 par value; 1 million shares
authorized; no shares outstanding - -
Common stock, $0.01 par value; 50 million shares
authorized; 34.8 million (May 25, 2002) and
34.4 million (February 23, 2002) shares issued
and outstanding 0.3 0.3
Additional paid-in capital 407.7 405.3
Accumulated deficit (260.2) (258.7)
Accumulated other comprehensive loss (22.0) (25.8)
--------- ---------
Total stockholders' equity 125.8 121.1
---------- ---------
$ 1,120.5 $ 1,128.3
========== =========
See notes to condensed consolidated financial statements.
2
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in millions, except per share data)
Three Months Ended
-------------------------------
May 25, 2002 May 26, 2001
------------ ------------
Net sales $ 154.3 $ 176.8
Cost of sales 101.4 110.9
-------- -------
Gross profit 52.9 65.9
Operating expenses:
Selling, general and administrative 28.4 31.2
Research, development and engineering 9.1 12.1
-------- -------
Total operating expenses 37.5 43.3
-------- -------
Operating earnings 15.4 22.6
Interest expense, net 16.9 14.0
-------- -------
(Loss) earnings before income taxes and extraordinary item (1.5) 8.6
Income taxes - 0.8
-------- -------
(Loss) earnings before extraordinary item (1.5) 7.8
Extraordinary item - 9.3
-------- -------
Net loss $ (1.5) $ (1.5)
======== =======
Basic net (loss) earnings per common share:
(Loss) earnings before extraordinary item $ (0.04) $ 0.26
Extraordinary item - (0.31)
-------- -------
Net loss per common share $ (0.04) $ (0.05)
======== =======
Diluted net (loss) earnings per common share:
(Loss) earnings before extraordinary item $ (0.04) $ 0.25
Extraordinary item - (0.30)
-------- -------
Net loss per common share $ (0.04) $ (0.05)
======== =======
See notes to condensed consolidated financial statements.
3
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
Three Months Ended
--------------------------------
May 25, 2002 May 26, 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1.5) $ (1.5)
Adjustments to reconcile net loss to net cash flows used in
operating activities:
Extraordinary item - 9.3
Depreciation and amortization 6.9 12.1
Non-cash employee benefit plan contributions 0.6 0.5
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 1.6 (0.7)
Inventories (0.9) 1.7
Other current assets (1.6) (1.5)
Accounts payable 10.3 (11.4)
Accrued liabilities (22.2) (14.8)
------- --------
Net cash flows used in operating activities (6.8) (6.3)
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired - (33.5)
Capital expenditures (4.2) (2.7)
Change in intangibles and other assets (5.1) (6.5)
------- --------
Net cash flows used in investing activities (9.3) (42.7)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under bank credit facilities (1.0) (66.7)
Proceeds from issuances of stock, net of expenses 1.8 56.1
Principal payments on long-term debt (0.3) (101.8)
Proceeds from long-term debt - 245.0
------- --------
Net cash flows provided by financing activities 0.5 132.6
------- --------
Effect of exchange rate changes on cash flows 0.9 (0.6)
------- --------
Net (decrease) increase in cash and cash equivalents (14.7) 83.0
Cash and cash equivalents, beginning of period 159.5 60.3
------- --------
Cash and cash equivalents, end of period $ 144.8 $ 143.3
======= ========
Supplemental disclosures of cash flow information: Cash paid during period
for:
Interest, net $ 32.3 $ 23.1
Income taxes, net $ 0.7 $ -
See notes to condensed consolidated financial statements.
4
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 25, 2002 AND MAY 26, 2001
(Unaudited - Dollars in millions, except share data)
Note 1. Basis of Presentation
The condensed consolidated financial statements of BE Aerospace, Inc. and
its wholly-owned subsidiaries (the "Company" or "B/E") have been prepared by
the Company and are unaudited pursuant to the rules and regulations of the
Securities and Exchange Commission. Under such rules, certain information
related to the Company's organization, significant accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted. In the opinion of
management, these unaudited condensed consolidated financial statements
reflect all material adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations
and statements of financial position for the interim periods presented.
These results are not necessarily indicative of a full year's results of
operations. Certain reclassifications have been made to the prior year
financial statements to conform to the May 25, 2002 presentation.
Although the Company believes that the disclosures provided are adequate
to make the information presented not misleading, these unaudited interim
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K/A for the fiscal year
ended February 23, 2002.
Note 2. Comprehensive Earnings (Loss)
-----------------------------
Comprehensive earnings (loss) is defined as all changes in a company's
net assets except changes resulting from transactions with shareholders. It
differs from net earnings (loss) in that certain items currently recorded to
equity would be a part of comprehensive earnings (loss). The following table
sets forth the computation of comprehensive earnings (loss) for the periods
presented:
Three Months Ended
---------------------------------
May 25, 2002 May 26, 2001
------------ ------------
Net loss $(1.5) $(1.5)
Other comprehensive earnings (loss):
Foreign currency translation adjustments 3.8 (3.8)
----- -----
Comprehensive earnings (loss) $ 2.3 $(5.3)
===== =====
Note 3. Segment Reporting
The Company is organized based on the products and services it offers.
Under this organizational structure, the Company has three reportable
segments: Commercial Aircraft Products, Business Jet Products and Fastener
Distribution. The Company's Commercial Aircraft Products segment consists of
eight principal operating units while the Business Jet Products and Fastener
Distribution segments consist of two and one principal operating units,
respectively.
Each segment reports its results of operations and makes requests for
capital expenditures and acquisition funding to the Company's chief
operational decision-making group. This group is presently comprised of the
Chairman, the President and Chief Executive Officer, and the Corporate
Senior Vice President of Administration and Chief Financial Officer. Each
operating segment has separate management teams and infrastructures
dedicated to providing a full range of products and services to their
commercial, business jet and aircraft manufacturing customers.
5
BE AEROSPACE, INC.
The following table presents net sales and other financial information
by business segment:
Three Months Ended
-------------------------------
May 25, 2002 May 26, 2001
------------ ------------
Commercial Aircraft Products
Net sales $107.1 $154.6
Operating earnings 12.0(A) 20.4
Business Jet Products
Net sales 22.8 22.2
Operating earnings 4.7 2.2
Fastener Distribution
Net sales 24.4 -
Operating earnings 4.9 -
Consolidated
Net sales 154.3 176.8
Operating earnings 21.6(A) 22.6
(A) Amounts exclude facility and personnel transition costs of $6.2.
Including the transition costs, operating earnings for the Commercial
Aircraft Products business segment and for the Company were $5.8 and
$15.4, respectively.
Note 4. Earnings Per Common Share
Basic net (loss) earnings per common share is computed using the
weighted average common shares outstanding during the period. Diluted net
(loss) earnings per common share is computed by using the average share
price during the period when calculating the dilutive effect of stock
options. Shares outstanding for the periods presented were as follows:
Three Months Ended
-----------------------------------
May 25, 2002 May 26, 2001
------------ ------------
Weighted average common shares outstanding 34.6 29.6
Dilutive effect of employee stock options - 1.3
---- ----
Diluted shares outstanding 34.6 30.9
==== ====
Note 5. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company has adopted SFAS No. 141 and
applied its new purchase accounting requirements to the acquisition of
M & M Aerospace Hardware, Inc. ("M & M").
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). The Company adopted SFAS No. 142 on
February 24, 2002. SFAS No. 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires the Company to complete a transitional goodwill impairment
test six months from the date of adoption. While the Company has not
completed its transitional goodwill assessment test, it does not believe the
impact, if any, will be material. The Company has tested indefinite-lived
intangible assets in connection with the adoption of SFAS No. 142 and no
impairment existed.
6
BE AEROSPACE, INC.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 establishes accounting
standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. It also provides
accounting guidance for legal obligations associated with the retirement of
tangible long-lived assets. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002, with early adoption permitted. The Company
is currently evaluating the provisions of SFAS No. 143 but expects that the
provisions of SFAS No. 143 will not have a material impact on its
consolidated results of operations and financial position upon adoption.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144") which
addresses the financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of" and became effective on February 24, 2002. The adoption
of SFAS No. 144 did not have a material impact on the Company's
consolidated results of operations and financial position.
Note 6. Goodwill and Intangible Assets
Effective February 24, 2002, the Company adopted SFAS No. 142. On
adoption, the Company established its reporting units based on its current
reporting structure. All recognized assets, liabilities and goodwill have
been assigned to these reporting units. The Company will complete the first
step of the transitional goodwill impairment test during the second
quarter. The following sets forth the intangible assets by major asset
class:
May 25, 2002 February 23, 2002
------------ -------------------------------------- -------------------------------------
Net Net
Useful Life Original Accumulated Book Original Accumulated Book
(Years) Cost Amortization Value Cost Amortization Value
------------ ---------- ---------------- ---------- ----------- -------------- ----------
Developed technologies 4-30 $ 93.0 $12.7 $ 80.3 $108.7 $27.2 $ 81.5
Trademarks and patents 7-30 24.9 7.2 17.7 24.6 6.8 17.8
Trademarks (nonamortizing) 19.4 - 19.4 19.4 - 19.4
Technical qualifications, plans
and drawings 3-30 25.6 11.8 13.8 25.5 11.5 14.0
Replacement parts annuity
and product approvals 3-30 37.9 16.5 21.4 37.6 15.9 21.7
Covenant not to compete and
other identified intangibles 3-10 22.8 9.7 13.1 30.6 12.1 18.5
------ ----- ------ ------ ----- ------
$223.6 $57.9 $165.7 $246.4 $73.5 $172.9
====== ===== ====== ====== ===== ======
In connection with the implementation of SFAS No. 142, the historical
cost and accumulated amortization of certain developed technologies were
reset with no impact to the consolidated financial statements. Changes to
the original cost basis of intangible assets during the quarter ended May
25, 2002 were due to the reclassification of assembled workforce to
goodwill and foreign currency fluctuations.
Aggregate amortization expense on intangible assets was approximately
$2.1 for the quarter ended May 25, 2002. There was no impairment loss
recorded during the quarter. Amortization expense is expected to be
approximately $8.4 in each of the next five fiscal years.
The changes in the carrying amount of goodwill for the quarter ended
May 25, 2002 are as follows:
Total
--------------------
Balance as of February 23, 2002 $333.1
Impairment losses -
Effect of foreign currency translation .6
Reclassification of assembled workforce 8.5
------
Balance as of May 25, 2002 $342.2
======
7
BE AEROSPACE, INC.
A reconciliation of reported (loss) earnings before extraordinary item to
(loss) earnings before extraordinary item adjusted to reflect adoption of
SFAS No. 142 in the quarter ended May 25, 2002 is as follows:
Quarter Ended
---------------------------------------
May 25, 2002 May 26, 2001
----------------- ---------------------
(Loss) earnings before extraordinary item:
As reported $ (1.5) $ 7.8
Add back: goodwill amortization - 2.0
------ ------
As adjusted $ (1.5) $ 9.8
====== ======
Basic (loss) earnings per share before extraordinary item:
As reported $(0.04) $ 0.26
As adjusted $(0.04) $ 0.33
Diluted (loss) earnings per share before extraordinary item:
As reported $(0.04) $ 0.25
As adjusted $(0.04) $ 0.32
A reconciliation of reported net (loss) earnings to net (loss) earnings
adjusted to reflect adoption of SFAS No. 142 in the quarter ended May 25,
2002 is provided below.
Net (loss) earnings:
As reported $ (1.5) $ (1.5)
Add back: goodwill amortization - 2.0
------ ------
As adjusted $ (1.5) $ 0.5
====== ======
Basic and diluted (loss) earnings per share:
As reported $(0.04) $(0.05)
As adjusted $(0.04) $ 0.02
Note 7. Long-Term Debt
On April 17, 2001 the Company sold $250.0 of 8 7/8% Senior Subordinated
Notes (the "8 7/8%") due 2011. The proceeds from this offering, net of
debt issue costs, were approximately $242.8. Approximately $105.0 of the
proceeds were used to redeem the Company's 9 7/8% Senior Subordinated Notes
(the "9 7/8% Notes") due 2006 and approximately $66.7 of the proceeds were
used to repay balances outstanding under the Company's bank credit facility,
which was then terminated.
On April 17, 2001 the Company called for redemption its 9 7/8% Notes due
2006. The 9 7/8% Notes were redeemed at a price equal to 104.97% of the
principal amount, together with the accrued interest to the redemption date.
The Company deposited with the trustee on April 17, 2001 funds in an amount
sufficient to redeem the 9 7/8% Notes on the redemption date. Upon deposit
of these funds, the indenture governing the 9 7/8% Notes was discharged. The
Company incurred an extraordinary charge of $9.3 (net of tax) for
unamortized debt issue costs, redemption premiums and fees and expenses
related to the repurchase of the 9 7/8% Notes.
In August 2001, the Company established a new bank credit facility
consisting of a $150.0 revolving credit facility which expires in August
2006. The bank credit facility is collateralized by the Company's accounts
receivable, inventories and by substantially all of its other personal
tangible property. On May 25, 2002, indebtedness under the existing bank
credit facility consisted of outstanding borrowings of $144.0 (bearing
interest at LIBOR plus 2.5%) and letters of credit aggregating approximately
$5.4. The bank credit facility, which requires no principal payments until
2006, was amended on December 14, 2001 to provide additional flexibility in
its financial covenants, contains customary affirmative covenants, negative
covenants and conditions of borrowing, all of which were met as of May 25,
2002. The interest rate margin on the bank credit facility may increase or
decrease in the event of certain changes to the Company's financial leverage
ratios.
8
BE AEROSPACE, INC.
Note 8. Equity Offering
On May 16, 2001, as part of a 5.75 million share offering, the Company
completed the sale of approximately 2.8 million primary shares of common
stock at a price of $19.50 per share. The remaining approximately 2.9
million shares of the Company's common stock represented shares that
previously were issued to former owners of the four companies acquired by
the Company effective February 24, 2001. These shares were sold on behalf of
the former owners as part of the offering, for which the former owners
received approximately $53.1 million. The Company received approximately
$50.3 million, net of estimated offering costs, from the sale of the 2.8
million shares.
Note 9. Acquisitions
Effective May 8, 2001, the Company acquired the outstanding common stock
of Nelson Aero Space, Inc. for approximately $20.0. Effective July 18, 2001,
the Company acquired the outstanding common stock of Denton Jet Interiors,
Inc. for approximately $16.0. Both of the transactions have been accounted
for using purchase accounting. The assets purchased and liabilities assumed
have been reflected in the accompanying balance sheet as of February 23,
2002.
On September 14, 2001, the Company acquired M & M for $184.7. M & M is a
leading distributor of aerospace fasteners. The M & M acquisition was
completed by issuing to the former shareholders a total of approximately 1.9
million shares of B/E stock valued at $32.7, paying them $152.0 in cash and
assuming current liabilities of approximately $8.8. The Company financed
this acquisition through cash on hand and approximately $100.0 of borrowings
under its bank credit facility. This transaction has been accounted for
using purchase accounting and has been included in the Company's operations
since the date of acquisition.
The following pro forma unaudited financial data for the quarter ended
May 26, 2001 is presented to illustrate the estimated effects of the fiscal
2002 acquisitions as if the transactions had occurred as of the beginning of
the period.
May 26, 2001
------------------
Net sales $208.8
Net earnings before extraordinary item 12.3
Diluted earnings per share before extraordinary item 0.37
Net earnings 3.0
Diluted earnings per share 0.09
Note 10. Recent Industry Conditions
The September 11 terrorist attacks have severely impacted conditions in
the airline industry. For the first time in the history of commercial
aviation, all domestic airlines were grounded for a period of three days.
According to industry sources, since resuming service, most major US
carriers have substantially reduced their flight schedules, parking or
retiring approximately 15% of their fleets. The airlines have further
responded by decreasing domestic airfares 14% for the 4 months ended April
2002 compared to the same period last year. As a result of the double-digit
decline in both traffic and airfares, airline revenues for domestic carriers
for the first calendar quarter of 2002 were down by 22%. As a result of the
substantial reduction in airline revenues arising from the September 11
terrorist attacks, and their aftermath, as well as other factors, such as
the weakening economy, the U.S. airline industry incurred the largest loss
in its history in calendar 2001, totaling in excess of $7 billion.
Accordingly, the airlines are seeking to conserve cash in part by deferring
or eliminating cabin interior refurbishment programs and canceling or
deferring aircraft purchases. This has caused a substantial contraction in
the Company's business, the extent and duration of which cannot be
determined at this time.
9
BE AEROSPACE, INC.
The Company's principal customers are the world's commercial airlines.
During the six years ended with calendar 2000, the airlines significantly
strengthened their balance sheets and enhanced their liquidity as a result
of improved profitability, debt and equity financings and closely managed
fleet expansion. However, increases in pilot and other airline wages,
coupled with higher fuel prices and the softening of the global economy were
already negatively impacting airline profitability prior to the events of
September 11, 2001. The combined impact of the recent recession and the
events of September 11 has negatively impacted discretionary airline
spending for cabin interior refurbishments and upgrades and new aircraft
purchases. The Company expects that this will have a material adverse impact
on its results of operations and financial condition until such time as
conditions in the airline industry improve. While management has developed
and begun to implement what it believes is a sound plan to counter these
difficult conditions, it cannot guarantee that the plans are adequate or
will be successful.
The airline industry is also undergoing a process of consolidation and
significantly increased competition. Such consolidation could result in a
reduction of future aircraft orders as overlapping routes are eliminated and
airlines seek greater economies through higher aircraft utilization.
Note 11. Facility Consolidation and Other Special Charges
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused the Company to implement a facility
consolidation plan designed to re-align its capacity and cost structure with
changed conditions in the airline industry. The Company is implementing a
plan to close five facilities and reduce its workforce by about 1,000
employees. As a result, the Company recorded a charge of $98.9 which
included cash expenses of approximately $15.6. In addition, during the three
months ended May 25, 2002, the Company incurred approximately $6.2 of
transition costs associated with the facilities and personnel consolidation
program, which have been expensed as incurred as a component of cost of
sales.
The cash charges relate to involuntary severance and benefit programs for
approximately 1,000 employees, lease termination costs and preparing
facilities for disposal and sale. As of May 25, 2002, the Company had
terminated approximately 900 employees. Through May 25, 2002, the Company
paid approximately $7.5 related to severance, termination benefits and other
cash costs related to this consolidation program.
Cash requirements related to facility consolidation activities were
funded from operations and bank borrowings. Pretax cash outlays are expected
to aggregate approximately $12.5 during fiscal 2003.
The following table summarizes the facility consolidation costs activity
during the quarter ended May 25, 2002:
Balance at
February 23, Dispositions/ Paid Balance at
2002 Reclassifications In Cash May 25, 2002
--------------- ---------------------- --------------- ---------------
Accrued liability for severance, lease
termination and other costs $ 12.5 $ 1.6 $ (7.5) $ 6.6
Impaired inventories, property and equipment 12.1 (7.2) - 4.9
--------------- ---------------------- --------------- ---------------
$ 24.6 $ (5.6) $ (7.5) $11.5
=============== ====================== =============== ===============
10
BE AEROSPACE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
The following discussion and analysis addresses the results of our
operations for the three months ended May 25, 2002, as compared to the
Company's results of operations for the three months ended May 26, 2001. The
discussion and analysis also addresses the liquidity and financial condition
of the Company and other matters.
THREE MONTHS ENDED MAY 25, 2002, AS COMPARED TO THE RESULTS OF OPERATIONS FOR
THE THREE MONTHS ENDED MAY 26, 2001
Revenues were negatively impacted by the severe decline in industry
conditions following the terrorist attacks on September 11, 2001. Net sales
for the three months ended May 25, 2002 were $154.3, which is $22.5 or 12.7%
less than net sales of $176.8 for the comparable period in the prior year.
However, on a proforma basis, revenues declined by approximately $54.5 or
26.1%. Proforma figures treat companies acquired during fiscal 2002 as
though acquired at the beginning of fiscal 2002. Sales of the commercial
aircraft products segment were $47.5 or 30.7% lower than sales in the prior
year, due to the recession in the airline industry and the further downturn
in industry conditions following the events of September 11, 2001.
Gross profit was $59.1, or 38.3% of net sales for the quarter, excluding
facility transition expenses of $6.2, as compared to $65.9 or 37.3% of net
sales in the prior year. Including such costs, gross profit was $52.9 or
34.3% of net sales, which was $13.0 lower than the prior year. The lower
gross profit was due to the lower revenue level and facility and personnel
transition costs. The improvement in the gross margin before such costs was
primarily due to impact of our facility consolidation efforts, and lean
manufacturing and continuous improvement programs.
Selling, general and administrative expenses were $28.4 or 18.4% of net
sales for the three month period as compared to $31.2 or 17.7% of net sales
during the comparable period in the prior year. On a comparable basis
(including last year's acquisitions in the first quarter results), such
costs would have been $36.4 last year. The $8.0 year over year decrease in
comparable selling, general and administrative expenses resulted from a $4.2
reduction in amortization expense and $3.8 of savings realized from facility
closures and austerity measures.
Research, development and engineering expenses were $9.1 or 5.9% of net
sales for the three month period ended May 25, 2002 as compared to $12.1 or
6.8% of net sales in fiscal 2001. The year over year decrease in research,
development and engineering expenses is primarily attributable to the
facility consolidation program and austerity measures we implemented in
response to weak airline performance caused by the recession and the
September 11 terrorist attacks.
We generated operating earnings of $21.6 or 14.0% of net sales for the
current quarter, excluding facility transition expenses of $6.2. This was
$1.0 or 4.4% lower than operating earnings of $22.6 or 12.8% of net sales
for the comparable period in the prior year. The decrease in operating
earnings in the current period is primarily attributable to the $54.5
decrease in revenues, on a proforma basis, from our businesses following the
terrorist attacks on September 11, 2001, offset by cost reductions arising
for our facility consolidation program, austerity measures and lower
amortization expense arising from the implementation of SFAS No. 142.
On a proforma basis, for the quarter ended May 25, 2002, our gross margin
excluding transition costs expanded by 50 basis points to 38.3% as
compared to the first quarter a year ago. On a similar basis, operating
expenses decreased by $11.0 to $37.5, reflecting a $6.8 reduction in actual
operating expenses and a $4.2 reduction in amortization expenses resulting
from new accounting rules. Proforma gross margin and operating expenses were
37.8% and $48.5, respectively, for the first quarter a year ago.
11
BE AEROSPACE, INC.
Interest expense, net was $16.9 for the quarter ended May 25, 2002, or
$2.9 greater than interest expense of $14.0 for the same period in the prior
year. The increase in interest expense is due to the increase in outstanding
debt due to last year's financing activities and acquisitions, net of
interest earned on our cash balances.
After transition expenses, we generated a $1.5 million loss before income
taxes.
Income tax expense for the current three-month period was $0.0 as
compared to $0.8 in the same period in the prior year. The Company recorded
a $9.3 extraordinary item during the prior year's first quarter related to
the early extinguishment of certain long-term debt.
Earnings before facility transition expenses were $4.2 (net of income
taxes of $0.5), or $0.12 per share for the current quarter, as compared to
net earnings before debt extinguishments costs of $7.8 or $0.25 per share
(diluted) for the comparable period in prior year. Our net loss for the
current quarter was ($1.5) or ($0.04) per share as compared to a net loss of
($1.5) or ($0.05) in the prior year.
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BE AEROSPACE, INC.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
Our liquidity requirements consist of working capital needs, ongoing capital
expenditures and payments of interest and principal on our indebtedness. Our
primary requirements for working capital are directly related to the level of
our operations; working capital, primarily accounts receivable and inventories,
fluctuate with the demand for our product. Our working capital was $305.1 as of
May 25, 2002, as compared to $304.8 as of February 23, 2002.
At May 25, 2002, our cash and cash equivalents were $144.8, as compared to
$159.5 at February 23, 2002. This decrease in cash is primarily attributable to
the timing of our semi-annual interest payments on our subordinated debt and
cash costs associated with our facility consolidation program.
We hold a promissory note from Thomson -- CSF Holding Corporation, a
subsidiary of The Thales Group (a publicly traded French Company with over $9
billion in sales). We are currently involved in a dispute with Thales over
certain terms of a purchase and sale agreement in connection with our sale in
Fiscal 2000 of our in-flight entertainment business. Thomson -- CSF Holding
Corporation failed to make payments on the promissory notes issued to us in
connection with the sale when due, and in December 2000 we initiated arbitration
proceedings against Thales and its parent Thomson. These obligations to us are
guaranteed by Thomson -- CSF Sextant, Inc. The arbitration against Thales and
Thomson is expected to be resolved during fiscal 2003.
Cash Flows
Cash used in operating activities was $6.8 for the three months ended May
25, 2002 and $6.3 for the three months ended May 26, 2001. The primary source of
cash during the three months ended May 25, 2002 was a net loss of $(1.5) offset
by charges for depreciation and amortization of $6.9, other non-cash expenses of
$0.6, and a decrease in accounts receivable of $1.6. These sources of cash were
partly offset by cash used to reduce payables and accruals of $11.9 and an
increase in inventories and other current assets of $2.5.
Capital Spending
Our capital expenditures were $4.2 and $2.7 during the three months ended
May 25, 2002 and May 26, 2001, respectively. The year over year increase in
capital expenditures is in line with our expectation for annual capital
expenditures of approximately $15.0-$19.0 for the next several years. We have no
material commitments for capital expenditures. We have, in the past, generally
funded our capital expenditures from cash from operations and funds available to
us under our bank credit facility. We expect to fund future capital expenditures
from cash on hand and from operations and from funds available to us under our
bank credit facility. In addition, since 1989, we have completed 22 acquisitions
for an aggregate purchase price of approximately $971.0. In addition, following
these acquisitions, we have rationalized the businesses, reducing headcount by
nearly 4,000 employees and eliminating 22 facilities. The cost of these actions
was approximately $285.3. We have financed these acquisitions primarily through
issuances of debt and equity securities, including our outstanding 8% Notes due
2008, 8 7/8% Notes due 2011 and the 9 1/2% Notes due 2008 and the bank credit
facility.
Outstanding Debt and Other Financing Arrangements
In August 2001, we established a new bank credit facility consisting of a
$150.0 revolving credit facility which expires in August 2006. The bank credit
facility is collateralized by our accounts receivable, inventories and by
substantially all of our other personal property. At May 25, 2002, indebtedness
under the existing bank credit facility consisted of revolving credit facility
outstanding borrowings of $144.0 (bearing interest at LIBOR plus 2.5%) and
letters of credit aggregating approximately $5.4. The bank credit facility,
which requires no principal payments until 2006, contains customary affirmative
covenants, negative covenants and conditions of borrowing, all of which were met
as of May 25, 2002. The interest rate margin on the bank credit facility may
increase or decrease in the event of certain changes to our financial leverage
ratios.
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BE AEROSPACE, INC.
Long-term debt consists principally of our 8% Notes, 8 7/8% Notes and 9 1/2%
Notes. The $250.0 of 8% Notes mature on March 1, 2008, the $250.0 of 8 7/8%
Notes mature on May 1, 2011 and the $200.0 of 9 1/2% Notes mature on November 1,
2008. The notes are unsecured senior subordinated obligations and are
subordinated to all of our senior indebtedness. Each of the 8% Notes, 8 7/8%
Notes and 9 1/2% 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 by us as of
May 25, 2002. A breach of such covenants, or the covenants under our bank credit
facility, that continues beyond any grace period can constitute a default, which
can limit the ability to borrow and can give rise to a right of the lenders to
terminate the applicable facility and/or require immediate repayment of any
outstanding debt.
Contractual and Other Obligations
The following charts reflect our contractual obligations and commercial cash
commitments as of May 25, 2002. 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.
Fiscal Fiscal Fiscal Fiscal Fiscal
Contractual Obligations Total 2003 2004 2005 2006 2007 Thereafter
----------------- ------------- ----------- ----------- ---------- ------------ --------------
Long-term debt $853.5 $1.3 $ 4.3 $0.6 $0.1 $147.8 $699.4
Operating leases 29.1 6.7 6.6 4.0 3.2 2.6 6.0
Capital lease obligations 0.2 0.2 - - - - -
------ ---- ----- ---- ---- ------ ------
Total $882.8 $8.2 $10.9 $4.6 $3.3 $150.4 $705.4
====== ==== ===== ==== ==== ====== ======
Commercial Commitments
Letters of Credit $ 5.4 $5.4 $ - $ - $ - $ - $ -
We believe that the cash flow from operations, which provides us with our
ability to fund our operations, make planned capital expenditures, make
scheduled payments and refinance our indebtedness, depends on our future
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors, some of which are
beyond our control.
Deferred Tax Assets
We established a valuation allowance related to the utilization of our
deferred tax assets because of uncertainties that preclude us from determining
that it is more likely than not that it will be able to generate taxable income
to realize such assets during the federal operating loss carryforward period,
which begins to expire in 2012. Such uncertainties include recent cumulative
losses, the highly cyclical nature of the industry in which we operate, risks
associated with our facility consolidation plan, our high degree of financial
leverage, risks associated with new product introductions, recent increases in
the cost of fuel and its impact on our airline customers, and risks associated
with the integration of acquired businesses. We monitor these uncertainties, as
well as other positive and negative factors that may arise in the future, as we
assess the necessity for a valuation allowance for our deferred tax assets.
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BE AEROSPACE, INC.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company has adopted SFAS No. 141 and applied
its new purchase accounting requirements to the acquisition of M & M Aerospace.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." We adopted SFAS No. 142 on February 24, 2002. SFAS No. 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
the standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires us to complete a transitional goodwill impairment test six months
from the date of adoption. While the Company has not completed its transitional
goodwill assessment test, it does not believe the impact, if any, will be
material. The Company has tested indefinite-lived intangible assets in
connection with the adoption of SFAS No. 142 and no impairment existed.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Retirement
Obligations." SFAS No. 143 establishes accounting standards for the recognition
and measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company is currently evaluating the provisions of SFAS No. 143
but expects that the provisions of SFAS No. 143 will not have a material impact
on its consolidated results of operations and financial position upon adoption.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of" and was effective
beginning on February 24, 2002. The adoption of SFAS No. 144 did not have a
material impact on our consolidated results of operations and financial
position.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies,
see Note 1 in the Notes to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K/A for the fiscal year ended February 23,
2002.
Revenue Recognition
Sales of products are recorded on the date of shipment and passage of title,
or if required, upon acceptance by the customer. Service revenues are recorded
when services are performed. Revenues and costs under certain long-term
contracts are recognized using contract accounting under the
percentage-of-completion method. The Company sells its products primarily to
airlines and aircraft manufacturers worldwide, including occasional sales
collateralized by letters of credit. The Company performs ongoing credit
evaluations of its customers and maintains reserves for estimated credit losses.
Actual losses have been within management's expectations.
We apply judgment to ensure that the criteria for recognizing sales are
consistently applied and achieved for all recognized sales transactions.
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BE AEROSPACE, INC.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current credit worthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past.
Inventories
We value our inventory at the lower of cost or market. We regularly review
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and
production requirements. As demonstrated during fiscal 2002, demand for our
products can fluctuate significantly. Our estimates of future product demand may
prove to be inaccurate, in which case we may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if our
inventory is determined to be overvalued, we would be required to recognize such
costs in our cost of goods sold at the time of such determination. Likewise, if
our inventory is determined to be undervalued, we may have over-reported our
costs of goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale.
Long-Lived Assets (including Tangible and Intangible Assets and Goodwill)
To conduct our global business operations and execute our strategy, we
acquire tangible and intangible assets. We periodically evaluate the
recoverability of the carrying amount of our long-lived assets (including
property and equipment, goodwill and other intangible assets) whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. An impairment is assessed when the undiscounted
expected future cash flows derived from an asset are less than its carrying
amount. Impairments are recognized in operating earnings. We continually apply
judgment when applying these impairment rules to determine the timing of the
impairment test, the undiscounted cash flows used to assess impairments, and the
fair value of an impaired asset. The dynamic economic environment in which each
of our businesses operate and the resulting assumptions used to estimate future
cash flows impact the outcome of all impairment tests.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we
are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheets. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the consolidated statements of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $106.3 million as of May 25, 2002, due to uncertainties
related to our ability to utilize some of our deferred tax assets, primarily
consisting of certain net operating income losses carried forward, before they
expire. The valuation allowance is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods we may need to
establish additional valuation allowance which could materially impact our
financial position and results of operations.
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BE AEROSPACE, INC.
DEPENDENCE UPON CONDITIONS IN THE AIRLINE INDUSTRY
The September 11 terrorist attacks have severely impacted conditions in the
airline industry. For the first time in the history of commercial aviation, all
domestic airlines were grounded for a period of three days. According to
industry sources, since resuming service, most major US carriers have
substantially reduced their flight schedules, parking or retiring approximately
15% of their fleets. The airlines have further responded by decreasing domestic
airfares 14% for the 4 months ended April 2002 compared to the same period last
year. As a result of the double-digit decline in both traffic and airfares,
airline revenues for domestic carriers for the first calendar quarter of 2002
were down by 22%. As a result of the substantial reduction in airline revenues
arising from the September 11 terrorist attacks, and their aftermath, as well as
other factors, such as the weakening economy, the U.S. airline industry incurred
the largest loss in its history in calendar 2001, totaling in excess of
$7 billion. Accordingly, the airlines are seeking to conserve cash in part by
deferring or eliminating cabin interior refurbishment programs and canceling or
deferring aircraft purchases. This has caused a substantial contraction in our
business, the extent and duration of which cannot be determined at this time.
Our principal customers are the world's commercial airlines. During the six
years ending with calendar 2000, the airlines significantly strengthened their
balance sheets and enhanced their liquidity as a result of improved
profitability, debt and equity financings and closely managed fleet expansion.
However, increases in pilot and other airline wages, coupled with higher fuel
prices and the softening of the global economy were already negatively impacting
airline profitability prior to the events of September 11, 2001. The combined
impact of the recent recession and the events of September 11 has negatively
impacted discretionary airline spending for cabin interior refurbishments and
upgrades and new aircraft purchases. We expect that this will have a material
adverse impact on our results of operations and financial condition until such
time as conditions in the airline industry improve. While management has
developed and begun to implement what it believes is a sound plan to counter
these difficult conditions, it cannot guarantee that the plans are adequate or
will be successful.
The airline industry is also undergoing a process of consolidation and
significantly increased competition. Such consolidation could result in a
reduction of future aircraft orders as overlapping routes are eliminated and
airlines seek greater economies through higher aircraft utilization.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including statements
regarding implementation and expected benefits of lean manufacturing and
continuous improvement programs, the Company's dealings with customers and
partners, the consolidation of facilities, integration of acquired businesses,
ongoing capital expenditures, the adequacy of funds to meet the Company's
capital requirements, the ability to refinance our indebtedness, if necessary,
the reduction of debt, the potential impact of new accounting pronouncements,
the allocation of M & M's purchase price, the impact on our business of the
September 11, 2001 terrorist attacks and the resolution of the Company's
arbitration against Thales. These forward-looking statements include risks and
uncertainties, and the Company's actual experience may differ materially from
that anticipated in such statements. Factors that might cause such a difference
include those discussed in the Company's filings with the Securities and
Exchange Commission, including its most recent proxy statement and Form 10-K/A,
as well as future events that may have the effect of reducing the Company's
available operating income and cash balances, such as unexpected operating
losses, the impact of rising fuel prices on our airline customers, delays in, or
unexpected costs associated with, the integration of our acquired businesses,
conditions in the airline industry, problems meeting customer delivery
requirements, the Company's 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.
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.
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BE AEROSPACE, INC.
Foreign currency - We have direct operations in Europe that receive
revenues from customers in various currencies and purchase raw materials
and component parts from foreign vendors in various currencies.
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, the Company and its foreign subsidiaries may enter
into foreign currency exchange contracts to manage risk on transactions
conducted in foreign currencies. At May 25, 2002, we had no outstanding
forward currency exchange contracts. We did not enter into any other
derivative financial instruments.
Interest Rates - At May 25, 2002, we had adjustable rate debt of $144.0
and fixed rate debt of $699.6. The weighted average interest rate for the
adjustable and fixed rate debt was approximately 4.7% and 8.7%,
respectively, at May 25, 2002. If interest rates were to increase by 10%
above current rates, the estimated impact on our financial statements
would be to reduce pretax income annually by approximately $0.7. We do
not engage in transactions to hedge our exposure to changes in interest
rates.
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BE AEROSPACE, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None.
Item 2. Changes in Securities None.
Item 3. Defaults Upon Senior Securities None.
Item 4. Submission of Matters to a Vote of Security Holders None.
Item 5. Other Information None.
Item 6. Exhibits and Reports
a. Exhibits
10(ii) Leases
10.1 Lease dated October of 1998, between Kilroy Realty, L.P.,
as lessor and BE Aerospace, Inc. as lessee,
related to the Anaheim, California property.
10.2 Lease dated February 20, 2001, between Pelmad Corporation,
as landlord and BE Aerospace, Inc., as tenant,
related to the Miami, Florida property.
b. Reports
Form 8-K, dated April 10, 2002 and filed April 11, 2002, includes a
press release containing earnings release information including
certain unaudited financial information.
19
BE AEROSPACE, INC.
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: June 26, 2002 By: /s/ Robert J. Khoury
--------------------
Robert J. Khoury
President and
Chief Executive Officer
Date: June 26, 2002 By: /s/ Thomas P. McCaffrey
-----------------------
Thomas P. McCaffrey
Corporate Senior Vice President of
Administration and Chief
Financial Officer
20