10-Q 1 f10q_110405.txt QUARTERLY REPORT 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, 2005 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[ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] The registrant has one class of common stock, $0.01 par value, of which 58,735,471 shares were outstanding as of November 3, 2005. 1 BE AEROSPACE, INC. Form 10-Q for the Quarter Ended September 30, 2005 Table of Contents Page ---- Part I Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) a) Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004....................3 b) Condensed Consolidated Statements of Earnings for the Three and Nine Months ended September 30, 2005 and September 30, 2004................................................4 c) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and September 30, 2004.......5 d) Notes to Condensed Consolidated Financial Statements..............6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................11 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. Unregistered Sales of Equity Securities and Use of Proceeds.........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............................................................24 Signatures..........................................................25 2 PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BE AEROSPACE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in millions, except share data)
September 30, December 31, 2005 2004 ----------------------- ---------------------- ASSETS Current assets: Cash and cash equivalents $ 87.3 $ 76.3 Accounts receivable - trade, less allowance for doubtful accounts ($3.2 at September 30, 2005 and $2.8 at December 31, 2004) 121.5 91.6 Inventories, net 222.1 197.8 Other current assets 12.8 13.4 ---------- ---------- Total current assets 443.7 379.1 Property and equipment, net 94.7 100.2 Goodwill 361.6 370.4 Identifiable intangible assets, net 142.7 151.4 Other assets, net 23.7 23.7 ---------- ---------- $ 1,066.4 $ 1,024.8 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 173.8 $ 152.6 Current maturities of long-term debt 1.5 1.5 ---------- ---------- Total current liabilities 175.3 154.1 Long-term debt, net of current maturities 678.1 678.6 Other non-current liabilities 6.7 9.3 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; 100.0 million shares authorized; 58.5 million (September 30, 2005) and 56.6 million (December 31, 2004) shares issued and outstanding 0.6 0.6 Additional paid-in capital 590.4 578.2 Accumulated deficit (382.5) (405.0) Accumulated other comprehensive income (loss) (2.2) 9.0 ----------- ------------ Total stockholders' equity 206.3 182.8 ---------- ---------- $ 1,066.4 $ 1,024.8 ========== ==========
See accompanying notes to condensed consolidated financial statements. 3 BE AEROSPACE, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Dollars in millions, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------------------- ---------------------------------- September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ----------------------------------------- ---------------------------------- Net sales $ 217.1 $ 183.5 $ 621.2 $ 543.9 Cost of sales 140.5 123.4 403.8 368.4 -------- -------- -------- -------- Gross profit 76.6 60.1 217.4 175.5 Operating expenses: Selling, general and administrative 34.0 29.8 97.8 88.4 Research, development and engineering 17.2 12.8 50.2 39.0 -------- -------- -------- -------- Total operating expenses 51.2 42.6 148.0 127.4 -------- -------- -------- -------- Operating earnings 25.4 17.5 69.4 48.1 Interest expense, net 14.8 19.7 44.9 59.4 -------- -------- -------- -------- Earnings (loss) before income taxes 10.6 (2.2) 24.5 (11.3) Income taxes 0.6 0.5 2.0 1.4 -------- -------- -------- -------- Net earnings (loss) $ 10.0 $ (2.7) $ 22.5 $ (12.7) ======== ======== ======== ======== Net earnings (loss) per common share: Basic $ 0.17 $ (0.07) $ 0.39 $ (0.34) ========= ======== ========= ======== Diluted $ 0.16 $ (0.07) $ 0.37 $ (0.34) ========= ======== ========= ======== Weighted average common shares: Basic 58.2 37.5 57.4 37.1 Diluted 61.2 37.5 60.3 37.1
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 30, September 30, 2005 2004 -------------------- ---------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 22.5 $ (12.7) Adjustments to reconcile net earnings (loss) to net cash flows provided by (used in) operating activities: Depreciation and amortization 21.7 21.0 Provision for doubtful accounts 0.5 0.7 Non-cash employee benefit plan contributions 2.1 1.7 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (35.3) (11.0) Inventories (26.8) (20.2) Other current assets and other assets (3.5) (0.6) Payables, accruals and other liabilities 28.3 20.2 ------- ------- Net cash flows provided by (used in) operating activities 9.5 (0.9) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (10.9) (10.7) Proceeds from sale of property and equipment 0.2 0.5 Acquisitions, net of cash acquired -- (12.5) Other, net 4.0 0.8 ------- ------- Net cash flows used in investing activities (6.7) (21.9) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from common stock issued 10.0 3.1 Repayment of long-term debt (0.3) (1.7) ------- ------- Net cash flows provided by financing activities 9.7 1.4 ------- ------- Effect of foreign exchange rate changes on cash and cash equivalents (1.5) -- ------- ------- Net increase (decrease) in cash and cash equivalents 11.0 (21.4) Cash and cash equivalents, beginning of period 76.3 147.6 ------- ------- Cash and cash equivalents, end of period $ 87.3 $ 126.2 ======= ======= Supplemental disclosures of cash flow information: Cash paid during period for: Interest, net $ 39.0 $ 48.2 Income taxes, net $ 1.9 $ 1.4
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, 2004. 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. If the compensation cost for the Company's stock option and stock purchase plans had been determined consistent with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings (loss) and net earnings (loss) per share for the three and nine months ended September 30, 2005 and 2004, would have been the pro forma amounts indicated in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------- ---------------------------------- September 30, September 30, September 30, September 30, 2005 2004 2005 2004 -------------------------------- ---------------------------------- Net earnings (loss) as reported $ 10.0 $ (2.7) $ 22.5 $ (12.7) Less: Expense per SFAS No. 123, fair value method, net of related tax effects 1.3 1.4 4.0 5.0 ------- ------- ------- ------- Pro forma net earnings (loss) $ 8.7 $ (4.1) $ 18.5 $ (17.7) ------- ------- ------- ------- Basic net earnings (loss) per share: As reported $ 0.17 $ (0.07) $ 0.39 $ (0.34) ======== ======= ======== ======= Pro forma $ 0.15 $ (0.11) $ 0.32 $ (0.48) ======== ======= ======== ======= Diluted net earnings (loss) per share: As reported $ 0.16 $ (0.07) $ 0.37 $ (0.34) ======== ======= ======== ======= Pro forma $ 0.14 $ (0.11) $ 0.31 $ (0.48) ======== ======= ======== =======
6 BE AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited - Dollars In Millions, Except Per Share Data) 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, 2004, and concluded that no impairment existed. As of September 30, 2005, the Company believed that no indicators of impairment existed. Aggregate amortization expense on identifiable intangible assets was approximately $2.5 and $2.4 for the three months ended September 30, 2005 and 2004, respectively, and $7.3 and $7.0 for the nine months ended September 30, 2005 and 2004, respectively. Amortization expense is expected to be approximately $10 in each of the next five fiscal years. Note 3. Long-Term Debt -------------- The Company's $50.0 credit facility with JPMorgan Chase Bank (the "Amended Bank Credit Facility") has no maintenance financial covenants other than an Interest Coverage Ratio (as defined in the Amended Bank Credit Facility) that must be maintained at a level equal to or greater than 1.15:1 for the trailing 12-month period. The Amended Bank Credit Facility, which expires in February 2007, is collateralized by substantially all of the Company's assets and contains customary affirmative covenants, negative covenants and conditions precedent for borrowings, all of which were met as of September 30, 2005. At September 30, 2005, indebtedness under the Amended Bank Credit Facility consisted of letters of credit aggregating approximately $11.6. The Amended Bank Credit Facility bears interest ranging from 250 to 400 basis points over the Eurodollar rate. As of September 30, 2005, the interest rate on any outstanding borrowings was approximately 6.8%. The amount available for borrowing under the Amended Bank Credit Facility was $38.4 as of September 30, 2005. Long-term debt consists principally of the $175 8-1/2% senior notes, $250 8-7/8% senior subordinated notes and $250 8% senior subordinated notes. The $175 8-1/2% senior notes mature on October 1, 2010, the $250 8% notes mature on March 1, 2008, and the $250 8-7/8% notes mature on May 1, 2011. The senior subordinated notes are unsecured senior subordinated obligations and are subordinated to all senior indebtedness. The senior notes are unsecured obligations and are senior to all subordinated indebtedness, but subordinate to the Amended Bank Credit Facility. Each of the 8-1/2% senior notes, 8% senior subordinated notes and 8-7/8% senior subordinated 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 September 30, 2005. A breach of these covenants, or the covenants under the Company's current Amended Bank Credit Facility 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 September 30, 2005, future minimum lease payments under these arrangements, the majority of which related to the long-term real estate leases, totaled approximately $92.1. 7 BE AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited - Dollars In Millions, Except Per Share Data) 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 amounts 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 30, September 30, 2005 2004 --------------------------------------------- Beginning balance $ 13.2 $ 11.9 Acquisitions -- 1.0 Accruals for warranties issued during the period 6.7 6.9 Settlements made (6.2) (8.3) -------------------- -------------------- Ending balance $ 13.7 $ 11.5 ==================== ====================
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, Distribution and Business Jet. The Company's Commercial Aircraft segment consists of eight principal operating units while the Distribution and Business Jet segments consist of one and two 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 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 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. 8 BE AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited - Dollars In Millions, Except Per Share Data) The following table presents net sales and other financial information by business segment:
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------- -------------------------------- September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ---------------- --------------- --------------- ---------------- Net sales Commercial Aircraft $ 140.6 $ 126.0 $ 404.6 $ 380.6 Distribution 43.0 36.6 131.0 107.5 Business Jet 33.5 20.9 85.6 55.8 ---------------- --------------- --------------- ---------------- $ 217.1 $ 183.5 $ 621.2 $ 543.9 ================ =============== =============== ================ Operating earnings (loss) Commercial Aircraft $ 14.0 $ 11.3 $ 37.2 $ 30.2 Distribution 8.7 6.2 26.5 19.5 Business Jet 2.7 -- 5.7 (1.6) ---------------- --------------- --------------- ---------------- $ 25.4 $ 17.5 $ 69.4 $ 48.1 ================ =============== =============== ================
Note 6. Net Earnings (Loss) Per Common Share ------------------------------------ Basic net earnings (loss) per common share is computed using the weighted average common shares outstanding during the period. Diluted net earnings (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 NINE MONTHS ENDED ----------------------------------- ---------------------------------- September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ------------------ ---------------- ---------------- ----------------- Net earnings (loss) $ 10.0 $ (2.7) $22.5 $ (12.7) ====== ======== ===== ======= Basic weighted average common shares 58.2 37.5 57.4 37.1 Effect of dilutive stock options and stock purchases under the employee stock purchase plan 3.0 -- 2.9 -- ------ -------- ----- ------- Diluted weighted average common shares 61.2 37.5 60.3 37.1 ====== ======== ===== ======= Basic net earnings (loss) per share $ 0.17 $ (0.07) $0.39 $ (0.34) ======= ======== ===== ======= Diluted net earnings (loss) per share $ 0.16 $ (0.07) $0.37 $ (0.34) ======= ======== ===== =======
The Company excluded potentially dilutive securities of 1.3 and 2.1 shares from the calculation of loss per share for the three and nine months ended September 30, 2004 as the effect of including these securities would have been anti-dilutive. Note 7. Comprehensive Earnings (Loss) ---------------------------- Comprehensive earnings (loss) is defined as all changes in a company's net assets except changes resulting from transactions with shareholders. It differs from net earnings (loss) in that certain items currently recorded to equity would be a part of comprehensive earnings (loss). The following table sets forth the computation of comprehensive earnings (loss) for the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------------------------------------------- September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ----------------- ---------------- ----------------- ---------------- Net earnings (loss) $10.0 $ (2.7) $ 22.5 $ (12.7) Other comprehensive earnings (loss): Foreign exchange translation adjustment (1.5) 0.4 (11.2) 0.1 ----- ------- ------ ------- Comprehensive earnings (loss) $ 8.5 $ (2.3) $ 11.3 $ (12.6) ===== ======= ====== =======
9 BE AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited - Dollars In Millions, Except Per Share Data) Note 8. Recent Accounting Pronouncements -------------------------------- In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised 2004) "Share-Based Payment" ("SFAS 123R"). The Securities and Exchange Commission has ruled that SFAS No. 123R is effective for publicly-traded companies for annual periods that begin after June 15, 2005. SFAS 123R sets accounting requirements for share-based compensation to employees, requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and disallows the use of the intrinsic value method of accounting for stock compensation. The Company is currently evaluating the impact that this statement will have on its results of operations. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS 151"), which requires abnormal amounts of inventory costs related to idle facility, freight handling and wasted material expenses to be recognized as current period charges. Additionally, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The standard is effective for fiscal years beginning after June 15, 2005. The Company does not believe the adoption of SFAS 151 will have a material impact on its consolidated financial statements. In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements" ("SFAS 154"). SFAS 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements. The Company does not believe adoption of SFAS 154 will have a material impact on its consolidated financial statements. [Remainder of page intentionally left blank] 10 BE AEROSPACE, INC. ------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars In Millions, Except Per Share Data) OVERVIEW The following discussion and analysis addresses the results of our operations for the three months ended September 30, 2005, as compared to our results of operations for the three months ended September 30, 2004. The discussion and analysis then addresses our results of operations for the nine months ended September 30, 2005, as compared to our results of operations for the nine months ended September 30, 2004. In addition, the discussion and analysis address our liquidity, financial condition and other matters for these periods. Based on our experience in the industry, we believe we are the world's largest manufacturer of cabin interior products for commercial aircraft and for business jets and a leading aftermarket distributor of aerospace fasteners. We sell our manufactured products directly to virtually all of the world's major airlines and airframe manufacturers and a wide variety of business jet customers. In addition, based on our experience, we believe that we have achieved leading global market positions in each of our major product categories, which include: o commercial aircraft seats, including an extensive line of first class, business class, tourist class and regional aircraft seats; o a full line of aircraft food and beverage preparation and storage equipment, including coffeemakers, water boilers, beverage containers, refrigerators, freezers, chillers and microwave, high heat convection and steam ovens; o both chemical and gaseous aircraft oxygen delivery systems and protective breathing equipment; o business jet and general aviation interior products, including an extensive line of executive aircraft seats, direct and indirect overhead lighting systems, oxygen delivery systems, air valve systems, high-end furniture and cabinetry; and o a broad line of aftermarket fasteners, covering over 100,000 stock keeping units (SKUs). We also design, develop and manufacture a broad range of cabin interior structures and provide comprehensive aircraft cabin interior reconfiguration and passenger-to-freighter conversion engineering services and component kits. We conduct our operations through strategic business units that have been aggregated under three reportable segments: Commercial Aircraft, Distribution and Business Jet. Net sales by line of business for the three- and nine-month periods ended September 30, 2005 and September 30, 2004 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------------------------------------------------------------------------------- September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004 -------------------------- --------------------------------------------------- ------------------------ Net % of Net % of Net % of Net % of Sales Net Sales Sales Net Sales Sales Net Sales Sales Net Sales ------------------------------------------------------------------------------------------------------- Commercial aircraft $140.6 64.8% $126.0 68.7% $404.6 65.1% $380.6 70.0% Distribution 43.0 19.8 36.6 19.9 131.0 21.1 107.5 19.8 Business jet 33.5 15.4 20.9 11.4 85.6 13.8 55.8 10.2 ------------------------------------------------------------------------------------------------------- Net sales $217.1 100.0% $183.5 100.0% $621.2 100.0% $543.9 100.0% =======================================================================================================
11 Net sales by domestic and foreign operations for the three- and nine-month periods ended September 30, 2005 and September 30, 2004 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------------------------------------------------------------- September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004 -------------------------------------------------------------------------------------- Domestic $152.2 $125.3 $436.5 $364.0 Foreign 64.9 58.2 184.7 179.9 -------------------------------------------------------------------------------------- Total $217.1 $183.5 $621.2 $543.9 ======================================================================================
Net sales by geographic segment (based on destination) for the three- and nine-month periods ended September 30, 2005 and September 30, 2004 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------------------------------------------------------------------- September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004 ---------------------------------------------------------------------------------------- Net % of Net % of Net % of Net % of Sales Net Sales Sales Net Sales Sales Net Sales Sales Net Sales United States $104.1 48.0% $98.3 53.6% $308.3 49.6% $285.5 52.5% Europe 45.6 21.0 35.8 19.5 142.9 23.0 113.5 20.9 Asia 57.4 26.4 33.8 18.4 138.9 22.4 104.9 19.3 Rest of World 10.0 4.6 15.6 8.5 31.1 5.0 40.0 7.3 ---------------------------------------------------------------------------------------- $217.1 100.0% $183.5 100.0% $621.2 100.0% $543.9 100.0% ========================================================================================
We have substantially expanded the size, scope and nature of our business through a number of acquisitions. Between 1989 and 2001, we completed 24 acquisitions for an aggregate purchase price of approximately $1 billion. Since 2001, we made two insignificant acquisitions. Essentially all of our revenue growth since 2001 has been organic. During the period from 1989 to 2000, we integrated the acquired businesses, closed 17 facilities, reduced our workforce by 3,000 positions and implemented common information technology platforms and lean manufacturing initiatives company-wide. This integration effort resulted in costs and charges totaling approximately $125. The rapid decline in industry conditions brought about by the terrorist attacks on September 11, 2001 caused us to implement a facility consolidation and integration plan designed to re-align our capacity and cost structure with changed conditions in the airline industry. The facility consolidation and integration plan included closing five facilities and reducing workforce by approximately 1,500 employees. We believe these initiatives will enable us to continue to expand profit margins as industry conditions and demand continue to improve, strengthen the global business management focus on our core product categories and more effectively leverage our resources. The total cost of this program was approximately $175, including approximately $74 of cash charges. New product development is a strategic initiative for our company. Our customers regularly request that we engage in new product development and enhancement activities. We believe that these activities, if properly focused and managed, will protect and enhance our leadership position. We believe our investments in research and development over the past several years has been the driving force behind our ongoing market share gains. Research, development and engineering spending have been approximately 6%- 8% of sales for the past several years, and is expected to remain at approximately that level for the foreseeable future. We also believe in providing our businesses with the tools required to remain competitive. In that regard, we have invested, and will continue to invest, in property and equipment that enhances our productivity. Over the past three years, annual capital expenditures ranged from $11 - $17. Taking into consideration our recent capital expenditure investments and current industry conditions, we anticipate capital expenditures of approximately $20 - $23 over the next twelve months. 12 BE AEROSPACE, INC. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005, AS COMPARED TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 (Dollars In Millions, Except Per Share Data) Sales for each of our segments are set forth in the following table: NET SALES ---------------------------------------------------- Three Months Ended September 30, ---------------------------------------------------- Percent 2005 2004 Change Change ---------------------------------------------------- Commercial aircraft $140.6 $126.0 $14.6 11.6% Distribution 43.0 36.6 6.4 17.5 Business jet 33.5 20.9 12.6 60.3 ---------------------------------------------------- Total $217.1 $183.5 $33.6 18.3% ==================================================== The commercial aircraft segment ("CAS") generated revenues of $140.6 in the third quarter of 2005, up 11.6% versus the same period in the prior year, primarily due to a higher volume of commercial aircraft passenger cabin equipment and engineering, integration and certification services. The distribution segment delivered strong revenue growth of 17.5% in the third quarter of 2005, driven by a broad based increase in aftermarket demand for aerospace fasteners and continued market share gains. In the business jet segment, revenues increased by 60.3% in the third quarter of 2005, reflecting the ongoing recovery within the business jet industry and initial shipments of super first class products. Gross profit for the third quarter of 2005 of $76.6, or 35.3% of sales, increased by $16.5, or 27.5% on the 18.3% year-over-year increase in revenues. Third quarter 2005 gross margin expanded by 250 basis points as compared to the same period of the prior year. The increase in gross margin was primarily driven by an improved mix of products sold and ongoing manufacturing efficiencies. Selling, general and administrative expenses in the third quarter of 2005 of $34.0, or 15.7% of sales, were up $4.2 versus selling, general and administrative expenses in the same period in the prior year of $29.8, or 16.2% of sales, primarily due to the higher level of commissions and sales incentives in the current period, as well as selling and marketing costs associated with the 18.3% increase in revenues and the 63% increase in backlog from September 30, 2004. Research, development and engineering expenses of $17.2, or 7.9% of sales, were up $4.4 versus the same period in the prior year due to a higher level of spending associated with customer reimbursed engineering and spending associated with new product development activities. Operating earnings for the third quarter of 2005 of $25.4 increased by 45.1%, as compared to the same period last year. The operating margin of 11.7% in the current quarter was 220 basis points greater than the operating margin realized in the third quarter of 2004. The substantial increase in operating earnings was driven primarily by continued margin expansion at the commercial aircraft segment, continued growth in revenues and earnings at the distribution segment, as well as the substantial turnaround in profitability at the business jet segment due to the higher volume of shipments and ongoing manufacturing efficiencies. The following is a summary of the change in operating earnings by segment: OPERATING EARNINGS ---------------------------------------------------- Three Months Ended September 30, ---------------------------------------------------- Percent 2005 2004 Change Change -------------------------------------------------- Commercial aircraft $14.0 $11.3 $2.7 23.9% Distribution 8.7 6.2 2.5 40.3 Business jet 2.7 -- 2.7 NM -------------------------------------------------- Total $25.4 $17.5 $7.9 45.1% ================================================== 13 The CAS operating results and order book continued to improve during the third quarter of 2005. Compared to the third quarter of 2004, CAS operating earnings of $14.0 increased by 23.9% on an 11.6% increase in sales. The operating margin expanded to 10.0%, a 100 basis point improvement over the same period in the prior year. This margin expansion was primarily a result of an improved mix of products sold and ongoing manufacturing efficiencies. CAS bookings for the third quarter nearly tripled versus the same period last year as backlog during the third quarter of 2005 reached record levels. The distribution segment generated revenues of $43.0 in the third quarter of 2005, which were 17.5% greater than the same period in the prior year. Operating earnings at the distribution segment in the third quarter of 2005 were $8.7, 40.3% higher than the same period last year and represented a 20.2% operating margin, as compared to a 16.9% margin last year. The distribution segment's strong performance was in spite of three lost days of operations due to the hurricane activity in the current third quarter period. The business jet segment generated third quarter revenues of $33.5, up 60.3% as compared to the third quarter of 2004. Operating earnings at the business jet segment during the quarter were $2.7 higher than operating earnings reported in the same period last year. The substantial increase in operating earnings reflects the higher level of revenues associated with an improving business jet industry and operational improvements in the new super first class product line, as well as expanding margins due to ongoing manufacturing efficiencies and operating leverage at the higher level of revenue. Interest expense for the third quarter of 2005 of $14.8 was $4.9 lower than interest expense recorded in the same period in the prior year. Interest expense decreased in the third quarter of 2005 as a result of the early retirement of $200 of senior subordinated notes during the fourth quarter of 2004. Income tax expense of $0.6 during the third quarter of 2005 increased from income tax expense of $0.5 in the same period in the prior year. Income taxes arise from earnings of foreign subsidiaries for which no net operating loss carryforwards are available. Net earnings for the third quarter of 2005 were $10.0 or $0.16 per diluted share, a $12.7 or $0.23 per diluted share improvement as compared to the same period of the prior year. [Remainder of page intentionally left blank] 14 RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005, AS COMPARED TO THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (Dollars In Millions, Except Per Share Data) Sales for each of our segments are set forth in the following table: NET SALES ---------------------------------------------------- Nine Months Ended September 30, ---------------------------------------------------- Percent 2005 2004 Change Change ---------------------------------------------------- Commercial Aircraft $404.6 $380.6 $24.0 6.3% Distribution 131.0 107.5 23.5 21.9 Business Jet 85.6 55.8 29.8 53.4 ---------------------------------------------------- Total $621.2 $543.9 $77.3 14.2% ==================================================== Net sales for the nine months ended September 30, 2005 were $621.2, an increase of $77.3 or 14.2% as compared to the same period of the prior year. Sales during the nine months ended September 30, 2005 at the CAS of $404.6 were up 6.3% versus the same period in the prior year, primarily due to a higher volume of commercial aircraft passenger equipment and engineering, integration and certification services. The distribution segment delivered strong revenue growth of 21.9%, driven by a broad based increase in aftermarket demand for aerospace fasteners and continued market share gains. In the business jet segment, revenues increased by 53.4%, reflecting the ongoing recovery within the business jet industry and initial shipments of super first class products. Gross profit for the nine months ended September 30, 2005 of $217.4, or 35.0% of sales, increased by $41.9 compared to the same period in the prior year, or 23.9% on the 14.2% increase in revenues. Gross margin for the nine months ended September 30, 2005 expanded by 270 basis points as compared to the same period of the prior year. The increase in gross margin was primarily driven by an improved mix of products sold and ongoing manufacturing efficiencies. Selling, general and administrative expenses during the nine months ended September 30, 2005 of $97.8, or 15.7% of sales, were up $9.4 versus selling, general and administrative expenses in the same period in the prior year of $88.4, or 16.3% of sales, primarily due to the higher level of commissions and sales incentives in the current period, as well as costs associated with the 14.2% increase in revenues. In connection with the resolution of two legal matters during the second quarter of 2005, we received approximately $1.8 of net reimbursed legal fees; such amounts were offset by increases in our allowance for doubtful accounts, incentive compensation and severance, which together aggregated approximately $1.6. Research, development and engineering expenses during the nine months ended September 30, 2005 of $50.2, or 8.1% of sales, were up $11.2 versus the prior year due to a higher level of spending associated with customer reimbursed engineering and spending associated with new product development activities. Operating earnings for the nine months ended September 30, 2005 of $69.4 increased by 44.3%, as compared to the same period last year. The operating margin of 11.2% for the nine months ended September 30, 2005 was 240 basis points greater than the operating margin realized in the same period of 2004. The substantial increase in operating earnings was driven by the continuing margin expansion at the commercial aircraft segment, continued growth in revenues and earnings at the distribution segment, as well as the substantial turnaround in profitability at the business jet segment due to the higher volume of shipments and ongoing manufacturing efficiencies. 15 The following is a summary of the change in operating earnings by segment: OPERATING EARNINGS ---------------------------------------------------- Nine Months Ended September 30, ---------------------------------------------------- Percent 2005 2004 Change Change ---------------------------------------------------- Commercial aircraft $37.2 $30.2 $7.0 23.2% Distribution 26.5 19.5 7.0 35.9 Business jet 5.7 (1.6) 7.3 NM ---------------------------------------------------- Total $69.4 $48.1 $21.3 44.3% ==================================================== CAS's operating results and order book continued to improve during the nine months ended September 30, 2005. Compared to the same period of 2004, CAS operating earnings of $37.2 increased by 23.2% on a 6.3% increase in sales. The operating margin expanded to 9.2%, a 130 basis point improvement over the prior year. This margin expansion was primarily a result of an improved mix of products sold and ongoing manufacturing efficiencies. The distribution segment generated record revenues of $131.0 for the nine months ended September 30, 2005, which were 21.9% greater than the same period in the prior year. Operating earnings at the distribution segment were $26.5 million for the nine-month period, 35.9% higher than the same period last year and represented a 20.2% operating margin, as compared to an 18.1% operating margin in the same period in the prior year. The expansion of the operating margin reflects the operating efficiencies at the higher revenue level, and was in spite of three lost days of operations due to the hurricane activity in the third quarter of 2005. The business jet segment generated revenues of $85.6 for the nine-month period ended September 30, 2005, up 53.4% as compared to the same period of 2004. Operating earnings at the business jet segment for the nine months ended September 30, 2005 were $7.3 higher than the same period last year. The substantial increase in operating earnings reflects the higher level of revenues associated with an improving business jet industry as well as ongoing manufacturing efficiencies and operating leverage at the higher level of revenues. Interest expense for the nine-month period ended September 30, 2005 of $44.9 was $14.5 lower than interest expense recorded in the same period in the prior year. Interest expense decreased for the nine months ended September 30, 2005 as a result of the early retirement of $200 of senior subordinated notes during the fourth quarter of 2004. Income tax expense of $2.0 during the nine-month period ended September 30, 2005 increased from income tax expense of $1.4 in the same period in the prior year. Income taxes arise from earnings of foreign subsidiaries for which no net operating loss carryforwards are available. Net earnings for the nine months ended September 30, 2005 were $22.5 or $0.37 per diluted share, a $35.2 or $0.71 per diluted share improvement as compared to the same period of the prior 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 accounts receivable and inventories, which fluctuate with the sales of our products. Our working capital was $268.4 as of September 30, 2005, as compared to $225.0 as of December 31, 2004. The increase in working capital from December 31, 2004 to September 30, 2005 was primarily due to an increased level of accounts receivable related to our recent revenue growth, a higher level of inventories to support expected further increases in revenues, offset somewhat by a higher level of accounts payable and accrued liabilities arising from the higher revenue volume, and the timing of interest payments. We currently have no bank borrowings outstanding and no debt principal payments due until 2008. Our Amended Bank Credit Facility, under which we have no borrowings, expires in February 2007. At September 30, 2005, our cash and cash equivalents were $87.3, as compared to $76.3 at December 31, 2004. The increase in cash and cash equivalents from December 31, 2004 to September 30, 2005 was primarily due to net earnings during the period, proceeds from common stock issued and by a somewhat higher level of accounts payable and accrued liabilities arising from the higher revenue volume and the timing of interest payments, offset by an increased level of accounts receivable related to our recent revenue growth and a higher level of inventories to support expected further increases in revenues. Cash Flows At September 30, 2005, our cash and bank credit available under our Amended Bank Credit Facility was $125.7 compared to $114.7 at December 31, 2004. Cash generated by operating activities was $9.5 for the nine months ended September 30, 2005, as compared to cash used by operating activities of $0.9 in the same period in the prior year. The primary source of cash during the nine months ended September 30, 2005 was due to net earnings of $22.5, non-cash charges of $24.3 primarily related to amortization and depreciation and a higher level of accounts payable and accrued liabilities arising from the higher revenue volume and the timing of interest payments. This source of cash was offset somewhat by an increased level of accounts receivable ($35.3) related to our recent revenue growth and a higher level of inventories ($26.8) to support expected further increases in revenues. Capital Spending Our capital expenditures were $10.9 and $10.7 during the nine months ended September 30, 2005 and 2004, respectively. We anticipate capital expenditures of approximately $20 - $23 for the next twelve months. 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 bank credit facilities. 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 or any future bank credit facility, although there can be no assurance that future bank credit facilities will be available. Between 1989 and 2001, we completed 24 acquisitions for an aggregate purchase price of approximately $1 billion. Following these acquisitions, we rationalized the businesses, reduced headcount by approximately 4,500 employees and eliminated 22 facilities. We have financed these acquisitions primarily through issuances of debt and equity securities, including our outstanding 8-1/2% senior notes, 8% senior subordinated notes and 8-7/8% senior subordinated notes and bank credit facilities. Outstanding Debt and Other Financing Arrangements Our $50.0 bank credit facility with JPMorgan Chase Bank ("Amended Bank Credit Facility") has no maintenance financial covenants, other than maintaining an Interest Coverage Ratio (as defined) of 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 our assets and bears interest at rates ranging from 250 to 400 basis points over the Eurodollar rate as defined in the Amended Bank Credit Facility. At September 30, 2005, indebtedness under the Amended Bank Credit Facility consisted of letters of credit aggregating 17 approximately $11.6. The amount available under the Amended Bank Credit Facility was $38.4 as of September 30, 2005. The Amended Bank Credit Facility contains customary affirmative covenants, negative covenants and conditions of borrowings, all of which were met as of September 30, 2005. Long-term debt consists principally of our $175 8-1/2% senior notes, $250 8-7/8% senior subordinated notes and $250 8% senior subordinated notes. The $175 8-1/2% senior notes mature on October 1, 2010, $250 8% notes mature on March 1, 2008, and the $250 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 unsecured obligations and are senior to all of our subordinated indebtedness, but subordinate to our Amended Bank Credit Facility. Each of the $175 8-1/2% senior notes, $250 8% senior subordinated notes and $250 8-7/8% senior subordinated 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 September 30, 2005. A breach of these covenants, or the covenants under our Amended Bank Credit Facility 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 nine-month period ended September 30, 2005, 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, 2004. We believe that our cash flows, together with cash on hand and availability under our Amended Bank Credit Facility, provide us with the ability to fund our operations, make planned capital expenditures and make scheduled debt service payments for at least the next twelve months. 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 offer assurance 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 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, 2005, future minimum lease payments under these arrangements, the majority of which related to the long-term real estate leases, was approximately $92.1. 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. Accordingly, no amounts have been accrued for indemnities, commitments and guarantees. 18 Product Warranty Costs ---------------------- For discussion of Product Warranty Costs, refer to Note 4 of our Condensed Consolidated Financial Statements included in Part 1, Item 1, of this report. 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 substantial 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 For discussion of Recent Accounting Pronouncements, refer to Note 8 of our Condensed Consolidated Financial Statements included in Part 1, Item 1, of this report. 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 fiscal year ended December 31, 2004. 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 nine months ended September 30, 2005 and 2004 were not significant to our financial statements. 19 We sell our products primarily to airlines and aircraft manufacturers worldwide, including occasional sales collateralized by letters of credit. 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, manufactured 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. 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. 20 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 ($129.3 as of December 31, 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, in the aftermath of the attacks most major U.S. carriers and a number of international carriers substantially reduced their flight schedules, parked or retired portions of their fleets, reduced their workforces and implemented other cost reduction initiatives. U.S. airlines 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 increases in fuel costs and heightened competition from low-cost carriers, the world airline industry lost a total of $35 billion in calendar years 2002 through 2004, including $5 billion in 2004. The airline industry crisis also caused 21 airlines worldwide to declare bankruptcy or cease operations in the past four years. Record fuel prices continue to negatively impact the airlines, particularly in the U.S., where there is too much airline capacity and where the airlines have very little ability to increase prices. During 2005, 4 U.S. airlines filed for bankruptcy protection. The U.S. airlines are expected to lose $9 - $10 billion in 2005. The business jet industry has also been experiencing a severe downturn, driven by weak economic conditions and poor corporate profits. During 2003, three business jet manufacturers reduced or temporarily halted production of a number of aircraft types. While deliveries of new business jets increased in 2004 as compared to 2003, deliveries were down 33% during 2003 as compared to 2001. Business jet deliveries are expected to slowly increase over the next several years, reaching 712 by 2007. The rate at which the business jet industry recovers is dependent on corporate profits, the number of used jets on the market and other factors which could slow the rate of recovery. As a result of the foregoing factors, the U.S. 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, caused a substantial contraction in our business during the period from 2001 through 2003. Although the global airline industry began to recover in late 2003 and our industry continues to improve, additional events similar to those above could delay any sustained 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 21 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. The forward-looking statements included in this report are made only as of the date of this report and, except as required by federal securities laws, we do not have any obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances. [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 component 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 September 30, 2005, we had no outstanding forward currency exchange contracts. We did not enter into any other derivative financial instruments during the period. Interest rates - At September 30, 2005, we had no adjustable rate debt outstanding and fixed rate debt of $679.6. The weighted average interest rate for the fixed rate debt was approximately 8.5% at September 30, 2005. 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 any outstanding variable rate debt. We do not engage in transactions to hedge our exposure to changes in interest rates. As of September 30, 2005, we maintained a portfolio of securities consisting mainly of taxable, interest-bearing deposits with 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 $0.3. ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our principal executive officer and our principal financial officer, after evaluating, together with management, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2005, 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 our consolidated subsidiaries would be made known to them by others within those entities. Internal Control over Financial Reporting There were no changes in our company's internal control over financial reporting that occurred during the third quarter of 2005 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. Unregistered Sales of Equity 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 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*
--------------- *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: November 7, 2005 By: /s/ Robert J. Khoury ------------------------------------ Robert J. Khoury President and Chief Executive Officer Date: November 7, 2005 By: /s/ Thomas P. McCaffrey ------------------------------------ Thomas P. McCaffrey Senior Vice President of Administration and Chief Financial Officer 25