UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarterly Period Ended September 30, 2003
Commission File No. 0-18348
BE AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1209796
(State of Incorporation) (I.R.S. Employer Identification No.)
1400 Corporate Center Way
Wellington, Florida 33414
(Address of principal executive offices)
(561) 791-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES[X] NO[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES[X] NO[ ]
The registrant has one class of common stock, $0.01 par value, of which
36,593,889 shares were outstanding as of November 5, 2003.
1
BE AEROSPACE, INC.
Form 10-Q for the Quarter Ended September 30, 2003
Table of Contents
Page
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets
as of September 30, 2003 and December 31, 2002.........................3
b) Condensed Consolidated Statements of Operations for the
Three and Nine Months ended September 30, 2003 and September 30, 2002..4
c) Condensed Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2003 and September 30, 2002............5
d) Notes to Condensed Consolidated Financial Statements...................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............25
Item 4. Controls and Procedures...............................................25
Part II Other Information
Item 1. Legal Proceedings.....................................................26
Item 2. Changes in Securities and Use of Proceeds.............................26
Item 3. Defaults Upon Senior Securities.......................................26
Item 4. Submission of Matters to a Vote of Security Holders...................26
Item 5. Other Information.....................................................26
Item 6. Exhibits and Reports on Form 8-K......................................26
Signatures............................................................27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in millions, except share data)
September 30, 2003 December 31, 2002
-------------------------- --------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 60.4 $ 156.9
Accounts receivable - trade, less allowance for doubtful
accounts of $3.2 (September 30, 2003)
and $3.9 (December 31, 2002) 82.5 73.8
Inventories, net 165.2 163.2
Other current assets 12.4 22.8
------ --------
Total current assets 320.5 416.7
Property and equipment, net 106.6 115.5
Goodwill 350.1 344.7
Identifiable intangible assets, net 159.5 165.2
Other assets, net 27.8 25.0
------ --------
$964.5 $1,067.1
====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 53.2 $ 67.3
Accrued liabilities 73.3 69.6
Current maturities of long-term debt 3.2 16.9
------ --------
Total current liabilities 129.7 153.8
Long-term debt, net of current maturities 784.4 836.0
Other non-current liabilities 6.8 8.0
Commitments, contingencies and off-balance sheet arrangements (Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value; 1.0 million shares
authorized; no shares outstanding -- --
Common stock, $0.01 par value; 100 million shares
authorized; 36.6 million (September 30, 2003) and
35.2 million (December 31, 2002) shares issued
and outstanding 0.4 0.3
Additional paid-in capital 413.2 410.1
Accumulated deficit (363.5) (329.5)
Accumulated other comprehensive loss (6.5) (11.6)
------ --------
Total stockholders' equity 43.6 69.3
------ --------
$964.5 $1,067.1
====== ========
See accompanying notes to condensed consolidated financial statements.
3
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in millions, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -------------------------------
September September September September
30, 2003 30, 2002 30, 2003 30, 2002
--------------- -------------- --------------- ---------------
Net sales $154.5 $152.5 $461.0 $449.7
Cost of sales 109.4 106.3 329.7 303.0
------ ------ ------ ------
Gross profit 45.1 46.2 131.3 146.7
Operating expenses:
Selling, general and administrative 25.1 28.0 79.7 84.9
Research, development and engineering 11.7 9.8 32.5 28.9
------ ------ ------ ------
Total operating expenses 36.8 37.8 112.2 113.8
------ ------ ------ ------
Operating earnings 8.3 8.4 19.1 32.9
Interest expense, net 16.9 16.9 50.9 50.5
------ ------ ------ ------
Loss before income taxes (8.6) (8.5) (31.8) (17.6)
Income taxes 0.5 0.9 2.2 0.9
------ ------ ------ ------
Net loss $ (9.1) $ (9.4) $(34.0) $(18.5)
====== ====== ====== ======
Loss per common share:
Basic and diluted $(0.25) $(0.27) $(0.95) $(0.53)
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
4
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
NINE MONTHS ENDED
---------------------------------------------
September September
30, 2003 30, 2002
-------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (34.0) $ (18.5)
Adjustments to reconcile net loss to net cash flows
(used in) provided by operating activities:
Depreciation and amortization 21.4 24.9
Non-cash employee benefit plan contributions 1.7 1.7
Loss on disposal of property and equipment 1.4 1.3
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable (6.7) 7.6
Inventories (0.3) (13.0)
Other current assets 11.0 30.0
Payables, accruals and other liabilities (15.7) (33.6)
------- -------
Net cash flows (used in) provided by operating activities (21.2) 0.4
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8.8) (14.5)
Proceeds from real estate sales 2.3 28.7
Acquisitions, net of cash acquired (2.7) (4.5)
Change in intangible and other assets (3.3) 1.4
------- -------
Net cash flows (used in) provided by investing activities (12.5) 11.1
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under bank credit facilities (65.0) (0.9)
Proceeds from issuances of common stock, net of expenses 1.4 2.0
Principal payments on long-term debt (0.6) (1.1)
------- -------
Net cash flows used in financing activities (64.2) --
------- -------
Effect of exchange rate changes on cash flows 1.4 2.2
------- -------
Net (decrease) increase in cash and cash equivalents (96.5) 13.7
Cash and cash equivalents, beginning of period 156.9 139.3
------- -------
Cash and cash equivalents, end of period $ 60.4 $ 153.0
======= =======
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest, net $ 44.3 $ 45.8
Income taxes, net $ 1.5 $ 1.8
See accompanying notes to condensed consolidated financial statements.
5
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars In Millions, Except Per Share Data)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and are unaudited
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. All adjustments which,
in the opinion of management, are considered necessary for a fair
presentation of the results of operations for the periods shown, are of a
normal recurring nature and have been reflected in the condensed
consolidated financial statements. The results of operations for the periods
presented are not necessarily indicative of the results expected for the
full fiscal year or for any future period. The information included in these
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and accompanying notes included
in the BE Aerospace, Inc. (the "Company" or "B/E") Annual Report on Form
10-K for the ten-month transition period ended December 31, 2002.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts and related disclosures. Actual results could differ from those
estimates. Certain reclassifications have been made for consistent
presentation.
In October 2002, the Company changed its fiscal year end from the last
Saturday in February to December 31, effective with the transition period
ended on December 31, 2002. During March 2003, the Company reported the
transition period in the Company's Annual Report on Form 10-K for the period
ended December 31, 2002.
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 stock
purchase plans. Accordingly, no compensation cost has been recognized for
its stock option and stock purchase plans. Had compensation cost for the
Company's stock option and stock purchase plans been determined consistent
with Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss and net
loss per share for the three and nine months ended September 30, 2003 and
2002, respectively, would have been the pro forma amounts indicated in the
following table:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- ------------------------------
September September September September
30, 2003 30, 2002 30, 2003 30, 2002
--------------- --------------- --------------- --------------
Net loss as reported $ (9.1) $ (9.4) $ (34.0) $ (18.5)
Expense per SFAS No. 123,
fair value method, net of
related tax effects 0.8 2.2 2.9 5.4
------- ------- ------- -------
Pro forma $ (9.9) $ (11.6) $ (36.9) $ (23.9)
------- ------- ------- -------
Basic and diluted net loss per share:
As reported $ (0.25) $ (0.27) $ (0.95) $ (0.53)
======= ======= ======= =======
Pro forma $ (0.27) $ (0.33) $ (1.03) $ (0.69)
======= ======= ======= =======
6
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except Per Share Data)
Note 2. Industry Conditions
The September 11, 2001 terrorist attacks have severely impacted
conditions in the airline industry. According to industry sources, since
such attacks most major U.S. and a number of international carriers have
substantially reduced their flight schedules, parked or retired portions of
their fleets, reduced their workforce and implemented other cost reduction
initiatives. The airlines have further responded by decreasing domestic
airfares. As a result of the decline in both traffic and airfares following
the September 11, 2001 terrorist attacks, and their aftermath, as well as
other factors, such as the weakening economy and increases in fuel costs,
the world airline industry lost a total of $25 billion in calendar 2001 and
2002. The airline industry crisis also caused 17 airlines worldwide to
declare bankruptcy or cease operations in the past two years. The onset of
war in Iraq and the Severe Acute Respiratory Syndrome (SARS) virus outbreak
during the first quarter of 2003 further adversely affected the world
airline industry. More recent trends indicate that the industry appears to
be making a significant recovery, particularly in the second half of 2003.
The business jet industry has also been experiencing a severe downturn,
driven by weak economic conditions and poor corporate profits. In late 2002,
all of the major business jet manufacturers announced plans to reduce or
temporarily halt production of a number of aircraft types. Business jet
airframe manufacturers announced further planned production cuts in early
2003. Deliveries of new business jets were down 33% for the first half of
2003 compared to the same period a year ago, and on an annualized basis were
down almost 45% versus two years ago. New business jet deliveries are
expected to remain depressed for the foreseeable future, according to
industry forecasts.
As a result of the foregoing, the airlines have been seeking to conserve
cash in part by deferring or eliminating cabin interior refurbishment
programs and deferring or canceling aircraft purchases. This, together with
the reduction of new business jet production, has caused a substantial
contraction in our business, the extent and duration of which cannot be
determined at this time. The Company expects 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 commercial
airline and business jet industries improve. Additional events similar to
those above could delay any recovery in the industry. While management has
developed and implemented what it believes is an aggressive cost reduction
plan to counter these difficult conditions, it cannot guarantee that the
plans are adequate or will be successful. (See Note 3.)
Note 3. Facility Consolidations and Other Special Charges
The rapid decline in industry conditions described in Note 2 caused the
Company 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, which is
substantially completed, included closing five facilities, relocating 12
major production lines and reducing workforce by approximately 1,500
employees, net of several hundred employees that were hired and trained to
operate the relocated production lines. The total estimated cost of this
program is approximately $166.0, including $76.0 of cash charges. Through
September 30, 2003, the Company had incurred approximately $164.1 of costs
related to this program, including $74.1 of cash costs. As of December 31,
2002, the Company had $3.8 of accrued severance and related costs. During
the nine months ended September 30, 2003, the Company paid $3.3 of these
costs (primarily related to the closure of its Dafen, Wales facility, which
was closed on June 30, 2003), leaving $0.5 of such costs accrued as of
September 30, 2003.
7
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except Per Share Data)
Note 4. 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 indefinite-lived 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 acquisition transactions:
September 30, 2003 December 31, 2002
--------------------------------------- -------------------------------------
Net Net
Useful Life Original Accumulated Book Original Accumulated Book
(Years) Cost Amortization Value Cost Amortization Value
------------- ---------- --------------- ------------ ------------ -------------- ---------
Acquired technologies 4-30 $ 93.6 $16.7 $ 76.9 $ 93.2 $14.4 $ 78.8
Trademarks and patents 7-30 25.7 9.8 15.9 26.0 8.5 17.5
Trademarks (nonamortizing) -- 20.6 -- 20.6 19.4 -- 19.4
Technical qualifications, plans 3-30 26.4 13.8 12.6 26.1 12.8 13.3
and drawings
Replacement parts annuity
and product approvals 3-30 40.0 20.1 19.9 39.2 18.2 21.0
Covenants not to compete and
other identified intangibles 3-10 24.5 10.9 13.6 24.8 9.6 15.2
------- ----- ------- ------- ----- -------
$ 230.8 $ 71.3 $ 159.5 $ 228.7 $63.5 $ 165.2
======= ====== ======= ======= ===== =======
In accordance with SFAS No. 142, the Company has completed the fair value
analysis for goodwill and other intangible assets as of June 30, 2003, and
concluded that no impairment existed. As of September 30, 2003, the Company
believed that no indicators of impairment existed. Aggregate amortization
expense on identifiable intangible assets was approximately $2.3 and $2.2
for the three months ended September 30, 2003 and 2002, and $6.8 and $7.7
for the nine months ended September 30, 2003 and 2002. Amortization expense
is expected to be approximately $9.0 in each of the next five fiscal years.
Changes to the original cost basis of goodwill during the nine months
ended September 30, 2003 were due to an acquisition and foreign currency
fluctuations. The change in the carrying amount of goodwill for the nine
months ended September 30, 2003 is as follows:
Balance as of December 31, 2002 $ 344.7
Acquisition 2.7
Effect of foreign currency translation 2.7
-------
Balance as of September 30, 2003 $ 350.1
=======
SFAS No. 142, which required the discontinuation of goodwill
amortization, became effective for the Company on February 24, 2002. A
reconciliation of reported net loss to net loss adjusted to reflect the
adoption of the non-amortization provisions of SFAS No. 142 in the nine
months ended September 30, 2003 and September 30, 2002 is as follows:
NINE MONTHS ENDED
-----------------------------------------------
September September
30, 2003 30, 2002
----------------------- -----------------------
Net loss:
As reported $ (34.0) $ (18.5)
Goodwill amortization, net of taxes -- 1.5
------- -------
As adjusted $ (34.0) $ (17.0)
======= =======
Basic and diluted loss per common share:
As reported $ (0.95) $ (0.53)
======= =======
As adjusted $ (0.95) $ (0.49)
======= =======
8
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except Per Share Data)
Note 5. Long-Term Debt
The Company amended its $150.0 credit facility with JPMorgan Chase Bank
several times during 2003. The most recent amendment, effective on October
7, 2003, reduced the facility to $50.0 (the "Amended Bank Credit Facility").
The Amended Bank Credit Facility expires in August 2006, is collateralized
by substantially all of the Company's assets and contains customary
affirmative covenants, negative covenants and conditions of borrowings, all
of which were met as of September 30, 2003.
At September 30, 2003, indebtedness under the Amended Bank Credit
Facility consisted of letters of credit aggregating approximately $6.5 and
outstanding borrowings aggregating $79.0 (bearing interest at 400 basis
points over the Eurodollar rate, or approximately 5.1% as of September 30,
2003). The amount available under the Amended Bank Credit Facility was $34.5
as of September 30, 2003.
Borrowings under this facility were repaid on October 7, 2003 with
proceeds from a private offering of senior notes (See Note 11).
Consequently, B/E currently has no bank borrowings outstanding. Available
bank credit totaled $43.5 following the amendment effective on October 7,
2003, reflecting letters of credit totaling $6.5.
Note 6. Commitments, Contingencies and Off-Balance Sheet Arrangements
Sale-Leaseback Transactions -- During September 2002, the Company entered
into two sale-leaseback transactions involving four of its facilities. Under
the transactions, 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. A gain of $4.8
resulting from the sales has been deferred and is being amortized 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 September 30, 2003, future minimum lease payments under these
arrangements approximated $73.9.
Legal Settlement -- 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 totalling $31.4, and a third payment based on actual sales and
bookings as defined in the agreement (the "IFE obligations"). Sextant did
not make 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 a net amount of $7.8, which was collected during the quarter ended
March 31, 2003. During the quarter ended June 30, 2003, the Company received
an additional $9.0 related to the resolution of the final matters associated
with the IFE Sale.
Indemnities, Commitments and Guarantees -- During its normal course of
business, the Company has made certain indemnities, commitments and
guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include non-infringement of patents
and intellectual property indemnities to the Company's customers in
connection with the delivery, design, manufacture and sale of its products,
indemnities to various lessors in connection with facility leases for
certain claims arising from such facility or lease, and indemnities to other
parties to certain acquisition agreements. The duration of these
indemnities, commitments and guarantees varies, and in certain cases is
indefinite. The Company believes that substantially all of these
indemnities, commitments and guarantees provide for limitations on the
maximum potential future payments the
9
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except Per Share Data)
Company could be obligated to make. However, the Company is unable to
estimate the maximum amount of liability related to its indemnities,
commitments and guarantees because such liabilities are contingent upon the
occurrence of events which are not reasonably determinable. Management
believes that any liability for these indemnities, commitments and
guarantees would not be material to the accompanying condensed consolidated
financial statements. In accordance with FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees and Indebtedness of Others," no expenses have
been accrued for indemnities, commitments and guarantees.
Product Warranty Costs - Estimated costs related to product warranties
are accrued at the time products are sold. In estimating its future warranty
obligations, the Company considers various relevant factors, including the
Company's stated warranty policies and practices, the historical frequency
of claims and the cost to replace or repair its products under warranty. The
following table provides a reconciliation of the activity related to the
Company's accrued warranty expense:
NINE MONTHS ENDED
----------------------------------
September September
30, 2003 30, 2002
-------------- ---------------
Beginning balance $ 8.9 $ 10.0
Charges to costs and expenses 4.4 4.2
Costs incurred (3.1) (4.3)
-------------- ---------------
Ending balance $ 10.2 $ 9.9
============== ===============
Note 7. Segment Reporting
The Company is organized based on the products and services it offers.
Under this organizational structure, the Company has three reportable
segments: Commercial Aircraft Products, Business Jet Products and Fastener
Distribution. The Company's Commercial Aircraft Products segment consists of
eight principal operating units while the Business Jet Products and Fastener
Distribution segments consist of two and one principal operating units,
respectively. Such operating units have been aggregated for segment
reporting purposes due to their similar nature. The Company evaluates
segment performance based on segment operating earnings (loss).
Each segment reports its results of operations and makes requests for
capital expenditures and acquisition funding to the Company's chief
operational decision-making group. This group is presently comprised of the
Chairman, 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
customers.
The following table presents net sales and other financial information
by business segment:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ----------------------------------
September September September September
30, 2003 30, 2002 30, 2003 30, 2002
--------------- -------------- -------------- ---------------
Commercial Aircraft Products
Net sales $ 113.7 $ 106.4 $ 332.2 $ 314.2
Operating earnings 5.8 1.0 4.7 10.1
Business Jet Products
Net sales 14.5 22.4 51.0 63.7
Operating earnings (loss) (1.4) 3.2 0.7 9.7
Fastener Distribution
Net sales 26.3 23.7 77.8 71.8
Operating earnings 3.9 4.2 13.7 13.1
Consolidated
Net sales 154.5 152.5 461.0 449.7
Operating earnings 8.3 8.4 19.1 32.9
10
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except Per Share Data)
Note 8. Net Loss Per Common Share
Basic net loss per common share is computed using the weighted average
common shares outstanding during the period. Diluted net loss per common
share is computed by using the average share price during the period when
calculating the dilutive effect of stock options. Shares outstanding for the
periods presented were as follows (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- --------------------------------
September September September September
30, 2003 30, 2002 30, 2003 30, 2002
--------------- --------------- ---------------- ---------------
Basic and diluted weighted average
common shares 36.2 34.9 35.8 34.7
==== ==== ==== ====
The Company excluded potentially dilutive securities of 0.7 and 0.9 from
the calculation of loss per share for the three and nine months ended
September 30, 2002 as the effect of including these securities would be
anti-dilutive. There were no securities that qualified as dilutive for the
three and nine months ended September 30, 2003.
Note 9. Comprehensive Loss
Comprehensive loss is defined as all changes in a company's net assets
except changes resulting from transactions with shareholders. It differs
from net loss in that certain items currently recorded to equity would be a
part of comprehensive loss. The following table sets forth the computation
of comprehensive loss for the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- -------------------------------
September September September September
30, 2003 30, 2002 30, 2003 30, 2002
----------------- ---------------- --------------- ---------------
Net loss $(9.1) $(9.4) $(34.0) $(18.5)
Other comprehensive earnings:
Foreign exchange translation
adjustment -- 2.6 5.1 8.6
----- ----- ------ ------
Comprehensive loss $(9.1) $(6.8) $(28.9) $ (9.9)
===== ===== ====== ======
Note 10. Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment to Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, with exceptions for certain provisions. The
adoption of SFAS No. 149 on July 1, 2003 did not have a significant impact
on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity," which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
SFAS No. 150 requires that an issuer classify a financial instrument that is
within its scope, which may have previously been reported as equity, as a
liability (or an asset in some circumstances). This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 on July 1, 2003
did not have a significant impact on the Company's financial statements.
11
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited - Dollars In Millions, Except Per Share Data)
Note 11. Subsequent Event
On October 7, 2003, the Company completed a $175.0 private offering of 8
1/2% senior notes due 2010. Estimated net proceeds of the offering totaled
$168.9 and were used to repay all amounts outstanding under the Amended Bank
Credit Facility, which totaled $79.0. The balance will be used for general
corporate purposes. Interest on the notes is payable semiannually beginning
on April 1, 2004. In connection with the notes offering, the Company amended
its Amended Bank Credit Facility, reducing total commitments to $50.0. As a
result of the notes offering, B/E now has no bank borrowings outstanding.
Available bank credit totaled $43.5 following the amendment effective on
October 7, 2003, reflecting letters of credit totaling $6.5.
[Remainder of page intentionally left blank]
12
BE AEROSPACE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Dollars In Millions, Except Share Data)
The following discussion and analysis addresses the results of our
operations for the three months ended September 30, 2003, as compared to our
results of operations for the three months ended September 30, 2002. The
discussion and analysis then addresses the results of our operations for the
nine months ended September 30, 2003, as compared to our results of
operations for the nine months ended September 30, 2002. The discussion and
analysis also addresses our liquidity and financial condition and other
matters.
AIRLINE INDUSTRY CRISIS, BUSINESS JET INDUSTRY CHANGES AND THEIR IMPACT ON
THE COMPANY
The September 11, 2001 terrorist attacks have severely impacted
conditions in the airline industry. According to industry sources, since
such attacks most major U.S. and a number of international carriers have
substantially reduced their flight schedules, parked or retired portions of
their fleets, reduced their workforce and implemented other cost reduction
initiatives. The airlines have further responded by decreasing domestic
airfares. As a result of the decline in both traffic and airfares following
the September 11, 2001 terrorist attacks, and their aftermath, as well as
other factors, such as the weakening economy and increases in fuel costs,
the world airline industry lost a total of $25 billion in calendar 2001 and
2002. The airline industry crisis also caused 17 airlines worldwide to
declare bankruptcy or cease operations in the past two years. The onset of
war in Iraq and the Severe Acute Respiratory Syndrome (SARS) virus outbreak
during the first quarter of 2003 further adversely affected the world
airline industry. More recent trends indicate that the industry appears to
be making a significant recovery, particularly in the second half of 2003.
The business jet industry has also been experiencing a severe downturn,
driven by weak economic conditions and poor corporate profits. In late 2002,
all of the major business jet manufacturers announced plans to reduce or
temporarily halt production of a number of aircraft types. Business jet
airframe manufacturers announced further planned production cuts in early
2003. Deliveries of new business jets were down 33% for the first half of
2003 compared to the same period a year ago, and on an annualized basis were
down almost 45% versus two years ago. New business jet deliveries are
expected to remain depressed for the foreseeable future, according to
industry forecasts.
As a result of the foregoing, the airlines have been seeking to conserve
cash in part by deferring or eliminating cabin interior refurbishment
programs and deferring or canceling aircraft purchases. This, together with
the reduction of new business jet production, 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 commercial airline and
business jet industries improve. While management has developed and
implemented what it believes is an aggressive cost reduction plan to counter
these difficult conditions, it cannot guarantee that the plans are adequate
or will be successful.
This rapid decline in industry conditions caused us to implement a
facility consolidation and integration plan designed to re-align our
capacity and our cost structure with changed conditions in the airline
industry. The facility consolidation and integration plan, which is
substantially completed, included closing five facilities, relocating 12
major production lines and reducing workforce by approximately 1,500
employees, net of several hundred employees that were hired and trained to
operate the relocated production lines. We believe these initiatives will
enable us to significantly expand profit margins when industry conditions
improve and demand increases, and more effectively leverage our resources.
The total estimated cost of this program is approximately $166.0, including
$76.0 of cash charges. Through September 30, 2003, the Company had incurred
approximately $164.1 of costs related to this program, including $74.1 of
cash costs. We believe this program has eliminated over $45 of annual cash
costs from our business.
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BE AEROSPACE, INC.
The following are unaudited condensed financial summaries for the
three-month periods ended September 30, 2003, June 30, 2003, and September
30, 2002 and the nine-month periods ended September 30, 2003 and 2002:
($ in millions)
--------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------- -----------------------------
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
2003 2003 2002 2003 2002
-------------- ------------- ------------ --------------- -------------
Net sales $154.5 $151.8 $152.5 $461.0 $449.7
Gross profit 45.1 39.8 46.2 131.3 146.7
Gross margin 29.2% 26.2% 30.3% 28.5% 32.6%
Operating expenses 36.8 36.0 37.8 112.2 113.8
-------------- ------------- ------------ --------------- -------------
Operating earnings 8.3 3.8 8.4 19.1 32.9
Interest expense 16.9 17.2 16.9 50.9 50.5
-------------- ------------- ------------ --------------- -------------
Loss before income taxes (8.6) (13.4) (8.5) (31.8) (17.6)
Income taxes 0.5 0.7 0.9 2.2 0.9
-------------- ------------- ------------ --------------- -------------
Net loss $ (9.1) $(14.1) $ (9.4) $(34.0) $(18.5)
============== ============= ============ =============== =============
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BE AEROSPACE, INC.
THREE MONTHS ENDED SEPTEMBER 30, 2003, AS COMPARED TO THE RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
Sales for each of our segments are set forth in the following table:
THREE MONTHS ENDED:
--------------------------------------------------
September 30, September 30,
2003 2002 Change
------------------------- ------------------------ ----------------
Commercial Aircraft Products $113.7 $106.4 $7.3
Business Jet Products 14.5 22.4 (7.9)
Fastener Distribution 26.3 23.7 2.6
------------------------- ------------------------ ----------------
Net sales $154.5 $152.5 $2.0
========================= ======================== ================
Net sales for the three months ended September 30, 2003 were virtually
unchanged compared to the same period in the prior year. Sales for both
periods are down approximately 30% compared to annualized pre-September 2001
levels, adjusted for acquisitions.
Sales in the commercial aircraft products segment were up $7.3 or 6.8%
compared to the same period in the prior year primarily due to an increase
in seating products sold. In the business jet segment, sales were down $7.9
or 35.3% compared to the prior year reflecting the substantial decline in
deliveries of new business jets. New business jet deliveries decreased by
33% for the first half of this year compared to the same period last year
and on an annualized basis were nearly 45% lower than deliveries two years
ago. Fastener distribution revenues were up $2.6 or 11.0% compared to the
prior year. All of the growth at fastener distribution is due to market
share gain.
Gross profit for the quarter ended September 2003 was $45.1, down $1.1
compared to the same period a year ago. Gross margin was 29.2% for the
quarter just ended, down compared to 30.3% a year ago. Lower consolidation
and integration costs were more than offset by a reduction in gross margin
due to a shift in the mix of products sold. Cash consolidation and
integration costs include learning curve costs associated with the 12 major
production lines that were relocated as part of our facility consolidation
program, severance, air freight and other similar costs. The following table
illustrates the continuing actual and expected decline in consolidation
costs:
Cash Consolidation and Integration Costs
($ millions)
6 months ended December 2002.............................$31
6 months ended June 2003..................................16
3 months ended September 2003..............................4
3 months ended December 2003 (estimate)....................2
A shift in mix of products sold adversely affected gross margin. Lower
sales at the business jet segment were offset by a $7.4 increase in coach
class seat sales in the Commercial Aircraft Products segment. However,
despite the increased sales of coach class seats, margins decreased because
coach class seats are lower-margin products.
Research, development and engineering expenses were $11.7 or 7.6% of net
sales for the quarter just ended, compared with $9.8 or 6.4% of sales for
the same period last year. The increase in expenses compared to last year
was attributable to new product development associated with the launch of
the Airbus A380 aircraft.
Selling, general and administrative expenses decreased to $25.1 or 16.2%
of net sales for the current period, as compared to $28.0 or 18.4% of net
sales during the same period last year and $34.1 in the same period in 2001.
We expect that our selling, general and administrative expenses will remain
at approximately this level through the balance of 2003.
Due to the factors cited above, we reported operating earnings of $8.3 or
5.4% of sales for the current quarter, essentially unchanged compared to
$8.4 or 5.5% of sales for the third quarter a year ago but $4.5, or 118.4%
higher than the immediately preceding quarter ended June 30, 2003.
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BE AEROSPACE, INC.
Interest expense, net was $16.9 for the quarter just ended, unchanged
compared to $16.9 a year ago.
Income tax expense for the quarter just ended was $0.5, down compared to
$0.9 in the same period last year. These amounts are foreign taxes that
cannot be offset with domestic tax loss carryforwards.
Net loss was $9.1, or $0.25 per share for the quarter just ended,
essentially unchanged compared to a net loss of $9.4 or $0.27 per share for
the same period last year, reflecting the above-mentioned factors.
On a sequential basis, gross margin and operating margin improved, and
net loss decreased for the quarter just ended compared to the immediately
preceding quarter ended June 30, 2003. Sequentially, gross margin increased
by 300 basis points, operating margin increased by 290 basis points and net
loss decreased by $5.0.
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BE AEROSPACE, INC.
NINE MONTHS ENDED SEPTEMBER 30, 2003, AS COMPARED TO THE RESULTS OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Sales for each of our segments are set forth in the following table:
NINE MONTHS ENDED:
--------------------------------------------------
September 30, September 30,
2003 2002 Change
------------------------- ------------------------ ----------------
Commercial Aircraft Products $332.2 $314.2 $ 18.0
Business Jet Products 51.0 63.7 (12.7)
Fastener Distribution 77.8 71.8 6.0
------------------------- ------------------------ ----------------
Net Sales $461.0 $449.7 $ 11.3
========================= ======================== ================
Consolidated net sales for the nine months ended September 30, 2003 were
up $11.3 or 2.5% compared to the same period in the prior year. Revenues for
both periods are down approximately 30% compared to pro forma annualized
pre-September 2001 levels, adjusted for acquisitions.
Sales within the commercial aircraft products segment were up $18.0 or
5.7% compared to the prior year, primarily due to an increase in legacy
tourist class seats. In the business jet segment, sales were down $12.7 or
19.9% compared to the prior year, reflecting the substantial decline in
deliveries of new business jets. The business jet segment revenue decline
was partially offset by completion center work. Fastener distribution sales
were up $6.0 or 8.4% compared to the prior year, due entirely to market
share gains.
Gross profit was $131.3, or 28.5% of net sales, compared to $146.7, or
32.6% of net sales in the same period of the prior year. The decrease in
gross profit is primarily due to the deterioration of conditions in the
business jet sector, which was partially offset with lower margin business
jet completion work. Revenues from the business jet segment declined by
19.9%. The revenue decline in the business jet segment was offset by an
increase in lower margin coach class seating products in the Commercial
Aircraft Products segment. In addition to sales mix, factors negatively
impacting our margins in the current period included: facility consolidation
and integration costs, including start-up and learning curve costs
associated with the 12 relocated major production lines as well as
substantial inefficiencies at our Dafen, Wales facility that was closed on
June 30, 2003; the impact of the strengthening of the Euro and British pound
versus the U.S. dollar; and charges to reduce inventories to estimated
current values.
Research, development and engineering expenses were $32.5 or 7.0% of net
sales as compared with $28.9 or 6.4% of net sales for the same period in the
prior year. The increase in expenses was attributable to new product
development programs associated with the launch of the Airbus A380 aircraft.
Selling, general and administrative expenses were $79.7 or 17.3% of net
sales, down $5.2 compared to $84.9 or 18.9% of net sales a year ago and down
$11.1 compared to the same period in 2001.
During the nine months ended September 30, 2003 we received $9.0 in
connection with the resolution of final matters related to the 1999 sale of
our In-Flight Entertainment business, offset by current period charges
totaling $7.0 primarily related to inventories, increasing our allowance for
bad debts, and reducing properties held for sale to estimated current
values.
Due to the factors cited above, we generated operating earnings of $19.1
or 4.1% of net sales for the nine-month period. The decreased operating
earnings reflect lower margins due to the steep decline in Business Jet
Product sales, poor product mix in our Commercial Aircraft Products segment,
start-up and learning curve costs on the relocated production lines and
adverse foreign exchange impacts.
Interest expense, net was $50.9, or $0.4 greater than the same period in
the prior year.
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BE AEROSPACE, INC.
Income tax expense was $2.2 as compared to $0.9 in the same period a year
ago. The increase was due to taxes on foreign earnings that cannot be offset
with domestic tax loss carry-forwards.
Net loss was $34.0 or $0.95 per share for the current nine-month period
as compared to a net loss of $18.5 or $0.53 per share for the same period
last year. The increased loss reflects the above-mentioned factors.
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BE AEROSPACE, INC.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
Our liquidity requirements consist of working capital needs, cash
requirements for our facility consolidation and personnel reduction programs,
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 consists of accounts
receivable and inventories, which fluctuate with the sales of our products. Our
working capital was $190.8 as of September 30, 2003, as compared to $262.9 as of
December 31, 2002. The decrease in working capital is primarily due to the $65.0
paydown of our Amended Bank Credit Facility (as defined below).
At September 30, 2003, our cash and cash equivalents were $60.4, as compared
to $156.9 at December 31, 2002. This decrease in cash was primarily due to a
$65.0 paydown of our Amended Bank Credit Facility, our net loss and other
changes in working capital.
We currently have no bank borrowings outstanding and no debt maturity
payments due until 2008. This improvement in our liquidity profile occurred
because of a recently completed financing. On October 7, 2003, we completed,
through a private placement, the sale of $175.0 of 8.5% senior notes due 2010.
The net proceeds of approximately $168.9 from this financing were used in part
to repay all borrowings under our Amended Bank Credit Facility, and the
remaining proceeds will be used for general corporate purposes. In connection
with the notes offering, effective on October 7, 2003 we amended our Amended
Bank Credit Facility, reducing total commitments to $50.0, of which $43.5 is
currently available, reflecting letters of credit totaling $6.5.
Cash Flows
At September 30, 2003, our cash and bank credit available under our Amended
Bank Credit Facility was $94.9 compared to $157.3 at December 31, 2002. Cash
used in operating activities was $21.2 for the nine months ended September 30,
2003. The primary use of cash was a net loss of $34.0 and $11.7 of uses related
to changes in our operating assets and liabilities offset by non-cash charges
from amortization and depreciation of $21.4.
During the nine months ended September 30, 2003, we used $65.0 of cash to
pay down our Amended Bank Credit Facility. On October 7, 2003 we repaid all
remaining outstanding bank borrowings.
Capital Spending
Our capital expenditures were $8.8 and $14.5 during the nine months ended
September 30, 2003 and September 30, 2002, respectively. The period over period
decrease in capital expenditures is in line with our expectation for annual
capital expenditures of approximately $15.0. 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
Amended Bank Credit Facility. We expect to fund future capital expenditures from
cash on hand, from operations and from funds available to us under our Amended
Bank Credit Facility. In addition, since 1989, we have completed 24 acquisitions
for an aggregate purchase price of approximately $982.7. Following these
acquisitions, we rationalized the businesses, reducing headcount by nearly 4,400
employees and eliminating 22 facilities. We have financed these acquisitions
primarily through issuances of debt and equity securities, including our
outstanding 8% Notes due 2008, 8 7/8% Notes due 2011, 9 1/2% Notes due 2008 and
the Amended Bank Credit Facility.
Outstanding Debt and Other Financing Arrangements
On October 7, 2003, we completed a $175.0 private offering of 8 1/2% senior
notes due in 2010. Estimated net proceeds of the offering totaled $168.9 and
were used in part to repay all $79.0 outstanding under the Amended Bank Credit
Facility, and the remaining proceeds will be used for general corporate
purposes. Interest on the notes is payable semiannually beginning on April 1,
2004. In connection with the notes offering, we amended our Amended Bank Credit
Facility, reducing total commitments to $50.0, of which $43.5 is available,
reflecting the letters of credit previously mentioned herein.
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BE AEROSPACE, INC.
Long-term debt also includes our 8% Notes, 8 7/8% Notes and 9 1/2% Notes
(the "Notes"). The $250.0 of 8% Notes mature on March 1, 2008, the $250.0 of 8
7/8% Notes mature on May 1, 2011 and the $200.0 of 9 1/2% Notes mature on
November 1, 2008. The Notes are unsecured senior subordinated obligations and
are subordinated to all of our senior indebtedness. Each of the indentures
governing the Notes contain restrictive covenants, including limitations on
future indebtedness, restricted payments, transactions with affiliates, liens,
dividends, mergers and transfers of assets, all of which we met as of September
30, 2003. The Amended Bank Credit Facility also contains customary affirmative
covenants, negative covenants and conditions of borrowing, all of which were met
as of September 30, 2003. 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 September 30, 2003. 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. On October 7, 2003, we repaid all outstanding bank borrowings. See
"Outstanding Debt and Other Financing Arrangements".
Contractual Obligations 2003 2004 2005 2006 2007 Thereafter Total
----------- ------------ ----------- ----------- ------------ ------------- ------------
Amended Bank Credit Facility $ -- $ -- $ -- $79.0 $ -- $ -- $ 79.0
Other long-term debt 3.1 0.5 0.5 0.5 4.0 700.0 708.6
Operating leases 2.8 7.8 6.9 6.1 6.0 44.3 73.9
---- ---- ---- ----- ----- ------ ------
Total $5.9 $8.3 $7.4 $85.6 $10.0 $744.3 $861.5
==== ==== ==== ===== ===== ====== ======
Commercial Commitments
Letters of Credit $ -- $ -- $ -- $ 6.5 $ -- $ -- $ 6.5
We believe that our cash flows, together with cash on hand, provide us with
the ability to fund our operations, make planned capital expenditures and make
scheduled debt service payments for the foreseeable future. However, such cash
flows are dependent upon our future operating performance, which, in turn, is
subject to prevailing economic conditions and to financial, business and other
factors, including the conditions of our markets, some of which are beyond our
control. If, in the future, we cannot generate sufficient cash from operations
to meet our debt service obligations, we will need to refinance such debt
obligations, obtain additional financing or sell assets. We cannot assure you
that our business will generate cash from operations, or that we will be able to
obtain financing from other sources, sufficient to satisfy our debt service or
other requirements.
Sale-Leaseback
During September 2002, we entered into two sale-leaseback transactions
involving four of our facilities. Under the transactions, 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 sale has been deferred and is being amortized to rent
expense over the initial term of the leases.
Off-Balance Sheet Arrangements - Lease Arrangements
We finance our use of certain 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 September 30, 2003, future minimum lease payments under these
arrangements approximated $73.9.
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BE AEROSPACE, INC.
Indemnities, Commitments and Guarantees
During the normal course of business, we made certain indemnities,
commitments and guarantees under which we may be required to make payments in
relation to certain transactions. These indemnities include non-infringement of
patents and intellectual property indemnities to our customers in connection
with the delivery, design, manufacture and sale of our products, indemnities to
various lessors in connection with facility leases for certain claims arising
from such facility or lease, and indemnities to other parties to certain
acquisition agreements. The duration of these indemnities, commitments and
guarantees varies, and in certain cases is indefinite. We believe that
substantially all of our indemnities, commitments and guarantees provide for
limitations on the maximum potential future payments we could be obligated to
make. However, we are unable to estimate the maximum amount of liability related
to our indemnities, commitments and guarantees because such liabilities are
contingent upon the occurrence of events which are not reasonably determinable.
Management believes that any liability for these indemnities, commitments and
guarantees would not be material to our accompanying condensed consolidated
financial statements.
Product Warranty Costs - Estimated costs related to product warranties are
accrued at the time products are sold. In estimating our future warranty
obligations, we consider various relevant factors, including our stated warranty
policies and practices, the historical frequency of claims and the cost to
replace or repair our products under warranty. The following table provides a
reconciliation of the activity related to our accrued warranty expense:
NINE MONTHS ENDED
----------------------------------
September September
30, 2003 30, 2002
-------------- ---------------
Beginning balance $ 8.9 $10.0
Charges to costs and expenses 4.4 4.2
Costs incurred (3.1) (4.3)
-------------- ---------------
Ending balance $10.2 $ 9.9
============== ===============
Deferred Tax Assets
We established a valuation allowance related to the utilization of our
deferred tax assets because of uncertainties that preclude us from determining
that it is more likely than not that we will be able to generate taxable income
to realize such assets during the federal operating loss carryforward period,
which begins to expire in 2012. Such uncertainties include recent cumulative
losses, the highly cyclical nature of the industry in which we operate, risks
associated with our facility consolidation plan, our high degree of financial
leverage, risks associated with new product introductions, recent increases in
the cost of fuel and its impact on our airline customers, and risks associated
with the integration of acquired businesses. We monitor these uncertainties, as
well as other positive and negative factors that may arise in the future, as we
assess the necessity for a valuation allowance for our deferred tax assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments, embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, with exceptions for certain provisions. The
adoption of SFAS No. 149 on July 1, 2003 did not have a significant impact on
our financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity," which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope, which may have previously been reported as equity, as a liability (or
an asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 on July 1, 2003 did not have a significant
impact on our financial statements.
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BE AEROSPACE, INC.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies,
see Note 1 in the Notes to the Consolidated Financial Statements included in our
Annual Report on Form 10-K for the ten-month transition period ended December
31, 2002.
Revenue Recognition
Sales of products are recorded on the date of shipment and passage of title,
or if required, upon acceptance by the customer. Service revenues are recorded
when services are performed. Revenues and costs under certain long-term
contracts are recognized using contract accounting under the
percentage-of-completion method. 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.
Inventories
We value our inventories at the lower of cost or market. We regularly review
inventory quantities on hand and record a provision for excess and obsolete
inventories based primarily on historical usage and on our estimated forecast of
product demand and production requirements. As demonstrated since the events of
September 11, 2001, 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 inventories. In the future, if our inventories are 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 inventories are
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.
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BE AEROSPACE, INC.
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 goodwill of a reporting unit and other intangible
assets 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 September 30, 2003, 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
jurisdictions 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 an additional valuation allowance which could materially impact our
financial position and results of operations.
DEPENDENCE UPON CONDITIONS IN THE AIRLINE INDUSTRY
The September 11, 2001 terrorist attacks have severely impacted conditions
in the airline industry. According to industry sources, since such attacks most
major U.S. and a number of international carriers have substantially reduced
their flight schedules, parked or retired portions of their fleets, reduced
their workforce and implemented other cost reduction initiatives. The airlines
have further responded by decreasing domestic airfares. As a result of the
decline in both traffic and airfares following the September 11, 2001 terrorist
attacks, and their aftermath, as well as other factors, such as the weakening
economy and increases in fuel costs, the world airline industry lost a total of
$25 billion in calendar 2001 and 2002. The airline industry crisis also caused
17 airlines worldwide to declare bankruptcy or cease operations in the past two
years. The onset of war in Iraq and the Severe Acute Respiratory Syndrome (SARS)
virus outbreak during the first quarter of 2003 further adversely affected the
world airline industry. More recent trends indicate that the industry appears to
be making a significant recovery, particularly in the second half of 2003.
The business jet industry has also been experiencing a severe downturn,
driven by weak economic conditions and poor corporate profits. In late 2002, all
of the major business jet manufacturers announced plans to reduce or temporarily
halt production of a number of aircraft types. Business jet airframe
manufacturers announced further planned production cuts in early 2003.
Deliveries of new business jets were down 33% for the first half of 2003
compared to the same period a year ago, and on an annualized basis were down
almost 45% versus two years ago. New business jet deliveries are expected to
remain depressed for the foreseeable future, according to industry forecasts.
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BE AEROSPACE, INC.
As a result of the foregoing, the airlines have been seeking to conserve
cash in part by deferring or eliminating cabin interior refurbishment programs
and deferring or canceling aircraft purchases. This, together with the reduction
of new business jet production, 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 commercial airline and business jet industries improve. Additional events
similar to those above could delay any recovery in the industry. While
management has developed and implemented what it believes is an aggressive cost
reduction plan to counter these difficult conditions, it cannot guarantee that
the plans are adequate or will be successful.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding implementation and expected
benefits of lean manufacturing and continuous improvement programs, our dealings
with customers and partners, the consolidation of facilities, reduction of our
workforce, integration of acquired businesses, ongoing capital expenditures, the
impact of the large number of indefinitely grounded aircraft on demand for our
products and our underlying assets, the adequacy of funds to meet our capital
requirements, the ability to refinance our indebtedness, if necessary, the
reduction of debt, the potential impact of new accounting pronouncements and the
impact on our business from the September 11, 2001 terrorist attacks, the SARS
outbreak and war in 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, including our most recent proxy statement and Form 10-K, as well as
future events that may have the effect of reducing our available operating
income and cash balances, such as unexpected operating losses, the impact of
rising fuel prices on our airline customers, outbreaks or escalations of
national or international hostilities, terrorist attacks, prolonged health
issues which reduce air travel demand (e.g. SARS), delays in, or unexpected
costs associated with, the integration of our acquired or recently consolidated
businesses, conditions in the airline industry, changing conditions in the
business jet industry, problems meeting customer delivery requirements, our
success in winning new or expected refurbishment contracts from customers,
capital expenditures, cash expenditures related to possible future acquisitions,
facility closures, product transition costs, labor disputes involving us, our
significant customers or airframe manufacturers, the possibility of a write-down
of intangible assets, delays or inefficiencies in the introduction of new
products or fluctuations in currency exchange rates.
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BE AEROSPACE, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of our
variable-rate debt.
Foreign currency - We have direct operations in Europe that receive
revenues from customers in various currencies and purchase raw materials
and components parts from foreign vendors in various currencies.
Accordingly, we are exposed to transaction gains and losses that could
result from changes in foreign currency exchange rates relative to the
U.S. dollar. The largest foreign currency exposure results from activity
in British pounds and Euros.
From time to time, the Company and its foreign subsidiaries may enter
into foreign currency exchange contracts to manage risk on transactions
conducted in foreign currencies. At September 30, 2003, we had no
outstanding forward currency exchange contracts. We did not enter into
any other derivative financial instruments.
Interest rates - At September 30, 2003, we had adjustable rate debt of
$79.0 and fixed rate debt of $708.6. The weighted average interest rate
for the adjustable and fixed rate debt was approximately 5.1% and 8.7%,
respectively, at September 30, 2003. If interest rates were to increase
by 10% above current rates, the estimated net impact on our financial
statements would be to reduce pretax income annually by approximately
$0.3. We do not engage in transactions to hedge our exposure to changes
in interest rates.
ITEM 4. 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-15(e) and 15d-15(e)) as of the end of the period covered by 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 its consolidated subsidiaries
would be made known to them by others within those entities.
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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BE AEROSPACE, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Not applicable.
Item 2. Changes in Securities and Use of Proceeds Not applicable.
Item 3. Defaults Upon Senior Securities Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders Not applicable.
Item 5. Other Information Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10(i) Material Contracts
10.1 Amendment No. 2 to Amended and Restated Employment Agreement
dated October 20, 2003 between the Registrant and Amin
J. Khoury.*
10.2 Amendment No. 2 to Amended and Restated Employment Agreement
dated October 20, 2003 between the Registrant and Robert
J. Khoury.*
10.3 Amendment No. 5 to Amended and Restated Employment Agreement
dated October 20, 2003 between the Registrant and Thomas
P. McCaffrey.*
Exhibit 31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Chief Executive Officer*
31.2 Certification of Chief Financial Officer*
Exhibit 32 Section 1350 Certifications
32.1 Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350*
32.2 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350*
b. Reports
Form 8-K, dated July 21, 2003 and filed July 22, 2003 reporting under
Items 5, 7, 9 and 12, includes a press release containing earnings
information.
Form 8-K, dated and filed September 29, 2003 reporting under Items 5,
7 and 9, includes Amendment No. 4 to the Bank Credit Facility and a
press release relating thereto.
Form 8-K, dated and filed September 30, 2003 reporting under Items 5
and 7, includes financial statements and related certifications and
independent auditors' consent.
- ---------------
*Filed herewith.
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BE AEROSPACE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BE AEROSPACE, INC.
Date: November 10, 2003 By: /s/ Robert J. Khoury
---------------------
Robert J. Khoury
President and Chief Executive Officer
Date: November 10, 2003 By: /s/ Thomas P. McCaffrey
-----------------------
Thomas P. McCaffrey
Corporate Senior Vice President of
Administration and Chief Financial Officer
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