10-Q 1 jun0410q.txt B/E AEROSPACE, INC., FORM 10-Q, JUNE 30, 2004 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 June 30, 2004 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 37,415,468 shares were outstanding as of August 2, 2004. 1 BE AEROSPACE, INC. Form 10-Q for the Quarter Ended June 30, 2004 Table of Contents Page Part I Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) a) Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003.........................3 b) Condensed Consolidated Statements of Operations for the Three and Six Month Periods ended June 30, 2004 and June 30, 2003..4 c) Condensed Consolidated Statements of Cash Flows for the Six Month Periods ended June 30, 2004 and June 30, 2003............5 d) Notes to Condensed Consolidated Financial Statements..............6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................12 Item 3. Quantitative and Qualitative Disclosures About Market Risk...........23 Item 4. Controls and Procedures..............................................23 Part II Other Information Item 1. Legal Proceedings....................................................24 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities....................................................24 Item 3. Defaults Upon Senior Securities......................................24 Item 4. Submission of Matters to a Vote of Security Holders..................24 Item 5. Other Information....................................................24 Item 6. Exhibits and Reports on Form 8-K.....................................24 Signatures...........................................................25 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BE AEROSPACE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in millions, except share data)
June 30, 2004 December 31, 2003 ------------- ----------------- ASSETS Current assets: Cash and cash equivalents (Note 3) $ 132.5 $ 147.6 Accounts receivable - trade, less allowance for doubtful accounts of $2.8 (June 30, 2004) and $2.2 (December 31, 2003) 91.1 80.3 Inventories, net 179.9 168.7 Other current assets 14.9 10.6 -------- -------- Total current assets 418.4 407.2 Property and equipment, net 101.7 103.8 Goodwill 364.1 352.7 Identifiable intangible assets, net 154.8 158.5 Other assets, net 29.3 30.3 -------- -------- $1,068.3 $1,052.5 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 154.6 $ 131.0 Current maturities of long-term debt 1.5 1.9 -------- -------- Total current liabilities 156.1 132.9 Long-term debt, net of current maturities 879.5 880.1 Other non-current liabilities 8.0 7.6 Commitments, contingencies and off-balance sheet arrangements (Note 4) 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; 37.3 million (June 30, 2004) and 36.7 million (December 31, 2003) shares issued and outstanding 0.4 0.4 Additional paid-in capital 416.9 413.8 Accumulated deficit (393.0) (383.0) Accumulated other comprehensive income 0.4 0.7 -------- -------- Total stockholders' equity 24.7 31.9 -------- -------- $1,068.3 $1,052.5 ======== ========
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 SIX MONTHS ENDED ------------------------------ ----------------------------- June 30, June 30, June 30, June 30, 2004 2003 2004 2003 --------------- -------------- -------------- -------------- Net sales $185.3 $151.8 $360.4 $306.5 Cost of sales 123.5 112.0 245.0 220.3 ------ ------ ------ ------ Gross profit 61.8 39.8 115.4 86.2 Operating expenses: Selling, general and administrative 29.9 26.1 58.6 54.6 Research, development and engineering 14.0 9.9 26.2 20.8 ------ ------ ------ ------ Total operating expenses 43.9 36.0 84.8 75.4 ------ ------ ------ ------ Operating earnings 17.9 3.8 30.6 10.8 Interest expense, net 19.9 17.2 39.7 34.0 ------ ------ ------ ------ Loss before income taxes (2.0) (13.4) (9.1) (23.2) Income taxes 0.4 0.7 0.9 1.7 ------ ------ ------ ------ Net loss $ (2.4) $(14.1) $(10.0) $(24.9) ====== ====== ====== ====== Loss per common share: Basic and diluted $(0.06) $(0.39) $(0.27) $(0.70) ====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements. 4 BE AEROSPACE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in millions)
SIX MONTHS ENDED ------------------------------------------ June 30, June 30, 2004 2003 -------------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(10.0) $(24.9) Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities: Depreciation and amortization 13.8 14.4 Non-cash employee benefit plan contributions 1.1 1.2 Loss on disposal of property and equipment -- 1.4 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (7.6) 3.2 Inventories (9.3) (2.3) Other current assets and other assets (2.7) 8.5 Payables, accruals and other liabilities 17.9 (15.8) ------ ------ Net cash flows provided by (used in) operating activities 3.2 (14.3) ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (7.1) (7.3) Proceeds from sale of property and equipment 0.2 2.3 Acquisitions, net of cash acquired (12.5) -- Other, net 0.1 (3.9) ------ ------ Net cash flows used in investing activities (19.3) (8.9) ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net payments under bank credit facilities -- (65.0) Proceeds from issuances of common stock, net of expenses 2.0 0.5 Repayment of long-term debt (0.9) (0.6) ------ ------ Net cash flows provided by (used in) financing activities 1.1 (65.1) ------ ------ Effect of exchange rate changes on cash and cash equivalents (0.1) 1.3 ------ ------ Net decrease in cash and cash equivalents (15.1) (87.0) Cash and cash equivalents, beginning of period 147.6 156.9 ------ ------ Cash and cash equivalents, end of period $132.5 $ 69.9 ====== ====== Supplemental disclosures of cash flow information: Cash paid during period for: Interest, net $ 38.2 $ 33.2 Income taxes, net $ -- $ 0.5
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 fiscal year ended December 31, 2003. 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. 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 six months ended June 30, 2004 and 2003, respectively, would have been the pro forma amounts indicated in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ----------------------------- June 30, June 30, June 30, June 30, 2004 2003 2004 2003 --------------- -------------- -------------- -------------- Net loss as reported $ (2.4) $(14.1) $(10.0) $(24.9) Expense per SFAS No. 123, fair value method, net of related tax effects 1.2 0.9 3.6 2.1 ------ ------ ------ ------ Pro forma $ (3.6) $(15.0) $(13.6) $(27.0) ------ ------ ------ ------ Basic and diluted net loss per share: As reported $(0.06) $(0.39) $(0.27) $(0.70) ====== ====== ====== ====== Pro forma $(0.10) $(0.42) $(0.37) $(0.76) ====== ====== ====== ======
Note 2. Goodwill and Intangible Assets In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", the Company has completed the fair value analysis for goodwill and other intangible assets as of December 31, 2003, and concluded that no impairment existed. As of June 30, 2004, 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 June 30, 2004 and 2003, and $4.6 and $4.5 for the six months ended June 30, 2004 and 2003. Amortization expense is expected to be approximately $9.0 in each of the next five fiscal years. 6 BE AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited - Dollars In Millions) Changes to the original cost basis of goodwill during the six months ended June 30, 2004 were primarily due to insignificant acquisitions and immaterial foreign currency fluctuations.
Commercial Business Aircraft Jet Distribution Total -------------------- -------------------- -------------------- ----------- Balance as of December 31, 2003 $158.5 $88.1 $106.1 $352.7 Goodwill acquired 9.7 -- 1.9 11.6 Effect of foreign currency translation (0.2) -- -- (0.2) ------ ----- ------ ------ Balance as of June 30, 2004 $168.0 $88.1 $108.0 $364.1 ====== ===== ====== ======
The following sets forth the intangible assets by major asset class, all of which were acquired during acquisition transactions:
June 30, 2004 December 31, 2003 --------------------------------------- -------------------------------------- Net Net Useful Life Original Accumulated Book Original Accumulated Book (Years) Cost Amortization Value Cost Amortization Value ------------- ---------- --------------- ------------ ------------ -------------- ---------- Acquired technologies 4-30 $ 93.8 $19.0 $ 74.8 $ 93.8 $17.5 $ 76.3 Trademarks and patents 7-30 26.6 11.1 15.5 26.6 10.5 16.1 Trademarks (nonamortizing) -- 20.6 -- 20.6 20.6 -- 20.6 Technical qualifications, plans and drawings 3-30 31.1 14.9 16.2 31.0 14.3 16.7 Replacement parts annuity and product approvals 3-30 41.2 22.2 19.0 41.0 21.2 19.8 Covenants not to compete and Other identified intangibles 3-10 20.8 12.1 8.7 20.3 11.3 9.0 ------ ----- ------ ------ ----- ------ $234.1 $79.3 $154.8 $233.3 $74.8 $158.5 ====== ===== ====== ====== ===== ======
Note 3. Long-Term Debt The Company amended its $50.0 credit facility with JPMorgan Chase Bank (the "Amended Bank Credit Facility") in February 2004. The amendment had the effect of eliminating maintenance financial covenants consisting of an interest coverage ratio, a leverage ratio and a minimum net worth test. Under the Amended Bank Credit Facility there are no maintenance financial covenants as long as cash and cash equivalents are above $25.0 and there are no borrowings outstanding under this facility. If borrowings under the Amended Bank Credit Facility are outstanding and if cash is less than $70, the interest coverage ratio (as defined) must be at least 1.15:1 for the trailing 12 month period. The Amended Bank Credit Facility expires in February 2007, 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 June 30, 2004. At June 30, 2004, indebtedness under the Amended Bank Credit Facility consisted of letters of credit aggregating approximately $11.6. Under the terms of the Amended Bank Credit Facility, the Company is required to have on deposit in a collateral account an amount equal to 102% of the face amount of the letters of credit outstanding, or $11.8 of restricted cash as of June 30, 2004. The Amended Bank Credit Facility bears interest ranging from 250 to 400 basis points over the Eurodollar rate (approximately 5.3% as of June 30, 2004). The amount available under the Amended Bank Credit Facility was $38.4 as of June 30, 2004. 7 BE AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited - Dollars In Millions) Long-term debt consists principally of our 8 1/2% senior notes, 8 7/8% senior subordinated notes, 9 1/2% senior subordinated notes and 8% senior subordinated notes. The $250 of 8% notes mature on March 1, 2008, the $200 of 9 1/2% notes mature on November 1, 2008, the $175 of 8 1/2% senior notes mature on October 1, 2010 and the $250 of 8 7/8% notes mature on May 1, 2011. The senior subordinated notes are unsecured senior subordinated obligations and are subordinated to all of our senior indebtedness. The senior notes are senior to all of our subordinated indebtedness, but subordinate to borrowings under our bank credit facility. Each of the 8%, 8 1/2%, 8 7/8% and 9 1/2% notes contains restrictive covenants, including limitations on future indebtedness, restricted payments, transactions with affiliates, liens, dividends, mergers and transfers of assets, all of which were met as of June 30, 2004. A breach of these covenants, or the covenants under our current or any future 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. Note 4. Commitments, Contingencies and Off-Balance Sheet Arrangements 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 the consolidated balance sheet. At June 30, 2004, future minimum lease payments under these arrangements, the majority of which related to long-term real estate leases, approximated $86.9. 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 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. Accordingly, 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:
SIX MONTHS ENDED ------------------------------------- June 30, June 30, 2004 2003 ---------------- ----------------- Beginning balance $11.9 $8.9 Acquisitions 1.0 -- Charges to costs and expenses 4.3 3.2 Costs incurred (4.3) (2.6) ----- ---- Ending balance $12.9 $9.5 ===== ====
8 BE AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited - Dollars In Millions) Note 5. 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, Business Jet and Distribution. The Company's Commercial Aircraft segment consists of eight principal operating units while the Business Jet and Distribution segments consist of two and one principal operating unit(s), 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 or 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 SIX MONTHS ENDED ------------------------------ ------------------------------ June 30, June 30, June 30, June 30, 2004 2003 2004 2003 ------------- ------------- ------------- -------------- Net sales Commercial Aircraft $128.4 $107.9 $254.6 $218.5 Distribution 37.1 25.8 70.9 51.5 Business Jet 19.8 18.1 34.9 36.5 ------ ------ ------ ------ $185.3 $151.8 $360.4 $306.5 ====== ====== ====== ====== Operating earnings (loss) Commercial Aircraft $ 10.5 $ (6.6) $ 18.9 $ (5.6) Distribution 7.0 4.4 13.3 8.7 Business Jet 0.4 (0.3) (1.6) 1.4 Divestiture settlement- net of charges -- 6.3 -- 6.3 ------ ------ ------ ------ $ 17.9 $ 3.8 $ 30.6 $ 10.8 ====== ====== ====== ======
[Remainder of page intentionally left blank] 9 BE AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited - Dollars In Millions, Except Share and Per Share Data) Note 6. 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:
THREE MONTHS ENDED SIX MONTHS ENDED --------------------------------- ------------------------------ June 30, June 30, June 30, June 30, 2004 2003 2004 2003 ----------------- --------------- -------------- --------------- Net loss $ (2.4) $(14.1) $(10.0) $(24.9) Basic and diluted weighted average common shares 37.0 35.8 37.0 35.6 Basic and diluted net loss per share $(0.06) $(0.39) $(0.27) $(0.70) ====== ====== ====== ======
The Company excluded potentially dilutive securities of 1.0 and 0.9 shares from the calculation of loss per share for the three and six months ended June 30, 2004 as the effect of including these securities would be anti-dilutive. There were no securities that qualified as dilutive for the three and six months ended June 30, 2003. Note 7. 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 SIX MONTHS ENDED ------------------------------ -------------------------- June 30, June 30, June 30, June 30, 2004 2003 2004 2003 ---------------- ------------- ------------ ------------- Net loss $(2.4) $(14.1) $(10.0) $(24.9) Other comprehensive earnings (loss): Foreign exchange translation adjustment (1.5) 3.8 (0.3) 5.1 ----- ------ ------ ------ Comprehensive loss $(3.9) $(10.3) $(10.3) $(19.8) ===== ====== ====== ======
Note 8. Recent Accounting Pronouncements In January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities" and in December 2003, issued Interpretation No. 46 (revised December 2003) "Consolidation of Variable Interest Entities - An Interpretation of APB No. 51." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 (R) clarifies the application of Accounting Research Bulletin ("APB") No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without subordinated financial support from other parties. The adoption of FIN No. 46 and FIN No. 46(R) did not have an impact on the Company's financial statements. 10 BE AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited - Dollars In Millions) In December 2003, the Securities and Exchange Commission released Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104 clarifies existing guidance regarding revenues for contracts which contain multiple deliverables to make it consistent with Emerging Issues Task Force ("EITF") No. 00-21,"Accounting for Revenue Arrangements with Multiple Deliverables." The adoption of SAB 104 did not have a material impact on our revenue recognition policies, nor our financial position or results of operations. [Remainder of page intentionally left blank] 11 BE AEROSPACE, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars In Millions) The following discussion and analysis addresses the results of our operations for the three months ended June 30, 2004, as compared to our results of operations for the three months ended June 30, 2003. The discussion and analysis then addresses our results of operations for the six months ended June 30, 2004, as compared to our results of operations for the six months ended June 30, 2003. The discussion and analysis also addresses our liquidity, financial condition and other matters. The September 11, 2001 terrorist attacks 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 workforces 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 weakened economy and increases in fuel costs, the world airline industry lost a total of $30 billion in calendar 2001 - 2003, including $6.5 billion in 2003. 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. During 2004, the airlines have been faced with very high fuel prices, making their return to profitability more difficult. More recent trends indicate that while the non-U.S. industry appears to be making a recovery, the U.S. airlines are expected to lose about $3 billion in 2004. The business jet industry has also been experiencing a severe downturn, driven by weak demand. During 2003, three business jet manufacturers reduced or temporarily halted production of a number of aircraft types. Deliveries of new business jets were down 32% during 2003 as compared to 2002, and 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 industry improve. Additional events similar to those above could delay any recovery in the industry. While management has completed what it believes is an aggressive cost reduction plan to counter these difficult conditions, it cannot guarantee that the plan 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 was completed as of December 31, 2003, 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 even at the current low level of revenues and even more so when industry conditions improve and demand increases. The total cost of this program was approximately $174.9, including $73.7 of cash charges. We believe the annual cash savings arising from this consolidation program are approximately $60. 12 BE AEROSPACE, INC. THREE MONTHS ENDED JUNE 30, 2004, AS COMPARED TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 (Dollars In Millions, Except Per Share Data) Sales for each of our segments are set forth in the following table:
THREE MONTHS ENDED -------------------------------------------------- June 30, June 30, 2004 2003 Change ------------------------- ------------------------ ---------------- Commercial Aircraft $128.4 $107.9 19.0% Distribution 37.1 25.8 43.8% Business Jet 19.8 18.1 9.4% ------------------------- ------------------------ ---------------- Total Sales $185.3 $151.8 22.1% ========================= ======================== ================
Net sales for the three months ended June 30, 2004 were $185.3, an increase of $33.5 or 22.1% as compared to the same period in the prior year. Bookings for the quarter of approximately $285 were a record for any quarter in our history and were about $70 or 33% greater than the same period in the prior year. Backlog at June 30, 2004 of approximately $615, was up 23% above the June 30, 2003 backlog of $500. During 2004, we were selected by Thai and Malaysia Airlines, Qantas Airways and Emirates Airline to design, manufacture and install luxurious first class cabin interiors for their wide-body aircraft. The combined initial value of these four awards, which aggregate over $225, exclusive of option aircraft, and for which initial product deliveries are scheduled to begin in the second half of 2005, were the principal reasons for the backlog growth. Sales during the quarter in the commercial aircraft segment were $128.4, an increase of $20.5 or 19.0% as compared to the same period in the prior year. The 19.0% year over year revenue growth was primarily driven by a 23.9% increase in the sale of seating products and a 41.5% increase in the sale of refrigeration products. The distribution segment reported record sales of $37.1, reflecting a 43.8% increase versus the same period in the prior year. This revenue growth was driven by a broad-based increase in demand for aftermarket aircraft fasteners and market share gains. In the business jet segment, sales were up $1.7 or 9.4% compared to the same period in the prior year. While conditions in the business jet industry appear to have stabilized, new business jet deliveries are still at very low levels. Our business jet segment will be the primary beneficiary of the aforementioned four recently awarded international super first class programs, for which initial product deliveries are scheduled to begin in 2005. Gross profit for the quarter of $61.8 or 33.4% of sales increased by $22.0 or 55.3%, as compared to gross profit of $39.8 or 26.2% of sales in the second quarter of 2003. Foreign exchange negatively impacted year over year financial comparisons by $2.1. We are subject to fluctuations in foreign exchange rates due to significant sales from our European facilities, substantially all of which are denominated in U.S. dollars, while the corresponding labor, overhead costs and certain material costs are denominated in British pounds or euros. Even after considering the negative effects of foreign exchange, our gross margin for the quarter improved to 33.4% compared to 26.2% for the same period last year, reflecting the significant cost savings from our cost reduction programs and an improved product mix. Selling, general and administrative expenses for the current quarter were $29.9 or 16.1% of net sales, as compared to $26.1 or 17.2% of net sales for the same period last year. During the second quarter of 2003, we received $9.0 in connection with the resolution of the final matters related to the 1999 sale of our in-flight entertainment business, which was presented as a reduction of selling, general and administrative expenses, offset by a $5.0 charge for the allowance for bad debts and impaired properties during the period. As a result, selling, general and administrative expenses increased by $3.8 compared to the same period last year. 13 Research, development and engineering expenses for the current quarter were $14.0 or 7.6% of net sales, an increase of $4.1 as compared with $9.9 or 6.5% of sales last year. The increase in expenses compared to last year was attributable to activities associated with product development for the Airbus A380 aircraft, international super-first class programs, and other new products. We completed our consolidation program at the end of 2003. This effort, which was developed in response to the rapid change in industry conditions following the events of September 11, 2001, resulted in the reduction of approximately 1,500 positions with targeted cost savings of $45. Annual cost savings associated with this program are now estimated at approximately $60, about equally split between operating expenses and manufacturing costs. The following is a summary of our operating results by segment: Operating earnings for the current quarter at our commercial aircraft segment were $10.5 or 8.2% of sales, an increase of $17.1 and up from a loss of $6.6 in the prior year. Foreign exchange negatively impacted financial comparisons, on a year over year basis, by $2.1. The improved operating results at the commercial aircraft segment were primarily driven by a higher level of sales of seating products (23.9%) and refrigeration products (41.5%) and substantially lower costs resulting from our recently completed consolidation program. Operating earnings in our distribution segment were $7.0 or 18.9% of sales, an increase of $2.6 or 59.1% as compared to operating earnings of $4.4 or 17.1% of sales in the prior year. The increase in distribution segment operating earnings was due to higher sales volume as a result of market share gains and a broad-based increase in demand for aftermarket aircraft fasteners. Operating earnings at our business jet segment were $0.4, an improvement of $0.7 as compared to an operating loss of $0.3 in the prior year. The increase in operating earnings was driven by the increased sales volume, successful cost reduction initiatives and improved product mix. Despite the $2.1 impact of a weakened dollar on our financial results for the quarter, consolidated operating earnings were $17.9 or 9.7% of sales, an increase of $14.1 or 371% as compared to operating earnings of $3.8 in the prior year. The substantial increase in operating earnings was driven by the continuing turnaround at our commercial aircraft segment combined with a broad based increase in sales and earnings at our distribution segment and significant cost reductions resulting from our consolidation program, which was completed during 2003. Income taxes relate to taxes paid in foreign jurisdictions and has not varied materially on a quarterly basis. Our consolidated net loss for the quarter was $2.4 or $0.06 per share, reflecting the $2.1 negative impact of foreign exchange and a $2.7 increase in interest expense arising from the October 2003 sale of $175 of senior notes, as compared with a consolidated loss of $14.1 or $0.39 per share last year. [Remainder of page intentionally left blank] 14 SIX MONTHS ENDED JUNE 30, 2004, AS COMPARED TO THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 (Dollars In Millions, Except Per Share Data) Sales for each of our segments are set forth in the following table:
SIX MONTHS ENDED -------------------------------------------------- June 30, June 30, 2004 2003 Change ------------------------- ------------------------ ---------------- Commercial Aircraft $254.6 $218.5 16.5% Distribution 70.9 51.5 37.7% Business Jet 34.9 36.5 (4.4%) ------------------------- ------------------------ ---------------- Total Sales $360.4 $306.5 17.6% ========================= ======================== ================
Net sales for the six months ended June 30, 2004 were $360.4, an increase of $53.9 or 17.6% as compared to the same period in the prior year. Sales during the six-month period at our commercial aircraft segment were $254.6, an increase of $36.1 or 16.5% as compared to the same period in the prior year. The 16.5% year over year revenue growth was primarily driven by a 23.2% increase in the sale of seating products and a 40.0% increase in the sale of refrigeration products. The distribution segment reported record sales of $70.9, or 37.7% greater than the same period in the prior year. The revenue growth at our distribution segment was driven by a broad-based increase in demand for aftermarket aircraft fasteners and market share gains. In the business jet segment, sales were down $1.6 or 4.4% compared to the same period in the prior year. Gross profit for the six-month period was $115.4 or 32.0% of sales and increased by $29.2 or 33.9%, as compared to gross profit of $86.2 or 28.1% of sales in the same period of 2003. Foreign exchange negatively impacted financial comparisons on a year over year basis by $4.4. We are subject to fluctuations in foreign exchange rates due to significant sales from our European facilities, substantially all of which are denominated in U.S. dollars, while the corresponding labor, overhead and certain material costs are denominated in British pounds or euros. Even after considering the negative effects of foreign exchange, our gross margin for the six-month period improved to 32.0% compared to 28.1% for the same period last year, reflecting the significant cost savings from our cost reduction programs and an improved product mix. Selling, general and administrative expenses for the six-month period were $58.6 or 16.3% of net sales, as compared to $54.6 or 17.8% of net sales last year. During the second quarter of 2003, we received $9.0 in connection with the resolution of the final matters related to the 1999 sale of our in-flight entertainment business, which was presented as a reduction of selling, general and administrative expenses, offset by a $5.0 charge for the allowance for bad debts and impaired properties during the period. As a result, selling, general and administrative expenses for the six months ended June 30, 2004 increased by $4.0 compared to the same period last year. Research, development and engineering expenses for the six-month period were $26.2 or 7.3% of net sales, an increase of $5.4 as compared with $20.8 or 6.8% of sales for the same period last year. The increase in expenses compared to the same period last year was primarily attributable to activities associated with product development for the Airbus A380 aircraft and international super-first class programs. We completed our consolidation program at the end of 2003. This effort, which was developed in response to the rapid change in industry conditions following the events of September 11, 2001, resulted in the reduction of approximately 1,500 positions with targeted cost savings of $45. Annual cost savings associated with this program are now estimated at approximately $60, about equally split between operating expenses and manufacturing costs. 15 The following is a summary of our operating results by segment: Operating earnings for the six-month period at our commercial aircraft segment were $18.9 or 7.4% of sales, an increase of $24.5 over the prior year's operating loss of $5.6. Foreign exchange negatively impacted financial comparisons, on a year over year basis, by $4.4. The increase in commercial aircraft segment operating earnings was driven by ongoing manufacturing efficiencies, the higher level of sales and improved product mix. Operating earnings at our distribution segment were $13.3 or 18.8% of sales, an increase of $4.6 or 52.9% as compared to operating earnings of $8.7 or 16.9% of sales in the prior year. The increase in distribution segment operating earnings was due to market share gains and a broad-based increase in demand for aftermarket aircraft fasteners. The operating loss of $1.6 at our business jet segment compares with operating earnings of $1.4 in the prior year. The decrease in business jet operating earnings reflects the lower level of revenues and the resulting poor absorption of overhead costs during the first quarter of 2004. Our business jet segment operated at particularly low levels of capacity utilization during the first quarter of 2004 as new business jet production remained at low levels. Our business jet segment should be the primary beneficiary of the aforementioned four recently awarded international super first class programs, for which initial product deliveries are scheduled to begin in 2005. Despite the $4.4 impact of a weakened dollar on our financial results for the six-month period, consolidated operating earnings were $30.6 or 8.5% of sales, an increase of $19.8 or 183.3% as compared to operating earnings of $10.8 in the prior year. The substantial increase in operating earnings was driven by the continuing turnaround at our commercial aircraft segment combined with a broad based increase in sales and earnings at our distribution segment and, importantly, significant cost reductions resulting from our consolidation program, which was completed during 2003. Income taxes relate to taxes paid in foreign jurisdictions and has not varied materially on a period over period basis. Our consolidated net loss for the six-month period was $10.0 or $0.27 per share, reflecting the $4.4 negative impact of foreign exchange and a $5.7 increase in interest expense arising from the October 2003 sale of $175 of senior notes, as compared with a consolidated loss of $24.9 or $0.70 per share last year. [Remainder of page intentionally left blank] 16 BE AEROSPACE, INC. LIQUIDITY AND CAPITAL RESOURCES Current Financial Condition Our liquidity requirements consist of working capital needs, ongoing capital expenditures and payments of interest and principal on our indebtedness. Our primary requirements for working capital are directly related to the level of our operations; working capital primarily consists of cash and cash equivalents, accounts receivable, inventories, accounts payable and accrued expenses, which fluctuate with the sales of our products. Our working capital was $262.3 as of June 30, 2004, as compared to $274.3 as of December 31, 2003. We currently have no bank borrowings outstanding and no debt principal payments due until 2008. At June 30, 2004, bank credit available under our Amended Bank Credit Facility was $38.4, compared to $42.6 at December 31, 2003. At June 30, 2004, our cash and cash equivalents were $132.5, as compared to $147.6 at December 31, 2003. Included in cash and cash equivalents at June 30, 2004 was $11.8 of restricted cash supporting our letters of credit under the Amended Bank Credit Facility. There were no restrictions on cash as of December 31, 2003. Cash Flows The $15.1 net use of cash was due to a net loss of $10.0, two insignificant acquisitions to extend our product offerings ($12.5), capital expenditures of $7.1 and $1.7 of uses related to changes in our operating assets and liabilities, offset by non-cash charges of $14.9 primarily related to amortization and depreciation. Accounts payable and accrued liabilities increased by $17.9 during the six months associated with the $19.6 increase in accounts receivable, inventories, other current assets and other assets. Capital Spending Our capital expenditures were $7.1 and $7.3 during the six months ended June 30, 2004 and June 30, 2003, respectively. The year over year 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 26 acquisitions for an aggregate purchase price of approximately $1 billion. Following these acquisitions, we rationalized the businesses, reducing headcount by nearly 4,500 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 During February 2004, we obtained an amendment to our credit facility with JPMorgan Chase Bank (the "Amended Bank Credit Facility") to provide us with additional financial flexibility. The amendment had the effect of eliminating maintenance financial covenants consisting of an interest coverage ratio, a leverage ratio and a minimum net worth test. Under the amended and restated credit facility there are no maintenance financial covenants as long as cash is above $25.0 and there are no borrowings outstanding under this facility. If borrowings under the bank credit facility are outstanding and if cash is less than $70.0, the interest coverage ratio (as defined) must be at least 1.15:1 for the trailing 12 month period. The Amended Bank Credit Facility expires in February 2007 and is collateralized by substantially all of our assets. At June 30, 2004, indebtedness under the bank credit facility consisted of letters of credit aggregating approximately $11.6. Under the terms of the Amended Bank Credit Facility, we are required to have on deposit in a collateral account an amount equal to 102% of the face amount of the letters of credit outstanding, or $11.8 as of June 30, 2004. Letters of credit of $2.0, $5.1 and $4.5 expire in 2004, 2005 and 2006, respectively. The amount available under the bank credit facility was $38.4 as of June 30, 2004. The bank credit facility contains customary affirmative covenants, negative covenants and conditions of borrowings, all of which were met as of June 30, 2004. 17 Long-term debt consists principally of our 8 1/2% senior notes, 8 7/8% senior subordinated notes, 9 1/2% senior subordinated notes and 8% senior subordinated notes. The $250 of 8% notes mature on March 1, 2008, the $200 of 9 1/2% notes mature on November 1, 2008, the $175 of 8 1/2% senior notes mature on October 1, 2010 and the $250 of 8 7/8% notes mature on May 1, 2011. The senior subordinated notes are unsecured senior subordinated obligations and are subordinated to all of our senior indebtedness. The senior notes are senior to all of our subordinated indebtedness, but subordinate to borrowings under our bank credit facility. Each of the 8%, 8 1/2%, 8 7/8% and 9 1/2% notes contains 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 June 30, 2004. A breach of these covenants, or the covenants under our current or any future 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 Obligations During the six month period ended June 30, 2004, there were no material changes in the contractual obligations specified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. 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. 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 June 30, 2004, future minimum lease payments under these arrangements approximated $86.9. 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. 18 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:
SIX MONTHS ENDED ---------------------------------- June 30, June 30, 2004 2003 -------------- --------------- Beginning balance $11.9 $ 8.9 Acquisitions 1.0 -- Charges to costs and expenses 4.3 3.2 Costs incurred (4.3) (2.6) ----- ----- Ending balance $12.9 $ 9.5 ===== =====
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 January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities" and in December 2003, issued Interpretation No. 46 (revised December 2003) "Consolidation of Variable Interest Entities - An Interpretation of APB No. 51." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 (R) clarifies the application of Accounting Research Bulletin ("APB") No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without subordinated financial support from other parties. The adoption of FIN No. 46 and FIN No. 46(R) did not have an impact on our financial statements. In December 2003, the Securities and Exchange Commission released Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104 clarifies existing guidance regarding revenues for contracts which contain multiple deliverables to make it consistent with Emerging Issues Task Force ("EITF") No. 00-21,"Accounting for Revenue Arrangements with Multiple Deliverables." The adoption of SAB 104 did not have a material impact on our revenue recognition policies, nor our financial position or results of operations. 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. 19 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 fiscal year ended December 31, 2003. Revenue Recognition Sales of products are recorded when the earnings process is complete. This generally occurs when the products are shipped to the customer in accordance with the contract or purchase order, risk of loss and title has passed to the customer, collectibility is reasonably assured and pricing is fixed and determinable. In instances where title does not pass to the customer upon shipment, we recognize revenue upon delivery or customer acceptance, depending on the terms of the sales contract. Service revenues primarily consist of engineering activities and are recorded when services are performed. Historically, revenues and costs under certain long-term contracts are recognized using contract accounting under the percentage-of-completion method. The percentage-of-completion method requires the use of estimates of costs to complete long-term contracts. The estimation of these costs requires judgment on the part of management due to the duration of these contracts as well as the technical nature of the products involved. Adjustments to these estimated costs are made on a consistent basis. A provision for contract losses is recorded when such facts are determinable. Revenues recognized under contract accounting during the three and six months ended June 30, 2004 and 2003 were not material. 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 creditworthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. If the actual uncollected amounts significantly exceed the estimated allowance, our operating results would be significantly adversely affected. 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 to purchase or manufacture the inventory or the current estimated market value of the inventory. Cost is determined using the standard cost method for our manufacturing businesses and the weighted average cost method for our distribution businesses. The inventory balance, which includes the cost of raw material, purchased parts, labor and production overhead costs, is recorded net of a reserve for excess, obsolete or unmarketable inventories. We regularly review inventory quantities on hand and record a reserve 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. 20 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 judgment regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of our acquired businesses, expected changes in the global economy, aerospace industry projections, discount rates 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 full valuation allowance of $136.3 as of June 30, 2004, 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 revise these estimates in future periods we may need to adjust the 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 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 weakened economy and increases in fuel costs, the world airline industry lost a total of $30 billion in calendar 2001 - 2003, including $6.5 billion in 2003. 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. During 2004, the airlines have been faced with very high fuel prices, making their return to profitability more difficult. More recent trends indicate that while the non-U.S. industry appears to be making a recovery, the U.S. airlines are expected to lose about $3 billion in 2004. The business jet industry has also been experiencing a severe downturn, driven by weak demand. During 2003, three business jet manufacturers reduced or temporarily halted production of a number of aircraft types. Deliveries of new business jets were down 32% during 2003 as compared to 2002, and are expected to remain depressed for the foreseeable future, according to industry forecasts. 21 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 industry improve. Additional events similar to those above could delay any recovery in the industry. While management has completed what it believes is an aggressive cost reduction plan to counter these difficult conditions, it cannot guarantee that the plans 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] 22 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 primarily in U.S. dollars and purchase raw materials and components parts from foreign vendors primarily in British pounds or euros. Accordingly, we are exposed to transaction gains and losses that could result from fluctuations in foreign currency exchange rates relative to the U.S. dollar. The largest foreign currency exposure results from activity in British pounds and euros. From time to time, we and our foreign subsidiaries may enter into foreign currency exchange contracts to manage risk on transactions conducted in foreign currencies. At June 30, 2004, we had no outstanding forward currency exchange contracts. We did not enter into any other derivative financial instruments. Interest rates - At June 30, 2004, we had no adjustable rate debt and fixed rate debt of $881.0. The weighted average interest rate for the fixed rate debt was approximately 8.7% at June 30, 2004. If interest rates were to increase by 10% above current rates, there would be no impact on our financial statements due to the absence of variable rate debt. We do not engage in transactions to hedge our exposure to changes in interest rates. As of June 30, 2004, we maintained a portfolio of securities consisting mainly of taxable, interest-bearing deposits with weighted average maturities of less than three months. If short-term interest rates were to increase or decrease by 10%, we estimate interest income would increase or decrease by approximately $0.1. ITEM 4. CONTROLS AND PROCEDURES Our chief executive officer and chief financial officer have concluded that, as of June 30, 2004, the end of the period covered by this report, our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) were effective, based on the evaluation of these controls and procedures required by Exchange Act Rules 13a-15(b) or 15d-15(b). There were no changes in our company's internal control over financial reporting that occurred during the second quarter of 2004 that have materially affected, or are reasonably likely to materially affect, our company's internal control over financial reporting. [Remainder of page intentionally left blank] 23 BE AEROSPACE, INC. PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities, Use of Proceeds and Issuer Not applicable. Purchases of Equity Services Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Annual meeting took place on June 24, 2004 1. Class I Directors elected - Jim C. Cowart, and Brian H. Rowe. Directors whose term of office continued after meeting (Class II and III) - Robert J. Khoury, David C. Hurley, Jonathan M. Schofield, Richard G. Hamermesh, Amin J. Khoury, Wesley W. Marple, Jr. 2. Amended the 1994 Employee Stock Purchase Plan The number of shares voted for, against and abstained/withheld were as follows:
Abstain/ For Against Withheld Unvoted --------------- ------------- -------------- ------------ 1. Election of Class I Directors Jim C. Cowart 31,649,863 732,648 -- Brian H. Rowe 28,400,370 3,982,141 -- 2. Proposal to amend the 1994 Employee Stock Purchase 20,888,629 1,880,381 100,598 -- Plan
Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K a. Exhibits 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 On April 21, 2004, we furnished under Item 12 a Current Report on Form 8-K with respect to earnings information for the fiscal quarter ended March 31, 2004. --------------- *Filed herewith. 24 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: August 5, 2004 By: /s/ Robert J. Khoury --------------------- Robert J. Khoury President and Chief Executive Officer Date: August 5, 2004 By: /s/ Thomas P. McCaffrey ----------------------- Thomas P. McCaffrey Corporate Senior Vice President of Administration and Chief Financial Officer 25