10-Q 1 may2001.txt MAY 2001 BE AEROSPACE, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For The Quarterly Period Ended May 26, 2001 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 33414-2105 (Address of principal executive offices) (561) 791-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES[X] NO[ ] The registrant has one class of common stock, $0.01 par value, of which 32,175,775 shares were outstanding as of July 9, 2001. PART I - FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data)
May 26, February 24, 2001 2001 ASSETS Current Assets: Cash and cash equivalents $ 143,322 $ 60,271 Accounts receivable - trade, less allowance for doubtful accounts of $2,953 (May 26, 2001) and $2,619 (February 24, 2001) 101,204 99,673 Inventories, net 138,200 135,005 Other current assets 51,203 50,150 ---------- ----------- Total current assets 433,929 345,099 Property and equipment, net 152,573 157,517 Intangibles and other assets, net 451,453 433,379 ---------- ----------- $1,037,955 $ 935,995 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 53,373 $ 64,671 Accrued liabilities 68,808 99,685 Current portion of long-term debt 826 5,846 ---------- ----------- Total current liabilities 123,007 170,202 ---------- ----------- Long-term debt 701,506 603,812 Other liabilities 26,922 26,707 Stockholders' Equity: Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares outstanding -- -- Common stock, $0.01 par value; 50,000,000 shares authorized; 32,118,788 (May 26, 2001) and 28,460,583 (February 24, 2001) issued and outstanding 321 285 Additional paid-in capital 368,090 311,506 Accumulated deficit 156,153) (154,602) Accumulated other comprehensive loss (25,738) (21,915) ---------- ----------- Total stockholders' equity 186,520 135,274 ---------- ----------- $1,037,955 $ 935,995 ========== ===========
See accompanying notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars in thousands, except per share data)
Three Months Ended --------------------------------------- ------------------- ------------------- May 26, May 27, 2001 2000 Net sales $176,833 $169,125 Cost of sales 110,927 107,572 -------- -------- Gross profit 65,906 61,553 Operating Expenses: Selling, general and administrative 24,883 24,041 Research, development and engineering 12,080 12,981 Amortization 6,349 5,868 -------- -------- Total operating expenses 43,312 42,890 -------- -------- Operating earnings 22,594 18,663 Interest expense, net 13,974 13,731 -------- -------- Earnings before income taxes and extraordinary item 8,620 4,932 Income taxes 862 494 -------- -------- Earnings before extraordinary item 7,758 4,438 Extraordinary item 9,309 -- -------- -------- Net (loss) earnings $(1,551) $4,438 ======== ======== Basic (loss) earnings per common share: Earnings before extraordinary item $0.26 $0.18 Extraordinary item (0.31) -- -------- -------- Net (loss) earnings $(0.05) $0.18 ======== ======== Diluted net earnings (loss) per common share: Earnings before extraordinary item $0.25 $0.18 Extraordinary item (0.30) -- -------- -------- Net (loss) earnings $(0.05) $0.18 ======== ======== See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)
Three Months Ended ------------------------------------------ --------------------- -------------------- May 26, May 27, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) earnings $ (1,551) $ 4,438 Adjustments to reconcile net earnings to net cash flows (used in) provided by operating activities: Extraordinary item 9,309 -- Depreciation and amortization 12,145 10,819 Non-cash employee benefit plan contributions 544 581 Changes in operating assets and liabilities, net of acquisition: Accounts receivable (731) 2,001 Inventories 1,753 3,333 Other current assets (1,496) 840 Accounts payable (11,422) (4,195) Accrued liabilities (14,811) (14,470) --------- --------- Net cash flows (used in) provided by operating activities (6,260) 3,347 ========= ========= CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired (33,517) -- Capital expenditures (2,664) (4,994) Change in intangible and other assets (6,547) (2,870) --------- --------- Net cash flows used in investing activities (42,728) (7,864) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net payments under bank credit facilities (66,684) (885) Proceeds from issuances of stock, net of expenses 56,077 1,020 Principal payments on long-term debt (101,754) -- Proceeds from long-term debt 244,966 -- --------- --------- Net cash flows provided by financing activities 132,605 135 --------- --------- Effect of exchange rate changes on cash flows (566) (540) --------- --------- Net increase (decrease) in cash and cash equivalents 83,051 (4,922) Cash and cash equivalents, beginning of period 60,271 37,363 --------- --------- Cash and cash equivalents, end of period $143,322 $32,441 ========= ========= Supplemental disclosures of cash flow information: Cash paid during period for: Interest, net $ 23,132 $20,451 Income taxes, net $ 48 $ 476
See accompanying notes to condensed consolidated financial statements. Notes to Condensed Consolidated Financial Statements May 26, 2001 and May 27, 2000 (Unaudited - Dollars in thousands, except share data) Note 1. Basis of Presentation The condensed consolidated financial statements of BE Aerospace, Inc. and its wholly-owned subsidiaries (the "Company" or "B/E") have been prepared by the Company and are unaudited pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information related to the Company's organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In the opinion of management, these unaudited condensed consolidated financial statements reflect all material adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations and statements of financial position for the interim periods presented. These results are not necessarily indicative of a full year's results of operations. Although the Company believes that the disclosures provided are adequate to make the information presented not misleading, these unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 24, 2001. Note 2. Comprehensive Earnings (Loss) Comprehensive earnings (loss) is defined as all changes in a company's net assets except changes resulting from transactions with shareholders. It differs from net earnings (loss) in that certain items currently recorded to equity would be a part of comprehensive earnings (loss). The following table sets forth the computation of comprehensive earnings (loss) for the periods presented:
Three Months Ended ----------------------------------------------- ----------------------- ----------------------- May 26, 2001 May 27, 2000 Net (loss) earnings $(1,551) $4,438 Other comprehensive earnings: Foreign currency translation adjustments (3,823) (8,284) ------- ------- Comprehensive loss $(5,374) $(3,846)
[Remainder of page intentionally left blank] Note 3. Segment Reporting The Company is organized based on the products and services it offers. Under this organizational structure, the Company has three reportable segments: Commercial Aircraft Products, Business Jet Products and Engineering Services. 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 and general aviation customers. Corporate expenses are allocated to reportable segments based upon segment revenues to consolidated revenues. The Company does not allocate interest expense to its segments. The following table presents net sales and operating earnings by business segment:
Three Months Ended ---------------------------------------- --------------------- ------------------ May 26, 2001 May 27, 2000 Commercial Aircraft Products Net sales $139,828 $133,658 Operating earnings 17,428 13,461 Business Jet Products Net sales 22,058 20,808 Operating earnings 2,900 2,831 Engineering Services Net sales 14,947 14,659 Operating earnings 2,266 2,371 Consolidated Net sales 176,833 169,125 Operating earnings 22,594 18,663
Note 4. Earnings Per Common Share Basic net earnings per common share is computed using the weighted average common shares outstanding during the period. Diluted net earnings per common share is computed by using the average share price during the period when calculating the dilutive effect of stock options. Shares outstanding for the periods presented were as follows:
Three Months Ended ---------------------------------------------- ----------------------- ---------------------- May 26, 2001 May 27, 2000 Weighted average common shares outstanding 29,562 25,091 Dilutive effect of employee stock options 1,341 4 ------ ------ Diluted shares outstanding 30,903 25,095
Note 5. Recently Issued Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which the Company adopted effective February 25, 2001. SFAS No. 133, as amended, requires the Company to record all derivatives on the balance sheet at fair value. The Company does not currently hold derivatives or engage in hedging activities; therefore, the effects of adopting SFAS No. 133 were not material. Note 6. Long-Term Debt On April 17, 2001 the Company sold $250,000 of 8 7/8% senior subordinated notes due 2011 in a private offering. The proceeds from this offering, net of debt issue costs, were approximately $242,800. Approximately $105,000 of proceeds were used to redeem the Company's 9 7/8% senior subordinated notes due 2006 and approximately $66,700 of proceeds were used to repay balances outstanding under the Company's bank credit facility, which was then terminated. On April 17, 2001 the Company called for redemption of all its 9 7/8% senior subordinated notes on May 17, 2001. The senior subordinated notes were redeemed at a redemption price equal to 104.97 percent of the principal amount, together with the accrued interest to the redemption date. The Company deposited with the trustee on April 17, 2001 funds in an amount sufficient to redeem the 9 7/8% senior subordinated notes on the redemption date. Upon deposit of these funds, the indenture governing the 9 7/8% senior subordinated notes was discharged. The Company incurred an extraordinary charge of $9,309 (net of tax) for unamortized debt issue costs, redemption premiums and fees and expenses related to the repurchase of the 9 7/8% Senior Subordinated Notes. Note 7. Equity Offering On May 16, 2001, the Company completed a 5,750,000 share offering of its common stock at $19.50 per share. Of the total number of shares, approximately 2,825,000 shares were sold by us and the remainder were sold by certain selling stockholders. The net proceeds from this offering were approximately $106,200. Approximately $53,100 was paid to the former owners of Alson Industries, Inc., T. L. Windust Machine, Inc., DMGI, Inc. and Maynard Precision, Inc. The Company received approximately $50,300, net of estimated offering costs, from the sale of 2,825,000 shares of stock it issued in connection with this offering. Note 8. Acquisition Effective May 8, 2001, the Company acquired the outstanding common stock of Nelson Aero Space, Inc. for approximately $20,000. This transaction has been accounted for using purchase accounting. The assets purchased and liabilities assumed have been reflected in the accompanying balance sheet as of May 26, 2001. Had the acquisition occurred on February 25, 2001, proforma statement of operations data would not have been materially different from that currently being reported. [Remainder of page intentionally left blank] Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations (Dollars in thousands, except per share data) The following discussion and analysis addresses the results of our operations for the three months ended May 26, 2001, as compared to our results of operations for the three months ended May 27, 2000. The discussion and analysis then addresses our liquidity and financial condition and other matters. See Note 3 for additional information regarding reportable segments. Three Months Ended May 26, 2001, As Compared To The Results of Operations For The Three Months Ended May 27, 2000 Net sales for the fiscal 2002 three-month period were $176,833, or 4.6% greater than net sales of $169,125 for the comparable period in the prior year. The year over year increase in net sales is primarily attributable to an increase in unit shipments at our commercial aircraft products and business jet product segments. Gross profit was $65,906 or 37.3% of net sales for the three months ended May 26, 2001 as compared to $61,553 or 36.4% of net sales in the comparable period in the prior year. This gross margin improvement was due to manufacturing efficiencies realized in our commercial aircraft operations. Lean manufacturing and continuous improvement programs are enabling the commercial aircraft products businesses to reduce costs, improve quality and productivity and accelerate the order fulfillment cycle. Selling, general and administrative expenses were $24,883 or 14.1% of net sales for the three months ended May 26, 2001 as compared to $24,041 or 14.2% of net sales in the comparable period in the prior year. The year over year increase in selling, general and administrative expenses was primarily attributable to costs associated with the lean manufacturing initiatives now underway at each operating plant, along with implementation costs and increased depreciation expense associated with our Enterprise Resource Planning system. Research, development and engineering expenses were $12,080 or 6.8% of net sales for the three months ended May 26, 2001, as compared with $12,981 in the comparable period in the prior year. The year over year decrease in research, development and engineering expenses is primarily attributable to the timing of customer programs. Amortization expense for the quarter ended May 26, 2001 of $6,349 was $481 greater than the amount recorded in the first quarter of fiscal 2001 and is due to acquisitions completed in the prior year. We generated operating earnings of $22,594 or 12.8% of net sales as compared to operating earnings of $18,663 or 11.0% of net sales during the comparable period in the prior year. The increase in operating earnings in the current period is primarily the result of higher sales, a 90 basis point improvement in gross margin and essentially unchanged operating expenses. Interest expense, net was $13,974 for the three months ended May 26, 2001, or $243 greater than interest expense of $13,731 for the comparable period in the prior year. The increase in interest expense is due to the newly issued 8 7/8% senior subordinated notes, net of interest income from the proceeds from our recent debt and equity offerings. Earnings before income taxes and extraordinary item in the current quarter were $8,620, or 75% greater, as compared to $4,932 in the prior year's comparable period. Income tax expense for the quarter ended May 26, 2001 was $862, as compared to $494 in the prior year's comparable period. Earnings before extraordinary item were $7,758 or $.25 per share (diluted) for the three months ended May 26, 2001, as compared to $4,438 or $0.18 (diluted) per share for the comparable period in the prior year. The Company incurred an extraordinary charge of $9,309 (net of tax) during the quarter ended May 26, 2001 related to the early redemption of its 9 7/8% Senior Subordinated Notes and repayment of its Bank Credit Facility. As a result, the Company reported a net loss and net loss per share of $1,551 and $0.05, respectively, as compared to net earnings and net earnings per share of $4,438 and $0.18 per share, respectively, in the prior year. [Remainder of page intentionally left blank] Liquidity and Capital Resources Our liquidity requirements consist of working capital needs, on-going capital expenditures and scheduled payments of interest and principal on indebtedness. Our working capital was $310,922 as of May 26, 2001, as compared to $174,897 as of February 24, 2001. At May 26, 2001, our cash and cash equivalents were $143,322, as compared to $60,271 at February 24, 2001. Cash used in operating activities was $6,260 for the three months ended May 26, 2001. Cash provided from earnings (net earnings adjusted for non-cash items), was $20,447 and was offset by a use of cash of $26,707 to fund working capital requirements. Our primary requirement for working capital during the three months period related to a decrease in accounts payable of $11,422 and a decrease in accrued interest and other liabilities of $14,811. We hold a promissory note from Thomson - CSF Holding Corporation, a subsidiary of The Thales Group (a public traded French company with over $9,000,000 in sales). We are currently involved in a dispute with Thales over certain terms of the purchase and sales agreement. Thomson - CSF Holding Corporation failed to make a $15,700 payment when due in October 2000. These obligations to us are guaranteed by Thomson - CSF Sextant, Inc. We have initiated arbitration against Thales and Thomson and expect that this matter will be resolved during fiscal 2002. During the three months ended May 26, 2001, we used $33,517 of cash for business acquisitions. Our capital expenditures were $2,664 and $4,994 during the three months ended May 26, 2001 and May 27, 2000, respectively. The year over year decrease in capital expenditures is primarily attributable to the timing of planned expenditures. We anticipate on-going annual capital expenditures of approximately $25,000 for the next several years. On April 17, 2001 we sold $250,000 of 8 7/8% senior subordinated notes due 2011 in a private offering. The net proceeds less estimated debt issue costs received by us from the sale of the notes were approximately $242,800. Approximately $105,000 of proceeds were used to redeem our 9 7/8% senior subordinated notes due 2006 and approximately $66,700 of proceeds were used to repay balances outstanding under our bank credit facility, which was then terminated. The remainder of the net proceeds will be used for general corporate purposes, including potential future acquisitions. We repaid and cancelled our bank credit facility on April 17, 2001 upon the settlement of the sale of $250,000 of 8 7/8% senior subordinated notes in our recent debt offering. We intend to replace our existing bank credit facility with a new credit facility as soon as reasonably practicable. We are currently in the process of arranging a new bank credit facility. When the credit agreement becomes effective, we do not expect to immediately incur any additional debt. On April 17, 2001 we called for redemption of all our 9 7/8% senior subordinated notes on May 17, 2001. We redeemed the notes at a redemption price equal to 104.97 percent of the principal amount, together with the accrued interest to the redemption date. We deposited with the trustee on April 17, 2001 funds in an amount sufficient to redeem the 9 7/8% senior subordinated notes on the redemption date. Upon deposit of these funds, the indenture governing the 9 7/8% senior subordinated notes was discharged. We incurred an extraordinary charge of $9,309 (net of tax) for unamortized debt issue costs, redemption premiums and fees and expenses related to the repurchase of the 9 7/8% Senior Subordinated Notes. On May 16, 2001, we completed a 5,750,000 share offering of our common stock at $19.50 per share. Of the total number of shares, approximately 2,825,000 shares were sold by us and the remainder were sold by certain selling stockholders. The net proceeds from this offering were approximately $106,200. Approximately $53,100 was paid to the former owners of Alson Industries, Inc., T. L. Windust Machine, Inc., DMGI, Inc. and Maynard Precision, Inc. The Company received approximately $50,300, net of estimated offering costs, from the sale of 2,825,000 shares of stock issued in connection with this offering. We believe that the cash flow from operations and the net proceeds of our recent debt and equity offerings will provide adequate funds for our working capital needs, planned capital expenditures and debt service requirements for the foreseeable future. We believe that we will be able to replace our bank credit facility, which was recently terminated, although there can be no assurance that we will be able to do so. Our ability to fund our operations, make planned capital expenditures, make scheduled payments and refinance our indebtedness depends on our future operating performance and cash flow, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. Deferred Tax Assets We established a valuation allowance related to the utilization of our deferred tax assets because of uncertainties that preclude it 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. These uncertainties include recent cumulative losses incurred by us, the highly cyclical nature of the industry in which we operate, economic conditions in Asia which has impacted the airframe manufacturers and the airlines, the impact of rising fuel prices on our airline customers, the impact of labor disputes involving our airline customers, our high degree of financial leverage and risks associated with the integration of acquisitions. We monitor these uncertainties, as well as other positive and negative factors that may arise in the future, as it assesses the necessity for a valuation allowance for its deferred tax assets. Dependence Upon Conditions In The Airline Industry Our principal customers are the world's commercial airlines. As a result, our business is directly dependent upon the conditions in the highly cyclical and competitive commercial airline industry. In the late 1980s and early 1990s, the world airline industry suffered a severe downturn, which resulted in record losses and several air carriers seeking protection under bankruptcy laws. As a consequence, during such period, airlines sought to conserve cash by reducing or deferring scheduled cabin interior refurbishment and upgrade programs and by delaying purchases of new aircraft. This led to a significant contraction in the commercial aircraft cabin interior products industry and a decline in our business and profitability. Since 2000, increases in fuel prices, the softening of the global economy and labor unrest have negatively impacted airline profitability. A number of airlines have announced that they expect these trends to continue in calendar year 2001. Should the airline industry suffer a severe and prolonged downturn which adversely affects their profitability, discretionary airline spending, including for new aircraft and cabin interior refurbishments and upgrades, would be more closely monitored or even reduced. In addition, any prolonged labor unrest experienced by any of our major customers could lead to a delay in their scheduled refurbishment and upgrade programs. Lower capital spending by the airlines or delays in scheduled programs could lead to reduced orders of our products and services and, as a result, our business and profitability could suffer. Our business and profitability have historically been adversely affected by downturns in the airline industry. [Remainder of page intentionally left blank] Forward Looking Statements This Form 10-Q includes forward-looking statements based on our current expectations, assumptions, estimates and projections about our company and our industry. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "could," "may," "believe," "will," "expect," "project," "estimate," "intend," "anticipate," "plan," "continue," "predict," "expectations" or other similar words. These statements, including statements regarding our future financial performance and other projections of measures of future financial performance of our company, are based on our current plans and expectations and involve risks and uncertainties that could cause actual future events or results to be different from those described in or implied by such statements. While we believe these forward-looking statements to be reasonable, projections are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections were based may vary significantly from actual results, which variations may be material and adverse. As a result, because these statements are based on expectations as to future performance and events and are not statements of fact, actual events or results may differ materially from those projected. Factors that might cause such a difference include those discussed in our filings with the Securities and Exchange Commission, including but not limited to our most recent proxy statement and under the heading "Risk Factors" in our most recent 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, - delays in, or unexpected costs associated with, the integration of our acquired businesses, - conditions in the airline industry, - problems meeting customer delivery requirements, - new or expected refurbishments, - capital expenditures, - cash expenditures related to possible future acquisitions, - 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-Q and the documents incorporated herein by reference. Item 3. Quantitative and Qualitative Disclosures about Market Risk During the three months ended May 26, 2001, there were no material changes to the disclosure about market risk included in the Company's Annual Report on Form 10-K for the fiscal year ended February 24, 2001. PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities The following is a summary of the transactions by the Company as to equity securities for the three months ended May 26, 2001 that were not registered under the Securities Act of 1933, as amended: In April 2001, an aggregate of 51,345 shares of the Company's Common Stock were issued to JCDL, Inc. in connection with the acquisitions of Alson Industries Inc., T.L. Windust Machine, Inc., DMGI, Inc. and Maynard Precision Inc. as consideration for financial advisory services and other assistance to the Company in connection with these acquisitions. These securities were issued pursuant to the exemption available under Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering. 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 None. Item 6. Exhibits and Reports on Form 8-K a. Reports on Form 8-K None. 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: July 9, 2001 By: /s/Robert J. Khoury President and Chief Executive Officer Date: July 9, 2001 By: /s/Thomas P. McCaffrey Corporate Senior Vice President of Administration and Chief Financial Officer