United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 23, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-18348
BE AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1209796
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1400 Corporate Center Way, Wellington, Florida 33414
(Address of principal executive offices) (Zip Code)
(561) 791-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
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 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $455.4 million on May 22, 2002 based on the
closing sales price of the registrant's common stock as reported on the Nasdaq
National Market as of such date.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of May 22, 2002 was 35,648,497 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Proxy Statement to be filed with the
Commission in connection with the 2002 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
INDEX
PART I
ITEM 1. Business..............................................................3
ITEM 2. Properties...........................................................14
ITEM 3. Legal Proceedings....................................................15
ITEM 4. Submission of Matters to a Vote of Security Holders..................15
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters..............................................................16
ITEM 6. Selected Financial Data..............................................17
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................19
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk...........36
ITEM 8. Consolidated Financial Statements and Supplementary Data.............36
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................36
PART III
ITEM 10. Directors and Executive Officers of the Registrant...................37
ITEM 11. Executive Compensation...............................................41
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.......47
ITEM 13. Certain Relationships and Related Transactions.......................48
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......49
Index to Consolidated Financial Statements and Schedule.............F-1
PART I
In this Form 10-K, when we use the terms the "company," "B/E," "we," "us," and
"our," unless otherwise indicated or the context requires, we are referring to
BE Aerospace, Inc. and its consolidated subsidiaries. Certain disclosures
included in this Form 10-K constitute forward-looking statements that are
subject to risks and uncertainty. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Forward-Looking Statements."
ITEM 1. BUSINESS
INTRODUCTION
The Company
General
We are the world's largest manufacturer of cabin interior products for
commercial aircraft and business jets. We sell our manufactured products
directly to virtually all of the world's major airlines and airframe
manufacturers and a wide variety of general aviation customers. 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;
o business jet and general aviation interior products, including an
extensive line of executive aircraft seats, direct and indirect overhead
lighting systems, oxygen, safety and air valve products; and
o a broad line of aftermarket fasteners, covering over
100,000 Stock Keeping Units (SKUs).
We design, develop and manufacture a broad range of cabin interior
structures such as galleys and crew rests, and provide comprehensive aircraft
cabin interior reconfiguration and passenger-to-freighter conversion engineering
services and component kits.
Our company was organized as a corporation in Delaware in 1987. We have
substantially expanded the size, scope and nature of our business as a result of
a number of acquisitions. Since 1989, we have completed 22 acquisitions,
including three acquisitions during fiscal 2002, for an aggregate purchase price
of approximately $971.0 million in order to position ourselves as a preferred
global supplier to our customers. We have undertaken three major facility and
product line consolidation efforts, eliminating 22 facilities. We have also
implemented lean manufacturing and continuous improvement programs which
together with our common information technology platform has significantly
improved our productivity and gross and operating margins.
Industry Overview
The commercial and business jet aircraft cabin interior products industries
encompass a broad range of products and services, including aircraft seating
products, passenger entertainment and service systems, food and beverage
preparation and storage systems, oxygen delivery systems, lavatories, lighting
systems, evacuation equipment and overhead bins, as well as a wide variety of
engineering design, integration, installation, retrofit and certification
services.
Historically, the airline cabin interior products industry has derived
revenues from five sources:
o retrofit programs in which airlines purchase new interior furnishings to
overhaul the interiors of aircraft already in service;
o refurbishment programs in which airlines purchase components and
services to improve the appearance and functionality of certain cabin
interior equipment;
o new installation programs in which airlines purchase new equipment to
outfit newly delivered aircraft;
o spare parts; and
o equipment to upgrade the functionality or appearance of the aircraft
interior.
The retrofit and refurbishment cycles for commercial aircraft cabin interior
products differ by product category. Aircraft seating typically has a
refurbishment cycle of one to two years and a retrofit cycle of four to eight
years. Galley and lavatory structures as well as food and beverage preparation
and storage equipment are periodically upgraded or repaired, and require a
continual flow of spare parts, but may be retrofitted only once or twice during
the useful life of an aircraft.
Historically, about 70% of fasteners are used in the aftermarket. There is a
direct relationship between demand for fastener products and fleet size,
utilization, and age. Fasteners must be replaced at prescribed intervals and
such replacements also drive demand for fasteners.
Revenues for aerospace fastener products have been derived from the
following sources:
o mandated maintenance and replacement of specified parts and
o demand for structural modifications, cabin interior modifications and
passenger-to-freighter conversions.
We estimate that the commercial and business jet cabin interior products and
aerospace-grade fastener distribution industries had combined annual sales in
excess of $3.0 billion and $1.2 billion, respectively during fiscal 2002.
Recent Industry Conditions
The September 11 terrorist attacks have severely impacted conditions in the
airline industry. For the first time in the history of commercial aviation, all
domestic airlines were grounded for a period of three days. According to
industry sources, since resuming service, most major US carriers have
substantially reduced their flight schedules, parking or retiring approximately
15% of their fleets. The airlines have further responded by decreasing domestic
airfares by approximately 14% as compared to February of last year. As a result
of the double-digit decline in both traffic and airfares, airline revenues for
domestic carriers for the first calendar quarter of 2002 were down by 22%. As a
result of the substantial reduction in airline revenues arising from the
September 11 terrorist attacks, and their aftermath, as well as other factors,
such as the weakening economy, the U.S. airline industry incurred the largest
loss in its history in calendar 2001, totaling in excess of $7 billion.
Accordingly, the airlines are seeking to conserve cash in part by deferring or
eliminating cabin interior refurbishment programs and canceling or deferring
aircraft purchases. This has caused a substantial contraction in our business,
the extent and duration of which cannot be determined at this time. We have
taken swift actions to respond to the rapid change in industry conditions,
including consolidating five of our principal facilities into other existing
facilities, reducing headcount by about 1,000 positions, or 22% of our
workforce, freezing salaries and eliminating management bonuses for fiscal 2002.
Our principal customers are the world's commercial airlines. During the six
years ending with calendar 2000, the airlines significantly strengthened their
balance sheets and enhanced their liquidity as a result of improved
profitability, debt and equity financings and closely managed fleet expansion.
However, increases in pilot and other airline wages, coupled with higher fuel
prices and the softening of the global economy, were already negatively
impacting airline profitability prior to the events of September 11, 2001. The
combined impact of the recent recession and the events of September 11 has
negatively impacted discretionary airline spending for cabin interior
refurbishments and upgrades and new aircraft purchases. We expect that this will
have a material adverse impact on our business' results of operations and
financial condition until such time as conditions in the industry improve. While
management has developed and begun to implement what it believes is a sound plan
to counter these difficult conditions, it cannot guarantee that the plans are
adequate or will be successful.
Other factors expected to affect the cabin interior products industry are the
following:
Existing Installed Base. Existing installed product base typically generates
continued retrofit, refurbishment and spare parts revenue as airlines
maintain their aircraft cabin interiors. According to industry sources, the
world's active commercial passenger aircraft fleet consisted of
approximately 12,600 aircraft as of February 2002, including 3,500 aircraft
with fewer than 120 seats, 6,400 aircraft with between 120 and 240 seats and
2,700 aircraft with more than 240 seats. Further, based on industry sources,
we estimate that there are currently over 11,700 business jets currently in
service. Based on such fleet numbers, we estimate that the total worldwide
installed base of commercial and general aviation aircraft cabin interior
products, valued at replacement prices, was approximately $28.1 billion as
of February 23, 2002.
Expanding Worldwide Fleet. The expanding worldwide aircraft fleet is
expected to generate additional revenues from new installation programs,
while the increase in the size of the installed base is expected to generate
additional and continued retrofit, refurbishment and spare parts revenue.
Worldwide air traffic has grown every year since 1946 (except in 1974, 1991
and 2001). According to the January/February 2002 issue of the Airline
Monitor, worldwide air traffic is projected to grow at a compounded average
rate of 5.5% per year through 2020, increasing annual revenue passenger
miles from approximately 2.0 trillion in 2001 to approximately 5.5 trillion
by 2020. According to the Airbus Industrie Global Market Forecast published
in July 2000, the worldwide installed seat base, which we consider a good
indicator for potential growth in the aircraft cabin interior products
industry, is expected to increase from approximately 1.85 million passenger
seats at the end of 1999 to approximately 4.17 million passenger seats at
the end of 2019.
Growing Passenger-to-Freighter Conversion Business. Industry sources project
that air cargo traffic will grow by five percent to six percent annually
over the next twenty years, approximately double the forecasted economic
growth rate. Industry sources project that the size of the worldwide
freighter fleet will double over the next twenty years, with more than
approximately 3,000 aircraft being added, after taking retirements into
account. Industry sources also estimate that almost 70 percent of that
increase will come from converting commercial passenger jets to use as
freighters.
New Aircraft Deliveries. The number of new aircraft delivered each year is
an important determinant of fleet expansion and is generally regarded as
cyclical in nature. New aircraft deliveries (including regional jets) were
1,043 in 2000 and 1,162 in 2001. According to the Airline Monitor published
in February 2002, new deliveries are expected to decline significantly in
2002, with average annual new aircraft deliveries of approximately 900
during 2002 through 2006.
Business Jet and VIP Aircraft Fleet Expansion and Related Retrofit
Opportunities. Business jet manufacturers have experienced growth in new
aircraft deliveries similar to that experienced by the commercial jet
manufacturers. According to industry sources, business jet aircraft
deliveries amounted to 758 units in calendar 2000 and 791 units in calendar
2001. Industry sources indicate that approximately 7,815 business jets will
be built between 2000 and 2009 with a value of more than $123 billion.
Wide-body Aircraft Deliveries. The trend toward wide-body aircraft is
significant to us because wide-body aircraft require almost five times the
dollar value content for our products as compared to narrow-body aircraft.
Deliveries of wide-body, long-haul aircraft constitute an increasing share
of total new aircraft deliveries and are an increasing percentage of the
worldwide fleet. Wide-body aircraft represented 17% of all new commercial
aircraft delivered in 2001, and are expected to increase to 19% of new
deliveries in 2005 and 22% of new deliveries in 2006. Wide-body aircraft
currently carry up to three or four times the number of seats as narrow-body
aircraft and because of multiple classes of service, including large first
class and business class configurations, our average revenue per seat on
wide-body aircraft is substantially higher. Aircraft cabin crews on
wide-body aircraft may make and serve between 300 and 900 meals and may brew
and serve more than 2,000 cups of coffee and serve more than 400 glasses of
wine on a single flight.
New Product Development. The aircraft cabin interior products companies are
engaged in intensive development and marketing efforts for both new features
on existing products and totally new products. These products include a
broad range of amenities such as full electric "sleeper seats," convertible
seats, full face crew masks, advanced telecommunications equipment,
protective breathing equipment, oxygen generating systems, new food and
beverage preparation and storage equipment, kevlar barrier nets, de-icing
systems, crew rests and cabin management systems.
Engineering Services Markets. Historically, the airlines have relied
primarily on their own in-house engineering resources to provide
engineering, design, integration and installation services, as well as
services related to repairing or replacing cabin interior products that have
become damaged or otherwise non-functional. As cabin interior product
configurations have become increasingly sophisticated and the airline
industry increasingly competitive, the airlines have begun to outsource such
services in order to increase productivity and reduce costs and overhead.
Outsourced services include:
o engineering design, integration, project management, installation and
certification services;
o modifications and reconfigurations for commercial aircraft; and
o services related to the support of product upgrades.
Competitive Strengths
We believe that we have a strong competitive position attributable to a
number of factors, including the following:
Combination of Manufacturing and Cabin Interior Design Services. We have
continued to expand our products and services, believing that the airline
industry increasingly will seek an integrated approach to the design,
development, integration, installation, testing and sourcing of aircraft
cabin interiors. We believe that we are the only manufacturer of a broad
technologically-advanced line of cabin interior products with cabin interior
design capabilities. Based on our established reputation among the world's
commercial airlines for quality, service and product innovation, we believe
that we are well positioned to serve these customers.
Technological Leadership/New Product Development. We believe that we are a
technological leader in our industry, with what we believe is the largest
research and development organization in the cabin interior products
industry, currently comprised of approximately 560 engineers. We believe our
research and development effort and our on-site technicians at both the
airlines and airframe manufacturers enable us to play a leading role in
developing and introducing innovative products to meet emerging industry
trends and needs and thereby gain early entrant advantages.
Proven Track Record of Acquisition Integration. We have demonstrated the
ability to make strategic acquisitions and successfully integrate such
acquired businesses. Our acquisition strategy is subject to a number of
risks including increasing leverage, the application of restrictive
covenants in connection with additional debt incurred for any further
acquisitions and the costs of integrating any acquired companies.
Large Installed Base. We believe our large installed base of products,
estimated to be approximately $6.6 billion as of February 23, 2002 (valued
at replacement prices), is a strategic advantage. The airlines tend to
purchase spare parts and retrofits and refurbishment programs from the
supplier of the existing equipment. As a result, we expect our large
installed base to generate continued retrofit, refurbishment and spare parts
revenue as airlines continue to maintain, evolve and reconfigure their
aircraft cabin interiors.
Growth Opportunities
We believe that we have benefited from three major growth trends in the
aerospace industry.
Large Aftermarket Business. Our substantial installed base provides
significant ongoing revenues from replacements, upgrades, repairs and the
sale of spare parts. Approximately 63% of our revenues for the year ended
February 23, 2002 were derived from aftermarket activities. We believe that
we are well positioned to benefit when the airlines' financial condition and
liquidity improves as the airlines begin to make the expenditures for their
existing aircraft well before they begin to buy new aircraft. See "Recent
Industry Conditions."
Expansion of Worldwide Fleet and Shift Toward Wide-Body Aircraft. Through
2001, airlines were taking delivery of a large number of new aircraft due to
high load factors and the projected growth in air travel. Near term, we
expect new aircraft deliveries to decline but over time we expect the fleet
expansion to return to earlier projected levels. See "Recent Industry
Conditions."
Opportunity to Double the Size of our Addressable Markets through our
Fastener Distribution Business. Through the recent acquisition of M & M
Aerospace Hardware, Inc. (M & M), we have entered a new segment which
leverages B/E's key strengths. Because 70% of fastener demand is generated
by the existing worldwide fleet, demand for fasteners will increase over
time as the fleet expands, much like the market for cabin interior products.
We believe we have acquired an outstanding distribution business which
possesses excellent information technology, automated parts retrieval,
purchasing and customer relationship management systems. In addition, the
business has sufficient management, systems and industry knowledge to serve
as a platform for consolidation of this business segment.
Business Jet and VIP Aircraft Fleet Expansion and Related Retrofit
Opportunities. Recently, business jet airframe manufacturers have
experienced growth in new aircraft deliveries similar to that experienced by
commercial aircraft manufacturers. According to industry sources, executive
jet aircraft deliveries amounted to 343 units in calendar 1996 and 791 units
in calendar 2001. Industry sources indicate that executive jet aircraft
deliveries should be approximately 779 in calendar 2002. Several new
aircraft models, and larger business jets, including the Boeing Business
Jet, Bombardier Challenger and Global Express, Gulfstream V, the Falcon 900,
Airbus Business Jet, Cessna Citation X and Cessna Citation Excel, which have
been or are expected to be introduced over the next several years, are
expected to be significant contributors to new general aviation aircraft
deliveries going forward. Industry sources indicate that approximately 7,800
business jets will be built between 2002 and 2009 with a value of more than
$123 billion, and that the number of larger business jets, as described
above, as a percentage of total business jet deliveries will increase from
33% in calendar year 2001 to 38% in calendar year 2002. This is important to
our company because the typical cost of cabin interior products manufactured
for a Cessna Citation is approximately $162 thousand; whereas the same
contents for a larger business jet, such as the Boeing Business Jet could
range up to approximately $1.4 million. Advances in engine technology and
avionics and the emergence of fractional ownership of executive aircraft are
also important growth factors. In addition, the general aviation and VIP
aircraft fleet consists of over 11,700 aircraft with an average age of
approximately 15 years. As aircraft age or ownership changes, operators
retrofit and upgrade the cabin interior, including seats, sofas and tables,
sidewalls, headliners, structures such as closets, lavatories and galleys,
and related equipment including lighting and oxygen delivery systems. In
addition, operators generally reupholster or replace seats every five to
seven years. We believe that we are well positioned to benefit from the
retrofit opportunities due to:
o 15-year average age of the business jet fleet;
o operators who have historically reupholstered their seats may be more
inclined to replace these seats with lighter weight, more modern and
16G-compliant seating models; and
o our belief that we are the only manufacturer with the capability for
cabin interior design services, a broad product line for essentially all
cabin interior products and program management services.
Business Strategy
Our business strategy is to maintain a leadership position and to best serve
our customers by:
o offering the broadest and most integrated product lines and services in
the industry, including not only new product and follow-on product
sales, but also design, integration, installation and certification
services;
o pursuing the highest level of quality in every facet of our operations,
from the factory floor to customer support;
o aggressively pursuing initiatives of continuous improvement of our
manufacturing operations to reduce cycle time, lower cost, improve
quality and expand our margins;
o pursuing a worldwide marketing and product support approach focused by
airline and general aviation airframe manufacturer and encompassing our
entire product line; and
o pursuing selective strategic acquisitions.
Products and Services
We conduct our operations through strategic business units which have been
aggregated under three reportable segments: Commercial Aircraft Products,
Business Jet Products and Fastener Distribution.
Commercial Aircraft Products
Seating Products
Our company is the world's leading manufacturer of aircraft seats, offering
a wide selection of first class, business class, tourist class and commuter
seats. A typical seat manufactured and sold by our company includes the seat
frame, cushions, armrests and tray table, together with a variety of optional
features such as adjustable lumbar supports, footrests, reading lights,
head/neck supports, oxygen masks and telephones. We estimate that as of February
23, 2002 we had an aggregate installed base of approximately 1.0 million
aircraft seats valued at replacement prices of approximately $2.3 billion.
First and Business Classes. Based upon major airlines' program selection and
orders on hand, we are the leading worldwide manufacturer of premium class
seats. Our new line of international first class sleeper seats incorporate
full electric actuation, an electric ottoman, privacy panels and side-wall
mounted tables. Our recently released business class seats incorporate
features from over 25 years of seating design. The premium business class
seats include electrical or mechanical actuation, PC power ports,
telephones, leg rests, adjustable lumbar cushions, 4-way adjustable
headrests and fiber-optic reading lights. The first and business class
products are substantially more expensive than tourist class seats due to
these luxury appointments.
Convertible Seats. We have developed two types of seats that can be
converted from tourist class triple-row seats to business class double-row
seats with minimal conversion complexity. Convertible seats allow airline
customers the flexibility to adjust the ratio of business class to tourist
class seats for a given aircraft configuration. This seat is increasing in
popularity in the European market.
Tourist Class. We are a leading worldwide manufacturer of tourist class
seats and believe we offer the broadest such product line in the industry.
We have designed tourist class seats which incorporate features not
previously utilized in that class, such as laptop power ports and a number
of premium comfort features such as footrests, headrests and adjustable
lumbar systems.
Commuter (Regional Jet) Seats. We are the leading manufacturer of regional
aircraft seating in both the United States and worldwide markets. Our
Silhouette(TM) Composite seats are similar to commercial jet seats in
comfort and performance but typically do not have as many added comfort
features. Consequently, they are lighter weight and require less
maintenance.
Spares. Aircraft seats require regularly scheduled maintenance in the course
of normal passenger use. Airlines depend on seat manufacturers and secondary
suppliers to provide spare parts and kit upgrade programs. As a result, a
significant market exists for spare parts.
Interior Systems
We are the leading manufacturer of interior systems for both narrow- and
wide-body aircraft, offering a broad selection of coffee and beverage makers,
water boilers, ovens, liquid containers, refrigeration equipment, oxygen
delivery systems and a variety of other interior components. We estimate that as
of February 23, 2002 we had an aggregate installed base of such equipment,
valued at replacement prices, in excess of $1.0 billion.
Coffee Makers. We are the leading manufacturer of aircraft coffee makers. We
manufacture a broad line of coffee makers, coffee warmers and water boilers,
including the Flash Brew Coffee Maker, with the capability to brew 54 ounces
of coffee in one minute, and a Combi(TM) unit which will both brew coffee
and boil water for tea while utilizing 25% less electrical power than
traditional 5,000-watt water boilers. We also manufacture a
cappuccino/espresso maker.
Ovens. We are the leading supplier of a broad line of specialized ovens,
including high-heat efficiency ovens, high-heat convection ovens and warming
ovens. Our newest offering, the DS Steam Oven, represents a new method of
preparing food in-flight by maintaining constant temperature and moisture in
the food. It addresses the airlines' need to provide a wider range of foods
than can be prepared by convection ovens.
Refrigeration Equipment. We are the worldwide industry leader in the design,
manufacture and supply of commercial aircraft refrigeration equipment. We
manufacture a self-contained wine and beverage chiller, the first unit
specifically designed to rapidly chill wine and beverage on-board an
aircraft.
Oxygen Delivery Systems. We are a leading manufacturer of oxygen delivery
systems for both commercial and general aviation aircraft. We are the only
manufacturer with the capability to fully integrate overhead passenger
service units with either chemical or gaseous oxygen equipment. Our oxygen
equipment has been approved for use on all Boeing and Airbus aircraft and is
also found on essentially all general aviation and VIP aircraft.
Engineered Interior Structures, Components and Assemblies
We are a leader in designing and manufacturing galley structures, crew rest
compartments and components. We estimate that as of February 23, 2002, we
had an installed base of such equipment, valued at replacement prices, of
approximately $1.1 billion.
Engineering Design, Integration, Installation and Certification Services. We
are a leader in providing engineering, design, integration, installation and
certification services for commercial aircraft passenger cabin interiors. We
also offer our customers in-house capabilities to design, project manage,
integrate, test and certify reconfigurations and modifications for
commercial aircraft and to manufacture related products, including
engineering kits and interface components. We provide a broad range of
interior reconfiguration services which allow airlines to change the size of
certain classes of service, modify and upgrade the seating, install
telecommunications or entertainment options, relocate galleys, lavatories
and overhead bins, and install crew rest compartments.
Crew Rest Compartments. We are the worldwide leader in the design,
certification and manufacture of crew rest compartments. Crew rest
compartments are utilized by the flight crew during long-haul international
flights. A crew rest compartment is constructed utilizing lightweight cabin
interior technology and incorporating electrical, heating, ventilation and
air conditioning and lavatory and sleep compartments.
Galley Structures. Galley structures are generally custom designed to
accommodate the unique product specifications and features required by a
particular carrier. Galley structures require intensive design and
engineering work and are among the most sophisticated and expensive of the
aircraft's cabin interior products. We provide a variety of galley
structures, closets and class dividers, emphasizing sophisticated and higher
value-added galleys for wide-body aircraft. We also manufacture lavatories
for commercial and freighter aircraft.
Aerospace Components and Assemblies. We are a leading manufacturer of
complex high quality machined and fabricated metal components, assemblies
and kits for aerospace and defense customers with demanding end-use
applications. Our major products consist of gears, gear boxes, pistons and
piston assemblies and standard hydraulic fittings. Additionally, we
fabricate structural components and related items of fuselage, wing and
payload sections including wing skin and fuel tank enclosure parts for
commercial aircraft. Through these manufacturing activities we also provide
our customers with significant engineering, materials and technical
expertise.
Passenger to Freighter Conversions. We are a leading supplier of structural
design and integration services, including airframe modifications for
passenger-to-freighter conversions. We are the leading provider of Boeing
767 passenger to freighter conversions and have performed conversions for
Boeing 747-200 Combi, Boeing 747-200 (door only) and Airbus A300 B4
aircraft. Freighter conversions require sophisticated engineering
capabilities and very large and complex proprietary parts kits.
Business Jet Products
We are the leading manufacturer of a broad product line including a complete
line of business jet seating products, direct and indirect lighting, air valves
and oxygen delivery systems as well as sidewalls, bulkheads, credenzas, closets,
galley structures, lavatories, tables and sofas. We have the capability to
provide complete interior packages, including all design services, all interior
components and program management services for executive aircraft interiors. We
are the preferred supplier of seating products and direct and indirect lighting
systems of essentially every general aviation airframe manufacturer. We estimate
that as of February 23, 2002 we had an aggregate installed base of such
equipment, valued at replacement prices, of approximately $1.4 billion.
Fastener Distribution
We entered the Fastener Distribution segment through the acquisition of M &
M in September 2001. We estimate that as of February 23, 2002 we had an
aggregate installed base of $800 million. Through M & M we offer one of the
broadest lines of fasteners and inventory management services worldwide.
Approximately 70% of fastener sales are to the aftermarket, and over 30% of
orders are shipped the same day that they are received. With over 100,000 Stock
Keeping Units ("SKUs") and next day service, we serve as a distributor for
almost every major aerospace fastener manufacturer. Our service offerings
include inventory replenishment and management, electronic data interchange,
special packaging and bar-coding, quality assurance testing and purchasing
assistance. Our seasoned purchasing and sales team, coupled with
state-of-the-art information technology and automated retrieval systems, provide
the basis for our reputation for high quality and rapid (overnight) delivery.
Research, Development and Engineering
We work closely with commercial airlines to improve existing products and
identify customers' emerging needs. Our expenditures in research, development
and engineering totaled $43.5 million, $48.9 million and $54.0 million for the
years ended February 23, 2002, February 24, 2001 and February 26, 2000,
respectively. We employed approximately 560 professionals in the engineering and
product development areas. We believe that we have the largest engineering
organization in the cabin interior products industry, with software, electronic,
electrical and mechanical design skills, as well as substantial expertise in
materials composition and custom cabin interior layout design and certification.
Marketing and Customers
We market and sell our commercial aircraft products directly to virtually
all of the world's major airlines and aircraft manufacturers. Airlines select
manufacturers of cabin interior products primarily on the basis of custom design
capabilities, product quality and performance, on-time delivery, after-sales
customer service, product support and price. We believe that our large installed
base, our timely responsiveness in connection with the custom design,
manufacture, delivery and after-sales customer service and product support of
our products and our broad product line and stringent customer and regulatory
requirements all present barriers to entry for potential new competitors in the
cabin interior products market.
We believe that airlines prefer our integrated worldwide marketing approach,
which is focused by airline and encompasses our entire product line. Led by a
senior executive, teams representing each product line serve designated airlines
that together accounted for almost 63% of the purchases of products manufactured
by our company during the fiscal year ended February 23, 2002. These airline
customer teams have developed customer-specific strategies to meet each
airline's product and service needs. We also staff "on-site" customer engineers
at major airlines and airframe manufacturers to represent our entire product
line and work closely with the customers to develop specifications for each
successive generation of products required by the airlines. These engineers help
customers integrate our wide range of cabin interior products and assist in
obtaining the applicable regulatory certification for each particular product or
cabin configuration. Through our on-site customer engineers, we expect to be
able to more efficiently design and integrate products which address the
requirements of our customers. We provide program management services,
integrating all on-board cabin interior equipment and systems, including
installation and Federal Aviation Administration certification, allowing
airlines to substantially reduce costs. We believe that we are one of the only
suppliers in the commercial aircraft cabin interior products industry with the
size, resources, breadth of product line and global product support capability
to operate in this manner.
We market our business jet products directly to all of the world's general
aviation airframe manufacturers, modification centers and operators. Business
jet owners typically rely upon the airframe manufacturers and completion centers
to coordinate the procurement and installation of their interiors. Business jet
owners select manufacturers of business jet products on a basis similar to that
for commercial aircraft interior products; customer design capabilities, product
quality and performance, on-time delivery, after-sales customer service, product
support and price. We believe that potential new competitors would face a number
of barriers to entering the cabin interior products market. Barriers to entry
include regulatory requirements, our large installed product base, our custom
design capability, manufacturing capability, delivery, and after-sales customer
service, product support and our broad product line.
We market our aerospace fasteners directly to the airlines, completion
centers, first tier suppliers to the airframe manufacturers, the airframe
manufacturers and other distributors. We believe that our key competitive
advantages are the breadth of our product offerings and our ability to deliver
on a timely basis. We believe that our broad product offerings of aerospace
fasteners and our ability to deliver products on a next day basis and our core
competencies in product information management, purchasing and logistics
management provide strong barriers to entry.
Our program management approach assigns a program manager to each
significant contract. The program manager is responsible for all aspects of the
specific contract, including managing change orders, negotiating related
non-recurring engineering charges, monitoring the progress of the contract
through its scheduled delivery dates and overall contract profitability. We
believe that our customers benefit substantially from our program management
approach, including better on-time delivery and higher service levels. We also
believe our program management approach results in better customer satisfaction
and higher profitability over the life of a contract.
As of February 23, 2002, our sales and marketing organization consisted of
274 persons, along with 25 independent sales representatives. Our sales to
non-U.S. customers were approximately $288 million for the fiscal year ended
February 23, 2002, $280 million for the fiscal year ended February 24, 2001 and
$311 million for the fiscal year ended February 26, 2000, or approximately 42%,
42% and 43%, respectively, of net sales during such periods. During fiscal 2002,
approximately 76% of our total revenues were derived from the airlines compared
with 86% in fiscal 2001. Approximately 63% of our revenues during fiscal 2002
and 60% of our revenues during fiscal 2001 were from refurbishment, spares and
upgrade programs. During the years ended February 23, 2002, February 24, 2001
and February 26, 2000, no single customer accounted for more than 10% of total
revenues. The portion of our revenues attributable to particular airlines varies
from year to year because of airlines' scheduled purchases of new aircraft and
for retrofit and refurbishment programs for their existing aircraft.
Backlog
We estimate that our backlog at February 23, 2002 was approximately $480.0
million, and $600.0 million on February 24, 2001. Of our backlog at February 23,
2002, approximately 59% is deliverable by the end of fiscal 2003; 64% of our
total backlog is with North American carriers, approximately 17% is with
European carriers and approximately 10% is with Asian carriers.
Customer Service
We believe that our customers place a high value on customer service and
product support and that such service is a critical factor in our industry. The
key elements of such service include:
o rapid response to requests for engineering designs, proposal requests
and technical specifications;
o flexibility with respect to customized features;
o on-time delivery;
o immediate availability of spare parts for a broad range of products; and
o prompt attention to customer problems, including on-site customer
training.
Customer service is particularly important to airlines due to the high cost
to the airlines of late delivery, malfunctions and other problems.
Warranty and Product Liability
We warrant our products, or specific components thereof, for periods ranging
from one to ten years, depending upon product type and component. We generally
establish reserves for product warranty expense on the basis of the ratio of
warranty costs incurred by the product over the warranty period to sales of the
product. Actual warranty costs reduce the warranty reserve as they are incurred.
We periodically review the adequacy of accrued product warranty reserves and
revisions of such reserves are recognized in the period in which such revisions
are determined.
We also carry product liability insurance. We believe that our insurance is
generally sufficient to cover product liability claims.
Competition
The commercial aircraft cabin interior products market is relatively
fragmented, with a number of competitors in each of the individual product
categories. Due to the global nature of the commercial industry, competition in
product categories comes from both U.S. and foreign manufacturers. However, as
aircraft cabin interiors have become increasingly sophisticated and technically
complex, airlines have demanded higher levels of engineering support and
customer service than many smaller cabin interior products suppliers can
provide. At the same time, airlines have recognized that cabin interior product
suppliers must be able to integrate a wide range of products, including
sophisticated electronic components, particularly in wide-body aircraft. We
believe that the airlines' increasing demands on their suppliers will result in
a consolidation of those suppliers that remain. We have participated in this
consolidation through strategic acquisitions and internal growth and we intend
to continue to participate in the consolidation.
Our principal competitors for seating products are Group Zodiac S.A. and
Keiper Recaro GmbH. Our primary competitors for interior systems products are
Britax PLC, JAMCO, Scott Aviation and Intertechnique. Our principal competitors
in the passenger-to-freighter conversion business include Boeing Airplane
Services, Elbe Flugzeugwerko GMBH, a division of EADS, Israel Aircraft
Industries, Pemco World Air Services and Aeronavili. Our principal competitors
for other product and service offerings in our engineered interior structures,
components and assemblies include TIMCO, JAMCO, Britax PLC, and Driessen
Aircraft Interior Systems. The market for business jet products is highly
fragmented, consisting of numerous competitors, the largest of which is Decrane
Aircraft Holdings. Our primary competitors in the fastener distribution market
are Honeywell Hardware Products Group, Wesco Aircraft Hardware, C.J. Fox and
Pentacon, Inc.
Manufacturing and Raw Materials
Our manufacturing operations consist of both the in-house manufacturing of
component parts and sub-assemblies and the assembly of our specified and
designed component parts that are purchased from outside vendors. We maintain
state-of-the-art facilities, and we have an ongoing strategic manufacturing
improvement plan utilizing lean manufacturing processes. We constantly strive
for continuous improvement from implementation of these plans for each of our
product lines. These activities should lower production costs, shorten cycle
times and reduce inventory requirements and at the same time improve product
quality, customer response and profitability.
Government Regulation
The Federal Aviation Administration prescribes standards and licensing
requirements for aircraft components, and licenses component repair stations
within the United States. Comparable agencies regulate such matters in other
countries. We hold several Federal Aviation Administration component
certificates and perform component repairs at a number of our U.S. facilities
under Federal Aviation Administration repair station licenses. We also hold an
approval issued by the UK Civil Aviation Authority to design, manufacture,
inspect and test aircraft seating products in Leighton Buzzard, England and in
Kilkeel, Northern Ireland. We also have the necessary approvals to design,
manufacture, inspect, test and repair our interior systems products in
Nieuwegein, Netherlands.
In March 1992, the Federal Aviation Administration adopted Technical
Standard Order C127, or TSO C127, requiring that all seats on certain new
generation commercial aircraft installed after such date be certified to meet a
number of new safety requirements, including the ability to withstand a 16G
force. We understand that the Federal Aviation Administration plans to adopt in
the near future additional regulations which will require that within the next
five years all seats, including those on existing older commercial aircraft
which are subject to the Federal Aviation Administration's jurisdiction, will
have to comply with similar seat safety requirements. We have developed 32
different seat models that meet these new seat safety regulations, have
successfully completed thousands of tests to comply with TSO C127 and, based on
our installed base of 16G seats, are the recognized industry leader in this
area.
Environmental Matters
Our operations are subject to extensive and changing federal, state and
foreign laws and regulations establishing health and environmental quality
standards, including those governing discharges and pollutants into the air and
water and the management and disposal of hazardous substances and wastes. We may
be subject to liability or penalties for violations of those standards. We are
also subject to laws and regulations, such as the Federal Superfund law and
similar state statutes, governing remediation of contamination at facilities
that we currently or formerly owned or operated or to which we send hazardous
substances or wastes for treatment, recycling or disposal. We believe that we
are currently in compliance, in all material respects, with all environmental
laws and regulations. However, we could become subject to future liabilities or
obligations as a result of new or more stringent interpretations of existing
laws and regulations. In addition, we may have liabilities or obligations in the
future if we discover any environmental contamination or liability relating to
our facilities or operations.
Patents
We currently hold 112 United States patents and 84 international patents,
covering a variety of products. We believe that the termination, expiration or
infringement of one or more of such patents would not have a material adverse
effect on our company.
Employees
As of February 23, 2002, we had approximately 4,100 employees. Approximately
66% of our employees are engaged in manufacturing, 14% in engineering, research
and development and 20% in sales, marketing, product support and general
administration. Unions represent approximately 13% of our worldwide employees. A
labor contract representing 250 U.S. employees expires on May 4, 2003. The labor
contract with the only other domestic union, which represents approximately 2%
of our employees, also runs through the year 2003. We consider our employee
relations to be good.
ITEM 2. PROPERTIES
As of February 23, 2002, we had 11 principal operating facilities,
comprising an aggregate of approximately 1.3 million square feet of space. The
following table describes the principal facilities and indicates the location,
function, approximate size and ownership status of each location.
Facility
Size
Segment Location Purpose (Sq. Feet) Ownership
- -------------------------------------- --------------------------------- ---------------- ------------ ---------------
Commercial Aircraft Products Winston-Salem, North Carolina... Manufacturing 264,800 Owned
- -------------------------------------- Leighton Buzzard, England....... Manufacturing 114,000 Owned
Kilkeel, Northern Ireland....... Manufacturing 100,500 Owned
Anaheim, California............. Manufacturing 98,000 Leased
Lenexa, Kansas.................. Manufacturing 80,000 Owned
Nieuwegein, The Netherlands..... Manufacturing 47,350 Leased
Arlington, Washington........... Manufacturing 110,000 Leased
Machined products, California... Manufacturing 150,800 Owned
- -------------------------------------- --------------------------------- ---------------- ------------ ---------------
Business Jet Products Miami, Florida.................. Manufacturing 110,000 Leased
- -------------------------------------- Holbrook, New York.............. Manufacturing 20,100 Leased
- -------------------------------------- --------------------------------- ---------------
Fastener Distribution Miami, Florida.................. Distribution 210,000 Owned
- -------------------------------------- --------------------------------- ---------------
Corporate Wellington, Florida............. Administrative 17,700 Owned
- -------------------------------------- --------------------------------- ------------ ---------------
------------
1,323,250
We believe that our facilities are suitable for their present intended
purposes and adequate for our present and anticipated level of operations.
[Remainder of page intentionally left blank]
ITEM 3. LEGAL PROCEEDINGS
We are not a party to litigation or other legal proceedings that we believe
could reasonably be expected to have a material adverse effect on our company's
business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of the fiscal year covered by this Form 10-K, we did
not submit any matters to a vote of security holders, through the solicitation
of proxies or otherwise.
[Remainder of page intentionally left blank]
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"BEAV." The following table sets forth, for the periods indicated, the range of
high and low per share sales prices for the common stock as reported by Nasdaq.
(Amounts in Dollars)
High Low
Fiscal Year Ended February 26, 2000
First Quarter $21.12 $13.50
Second Quarter 22.25 16.50
Third Quarter 18.19 5.75
Fourth Quarter 9.87 6.38
Fiscal Year Ended February 24, 2001
First Quarter 9.00 5.88
Second Quarter 16.38 6.38
Third Quarter 17.25 11.81
Fourth Quarter 23.94 13.06
Fiscal Year Ended February 23, 2002
First Quarter 25.88 17.69
Second Quarter 23.84 15.49
Third Quarter 18.19 3.50
Fourth Quarter 9.95 6.31
On May 16, 2001, as part of a 5.75 million share offering, we completed the
sale of approximately 2.8 million primary shares of common stock at $19.50 per
share. As described in "Overview" in Item 7, approximately 2.9 million shares of
our common stock were issued to the former owners of the four companies acquired
effective February 24, 2001. These shares were sold on behalf of the former
owners as part of the offering, for which they received approximately $53.1
million. We received approximately $50.3 million, net of estimated offering
costs, from the sale of the 2.8 million shares. Following this offering we had
approximately 32.1 million shares outstanding. On May 22, 2002 the closing price
of our common stock as reported by Nasdaq was $13.00 per share. As of such date,
we had 887 shareholders of record, and we estimate that there are approximately
15,300 beneficial owners of our common stock. We have not paid any cash
dividends in the past, and we have no present intention of doing so in the
immediate future. Our Board of Directors intends, for the foreseeable future, to
retain any earnings to reduce indebtedness and finance our future growth, but
expects to review our dividend policy regularly. The Indentures pursuant to
which our 8 7/8%, 8% and 9 1/2% Senior Subordinated Notes were issued, permit
the declaration of cash dividends only in certain circumstances described
therein.
[Remainder of page intentionally left blank]
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share data)
During fiscal 1999, we acquired Aerospace Interiors, Inc., Puritan-Bennett
Aero Systems Co., substantially all of the assets of Aircraft Modular Products,
Aerospace Lighting Corporation and SMR Aerospace, Inc., and its affiliates
("1999 Acquisitions"). Effective as of February 24, 2001, we acquired Alson
Industries, Inc., T.L. Windust Machine, Inc., Maynard Precision, Inc. and DMGI,
Inc. ("2001 Acquisitions"). During fiscal 2002, we acquired M&M Aerospace
Hardware, Inc., Nelson Aero Space, Inc. and Denton Jet Interiors, Inc. ("2002
Acquisitions"). Results for each of these acquisitions are included in our
operations in the financial data below since the date of acquisition. The
financial data as of and for the fiscal years ended February 23, 2002, February
24, 2001, February 26, 2000, February 27, 1999 and February 28, 1998 have been
derived from financial statements which have been audited by our independent
auditors. The following financial information is qualified by reference to, and
should be read in conjunction with, our historical financial statements,
including notes thereto, which are included elsewhere in this Form 10-K.
Year Ended
-----------------------------------------------------------------
Feb. 23, Feb. 24, Feb. 26, Feb. 27, Feb. 28,
2002(a)(b) 2001(c) 2000(d) 1999(e) 1998(f)
-------- ------ ------ ------ ------
Statements of Operations Data:
Net sales.................................... $ 680.5 $666.4 $723.3 $701.3 $488.0
Cost of sales................................ 530.1 416.6 543.6 522.9 309.1
-------- ------ ------ ------ ------
Gross profit................................. 150.4 249.8 179.7 178.4 178.9
Operating expenses:
Selling, general and administrative........ 114.4 100.8 94.9 83.6 58.6
Research, development and engineering...... 43.5 48.9 54.0 56.2 45.7
Amortization............................... 25.0 23.4 24.1 22.5 11.2
Transaction gain, expenses and other expenses - - - 53.9 4.7
-------- ------ ------ ------ ------
Operating earnings (loss).................... (32.5) 76.7 6.7 (37.8) 58.7
Equity in losses of unconsolidated subsidiary - - 1.3 - -
Interest expense, net........................ 60.5 54.2 52.9 41.7 22.8
-------- ------ ------ ------ ------
Earnings (loss) before income taxes and
extraordinary item......................... (93.0) 22.5 (47.5) (79.5) 35.9
Income taxes ................................ 1.8 2.2 3.3 3.9 5.4
-------- ------ ------ ------ ------
Earnings (loss) before extraordinary item ... (94.8) 20.3 (50.8) (83.4) 30.5
Extraordinary item........................... 9.3 - - - 8.9
-------- ------ ------ ------ ------
Net earnings (loss)................... ..... $ (104.1) $ 20.3 $(50.8) $(83.4) $ 21.6
======== ====== ====== ====== ======
Basic earnings (loss) per share:
Earnings (loss) before extraordinary item.... $ (2.90) $ 0.80 $(2.05) $(3.36) $ 1.36
Extraordinary item........................... (0.28) - - - $(0.40)
-------- ------ ------ ------ -------
Net earnings (loss).......................... $ (3.18) $ 0.80 $(2.05) $(3.36) $ 0.96
======== ====== ====== ====== ======
Weighted average common shares............... 32.7 25.4 24.8 24.8 22.4
Diluted earnings (loss) per share:
Earnings (loss) before extraordinary item.... $ (2.90) $ 0.78 $(2.05) $(3.36) $ 1.30 (f)
Extraordinary item........................... (0.28) - - - $(0.38)
-------- ------ ------ ------ ------
Net earnings (loss).......................... $ (3.18) $ 0.78 $(2.05) $(3.36) $ 0.92
======== ====== ====== ====== ======
Weighted average common shares............... 32.7 25.9 24.8 24.8 23.4
Balance Sheet Data (end of period):
Working capital.............................. $ 304.8 $174.9 $129.9 $143.4 $262.5
Intangible and other assets, net ............ 529.2 433.4 425.8 452.0 195.7
Total assets................................. 1,128.3 936.0 881.8 904.3 681.8
Long-term debt............................... 853.5 603.8 618.2 583.7 349.6
Stockholders' equity......................... 121.1 135.3 64.5 115.9 196.8
SELECTED FINANCIAL DATA (continued)
Footnotes to Table
(a) In response to the terrorist attacks on September 11, 2001 and the
resulting impact on the airline industry during the third quarter of
fiscal 2002, we adopted and began to implement a facility consolidation
plan designed to re-align our capacity and cost structure consistent
with changed conditions in the airline industry. This plan includes
closing five facilities, reducing the number of principal production
facilities from 16 to 11, and reducing our workforce by approximately
1,000 employees. The estimated cost of this facility consolidation plan
is expected to be approximately $98.9, of which the cash portion of
$15.6 is primarily related to involuntary severance programs, lease
termination costs and preparing facilities for disposal and sale; $62.9
is related to write-downs of property, plant and equipment, inventory
and other assets; and $20.4 is related to the impairment of certain
intangible assets rendered useless as a result of industry conditions
and facility consolidation. The charge has been included as a component
of cost of sales for the year ended February 23, 2002. We also incurred
approximately $5.7 of transition costs related to this plan during our
third and fourth quarters which have been included as a component of
cost of sales.
(b) In fiscal 2002, we incurred an extraordinary charge of $9.3 (net of tax)
for unamortized debt issue costs, redemption premiums and expenses
related to the early retirement of our 9 7/8% Senior Subordinated Notes
due February 1, 2006. Excluding such charge and the costs described in
(a) above, our operating earnings and net earnings were $72.1 and $9.8,
respectively.
(c) Our operating results during fiscal 2001 were negatively impacted by
costs related to recently completed acquisitions and the termination of
a proposed initial public offering by our subsidiary Advanced Thermal
Sciences. These items reduced our net earnings by $8.3. Excluding such
costs for the year ended February 24, 2001, our operating earnings were
$85.0 and net earnings were $27.7.
(d) Our operating results during fiscal 2000 were negatively impacted due to
operational problems in our seating operations. These problems, which
have since been resolved, arose due to a misalignment between our
manufacturing processes, our newly installed Enterprise Resource
Planning, or ERP, system and our product and service line
rationalization. The aggregate impact of these problems on our results
for the year ended February 26, 2000 was $94.4. Substantially all of
these costs have been included as a component of cost of sales.
Excluding such costs and charges for the year ended February 26, 2000,
our gross profit was $263.3, our gross margin was 36.4%, our operating
earnings were $101.1 and our net earnings were $40.6.
(e) As a result of acquisitions in 1999, we recorded a charge of $79.2 for
the write-off of acquired in-process research and development and
acquisition-related expenses. We also sold a 51% interest in our
in-flight entertainment business, as a result of which we recorded a
gain of $25.3. Transaction gain, expenses and other expenses for the
year ended February 27, 1999 consist of the in-process research and
development and other acquisition expenses, offset by the gain
attributable to the sale of our in-flight entertainment business. During
fiscal 1999, we implemented a restructuring plan. In connection
therewith we closed 7 plants and reduced our workforce by approximately
1,000 positions. As a result, we incurred $87.8 of cost which included
both the restructuring referred to above, the rationalization of related
product lines and the introduction of new products. Excluding such costs
and expenses and the gain attributable to the sale, our gross profit was
$266.3, our operating earnings were $103.9 and our net earnings were
$51.6.
(f) In fiscal 1998, we settled a long-running dispute with the U.S.
Government over export sales made to Iran Air between 1992 and 1995. We
recorded a charge of $4.7 in fiscal 1998 related to fines, civil
penalties and associated legal fees arising from the settlement. We
incurred an extraordinary charge of $9.0 during fiscal 1998 for
unamortized debt issue costs, tender and redemption premiums and fees
and expenses related to the repurchase of our 9 3/4 % Senior Notes due
2003.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in millions, except per share amounts)
INTRODUCTION
Management's discussion and analysis of results of operations and financial
condition ("MD&A") is provided as a supplement to the accompanying consolidated
financial statements and footnotes to help provide an understanding of our
financial condition, changes in financial condition and results of operations.
The MD&A is organized as follows:
Overview. This section provides a general description of our company's
businesses, as well as recent significant transactions that have either
occurred during 2001 or early 2002 that we believe are important in
understanding the results of operations and anticipating future trends in
those operations.
Results of Operations. This section provides an analysis of our results of
operations for all three years presented in the accompanying consolidated
statements of operations. In addition, we provide a brief description of
transactions and events that impact the comparability of the results being
analyzed.
Liquidity and Capital Resources. This section provides an analysis of our
cash flows, as well as a discussion of outstanding debt and commitments,
both firm and contingent, that existed as of February 23, 2002. Included is
a discussion of the amount of financial capacity available to fund future
commitments, as well as a discussion of other financing arrangements.
New Accounting Pronouncements. This section describes significant new
accounting pronouncements and the timing of their adoption and estimated
impact, if known, to the financial statements.
Critical Accounting Policies. This section discusses those accounting
policies that both are considered important to our financial condition and
results, and require significant judgment and estimates on the part of
management in their application. In addition, all of our significant
accounting policies, including the critical accounting policies, are
summarized in Note 1 to the accompanying consolidated financial statements.
Risk Factors and Forward-looking Statements. These sections discuss
important risk factors and how certain of our forward-looking statements
throughout MD&A are based on management's present expectations about future
events and are inherently susceptible to uncertainty and changes in
circumstances.
OVERVIEW
We are the world's largest manufacturer of cabin interior products for
commercial aircraft and for business jets. We are also a leader in the
distribution of aftermarket fasteners. We serve virtually all major airlines and
a wide variety of business jet customers and airframe manufacturers. 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 ovens;
o both chemical and gaseous aircraft oxygen delivery systems;
o business jet and general aviation interior products, including an
extensive line of executive aircraft seats, indirect overhead lighting
systems, oxygen, safety and air valve products; and
o a broad line of aftermarket fasteners, covering over 100,000 SKUs.
We design, develop and manufacture a broad range of cabin interior
structures such as galleys and crew rests, and provide comprehensive aircraft
cabin interior reconfiguration and passenger-to-freighter conversion engineering
services and component kits.
We generally derive our revenues from two primary sources: refurbishment or
upgrade programs for the existing worldwide fleets of commercial and general
aviation aircraft and new aircraft deliveries. We believe our large installed
base of products, estimated to be approximately $6.6 billion as of February 23,
2002 (valued at replacement prices), gives us a significant advantage over our
competitors in obtaining orders both for spare parts and for refurbishment
programs, principally due to the tendency of the airlines to purchase equipment
for such programs from the original supplier.
We have substantially expanded the size, scope and nature of our business
through a number of acquisitions. Since 1989, we have completed 22 acquisitions,
including four during fiscal 2001, and three during fiscal 2002 for an aggregate
purchase price of approximately $971.0 in order to position ourselves as the
preferred global supplier to our customers.
During the period from 1989 to 1996, we acquired nine commercial aircraft
cabin interior products manufacturers for approximately $290.0. Through these
acquisitions we built worldwide market leadership positions and became the
number one manufacturer for a large number of product offerings. At the same
time, we rationalized our businesses and began re-engineering our operations. We
integrated the acquisitions by eliminating 11 operating facilities and
consolidating personnel at the acquired businesses, resulting in headcount
reductions of approximately 1,300 employees through January 1998.
During fiscal 1999 we completed six acquisitions for approximately $387.0.
Through these acquisitions we extended our product offerings into oxygen systems
and we entered three new markets. These markets include the structural
reconfiguration of passenger cabins, the conversion of passenger aircraft to
freighters and the business jet cabin interiors market. During the fourth
quarter of fiscal 1999, we launched a series of initiatives directed towards
expanding our profit margins by consolidating these operations, improving
productivity, reducing costs and inventory levels and speeding production of
finished products. These actions included eliminating seven principal
facilities, reducing our employment base by over 1,000 employees during fiscal
2000 and rationalizing our product offerings. The plan also included initiatives
to install company-wide information technology and engineering design systems
and implement lean manufacturing techniques in our remaining factories. We
recognized a charge in the fourth quarter of fiscal 1999 of $87.8 to provide for
the entire amount of the restructuring, along with costs associated with new
product introductions, all of which was charged to cost of sales.
During fiscal 2000, we restructured our seating products operations and
decided to discontinue certain product and service offerings. This product line
rationalization eliminated two additional facilities. It also resulted in a
headcount reduction of approximately 700. The total cost of this product and
service line rationalization was approximately $34.3.
Effective February 24, 2001 we completed the acquisition of four companies
that specialize in manufacturing precision-machined components and assemblies
for the aerospace industry. We acquired these businesses, Alson Industries,
Inc., T.L. Windust Machine, Inc. DMGI, Inc. and Maynard Precision, Inc., for an
aggregate purchase price of approximately $70.1.
In May 2001, we acquired the outstanding common stock of Nelson Aero Space,
Inc. for a cash consideration of approximately $20.0. In July 2001, we acquired
the outstanding common stock of Denton Jet Interiors, Inc. for approximately
$16.0.
On September 14, 2001, we acquired M & M for a purchase price of $184.7. M &
M is a leading distributor of aerospace fasteners. The M & M acquisition was
completed by issuing to the former shareholders a total of approximately 1.9
million shares of our stock, paying them $152.0 in cash and assuming current
liabilities of approximately $8.8. We financed this acquisition through cash on
hand and approximately $100.0 of borrowings under our bank credit facility.
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused us to implement a facility consolidation
plan designed to re-align our capacity and cost structure with changed
conditions in the airline industry. The facility consolidation plan includes
closing five facilities and reducing workforce by approximately 1,000 employees.
We recognized a charge of $98.9 to provide for the total cost of the facility
consolidation plan, all of which has been included in cost of sales for the year
ended February 23, 2002.
All of the aforementioned initiatives to integrate, rationalize and
restructure the businesses acquired through fiscal 2002 had an aggregate cost of
approximately $285.3 and have already been expensed. These initiatives enabled
us to eliminate 22 facilities and reduce headcount by over 4,000 employees. We
believe these initiatives will enable us to substantially expand profit margins,
strengthen the global business management focus on our core product categories,
more effectively leveraging our resources and improve our ability to rapidly
react to changing business conditions. In conjunction with these efforts, we
have also implemented a company-wide information technology system, a
company-wide engineering system and initiated lean manufacturing techniques in
our remaining facilities. Common management information and engineering systems
and lean manufacturing processes across all operations, coupled with a
rationalized product offering, are expected to provide us with the ongoing
benefit of a generally lower cost structure, and expanding gross and operating
margins.
New product development is a strategic tool 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. Research, development and
engineering spending have been approximately 6-7% of sales for the past several
years, and is expected to remain at 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, and will continue to invest in
property and equipment that enhances our productivity. Over the past two years,
annual capital expenditures were approximately $13.0-19.0. Taking into
consideration our recent capital expenditure investments, current industry
conditions and the recent acquisitions, we expect that annual capital
expenditures will be approximately $15.0-19.0 for the next few years.
All dollar amounts in the following discussion and analysis are presented in
millions of dollars, except per share amounts.
[Remainder of this page intentionally left blank]
RESULTS OF OPERATIONS
Year Ended February 23, 2002 Compared with Year Ended February 24, 2001
Impact of Terrorist Attacks on Our Business
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused us to develop and implement a facility
consolidation plan designed to re-align our capacity and cost structure with
changed conditions in the airline industry. The facility consolidation plan
includes closing five facilities and reducing workforce by approximately 1,000
employees. We recognized a charge of $98.9, of which the cash portion of $15.6
is primarily related to severance programs, lease termination costs and
preparing facilities for disposal and sale; $62.9 is related to write-downs of
inventory, property, plant and equipment; and $20.4 is related to the impairment
of certain intangible assets as a result of industry conditions and facility
consolidation. In addition, during the fourth quarter, we incurred approximately
$4.7 of transition costs associated with the facilities and personnel
consolidation program. The charge and transition costs have been included in
cost of sales for the year ended February 23, 2002.
Consolidated Results
Revenues were negatively impacted by the severe change in industry
conditions following the terrorist attacks on September 11, 2001. Net sales for
fiscal 2002 were $680.5, which is $14.1 or 2.1% greater than net sales of $666.4
for the comparable period in the prior year. However, excluding revenues from
acquisitions, revenues declined by approximately 12.9%.
Sales for each of our segments, as calculated to include and exclude
acquisitions completed in fiscal 2002 are set forth in the following table:
FY 2002 Change
Excluding Excluding
FY 2002 Acquisitions FY 2001 Change Acquisitions
--------------- ----------------- ------------- ------------- -----------------
Commercial Aircraft Products $550.6 $497.6 $580.3 $(29.7) $(82.7)
Business Jet Products 85.6 82.6 86.1 (.5) (3.5)
Fastener Distribution 44.3 - - 44.3 -
--------------- ----------------- ------------- ------------- -----------------
$680.5 $580.2 $666.4 $ 14.1 $(86.2)
Sales of commercial aircraft products were $82.7 or 14.3% lower than sales
in the prior year on a comparable basis, due to the recession in the airline
industry and the further downturn in industry conditions following September 11,
2001.
Gross profit was $255.0, or 37.5% of net sales for fiscal 2002, excluding
facility consolidation expenses of $104.6, as compared to $249.8 or 37.5% of net
sales in the comparable period in the prior year. The decline in the gross
margin before such costs was primarily due to the lower revenue levels along
with the mix of products sold, including the impact of a lower spares sales
immediately following the September 11 terrorist attacks.
Selling, general and administrative expenses were $114.4 or 16.8% of net
sales for fiscal 2002 as compared to $100.8 or 15.1% of net sales in fiscal
2001. The $13.6 year over year increase in selling, general and administrative
expenses resulted from $13.0 of such costs related to recent acquisitions.
Included in selling, general and administrative expenses for fiscal 2002 and
2001 were approximately $6.8 and $8.3, respectively, of costs related to
acquisitions we completed during each respective fiscal year.
Research, development and engineering expenses were $43.5 or 6.4% of net
sales for fiscal 2002, as compared with $48.9 or 7.3% of sales in fiscal 2001.
The year over year decrease in research, development and engineering expenses is
primarily attributable to the timing of customer programs along with austerity
measures we implemented subsequent to the September 11 terrorist attacks.
Amortization expense for fiscal 2002 was $25.0 as compared to $23.4 in the
prior year. The year over year increase in amortization expense is due to recent
acquisitions. We are assessing the impact of SFAS 142 on our financial position
and results of operations and we currently believe the recurring impact will be
to reduce amortization expense by approximately $15.0 annually, commencing in
our fiscal 2003.
We generated operating earnings of $78.9 or 11.6% of net sales for fiscal
2002, excluding facility consolidation and related expenses of $111.4. This was
$6.1 or 7.2% lower than operating earnings of $85.0 or 12.8% of net sales during
the comparable period in the prior year. The decrease in operating earnings in
the current period is primarily attributable to the lower level of revenues from
our businesses following the terrorist attacks on September 11, 2001.
Interest expense, net was $60.5 for fiscal 2002, or $6.3 greater than
interest expense of $54.2 for the prior year. The increase in interest expense
is due to the larger amount of outstanding debt created by the refinancing of
certain indebtedness during fiscal 2002 along with the impact of recent
acquisitions.
Earnings before facility consolidation and acquisition-related expenses,
income taxes, and extraordinary item in fiscal 2002 were $18.4, which was $12.4
or 40.3% lower than pretax earnings in the prior year of $30.8. The lower level
of revenues and facility consolidation costs during fiscal 2002 resulted in a
loss before income taxes and extraordinary item of $(93.0) or $(115.5) less than
pretax earnings in the prior year of $22.5.
Income tax expense for fiscal 2002 was $1.8 as compared to $2.2 in the prior
year. The company recorded a $9.3 extraordinary item during fiscal 2002 related
to the early extinguishment of certain long term debt.
Net (loss) earnings were $(104.1) or $(3.18) per share (diluted) for fiscal
2002, as compared to net earnings of $20.3 or $0.78 per share (diluted) for the
prior year.
Year Ended February 24, 2001 Compared with Year Ended February 26, 2000
Net sales for fiscal 2001 were $666.4, a decrease of $56.9, or 7.9% as
compared to the prior year. The year over year decrease in sales is primarily
attributable to lower shipments of seating products and galley structures, as
well as decisions made in the prior year to discontinue certain low-margin
products and services. The decreased sales of seating and galley structures are
consistent with the 11% reduction in new aircraft deliveries in calendar 2000 as
compared to calendar 1999, and also reflect last year's problems in our seating
business, which have since been resolved.
Improved gross and operating profit margins were key contributors to B/E's
improved financial performance for fiscal 2001 compared to fiscal 2000. Gross
profit was $249.8 (37.5% of net sales) for fiscal 2001. Gross profit was $70.1
higher than fiscal 2000 gross profit of $179.7 (24.8% of net sales), reflecting
a gross margin improvement of 1,270 basis points compared to fiscal 2000. The
previous year's gross margin was adversely impacted by manufacturing problems in
our seating operations. The gross margin improvement was due to two principal
factors: the turnaround in our seating business and the success of our
continuous improvement initiatives. Aided by our information technology
investments, these initiatives are enabling us to substantially improve both
quality and productivity and reduce costs, particularly in our manufacturing
operations.
Selling, general and administrative expenses were $100.8 (15.1% of net
sales) for fiscal 2001, which was $5.9 greater than the prior-year amount of
$94.9 (13.1% of net sales).
Research, development and engineering expenses were $48.9 (7.3% of net
sales) for fiscal 2001, a decrease of $5.1 compared to $54.0 (7.5% of net sales)
for the previous year. The decrease is primarily due to substantially lower
spending in our seating and galley operations.
Amortization expense for fiscal 2001 was $23.4 (3.5% of net sales) as
compared to $24.1 (3.3% of net sales) in the prior year.
Operating earnings, excluding acquisition-related expenses and IPO costs,
were $85.0 (12.8% of net sales) for fiscal 2001, excluding $8.3 of costs related
to the four recent acquisitions and the termination of Advanced Thermal
Sciences' (a wholly-owned subsidiary) initial public offering. Including such
costs, operating earnings were $76.7 (11.5% of net sales) during fiscal 2001, as
compared to $6.7 (0.9% of net sales) in the prior year.
Interest expense, net was $54.2 during fiscal 2001, or $1.3 greater than
interest expense of $52.9 for the prior year. The increase is primarily due to
higher interest rates on the company's bank borrowings.
Earnings before income taxes during fiscal 2001 were $30.8 excluding the
acquisition-related and IPO costs. Including such costs, earnings before income
taxes were $22.5 for fiscal 2001 compared to a loss of $(47.5) in the previous
year.
Income tax expense for fiscal 2001 was $2.2 as compared to $3.3 in the prior
year.
B/E's net earnings for fiscal 2001 were $27.7, excluding the
acquisition-related and IPO costs. Including such costs, net earnings were
$20.3, or $0.80 per share (basic) and $0.78 (diluted), as compared to a net loss
of $(50.8) or $(2.05) per share (basic and diluted) in the previous year.
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 accounts receivable and inventories,
fluctuate with the demand for our product. Our working capital was $304.8 as of
February 23, 2002, as compared to $174.9 as of February 24, 2001.
At February 23, 2002, our cash and cash equivalents were $159.5, as compared
to $60.3 at February 24, 2001. This increase in cash, in part, is attributable
to borrowings outstanding on our bank line of credit and the timing of our
semi-annual interest payments on our subordinated debt coupled with an
aggressive working capital management program. During our fourth quarter,
accounts receivable decreased by approximately $10.0.
We hold a promissory note from Thomson -- CSF Holding Corporation, a
subsidiary of The Thales Group (a publicly traded French company with over $9
billion in sales). We are currently involved in a dispute with Thales over
certain terms of the purchase and sale agreement. Thomson -- CSF Holding
Corporation failed to make payments on the promissory notes when due, and in
December 2000 we initiated arbitration proceedings against Thales and its parent
Thomson. These obligations to us are guaranteed by Thomson -- CSF Sextant, Inc.
The arbitration against Thales and Thomson is expected to be resolved during
fiscal 2003.
Cash Flows
Cash provided from operating activities was $57.9 for fiscal 2002 and $57.9
for fiscal 2001. The primary source of cash during fiscal 2002 was a net loss of
$104.1 offset by non-cash facility consolidation charges of $83.3, charges for
depreciation and amortization of $46.8, an extraordinary item of $9.3, other
non-cash expenses of $2.6, a decrease in accounts receivable of $19.7, a
decrease in inventories and other current assets of $35.2. These sources of cash
were partly offset by cash used to reduce payables and accruals of $36.8.
In connection with financing activities, we raised approximately $356.0
through a series of capital market transactions. In April 2001 we sold $250.0 of
8 7/8% senior subordinated notes and completed a $106.0 common stock offering at
$19.50 per share (about half of the proceeds were from the sale of shares issued
by the company, the other half were shares we registered on behalf of selling
shareholders in fiscal 2001 acquisitions, which we completed as of February 24,
2001). We also established a new $150.0 line of credit during the year. Net of
underwriting discounts and related costs, these transactions generated
approximately $450.0 of cash for the company.
We used approximately $171.7 of the subordinated notes proceeds to repay
debt; we used $105.0 to retire some higher priced (9 7/8%) senior subordinated
notes and we used another $66.7 to repay our then-outstanding balance under our
line of credit.
We used approximately $188.0 of the proceeds to complete several
acquisitions during the year; we acquired Nelson Aero Space for approximately
$20.0 in cash, we acquired Denton Jet Interiors for approximately $16.0 in cash
and we acquired M&M Aerospace for approximately $184.7, the cash portion of
which was $152.0. The balance of the proceeds from our financing activities is
included in our cash balances at February 23, 2002.
Capital Spending
Our capital expenditures were $13.9 and $17.2 during fiscal 2002 and fiscal
2001, respectively. The year over year decrease in capital expenditures is
primarily attributable to recently implemented austerity measures along with a
reduction in spending for management information system enhancements and plant
modernization. We anticipate ongoing annual capital expenditures of
approximately $15.0-$19.0 for the next several years. 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 bank credit facility. We expect to fund future capital expenditures from
cash on hand and from operations and from funds available to us under our bank
credit facility. In addition, since 1989, we have completed 22 acquisitions for
an aggregate purchase price of approximately $971.0. We have financed these
acquisitions primarily through issuances of debt and equity securities,
including our 8 7/8%, 8% and 9 1/2% senior subordinated notes.
Outstanding Debt and Other Financing Arrangements
In August 2001, we established a new bank credit facility consisting of a
$150.0 revolving credit facility which expires in August 2006. The bank credit
facility is collateralized by our accounts receivable, inventories and by
substantially all of our other personal property. At February 23, 2002,
indebtedness under the existing bank credit facility consisted of revolving
credit facility outstanding borrowings of $145.0 (bearing interest at LIBOR plus
2.5%) and letters of credit aggregating approximately $4.7 (bearing interest at
LIBOR plus 2.5%, as defined). The bank credit facility, which requires no
principal payments until 2006, contains customary affirmative covenants,
negative covenants and conditions of borrowing, all of which were met as of
February 23, 2002. The interest rate margin on the bank credit facility may
increase in the event of certain changes to our financial leverage ratios.
In connection with a recapitalization of the company in April 2001, the
company issued $250.0 of 8 7/8% Senior Subordinated Notes due 2011, pursuant to
an Indenture dated April 17, 2001, between the company and the Bank of New York,
as trustee, and sold the notes to Merrill Lynch & Co., Credit Suisse First
Boston, JP Morgan, CIBC World Markets and First Union Securities, Inc. On July
27, 2001, the company exchanged the outstanding 8 7/8% Senior Subordinated Notes
due 2011 with an aggregate value of $250.0 principal amount for 8 7/8% Senior
Subordinated Notes due 2011, Series B, registered under the Securities Act of
1933.
Long-term debt consists principally of our newly issued 8 7/8% senior
subordinated notes, 9 1/2% senior subordinated notes and 8% senior subordinated
notes. The $250.0 of 8% notes mature on March 1, 2008, the $200.0 of 9 1/2%
notes mature on November 1, 2008 and the $250.0 of 8 7/8% notes mature on May 1,
2011. The notes are unsecured senior subordinated obligations and are
subordinated to all of our senior indebtedness. Each of the 8% notes, 8 7/8%
notes and 9 1/2% notes contain restrictive covenants, including limitations on
future indebtedness, restricted payments, transactions with affiliates, liens,
dividends, mergers and transfers of assets, all of which were met by us as of
February 23, 2002. A breach of such covenants, or the covenants under our bank
credit facility, that continues beyond any grace period can constitute a
default, which can limit the ability to borrow and can give rise to a right of
the lenders to terminate the applicable facility and/or require immediate
repayment of any outstanding debt.
Contractual and Other Obligations
The following charts reflect our contractual obligations and commercial cash
commitments as of February 23, 2002. Commercial commitments include lines of
credit, guarantees and other potential cash outflows resulting from a contingent
event that requires performance by us or our subsidiaries pursuant to a funding
commitment.
Contractual Obligations Total 2003 2004 2005 2006 2007 Thereafter
-------------- ------------- ----------- ----------- ----------- ------------ --------------
Long-term debt $854.8 $ 1.3 $ 4.3 $0.6 $ 0.1 $148.8 $699.7
Operating leases 31.3 8.9 6.6 4.0 3.2 2.6 6.0
Capital lease obligations 0.2 0.2 - - - - -
------ ----- ----- ---- ----- ------ ------
Total $886.3 $10.4 $10.9 $4.6 $ 3.3 $151.4 $705.7
====== ===== ===== ==== ===== ====== ======
Commercial Commitments
Letters of Credit $ 4.7 $ 4.7 - - - - -
We believe that the cash flow from operations which provides us with our
ability to fund our operations, make planned capital expenditures, make
scheduled payments and refinance our indebtedness depends on our future
operating performance, which, in turn, are subject to prevailing economic
conditions and to financial, business and other factors, some of which are
beyond our control.
The September 11, 2001 terrorist attacks have severely impacted conditions
in the airline industry. Accordingly, the airlines are seeking to conserve cash
in part by deferring or eliminating cabin interior refurbishment programs and
cancelling or deferring aircraft purchases. This has caused a substantial
contraction in our business, the extent and duration of which cannot be
determined at this time. See "Dependence on Conditions in the Airline Industry."
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 it 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.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The company has adopted SFAS 141 and applied its
new purchase accounting requirements to the acquisition of M & M Aerospace.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." We are required to
adopt SFAS 142 for our fiscal year beginning February 24, 2002. SFAS 142
requires, among other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS 142 also
requires us to complete a transitional goodwill impairment test six months from
the date of adoption.
We are assessing but have not yet determined the impact of fully adopting
SFAS 142 on our financial position and results of operations. We currently
believe the recurring impact will be to reduce amortization expense by
approximately $15.0 annually, commencing in fiscal 2003.
In June 2001, the FASB issued SFAS No. 143, Accounting for Retirement
Obligations. SFAS 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. The company is currently evaluating the provisions of SFAS 143 but
expects that the provisions of SFAS 143 will not have a material impact on its
consolidated results of operations and financial position upon adoption.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of" and will be effective
on February 24, 2002. We are assessing the impact, if any, SFAS No. 144 will
have on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. 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.
Revenue Recognition
Sales of products are recorded on the date of shipment and passage of title,
or if required, upon acceptance by the customer. Service revenues are recorded
when services are performed. Revenues and costs under certain long-term
contracts are recognized using contract accounting under the
percentage-of-completion method. The company sells its products primarily to
airlines and aircraft manufacturers worldwide, including occasional sales
collateralized by letters of credit. The company performs ongoing credit
evaluations of its customers and maintains reserves for estimated credit losses.
Actual losses have been within management's expectations.
We apply judgment to ensure that the criteria for recognizing sales are
consistently applied and achieved for all recognized sales transactions.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current credit worthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past.
Inventories
We value our inventory at the lower of cost or market. We regularly review
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and
production requirements. As demonstrated during fiscal 2002, 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 inventory. In the future, if our
inventory is 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 inventory is 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. We periodically evaluate the
recoverability of the carrying amount of our long-lived assets (including
property, plant and equipment, goodwill and other intangible assets) whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. An impairment is assessed when the undiscounted
expected future cash flows derived from an asset are less than its carrying
amount. Impairments are recognized in operating earnings. We continually apply
judgment when applying these impairment rules to determine the timing of the
impairment test, the undiscounted cash flows used to assess impairments, and the
fair value of an impaired asset. The dynamic economic environment in which each
of our businesses operate and the resulting assumptions used to estimate future
cash flows impact the outcome of all impairment tests.
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 sheet. We must then asses 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 statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $106.3 million as of February 23, 2002, 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 and
foreign tax credits, before they expire. The valuation allowance is based on our
estimates of taxable income by jurisdiction in which we operate and the period
over which our deferred tax assets will be recoverable. In the event that actual
results differ from these estimates or we adjust these estimates in future
periods we may need to establish additional valuation allowance which could
materially impact our financial position and results of operations.
[Remainder of this page intentionally left blank]
RISK FACTORS
We are directly dependent upon the conditions in the airline industry and a
severe and prolonged downturn could negatively impact our results of operations
The September 11 terrorist attacks have severely impacted conditions in the
airline industry. For the first time in the history of commercial aviation, all
domestic airlines were grounded for a period of three days. Since resuming
service, most major US carriers have substantially reduced their flight
schedules, parking or retiring approximately 15% of their fleets. The airlines
have further responded by decreasing domestic airfares by approximately 14% as
compared to last year. As a result of the double-digit decline in both traffic
and airfares, airline revenues for domestic carriers for the first calendar
quarter of 2002 were down by 22% Industry-wide workforce reductions announced by
the airlines, airframe manufacturers and the related suppliers to these
industries have exceeded 100,000 employees. As a result of the substantial
reduction in airline traffic arising from the September 11 terrorist attacks and
their aftermath, as well as other factors, such as the weakening economy, the
airline industry incurred the largest loss in history in calendar 2001, totaling
in excess of $7 billion. Accordingly, the airlines are seeking to conserve cash
in part by deferring or eliminating cabin interior refurbishment programs and
canceling or deferring aircraft purchases. This will cause a substantial
contraction in the company's business, the extent and duration of which cannot
be determined at this time. The company has taken swift actions to respond to
the rapid change in industry conditions, including consolidating five of its
principal facilities into existing facilities, reducing headcount by about 1,000
positions, or 22%, freezing salaries and eliminating all management bonuses for
fiscal 2002.
Our principal customers are the world's commercial airlines. Through
calendar 2000, airline company balance sheets had been substantially
strengthened and their liquidity significantly enhanced over the past several
years as a result of improved profitability, debt and equity financings and a
closely managed fleet expansion. However, increases in pilot and other airline
wages, coupled with fuel prices and the softening of the global economy were
already negatively impacting airline profitability during calendar 2001. The
combined impact of the recent recession and the events of September 11 are
expected to negatively impact discretionary airline spending, including for new
aircraft and cabin interior refurbishments and upgrades, is expected to have a
material adverse effect on our business results of operations and financial
condition until such time that conditions in the industry improve. While
management has developed and begun to implement what it believes is a sound plan
to counter these difficult conditions, it is not yet determinable whether its
plans are adequate or will be successful.
The airline industry is also undergoing a process of consolidation and
significantly increased competition. Such consolidation could result in a
reduction of future aircraft orders as overlapping routes are eliminated and
airlines seek greater economies through higher aircraft utilization.
Our substantial indebtedness could limit our ability to obtain additional
financing and will require that a significant portion of our cash flow be used
for debt service
We have substantial indebtedness and, as a result, significant debt service
obligations. As of February 23, 2002, we had approximately $854.8 aggregate
amount of indebtedness outstanding, representing approximately 85% of total
capitalization.
The degree of our leverage and, as a result, significant debt service
obligations, could have significant consequences to purchasers or holders of our
shares of common stock, including:
o limiting our ability to obtain additional financing to fund our growth
strategy, working capital requirements, capital expenditures,
acquisitions, debt service requirements or other general corporate
requirements;
o limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of those funds
to fund debt service obligations;
o increasing our vulnerability to adverse economic and industry
conditions; and
o if we are able to replace our bank credit facility, increasing our
exposure to interest rate increases because borrowings under a new bank
credit facility will likely be at variable interest rates.
We may not be able to generate the necessary amount of cash to service our
indebtedness, which may require us to refinance our debt, obtain additional
financing or sell assets
Our ability to satisfy our debt service obligations will depend upon, among
other things, our future operating performance and our ability to refinance
indebtedness when necessary. Each of these factors is to a large extent
dependent on economic, financial, competitive and other factors 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, obtain
additional financing or sell assets. Our business may not generate cash flow,
and we may not be able to obtain funding, sufficient to satisfy our debt service
requirements.
We have significant financial and operating restrictions in our debt instruments
that may have an adverse affect on our operations
The indentures governing our outstanding notes contain numerous financial
and operating covenants that limit our ability to incur additional indebtedness,
to create liens or other encumbrances, to make certain payments and investments,
including dividend payments and to sell or otherwise dispose of assets and merge
or consolidate with other entities. Agreements governing future indebtedness
could also contain significant financial and operating restrictions. Our bank
credit facility contains customary affirmative and negative covenants. A failure
to comply with the obligations contained in any current or future agreements
governing our indebtedness, including our indentures, could result in an event
of default under our bank credit facilities, or such indentures, which could
permit acceleration of the related debt and acceleration of debt under other
instruments that may contain cross-acceleration or cross-default provisions. We
are not certain whether we would have, or be able to obtain, sufficient funds to
make these accelerated payments.
The airline industry is heavily regulated and failure to comply with applicable
laws could reduce our sales, or require us to incur additional costs to achieve
compliance, which could reduce our results of operations
The Federal Aviation Administration prescribes standards and licensing
requirements for aircraft components, including virtually all commercial airline
and general aviation cabin interior products, and licenses component repair
stations within the United States. Comparable agencies, such as the U.K. Civil
Aviation Authority and the Japanese Civil Aviation Board, regulate these matters
in other countries. If we fail to obtain a required license for one of our
products or services or lose a license previously granted, the sale of the
subject product or service would be prohibited by law until such license is
obtained or renewed. In addition, designing new products to meet existing
regulatory requirements and retrofitting installed products to comply with new
regulatory requirements can be both expensive and time consuming.
From time to time the FAA proposes new regulations. These new regulations
generally cause an increase in costs to comply with these regulations; when the