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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from February 24, 2002 to December 31, 2002
Commission File No. 0-18348
BE AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1209796
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1400 Corporate Center Way, Wellington, Florida 33414
(Address of principal executive offices) (Zip Code)
(561) 791-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES[X] NO[ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $269.3 million on August 24, 2002 based on the
closing sales price of the registrant's common stock as reported on the Nasdaq
National Market as of such date, which is the last business day of the
registrant's most recently completed second fiscal quarter.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of March 24, 2003 was 35,545,904 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Proxy Statement to be filed with the
Commission in connection with the 2003 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
1
INDEX
PART I
ITEM 1. Business..............................................................3
ITEM 2. Properties...........................................................15
ITEM 3. Legal Proceedings....................................................16
ITEM 4. Submission of Matters to a Vote of Security Holders..................16
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters..............................................................17
ITEM 6. Selected Financial Data..............................................18
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................21
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk...........39
ITEM 8. Consolidated Financial Statements and Supplementary Data.............39
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................39
PART III
ITEM 10. Directors and Executive Officers of the Registrant...................40
ITEM 11. Executive Compensation...............................................44
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters......................................44
ITEM 13. Certain Relationships and Related Transactions.......................44
ITEM 14. Controls and Procedures..............................................44
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......45
Index to Exhibits....................................................46
Signatures...........................................................49
Certifications.......................................................50
Index to Consolidated Financial Statements and Schedule.............F-1
2
PART I
Because we have changed our fiscal year to a calendar year, this report
contains results for a ten-month transition period from February 24, 2002 to
December 31, 2002. References to the "transition period" in this report are to
the transition period beginning February 24, 2002 and ending on December 31,
2002. References to a "fiscal year" in this report are to the fiscal years
ending the last Saturday of February for each respective year-end.
Certain disclosures included in this Form 10-K constitute forward-looking
statements that are subject to risks and uncertainties. Where possible, we have
identified these statements by the use of terms such as "may," "will," "should,"
"expect," "anticipate," "believe," "estimate," "intend," and similar words,
although some forward-looking statements are expressed differently. Our actual
results could differ materially from those described in the forward-looking
statements due to a number of risks and uncertainties. These forward-looking
statements and risks and uncertainties are more fully explained under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Forward-Looking Statements" and "Risk Factors", respectively.
ITEM 1. BUSINESS
INTRODUCTION
The Company
General
We are the world's largest manufacturer of cabin interior products for
commercial aircraft and business jets and a leading distributor of aftermarket
fasteners. We sell our manufactured products directly to virtually all of the
world's major airlines and airframe manufacturers and a wide variety of general
aviation customers. 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 systems;
o Business jet and general aviation interior products, including an extensive
line of executive aircraft seats, direct and indirect overhead lighting
systems, oxygen, safety air valve systems, high-end furniture and cabinetry;
and
o A broad line of fasteners, consisting of over 100,000 Stock Keeping Units
(SKUs).
We design, develop and manufacture a broad range of cabin interior
structures, provide comprehensive aircraft cabin interior reconfiguration and
passenger-to-freighter conversion engineering services and component kits.
Our Company was organized as a corporation in Delaware in 1987. We have
substantially expanded the size, scope and nature of our business as a result of
a number of acquisitions. Since 1989, we have completed 23 acquisitions,
including one acquisition during the transition period ended December 31, 2002,
three during fiscal 2002 and four during fiscal 2001, for an aggregate purchase
price of approximately $980 million in order to position ourselves as a
preferred global supplier to our customers. We have undertaken three major
facility and product line consolidation efforts, eliminating 21 facilities, with
one additional facility expected to be closed by mid-2003. We have also
implemented lean manufacturing and continuous improvement programs which
together with our common information technology platform have significantly
improved our productivity and allowed us to maintain gross and operating margins
despite significant decreases in revenues resulting from the downturn in
industry conditions following the events of September 11, 2001.
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Industry Overview
The commercial and business jet aircraft cabin interior products industries
encompass a broad range of products and services, including aircraft seating
products, passenger entertainment and service systems, food and beverage
preparation and storage systems, oxygen delivery systems, lavatories, lighting
systems, evacuation equipment and overhead bins, as well as
passenger-to-freighter conversions, interior reconfiguration and a variety of
other engineering design, integration, installation, retrofit and certification
services.
Historically, the airline cabin interior products industry has derived
revenues from five sources:
o Retrofit programs in which airlines purchase new interior furnishings to
overhaul the interiors of aircraft already in service;
o Refurbishment programs in which airlines purchase components and services to
improve the appearance and functionality of their cabin interior equipment;
o New installation programs in which airlines purchase new equipment to outfit
newly delivered aircraft;
o Spare parts; and
o Equipment to upgrade the functionality or appearance of the aircraft
interior.
The retrofit and refurbishment cycles for commercial aircraft cabin interior
products differ by product category. Aircraft seating typically has a
refurbishment cycle of one to two years and a retrofit cycle of four to eight
years. Food and beverage preparation and storage equipment are periodically
upgraded or repaired, and require a continual flow of spare parts, but may be
retrofitted only once or twice during the useful life of an aircraft.
Historically, about 70% of fasteners are used in the aftermarket. There is a
direct relationship between demand for fastener products and fleet size,
utilization and an aircraft's age. Fasteners must be replaced at prescribed
intervals and such replacements also drive demand for fasteners.
Revenues for aerospace fastener products have been derived from the
following sources:
o Mandated maintenance and replacement of specified parts; and
o Demand for structural modifications, cabin interior modifications and
passenger-to-freighter conversions.
We estimate that the commercial and business jet cabin interior products and
aerospace-grade fastener distribution industries had combined annual sales in
excess of $1.4 billion and $0.8 billion, respectively, during calendar 2002.
Recent Industry Conditions
The September 11, 2001 terrorist attacks have severely impacted conditions
in the airline industry. Sharply lower demand from our airline customer base
affected our financial results, both for the ten-month period ended December 31,
2002 and the fiscal year ended February 23, 2002. The lower demand reflects the
current downturn in the airline industry, which is the most severe ever
experienced. High airline operating costs, weak air travel and low ticket prices
have damaged many carriers' financial condition. Prior to the September 11, 2001
terrorist attacks, airline profits were already being adversely affected by
increases in pilot and other airline wages, higher fuel prices and the softening
of the global economy. Air travel dropped significantly following the 2001
terrorist attacks, further weakening many airlines' financial condition. To cut
costs, carriers worldwide have reduced fleet sizes, parking or idling about
2,200 aircraft, or 15% of their fleets, as of December 2002. In an attempt to
stimulate air travel, airlines have decreased domestic airfares to levels not
seen since 1988. Reflecting the reduction in air travel and fares, North
American airline revenue has dropped 24% since 2000.
As a result of these factors, the U.S. airline industry incurred losses of
approximately $7 billion in calendar 2001 and $11 billion in calendar 2002. The
airline industry crisis caused two major domestic airlines, US Airways and
United Airlines, to file for protection under Chapter 11 of the United States
Bankruptcy Act and industry experts believe other major domestic carriers may be
required to do so as well. In addition, Hawaiian Airlines filed for bankruptcy
protection and at least one smaller domestic carrier, National Airlines, has
ceased operations entirely.
4
Accordingly, the airlines are seeking to conserve cash in part by deferring
or eliminating cabin interior refurbishment programs and deferring or canceling
aircraft purchases. This has caused a substantial contraction in our business,
the extent and duration of which cannot be determined at this time. We expect
these adverse industry conditions to have a material adverse impact on our
results of operations and financial condition until such time as conditions in
the industry improve.
We took swift action to respond to the rapid change in industry conditions,
including consolidating four of our principal facilities into other existing
facilities, and targeting a fifth facility for closure by mid-2003. We reduced
headcount by about 1,000 positions and later expanded our headcount reduction
goal to about 1,400 positions, or about 30% of our pre-September 11, 2001
workforce headcount. When we complete these actions, we expect to have incurred
about $155 million in total costs, the cash portion of which is expected to be
approximately $65 million. Through December 31, 2002, we had already incurred
approximately $145 million of these costs, of which approximately $55 million
were cash related costs. We expect to incur the balance of the charges during
the first half of calendar 2003. We also froze salaries for an extended period
of time and have not paid management bonuses since February 2001. While we
believe the steps we have taken to date contribute to a sound plan to counter
these difficult conditions, we cannot guarantee that the plans are adequate or
that they will be successful.
Other factors expected to affect the cabin interior products industry are
the following:
Existing Installed Base. Existing installed product base typically generates
continued retrofit, refurbishment and spare parts revenue as airlines
maintain their aircraft cabin interiors. According to industry sources, the
world's active commercial passenger aircraft fleet consisted of
approximately 13,100 aircraft as of December 2002, including approximately
3,400 aircraft with fewer than 120 seats, approximately 7,500 aircraft with
between 120 and 240 seats and approximately 2,200 aircraft with more than
240 seats. Further, based on industry sources, there are approximately
12,300 business jets currently in service. Based on such fleet numbers, we
estimate that the total worldwide installed base of commercial and general
aviation aircraft cabin interior products, valued at replacement prices, was
approximately $13.0 billion as of December 31, 2002.
Expanding Worldwide Fleet. The expanding worldwide aircraft fleet is
expected to generate additional revenues from new installation programs,
while the increase in the size of the installed base is expected to generate
additional and continued retrofit, refurbishment and spare parts revenue.
Worldwide air traffic has grown every year since 1946 (except in 1974, 1991,
2001 and 2002). According to the January 2003 issue of the Airline Monitor,
worldwide air traffic is projected to grow at a compounded average rate of
4.3% per year through 2010, increasing annual revenue passenger miles from
approximately 2.0 trillion in 2002 to approximately 5.1 trillion by 2020.
According to the Airbus Industrie Global Market Forecast published in
September 2002, the worldwide installed seat base, which we consider a good
indicator for potential growth in the aircraft cabin interior products
industry, is expected to increase from approximately 2.0 million passenger
seats at the end of 2000 to approximately 4.3 million passenger seats at the
end of 2020.
Growing Passenger-to-Freighter Conversion Business. Industry sources project
that the size of the worldwide freighter fleet will double over the next
twenty years, with more than 2,500 aircraft being added, after taking
retirements into account. Industry sources also estimate that almost 70
percent of that increase will come from converting commercial passenger jets
to use as freighters.
New Aircraft Deliveries. The number of new aircraft delivered each year is
generally regarded as cyclical in nature. New aircraft deliveries (including
regional jets) decreased to 999 in 2002 from 1,162 in 2001. According to the
Airline Monitor published in January 2003, new deliveries (including
regional jets) are expected to decline to 850 aircraft in 2003, with average
annual new aircraft deliveries (including regional jets) of about 800 during
2004 through 2007.
Business Jet and VIP Aircraft Fleet Expansion and Related Retrofit
Opportunities. Recently, general aviation and VIP airframe manufacturers
have begun to see a slowdown in deliveries which is expected to continue
throughout calendar 2003. According to industry sources, business jet
aircraft deliveries amounted to 787 units in calendar 2001 and 683 units in
calendar 2002. Industry sources indicate that approximately 8,200 business
jets will be built between 2002 and 2011 with a value of more than $135
billion.
5
Wide-body Aircraft Deliveries. The trend toward wide-body aircraft is
significant to us because wide-body aircraft require almost five times the
dollar value content for our products as compared to narrow-body aircraft.
Deliveries of wide-body, long haul aircraft constitute an increasing share
of total new aircraft deliveries and are an increasing percentage of the
worldwide fleet. Wide-body aircraft represented 24% of all new commercial
aircraft delivered in 2002, and are expected to stay at approximately this
same percentage through 2006. Wide-body aircraft currently carry up to three
or four times the number of seats as narrow-body aircraft and because of
multiple classes of service, including large first class and business class
configurations, our average revenue per seat on wide-body aircraft is
substantially higher. Aircraft cabin crews on wide-body aircraft may make
and serve between 300 and 900 meals and may brew and serve more than 2,000
cups of coffee and serve more than 400 glasses of wine on a single flight.
New Product Development. The aircraft cabin interior products companies are
engaged in intensive development and marketing efforts for both new features
on existing products and totally new products. These products include a
broad range of amenities such as full electric "sleeper seats," convertible
seats, full face crew masks, a full range of business and executive jet
seating and lighting products, protective breathing equipment, oxygen
generating systems, new food and beverage preparation and storage equipment,
kevlar barrier nets, de-icing systems and crew rests.
Engineering Services Markets. Historically, the airlines have relied
primarily on their own in-house engineering resources to provide
engineering, design, integration and installation services, as well as
services related to repairing or replacing cabin interior products that have
become damaged or otherwise non-functional. As cabin interior product
configurations have become increasingly sophisticated and the airline
industry increasingly competitive, the airlines have begun to outsource such
services in order to increase productivity and reduce costs and overhead.
Outsourced services include:
o Engineering design, integration, project management, installation and
certification services;
o Modifications and reconfigurations for commercial aircraft; and
o Services related to the support of product upgrades.
Unless otherwise indicated, the industry data contained in this report is
from the January 2003 issue of the Airline Monitor or the Airbus Industrie
Global Market Forecast published in September 2002.
Competitive Strengths
We believe that we have a strong competitive position attributable to a
number of factors, including the following:
Combination of Manufacturing and Cabin Interior Design Services. We have
continued to expand our products and services, believing that the airline
industry increasingly will seek an integrated approach to the design,
development, integration, installation, testing and sourcing of aircraft
cabin interiors. We believe that we are the only company, which both
manufactures a broad, technologically advanced line of cabin interior
products and offers cabin interior design capabilities. Based on our
established reputation among the world's commercial airlines for quality,
service and product innovation, we believe that we are well positioned to
serve these customers.
Technological Leadership/New Product Development. We believe that we are a
technological leader in our industry, with what we believe is the largest
research and development organization in the cabin interior products
industry. We believe our research and development effort and our on-site
technicians at both the airlines and airframe manufacturers enable us to
play a leading role in developing and introducing innovative products to
meet emerging industry trends and needs and thereby gain early entrant
advantages.
Large Installed Base. We believe our large installed base of commercial and
general aviation cabin interior products, estimated to be approximately $5.0
billion as of December 31, 2002 (valued at replacement prices), is a
strategic advantage. The airlines tend to purchase spare parts and retrofits
and refurbishment programs from the supplier of the existing equipment. As a
result, we expect our large installed base to generate continued retrofit,
refurbishment and spare parts revenue as airlines continue to maintain,
evolve and reconfigure their aircraft cabin interiors.
6
Proven Track Record of Acquisition Integration. We have demonstrated the
ability to make strategic acquisitions and successfully integrate such
acquired businesses. Our acquisition strategy is subject to a number of
risks including increasing leverage, the application of restrictive
covenants in connection with additional debt incurred for any further
acquisitions and the costs of integrating any acquired companies.
Growth Opportunities
We believe that we will benefit from the following trends in the aerospace
industry as the industry recovers:
Large Aftermarket Business. Our substantial installed base provides
significant ongoing revenues from replacements, upgrades, repairs and the
sale of spare parts. Approximately 60% of our revenues for the transition
period ended December 31, 2002 were derived from aftermarket activities.
With so many aircraft parked as a result of the recent industry conditions,
we are experiencing weak demand for spare parts. Looking ahead, we believe
the majority of the idled aircraft will eventually return to service. With
airlines' balance sheets so weak, we believe they will not have the
financial resources to replace many of the parked aircraft with new ones.
That means demand for new aircraft could be depressed for several years. In
the meantime, the airlines will operate an older fleet. That should
eventually have a positive impact on demand for our aftermarket products. At
some point, the airlines will begin to spend to maintain their fleets. We
believe this will occur before they begin buying new aircraft. With our
aftermarket focus, we should be an early beneficiary of the industry
recovery. Aftermarket demand should lead that recovery, because refurbishing
existing aircraft is much less expensive than buying new aircraft.
Expansion of Worldwide Fleet and Shift Toward Wide-Body Aircraft. Through
2001, airlines were taking delivery of a large number of new aircraft due to
high load factors and the projected growth in air travel. Near term, we
expect new aircraft deliveries to decline due to recent industry conditions
but over time we expect the fleet expansion, along with the trend toward
wide-body aircraft, to return to earlier projected levels. As the size of
the fleet expands, demand for upgrade, refurbishment programs and for cabin
interior products, must grow as well.
Opportunity to Substantially Expand our Addressable Markets through our
Fastener Distribution Business. Through the acquisition of M & M Aerospace
Hardware, Inc. ("M & M"), we have entered a new segment that leverages B/E's
key strengths. Because nearly 70% of fastener demand is generated by the
existing worldwide fleet, demand for fasteners will increase over time as
the fleet expands, much like the market for cabin interior products. We
believe we have acquired an outstanding distribution business that possesses
excellent information technology, automated parts retrieval, purchasing and
customer relationship management systems. In addition, the business has
sufficient management, systems and industry knowledge to serve as a platform
for future consolidation of this business segment.
Business Jet and VIP Aircraft Fleet Expansion and Related Retrofit
Opportunities. Business jet manufacturers' backlogs remain at fairly high
levels, including several new models in development. According to industry
sources, executive jet aircraft deliveries amounted to 241 units in calendar
1996 and 787 units in calendar 2001 and 683 units in calendar 2002.
Deliveries in 2003 are expected to increase by about 7% and are expected to
increase by over 200% in calendar 2003 from the calendar 1996 delivery
levels. Several new aircraft models and larger business jets, including the
Boeing Business Jet, Bombardier Challenger and Global Express, Gulfstream V,
the Falcon 900, Airbus Corporate Jet, Cessna Citation X and Cessna Citation
Excel, are expected to be significant contributors to new general aviation
aircraft deliveries going forward. Industry sources indicate that
approximately 8,200 business jets will be built between 2002 and 2011 with a
value of more than $135 billion, and approximately 40% of these jets are
projected to be larger business jets as described above. This is important
to us because the typical cost of cabin interior products manufactured for a
small jet is approximately $162,000; whereas the same contents for a larger
business jet, such as the Boeing Business Jet could range up to
approximately $1.4 million. Advances in engine technology and avionics and
the emergence of fractional ownership of executive aircraft are also
important growth factors. In addition, the general aviation and VIP aircraft
fleet consists of approximately 12,300 aircraft with an average age of
approximately 15 years. As aircraft age or due to ownership changes,
operators retrofit and upgrade cabin interiors, including seats, sofas and
tables, sidewalls, headliners, structures such as closets, lavatories and
galleys, and related equipment including lighting and oxygen delivery
systems. In addition, operators generally reupholster or replace seats every
five to seven years.
7
We believe that we are well positioned to benefit from such retrofit
opportunities due to:
o 15-year average age of the business jet fleet;
o Operators who have historically reupholstered their seats may be more
inclined to replace these seats with lighter weight, more modern and
16G-compliant seating models; and
o Our belief that we are the only manufacturer with the capability for cabin
interior design services, a broad product line for essentially all cabin
interior products and program management services.
In addition to benefiting from these industry trends, we expect that when
industry conditions improve and demand increases, we will have enhanced earnings
power through substantial operating leverage due to the steps we took to respond
to industry conditions, including the consolidation of our facilities. We
believe that our factories have the capacity to generate revenues of up to $1
billion without significant additional capital investment.
Business Strategy
Our business strategy is to maintain a leadership position and to best serve
our customers by:
o Offering the broadest and most integrated product lines and services in the
industry, including not only new product and follow-on product sales, but
also design, integration, installation and certification services;
o Pursuing the highest level of quality in every facet of our operations, from
the factory floor to customer support;
o Aggressively pursuing initiatives of continuous improvement of our
manufacturing operations to reduce cycle time, lower cost, improve quality
and expand our margins;
o Pursuing a worldwide marketing and product support approach focused by
airline and general aviation airframe manufacturer and encompassing our
entire product line; and
o Pursuing selective strategic acquisitions.
Products and Services
We conduct our operations through strategic business units that have been
aggregated under three reportable segments: Commercial Aircraft Products,
Business Jet Products and Fastener Distribution.
Net sales by line of business were as follows:
Fiscal Year Ended
Ten-Month Period ----------------------------------------------------
Ended Dec. 31, 2002 February 23, 2002 February 24, 2001
------------------------- ------------------------ ------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
----------- ------------- ----------- ------------ ----------- ------------
Commercial aircraft products:
Seating products $144.6 28.7% $247.8 36.4% $288.1 43.2%
Interior systems products 116.0 23.0 152.6 22.4 151.6 22.8
Engineered interior structures, components
and assemblies 93.9 18.7 150.2 22.1 140.6 21.1
----------- ------------- ----------- ------------ ----------- ------------
354.5 70.4 550.6 80.9 580.3 87.1
Business jet products 71.1 14.1 85.6 12.6 86.1 12.9
Fastener distribution 78.0 15.5 44.3 6.5 -- --
----------- ------------- ----------- ------------ ----------- ------------
Net sales $503.6 100.0% $680.5 100.0% $666.4 100.0%
=========== ============= =========== ============ =========== ============
8
Commercial Aircraft Products
Seating Products
We are the world's leading manufacturer of aircraft seats, offering a wide
selection of first class, business class, tourist class and commuter seats. A
typical seat manufactured and sold by us includes the seat frame, cushions,
armrests and tray table, together with a variety of optional features such as
adjustable lumbar supports, footrests, reading lights, head/neck supports,
oxygen masks and telephones. We estimate that as of December 31, 2002 we had an
aggregate installed base of approximately 900,000 aircraft seats valued at
replacement prices of approximately $1.9 billion.
First and Business Classes. Based upon major airlines' program selection and
orders on hand, we are the leading worldwide manufacturer of premium class
seats. Our line of international first class sleeper seats incorporates full
electric actuation, an electric ottoman, privacy panels and sidewall-mounted
tables. Our recently released business class seats incorporate features from
over 25 years of seating design. The premium business class seats include
electrical or mechanical actuation, PC power ports, telephones, leg rests,
adjustable lumbar cushions, 4-way adjustable headrests and fiber-optic
reading lights. The first and business class products are substantially more
expensive than tourist class seats due to these luxury appointments.
Convertible Seats. We have developed two types of seats that can be
converted from tourist class triple-row seats to business class double-row
seats with minimal conversion complexity. Convertible seats allow airline
customers the flexibility to adjust the ratio of business class to tourist
class seats for a given aircraft configuration. This seat is increasing in
popularity in the European market.
Tourist Class. We are a leading worldwide manufacturer of tourist class
seats and believe we offer the broadest such product line in the industry.
We have designed tourist class seats that incorporate features not
previously utilized in that class, such as laptop power ports and a number
of premium comfort features such as footrests, headrests and adjustable
lumbar systems.
Commuter (Regional Jet) Seats. We are the leading manufacturer of regional
aircraft seating in both the United States and worldwide markets. Our
Silhouette(TM) Composite seats are similar to those found in commercial jets
but typically do not have as many added comfort features. Consequently, they
are lighter in weight and require less maintenance.
Spares. Aircraft seats require regularly scheduled maintenance in the course
of normal passenger use. Airlines depend on seat manufacturers and secondary
suppliers to provide spare parts and kit upgrade programs. As a result, a
significant market exists for spare parts.
Interior Systems
We are the leading manufacturer of interior systems for both narrow- and
wide-body aircraft, offering a broad selection of coffee and beverage makers,
water boilers, ovens, liquid containers, refrigeration equipment, oxygen
delivery systems and a variety of other interior components. We estimate that as
of December 31, 2002 we had an aggregate installed base of such equipment,
valued at replacement prices, in excess of $1.2 billion.
Coffee Makers. We are the leading manufacturer of aircraft coffee makers. We
manufacture a broad line of coffee makers, coffee warmers and water boilers,
including the Flash Brew Coffee Maker, with the capability to brew 54 ounces
of coffee in one minute, and a Combi(TM) unit which will both brew coffee
and boil water for tea while utilizing 25% less electrical power than
traditional 5,000-watt water boilers. We also manufacture a
cappuccino/espresso maker.
Ovens. We are the leading manufacturer of a broad line of specialized ovens,
including high-heat efficiency ovens, high-heat convection ovens and warming
ovens. Our newest offering, the DS Steam Oven, represents a method of
preparing food in-flight by maintaining constant temperature and moisture in
the food. It addresses the airlines' need to provide a wider range of foods
than can be prepared by convection ovens.
Refrigeration Equipment. We are the worldwide industry leader in the design,
manufacture and supply of commercial aircraft refrigeration equipment. We
manufacture a self-contained wine and beverage chiller, the first unit
specifically designed to rapidly chill wine and beverages on-board an
aircraft.
9
Oxygen Delivery Systems. We are a leading manufacturer of oxygen delivery
systems for both commercial and general aviation aircraft. We are the only
manufacturer with the capability to fully integrate overhead passenger
service units with either chemical or gaseous oxygen equipment. Our oxygen
equipment has been approved for use on all Boeing and Airbus aircraft and is
also found on essentially all general aviation and VIP aircraft.
Engineered Interior Structures, Components and Assemblies
We are a leader in designing and manufacturing galley structures, crew rest
compartments and components. We estimate that as of December 31, 2002, we had an
installed base of engineered interior structures, valued at replacement prices,
of approximately $700 million.
Engineering Design, Integration, Installation and Certification Services. We
are a leader in providing engineering, design, integration, installation and
certification services for commercial aircraft passenger cabin interiors. We
also offer our customers in-house capabilities to design, manage, integrate,
test and certify reconfigurations and modifications for commercial aircraft
and to manufacture related products, including engineering kits and
interface components. We provide a broad range of interior reconfiguration
services which allow airlines to change the size of certain classes of
service, modify and upgrade the seating, install telecommunications or
entertainment options, relocate galleys, lavatories and overhead bins, and
install crew rest compartments.
Crew Rest Compartments. We are the worldwide leader in the design,
certification and manufacture of crew rest compartments. The flight crew
utilizes crew rest compartments during long-haul international flights. A
crew rest compartment is constructed utilizing lightweight cabin interior
technology and incorporating electrical, heating, ventilation and air
conditioning and lavatory and sleep compartments.
Aerospace Components and Assemblies. We are a leading manufacturer of
complex high-quality machined and fabricated metal components, assemblies
and kits for aerospace and defense customers with demanding end-use
applications. Our major products consist of gears, gearboxes, pistons and
piston assemblies and standard hydraulic fittings. Additionally, we
fabricate structural components and related items of fuselage, wing and
payload sections including wing skin and fuel tank enclosure parts for
commercial aircraft. Through these manufacturing activities we also provide
our customers with significant engineering, materials and technical
expertise.
Passenger to Freighter Conversions. We are a leading supplier of structural
design and integration services, including airframe modifications for
passenger-to-freighter conversions. We are the leading provider of Boeing
767 passenger-to-freighter conversions and have performed conversions for
Boeing 747-200 Combi, Boeing 747-200 (door only) and Airbus A300 B4
aircraft. Freighter conversions require sophisticated engineering
capabilities and very large and complex proprietary parts kits.
Business Jet Products
We are the leading manufacturer of a broad product line including a complete
line of business jet seating products, direct and indirect lighting, air valves
and oxygen delivery systems as well as sidewalls, bulkheads, credenzas, closets,
galley structures, lavatories, tables and sofas. We have the capability to
provide complete interior packages, including all design services, all interior
components and program management services for executive aircraft interiors. We
are the preferred supplier of seating products and direct and indirect lighting
systems for essentially every general aviation airframe manufacturer. We
estimate that as of December 31, 2002 we had an aggregate installed base of such
equipment, valued at replacement prices, of approximately $1.2 billion.
Fastener Distribution
Through our M & M subsidiary, we offer one of the broadest lines of
fasteners and inventory management services worldwide. Approximately 70% of
fastener sales are to the aftermarket, and over 35% of orders are shipped the
same day that they are received. With over 100,000 SKUs and next-day service, we
serve as a distributor for almost every major aerospace fastener manufacturer.
Our service offerings include inventory replenishment and management, electronic
data interchange, special packaging and bar-coding, quality assurance testing
and purchasing assistance. Our seasoned purchasing and sales team, coupled with
state-of-the-art information technology and automated retrieval systems, provide
the basis for our reputation for high quality and rapid (overnight) delivery.
10
Research, Development and Engineering
We work closely with commercial airlines to improve existing products and
identify customers' emerging needs. Our expenditures in research, development
and engineering totaled $34.1 million, $43.5 million, $48.9 million for the
transition period ended December 31, 2002, and for the fiscal years ended
February 23, 2002 and February 24, 2001, respectively. We employed 457
professionals in engineering, research and development as of December 31, 2002.
We believe that we have the largest engineering organization in the cabin
interior products industry, with software, electronic, electrical and mechanical
design skills, as well as substantial expertise in materials composition and
custom cabin interior layout design and certification.
Marketing and Customers
We market and sell our commercial aircraft products directly to virtually
all of the world's major airlines and aircraft manufacturers. Airlines select
manufacturers of cabin interior products primarily on the basis of custom design
capabilities, product quality and performance, on-time delivery, after-sales
customer service, product support and price. We believe that our large installed
base, our timely responsiveness in connection with the custom design,
manufacture, delivery and after-sales customer service and product support of
our products and our broad product line and stringent customer and regulatory
requirements all present barriers to entry for potential new competitors in the
cabin interior products market.
We believe that airlines prefer our integrated worldwide marketing approach,
which is focused by airline and encompasses our entire product line. Led by a
senior executive, teams representing each product line serve designated airlines
that together accounted for 62% of the purchases of products manufactured by our
Commercial Aircraft Products Group during the transition period ended December
31, 2002. Our teams have developed customer-specific strategies to meet each
airline's product and service needs. We also staff "on-site" customer engineers
at major airlines and airframe manufacturers to represent our entire product
line and work closely with the customers to develop specifications for each
successive generation of products required by the airlines. These engineers help
customers integrate our wide range of cabin interior products and assist in
obtaining the applicable regulatory certification for each particular product or
cabin configuration. Through our on-site customer engineers, we expect to be
able to more efficiently design and integrate products that address the
requirements of our customers. We provide program management services,
integrating all on-board cabin interior equipment and systems, including
installation and Federal Aviation Administration certification, allowing
airlines to substantially reduce costs. We believe that we are one of the only
suppliers in the commercial aircraft cabin interior products industry with the
size, resources, breadth of product line and global product support capability
to operate in this manner.
We market our business jet products directly to all of the world's general
aviation airframe manufacturers, modification centers and operators. Business
jet owners typically rely upon the airframe manufacturers and completion centers
to coordinate the procurement and installation of their interiors. Business jet
owners select manufacturers of business jet products on a basis similar to that
for commercial aircraft interior products; customer design capabilities, product
quality and performance, on-time delivery, after-sales customer service, product
support and price. We believe that potential new competitors would face a number
of barriers to entering the cabin interior products market. Barriers to entry
include regulatory requirements, our large installed product base, our custom
design capability, manufacturing capability, delivery, and after-sales customer
service, product support and our broad product line.
We market our aerospace fasteners directly to the airlines, completion
centers, first-tier suppliers to the airframe manufacturers, the airframe
manufacturers and other distributors. We believe that our key competitive
advantages are the breadth of our product offerings and our ability to deliver
on a timely basis. We believe that our broad product offerings of aerospace
fasteners and our ability to deliver products on a next day basis and our core
competencies in product information management, purchasing and logistics
management provide strong barriers to entry.
Our program management approach assigns a program manager to each
significant contract. The program manager is responsible for all aspects of the
specific contract, including managing change orders, negotiating related
non-recurring engineering charges, monitoring the progress of the contract
through its scheduled delivery dates and overall contract profitability. We
believe that our customers benefit substantially from our program management
approach, including better on-time delivery and higher service levels. We also
believe our program management approach results in better customer satisfaction.
11
As of December 31, 2002, our direct sales and marketing organization
consisted of 171 persons, plus 42 independent sales representatives. Our sales
to non-U.S. customers were approximately $234 million for the transition period
ended December 31, 2002, $288 million for the fiscal year ended February 23,
2002 and $280 million for the fiscal year ended February 24, 2001, or
approximately 46%, 42% and 42%, respectively, of net sales during such periods.
During the transition period ended December 31, 2002, approximately 74% of our
total revenues were derived from airlines and other commercial aircraft
operators compared to approximately 76% in the fiscal year ended February 23,
2002 and compared with 86% in the fiscal year ended February 24, 2001.
Approximately 60% of our revenues during the transition period ended December
31, 2002, 63% of our revenues during the fiscal year ended February 23, 2002 and
60% of our revenues during the fiscal year ended February 24, 2001 were from
refurbishment, spares and upgrade programs. During the transition period ended
December 31, 2002 and for the fiscal years ended February 23, 2002 and February
24, 2001, no single customer accounted for more than 10% of total revenues. The
portion of our revenues attributable to particular customers varies from year to
year because of airlines' scheduled purchases of new aircraft and for retrofit
and refurbishment programs for their existing aircraft.
Backlog
We estimate that our backlog at December 31, 2002 was approximately $450
million compared to approximately $480 million at February 23, 2002. Of our
backlog at December 31, 2002, approximately 60% is scheduled to be deliverable
by the end of calendar 2003; 53% of our total backlog is with North American
carriers, approximately 16% is with European carriers and approximately 22% is
with Asian and Pacific Rim carriers.
Customer Service
We believe that our customers place a high value on customer service and
product support and that such service is a critical factor in our industry. The
key elements of such service include:
o Rapid response to requests for engineering designs, proposal requests and
technical specifications;
o Flexibility with respect to customized features;
o On-time delivery;
o Immediate availability of spare parts for a broad range of products; and
o Prompt attention to customer problems, including on-site customer training.
Customer service is particularly important to airlines due to the high cost
to the airlines of late delivery, malfunctions and other problems.
Warranty and Product Liability
We warrant our products, or specific components thereof, for periods ranging
from one to ten years, depending upon product type and component. We generally
establish reserves for product warranty expense after considering relevant
factors such as our stated warranty policies and practices, historical
frequencies of claims to replace or repair products under warranty and recent
sales and claims trends. Actual warranty costs reduce the warranty reserve as
they are incurred. We periodically review the adequacy of accrued product
warranty reserves and revisions of such reserves are recognized in the period in
which such revisions are determined.
We also carry product liability insurance. We believe that our insurance is
generally sufficient to cover product liability claims.
12
Competition
The commercial aircraft cabin interior products market is relatively
fragmented, with a number of competitors in each of the individual product
categories. Due to the global nature of the commercial aerospace industry,
competition comes from both U.S. and foreign manufacturers. However, as aircraft
cabin interiors have become increasingly sophisticated and technically complex,
airlines have demanded higher levels of engineering support and customer service
than many smaller cabin interior products suppliers can provide. At the same
time, airlines have recognized that cabin interior product suppliers must be
able to integrate a wide range of products, including sophisticated electronic
components, particularly in wide-body aircraft. We believe that the airlines'
increasing demands on their suppliers will result in a consolidation of those
suppliers that remain. We have participated in this consolidation through
strategic acquisitions and internal growth and we intend to continue to
participate in the consolidation.
Our principal competitors for seating products are Group Zodiac S.A. and
Keiper Recaro GmbH. Our primary competitors for interior systems products are
Britax PLC, JAMCO, Scott Aviation and Intertechnique. Our principal competitors
in the passenger-to-freighter conversion business include Boeing Airplane
Services, Elbe Flugzeugwerko GMBH, a division of EADS, Israel Aircraft
Industries, Pemco World Air Services and Aeronavili. Our principal competitors
for other product and service offerings in our engineered interior structures,
components and assemblies include TIMCO, JAMCO, Britax PLC and Driessen Aircraft
Interior Systems. The market for business jet products is highly fragmented,
consisting of numerous competitors, the largest of which is Decrane Aircraft
Holdings. Our primary competitors in the fastener distribution market are
Honeywell Hardware Products Group, Wesco Aircraft Hardware, C.J. Fox and
Pentacon, Inc.
Manufacturing and Raw Materials
Our manufacturing operations consist of both the in-house manufacturing of
component parts and sub-assemblies and the assembly of our specified and
designed component parts that are purchased from outside vendors. We maintain
state-of-the-art facilities, and we have an ongoing strategic manufacturing
improvement plan utilizing lean manufacturing processes. We constantly strive
for continuous improvement from implementation of these plans for each of our
product lines. We have implemented common information technology platforms
company-wide, as appropriate. These activities should lower production costs,
shorten cycle times and reduce inventory requirements and at the same time
improve product quality, customer response and profitability. We do not believe
we are materially dependent on any single supplier or assembler for any of our
raw materials or specified and designed component parts and, based upon the
existing arrangements with vendors, our current and anticipated requirements and
market conditions, we believe that we have made adequate provisions for
acquiring raw materials.
Government Regulation
The Federal Aviation Administration ("FAA") prescribes standards and
licensing requirements for aircraft components, and licenses component repair
stations within the United States. Comparable agencies regulate such matters in
other countries. We hold several FAA component certificates and perform
component repairs at a number of our U.S. facilities under FAA repair station
licenses. We also hold an approval issued by the U.K. Civil Aviation Authority
to design, manufacture, inspect and test aircraft seating products in Leighton
Buzzard, England and to manufacture and ship from our Kilkeel, Northern Ireland
facility. We also have the necessary approvals to design, manufacture, inspect,
test and repair our interior systems products in Nieuwegein, The Netherlands.
In March 1992, the FAA adopted Technical Standard Order C127, or TSO C127,
requiring that all seats on certain new generation commercial aircraft installed
after such date be certified to meet a number of new safety requirements,
including the ability to withstand a 16G force. We have developed over 32
different seat models that meet the TSO C127 seat safety regulations, have
successfully completed thousands of tests to comply with TSO C127 and, based on
our installed base of 16G seats, are the recognized industry leader in this
area.
In November 2002, our seating group became the first passenger seating
supplier to sign a Partnership for Safety Plan (PSP) with the FAA. Based on
established qualifications of personnel and systems, the PSP provides us with
increased authority to approve test plans and reports, and to witness tests. The
PSP provides us with a number of business benefits including greater planning
flexibility, simplified scheduling and greater program control and eliminates
variables such as FAA workload and priorities.
13
On October 4, 2002, the FAA published a Supplemental Notice of Proposed Rule
Making (SNPRM). This SNPRM proposed extending the current requirement for
"enhanced safety" seats (16G seats) on aircraft designs registered after 1988,
to all aircraft. This proposed rule would require that older design aircraft be
retrofitted with new enhanced safety "16G" seats over a multi-year basis. The
public comment period for the proposed retrofit rule closed on March 3, 2003.
The date for final rule making and any changes to the details of the rule will
be based on the comments received and the priority assigned to this proposal by
the FAA.
Environmental Matters
Our operations are subject to extensive and changing federal, state and
foreign laws and regulations establishing health and environmental quality
standards, including those governing discharges and pollutants into the air and
water and the management and disposal of hazardous substances and wastes. We may
be subject to liability or penalties for violations of those standards. We are
also subject to laws and regulations, such as the Federal Superfund law and
similar state statutes, governing remediation of contamination at facilities
that we currently or formerly owned or operated or to which we send hazardous
substances or wastes for treatment, recycling or disposal. We believe that we
are currently in compliance, in all material respects, with all environmental
laws and regulations. However, we could become subject to future liabilities or
obligations as a result of new or more stringent interpretations of existing
laws and regulations. In addition, we may have liabilities or obligations in the
future if we discover any environmental contamination or liability relating to
our facilities or operations.
Patents
We currently hold 117 United States patents and 92 international patents,
covering a variety of products. We believe that the termination, expiration or
infringement of one or more of such patents would not have a material adverse
effect on our Company.
Employees
As of December 31, 2002, we had approximately 3,700 employees, or
approximately 1,000 fewer than our headcount as of September 30, 2001.
Approximately 66% of our employees are engaged in manufacturing, 14% in
engineering, research and development and program management and 20% in sales,
marketing, product support and general administration. Unions represent
approximately 14% of our worldwide employees. A labor contract representing
approximately 220 U.S. employees expires on May 4, 2003. The labor contract with
the only other domestic union, which represents approximately 2% of our
employees, runs through May 2004. We consider our employee relations to be good.
Financial Information About Segments and Foreign and Domestic Operations
Financial and other information by segment and relating to foreign and
domestic operations for the ten-month transition period ending December 31, 2002
and for the fiscal years ended February 23, 2002 and February 24, 2001, is set
forth in note 15 to our consolidated financial statements.
Available Information
Our filings with the Securities and Exchange Commission (the "SEC"),
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports, are available free
of charge on our website as soon as reasonably practicable after they are filed
with, or furnished to, the SEC. Our Internet website is located at
http://www.beaerospace.com. Information included in our website is not
incorporated by reference in this annual report.
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14
ITEM 2. PROPERTIES
As of December 31, 2002, we had 11 principal operating facilities and an
administrative facility, which comprises an aggregate of approximately 1.3
million square feet of space. The following table describes the principal
facilities and indicates the location, function, approximate size and ownership
status of each location.
Facility
Size
Segment Location Purpose (Sq. Feet) Ownership
- -------------------------------------- --------------------------------- ---------------- ------------ ---------------
Commercial Aircraft Products Winston-Salem, North Carolina.... Manufacturing 264,800 Leased
Leighton Buzzard, England........ Manufacturing 114,000 Owned
Kilkeel, Northern Ireland Manufacturing 65,000 Leased
Kilkeel, Northern Ireland........ Manufacturing 45,500 Owned
Anaheim, California.............. Manufacturing 98,000 Leased
Lenexa, Kansas................... Manufacturing 80,000 Leased
Nieuwegein, The Netherlands...... Manufacturing 47,350 Leased
Marysville, Washington........... Engineering
Services/
Manufacturing 110,000 Leased
Machined products, California.... Manufacturing 150,800 Owned
Business Jet Products Miami, Florida................... Manufacturing 110,000 Leased
Holbrook, New York............... Manufacturing 20,100 Leased
Fastener Distribution Miami, Florida................... Distribution 210,000 Leased
Corporate Wellington, Florida.............. Administrative 17,700 Owned
-----------
1,333,250
We believe that our facilities are suitable for their present intended
purposes and adequate for our present and anticipated level of operations.
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15
ITEM 3. LEGAL PROCEEDINGS
We are not a party to litigation or other legal proceedings that we believe
could reasonably be expected to have a material adverse effect on our business,
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of the fiscal year covered by this Form 10-K, we did
not submit any matters to a vote of security holders, through the solicitation
of proxies or otherwise.
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16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"BEAV." The following table sets forth, for the periods indicated, the range of
high and low per share sales prices for the common stock as reported by Nasdaq.
(Amounts in Dollars)
High Low
---- ---
Calendar Year Ended December 31, 2000
First Quarter $ 9.88 $ 5.88
Second Quarter 8.25 6.00
Third Quarter 17.25 6.50
Fourth Quarter 16.63 11.81
Calendar Year Ended December 31, 2001
First Quarter 25.88 16.00
Second Quarter 24.35 15.49
Third Quarter 19.90 3.50
Fourth Quarter 11.85 6.27
Calendar Year Ended December 31, 2002
First Quarter 10.16 6.31
Second Quarter 14.05 9.06
Third Quarter 13.11 4.00
Fourth Quarter 5.38 2.62
On March 24, 2003 the closing price of our common stock as reported by
Nasdaq was $1.56 per share. As of such date, we had 1,027 shareholders of
record, and we estimate that there are approximately 15,200 beneficial owners of
our common stock. We have not paid any cash dividends in the past, and we have
no present intention of doing so in the immediate future. Our Board of Directors
intends, for the foreseeable future, to retain any earnings to reduce
indebtedness and finance our future growth, but expects to review our dividend
policy regularly. The indentures, pursuant to which our 8%, 8 7/8% and 9 1/2%
senior subordinated notes were issued, as well as our amended bank credit
facility, permit the declaration of cash dividends only in certain circumstances
described therein.
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17
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share data)
Effective as of February 24, 2001, we acquired Alson Industries, Inc., T.L.
Windust Machine, Inc., Maynard Precision, Inc. and DMGI, Inc. ("Fiscal 2001
Acquisitions"). During fiscal 2002, we acquired M&M Aerospace Hardware, Inc.,
Nelson Aero Space, Inc. and Denton Jet Interiors, Inc. ("Fiscal 2002
Acquisitions"). We also made one acquisition during the transition period ended
December 31, 2002. Results for each of these acquisitions are included in our
operations in the financial data below since the date of acquisition. The
financial data as of the transition period ended December 31, 2002 and for the
fiscal years ended February 23, 2002, February 24, 2001, February 26, 2000 and
February 27, 1999 have been derived from financial statements that have been
audited by our independent auditors. The financial data for the period from
February 25, 2001 to December 31, 2001 has been derived from unaudited financial
statements. The following financial information is qualified by reference to,
and should be read in conjunction with, our historical financial statements,
including notes thereto, which are included elsewhere in this Form 10-K.
Ten-Month Period Ended Fiscal Year Ended
------------------------- -----------------------------------------------
Dec. 31, Dec. 31, Feb. 23, Feb. 24, Feb. 26, Feb. 27,
2002(a) 2001(a) 2002(a) 2001(d) 2000(e) 1999(f)
------------- ----------- ----------- ----------- ----------- -----------
Statements of Operations Data:
Net sales.................................... $ 503.6 $ 582.6 $ 680.5 $666.4 $ 723.3 $ 701.3
Cost of sales(1)............................. 352.3 464.4 530.1 416.6 543.6 522.9
-------- -------- --------- ------ -------- -------
Gross profit................................. 151.3 118.2 150.4 249.8 179.7 178.4
Operating expenses:
Selling, general and administrative........ 98.5 120.2 139.4 124.2 119.0 106.1
Research, development and engineering...... 34.1 36.7 43.5 48.9 54.0 56.2
Legal settlement(b)........................ 29.5 -- -- -- -- --
Transaction gain, expenses and other expenses -- -- -- -- -- 53.9
-------- -------- --------- ------ -------- -------
Operating (loss) earnings.................... (10.8) (38.7) (32.5) 76.7 6.7 (37.8)
Equity in losses of unconsolidated subsidiary -- -- -- -- 1.3 --
Interest expense, net........................ 57.3 48.8 60.5 54.2 52.9 41.7
-------- -------- --------- ------ -------- -------
(Loss) earnings before income taxes and
extraordinary item......................... (68.1) (87.5) (93.0) 22.5 (47.5) (79.5)
Income taxes ................................ 2.7 2.0 1.8 2.2 3.3 3.9
-------- -------- --------- ------ -------- -------
(Loss) earnings before extraordinary item ... (70.8) (89.5) (94.8) 20.3 (50.8) (83.4)
Extraordinary item(c)........................ -- 9.3 9.3 -- -- --
-------- -------- --------- ------ -------- -------
Net (loss) earnings(1)....................... $ (70.8) $ (98.8) $ (104.1) $ 20.3 $ (50.8) $ (83.4)
======== ======== ========= ====== ======== =======
Basic net (loss) earnings per share:
(Loss) earnings before extraordinary item.... $ (2.03) $ (2.76) $ (2.90) $ 0.80 $ (2.05) $(3.36)
Extraordinary item........................... -- (0.29) (0.28) -- -- --
-------- -------- -------- ------ ------- -------
Net (loss) earnings.......................... $ (2.03) $ (3.05) $ (3.18) $ 0.80 $ (2.05) $(3.36)
======== ======== ======== ====== ======= ======
Weighted average common shares............... 34.9 32.4 32.7 25.4 24.8 24.8
Diluted net (loss) earnings per share:
(Loss) earnings before extraordinary item.... $ (2.03) $ (2.76) $ (2.90) $ 0.78 $ (2.05) $(3.36)
Extraordinary item........................... -- (0.29) (0.28) -- -- --
-------- -------- -------- ------ ------- -------
Net (loss) earnings.......................... $ (2.03) $ (3.05) $ (3.18) $ 0.78 $ (2.05) $(3.36)
======== ======== ======== ====== ======= ======
Weighted average common shares............... 34.9 32.4 32.7 25.9 24.8 24.8
Balance Sheet Data (end of period):
Working capital.............................. $ 262.9 $ 295.6 $ 304.8 $174.9 $ 129.9 $ 143.4
Goodwill, intangible and other assets, net .. 534.9 555.2 529.2 433.4 425.8 452.0
Total assets................................. 1,067.1 1,177.8 1,128.3 936.0 881.8 904.3
Long-term debt............................... 836.0 853.7 853.5 603.8 618.2 583.7
Stockholders' equity(1)...................... 69.3 142.6 121.1 135.3 64.5 115.9
(1) The Company has acquired 23 businesses since 1989 for an aggregate purchase
price of nearly $1 billion. The Company has incurred and expensed
approximately $276.5 in fiscal years 1999 - 2002 related to acquisitions,
integration of such acquisitions, consolidation of 17 facilities and
reduction of 3,000 employees. The Company incurred and expensed
approximately $145 of such costs since the terrorist attacks of September
11, 2001, increasing the number of facilities consolidated to 21, with one
additional facility expected to be closed by mid-2003, and its planned
headcount reductions to 4,400 employees.
18
SELECTED FINANCIAL DATA (continued)
Footnotes to Table
(a) In response to the terrorist attacks on September 11, 2001 and the resulting
impact on the airline industry subsequent to the attacks, we adopted and
began to implement a facility consolidation and integration plan in November
2001 designed to re-align our capacity and cost structure consistent with
changed conditions in the airline industry. This plan included closing five
facilities, reducing the number of principal production facilities from 16
to 11, and reducing our workforce by approximately 1,000 employees. In
response to worsening industry conditions during 2002, the Company revised
its consolidation plan to encompass a total of 1,400 employees. The total
costs and charges are expected to be approximately $155.0, of which $65.0 is
expected to be cash costs. Through December 31, 2002, we incurred
approximately $145.0 of the expected total costs (approximately $55.0 of
cash costs). We expect to incur the remaining $10.0 of estimated cash costs
during the first half of calendar 2003.
We incurred costs related to this program as follows:
Transition Period Fiscal Year
Ended Ended
December 31, 2002 February 23, 2002
-------------------------- ------------------------
Cash charges (severance, integration costs, lease
termination costs, relocation, training, facility
preparation) $ 32.5 $ 21.3
Write-down of property, plant, equipment, inventory and
other assets 7.0 62.9
Impaired intangible assets -- 20.4
------ -------
$ 39.5 $ 104.6
====== =======
The consolidation and integration costs have been included as a component of
cost of sales. Cost of sales included $100.4 of consolidation and
integration costs for the ten-month period ended December 31, 2001.
We also incurred acquisition-related expenses of $6.8 during the fiscal year
ended February 23, 2002 and the ten-month period ended December 31, 2001,
which have been included as a component of selling, general and
administrative expenses.
(b) In February 2003, we received an adverse arbitration award related to the
amounts due us from the Thales Group, which reduced the amount due by $29.5.
(c) An extraordinary charge of $9.3 (net of tax) for unamortized debt issue
costs, redemption premiums and expenses related to the early retirement of
our 9 7/8% senior subordinated notes due February 1, 2006 has been included
in our consolidated statement of operations for the ten-month period ended
December 31, 2001 and the fiscal year ended February 23, 2002, respectively.
Excluding such charge and the costs described in (a) above, our operating
earnings were $61.7 and $72.1 and net earnings were $10.9 and $9.8, for the
ten-month period ended December 31, 2001 and the fiscal year ended February
23, 2002, respectively.
(d) Our operating results during fiscal 2001 were negatively impacted by costs
related to acquisitions and the termination of a proposed initial public
offering by our subsidiary Advanced Thermal Sciences. These items reduced
our net earnings by $8.3. Excluding such costs for the year ended February
24, 2001, our operating earnings were $85.0 and net earnings were $27.7.
(e) Our operating results during fiscal 2000 were negatively impacted due to
operational problems in our seating operations. These problems, which have
since been resolved, arose due to a misalignment between our manufacturing
processes, our newly installed Enterprise Resource Planning, or ERP, system
and our product and service line rationalization. The aggregate impact of
these problems on our results for the year ended February 26, 2000 was
$94.4. Substantially all of these costs have been included as a component of
cost of sales. Excluding such costs and charges for the year ended February
26, 2000, our gross profit was $263.3, our gross margin was 36.4%, our
operating earnings were $101.1 and our net earnings were $40.6.
19
(f) As a result of acquisitions in 1999, we recorded a charge of $79.2 for the
write-off of acquired in-process research and development and
acquisition-related expenses. We also sold a 51% interest in our in-flight
entertainment business, as a result of which we recorded a gain of $25.3.
Transaction gain, expenses and other expenses for the year ended February
27, 1999 consist of the in-process research and development and other
acquisition expenses, offset by the gain attributable to the sale of our
in-flight entertainment business. During fiscal 1999, we implemented a
restructuring plan. In connection therewith we closed 7 plants and reduced
our workforces by approximately 1,000 positions. As a result, we incurred
$87.8 of costs that included both the restructuring referred to above, the
rationalization of related product lines and the introduction of new
products. Excluding such costs and expenses and the gain attributable to the
sale, our gross profit was $266.3, our operating earnings were $103.9 and
our net earnings were $51.6.
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20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in millions, except per share data)
INTRODUCTION
Management's discussion and analysis of results of operations and financial
condition ("MD&A") is provided as a supplement to the accompanying consolidated
financial statements and footnotes to help provide an understanding of our
financial condition, changes in financial condition and results of operations.
The MD&A is organized as follows:
Overview. This section provides a general description of our Company's
businesses, as well as recent significant transactions that have either
occurred during the transition period ended December 31, 2002 or early
calendar year 2003 that we believe are important in understanding the
results of operations and anticipating future trends in those operations.
Results of Operations. This section provides an analysis of our results of
operations for all three years presented in the accompanying consolidated
statements of operations. In addition, we provide a brief description of
transactions and events that impact the comparability of the results being
analyzed.
Liquidity and Capital Resources. This section provides an analysis of our
cash flows, as well as a discussion of outstanding debt and commitments,
both firm and contingent, that existed as of December 31, 2002. Included is
a discussion of the amount of financial capacity available to fund future
commitments, as well as a discussion of other financing arrangements.
New Accounting Pronouncements. This section describes significant new
accounting pronouncements and the timing of their adoption and estimated
impact, if known, to the financial statements.
Critical Accounting Policies. This section discusses those accounting
policies that both are considered important to our financial condition and
results, and require significant judgment and estimates on the part of
management in their application. In addition, all of our significant
accounting policies, including the critical accounting policies, are
summarized in note 1 to the accompanying consolidated financial statements.
Risk Factors and Forward-Looking Statements. These sections discuss
important risk factors and how certain of our forward-looking statements
throughout MD&A are based on management's present expectations about future
events and are inherently susceptible to uncertainty and changes in
circumstances.
All dollar amounts in the following discussion and analysis are presented in
millions of dollars, except per share amounts.
OVERVIEW
We are the world's largest manufacturer of cabin interior products for
commercial aircraft and for business jets and a leading distributor of
aftermarket fasteners. We serve virtually all major airlines and a wide variety
of business jet customers and airframe manufacturers. 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 high-heat and convection ovens;
o Both chemical and gaseous aircraft oxygen delivery systems;
o Business jet and general aviation interior products, including an extensive
line of executive aircraft seats, indirect overhead lighting systems,
oxygen, safety and air valve products; and
o A broad line of aftermarket fasteners, covering over 100,000 SKUs.
21
We design, develop and manufacture a broad range of cabin interior
structures and provide comprehensive aircraft cabin interior reconfiguration and
passenger-to-freighter conversion engineering services and component kits.
We generally derive our revenues from two primary sources: refurbishment or
upgrade programs for the existing worldwide fleets of commercial and general
aviation aircraft and new aircraft deliveries. We believe our large installed
base of products, estimated to be over $5.0 billion as of December 31, 2002
(valued at replacement prices), gives us a significant advantage over our
competitors in obtaining orders both for spare parts and for refurbishment
programs, principally due to the tendency of the airlines to purchase equipment
for such programs from the original supplier. For the transition period ended
December 31, 2002, approximately 60% of our revenues were from the aftermarket
and 40% were from new aircraft deliveries. For fiscal year 2002, 63% of our
revenues were from the aftermarket and 37% were from new aircraft deliveries.
For fiscal year 2001, 60% of our revenues were from the aftermarket and 40% were
from new aircraft deliveries.
We conduct our operations through strategic business units that have been
aggregated under three reportable segments: Commercial Aircraft Products,
Business Jet Products and Fastener Distribution.
Net sales by line of business were as follows:
Fiscal Year Ended
Ten-Month Period Ended ----------------------------------------------------
Dec. 31, 2002 February 23, 2002 February 24, 2001
------------------------- ------------------------ ------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
----------- ------------- ----------- ------------ ----------- ------------
Commercial aircraft products:
Seating products $144.6 28.7% $247.8 36.4% $288.1 43.2%
Interior systems products 116.0 23.0 152.6 22.4 151.6 22.8
Engineered interior structures, components
and assemblies 93.9 18.7 150.2 22.1 140.6 21.1
----------- ------------- ----------- ------------ ----------- ------------
354.5 70.4 550.6 80.9 580.3 87.1
Business jet products 71.1 14.1 85.6 12.6 86.1 12.9
Fastener distribution 78.0 15.5 44.3 6.5 -- --
----------- ------------- ----------- ------------ ----------- ------------
Net sales $503.6 100.0% $680.5 100.0% $666.4 100.0%
=========== ============= =========== ============ =========== ============
We generated approximately 46% of our total revenues from sales outside the
U.S. for the transition period ended December 31, 2002, and approximately 24% of
total revenues was generated in Europe and approximately 11% was generated in
Asia. In fiscal 2002, we generated approximately 42% of our total revenues from
sales outside the U.S., and approximately 20% of total revenues were generated
in Europe and approximately 12% was generated in Asia. In fiscal 2001, we
generated approximately 42% of our total revenues from sales outside the U.S.,
and approximately 22% of total revenues were generated in Europe and
approximately 10% was generated in Asia.
Financial and other information by segment and relating to foreign and
domestic operations for each of the ten-month transition period ending December
31, 2002, and the fiscal years ended February 23, 2002 and February 24, 2001, is
set forth in note 15 to our consolidated financial statements.
We have substantially expanded the size, scope and nature of our business
through a number of acquisitions. Since 1989, we have completed 23 acquisitions,
including one acquisition during the transition period ended December 31, 2002,
three during fiscal year 2002 and four during fiscal year 2001, for an aggregate
purchase price of approximately $980.0, in order to position ourselves as the
preferred global supplier to our customers.
During the period from 1989 to 2000, we integrated the acquired businesses,
closing 17 facilities, reducing our workforce by 3,000 positions and
implementing common information technology platforms and lean manufacturing
initiatives company-wide. This integration effort resulted in costs and charges
totaling approximately $125.0.
22
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused us to implement a facility consolidation
and integration plan designed to re-align our capacity and cost structure with
changed conditions in the airline industry. The facility consolidation and
integration plan includes closing five facilities and reducing workforce by
approximately 1,400 employees. The total estimated cost of this program is
approximately $155.0, including $65.0 of cash charges. Through December 31,
2002, we had incurred approximately $55.0 of the cash costs and expect to incur
the remaining $10.0 during the first half of calendar 2003.
All of the aforementioned initiatives to integrate, rationalize and
restructure the businesses acquired through December 31, 2002 had an aggregate
cost of approximately $270, which has already been expensed. These initiatives
enabled us to eliminate a total of 21 facilities, with one additional facility
expected to be closed by mid-2003, and reduce headcount by over 4,000 employees,
with an additional reduction of approximately 400 expected in connection with
the closure of the aforementioned facility by mid-2003. We believe these
initiatives will enable us to substantially expand profit margins when industry
conditions improve and demand increases, strengthen the global business
management focus on our core product categories, more effectively leverage our
resources and improve our ability to rapidly react to changing business
conditions. In conjunction with these efforts, we have also implemented a
company-wide information technology system, a company-wide engineering system
and initiated lean manufacturing techniques in our remaining facilities. Common
management information and engineering systems and lean manufacturing processes
across all operations, coupled with a rationalized product offering, are
expected to provide us with the ongoing benefit of a generally lower cost
structure, and expanding gross and operating margins.
New product development is a strategic tool for our company. Our customers
regularly request that we engage in new product development and enhancement
activities. We believe that these activities, if properly focused and managed,
will protect and enhance our leadership position. Research, development and
engineering spending have been approximately 6% - 7% of sales for the past
several years, and is expected to remain at that level for the foreseeable
future.
We also believe in providing our businesses with the tools required to
remain competitive. In that regard, we have, and will continue to invest in
property and equipment that enhances our productivity. Over the past two years,
annual capital expenditures were approximately $14 - $18. Taking into
consideration our recent capital expenditure investments, current industry
conditions and the recent acquisitions, we expect that annual capital
expenditures will be approximately $15 for the next few years.
Recent Acquisitions
- -------------------
We completed the following significant acquisitions during fiscal 2001 and
fiscal 2002:
Fiscal 2001 Acquisitions
- ------------------------
Effective February 24, 2001 we completed the acquisition of four companies
that specialize in manufacturing precision-machined components and assemblies
for the aerospace industry. We acquired these businesses, Alson Industries,
Inc., T.L. Windust Machine, Inc., DMGI, Inc. and Maynard Precision, Inc., for an
aggregate purchase price of approximately $70.1.
Fiscal 2002 Acquisitions
- ------------------------
In May 2001, we acquired the outstanding common stock of Nelson Aero Space,
Inc. for approximately $20.0. In July 2001, we acquired the outstanding common
stock of Denton Jet Interiors, Inc. for approximately $16.0.
On September 14, 2001, we acquired M & M for a purchase price of $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 our stock, paying them $152.0 in cash and assuming current
liabilities of approximately $8.8. We financed this acquisition through cash on
hand and approximately $100.0 of borrowings under our bank credit facility.
23
RESULTS OF OPERATIONS
The Transition Period from February 24, 2002 to December 31, 2002 Compared to
the Ten-Month Period From February 25, 2001 to December 31, 2001
Consolidated Results
To assist in understanding the performance of our operations, where noted,
the results discussed below have been adjusted to exclude the effect of certain
facility and workforce consolidation costs, as well as certain unusual or
nonrecurring items. By presenting "as adjusted" results, we intend to provide a
better understanding of the core results and underlying trends from which to
consider not only past performance, but also the prospects for the future. In
each case where "as adjusted" results are discussed, all of the differences from
our reported results are given to reconcile the reported results to the "as
adjusted" results. Users of this financial information should consider the types
of events and transactions for which adjustments have been made. In addition to
providing a discussion of reported results, results for the comparable period in
the prior year have also been prepared on a pro forma basis treating companies
acquired during the ten-month period ended December 31, 2001 as though acquired
as of February 25, 2001. By also discussing these pro forma results, we intend
to enhance comparability between periods and make an analysis of the current
period results more meaningful. Pro forma adjustments would have increased net
sales, gross profit, selling, general and administrative expenses, operating
earnings, interest expense and net earnings by $60.9, $24.0, $10.6, $13.4, $4.7
and $8.8, respectively, for the ten-month period ended December 31, 2001.
Results for the current transition period ended December 31, 2002 have not been
prepared on a pro forma basis, as we made no significant acquisitions in the
current period. These "as adjusted" and pro forma results do not conform to U.S.
generally accepted accounting principles, or GAAP. While we believe that these
measures are useful aids in understanding our results in the periods shown, as
the magnitude of these items is such that it is important for readers of this
discussion and analysis to be aware of these items and the effect that they had
on our results during the periods presented and we use these measures to
evaluate our performance. These "as adjusted" and pro forma results should be
used only in conjunction with the results presented in accordance with GAAP. The
pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the results of operations that would have been
achieved had the acquisitions been completed as of the date indicated.
Revenues were negatively impacted by the severe change in industry
conditions following the terrorist attacks on September 11, 2001. Net sales for
the transition period ended December 31, 2002 were $503.6, which is $79.0 or
13.6% lower than net sales of $582.6 for the comparable period in the prior
year, which was also negatively impacted by the events of September 11, 2001.
On a pro forma basis (treating companies acquired during the ten-month
period ended December 31, 2001 as though acquired as of February 25, 2001), net
sales during the transition period ended December 31, 2002 would have been
$139.9 or 21.7% lower than pro forma net sales of $643.5 for the prior period.
Net sales for each of our segments are set forth in the following table:
Transition Ten-Month
Period Ended % of Period Ended % of
Dec. 31, 2002 Net Sales Dec. 31, 2001 Net Sales Change
------------------ ---------------- ------------------ ----------------- -------------------
Commercial Aircraft Products $354.5 70.4% $476.5 81.8% $ (122.0)
Business Jet Products 71.1 14.1% 75.7 13.0% (4.6)
Fastener Distribution 78.0 15.5% 30.4 5.2% 47.6
------------------ ---------------- ------------------ ----------------- -------------------
Total $503.6 100.0% $582.6 100.0% $ (79.0)
================== ================ ================== ================= ===================
Sales of commercial aircraft products were $122.0 or 25.6% lower than sales
in the prior year, due to the recession in the airline industry and the further
downturn in industry conditions following September 11, 2001. Sales of business
jet products and fastener distribution products also reflected restrained demand
due to the aviation industry downturn. Because we acquired M&M in September
2001, the current period reflects the full ten-month transition period of
fastener distribution revenue compared with four months in the comparable period
in the prior year. On a pro forma basis (treating companies acquired during the
ten-month period ended December 31, 2001 as though acquired as of February 25,
2001), sales of fastener distribution products were $10.5 or 11.9% lower than
pro forma sales in the comparable period in the prior year. Pro forma
adjustments would have increased sales of fastener distribution products by
$58.1 for the comparable period ended December 31, 2001.
24
Gross profit was $151.3, or 30.0% of net sales for the transition period
ended December 31, 2002 as compared to $118.2, or 20.3% of sales for the
ten-month period ended December 31, 2001. The period over period increase in
gross margin as a percentage of net sales occurred despite the 13.6% decrease in
revenues and was due to a $60.9 reduction in facility consolidation and
integration costs and the positive impact of our facility consolidation efforts,
lean manufacturing and continuous improvement programs.
On a pro forma basis (treating companies acquired during the ten-month
period ended December 31, 2001 as though acquired as of February 25, 2001) and
excluding facility and personnel consolidation and integration costs of $39.5 in
2002 and $100.4 in 2001, gross profit on this pro forma, as adjusted basis would
have been $190.8, or 37.9% of sales for the transition period ended December 31,
2002 as compared to $242.6, or 37.7% of pro forma sales for the ten-month period
ended December 31, 2001. This increase in gross margin as a percentage of sales
on this pro forma, as adjusted basis occurred despite the $139.9 or 21.7%
decrease in revenues, and was due to the positive impact of our facility
consolidation and integration efforts, lean manufacturing and continuous
improvement programs.
Selling, general and administrative expenses were $98.5 or 19.6% of net
sales for the transition period ended December 31, 2002 as compared to $120.2 or
20.6% of net sales for the comparable period in the prior year. The $21.7
decrease in selling, general and administrative expenses was due to lower
spending, primarily as a result of our facility consolidation and integration
program and austerity measures, together with a decrease of $13.4 related to the
adoption of SFAS No. 142. Because we acquired M & M in September 2001, the
current period reflects the full ten-month period of selling, general and
administrative expenses of $12.0, as compared with $6.1 of such costs during the
four months in the comparable period in the prior year.
On a pro forma basis (treating companies acquired during the ten-month
period ended December 31, 2001, as though acquired as of February 25, 2001), pro
forma, as adjusted, selling, general and administrative expenses would have been
$124.0 or 19.3% of pro forma net sales for the comparable period in the prior
year. The period over period decrease in selling, general and administrative
expenses for the transition period ended December 31, 2002 compared to the pro
forma, as adjusted, selling, general and administrative expenses in the
comparable period in the prior year of $25.5 or 20.6% resulted from our
austerity measures, a lower level of spending $(12.1) and the implementation of
SFAS No. 142 $(13.4). We incurred acquisition-related expenses of $6.8 in the
prior period in connection with the acquisition of M&M that have been excluded
from the pro forma, as adjusted, figures in 2001.
Research, development and engineering expenses were $34.1 or 6.8% of net
sales for the transition period ended December 31, 2002 as compared with $36.7
or 6.3% of sales for the comparable period in the prior year. The period over
period decrease in research, development and engineering expenses is primarily
attributable to austerity measures, which were implemented subsequent to the
September 11, 2001 terrorist attacks.
In February 2003, we received an adverse result in an arbitration
proceeding, which had been ongoing since October 2000. The decision reduced the
amounts we originally sought in connection with the dispute, resulting in a net
amount of $7.8 million due to us. The dispute concerned the sale of our
in-flight entertainment business to Thales. Under the terms of the purchase and
sale agreement, we received $62 million during 1999, and were to receive two
additional payments totaling $31.4 million, and a third and final payment based
on actual sales and bookings. Thales did not pay the $31.4 million, or the third
and final payment. We initiated arbitration proceedings to compel payment in
December 2000. Thales counterclaimed against us, alleging various breaches of
the purchase and sale agreement. Previously, we had recorded a receivable of
$38.5 million in connection with the sale of the business to Thales. As a result
of the arbitration award, we reduced our note receivable by $29.5 as of December
31, 2002, representing the difference between the arbitration panel's award and
our previously recorded amounts.
Despite a 13.6% decrease in net sales, our operating loss for the current
period decreased by $27.9 compared to the operating loss in the comparable
period in the prior year due to a $60.9 decrease in facility consolidation and
integration costs, and a $24.3 decrease in operating expenses, excluding the
$29.5 arbitration result, arising from austerity measures and the implementation
of SFAS No. 142.
25
On a pro forma basis (treating companies acquired during the ten-month
period ended December 31, 2001, as though acquired as of February 25, 2001) and
excluding facility and personnel consolidation and integration costs of $39.5
and the $29.5 arbitration award in 2002 and facility and personnel consolidation
and integration costs of $100.4 and acquisition related expenses of $6.8 in
2001, operating earnings on this pro forma, as adjusted basis declined by only
$23.7, despite the $139.9 decrease in revenues for the current transition period
compared to pro forma revenues in the comparable period in the prior year,
reflecting both lower manufacturing costs and lower operating expenses. Our
gross margin calculated on the pro forma, as adjusted basis described above for
both periods was nearly unchanged, reflecting the impact of our facility
consolidation and integration initiatives. Period over period operating expenses
calculated on the pro forma, as adjusted basis described above decreased by
$28.1, which was attributable to austerity measures and a decrease of $13.4 from
the implementation of SFAS No. 142. Pro forma adjustments would have increased
operating expenses by $10.6 for the ten-month period ended December 31, 2001.
Based on our results for the transition period ended December 31, 2002, we
believe our facility consolidation and integration program has eliminated over
$35.0 of annualized cash costs.
Interest expense, net was $57.3 for the transition period ended December 31,
2002, or $8.5 greater than interest expense of $48.8 for the comparable period
in the prior year. The increase in interest expense is due to an increase in
debt following the acquisition of M & M in September 2001 and higher interest
rates on our bank borrowings. On a pro forma basis (treating companies acquired
during the ten-month period ended December 31, 2001, as though acquired as of
February 25, 2001), interest expense, net was $57.3 for the transition period
ended December 31, 2002, or $3.8 greater than pro forma interest expense of
$53.5 for the comparable period in the prior year. The increase in interest
expense for the current transition period compared to pro forma interest expense
in the comparable period in the prior year is due to higher interest rates on
our bank borrowings.
The lower level of revenues, which was partially offset by lower facility
consolidation and integration costs during the transition period ended December
31, 2002, resulted in a loss before income taxes and extraordinary item of
$(68.1) or $19.4 less than the $(87.5) loss before income taxes and
extraordinary item in the comparable period in the prior year.
Income tax expense for the transition period ended December 31, 2002 was
$2.7 as compared to $2.0 in the comparable period in the prior year. We recorded
a $9.3 extraordinary item during the ten-month period ended December 31, 2001
related to the early extinguishment of certain long-term debt.
Net loss was $(70.8) or $(2.03) per share for the transition period ended
December 31, 2002 as compared to a net loss of $(98.8) or $(3.05) per share for
the comparable period in the prior year.
On a pro forma basis (treating companies acquired during the ten-month
period ended December 31, 2001, as though acquired as of February 25, 2001) and
excluding facility and personnel consolidation and integration costs of $39.5
and the $29.5 arbitration award in 2002 and facility and personnel consolidation
costs of $100.4, acquisition-related expenses of $6.8 and debt extinguishment
costs of $9.3 in 2001, our net loss on this pro forma, as adjusted basis would
have been $(1.8) or $(0.05) per share for the transition period ended December
31, 2002 as compared to net earnings on this same pro forma, as adjusted basis
of $26.5 or $0.79 per share for the comparable period in the prior year. Lower
net sales and greater interest expense were the principal reasons for the
decrease in net earnings on this pro forma, as adjusted basis as discussed
further above.
[Remainder of this page intentionally left blank]
26
Fiscal Year Ended February 23, 2002 Compared with the Fiscal Year Ended
February 24, 2001
Consolidated Results
Revenues were negatively impacted by the severe change in industry
conditions following the terrorist attacks on September 11, 2001. Net sales for
fiscal 2002 were $680.5, which is $14.1 or 2.1% greater than net sales of $666.4
for the comparable period in the prior year. This increase was entirely
attributable to the acquisition of M & M in September 2001.
Net sales for each of our segments are set forth in the following table:
FY 2002 FY 2001 Change
--------------- ----------- --------------
Commercial Aircraft Products $550.6 $580.3 $ (29.7)
Business Jet Products 85.6 86.1 (0.5)
Fastener Distribution 44.3 -- 44.3
--------------- ----------- --------------
$680.5 $666.4 $ 14.1
=============== =========== ==============
Net sales at our Commercial Aircraft Products segment were $29.7 or 5.1%
lower than the prior year due to the recession in the airline industry and the
further downturn in industry conditions following September 11, 2001.
Gross profit was $150.4, or 22.1% of net sales for fiscal 2002, including
facility consolidation and integration expenses of $104.6, as compared to $249.8
or 37.5% of net sales in the prior year. The decline in the gross margin was due
to the facility consolidation and integration costs; excluding such costs, gross
margin for fiscal 2002 was essentially unchanged from fiscal 2001.
Selling, general and administrative expenses were $139.4 or 20.5% of net
sales for fiscal 2002 as compared to $124.2 or 18.6% of net sales in fiscal
2001. The $15.2 year over year increase in selling, general and administrative
expenses resulted from recent acquisitions. Included in selling, general and
administrative expenses for fiscal 2002 and 2001 were approximately $6.8 and
$8.3, respectively, of costs related to acquisitions we completed during each
respective fiscal year.
Research, development and engineering expenses were $43.5 or 6.4% of net
sales for fiscal 2002, as compared with $48.9 or 7.3% of sales in fiscal 2001.
The year over year decrease in research, development and engineering expenses is
primarily attributable to the timing of customer programs along with austerity
measures we implemented subsequent to the September 11, 2001 terrorist attacks.
We generated an operating loss of $(32.5) during fiscal 2002, including
facility consolidation and related expenses of $111.4. Excluding such costs, we
generated operating earnings of $78.9 or 11.6% of net sales, which was $6.1 or
7.2% lower than operating earnings of $85.0 (excluding acquisition-related
expenses of $8.3) or 12.8% of net sales in the prior year. The decrease in
operating earnings excluding such costs in fiscal 2002 is primarily attributable
to the lower level of revenues from our businesses following the terrorist
attacks on September 11, 2001.
Interest expense, net was $60.5 for fiscal 2002, or $6.3 greater than
interest expense of $54.2 for the prior year. The increase in interest expense
is due to the larger amount of outstanding debt created by the refinancing of
certain indebtedness during fiscal 2002 along with the impact of recent
acquisitions.
The lower level of revenues and facility and integration consolidation costs
during fiscal 2002 resulted in a loss before income taxes and extraordinary item
of $(93.0) or $(115.5) less than income before income taxes in the prior year of
$22.5. Earnings before facility consolidation and acquisition-related expenses,
income taxes, and extraordinary item in fiscal 2002 were $18.4, which was $12.4
or 40.3% lower than pretax earnings in fiscal 2001 of $30.8, calculated on the
same basis.
Income tax expense for fiscal 2002 was $1.8 as compared to $2.2 in the prior
year. The Company recorded a $9.3 extraordinary item during fiscal 2002 related
to the early extinguishment of certain long-term debt.
Net (loss) earnings was $(104.1) or $(3.18) per share for fiscal 2002, as
compared to net earnings of $20.3 or $0.78 per share for fiscal 2001.
27
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 $262.9 as of
December 31, 2002, as compared to $304.8 as of February 23, 2002. At December
31, 2002, our cash and cash equivalents were $156.9 as compared to $159.5 at
February 23, 2002.
Cash Flows
Cash used in operating activities was $13.5 during the transition period
ended December 31, 2002 compared to cash provided by operations of $57.9 for
fiscal year 2002. The primary sources of cash during the transition period
ending December 31, 2002 were a non-cash impairment charge of $7.0, charges for
depreciation and amortization of $24.7, a legal settlement charge of $29.5 and a
decrease in accounts receivable of $22.2. The primary uses of cash were a net
loss of $70.8, an increase in inventories of $8.5 and a decrease in payables and
accruals of $15.9.
The primary source of cash from investing activities was $33.4 of proceeds
received from real estate sales and sales-leaseback transactions. The primary
uses of cash from investing activities were related to capital expenditures to
implement new information system enhancements and plant modernization along with
$6.5 of cash used for acquisitions.
Capital Spending
Our capital expenditures were $17.4 and $13.9 during the transition period
ended December 31, 2002 and the fiscal year ended February 23, 2002,
respectively. The period over period increase in capital expenditures is
primarily attributable to plant consolidation and modernization efforts. We
anticipate ongoing annual capital expenditures of approximately $15 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 23 acquisitions for an aggregate purchase price of
approximately $980.0. We have financed these acquisitions primarily through
issuances of debt and equity securities, including our 8%, 8 7/8% and 9 1/2%
senior subordinated notes.
Outstanding Debt and Other Financing Arrangements
In January and March 2003, the Company obtained amendments to the credit
facility with J.P. Morgan Chase. The amended bank credit facility reduced the
total commitments by $15.0 to $135.0 (of which $30.0 may be utilized for
acquisitions) during January 2003. The amended bank credit facility provides for
another $15.0 reduction in facility size to $120.0 at December 31, 2004. The
amended bank credit facility expires in August 2006 and is collateralized by
substantially all of our cash, accounts receivable, inventories and other
personal property. At December 31, 2002, indebtedness under the old bank credit
facility consisted of letters of credit aggregating approximately $5.6 and
outstanding borrowings under the revolving facility aggregating to $144.0
(bearing interest at LIBOR plus 3.0%, or approximately 4.64% as of December 31,
2002). The amended bank credit facility bears interest ranging from 200 to 350
basis points over the Eurodollar rate as defined in the agreement (or
approximately 4.5% as of the January 2003 effective date). The amended bank
credit facility contains customary affirmative covenants, negative covenants and
conditions of borrowings, all of which were met as of December 31, 2002. We
presented the $15.0 reduction in commitments as short-term debt in our
consolidated balance sheet at December 31, 2002.
In connection with a recapitalization of our company in April 2001, we
issued $250.0 of 8 7/8% senior subordinated notes due 2011, pursuant to an
indenture dated April 17, 2001, between us and the Bank of New York, as trustee,
and sold the notes to Merrill Lynch & Co., Credit Suisse First Boston, JP
Morgan, CIBC World Markets and First Union Securities, Inc. On July 27, 2001, we
exchanged the outstanding 8 7/8% senior subordinated notes due 2011 with an
aggregate value of $250.0 principal amount for 8 7/8% senior subordinated notes
due 2011, Series B, registered under the Securities Act of 1933.
28
Long-term debt consists principally of our 8 7/8% senior subordinated notes,
9 1/2% senior subordinated notes and 8% senior subordinated notes and borrowings
outstanding under the amended bank credit facility (net of the $15.0 reduction
in commitments, which is a component of short-term debt). The $250.0 of 8% notes
mature on March 1, 2008, the $200.0 of 9 1/2% notes mature on November 1, 2008
and the $250.0 of 8 7/8% notes mature on May 1, 2011. 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 December 31, 2002. A breach of such
covenants, or the covenants under our amended 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 December 31, 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.
Contractual Obligations 2003 2004 2005 2006 2007 Thereafter Total
------------- ------------ ----------- ---------- ------------- ------------- --------------
Long-term debt $ 16.9 $ 17.6 $0.7 $ 114.7 $ 3.3 $ 699.7 $ 852.9
Operating leases 11.1 7.8 6.9 6.1 6.0 44.3 82.2
------- ----- ----- -------- ----- -------- -------
Total $ 28.0 $ 25.4 $7.6 $ 120.8 $ 9.3 $ 744.0 $ 935.1
======= ====== ==== ======== ===== ======== =======
Commercial Commitments
Letters of Credit $ 5.6 -- -- -- -- -- $ 5.6
We believe that our 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.
The September 11, 2001 terrorist attacks have severely impacted conditions
in the airline industry. 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. However, we believe that our operating cash flow, cash
and cash equivalents, borrowing capacity under our amended bank credit facility,
and access to capital markets are sufficient to fund our operating needs,
including contractual and other obligations, and to service our debt obligations
for the foreseeable future.
Sale-Leaseback
During the third quarter of 2002, we entered into two sale-leaseback
transactions involving four of our facilities. Under the terms of the
sale-leaseback agreements, the facilities were sold for $27.0, net of
transaction costs, and have been leased back for periods ranging from 15 to 20
years. The leasebacks have been accounted for as operating leases. The future
lease payments have been included in the above tables. A gain of $4.8 resulting
from the sales have been deferred and will be amortized on a straight-line basis
to rent expense over the initial term of the leases.
Off-Balance Sheet Arrangements - Lease Arrangements
We finance our 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 our
consolidated balance sheet. As of December 31, 2002, future minimum lease
payments under these arrangements approximated $54.2. We also have various other
arrangements whose future minimum lease payments approximated $28.0 at December
31, 2002.
29
Indemnities, Commitments and Guarantees
During our normal course of business, we have 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 its products, indemnities to
various lessors in connection with facility leases for certain claims arising
from such facility or lease, indemnities to other parties to certain acquisition
agreements and indemnities to our directors and officers to the maximum extent
permitted under the laws of the State of Delaware. The duration of these
indemnities, commitments and guarantees varies, and in certain cases, is
indefinite. Substantially all of these indemnities, commitments and guarantees
provide for limitations on the maximum potential future payments we could be
obligated to make. We have not recorded any liability for these indemnities,
commitments and guarantees in the accompanying consolidated balance sheets.
Deferred Tax Assets
We established a valuation allowance of $124.4 as of December 31, 2002
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 we will
be able to generate taxable income to realize such assets during the federal
operating loss carryforward period. The federal operating loss carryforward
begins to expire in 2012. Such uncertainties include recent cumulative losses
attributable to the recent industry conditions, the highly cyclical nature of
the industry in which we operate, risks associated with our facility
consolidation and integration 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145, among other things, requires gains and
losses on extinguishment of debt to be classified as part of continuing
operations rather than treated as extraordinary, as previously required in
accordance with SFAS No. 4. SFAS No. 145 also modifies accounting for subleases
where the original lessee remains the secondary obligor and requires certain
modifications to capital leases to be treated as sale-leaseback transactions. We
will adopt SFAS No. 145 on January 1, 2003 and expect no material impact to our
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies the
guidance previously provided under Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Among other things, SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred
as opposed to when there is a commitment to a restructuring plan as set forth
under the nullified guidance. We plan to adopt SFAS No. 146 on January 1, 2003
for future restructurings as required.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The adoption
of SFAS No. 148 is not expected to have a material impact on our financial
position or results of operations as we have no plans to adopt the fair value
method.
30
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others", an interpretation of FIN No. 5,
57 and 107, and rescission of FIN No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others". FIN No. 45 elaborates on the disclosures to be made by
the guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002;
while, the provisions of the disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of the recognition provisions of FIN No. 45 is not expected to have a
material impact on our consolidated results of operations and financial
position.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Entities", an interpretation of Accounting Research Bulletin No. 51. FIN No. 46
requires that variable interest entities be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. FIN No. 46 also requires disclosures about variable
interest entities that companies are not required to consolidate but in which a
company has a significant variable interest. The consolidation requirements of
FIN No. 46 will apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements will apply to entities
established prior to January 31, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. The disclosure requirements will apply in all
financial statements issued after January 31, 2003. We will begin to adopt the
provisions of FIN No. 46 during the first quarter of calendar 2003 but expect
the provisions of FIN No. 46 will not have a material impact on our consolidated
results of operations and financial position upon adoption as we do not
currently have any variable interest entities.
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 to our consolidated financial statements.
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. We sell our products primarily to airlines and
aircraft manufacturers worldwide, including occasional sales collateralized by
letters of credit. We perform ongoing credit evaluations of our customers and
maintain reserves for estimated credit losses. Actual losses have been within
management's expectations.
We apply judgment to ensure that the criteria for recognizing sales are
consistently applied and achieved for all recognized sales transactions.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current 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.
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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 the transition period ended
December 31, 2002 and the fiscal year ended February 23, 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 were 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 were determined to be undervalued, we may have
over-reported our costs of goods sold in previous periods and would be required
to recognize such additional operating income at the time of sale.
Long-Lived Assets (including Tangible and Intangible Assets and Goodwill)
To conduct our global business operations and execute our strategy, we
acquire tangible and intangible assets, which affect the amount of future period
amortization expense and possible impairment expense that we may incur. The
determination of the value of such intangible assets requires management to make
estimates and assumptions that affect our consolidated financial statements. We
assess potential impairment to intangible assets of a reporting unit on an
annual basis or when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recovered. Our
judgments regarding the existence of impairment indicators and future cash flows
related to intangible assets are based on operational performance of our
acquired businesses, market conditions and other factors. Future events could
cause us to conclude that impairment indicators exist and that goodwill or other
acquired tangible or intangible assets associated with our acquired businesses
is impaired. Any resulting impairment loss could have an adverse impact on our
results of operations.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we
are required to 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 $124.4 as of December 31, 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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32
RISK FACTORS
We are directly dependent upon the conditions in the airline industry and a
severe and prolonged downturn could negatively impact our results of operations
The September 11, 2001 terrorist attacks have severely impacted conditions
in the airline industry. Sharply lower demand from our airline customer base
affected our financial results, both for the transition period ended December
31, 2002 and the fiscal year ended February 23, 2002. The lower demand reflects
the current downturn in the airline industry, which is the most severe ever
experienced. High airline operating costs, weak air travel and low-ticket prices
have damaged many carriers' financial condition. Prior to the September 11, 2001
terrorist attacks, airline profits were already being adversely affected by
increases in pilot and other airline wages, higher fuel prices and the softening
of the global economy. Air travel dropped significantly following the 2001
terrorist attacks, further weakening many airlines' financial condition. To cut
costs, carriers worldwide have reduced fleet sizes, parking or idling about
2,200 aircraft, or 15% of their fleets, as of December 2002. In an attempt to
stimulate air travel, airlines have decreased domestic airfares to levels not
seen since 1988. Reflecting the reduction in air travel and fares, North
American airline revenue has dropped 24% since 2000.
As a result of these factors, the U.S. airline industry incurred a $7
billion loss in calendar 2001 and an $11 billion loss in calendar 2002. The
airline industry crisis caused two major domestic airlines, US Airways and
United Airlines, to file for protection under Chapter 11 of the United States
Bankruptcy Act and industry experts believe other major domestic carriers may be
required to do so as well. In addition, at least one smaller domestic carrier,
National Airlines, has ceased operations entirely.
Accordingly, the airlines are seeking to conserve cash in part by deferring
or eliminating cabin interior refurbishment programs and deferring or canceling
aircraft purchases. This has caused a substantial contraction in our business,
the extent and duration of which cannot be determined at this time. We expect
these adverse industry conditions to have a material adverse impact on our
results of operations and financial condition until such time as conditions in
the industry improve. Industry conditions could also deteriorate further if
there is a prolonged war in Iraq or other outbreak or escalation of national or
international hostilities. Several airlines have recently announced additional
employee layoffs and the parking or idling of additional aircraft citing the
commencement of hostilities with Iraq, along with rising fuel prices and the
threat of terrorism.
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.
Our substantial indebtedness could limit our ability to obtain additional
financing and will require that a significant portion of our cash flow be used
for debt service
We have substantial indebtedness and, as a result, significant debt service
obligations. As of December 31, 2002, we had approximately $696.0 of net
indebtedness outstanding, representing approximately 91% of total
capitalization.
The degree of our leverage and, as a result, significant debt service
obligations, could have significant consequences to purchasers or holders of our
shares of common stock, including:
o Limiting our ability to obtain additional financing to fund our growth
strategy, working capital requirements, capital expenditures, acquisitions,
debt service requirements or other general corporate requirements;
o Limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of those funds to
fund debt service obligations;
o Increasing our vulnerability to adverse economic and industry conditions;
and
o If we are able to replace our bank credit facility, increasing our exposure
to interest rate increases because borrowings under a new bank credit
facility will likely be at variable interest rates.
33
We may not be able to generate the necessary amount of cash to service our
indebtedness, which may require us to refinance our debt, obtain additional
financing or sell assets
Our ability to satisfy our debt service obligations will depend upon, among
other things, our future operating performance and our ability to refinance
indebtedness when necessary. Each of these factors is to a large extent
dependent on economic, financial, competitive and other factors beyond our
control. If, in the future, we cannot generate sufficient cash from operations
to meet our debt service obligations, we will need to refinance, obtain
additional financing or sell assets. Our business may not generate cash flow,
and we may not be able to obtain funding, sufficient to satisfy our debt service
requirements.
We have significant financial and operating restrictions in our debt
instruments that may have an adverse affect on our operations
The indentures governing our outstanding notes contain numerous financial
and operating covenants that limit our ability to incur additional indebtedness,
to create liens or other encumbrances, to make certain payments and investments,
including dividend payments and to sell or otherwise dispose of assets and merge
or consolidate with other entities. Agreements governing future indebtedness
could also contain significant financial and operating restrictions. Our amended
bank credit facility contains customary affirmative and negative covenants. A
failure to comply with the obligations contained in any current or future
agreements governing our indebtedness, including our indentures, could result in
an event of default under our amended bank credit facility, or such indentures,
which could permit acceleration of the related debt and acceleration of debt
under other instruments that may contain cross-acceleration or cross-default
provisions. We are not certain whether we would have, or be able to obtain,
sufficient funds to make these accelerated payments.
The airline industry is heavily regulated and failure to comply with
applicable laws could reduce our sales, or require us to incur additional costs
to achieve compliance, which could reduce our results of operations
The Federal Aviation Administration prescribes standards and licensing
requirements for aircraft components, including virtually all commercial airline
and general aviation cabin interior products, and licenses component repair
stations within the United States. Comparable agencies, such as the U.K. Civil
Aviation Authority and the Japanese Civil Aviation Board, regulate these matters
in other countries. If we fail to obtain a required license for one of our
products or services or lose a license previously granted, the sale of the
subject product or service would be prohibited by law until such license is
obtained or renewed. In addition, designing new products to meet existing
regulatory requirements and retrofitting installed products to comply with new
regulatory requirements can be both expensive and time consuming.
From time to time the FAA proposes new regulations. These new regulations
generally cause an increase in costs to comply with these regulations; when the
FAA first enacted Technical Standard Order C127, all seating companies were
required to meet these new rules. Compliance with this rule required industry
participants to spend millions of dollars on engineering, plant and equipment to
comply with the regulation. A number of smaller seating companies decided that
they did not have the resources, financial or otherwise, to comply with these
rules and they either sold their businesses or ceased operations.
To the extent the FAA implements rule changes in the future, we may incur
additional costs to achieve compliance.
There are risks associated with the implementation of our facility
consolidation program; failure to integrate our combined operations successfully
could lead to a loss of revenues and customers
We have developed a comprehensive facility consolidation and integration
plan, which is designed to reduce our capacity and fixed costs consistent with
current demand and anticipated demand. This plan involves shutting five
principal facilities, transferring the operations to another facility while
maintaining an ongoing business for the transferred operations. If we are not
successful in implementing this plan, our costs may not be as currently
anticipated, we may incur delays in delivering products to our customers, which
could result in significant penalty payments to our customers and the airframe
manufacturers. While the facility consolidation program is on track as of the
date of this report, there can be no assurance that we will be successful in the
implementation of this effort or that we will not incur liabilities as a result
thereof.
34
The airline industry is subject to extensive health and environmental
regulation, any violation of which could subject us to significant liabilities
and penalties
We are subject to extensive and changing federal, state and foreign laws and
regulations establishing health and environmental quality standards, and may be
subject to liability or penalties for violations of those standards. We are also
subject to laws and regulations governing remediation of contamination at
facilities currently or formerly owned or operated by us or to which we have
sent hazardous substances or wastes for treatment, recycling or disposal. We may
be subject to future liabilities or obligations as a result of new or more
stringent interpretations of existing laws and regulations. In addition, we may
have liabilities or obligations in the future if we discover any environmental
contamination or liability at any of our facilities, or at facilities we may
acquire.
We compete with a number of established companies, some of which have
significantly greater financial, technological and marketing resources than we
do and we may not be able to compete effectively with these companies
We compete with numerous established companies. Some of these companies,
particularly in the passenger-to-freighter conversion business, have
significantly greater financial, technological and marketing resources than we
do. Our ability to be an effective competitor will depend on our ability to
remain the supplier of retrofit and refurbishment products and spare parts on
the commercial fleets on which our products are currently in service. It will
also depend on our success in causing our products to be selected for
installation in new aircraft, including next-generation aircraft, and in
avoiding product obsolescence. Our ability to maintain or expand our market
position in the rapidly growing passenger-to-freighter conversion business will
depend on our success in being selected to convert specific aircraft, our
ability to maintain and enhance our engineering design, our certification and
program management capabilities and our ability to effectively use our recent
acquisitions to manufacture a broader range of structural components, connectors
and fasteners used in this business.
If we are unable to manufacture quality products and to deliver our products
on time, we may be subject to increased costs or loss of customers or orders,
which could reduce our results of operations
During the latter part of fiscal 1999 and throughout fiscal 2000, we
experienced significant operating inefficiencies in our seating programs which
resulted in delayed deliveries to customers, increased re-work of seating
products, claims for warranty, penalties, out of sequence charges, substantial
increases in air freight and other expedite-related costs. In addition, as a
result of our late customer deliveries, certain airlines diverted their seating
programs to other manufacturers. To the extent we suffer any of these
inefficiencies or shortcomings in the future we will likely experience
significant penalties and loss of customers.
Our acquisition strategy may be less successful than we expect and
therefore, our growth may be limited
We intend to consider future acquisitions. We intend to consider future
strategic acquisitions, some of which could be material to us and which may
include companies that are substantially equivalent or larger in size compared
to us. We continually explore and conduct discussions with many third parties
regarding possible acquisitions. As of the date of this Form 10-K, we have no
acquisition agreements to acquire any business or assets. Our ability to
continue to achieve our goals may depend upon our ability to identify and
successfully acquire attractive companies, to effectively integrate such
companies, achieve cost efficiencies and to manage these businesses as part of
our Company.
We may not be able to effectively manage or integrate the acquired
companies. Further, we may not be successful in implementing appropriate
operational, financial and management systems and controls to achieve the
benefits expected to result from these acquisitions. Our efforts to integrate
these businesses could be affected by a number of factors beyond our control,
such as regulatory developments, general economic conditions, increased
competition and the loss of certain customers resulting from the acquisitions.
In addition, the process of integrating these businesses could cause an
interruption of, or loss of momentum in, the activities of our existing business
and the loss of key personnel and customers. The diversion of management's
attention and any delays or difficulties encountered in connection with the
transition and integration of these businesses could have a material adverse
effect on our business and results of operations. Further, the benefits that we
anticipate from these acquisitions may not develop.
35
We will have to finance any future acquisitions. Depending upon the
acquisition opportunities available, we may need to raise additional funds or
arrange for additional bank financing. We may seek such additional funds through
public offerings or private placements of debt or equity securities or bank
loans. Issuance of additional equity securities by us could result in
substantial dilution to stockholders. The incurrence of additional indebtedness
by us could have adverse consequences to stockholders as described above. In the
absence of such financing, our ability to make future acquisitions in accordance
with our business strategy, to absorb adverse operating results, to fund capital
expenditures or to respond to changing business and economic conditions may be
adversely affected, all of which may have a material adverse effect on our
business, results of operations and financial condition.
There are risks inherent in international operations that could have a
material adverse effect on our business operations
Our operations are primarily in the United States, with approximately 28% of
our sales during the transition period ended December 31, 2002 coming from our
foreign operations in the United Kingdom and The Netherlands. While the majority
of our operations are based domestically, each of our facilities sells to
airlines all over the world. As a result, 40% or more of our consolidated sales
for the past three fiscal years were to airlines located outside the United
States. We have direct investments in a number of subsidiaries in foreign
countries (primarily in Europe). Fluctuations in the value of foreign currencies
affect the dollar value of our net investment in foreign subsidiaries, with
these fluctuations being included in a separate component of stockholders'
equity. Operating results of foreign subsidiaries are translated into U.S.
dollars at average monthly exchange rates. At December 31, 2002, we reported a
cumulative foreign currency translation amount of $(11.6) in stockholders'
equity as a result of foreign currency adjustments, and we may incur additional
adjustments in future periods. In addition, the U.S. dollar value of
transactions based in foreign currency (collections on foreign sales or payments
for foreign purchases) also fluctuates with exchange rates. If in the future a
substantial majority of our sales were not denominated in the currency of the
country of product origin, we could face increased currency risk. Also, changes
in the value of the U.S. dollar or other currencies could result in fluctuations
in foreign currency translation amounts or the U.S. dollar value of transactions
and, as a result, our net earnings could be adversely affected. Our largest
foreign currency exposure results from activity in Euros and British pounds.
We may engage in hedging transactions in the future to manage or reduce our
foreign exchange risk. However, our attempts to manage our foreign currency
exchange risk may not be successful and, as a result, our results of operations
and financial condition could be adversely affected.
Our foreign operations could also be subject to unexpected changes in
regulatory requirements, tariffs and other market barriers and political and
economic instability in the countries where we operate. Due to our foreign
operations we could be subject to such factors in the future and the impact of
any such events that may occur in the future could subject us to additional
costs or loss of sales, which could adversely affect our operating results.
Our total assets include substantial intangible assets. The write-off of a
significant portion of unamortized intangible assets would negatively affect our
results of operations
Our total assets reflect substantial intangible assets. At December 31,
2002, goodwill and identified intangibles, net, represented approximately 48% of
total assets and 736% of stockholders' equity. Intangible assets consist of
goodwill and other identified intangible assets associated with our
acquisitions, representing the excess of cost over the fair value of tangible
assets we have acquired since 1989. We may not be able to realize the value of
these assets. Goodwill and other intangible assets with indefinite lives are not
amortized, but are reviewed at least annually for impairment. Acquired
intangible assets with definite lives are amortized over their individual useful
lives. In addition to goodwill, our intangible assets with indefinite lives
consist of the M & M trademark. In accordance with SFAS No. 142, the goodwill
and trademark with indefinite lives that were being amortized over periods
ranging from 30 to 40 years follow the non-amortization approach beginning
February 24, 2002. Patents and other intangible assets are amortized using the
straight-line method over periods ranging from three to thirty years (see note 7
to our consolidated financial statements). On at least an annual basis, we
assess whether there has been an impairment in the value of intangible assets.
If the carrying value of the asset exceeds the estimated undiscounted future
cash flows from operating activities of the related business, an impairment is
deemed to have occurred. In this event, the amount is written down accordingly.
Under current accounting rules, this would result in a charge of operating
earnings. Any determination requiring the write-off of a significant portion of
unamortized goodwill and identified intangible assets would negatively affect
our results of operations and total capitalization, which could be material. As
of December 31, 2002, we have determined that no impairment existed.
36
Risks Associated with our Capital Stock
Provisions in our charter documents may discourage potential acquisitions of
our company, even those which the holders of a majority of our common stock may
favor
Our restated certificate of incorporation and by-laws contain provisions
that may have the effect of discouraging a third party from making an
acquisition of us by means of a tender offer, proxy contest or otherwise. Our
restated certificate of incorporation and by-laws:
o Classify the board of directors into three classes, with directors of each
class serving for a staggered three-year period;
o Provide that directors may be removed only for cause and only upon the
approval of the holders of at least two-thirds of the voting power of our
shares entitled to vote generally in the election of such directors;
o Require at least two-thirds of the voting power of our shares entitled to
vote generally in the election of directors to alter, amend or repeal the
provisions relating to the classified board and removal of directors
described above;
o Permit the board of directors to fill vacancies and newly created
directorships on the board;
o Restrict the ability of stockholders to call special meetings; and
o Contain advance notice requirements for stockholder proposals.
Such provisions would make the removal of incumbent directors more difficult
and time-consuming and may have the effect of discouraging a tender offer or
other takeover attempt not previously approved by the board of directors.
Our board of directors has declared a dividend of one preferred share
purchase right for each share of common stock outstanding. A right will also be
attached to each share of common stock subsequently issued. The rights will have
certain anti-takeover effects. If triggered, the rights would cause substantial
dilution to a person or group of persons that acquires more than 15.0% of our
common stock on terms not approved by our board of directors. The rights could
discourage or make more difficult a merger, tender offer or other similar
transaction.
Under our restated certificate of incorporation, our board of directors also
has the authority to issue preferred stock in one or more series and to fix the
powers, preferences and rights of any such series without stockholder approval.
The board of directors could, therefore, issue, without stockholder approval,
preferred stock with voting and other rights that could adversely affect the
voting power of the holders of common stock and could make it more difficult for
a third party to gain control of us. In addition, under certain circumstances,
Section 203 of the Delaware General Corporation Law makes it more difficult for
an "interested stockholder", or generally a 15% stockholder, to effect various
business combinations with a corporation for a three-year period.
You may not receive cash dividends on our shares
We have never paid a cash dividend and do not plan to pay cash dividends on
our common stock in the foreseeable future. We intended to retain our earnings
to finance the development and expansion of our business and to repay
indebtedness. Also, our ability to declare and pay cash dividends on our common
stock is restricted by covenants in our outstanding notes and amended bank
credit facility.
37
If the price of our common stock continues to fluctuate significantly, you
could lose all or a part of your investment
Since the beginning of the transition period ending on December 31, 2002,
the closing price of our common stock has ranged from a low of $2.62 to a high
of $14.05. The price of our common stock is subject to sudden and material
increases and decreases, and decreases could adversely affect investments in our
common stock. The price of our common stock could fluctuate widely in response
to:
o Our quarterly operating results;
o Changes in earnings estimates by securities analysts;
o Changes in our credit ratings;
o Changes in our business;
o Changes in the market's perception of our business;
o Changes in the businesses, earnings estimates or market perceptions of our
competitors or customers;
o Changes in the outlook for the airline industry;
o Changes in general market or economic conditions;
o Changes in the legislative or regulatory environment;
o A prolonged war with Iraq or other outbreak or escalation of national or
international hostilities; and
o Terrorist attacks.
In addition, the stock market has experienced extreme price and volume
fluctuations in recent years that have significantly affected the quoted prices
of the securities of many companies, including companies in our industry. The
changes often appear to occur without regard to specific operating performance.
The price of our common stock could fluctuate based upon factors that have
little or nothing to do with our company and these fluctuations could materially
reduce our stock price.
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, including statements regarding the future benefits of our
consolidation program, implementation and expected benefits of lean
manufacturing and continuous improvement programs, our dealings with customers
and partners, the integration of acquired businesses, productivity improvements
from recent information technology investments, ongoing capital expenditures,
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 of the September 11,
2001 terrorist attacks, the recovery of the airline industry and the impact on
our business of a prolonged war with Iraq. These forward-looking statements
include risks and uncertainties, and our actual experience may differ materially
from that anticipated in such statements. Factors that might cause such a
difference include those discussed in our filings with the Securities and
Exchange Commission, under the heading "Risk Factors" in this Form 10-K, as well
as future events that may have the effect of reducing our available operating
income and cash balance, 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, our success
in winning new or expected refurbishment contracts from customers, capital
expenditures, cash expenditures related to possible future acquisitions,
facility closures, product transition costs, labor disputes involving us, our
significant customers or airframe manufacturers, the possibility of a write-down
of intangible assets, delays or inefficiencies in the introduction of new
products or fluctuations in currency exchange rates.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are cautioned not to unduly rely on such forward-looking statements when
evaluating the information presented herein. These statements should be
considered only after carefully reading this entire Form 10-K and the documents
incorporated herein by reference.
38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of our
variable-rate debt.
Foreign currency - We have direct operations in Europe that receive revenues
from customers 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, we and our foreign subsidiaries may enter into foreign
currency exchange contracts to manage risk on transactions conducted in
foreign currencies. At December 31, 2002, we had no outstanding forward
currency exchange contracts. We did not enter into any other derivative
financial instruments.
Interest Rates - At December 31, 2002, we had adjustable rate debt of $144.0
and fixed rate debt of $699.7. The weighted average interest rate for the
adjustable and fixed rate debt was approximately 4.6% and 8.7%,
respectively, at December 31, 2002. If interest rates were to increase by
10% above current rates, the estimate impact on our financial statements
would be to reduce pretax income by approximately $0.7. We do not engage in
transactions intended to hedge our exposure to changes in interest rates.
As of December 31, 2002, 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 $0.2.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this section is set forth beginning from page
F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our directors and
executive officers as of January 27, 2002. Officers of the Company are elected
annually by the Board of Directors.
Title Age Position
- ----- --- --------
Amin J. Khoury........... 63 Chairman of the Board
Robert J. Khoury......... 60 President, Chief Executive Officer and Director
Jim C. Cowart............ 51 Director *
Richard G. Hamermesh..... 54 Director*
Brian H. Rowe............ 71 Director**
Jonathan M. Schofield.... 62 Director*,**
Thomas P. McCaffrey...... 48 Corporate Senior Vice President of
Administration and Chief Financial Officer
Michael B. Baughan....... 43 Senior Vice President and General Manager,
Commercial Aircraft Products Group
Robert A. Marchetti...... 60 Group Vice President and General Manager,
Fastener Distribution Group
Mark D. Krosney.......... 56 Group Vice President and General Manager,
Business Jet Group
Edmund J. Moriarty....... 59 Corporate Vice President-Law,
General Counsel and Secretary
Jeffrey P. Holtzman...... 47 Vice President-Finance and Treasurer
Stephen R. Swisher....... 44 Vice President-Finance and Controller
- --------
* Member, Audit Committee
** Member, Stock Option and Compensation Committee
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40
Director Classification
Our Restated Certificate of Incorporation provides that the Board of
Directors is to be divided into three classes, each nearly as equal in number as
possible, so that each director (in certain circumstances after a transitional
period) will serve for three years, with one class of directors being elected
each year. The Board is currently comprised of two Class I Directors (Brian H.
Rowe and Jim C. Cowart), two Class II Directors (Robert J. Khoury and Jonathan
M. Schofield) and two Class III Directors (Amin J. Khoury and Richard G.
Hamermesh). The terms of the Class I, Class II and Class III Directors expire at
the end of each respective three-year term and upon the election and
qualification of successor directors at annual meetings of stockholders held at
the end of each fiscal year. Our executive officers are elected annually by the
Board of Directors following the annual meeting of stockholders and serve at the
discretion of the Board of Directors.
Current Directors
Amin J. Khoury has been our Chairman of the Board since July 1987 when he
founded the Company and was Chief Executive Officer until April 1, 1996. Mr.
Khoury is currently the Chairman of the Board of Directors and Chief Executive
Officer of Applied Extrusion Technologies, Inc., a manufacturer of oriented
polypropylene films used in consumer products labeling and packaging
applications, a member of the Board of Directors of Brooks Automation, Inc., a
leading supplier of integrated automation solutions for the global
semiconductor, data storage and flat panel display manufacturing industries, and
a member of the Board of Directors of Synthes-Stratec, the world's leading
orthopedic trauma medical device company. Mr. Khoury is the brother of Robert J.
Khoury.
Robert J. Khoury has been a Director since July 1987, when he co-founded the
Company. He currently serves as President and Chief Executive Officer. From
April 1996 through August 2000, he served as Vice Chairman. Mr. Khoury is a
board member of Mar-Test, Inc., a leading test lab for low cycle fatigue
testing. Mr. Khoury is the brother of Amin J. Khoury.
Jim C. Cowart has been a Director since November 1989. Mr. Cowart is
currently a Principal of Cowart & Co. LLC and Auriga Partners, Inc., private
capital firms that provide strategic planning, competitive analysis, financial
relations and other services. From August 1999 to May 2001, he was Chairman of
QualPro Corporation, an aerospace components manufacturing company, and from
February 1998 to November 2000, Mr. Cowart was Chairman and CEO of E-Com
Architects, Inc., a computer software company. From January 1993 to November
1997, he was the Chairman and CEO of Aurora Electronics Inc. Previously, Mr.
Cowart was a founding general partner of Capital Resource Partners, a private
investment capital manager, and he held various positions in investment banking
and venture capital with Lehman Brothers, Shearson Venture Capital and Kidder,
Peabody & Co.
Richard G. Hamermesh has been a Director since July 1987. Dr. Hamermesh is
currently a Professor of Management Practice at the Harvard Business School.
From 1987 to 2001, he was a co-founder and a Managing Partner of The Center for
Executive Development, an executive education and development-consulting firm.
Prior to this, from 1976 to 1987, Dr. Hamermesh was a member of the faculty of
the Harvard Business School. He is also an active investor and entrepreneur,
having participated as a principal, director and investor in the founding and
early stages of more than 15 organizations. Dr. Hamermesh is also a director of
Applied Extrusion Technologies, Inc., a manufacturer of oriented polypropylene
films used in consumer products labeling and packaging applications.
Brian H. Rowe has been a Director since July 1995. He is currently Chairman
Emeritus of GE Aircraft Engines, a principal business unit of the General
Electric Company, where he also served as Chairman from September 1993 through
January 1995 and as President from 1979 through 1993. Since February 2001, Mr.
Rowe has acted as Chairman of Atlas Air, an air cargo carrier, where he has
served as a director since March 1995. Mr. Rowe is also a director of the
following companies since the date listed: December 1995--Textron Inc., a
manufacturer of aircraft, automobile components, an industrial segment, systems
and components for commercial aerospace and defense industries, and financial
services; and December 1998--Acterna Corporation, a test equipment and
communication systems manufacturing company.
41
Jonathan M. Schofield has been a Director since April 2001. Mr. Schofield
recently retired from Airbus Industrie of North America, Inc., a subsidiary of
Airbus Industrie, a manufacturer of large civil aircraft. From December 1992
through February 2000, Mr. Schofield served as Chairman of the Board and CEO,
and served as Chairman from February 2000 until his retirement in March 2001.
From 1989 until he joined Airbus, Mr. Schofield was President of United
Technologies International Corporation. Mr. Schofield presently sits on the
Boards of Aviall, Inc. and SS&C Technologies, Inc., and is a trustee of LIFT
Trust.
Executive Officers
Thomas P. McCaffrey has been Corporate Senior Vice President of
Administration and Chief Financial Officer since May 1993. From August 1989
through May 1993, Mr. McCaffrey was an Audit Director with Deloitte & Touche
LLP, and from 1976 through 1989 served in several capacities, including Audit
Partner, with Coleman & Grant.
Michael B. Baughan has been Senior Vice President and General Manager of
Commercial Aircraft Products since July 2002. From May 1999 to July 2002, Mr.
Baughan was Group Vice President and General Manager of Seating Products. From
September 1994 to May 1999, Mr. Baughan was Vice President, Sales and Marketing
for Seating Products. Prior to 1994, Mr. Baughan held various positions
including President of AET Systems, Manager of Strategic Initiatives at The
Boston Company (American Express) and Sales Representative at Dow Chemical
Company.
Robert A. Marchetti has been Group Vice President and General Manager of
Fastener Distribution Group since April 2002. From February 2001 to April 2002,
Mr. Marchetti was Group Vice President of Machined Products Group. From 1997 to
January 2001 Mr. Marchetti was with Fairchild Corporation's Fasteners Division
with his last position being Senior Vice President and Chief Operating Officer.
From 1990 to 1997, Mr. Marchetti served as a corporate officer of UNC Inc. where
he held several senior positions, Corporate VP of Marketing, President of
Tri-Remanufacturing and Chief Operating Officer of the Accessory Overhaul
Division. From 1989 to 1990, he served as President of AWA Incorporated. From
1986 through 1989, Mr. Marchetti was Vice President of Marketing at General
Electric Aircraft Engines and he was General Manager for a Component Repair
Division. Prior to that he held several sales and general management positions
from 1965 through 1986 with Copperweld Corporation and Carlisle Corporation.
Mark D. Krosney has been Group Vice President and General Manager of
Business Jet Group since January 2001. From February 1996 through December 2000,
Mr. Krosney was Vice President of Engineering for Seating Products. From 1994 to
1996, Mr. Krosney served as General Manager for A.W. Chesterton. From 1992 to
1994, Mr. Krosney was with Johnson Controls, Automotive System Group, where his
last position was General Manager of the Seat Mechanisms Group. Prior to that he
was with United Technologies Corporation for 22 years, where he held positions
as Divisional Director of Technology for Control Systems, Director of Product
Development and Marketing of Diesel Systems and member of the Senior Committee
for UTC Corporation.
Edmund J. Moriarty has been Corporate Vice President-Law, General Counsel
and Secretary since November 16, 1995. From 1991 to 1995, Mr. Moriarty served as
Vice President and General Counsel to Rollins, Inc., a national service company.
From 1982 through 1991, Mr. Moriarty served as Vice President and General
Counsel to Old Ben Coal Company, a wholly owned coal subsidiary of The Standard
Oil Company.
Jeffrey P. Holtzman has been Vice President-Finance and Treasurer since
August 1999. Mr. Holtzman has been a Vice President since November 1996 and
Treasurer since September 1993. From June 1986 to July 1993, Mr. Holtzman served
in several capacities at FPL Group, Inc., including Assistant Treasurer and
Manager of Financial Planning. Mr. Holtzman previously worked for Mellon Bank,
Gulf Oil Corporation and Ernst & Young L.L.P.
Stephen R. Swisher has been Vice President-Finance and Controller since
August 1999. Mr. Swisher has been Controller since 1996 and served as Director
of Finance from 1994 to 1996. Prior to 1994, Mr. Swisher held various positions,
including Accounting Manager at Burger King Corporation and Audit Manager with
Deloitte & Touche LLP.
42
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons who own more than ten percent
of a registered class of our equity securities, to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities. Officers,
directors and greater-than-ten-percent shareholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and, with respect to our officers and directors, written
representations that no other reports were required, during the transition
period ended December 31, 2002, all Section 16(a) filing requirements applicable
to our officers, directors and greater-than-ten-percent beneficial owners were
complied with.
In making the above statements, we have relied on the written
representations of our directors and officers and copies of the reports that
have been filed with the SEC.
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43
ITEM 11. EXECUTIVE COMPENSATION
Information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated by reference herein. The Compensation Committee
Report and the Performance Graph included in the Proxy Statement are not
incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information set forth under the captions "Security Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information" in
the Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated by reference herein.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures - Our principal executive
officer and our principal financial officer, after evaluating, together with
management, the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) within 90 days of the
date of filing this report, have concluded that, as of such date, our disclosure
controls and procedures were adequate and effective to ensure that material
information relating to our company and our consolidated subsidiaries would be
made known to them by others within those entities.
Changes in internal controls - There were no significant changes in our
internal controls or in other factors that could significantly affect our
disclosure controls and procedures subsequent to the date of their evaluation,
nor were there any significant deficiencies or material weaknesses in our
internal controls. As a result, no corrective actions were required or
undertaken.
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44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Consolidated Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets, December 31, 2002 and February 23, 2002.
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Ten-Month Transition Period ended December 31, 2002 and for the
Fiscal Years Ended February 23, 2002 and February 24, 2001
Consolidated Statements of Stockholders' Equity for the Ten-Month
Transition Period Ended December 31, 2002 and for the Fiscal Years
Ended February 23, 2002 and February 24, 2001
Consolidated Statements of Cash Flows for the Ten-Month Transition
Period Ended December 31, 2002 and for the Fiscal Years Ended February
23, 2002 and February 24, 2001
Notes to Consolidated Financial Statements for the Ten-Month Transition
Period Ended December 31, 2002 and for the Fiscal Years Ended February
23, 2002 and February 24, 2001
2. Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other consolidated financial statement schedules are omitted
because such schedules are not required or the information required has
been presented in the aforementioned consolidated financial statements.
3. Exhibits - The exhibits listed in the following "Index to Exhibits" are
filed with this Form 10-K or incorporated by reference as set forth
below.
(b) The following reports on Form 8-K were filed during the period from
November 24, 2002 to December 31, 2002:
Form 8-K, dated and filed December 17, 2002, includes a press release
containing earnings information, including certain unaudited financial
information.
(c) The exhibits listed in the "Index to Exhibits" below are filed with this
Form 10-K or incorporated by reference as set forth below.
(d) Additional Financial Statement Schedules - None.
45
INDEX TO EXHIBITS
Exhibit
Number Description
Exhibit 3 Articles of Incorporation and By-Laws
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Certificate of Amendment of the Restated Certificate of Incorporation (2)
3.3 Certificate of Amendment of the Restated Certificate of Incorporation (5)
3.4 Amended and Restated By-Laws *
Exhibit 4 Instruments Defining the Rights of Security Holders,
including debentures
4.1 Specimen Common Stock Certificate (1)
4.2 Form of Note for the Registrant's 9 1/2% Senior Subordinated Notes (7)
4.3 Indenture dated November 2, 1998 between The Bank of New York, as
trustee, and the Registrant relating to the Registrant's 9 1/2% Senior
Subordinated Notes (7)
4.4 Form of Note for the Registrant's 8% Series B Senior Subordinated Notes
(3)
4.5 Indenture dated February 13, 1998 for the Registrant's issue of 8% Senior
Subordinated Notes (3)
4.6 Indenture dated April 17, 2001 between The Bank of New York, as trustee,
and the Registrant relating to the Registrant's 8 7/8% Senior
Subordinated Notes and Series B 8 7/8% Senior Subordinated Notes (12)
4.7 Form of Note for the Registrant's 8 7/8% Senior Subordinated Notes and
Series B Subordinated Notes (12)
4.8 Rights Agreement between the Registrant and BankBoston, N.A., as rights
agent, dated as of November 12, 1998 (6)
Exhibit 10(i) Material Contracts
10.1 Credit Agreement dated as of August 21, 2001 between the Registrant,
Lenders, JP Morgan Securities Inc. and The Chase Manhattan Bank (14)
10.2 Amendment No. 1 to the Credit Agreement dated as of December 14, 2001
(19)
10.3 Amendment No. 2 to the Credit Agreement dated as of January 23, 2003 (20)
10.4 Amendment No. 3 to the Credit Agreement dated as of March 4, 2003*
10.5 Agreement dated as of January 25, 1999 between the Registrant and Sextant
Avionics, Inc. related to the sale of a 51% interest in the Registrant's
in-flight entertainment business (17)
10.6 Agreement dated as of September 1, 1999 with Thomson-CSF Sextant, Inc.
for the sale of a 49% interest in the Registrant's in-flight
entertainment business (10)
10.7 Acquisition Agreement dated as of August 10, 2001 between the Registrant
and the Shareholders of M&M Aerospace, Inc. (13)
46
Exhibit
Number Description
Exhibit 10(iii) Executive Compensation Plans and Arrangements
10.8 Amended and Restated Employment Agreement as of September 14, 2001
Between the Registrant and Amin J. Khoury. (14)
10.9 Amendment No. 1 to Amended and Restated Employment Agreement dated May
15, 2002 between the Registrant and Amin J. Khoury. (19)
10.10 Amended and Restated Employment Agreement as of September 14, 2001
Between the Registrant and Robert J. Khoury. (14)
10.11 Amendment No. 1 to Amended and Restated Employment Agreement dated May
15, 2002 between the Registrant and Robert J. Khoury. (19)
10.12 Amended and Restated Employment Agreement as of September 14, 2001
Between the Registrant and Thomas P. McCaffrey. (14)
10.13 Amendment No. 1 to Amended and Restated Employment Agreement dated
September 14, 2001 between the Registrant and Thomas P. McCaffrey. (18)
10.14 Amendment No. 2 to Amended and Restated Employment Agreement dated May
15, 2002 between the Registrant and Thomas P. McCaffrey. (19)
10.15 Employment Agreement dated as of March 6, 1998 between the Registrant and
Scott A. Smith. (19)
10.16 Employment Agreement dated as of December 7, 1997 between the Registrant
and Roman G. Ptakowski. (19)
10.17 Employment Agreement dated as of May 28, 1999 between the Registrant and
Michael B. Baughan. (19)
10.18 Employment Agreement dated as of January 15, 2001 between the Registrant
and Mark D. Krosney. (19)
10.19 Employment Agreement dated as of February 26, 2001 between the Registrant
and Robert A. Marchetti. (19)
10.20 Amended and Restated 1989 Stock Option Plan. (15)
10.21 Amendment No. 1 to Amended and Restated 1989 Stock Option Plan. (9)
10.22 1991 Directors' Stock Option Plan. (4)
10.23 United Kingdom 1992 Employee Share Option Scheme. (2)
10.24 1996 Stock Option Plan. (15)
10.25 Amendment No. 1 to the 1996 Stock Option Plan. (9)
10.26 Amendment No. 2 to the 1996 Stock Option Plan. (11)
10.27 2001 Stock Option Plan. (16)
10.28 2001 Directors' Stock Option Plan. (16)
10.29 1994 Employee Stock Purchase Plan (Amended and Restated as of January 19,
2000). (11)
10.30 Supplemental Executive Deferred Compensation Plan III. (8)
10.31 Amendment No. 3 to Amended and Restated Employment Agreement dated
March 24, 2003 between the Registrant and Thomas P. McCaffrey*
Exhibit 12 Statements re computation of ratios
12.1 Statement of computation of ratio of earnings to fixed charges*
Exhibit 14 Code of Ethics
14.1 Code of Business Conduct*
Exhibit 21 Subsidiaries of the Registrant
21.1 Subsidiaries *
Exhibit 23 Consents of Experts and Counsel
23.1 Consent of Independent Accountants - Deloitte & Touche LLP*
Exhibit 99 Additional Exhibits
99.1 Section 906 Certifications*
- ------------------
* Filed herewith.
47
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (No. 33-33689), filed with the Commission on March 7,
1990.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (No. 333-54146), filed with the Commission on November 3,
1992.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 333-47649), filed with the Commission on March 10, 1998.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-48010), filed with the Commission on May 26, 1992.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-60209), filed with the Commission on July 30, 1998.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
dated November 12, 1998, filed with the Commission on November 18, 1998.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 333-67703), filed with the Commission on January 13, 1999.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended May 29, 1999, filed with the Commission on July 9,
1999.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-89145), filed with the Commission on October 15, 1999.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended November 27, 1999, filed with the Commission on
January 7, 2000.
(11) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-30578), filed with the Commission on February 16, 2000.
(12) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 333-62674) as filed with the Commission on June 8, 2001.
(13) Incorporated by reference to the Company's Current Report on Form 8-K
dated August 10, 2001 and filed with the Commission on August 21, 2001.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 25, 2001, filed with the Commission on
October 9, 2001.
(15) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-14037), filed with the Commission on October 15, 1996.
(16) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-71442), filed with the Commission on October 11, 2001.
(17) Incorporated by reference to the Company's Current Report on Form 8-K
dated February 25, 1999, filed with the Commission on March 12, 1999.
(18) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended November 24, 2001, filed with the Commission on
January 8, 2002.
(19) Incorporated by reference to the Company's Annual Report on Form 10-K/A
for the fiscal year ended February 23, 2002, filed with the Commission on
May 29, 2002.
(20) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 23, 2003, filed with the Commission on January 24, 2003.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BE AEROSPACE, INC.
By: /s/ Robert J. Khoury
--------------------
Robert J. Khoury
President and Chief Executive Officer
Date: March 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Amin J. Khoury Chairman March 26, 2003
- ------------------
Amin J. Khoury
/s/ Robert J. Khoury President and Chief Executive Officer March 26, 2003
- --------------------
Robert J. Khoury
Corporate Senior Vice President of Administration
and Chief Financial Officer
/s/ Thomas P. McCaffrey (principal financial and accounting officer) March 26, 2003
- -----------------------
Thomas P. McCaffrey
/s/ Jim C. Cowart Director March 26, 2003
- -----------------
Jim C. Cowart
/s/ Richard G. Hamermesh Director March 26, 2003
- ------------------------
Richard G. Hamermesh
/s/ Brian H. Rowe Director March 26, 2003
- -----------------
Brian H. Rowe
/s/ Jonathan M. Schofield Director March 26, 2003
- -------------------------
Jonathan M. Schofield
49
CERTIFICATION
I, Robert J. Khoury, certify that:
1. I have reviewed this annual report on Form 10-K of BE Aerospace, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrants as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 26, 2003 By: /s/ Robert J. Khoury
--------------------
Robert J. Khoury
President and
Chief Executive Officer
50
CERTIFICATION
I, Thomas P. McCaffrey, certify that:
1. I have reviewed this annual report on Form 10-K of BE Aerospace, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 26, 2003 By: /s/ Thomas P. McCaffrey
-----------------------
Thomas P. McCaffrey
Corporate Senior Vice President of
Administration and Chief Financial Officer
51
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2002 and February 23, 2002 F-3
Consolidated Statements of Operations and Comprehensive Income F-4
(Loss) for the Ten-Month Transition Period Ended December 31, 2002 and
for the Fiscal Years Ended February 23, 2002 and February 24, 2001
Consolidated Statements of Stockholders' Equity for the Ten-Month F-5
Transition Period Ended December 31, 2002 and for the Fiscal Years
Ended February 23, 2002 and February 24, 2001
Consolidated Statements of Cash Flows for the Ten-Month Transition F-6
Period Ended December 31, 2002 and for the Fiscal Years Ended February
23, 2002 and February 24, 2001
Notes to Consolidated Financial Statements for the Ten-Month F-7
Transition Period Ended December 31, 2002 and for the Fiscal Years
Ended February 23, 2002 and February 24, 2001
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the Ten-Month F-25
Transition Period Ended December 31, 2002 and for the Fiscal Years
Ended February 23, 2002 and February 24, 2001
[Remainder of page intentionally left blank]
F-1
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
BE Aerospace, Inc.
Wellington, Florida
We have audited the accompanying consolidated balance sheets of BE
Aerospace, Inc. and subsidiaries (the "Company") as of December 31, 2002 and
February 23, 2002, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity, and cash flows for the
10-month period from February 24, 2002 to December 31, 2002 and the fiscal years
ended February 23, 2002 and February 24, 2001. Our audits also included the
financial statement schedule listed in item 15(a). These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of BE Aerospace, Inc. and
subsidiaries as of December 31, 2002 and February 23, 2002, and the results of
their operations and their cash flows for the 10-month period from February 24,
2002 to December 31, 2002 and the fiscal years ended February 23, 2002 and
February 24, 2001, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and intangible assets.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 4, 2003
F-2
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 2002 AND FEBRUARY 23, 2002
- --------------------------------------------------------------------
(In millions, except share data)
December 31, February 23,
2002 2002
----------------- ----------------
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 156.9 $ 159.5
Accounts receivable - trade, less allowance for doubtful
accounts of $3.9 (December 31, 2002) and $4.9 (February 23, 2002) 73.8 93.3
Inventories, net 163.2 157.0
Other current assets 22.8 46.6
--------- ----------
Total current assets 416.7 456.4
Property and equipment, net 115.5 142.7
Goodwill, net 344.7 333.1
Identified intangibles, net 165.2 172.9
Other assets, net 25.0 23.2
--------- ----------
$ 1,067.1 $ 1,128.3
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 136.9 $ 150.3
Current portion of long-term debt 16.9 1.3
--------- ----------
Total current liabilities 153.8 151.6
--------- ----------
Long-term debt 836.0 853.5
Other liabilities 8.0 2.1
Commitments, contingencies and off-balance sheet arrangements (Note 10)
Stockholders' Equity:
Preferred stock, $0.01 par value; 1.0 million shares
authorized; no shares outstanding -- --
Common stock, $0.01 par value; 100.0 million shares
authorized; 35.2 million (December 31, 2002) and
34.4 million (February 23, 2002)
shares issued and outstanding 0.3 0.3
Additional paid-in capital 410.1 405.3
Accumulated deficit (329.5) (258.7)
Accumulated other comprehensive loss (11.6) (25.8)
--------- ----------
Total stockholders' equity 69.3 121.1
--------- ----------
$ 1,067.1 $ 1,128.3
========= ==========
See notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE
TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002 AND FOR THE FISCAL YEARS
ENDED FEBRUARY 23, 2002 AND FEBRUARY 24, 2001
- -----------------------------------------------------------------------------
(In millions, except per share data)
Transition Fiscal Year Ended
Period Ended ---------------------------------------
December 31, February 23, February 24,
2002 2002 2001
------------------ -------------------- ------------------
Net sales $ 503.6 $ 680.5 $ 666.4
Cost of sales (Note 4) 352.3 530.1 416.6
------- ------- -------
Gross profit 151.3 150.4 249.8
Operating expenses:
Selling, general and administrative 98.5 139.4 124.2
Research, development and engineering 34.1 43.5 48.9
Legal settlement 29.5 -- --
------- ------- -------
Total operating expenses 162.1 182.9 173.1
------- ------- -------
Operating (loss) earnings (10.8) (32.5) 76.7
Interest expense, net 57.3 60.5 54.2
------- ------- -------
(Loss) earnings before income taxes and
extraordinary item (68.1) (93.0) 22.5
Income taxes 2.7 1.8 2.2
------- ------- -------
(Loss) earnings before extraordinary item (70.8) (94.8) 20.3
Extraordinary item -- 9.3 --
------- ------- -------
Net (loss) earnings (70.8) (104.1) 20.3
Other comprehensive income (loss):
Foreign exchange translation adjustment 14.2 (3.9) (11.3)
------- ------- -------
Comprehensive (loss) income $ (56.6) $(108.0) $ 9.0
======= ======= =======
Basic net (loss) earnings per share before
extraordinary item $ (2.03) $ (2.90) $ 0.80
Extraordinary item -- (0.28) --
------- ------- -------
Basic net (loss) earnings per share $ (2.03) $ (3.18) $ 0.80
======= ======= =======
Weighted average common shares 34.9 32.7 25.4
======== ======= =======
Diluted net (loss) earnings per share before
extraordinary item $ (2.03) $ (2.90) $ 0.78
Extraordinary item -- (0.28) --
-------- ------- -------
Diluted net (loss) earnings per share $ (2.03) $ (3.18) $ 0.78
======= ======= =======
Weighted average common shares 34.9 32.7 25.9
======= ======= =======
See notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002
AND FOR THE FISCAL YEARS ENDED FEBRUARY 23, 2002 AND FEBRUARY 24, 2001
- ----------------------------------------------------------------------
(In millions)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income (Loss) Equity
------ ------ ---------- ----------- ------------- -------------
Balance, February 26, 2000 24.9 $0.2 $249.7 $(174.9) $(10.6) $ 64.4
Sale of stock under
employee stock purchase plan 0.3 -- 2.1 -- -- 2.1
Exercise of stock options 0.6 -- 6.4 -- -- 6.4
Employee benefit plan
matching contribution 0.2 -- 1.9 -- -- 1.9
Issuance of stock in connection
with acquisitions 2.5 0.1 51.4 -- -- 51.5
Net earnings -- -- -- 20.3 -- 20.3
Foreign currency translation
adjustment -- -- -- -- (11.3) (11.3)
----- ------ -------- -------- -------- --------
Balance, February 24, 2001 28.5 0.3 311.5 (154.6) (21.9) 135.3
Sale of stock under
employee stock purchase plan 0.1 -- 1.9 -- -- 1.9
Exercise of stock options 0.4 -- 4.2 -- -- 4.2
Employee benefit plan
matching contribution 0.2 -- 2.6 -- -- 2.6
Issuance of stock in connection
with acquisitions 2.4 -- 42.9 -- -- 42.9
Sale of common stock
under public offering 2.8 -- 42.2 -- -- 42.2
Net loss -- -- -- (104.1) -- (104.1)
Foreign currency translation
adjustment -- -- -- -- (3.9) (3.9)
----- ------ -------- --------- ------- --------
Balance, February 23, 2002 34.4 0.3 405.3 (258.7) (25.8) 121.1
Sale of stock under
employee stock purchase plan 0.3 -- 1.8 -- -- 1.8
Exercise of stock options 0.2 -- 1.3 -- -- 1.3
Employee benefit plan
matching contribution 0.3 -- 1.7 -- -- 1.7
Net loss -- -- -- (70.8) -- (70.8)
Foreign currency translation
adjustment -- -- -- -- 14.2 14.2
----- ------ -------- --------- ------- --------
Balance, December 31, 2002 35.2 $0.3 $410.1 $(329.5) $(11.6) $ 69.3
===== ====== ======== ========= ======= ========
See notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002 AND FOR THE
FISCAL YEARS ENDED FEBRUARY 23, 2002 AND FEBRUARY 24, 2001
- -----------------------------------------------------------------------
(In millions)
Ten-Month
Transition Fiscal Year Ended
Period Ended --------------------------------------
December 31, February 23, February 24,
2002 2002 2001
-------------------- ------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $ (70.8) $ (104.1) $ 20.3
Adjustments to reconcile net (loss) earnings to
net cash flows provided by operating activities:
Extraordinary item -- 9.3 --
Depreciation and amortization 24.7 46.8 42.8
Provision for doubtful accounts 0.8 1.9 0.6
Loss on disposal of property and equipment 0.5 -- --
Impairment of property and equipment,
inventories and other assets 7.0 62.9 --
Impairment of intangible assets -- 20.4 --
Non-cash employee benefit plan contributions 1.8 2.6 1.9
Legal settlement 29.5 -- --
Changes in operating assets and liabilities, net
of effects from acquisitions:
Accounts receivable 22.2 19.7 6.0
Inventories (8.5) 3.9 (6.4)
Other current assets (4.8) 31.3 1.8
Payables, accruals and other liabilities (15.9) (36.8) (9.1)
------- --------- --------
Net cash flows (used in) provided by operating activities (13.5) 57.9 57.9
------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (6.5) (207.9) --
Capital expenditures (17.4) (13.9) (17.2)
Proceeds from real estate sales 33.4 -- --
Change in intangibles and other assets (2.6) (9.2) (0.9)
------- --------- --------
Net cash flows provided by (used in) investing activities 6.9 (231.0) (18.1)
------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Bank Credit Facility -- 155.0 --
Repayments of Bank Credit Facility (1.0) (66.7) (24.5)
Proceeds from issuance of stock, net of expenses 3.0 48.3 8.5
Principal payments on long-term debt (3.3) (112.1) --
Proceeds from long-term debt 2.0 248.4 --
------- --------- --------
Net cash flows provided by (used in) financing activities 0.7 272.9 (16.0)
------- --------- --------
Effect of exchange rate changes on cash flows 3.3 (0.6) (0.9)
------- --------- --------
Net (decrease) increase in cash and cash equivalents (2.6) 99.2 22.9
Cash and cash equivalents, beginning of period 159.5 60.3 37.4
------- --------- --------
Cash and cash equivalents, end of period $ 156.9 $ 159.5 $ 60.3
======= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest, net $ 68.1 $ 56.7 $ 56.2
Income taxes, net 2.4 1.6 2.9
Interest capitalized in computer equipment and -- -- 0.3
software
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Stock issued in connection with acquisitions -- 42.9 51.5
Liabilities assumed and accrued acquisition
costs incurred in connection with the
acquisitions -- 11.2 14.5
Reclassification of Sextant Note from long-term
other asset to other current asset -- -- 15.7
See notes to consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002 AND FOR THE
FISCAL YEARS ENDED FEBRUARY 23, 2002 AND FEBRUARY 24, 2001
- -----------------------------------------------------------------------
(In millions, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation - BE Aerospace, Inc. and its
wholly-owned subsidiaries (the "Company" or "B/E") designs, manufactures, sells
and services a broad line of commercial aircraft and business jet cabin interior
products consisting of a broad range of seating products, interior systems,
including structures as well as all food and beverage storage and preparation
equipment and distributes aerospace fasteners. The Company's principal customers
are the operators of commercial and business jet aircraft and aircraft
manufacturers. As a result, the Company's business is directly dependent upon
the conditions in the commercial airline, business jet and aircraft
manufacturing industries. The accompanying financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America.
In October 2002, the Company changed its year end from the last Saturday in
February to December 31, effective with the transition period beginning on
February 24, 2002 and ending on December 31, 2002. These financial statements
are being filed by the Company as part of a Transitional Report on Form 10-K
covering the transition period. References to the "transition period" in these
consolidated financial statements are to the transition period beginning
February 24, 2002 and ending on December 31, 2002. Prospectively, the Company's
fiscal quarters will conform to calendar periods ending March 31, June 30 and
September 30.
Consolidation - The accompanying consolidated financial statements include
the accounts of BE Aerospace, Inc. and its wholly owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
Financial Statement Preparation - The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Certain
reclassifications have been made to the prior years' financial statements to
conform to the December 31, 2002 presentation.
Revenue Recognition - Sales of parts, assembled products and equipment 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 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.
Income Taxes - The Company provides deferred income taxes for temporary
differences between amounts of assets and liabilities recognized for financial
reporting purposes and such amounts recognized for income tax purposes. Deferred
income taxes are computed using enacted tax rates that are expected to be in
effect when the temporary differences reverse. A valuation allowance related to
a deferred tax asset is recorded when it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Accounts Receivable - The Company performs ongoing credit evaluations of
our customers and adjusts 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.
F-7
Inventories - The Company values inventory at the lower of cost or market.
The Company regularly reviews inventory quantities on hand and records a
provision for excess and obsolete inventory is based primarily on an estimated
forecast of product demand and production requirements. As demonstrated during
the transition period ended December 31, 2002 and during the fiscal year ended
February 23, 2002, demand for the Company's products can fluctuate
significantly. Estimates of future product demand may prove to be inaccurate, in
which case the Company may understate or overstate the provision required for
excess and obsolete inventory. In the future, if inventory is determined to be
overvalued, the Company would be required to recognize such costs in cost of
goods sold at the time of such determination. Likewise, if inventory is
determined to be undervalued, the Company may have over-reported costs of goods
sold in previous periods and would be required to recognize such additional
operating income at the time of sale.
Debt Issuance Costs - Costs incurred to issue debt are deferred and
amortized as interest expense over the term of the related debt using the
straight-line method, which approximates the effective interest method.
Change in Accounting for Goodwill and Identified Intangible Assets -
Effective February 24, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
Under SFAS No. 142, acquired intangible assets must be separately identified.
Goodwill and other intangible assets with indefinite lives are not amortized,
but are reviewed at least annually for impairment. Acquired intangible assets
with definite lives are amortized over their individual useful lives. In
addition to goodwill, intangible assets with indefinite lives consist of the M &
M trademark. In accordance with SFAS No. 142, the goodwill and the trademark
with indefinite lives that were being amortized over periods ranging from 30 to
40 years follow the non-amortization approach beginning January 1, 2002. Patents
and other intangible assets are amortized using the straight-line method over
periods ranging from three to thirty years (see note 7). Upon adoption of SFAS
No. 142 and on at least an annual basis, management assesses whether there has
been any impairment in the value of goodwill by comparing the fair value to the
net carrying value of reporting units. If the carrying value exceeds its
estimated fair value, an impairment loss would be recognized if the implied fair
value of goodwill was less than its carrying value. In this event, the asset is
written down accordingly. In accordance with SFAS No. 142, the Company has
completed step one of the impairment tests and fair value analysis for goodwill
and other intangible assets, respectively, and there were no impairments or
impairment indicators present and no loss was recorded during the ten-month
transition period ended December 31, 2002. During the fiscal year ended February
23, 2002, management determined that certain intangible assets having an
unamortized cost of $20.4 had been permanently impaired as a result of the
decline in industry conditions and facility consolidation.
Long-Lived Assets - The Company assesses potential impairments to its
long-lived assets when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recovered. An
impairment loss is recognized when the undiscounted cash flows expected to be
generated by an asset (or group of assets) is less than its carrying amount. Any
required impairment loss is measured as the amount by which the asset's carrying
value exceeds its fair value, and is recorded as a reduction in the carrying
value of the related asset and a charge to operating results. During the year
ended February 23, 2002, management determined that certain property, plant and
equipment had been permanently impaired as a result of the decline in industry
conditions and facility consolidation. As a result, the Company recorded a
charge of $24.1 in the third quarter of the fiscal year ended February 23, 2002.
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:
Transition Fiscal Year Ended
Period Ended ------------------------------------
December 31, February 23, February 24,
2002 2002 2001
-------------------- ------------------ -----------------
Balance at beginning of period $ 11.3 $ 9.9 $ 22.9
Charges to costs and expenses 2.5 8.4 9.7
Costs incurred (4.9) (7.0) (22.7)
------ ------ ------
Balance at end of period $ 8.9 $ 11.3 $ 9.9
====== ====== ======
F-8
Accounting for Stock-Based Compensation - The Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related Interpretations in accounting for its stock option and purchase plans.
Accordingly, no compensation cost has been recognized for its stock option plans
and stock purchase plan. Had compensation cost for the Company's stock option
plans and stock purchase plan been determined consistent with SFAS No. 123, the
Company's net (loss) earnings and net (loss) earnings per share for the
transition period ended December 31, 2002 and for the fiscal years ended
February 23, 2002 and February 24, 2001 would have been reduced to the pro forma
amounts indicated in the following table:
Transition Fiscal Year Ended
Period Ended ----------------------------------
December February February
31, 2002 23, 2002 24, 2001
--------------------- ---------------- -----------------
As reported
Net (loss) earnings $ (70.8) $ (104.1) $ 20.3
Deduct: Additional expense per SFAS
No. 123, fair value method, net of
related tax effects 5.8 9.2 14.6
--------------------- ---------------- -----------------
Pro forma $ (76.6) $ (113.3) $ 5.7
--------------------- ---------------- -----------------
Basic net earnings (loss) per share:
As reported $ (2.03) $ (3.18) $ 0.80
Pro forma $ (2.19) $ (3.46) $ 0.22
Diluted net earnings (loss) per share:
As reported $ (2.03) $ (3.18) $ 0.78
Pro forma $ (2.19) $ (3.46) $ 0.22
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for options granted during the transition period ended on
December 31, 2002 and fiscal 2002 and 2001: risk-free interest rates of 3.7%,
4.4% and 6.1%, expected dividend yields of 0.0%; expected lives of 3.5 years,
3.5 years and 3.5 years; and expected volatility of 96%, 85%, and 70%,
respectively.
Research and Development - Research and development expenditures are
expensed as incurred.
Foreign Currency Translation - The assets and liabilities of subsidiaries
located outside the United States are translated into U.S. dollars at the rates
of exchange in effect at the balance sheet dates. Revenue and expense items are
translated at the average exchange rates prevailing during the period. Gains and
losses resulting from foreign currency transactions are recognized currently in
income, and those resulting from translation of financial statements are
accumulated as a separate component of stockholders' equity.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145, among other things,
requires gains and losses on extinguishment of debt to be classified as part of
continuing operations rather than treated as extraordinary, as previously
required in accordance with SFAS No. 4. SFAS No. 145 also modifies accounting
for subleases where the original lessee remains the secondary obligor and
requires certain modifications to capital leases to be treated as sale-leaseback
transactions. The Company will adopt SFAS No. 145 on January 1, 2003 and expects
no material impact to its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies the
guidance previously provided under Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Among other things, SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred
as opposed to when there is a commitment to a restructuring plan as set forth
under the nullified guidance. The Company plans to adopt SFAS No. 146 on January
1, 2003 for future restructurings as required.
F-9
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The adoption
of SFAS No. 148 is not expected to have a material impact on the Company's
financial position or results of operations as the Company has no plans to adopt
the fair value method.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others", an interpretation of FIN No. 5,
57 and 107, and rescission of FIN No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others". FIN No. 45 elaborates on the disclosures to be made by
the guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002;
while, the provisions of the disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of the recognition provisions of FIN No. 45 is not expected to have a
material impact on the Company's consolidated results of operations and
financial position.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Entities", an interpretation of Accounting Research Bulletin No. 51. FIN No. 46
requires that variable interest entities be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. FIN No. 46 also requires disclosures about variable
interest entities that companies are not required to consolidate but in which a
company has a significant variable interest. The consolidation requirements of
FIN No. 46 will apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements will apply to entities
established prior to January 31, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. The disclosure requirements will apply in all
financial statements issued after January 31, 2003. The Company will begin to
adopt the provisions of FIN No. 46 during the first quarter of calendar 2003 but
expects the provisions of FIN No. 46 will not have a material impact on its
consolidated results of operations and financial position upon adoption as it
does not currently have any variable interest entities.
2. TRANSITION REPORTING
In October 2002, the Company changed its fiscal year end from the last
Saturday in February to December 31, effective with the transition period
beginning on February 24, 2002 and ending on December 31, 2002. These financial
statements are being filed by the Company as part of a Transitional Report on
Form 10-K covering the transition period. Prospectively, the Company's fiscal
quarters will conform to calendar periods ending March 31, June 30 and September
30.
All references to the ten-month period from February 25, 2001 to December
31, 2001 are unaudited.
The following financial data is presented to illustrate the period's
results of operations and earnings per share information for the ten-month
period ended December 31, 2001:
2001
----------------
Net sales $ 582.6
Gross profit 118.2
Operating loss (38.7)
Loss before income taxes and extraordinary item (87.5)
Income taxes 2.0
Net loss before extraordinary item (89.5)
Net loss (98.8)
Net loss per share before extraordinary item (2.76)
Net loss per share (3.05)
The results for the ten-month period ended December 31, 2001 include
approximately $98.9 of facility consolidation charges and $1.5 of transition
costs included as a component of cost of sales (See note 4). Also, the Company
recorded costs and expenses associated with the acquisition of M & M of
approximately $6.8 that is included as a component of selling, general and
administrative expenses in the ten-month period ended December 31, 2001 (See
note 3).
F-10
The Company recorded a $9.3 extraordinary item during the ten-month period
ended December 31, 2001 related to the early extinguishments of certain
long-term debt.
3. ACQUISITIONS AND DISPOSITION
The Company has completed a number of acquisitions and a disposition. The
following is a summary of recent transactions:
Fiscal Year 2002 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 consolidated balance sheet as of February 23,
2002.
On September 14, 2001, the Company acquired M & M Aerospace Hardware, Inc.
("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 purchase price of M & M has been allocated based on independent
appraisals and management's estimates as follows:
Accounts receivable $ 13.4
Inventories 53.8
Other current assets 0.2
Property and equipment 16.7
Goodwill, (non-amortizing, tax deductible) 88.3
Trademark (indefinite life, non-amortizing) 19.4
Non-compete agreement (useful life of 8 years) 1.7
Current liabilities (8.8)
--------
$ 184.7
========
The Company believes that the M&M acquisition resulted in the recognition
of goodwill primarily because of its industry position, management strength and
potential to serve as a platform for the consolidation of the business segment.
The Company recorded costs and expenses associated with the acquisition of
M & M of approximately $6.8, which is included as a component of selling,
general and administrative expenses in the accompanying consolidated statements
of operations for the fiscal year ended February 23, 2002.
Disposition
- -----------
In-Flight Entertainment Business
- --------------------------------
In February 1999, the Company completed the sale of a 51% interest in its
In-Flight Entertainment ("IFE") business to Sextant Avionique, Inc. ("Sextant"),
a wholly-owned subsidiary of Sextant Avionique, S.A. (the "IFE Sale") for
approximately $62.0 in cash. In October 1999, the Company completed the sale of
its remaining 49% equity interest in IFE to Sextant. Terms of the agreement
provided for the Company to receive two payments totaling $31.4, and a third
payment based on actual sales and bookings as defined in the agreement (the "IFE
obligations"). The IFE obligation amounts were included in other current assets
net, in the accompanying consolidated financial statements as of February 23,
2002. Sextant had not made any of the payments related to the IFE obligations in
accordance with the terms of the purchase and sale agreement. The Company
initiated arbitration proceedings to compel payment. Sextant counterclaimed
against the Company, claiming various breaches of the IFE Sale agreements. In
February 2003, an arbitration panel resolved the dispute by awarding BE
Aerospace, Inc. a net amount of $7.8. In connection with this decision, the
Company recorded a charge of $29.5 in the accompanying consolidated statement of
operations for the transition period ended December 31, 2002. This charge
represented the difference between the balance of the IFE obligations receivable
and the net amount awarded to the Company as of December 31, 2002.
F-11
4. FACILITY CONSOLIDATIONS AND OTHER SPECIAL CHARGES
The September 11, 2001 terrorist attacks have severely impacted conditions
in the airline industry. Sharply lower demand from our airline customer base
affected the Company's financial results, both for the ten-month transition
period ended December 31, 2002 and the fiscal year ended February 23, 2002. The
lower demand reflects the current downturn in the airline industry, which is the
most severe ever experienced. High airline operating costs, weak air travel and
low ticket prices have damaged many carriers' financial condition. Prior to the
September 11, 2001 terrorist attacks, airline profits were already being
adversely affected by increases in pilot and other airline wages, higher fuel
prices and the softening of the global economy. Air travel dropped significantly
following the 2001 terrorist attacks, further weakening many airlines' financial
condition.
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused the Company to implement a facility
consolidation and integration plan designed to re-align its capacity and cost
structure with changed conditions in the airline industry. In November 2001, the
Company began implementing a facility consolidation plan that consisted of
closing five principal facilities and reduce its workforce by about 1,000
employees. As a result, during fiscal 2002, the Company recorded a charge of
$98.9 which included cash expenses of approximately $15.6 and non-cash charges
totaling approximately $62.9 associated with the write-down of fixed assets,
inventory and other assets and $20.4 million associated with the impairment of
related intangible assets. The $15.6 of cash charges related to involuntary
severance and benefit programs for approximately 1,000 employees, lease
termination costs and preparing facilities for disposal and sale. In addition,
the Company incurred approximately $5.7 of transition costs associated with the
facilities and personnel consolidation program, which were expensed as incurred.
These costs and charges, which aggregate $104.6, have been included in cost of
sales for the fiscal year ended February 23, 2002.
Industry conditions continued to worsen during the fall of 2002 as the
airlines deferred retrofit programs and continued to lower their purchases of
spare parts. In addition, the business jet manufacturers announced further
production cuts and additional plant shutdowns. In response to these worsening
conditions, the Company revised its consolidation plan to encompass a total
personnel reduction of 1,400 employees.
During the transition period ended December 31, 2002, the Company incurred
a total of approximately $39.5 of charges and transition costs associated with
the facilities and personnel consolidation and integration program, which have
been expensed as incurred as a component of cost of sales. The charges and
transition costs included $6.0 of costs associated with additional personnel
reductions and a $7.0 charge related to inventories that became obsolete due to
the increase in parked aircraft that are not expected to return to active
service. Cash requirements related to facility consolidation activities were
funded from cash in banks.
Through December 31, 2002, the Company has closed four of the five
facilities and paid approximately $7.0 for over 1,000 of the planned 1,400
headcount reductions. Through December 31, 2002, the Company has incurred
approximately $145.0 of the total estimated costs, including approximately $55.0
of the estimated cash costs. Cash requirements related to facility consolidation
activities were funded from cash in banks.
The following table summarizes the facility consolidation costs accrued as
of December 31, 2002:
Balance Balance
Original Cash at Feb. Disposals/ Cash at Dec.
Accrual Disposals Paid 23, 2002 Additions Reclass Paid 31, 2002
------------- ------------ ----------- -------------- ------------ -------------- -------- --------
Accrued liability for severance,
lease termination and $15.6 $ -- $(3.1) $12.5 $ 6.0 $ 1.7 $(16.4) $3.8
other costs
Impaired inventories, property 62.9 (50.8) -- 12.1 7.0 (19.1) -- --
and equipment
Impaired intangible assets 20.4 (20.4) -- -- -- -- -- --
------------- ------------ ----------- -------------- ------------ -------------- -------- --------
$98.9 $ (71.2) $(3.1) $24.6 $ 13.0 $ (17.4) $(16.4) $3.8
============= ============ =========== ============== ============ ============== ======== ========
F-12
5. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average cost method. Finished goods and work-in-process
inventories include material, labor and manufacturing overhead costs.
Inventories consist of the following:
December 31, 2002 February 23, 2002
--------------------------------- -----------------------------
Raw materials and component parts $ 58.8 $ 53.4
Work-in-process 26.5 32.6
Finished goods (primarily aftermarket fasteners) 77.9 71.0
------ ------
$163.2 $157.0
====== ======
6. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated and amortized
generally on the straight-line method over their estimated useful lives of two
to thirty years (or the lesser of the term of the lease as to leasehold
improvements, as appropriate). Property and equipment consist of the following:
Useful Life December 31, February 23,
(Years) 2002 2002
--------------- ------------------- -----------------
Land, buildings and improvements 10 - 30 $ 38.2 $ 61.2
Machinery 3 - 13 54.4 56.6
Tooling 3 - 10 16.0 15.8
Computer equipment and software 4 - 15 84.6 81.8
Furniture and equipment 2 - 10 9.9 9.4
------ ------
203.1 224.8
Less accumulated depreciation and amortization (87.6) (82.1)
------ ------
$115.5 $142.7
====== ======
7. GOODWILL AND INTANGIBLE ASSETS
Effective February 24, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." As a result of adopting SFAS No. 142, the
Company's goodwill and certain intangible assets are no longer amortized, but
are subject to an annual impairment test. In accordance 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. The following sets forth the intangible assets by major asset class,
all of which were acquired during business acquisition transactions:
December 31, 2002 February 23, 2002
--------------------------------------- ------------------------------------
Net Net
Useful Life Original Accumulated Book Original Accumulated Book
(Years) Cost Amortization Value Cost Amortization Value
-------------- ----------- --------------- ----------- ----------- -------------- ---------
Acquired technologies 4-30 $ 93.2 $14.4 $ 78.8 $ 108.7 $27.2 $ 81.5
Trademarks and patents 7-30 26.0 8.5 17.5 24.6 6.8 17.8
Trademarks (nonamortizing) -- 19.4 -- 19.4 19.4 -- 19.4
Technical qualifications, plans
and drawings 3-30 26.1 12.8 13.3 25.5 11.5 14.0
Replacement parts annuity
and product approvals 3-30 39.2 18.2 21.0 37.6 15.9 21.7
Covenant not to compete and
other identified intangibles 3-10 24.8 9.6 15.2 30.6 12.1 18.5
------- ----- ------ ------- ----- -------
$ 228.7 $63.5 $165.2 $ 246.4 $73.5 $172.9
======= ===== ====== ======= ===== =======
Aggregate amortization expense on intangible assets was approximately
$7.5, $25.0 and $23.4 for the ten-month transition period ended December 31,
2002 and for the fiscal years ended February 23, 2002 and February 24, 2002,
respectively. Amortization expense associated with identified intangible assets
is expected to be approximately $8.9 in each of the next five years.
F-13
Changes to the original cost basis of goodwill during the transition
period ended December 31, 2002 were due to the reclassification of assembled
workforce to goodwill and foreign currency fluctuations. The changes in the
carrying amount of goodwill for the transition period ended December 31, 2002
are as follows:
Total
--------------------
Balance as of February 23, 2002 $ 333.1
Goodwill acquired 2.0
Reclassification of assembled workforce 8.5
Acquisition purchase price adjustment (1.5)
Effect of foreign currency translation 2.6
--------
Balance as of December 31, 2002 $ 344.7
========
A reconciliation of reported earnings (losses) before extraordinary item
to earnings (losses) before extraordinary item adjusted to reflect the adoption
of the non-amortization provisions of SFAS No. 142 as if SFAS No. 142 was
adopted on February 27, 2000:
Transition Fiscal Year Ended
Period Ended -------------------------------------------
December February 23, February 24,
31, 2002 2002 2001
------------------ --------------------- -----------------
Earnings (loss) before extraordinary item:
As reported $ (70.8) $ (94.8) $ 20.3
Goodwill amortization -- 8.8 6.6
------- -------- --------
As adjusted $ (70.8) $ (86.0) $ 26.9
======= ======== ========
Basic net earnings (loss) per share
before extraordinary item:
As reported $ (2.03) $ (2.90) $ 0.80
Goodwill amortization -- 0.27 0.26
------- -------- --------
As adjusted $ (2.03) $ (2.63) $ 1.06
======= ======== ========
Diluted net earnings (loss) per share
before extraordinary item:
As reported $ (2.03) $ (2.90) $ 0.78
Goodwill amortization -- 0.27 0.26
------- -------- -------
As adjusted $ (2.03) $ (2.63) $ 1.04
======= ======== =======
A reconciliation of reported net earnings (losses) to net earnings (losses)
adjusted to reflect the adoption of the non-amortization provisions of SFAS No.
142 as if SFAS No. 142 was adopted on February 27, 2000:
Transition Fiscal Year Ended
Period Ended -------------------------------------------
December February 23, February 24,
31, 2002 2002 2001
----------------- -------------------- ------------------
Net earnings (loss):
As reported $ (70.8) $(104.1) $ 20.3
Goodwill amortization, net of taxes -- 8.8 6.6
------- ------- --------
As adjusted $ (70.8) $ (95.3) $ 26.9
======= ======= ========
Basic net earnings (loss) per share:
As reported $ (2.03) $ (3.18) $ 0.80
Goodwill amortization -- 0.27 0.26
-------- ------- --------
As adjusted $ (2.03) $ (2.91) $ 1.06
======= ======= ========
Diluted net earnings (loss) per share:
As reported $ (2.03) $ (3.18) $ 0.78
Goodwill amortization -- 0.27 0.26
------- ------- --------
As adjusted $ (2.03) $ (2.91) $ 1.04
======= ======= ========
F-14
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
December 31, February 23,
2002 2002
---------------------- ---------------------
Accounts payable $ 67.3 $ 48.1
Accrued salaries, vacation and related benefits 16.3 17.0
Accrued interest 14.3 24.1
Accrued product warranties 8.9 11.3
Accrued acquisition expenses 3.8 13.9
Accrued restructuring 3.8 12.5
Other accrued liabilities 22.5 23.4
-------- -------
$ 136.9 $ 150.3
======== =======
9. LONG-TERM DEBT
Long-term debt consists of the following:
December 31, February 23,
2002 2002
---------------------- ---------------------
8% Senior Subordinated Notes $ 249.7 $ 249.7
8 7/8% Senior Subordinated Notes 250.0 250.0
9 1/2% Senior Subordinated Notes 200.0 200.0
Bank Credit Facility 144.0 145.0
Other long-term debt 9.2 10.1
-------- -------
852.9 854.8
Less current portion of long-term debt (16.9) (1.3)
-------- -------
$ 836.0 $ 853.5
======== =======
8% Senior Subordinated Notes
The 8% Senior Subordinated Notes (the "8% Notes") are unsecured senior
subordinated obligations of the Company, subordinated to any senior indebtedness
of the Company and mature on March 1, 2008. Interest on the 8% Notes is payable
semiannually in arrears on March 1 and September 1 of each year. The 8% Notes
are redeemable at the option of the Company, in whole or in part, on or after
March 1, 2003, at predetermined redemption prices together with accrued and
unpaid interest through the date of redemption. Upon a change of control (as
defined), each holder of the 8% Notes may require the Company to repurchase such
holder's 8% Notes at 101% of the principal amount thereof, plus accrued interest
to the date of such purchase.
8 7/8% Senior Subordinated Notes
In April 2001, the Company sold $250.0 of 8 7/8% Senior Subordinated Notes
(the "8 7/8% Notes") due 2011. The net proceeds less debt issue costs received
from the sale of the notes were approximately $242.8. Approximately $105.0 of
proceeds was used to redeem the Company's $100.0 of 9 7/8% senior subordinated
notes due 2006 and approximately $66.7 of proceeds was used to repay balances
outstanding under the Company's previous bank credit facility, which was then
terminated.
The 8 7/8% Notes are unsecured senior subordinated obligations of the
Company, subordinated to all existing and future senior indebtedness and mature
on May 1, 2011. Interest on the 8 7/8% Notes is payable semiannually in arrears
on May 1 and November 1 of each year. The 8 7/8% Notes are redeemable, at the
option of the Company, in whole or in part, at any time on or after May 1, 2006,
at predetermined redemption prices together with accrued and unpaid interest
through the date of redemption. In addition, at any time prior to May 1, 2004,
the Company may redeem up to 35% of the aggregate principal amount of the Notes
originally issued with the net proceeds of a public equity offering at 108.875
of the principal amount thereof, plus accrued interest, if at least 65% of the
aggregate amount of the notes originally issued remains outstanding after the
redemption. Upon a change in control (as defined), each holder of the 8 7/8%
Notes may require the Company to repurchase such holder's 8 7/8% Notes at 101%
of the principal amount thereof, plus accrued interest to the date of such
purchase.
F-15
The 9 7/8% Senior Subordinated Notes (the "9 7/8% Notes") were senior
unsecured obligations of the Company. The Company redeemed the 9 7/8% Notes at a
redemption price equal to 104.97% of the principal amount, together with the
accrued interest to the redemption date. 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 redemption of the 9 7/8% Notes.
9 1/2% Senior Subordinated Notes
The 9 1/2% Senior Subordinated Notes (the "9 1/2 Notes") are unsecured
senior subordinated obligations and are subordinated to any senior indebtedness
of the Company and mature on November 1, 2008. Interest on the 9 1/2% Notes is
payable semiannually in arrears on May 1 and November 1 of each year. The 9 1/2%
Notes are redeemable at the option of the Company, in whole or in part, at any
time after November 1, 2003 at predetermined redemption prices together with
accrued and unpaid interest through the date of redemption. Upon a change of
control (as defined), each holder of the 9 1/2% Notes may require the Company to
repurchase such holder's 9 1/2% Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of such purchase.
The 8% Notes, 8 7/8% Notes and 9 1/2% Notes contain certain restrictive
covenants, including limitations on future indebtedness, restricted payments,
transactions with affiliates, liens, dividends, mergers and transfers of assets,
all of which were met by the Company as of December 31, 2002.
Bank Credit Facility
In January and March 2003, the Company obtained amendments to the credit
facility with J.P. Morgan Chase (the "Amended Bank Credit Facility"). The
Amended Bank Credit Facility reduced the total commitments by $15.0 to $135.0
during January 2003 (of which $30.0 may be utilized for acquisitions). The
Amended Bank Credit Facility provides for another $15.0 reduction in facility
size to $120.0 at December 31, 2004. The Amended Bank Credit Facility expires in
August 2006 and is collateralized by substantially all of our cash, accounts
receivable, inventories and other personal property. At December 31, 2002,
indebtedness under the Bank Credit Facility consisted of letters of credit
aggregating approximately $5.6 and outstanding borrowings under the revolving
facility aggregating to $144.0 (bearing interest at LIBOR plus 3.0%, or
approximately 4.64% as of December 31, 2002). The Amended Bank Credit Facility
bears interest ranging from 200 to 350 basis points over the Eurodollar rate as
defined in the agreement (or approximately 4.5% as of the January 2003 effective
date). The Amended Bank Credit Facility contains customary affirmative
covenants, negative covenants and conditions of borrowings, all of which were
met as of December 31, 2002. The Company presented the $15.0 reduction in
commitments as short-term debt in the consolidated balance sheet at December 31,
2002.
B/E Aerospace (UK) Limited, one of the Company's subsidiaries, has a
revolving line of credit agreement aggregating approximately $6.4. This credit
agreement is collateralized by accounts receivable and inventory of B/E
Aerospace (UK) Limited. There were no borrowings outstanding under the credit
agreement as of December 31, 2002.
Royal Inventum B.V., one of the Company's subsidiaries, has a revolving
credit agreement aggregating approximately $0.5. This credit agreement is
collateralized by accounts receivable and inventory of the Netherland's entity.
There were no borrowings outstanding under the credit agreement as of December
31, 2002.
Maturities of long-term debt are as follows:
Year ending December 31,
------------------------
2003 $ 16.9
2004 17.6
2005 0.7
2006 114.7
2007 3.3
Thereafter 699.7
------
Total $852.9
======
Interest expense amounted to $60.7 for the transition period ended
December 31, 2002 and $66.2 and $57.9 for the fiscal years ended February 23,
2002 and February 24, 2001, respectively.
F-16
10. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Sale-Leaseback Transaction -- During 2002, the Company entered into two
sale-leaseback transactions involving four of its facilities. Under the terms of
the sale-leaseback agreements, the facilities were sold for $27.0, net of
transaction costs, and have been leased back for initial periods ranging from 15
to 20 years. The leasebacks have been accounted for as operating leases. A gain
of $4.8 resulting from the sales have been deferred and will be amortized on a
straight-line basis to rent expense over the initial term of the leases.
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 our consolidated balance sheet. At December
31, 2002, future minimum lease payments under these arrangements approximated
$54.2. We also have various other agreements whose future minimum lease payments
approximated $28.0 at December 31, 2002.
Rent expense for the transition period ended December 31, 2002 and for
fiscal years 2002 and 2001 was approximately $13.5, $9.7 and $12.3,
respectively. Future payments under operating leases with terms currently
greater than one year are as follows:
Year ending December 31,
------------------------
2003 $11.1
2004 7.8
2005 6.9
2006 6.1
2007 6.0
Thereafter 44.3
-----
$82.2
=====
Litigation -- The Company is a defendant in various legal actions arising
in the normal course of business, the outcomes of which, in the opinion of
management, neither individually nor in the aggregate are likely to result in a
material adverse effect to the Company's financial statements.
Indemnities, Commitments and Guarantees -- During its normal course of
business, the Company has made certain indemnities, commitments and guarantees
under which it may be required to make payments in relation to certain
transactions. These indemnities include non-infringement of patents and
intellectual property indemnities to the Company's customers in connection with
the delivery, design, manufacture and sale of its products, indemnities to
various lessors in connection with facility leases for certain claims arising
from such facility or lease, indemnities to other parties to certain acquisition
agreements and indemnities to directors and officers of the Company to the
maximum extent permitted under the laws of the State of Delaware. The duration
of these indemnities, commitments and guarantees varies, and in certain cases,
is indefinite. Substantially all of these indemnities, commitments and
guarantees provide for limitations on the maximum potential future payments the
Company could be obligated to make. The Company has not recorded any liability
for these indemnities, commitments and guarantees in the accompanying
consolidated balance sheets.
Employment Agreements -- The Company has employment and compensation
agreements with three key officers of the Company. Agreements for one of the
officers provides for an officer to earn a minimum of $765 thousand per year
through a three year period ending from any date after which it is measured,
adjusted annually for changes in the consumer price index (as defined) or as
determined by the Company's Board of Directors, as well as a deferred
compensation benefit equal to the product of the years worked times 150% of the
highest annual salary paid over the period. Such deferred compensation is
payable in a lump sum, less any prior distributions.
A second agreement provides for an officer to receive annual minimum
compensation of $710 thousand per year through a three year period ending from
any date after which it is measured, adjusted annually for changes in the
consumer price index (as defined) or as determined by the Company's Board of
Directors, as well as a deferred compensation benefit equal to the product of
the years worked times the highest annual salary paid over the period. In all
other respects, this officer's employment agreement contains similar provisions
to those described above in the first agreement.
F-17
A third agreement provides for an officer to receive annual minimum
compensation of $345 thousand per year through a three year period ending from
any date after which it is measured, adjusted annually for changes in the
consumer price index (as defined) or as determined by the Company's Board of
Directors, as well as a deferred compensation benefit equal to the product of
the number of years worked times one-half of this officer's average highest
three year's annual salary (as defined). Such deferred compensation is payable
in a lump sum, less any prior distributions.
Deferred compensation for these three officers has been accrued as
provided for under the above-mentioned employment agreements. Through December
31, 2001, the Company funded these and other deferred compensation obligations
through corporate-owned life insurance policies and other investments, all of
which were maintained in an irrevocable rabbi trust. The rabbi trust was
terminated and the funds were deposited into individual retirement accounts for
the benefit of the executives in January 2002. All contributions and prior
deferred compensation made subsequent to January 2002 are maintained in
individual grantor trusts on behalf of each of the executives. In addition, the
Company has employment agreements with certain other key members of management
that provide for aggregate minimum annual base compensation of $1.9 million
expiring on various dates through the year 2003. The Company's employment
agreements generally provide for certain protections in the event of a change of
control. These protections generally include the payment of severance and
related benefits under certain circumstances in the event of a change of
control, and for the Company to reimburse such officers for the amount of any
excise taxes associated with such benefits.
11. INCOME TAXES
Income tax expense consists of the following:
Transition Fiscal Year Ended
Period Ended ------------------------------------
December February February
31, 2002 23, 2002 24, 2001
-------------------- ------------------ -----------------
Current:
Federal $ -- $ 0.7 $ 1.3
State -- -- --
Foreign 2.7 1.1 0.9
-------- --------- --------
2.7 1.8 2.2
Deferred:
Federal 11.7 22.9 8.3
State (0.2) 3.8 2.5
Foreign 6.6 4.0 1.1
-------- --------- --------
18.1 30.7 11.9
Change in valuation allowance (18.1) (30.7) (11.9)
-------- --------- --------
$ 2.7 $ 1.8 $ 2.2
======== ========= ========
The difference between income tax expense and the amount computed by
applying the statutory U.S. federal income tax rate (35%) to the pretax earnings
before extraordinary item consists of the following:
Transition Fiscal Year Ended
Period Ended -------------------------------------
December February February
31, 2002 23, 2002 24, 2001
-------------------- ----------------- -------------------
Statutory U.S. federal income tax expense (benefit) $ (23.8) $ (32.5) $ 7.9
Operating loss (with) without tax benefit 6.6 (2.5) 1.0
Goodwill amortization -- 3.2 3.3
Foreign tax rate differential 1.2 2.5 1.3
Meals and entertainment 0.3 0.2 0.3
Officer's life insurance 0.1 0.2 0.3
Change in valuation allowance 18.1 30.7 (11.9)
Other, net 0.2 -- --
-------- --------- --------
$ 2.7 $ 1.8 $ 2.2
======== ========= ========
F-18
The tax effects of temporary differences and carryforwards that give rise
to deferred income tax assets and liabilities consist of the following:
December February February
31, 2002 23, 2002 24, 2001
------------------- ------------------ ------------------
Inventory reserves $ 9.3 $ 8.9 $ 6.3
Acquisition accruals (10.2) (7.3) (6.4)
Warranty accruals 2.9 4.8 3.5
Accrued liabilities 12.9 15.0 10.6
Other 1.2 2.1 1.5
-------- --------- --------
Net current deferred income tax asset 16.1 23.5 15.5
-------- --------- --------
Intangible assets 4.0 11.6 9.8
Depreciation (11.9) (15.5) (11.8)
Net operating loss carryforward 99.9 83.0 48.3
Research credit carryforward 7.1 7.1 7.1
Deferred compensation 0.7 1.1 11.3
Software development costs (5.5) (5.5) (5.4)
Loss on legal settlement 13.0 -- --
Other 1.0 1.0 0.8
-------- --------- --------
Net noncurrent deferred income tax asset 108.3 82.8 60.1
-------- --------- --------
Valuation allowance (124.4) (106.3) (75.6)
-------- --------- --------
Net deferred tax assets (liabilities) $ -- $ -- $ --
======== ========= ========
The Company established a valuation allowance of $124.4, as of December
31, 2002 related to the utilization of its deferred tax assets because of
uncertainties that preclude it from determining that it is more likely than not
that the Company will be able to generate taxable income to realize such assets
during the federal operating loss carryforward period. The federal operating
loss carryforward begins to expire in 2012. Such uncertainties include the
impact of changing fuel prices on the Company's customers, recent cumulative
losses, the highly cyclical nature of the industry in which it operates,
economic conditions impacting the airframe manufacturers and the airlines, the
Company's high degree of financial leverage, risks associated with new product
introductions and risks associated with the integration of acquisitions. The
Company monitors these as well as other positive and negative factors that may
arise in the future, as it assesses the necessity for a valuation allowance
against its deferred tax assets.
As of December 31, 2002, the Company had federal, state and foreign net
operating loss carryforwards of $223.4, $134.7 and $9.6, respectively. The
federal and state net operating loss carryforwards begin to expire in 2012 and
2003, respectively. Approximately $43.1 of the Company's net operating loss
carryforward is related to the exercise of stock options and the tax effect of
such net operating losses will be credited to additional paid-in capital rather
than income tax expense when utilized.
As of December 31, 2002, the Company had federal research tax credit and
alternative minimum tax credit carryforwards of $7.1 and $1.0, respectively. The
federal research tax credits begin to expire in 2012.
The Company has not provided for any residual U.S. income taxes on the
approximately $24.7 of earnings from its foreign subsidiaries because such
earnings are intended to be indefinitely reinvested. Such residual U.S. income
taxes, if provided for, would be immaterial.
The Company's federal tax returns for the years ended February 22, 1997,
February 28, 1998 and February 27, 1999 are currently under examination by the
Internal Revenue Service. Management believes that the resolution of this
examination will not have a material adverse effect on either the Company's
results of operations or financial position.
12. EMPLOYEE RETIREMENT PLANS
The Company sponsors and contributes to a qualified, defined contribution
Savings and Investment Plan covering substantially all U.S. employees. The
Company also sponsors and contributes to nonqualified deferred compensation
programs for certain other employees. The Company has invested in
corporate-owned life insurance policies to assist in funding this program. The
cash surrender values of these policies and other investments associated with
these plans are maintained in an irrevocable rabbi trust and are recorded as
assets of the Company. In addition, the Company and its subsidiaries participate
in government-sponsored programs in certain European countries. In general, the
Company's policy is to fund these plans based on legal requirements, tax
considerations, local practices and investment opportunities.
F-19
The BE Aerospace Savings and Investment Plan was established pursuant to
Section 401(k) of the Internal Revenue Code. Under the terms of the plan,
covered employees are allowed to contribute up to 15% of their pay, limited to
$11.0 thousand per year. The Company match is equal to 50% of employee
contributions, subject to a maximum of 8% of an employee's pay and is generally
funded in Company stock. Total expense for the plan was $2.1, $3.4 and $1.9 for
the transition period ended December 31, 2002 and for the fiscal years ended
February 23, 2002 and February 24, 2001, respectively. Participants vest 100% in
the Company match after three years of service.
13. STOCKHOLDERS' EQUITY
Earnings (Loss) Per Share. Basic earnings per common share are determined
by dividing earnings (loss) applicable to common shareholders by the weighted
average number of shares of common stock. Diluted earnings per share are
determined by dividing earnings (loss) applicable to common shareholders by the
weighted average number of shares of common stock and dilutive common stock
equivalents outstanding (all related to outstanding stock options discussed
below).
The following table sets forth the computation of basic and diluted net
(loss) earnings per share for the transition period ended December 31, 2002 and
for the fiscal years ended February 23, 2002 and February 24, 2001:
Transition Fiscal Year Ended
Period Ended -----------------------------------
December February February
31, 2002 23, 2002 24, 2001
----------------- ---------------- -----------------
Numerator - Net (loss) earnings $ (70.8) $ (104.1) $ 20.3
======= ======== =======
Denominator:
Denominator for basic earnings (loss) per share -
Weighted average shares 34.9 32.7 25.4
Effect of dilutive securities -
Employee stock options -- -- 0.5
------- ------- -------
Denominator for diluted (loss) earnings per share -
Adjusted weighted average shares 34.9 32.7 25.9
======= ======= =======
Basic net (loss) earnings per share $ (2.03) $ (3.18) $ 0.80
======= ======= =======
Diluted net (loss) earnings per share $ (2.03) $ (3.18) $ 0.78
======= ======= =======
The Company excluded dilutive securities from the calculation of loss per
share of approximately 0.8 million and approximately 1.1 million for the
transition period ended December 31, 2002 and for the fiscal year ended February
23, 2002, respectively.
Stock Option Plans. The Company has various stock option plans, including
the Amended and Restated 1989 Stock Option Plan, the 1991 Directors Stock Option
Plan, the 1992 Share Option Scheme and the Amended and Restated 1996 Stock
Option Plan (collectively, the "Option Plans"), under which shares of the
Company's common stock may be granted to key employees and directors of the
Company. The Option Plans provide for granting key employees options to purchase
the Company's common stock. Options are granted at the discretion of the Stock
Option and Compensation Committee of the Board of Directors. Options granted
vest 25% on the date of grant and 25% per year thereafter.
The following tables set forth options granted, canceled, forfeited and
outstanding:
December 31, 2002
-----------------
Option Price Weighted Average
Options Per Share Price Per Share
------------ ------------ ----------------
(in thousands)
Outstanding, beginning of period 7,059 $4.08 - $31.50 $14.41
Options granted 1,432 3.25 - 9.70 4.42
Options exercised (203) 4.08 - 12.00 6.31
Options forfeited (294) 4.08 - 31.50 17.15
-----
Outstanding, end of period 7,994 3.25 - 31.50 12.50
=====
Exercisable at end of period 5,420 $3.25 - $30.25 $15.59
=====
F-20
February 23, 2002
-----------------
Option Price Weighted Average
Options Per Share Price Per Share
------------ ------------ ----------------
(in thousands)
Outstanding, beginning of period 6,056 $6.94 - $31.50 $17.30
Options granted 1,980 4.08 - 21.88 5.55
Options exercised (365) 4.08 - 22.75 11.60
Options forfeited (612) 4.08 - 29.87 19.93
-----
Outstanding, end of period 7,059 4.08 - 31.50 14.41
=====
Exercisable at end of year 4,535 $4.08 - $31.50 $17.43
=====
February 24, 2001
-----------------
Option Price Weighted Average
Options Per Share Price Per Share
------------ ------------ ----------------
(in thousands)
Outstanding, beginning of period 5,808 $7.00 - $31.50 $18.00
Options granted 1,231 6.94 - 16.00 12.05
Options exercised (600) 6.94 - 19.00 10.61
Options forfeited (383) 6.94 - 29.88 19.98
------
Outstanding, end of period 6,056 6.94 - 31.50 17.30
======
Exercisable at end of year 3,793 $6.94 - $31.50 $19.54
======
At December 31, 2002, 450,235 options were available for grant under each of the
Company's Option Plans.
Options Outstanding at December 31, 2002
- ------------------------------------------------------------------------------------------------------------------
Weighted Weighted Average Weighted
Range of Options Average Remaining Options Average
Exercise Price Outstanding Exercise Contractual Exercisable Exercise Price
-------------- ----------- --------- ------------ ----------- --------------
(in thousands) (years) (in thousands)
$ 3.25 - $4.43 2,854 $4.25 9.23 996 $ 4.20
6.75 - 12.00 2,007 9.60 6.81 1,382 9.75
12.13 - 19.00 1,364 17.87 5.77 1,308 17.88
19.88 - 30.25 1,769 24.98 5.20 1,734 25.05
----- -----
7,994 5,420
===== =====
The estimated fair value of options granted during the transition period
ended December 31, 2002 and for fiscal 2002 and fiscal 2001, was $3.54 per
share, $4.17 per share and $7.80 per share, respectively.
14. EMPLOYEE STOCK PURCHASE PLAN
The Company has established a qualified Employee Stock Purchase Plan, the
terms of which allow for qualified employees (as defined) to participate in the
purchase of designated shares of the Company's common stock at a price equal to
the lower of 85% of the closing price at the beginning or end of each
semi-annual stock purchase period. The Company issued 261,000 and 136,000 shares
of common stock during the transition period ended December 31, 2002 and during
fiscal 2002, respectively, pursuant to this plan at an average price per share
of $6.49 and $14.29, respectively.
15. 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 operating
facilities while the Business Jet and Fastener Distribution segments consist of
two and one principal operating facilities, respectively.
Each segment reports its results of operations and makes requests for
capital expenditures and acquisition funding to the Company's chief operational
decision-making group. This group is presently comprised of the Chairman, 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.
F-21
The following table presents net sales and other financial information by
business segment:
TRANSITION PERIOD ENDED DECEMBER 31, 2002
----------------------------------------------------------------------
Commercial
Aircraft Business Fastener
Products Jet Products Distribution Consolidated
----------------- ------------------ ------------------ --------------
Net sales $354.5 $ 71.1 $ 78.0 $ 503.6
Operating earnings (loss) (32.9) 7.6 14.5 (10.8)
Total assets 700.9 170.5 195.7 1,067.1
Goodwill 169.2 87.3 88.2 344.7
Capital expenditures 12.0 4.9 0.5 17.4
Depreciation and amortization 19.9 3.6 1.2 24.7
FISCAL YEAR ENDED FEBRUARY 23, 2002
---------------------------------------------------------------------
Commercial
Aircraft Business Fastener
Products Jet Products Distribution Consolidated
----------------- ----------------- ---------------- ----------------
Net sales $550.6 $ 85.6 $ 44.3 $ 680.5
Operating earnings (loss) (40.1) 6.0 1.6 (32.5)
Total assets 761.3 165.0 202.0 1,128.3
Goodwill, net 164.8 82.5 85.8 333.1
Capital expenditures 11.1 2.2 0.6 13.9
Depreciation and amortization 34.9 10.6 1.3 46.8
FISCAL YEAR ENDED FEBRUARY 24, 2001
---------------------------------------------------------------------
Commercial
Aircraft Business Fastener
Products Jet Products Distribution Consolidated
----------------- ----------------- ---------------- ----------------
Net sales $580.3 $ 86.1 $ -- $ 666.4
Operating earnings 62.5 14.2 -- 76.7
Total assets 739.8 196.2 -- 936.0
Goodwill, net 172.6 43.5 -- 216.1
Capital expenditures 12.6 4.6 -- 17.2
Depreciation and amortization 33.4 9.4 -- 42.8
[Remainder of page intentionally left blank]
F-22
Through February 24, 2001, we operated in the (1) commercial aircraft
products, (2) business jet products and (3) engineering services segments of the
commercial airline and general aviation industry. Following the purchase of M &
M Aerospace, Inc., we realigned our business to operate in the following
segments - (1) commercial aircraft products, (2) business jet products and (3)
fastener distribution.
Net sales for similar classes of products or services within these
business segments for the transition period ended December 31, 2002 and for the
fiscal years ended February 2002 and 2001 are presented below:
Transition Fiscal Year Ended
Period Ended --------------------------------
December February February
31, 2002 23, 2002 24, 2001
-------------- -------------- --------------
Commercial aircraft products:
Seating products $144.6 $247.8 $288.1
Interior systems products 116.0 152.6 151.6
Engineered interior structures, components
and assemblies 93.9 150.2 140.6
-------------- -------------- --------------
354.5 550.6 580.3
Business jet products 71.1 85.6 86.1
Fastener distribution 78.0 44.3 --
-------------- -------------- --------------
Net sales $503.6 $680.5 $666.4
============== ============== ==============
The Company operated principally in two geographic areas, the United States
and Europe (primarily the United Kingdom), during the transition period ended
December 31, 2002 and during the fiscal years ended February 23, 2002 and
February 24, 2001. There were no significant transfers between geographic areas
during the period. Identifiable assets are those assets of the Company that are
identified with the operations in each geographic area.
The following table presents net sales and operating earnings (loss) for
the transition period ended December 31, 2002 and the fiscal years ended
February 23, 2002 and February 24, 2001 and identifiable assets as of December
31, 2002, February 23, 2002 and February 24, 2001 by geographic area:
Transition Fiscal Year Ended
Period Ended ---------------------------------
December February February
31, 2002 23, 2002 24, 2001
------------------ ---------------- ----------------
Net sales:
United States $ 362.4 $ 535.7 $ 503.8
Europe 141.2 144.8 162.6
--------- -------- -------
Total: $ 503.6 $ 680.5 $ 666.4
========= ======== =======
Operating (loss) earnings:
United States $ 13.9 $ (30.3) $ 65.4
Europe (24.7) (2.2) 11.3
--------- -------- -------
Total: $ (10.8) $ (32.5) $ 76.7
========= ======== =======
Identifiable assets:
United States $ 861.9 $ 948.7 $ 756.7
Europe 205.2 179.6 179.3
--------- -------- -------
Total: $ 1,067.1 $1,128.3 $ 936.0
========= ======== =======
F-23
Export sales from the United States to customers in foreign countries
amounted to approximately $111.5, $113.7 and $160.8 in the transition period
ended December 31, 2002 and fiscal years 2002 and 2001, respectively. Net sales
to all customers in foreign countries amounted to $233.9, $288.3 and $279.8 in
the transition period ended December 31, 2002 and fiscal 2002 and 2001,
respectively. Net sales to Europe amounted to 24%, 20% and 22% in the transition
period ended December 31, 2002, fiscal 2002 and 2001, respectively. Net sales to
Asia amounted to 11%, 12% and 10% in the transition period ended December 31,
2002, fiscal 2002 and 2001, respectively. Major customers (i.e., customers
representing more than 10% of net sales) change from year to year depending on
the level of refurbishment activity and/or the level of new aircraft purchases
by such customers. There were no major customers in the transition period ended
December 31, 2002, fiscal 2002 and 2001.
16. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments at December 31, 2002 and February 23, 2002 is made in accordance
with the requirements of SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts have been determined by
the Company using available market information and appropriate valuation
methodologies; however, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The carrying amounts of cash and cash equivalents, accounts
receivable-trade, and accounts payable are a reasonable estimate of their fair
values. At December 31, 2002 and February 23, 2002, the Company's 8 7/8% Notes
had carrying values of $250.0 and $250.0 and fair values of $183.8 and $211.2,
respectively. At December 31, 2002 and February 23, 2002, the Company's 8% Notes
had carrying values of $249.7 and $249.7 and fair values of $186.3 and $209.3,
respectively. At December 31, 2002 and February 23, 2002, the Company's 9 1/2%
Notes had carrying values of $200.0 and $200.0 and fair values of $150.0 and
$176.5, respectively. The carrying amounts under the Bank Credit Facility are a
reasonable estimate of fair value as interest is based upon floating market
rates.
The fair value information presented herein is based on pertinent
information available to management at December 31, 2002 and February 23, 2002,
respectively. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these consolidated financial
statements since that date, and current estimates of fair value may differ
significantly from the amounts presented herein.
17. SELECTED QUARTERLY DATA (Unaudited)
Summarized quarterly financial data for the transition period ended
December 31, 2002 and the fiscal year ended February 23, 2002 are as follows:
Transition Period Ended December 31, 2002
---------------------------------------------------------------------
First Second Third December
Quarter Quarter Quarter 2002
---------------- ----------------- ----------------- ----------------
Net sales $ 154.3 $ 154.8 $ 145.5 $ 49.0
Gross profit 52.9 49.0 37.0 12.4
Net loss (1.5) (6.2) (22.4) (40.7)
Basic net loss per share (0.04) (0.18) (0.64) (1.17)
Diluted net loss per share (0.04) (0.18) (0.64) (1.17)
Fiscal Year Ended February 23, 2002
---------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------- ----------------- ----------------- ----------------
Net sales $ 176.8 $179.1 $ 172.8 $ 151.8
Gross profit (loss) 65.9 69.0 (37.8) 53.3
Net earnings (loss) before extraordinary item 7.8 8.9 (106.2) (5.3)
Net (loss) earnings (1.5) 8.9 (106.2) (5.3)
Basic net (loss) earnings per share (0.05) 0.28 (3.08) (0.15)
Diluted net (loss) earnings per share (0.05) 0.27 (3.08) (0.15)
F-24
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002
AND FOR THE FISCAL YEARS ENDED FEBRUARY 23, 2002, AND FEBRUARY 24, 2001
- -----------------------------------------------------------------------
(In millions)
BALANCE BALANCE
AT BEGINNING AT END
OF PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD
------------ -------- ----- ---------- ---------
DEDUCTED FROM ASSETS:
- ---------------------
Allowance for doubtful accounts:
December 31, 2002 $ 4.9 $ 0.8 $(0.1) $ 1.7 $ 3.9
Fiscal Year 2002 2.6 1.9 1.3 (1) 0.9 4.9
Fiscal Year 2001 3.9 0.6 (0.4) (2) 1.5 2.6
Reserve for obsolete inventories:
December 31, 2002 $ 27.9 $ 9.3 (3) $ 4.7 $ 12.9 (3) $29.0
Fiscal Year 2002 16.1 11.7 (3) 8.0 (1) 7.9 (3) 27.9
Fiscal Year 2001 16.5 13.6 0.7 (2) 14.7 16.1
(1) Balances associated with the 2002 acquisitions.
(2) Balances associated with the 2001 acquisitions.
(3) Excludes $7.0 and $34.5 of inventory impairments associated with the
Company's facility consolidation and integration plan during the transition
period ended December 31, 2002 and the fiscal year ended February 23, 2002,
respectively.
F-25