10-Q 1 sept10q.txt BE AEROSPACE, INC FORM 10-Q 9-30-03 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 $45 of annual cash costs from our business. 13 BE AEROSPACE, INC. The following are unaudited condensed financial summaries for the three-month periods ended September 30, 2003, June 30, 2003, and September 30, 2002 and the nine-month periods ended September 30, 2003 and 2002:
($ 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) ============== ============= ============ =============== =============
[Remainder of page intentionally left blank] 14 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. 15 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. [Remainder of page intentionally left blank] 16 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. 17 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. 18 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. 19 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. 20 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. 21 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. 22 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. 23 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. [Remainder of page intentionally left blank] 24 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. [Remainder of page intentionally left blank] 25 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. 26 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 27