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 December 31, 2003
[ ] 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 of (I.R.S. Employer Identification No.)
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES[X] NO[ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $111.5 million on June 30, 2003 based on the
closing sales price of the registrant's common stock as reported on the Nasdaq
National Market as of such date, which is the last business day of the
registrant's most recently completed second fiscal quarter.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of March 9, 2004 was 36,953,478 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Proxy Statement to be filed with the
Commission in connection with the 2004 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
1
INDEX
PART I
ITEM 1. Business.............................................................3
ITEM 2. Properties..........................................................16
ITEM 3. Legal Proceedings...................................................17
ITEM 4. Submission of Matters to a Vote of Security Holders.................17
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................18
ITEM 6. Selected Financial Data.............................................19
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................21
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk..........39
ITEM 8. Consolidated Financial Statements and Supplementary Data............39
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................39
ITEM 9A. Controls and Procedures.............................................39
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................40
ITEM 11. Executive Compensation..............................................44
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.....................................44
ITEM 13. Certain Relationships and Related Transactions......................44
ITEM 14. Principal Accountant Fees and Services..............................44
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....45
Index to Exhibits...................................................46
Signatures..........................................................49
Index to Consolidated Financial Statements and Schedule............F-1
2
PART I
Because we changed our fiscal year to a calendar year, this report contains
results for a ten-month transition period from February 24, 2002 to December 31,
2002. References to the "transition period" in this report are to the transition
period beginning February 24, 2002 and ending on December 31, 2002. References
to a "fiscal year" in this report are to the fiscal years ending February 23,
2002 and December 31, 2003.
Certain disclosures included in this Form 10-K constitute forward-looking
statements that are subject to risks and uncertainties. Where possible, we have
identified these statements by the use of terms such as "may," "will," "should,"
"expect," "anticipate," "believe," "estimate," "intend," and similar words,
although some forward-looking statements are expressed differently. Our actual
results could differ materially from those described in the forward-looking
statements due to a number of risks and uncertainties. These forward-looking
statements and risks and uncertainties are more fully explained under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Forward-Looking Statements" and "Risk Factors", respectively.
Unless otherwise indicated, the industry data contained in this Form 10-K is
from the February 2004 issue of the Airline Monitor, the Airbus Industrie Global
Market Forecast published in September 2002, the General Aviation Manufactures'
Association 2003 Annual Industry Review and Aircraft Shipment Reports, the NBAA
Business Aviation Fact Book 2003 or other publicly available sources.
ITEM 1. BUSINESS
INTRODUCTION
The Company
General
Based on our experience in the industry, we believe we are the world's
largest manufacturer of cabin interior products for commercial aircraft and
business jets and a leading distributor of aftermarket fasteners. 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. In
addition, based on our experience, we believe that we have achieved leading
global market positions in each of our major product categories, which include:
o commercial aircraft seats, including an extensive line of first class,
business class, tourist class and regional aircraft seats;
o a full line of aircraft food and beverage preparation and storage
equipment, including coffeemakers, water boilers, beverage containers,
refrigerators, freezers, chillers and microwave, high heat convection
and steam ovens;
o both chemical and gaseous aircraft oxygen delivery systems;
o business jet and general aviation interior products, including an
extensive line of executive aircraft seats, direct and indirect overhead
lighting systems, oxygen delivery systems, air valve systems, high-end
furniture and cabinetry; and
o a broad line of fasteners, consisting of over 100,000 Stock Keeping
Units (SKUs).
We also design, develop and manufacture a broad range of cabin interior
structures, 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 24 acquisitions,
including one acquisition during fiscal 2003, one acquisition during the
transition period ended December 31, 2002 and three during fiscal 2002. The
aggregate purchase price of these 24 acquisitions was approximately $983
million, and we believe these acquisitions enabled us 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 information technology investments, have significantly
improved our productivity and allowed us to expand gross and operating margins
prior to the events of September 11, 2001, which we were able to maintain
despite significant decreases in revenues resulting from the downturn in
industry conditions following the events of September 11, 2001.
3
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
passenger-to-freighter conversions, interior reconfiguration and a variety of
other 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 their 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. 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 an aircraft's age. Commercial aircraft must be serviced at
prescribed intervals which also drives demand for aftermarket fasteners.
Revenues for aerospace fastener products have been derived from the
following sources:
o Mandated maintenance and replacement of specified parts;
o Demand for structural modifications, cabin interior modifications and
passenger-to-freighter conversions; and
o Demand for aerospace fasteners on new build aircraft for the original
equipment manufacturers (OEMs) and their prime suppliers.
We estimate that the commercial and business jet cabin interior products and
aerospace-grade fastener distribution industries had combined annual sales in
excess of $1.1 billion and $1.2 billion, respectively, during calendar 2003.
The September 11, 2001 terrorist attacks are still severely impacting the
airline industry. However, despite the difficult start to 2003 with the onset of
Severe Acute Respiratory Syndrome (SARS) and the war in Iraq, the airline
industry saw a resurgence in air travel in 2003. Passenger traffic rebounded in
the last half of 2003, with the biggest gains in the Asia-Pacific region.
Traffic growth in 2004 is expected to be led by the Asia-Pacific region,
followed to a lesser extent in North America and Europe. With guarded optimism,
airlines are beginning to increase capacity slightly and appear to be
considering investment in retrofit programs and new aircraft. The Asia-Pacific
region leads spending in both the retrofit and new aircraft markets.
Airlines remain focused on making significant cost reductions to offset
declining yields. With the success of low cost carriers, it is possible that
yields will erode even further.
As a result of the decline in both traffic and airfares following the
September 11, 2001 terrorist attacks, and their aftermath, as well as other
factors, such as the weakened economy during 2001 - 2002 and rising fuel costs,
according to the International Air Transport Association (IATA), the world
airline industry lost a total of $30 billion in calendar years 2001 - 2003,
including $6.5 billion in 2003. The airline industry crisis caused 17 airlines
worldwide to declare bankruptcy or cease operations in the past three years.
4
The business jet industry has also been experiencing a severe downturn,
driven by weak economic conditions and poor corporate profits. During 2003,
three business jet manufacturers reduced or temporarily halted production of a
number of aircraft types. Deliveries of new business jets were down 32% during
2003 as compared to 2002, and are expected to remain depressed for the
foreseeable future, according to industry forecasts.
Accordingly, the domestic airlines have been conserving cash in part by
deferring or eliminating cabin interior refurbishment programs and by deferring
or canceling aircraft purchases. This, together with the reduction in new
business jet production, has caused a substantial contraction in our business,
the extent and duration of which cannot be determined at this time. We expect
these adverse industry conditions will have a material adverse impact on our
results of operations and financial condition until such time as conditions in
the commercial airline and business jet industries improve. While management has
developed and implemented what it believes is an aggressive cost reduction plan
to counter these difficult conditions, it cannot guarantee that the plans are
adequate or will be successful. During the second half of 2003, we have seen an
increase in demand for our aftermarket products from the large foreign
international carriers. IATA is now projecting that its 270 airline members will
earn $2 - 4 billion on their international routes during 2004. Our bookings in
2003 were up 25 percent over 2002 and backlog at December 2003 was $503 million,
an increase of about 15% over the prior year. There can be no assurance that
these trends will continue.
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 13,300 aircraft as of December 2003, including approximately
3,800 aircraft with fewer than 120 seats, approximately 7,300 aircraft with
between 120 and 240 seats and approximately 2,200 aircraft with more than
240 seats. Further, based on industry sources, there are approximately
12,600 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 $15.0 billion as of December 31, 2003.
Growth in Worldwide Fleet. Once the worldwide aircraft fleet starts to
expand again, it 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. Although worldwide air traffic declined during 2001 -
2003 for the reasons described above, according to the February 2004 issue
of the Airline Monitor, worldwide air traffic is projected to grow at a
compound average rate of 6.7% per year through 2010, increasing annual
revenue passenger miles from approximately 2.0 trillion in 2003 to
approximately 3.1 trillion by 2010. According to the Airbus Industrie Global
Market Forecast published in September 2002, 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 2.0 million passenger seats at year-end 2000 to approximately
4.3 million passenger seats at the end of 2020.
New Aircraft Deliveries. The number of new aircraft delivered each year is
generally regarded as cyclical in nature. New aircraft deliveries (excluding
regional jets) decreased to 579 in 2003 from 669 in 2002 and 833 in 2001.
According to the Airline Monitor published in February 2004, new deliveries
(excluding regional jets) are expected to decline to 575 in 2004 and 540 in
2005, reaching a trough of 510 aircraft in 2006 and increasing to 520
aircraft in 2007 and 620 in 2008. Including regional jets, new aircraft
deliveries decreased to 887 in 2003, from 978 in 2002 and 1,177 in 2001.
Growth in Passenger-to-Freighter Conversion Business. While current
activities in this sector remain at depressed levels, Boeing's Current
Market Outlook, published in June 2003, projects that the size of the
worldwide freighter fleet will double over the next twenty years, with more
than 2,900 aircraft being added, after taking retirements into account.
Industry sources also estimate that more than 70% of the increase in the
worldwide freighter fleet will come from converting commercial passenger
jets to use as freighters.
Business Jet and VIP Aircraft Fleet Expansion and Related Retrofit
Opportunities. Business jet airframe manufacturers have seen a significant
slowdown in deliveries which is expected to continue for the foreseeable
future. According to industry sources, business jet aircraft deliveries
amounted to 891 units in calendar 2001, 750 units in calendar 2002 and 515
units in calendar 2003. However, industry sources indicate that
approximately 7,700 business jets will be built between 2004 and 2014 with a
value of more than $115.0 billion.
5
Wide-body Aircraft Deliveries. The trend toward wide-body aircraft is
significant to us because wide-body aircraft require about 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 25% of all new commercial
aircraft (excluding regional jets) delivered in 2003, and are expected to
increase to 32% in 2008. The February 2004 Airline Monitor projects that
wide-body deliveries after 2017 will account for almost 40% of new aircraft
deliveries. 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 electric lie-flat first and business class
seats, convertible seats, full face crew masks, gaseous passenger oxygen
systems, a full range of business and executive jet seating and LED lighting
products, protective breathing equipment, oxygen generating systems, new
food and beverage preparation and storage equipment, kevlar barrier nets,
de-icing systems and crew rests.
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
these 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 including
passenger to freighter conversions and related kits; 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:
Large Installed Base. We have a large installed base of commercial and
general aviation cabin interior products, estimated to be approximately $4.4
billion as of December 31, 2003 (valued at replacement prices). Based on our
experience in the industry, we believe our installed base is substantially
larger than that of our competitors, and further believe that this 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.
Low-Cost Producer. We believe, based on our experience in the industry, that
we are among the industry's lowest-cost producers. We achieved this status
through a series of cost savings programs, including most recently a
significant facility consolidation and integration plan implemented
following the September 11 terrorist attacks and which involved closing five
facilities and reducing our workforce by approximately 1,500 employees. We
believe this most recent facility consolidation and integration plan, which
is now complete, has eliminated over $45 million of annual cash costs from
our business.
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 company, which both
manufactures a broad, technologically advanced line of cabin interior
products and offers 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.
6
Technological Leadership/New Product Development. We believe, based on our
experience in the industry, 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. 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.
Growth Opportunities
We believe that we will benefit from the following trends in the aerospace
industry at such time that the industry recovers:
Aftermarket Demand Should Lead Industry Recovery. Our substantial installed
base provides significant ongoing revenues from replacements, upgrades,
repairs and the sale of spare parts. As airlines slowly add capacity by
returning aircraft to service, we expect demand for retrofit programs and
for spare parts to increase. As new aircraft purchases are delayed,
airlines' fleets continue to age and experience wear and tear. Approximately
57% and 60% of our revenues were derived from aftermarket activities for
fiscal 2003 and the transition period ended December 31, 2002, respectively.
With so many aircraft parked as a result of the recent industry conditions,
we are experiencing weak demand for spare parts. Looking ahead, we believe
the majority of the idled aircraft should eventually return to service. With
airlines' balance sheets so weak, we believe they will not have the
financial resources to replace many of the parked aircraft with new ones.
That means demand for new aircraft could be depressed for several years. In
the meantime, the airlines' fleets will continue to age, and the aging
fleets will experience continued wear and tear. That should eventually have
a positive impact on demand for our aftermarket products. At some point, the
airlines will begin to spend to maintain and upgrade their fleets. We
believe this will occur before they begin buying new aircraft. Aftermarket
demand should lead the industry recovery, because refurbishing existing
aircraft is much less expensive than buying new aircraft.
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. New aircraft
deliveries declined over the last two years and are expected to remain
depressed through 2007. In addition, we expect the trend toward wide-body
aircraft to continue. As the size of the fleet expands, demand for upgrade
and refurbishment programs and for cabin interior products should grow as
well, particularly with the expected introduction of the Airbus A380 in 2006
and the Boeing 7E7 in 2008.
Opportunity to Substantially Expand our Addressable Markets through our
Fastener Distribution Business. Our fastener distribution business leverages
our key strengths, including marketing and service relationships with most
of the world's airlines and airframe manufacturers. Because nearly 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.
Business Jet and VIP Aircraft Fleet Expansion and Related Retrofit
Opportunities. Business jet aircraft deliveries in 2003 decreased by about
32% compared to 2002, and are expected to remain depressed for the
foreseeable future, according to industry forecasts. Several larger business
jets, including the Boeing Business Jet, Bombardier Challenger, the Global
Express, the Gulfstream V, the Falcon 900, the Airbus Corporate Jet, the
Cessna Citation X and the Cessna Citation Excel, are expected to be
significant contributors to new general aviation aircraft deliveries going
forward. Industry sources indicate that approximately 7,700 business jets
will be built between 2004 and 2014 with a value of more than $115 billion,
and approximately 50% of these jets are projected to be the larger business
jets described above. This is important to us because the typical cost of
cabin interior products manufactured for a small jet 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 continued development of
fractional ownership of executive aircraft are also important growth
factors. In addition, the general aviation and VIP aircraft fleet consists
of approximately 12,600 aircraft with an average age of approximately 16
years. As aircraft age or due to ownership changes, operators retrofit and
upgrade cabin interiors, including seats, sofas and tables, sidewalls,
headliners, structures such as closets, lavatories and galleys, and related
equipment including lighting and oxygen delivery systems.
7
In addition, operators generally reupholster or replace seats every five to
seven years. During 2003 we won two contracts to design and deliver
luxurious compartments for the emerging international super first class
cabins for Malaysian Airlines and Thai International Airways. We plan to
utilize the key engineering and manufacturing at our business jet segment
for these programs, which will begin to deliver in 2005 - 2006, in this
important segment.
The Airbus A380 aircraft is creating retrofit demand for existing wide-body
carriers. To date, 9 airlines have placed orders for the new Airbus A380
wide-body aircraft. These airlines are evaluating their current wide-body
fleets to ensure that they can maintain fleet-wide commonality of their
cabin interiors as they begin to take delivery of the new aircraft. Based on
discussions to date with several of these carriers and based on our
experience with the introduction of other wide-body aircraft, we expect that
these airlines will place retrofit orders for their existing wide-body
aircraft over the next several years.
We believe we are well-positioned to benefit from these retrofit
opportunities. In addition to benefiting from these industry trends, we expect
that when industry conditions improve and demand increases, we will have
enhanced earnings power through substantial operating leverage due to the steps
we have taken to respond to industry conditions, including the consolidation of
our facilities. We believe that our factories have the capacity to generate
annual revenues of up to $1 billion without substantial additional capital
investment.
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; and
o Pursuing a worldwide marketing and product support approach focused by
airline and general aviation airframe manufacturer and encompassing our
entire product line.
Through these strategies and as the industry recovers we intend to achieve,
among other things, increased cash flows, which would allow us to increase our
cash balances and potentially reduce our total indebtedness.
Products and Services
We conduct our operations through strategic business units that have been
aggregated under three reportable segments: Commercial Aircraft Products,
Business Jet Products and Fastener Distribution.
Fiscal Year Ended Ten-Month Period Ended Fiscal Year Ended
December 31, 2003 December 31, 2002 February 23, 2002
---------------------- ----------------------------- ------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
--------- ------------ ------------ ---------------- ---------- -------------
Commercial aircraft products:
Seating products $217.9 34.9% $144.6 28.7% $247.8 36.4%
Interior systems products 137.5 22.0% 116.0 23.0% 152.6 22.4%
Engineering services and
engineered structures
and components 99.9 16.0% 93.9 18.7% 150.2 22.1%
--------- ------------ ------------ ---------------- ---------- -------------
455.3 72.9% 354.5 70.4% 550.6 80.9%
Business jet products 65.4 10.5% 71.1 14.1% 85.6 12.6%
Fastener distribution 103.7 16.6% 78.0 15.5% 44.3 6.5%
--------- ------------ ------------ ---------------- ---------- -------------
Net sales $624.4 100.0% $503.6 100.0% $680.5 100.0%
========= ============ ============ ================ ========== =============
8
Commercial Aircraft Products
Seating Products
We believe, based on our experience in the industry, that we are the world's
leading manufacturer of aircraft seats, offering a wide selection of first
class, business class, tourist class and regional seats. A typical seat
manufactured and sold by us 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 December 31, 2003 we had an aggregate
installed base of approximately 919,000 aircraft seats valued at replacement
prices of approximately $2.0 billion.
First and Business Classes. Based upon major airlines' program selection and
orders on hand, we believe we are the leading worldwide manufacturer of
premium class seats. Our line of first class sleeper seats incorporates full
electric actuation, an electric ottoman, privacy panels and sidewall-mounted
tables. Our 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 fiberoptic 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 airlines
the flexibility to adjust the ratio of business class to tourist class seats
for a given aircraft configuration or flight demand. This seat is increasing
in popularity in the European market.
Tourist Class and Regional Jet Seats. We believe, based on our experience in
the industry, that we are a leading worldwide manufacturer of tourist class
seats and regional aircraft seats. We believe our next-generation coach
class seat, Spectrum(TM), has become the industry's most popular seat
platform for single-aisle aircraft since its launch in late 2002. We believe
the seat improves comfort and offers significantly improved passenger living
space as well as benefiting the airlines with simplified maintenance and
spare parts purchasing. Spectrum(TM) was engineered for use across the
entire single-aisle aircraft fleet, including regional jets.
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 believe, based on our experience in the industry, that 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 December 31, 2003
we had an aggregate installed base of such equipment, valued at replacement
prices, of approximately $1.3 billion.
Coffee Makers. We believe, based on our experience in the industry, that we
are the leading manufacturer of aircraft coffee makers. We manufacture a
broad line of coffee makers, including the recently introduced Endura(TM)
beverage maker, coffee warmers and water boilers, 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 believe, based on our experience in the industry, that we are the
leading manufacturer of a broad line of specialized ovens, including
high-heat efficiency ovens, high-heat convection and steam ovens and warming
ovens. Our DS Steam Oven uses a 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 believe, based on our experience in the
industry, that 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,
refrigeration/freezers and air chilling systems.
9
Oxygen Delivery Systems. We believe, based on our experience in the
industry, that we are a leading manufacturer of oxygen delivery systems for
both commercial and business jet 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 believe, based on our experience in the industry, that we are a leader in
designing and manufacturing galley structures, crew rest compartments and
components. We estimate that as of December 31, 2003, we had an installed base
of engineered interior structures, valued at replacement prices, of
approximately $300 million.
Engineering Design, Integration, Installation and Certification Services. We
believe, based on our experience in the industry, that 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, 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 and entertainment
equipment, relocate galleys, lavatories and overhead bins, and install crew
rest compartments.
Crew Rest Compartments. We believe, based on our experience in the industry,
that we are the worldwide leader in the design, certification and
manufacture of crew rest compartments. The flight crew utilizes crew rest
compartments 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.
Aerospace Components and Assemblies. We believe, based on our experience in
the industry, that 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, gearboxes, 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 believe, based on our experience in
the industry, that we are a leading supplier of structural design and
integration services, including airframe modifications for
passenger-to-freighter conversions. In addition, we believe 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 believe, based on our experience in the industry, that we are the leading
manufacturer of a broad product line of furnishings for business jets. Our
products include 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 believe we are the preferred supplier of
seating products and direct and indirect lighting systems for essentially every
general aviation airframe manufacturer. We estimate that as of December 31, 2003
we had an aggregate installed base of such equipment, valued at replacement
prices, of approximately $800 million.
10
Fastener Distribution
Through our M & M subsidiary, we believe we offer one of the broadest lines
of fasteners and inventory management services worldwide. Approximately 70% of
our fastener sales are to the aftermarket, and over 60% of our orders are
shipped the same day that they are received. With over 100,000 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 $44.7 for the fiscal year ended December 31, 2003, $34.1
million for the transition period ended December 31, 2002, and $43.5 million for
the fiscal year ended February 23, 2002. We employed 487 professionals in
engineering, research and development and program management as of December 31,
2003. We believe, based on our experience in the industry, 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 65% of the purchases of products manufactured by our
Commercial Aircraft Products Group during the year ended December 31, 2003. Our
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 that 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.
11
We market our aerospace fasteners directly to the airlines, completion
centers, general aviation airframe manufacturers, 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.
As of December 31, 2003, our direct sales and marketing organization and
product support consisted of 226 persons, plus 44 independent sales
representatives. Our sales to non-U.S. customers were approximately $317 for the
fiscal year ended December 31, 2003, $234 million for the transition period
ended December 31, 2002 and $288 million for the fiscal year ended February 23,
2002, or approximately 51%, 46% and 42%, respectively, of net sales during such
periods. During the fiscal year ended December 31, 2003 and the transition
period ended December 31, 2002, approximately 74% of our total revenues were
derived from airlines and other commercial aircraft operators compared to
approximately 76% in the fiscal year ended February 23, 2002. Approximately 57%
of our revenues for the fiscal year ended December 31, 2003 and 60% of our
revenues during the transition period ended December 31, 2002 were from
refurbishment, spares and upgrade programs. During the fiscal year ended
December 31, 2003 and the transition period ended December 31, 2002, no single
customer accounted for more than 10% of our consolidated sales. The portion of
our revenues attributable to particular customers varies from year to year with
the airlines' scheduled purchases of new aircraft and for retrofit and
refurbishment programs for their existing aircraft.
Backlog
We estimate that our backlog at December 31, 2003 was approximately $503
million as compared to approximately $450 million at December 31, 2002 and
approximately $480 million at February 23, 2002. Of our backlog at December 31,
2003, approximately 66% is scheduled to be deliverable within the next twelve
months; 52% of our total backlog is with North American customers, approximately
11% is with European customers and approximately 35% is with Asian customers
(including Australia and New Zealand). Our backlog includes backlog from all of
our businesses. Orders during 2003 increased 25% over the order level during
2002, resulting in a nearly 15% year-over-year increase in backlog at December
31, 2003.
Customer Service
We believe that our customers place a high value on customer service and
product support and that this service is a critical differentiating factor in
our industry. The key elements of such service include:
o Rapid response to requests for engineering design, proposal request
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.
12
Warranty and Product Liability
We warrant our products, or specific components thereof, for periods ranging
from one to ten years, depending upon product and component type. We establish
reserves for product warranty expense after considering relevant factors such as
our stated warranty policies and practices, historical frequencies of claims to
replace or repair products under warranty and recent sales and claims trends.
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
should be 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 aerospace industry,
competition 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, such as video and live broadcast TV, particularly in wide-body
aircraft. We believe that the airlines' increasing demands will result in a
consolidation of the remaining suppliers. 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 Flugzeugwerk 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,
consist 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.
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 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. We
have implemented common information technology platforms company-wide, as
appropriate. These activities should lower our production costs, shorten cycle
times and reduce inventory requirements and at the same time improve product
quality, customer response and profitability. We do not believe we are
materially dependent on any single supplier or assembler for any of our raw
materials or specified and designed component parts and, based upon the existing
arrangements with vendors, our current and anticipated requirements and market
conditions, we believe that we have made adequate provisions for acquiring raw
materials.
Government Regulation
The Federal Aviation Administration ("FAA") 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 FAA component certificates and perform
component repairs at a number of our U.S. facilities under FAA repair station
licenses. We also hold an approval issued by the U.K. Civil Aviation Authority
to design, manufacture, inspect and test aircraft seating products in Leighton
Buzzard, England and to manufacture and ship from our Kilkeel, Northern Ireland
facility. We also have the necessary approvals to design, manufacture, inspect,
test and repair our interior systems products in Nieuwegein, The Netherlands.
13
In March 1992, the FAA 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 have developed over 32
different seat models that meet the TSO C127 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 November 2002, our seating group became the first passenger seating
supplier to sign a Partnership for Safety Plan (PSP) with the FAA. Based on
established qualifications of personnel and systems, the PSP provides us with
increased authority to approve test plans and reports, and to witness tests. The
PSP provides us with a number of business benefits including greater planning
flexibility, simplified scheduling and greater program control and eliminates
variables such as FAA workload and priorities.
On October 4, 2002, the FAA published a Supplemental Notice of Proposed Rule
Making (SNPRM). This SNPRM proposed extending the current requirement for
"enhanced safety" seats (16G seats) on aircraft designs registered after 1988,
to all aircraft. This proposed rule would require that older design aircraft be
retrofitted with new enhanced safety "16G" seats over a multi-year basis. The
public comment period for the proposed retrofit rule closed on March 3, 2003.
The date for final rule making and any changes to the details of the rule will
be based on the comments received and the priority assigned to this proposal by
the FAA.
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 of 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 131 United States patents and 89 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 December 31, 2003, we had approximately 3,300 employees. Approximately
69% of our employees are engaged in manufacturing, 15% in engineering, research
and development and program management and 16% in sales, marketing, product
support and general administration. Unions represent approximately 17% of our
worldwide employees. A labor contract representing approximately 181 U.S.
employees expires on April 30, 2006. The labor contract with the only other
domestic union, which represents approximately 2% of our employees, runs through
May 2004. We consider our employee relations to be good.
Financial Information About Segments and Foreign and Domestic Operations
Financial and other information by segment and relating to foreign and
domestic operations for the fiscal year ended December 31, 2003, the ten-month
transition period ended December 31, 2002 and the fiscal year ended February 23,
2002, is set forth in note 15 to our consolidated financial statements.
14
Available Information
Our filings with the Securities and Exchange Commission (the "SEC"),
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports, are available free
of charge on our website as soon as reasonably practicable after they are filed
with, or furnished to, the SEC. Our Internet website is located at
http://www.beaerospace.com. Information included in our website is not
incorporated by reference in this annual report.
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15
ITEM 2. PROPERTIES
As of December 31, 2003, we had 11 principal operating facilities and one
administrative facility, which comprises 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 Leased
Leighton Buzzard, England........ Manufacturing 114,000 Owned
Kilkeel, Northern Ireland........ Manufacturing 110,500 Leased/Owned
Anaheim, California.............. Manufacturing 98,000 Leased
Lenexa, Kansas................... Manufacturing 80,000 Leased
Nieuwegein, The Netherlands...... Manufacturing 47,350 Leased
Marysville, Washington........... Engineering
Services/
Manufacturing 110,000 Leased
Long Beach, 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 Leased
Corporate Wellington, Florida.............. Administrative 17,700 Owned
------------
1,333,250
We believe that our facilities are suitable for their present intended
purposes and adequate for our present and anticipated level of operations.
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16
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in various legal actions arising in the normal course of
business, the outcomes of which, in the opinion of management, neither
individually nor in the aggregate are likely to result in a material adverse
effect on our business, results of operations or financial condition.
There are no material pending legal proceedings, other than the ordinary
routine litigation incidental to the business discussed above, to which we or
any of our subsidiaries are a party or of which any of our property is the
subject.
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.
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17
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
Calendar Year Ended December 31, 2001
First Quarter $25.88 $16.00
Second Quarter 24.35 15.49
Third Quarter 19.90 3.50
Fourth Quarter 11.85 6.27
Calendar Year Ended December 31, 2002
First Quarter 10.16 6.31
Second Quarter 14.05 9.06
Third Quarter 13.11 4.00
Fourth Quarter 5.38 2.62
Calendar Year Ended December 31, 2003
First Quarter 3.90 1.23
Second Quarter 3.97 1.47
Third Quarter 5.92 2.63
Fourth Quarter 6.72 4.12
On March 9, 2004 the last reported sale price of our common stock as
reported by Nasdaq was $6.27 per share. As of such date, we had approximately
1,100 shareholders of record, and we estimate that there are approximately
16,000 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%, 8 7/8% and 9 1/2% senior subordinated notes and 8 1/2% senior
notes were issued, as well as our amended and restated bank credit facility,
permit the declaration of cash dividends only in certain circumstances described
therein.
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18
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share data)
Effective as of February 24, 2001, we acquired Alson Industries, Inc., T.L.
Windust Machine, Inc., Maynard Precision, Inc. and DMGI, Inc. During fiscal
2002, we acquired M&M Aerospace Hardware, Inc., Nelson Aero Space, Inc. and
Denton Jet Interiors, Inc. We also made one acquisition during the transition
period ended December 31, 2002 and one acquisition during fiscal 2003. 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 December 31,
2003, the transition period ended December 31, 2002 and for the fiscal years
ended February 23, 2002, February 24, 2001 and February 26, 2000 have been
derived from financial statements that have been audited by our independent
auditors. The financial data for calendar 2002 and for the period from February
25, 2001 to December 31, 2001 has been derived from unaudited financial
statements. Effective January 1, 2003, the Company adopted SFAS No. 145
"Rescissions of FASB Statements No. 4, 44, and 64, amendment of FASB Statement
No. 13, and Technical Corrections" and, accordingly, has reclassified certain
amounts from extraordinary item to loss on debt extinguishment in the summary
financial data below. 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.
----------------------- --------------------- ---------------------------
Calendar Ten-Month Fiscal
Year Ended Period Ended Year Ended
----------------------- --------------------- ---------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Feb. 23, Feb. 24, Feb. 26,
2003 2002 2002 2001 2002 2001(d) 2000(e)
---------- ----------- ---------- ---------- --------- --------- --------
Statements of Operations Data:
Net sales.................................... $ 624.4 $ 601.5 $ 503.6 $ 582.6 $ 680.5 $666.4 $723.3
Cost of sales(a)............................. 453.6 417.9 352.3 464.4 530.1 416.6 543.6
-------- -------- -------- -------- -------- ------ ------
Gross profit................................. 170.8 183.6 151.3 118.2 150.4 249.8 179.7
Operating expenses:
Selling, general and administrative(b)...... 105.8 147.2 128.0 120.2 139.4 124.2 119.0
Research, development and engineering....... 44.7 40.8 34.1 36.7 43.5 48.9 54.0
-------- -------- -------- -------- -------- ------ ------
Operating earnings (loss).................... 20.3 (4.4) (10.8) (38.7) (32.5) 76.7 6.7
Equity in losses of unconsolidated subsidiary -- -- -- -- -- -- 1.3
Interest expense, net........................ 70.6 69.0 57.3 48.8 60.5 54.2 52.9
Loss on debt extinguishment(c)............... 1.2 -- -- 9.3 9.3 -- --
-------- -------- -------- -------- -------- ------ ------
(Loss) earnings before income taxes.......... (51.5) (73.4) (68.1) (96.8) (102.3) 22.5 (47.5)
Income taxes ................................ 2.0 2.7 2.7 2.0 1.8 2.2 3.3
-------- -------- -------- -------- ------- ------ ------
Net (loss) earnings.......................... $ (53.5) $ (76.1) $ (70.8) $ (98.8) $(104.1) $ 20.3 $(50.8)
======== ======== ======== ======== ======= ====== ======
Basic net (loss) earnings per share:
Net (loss) earnings.......................... $ (1.49) $ (2.19) $ (2.03) $ (3.05) $ (3.18) $ 0.80 $(2.05)
======== ======== ======== ======== ======= ====== ======
Weighted average common shares............... 36.0 34.8 34.9 32.4 32.7 25.4 24.8
Diluted net (loss) earnings per share:
Net (loss) earnings.......................... $ (1.49) $ (2.19) $ (2.03) $ (3.05) $ (3.18) $ 0.78 $(2.05)
======== ======== ======== ======== ======= ====== ======
Weighted average common shares............... 36.0 34.8 34.9 32.4 32.7 25.9 24.8
Balance Sheet Data (end of period):
Working capital.............................. $ 274.3 $ 262.9 $ 262.9 $ 295.6 $ 304.8 $174.9 $129.9
Goodwill, intangible and other assets, net .. 541.5 534.9 534.9 555.2 529.2 433.4 425.8
Total assets................................. 1,052.5 1,067.1 1,067.1 1,177.8 1,128.3 936.0 881.8
Long-term debt............................... 880.1 836.0 836.0 853.7 853.5 603.8 618.2
Stockholders' equity......................... 31.9 69.3 69.3 142.6 121.1 135.3 64.5
19
SELECTED FINANCIAL DATA (continued)
Footnotes to Table
(a) We have acquired 24 businesses since 1989 for an aggregate purchase price
of nearly $1 billion. We have incurred and expensed approximately $310
during the period from 1989 to 2001 related to acquisitions, integration
of such acquisitions, consolidation of 17 facilities and reduction of
approximately 3,000 employees. We incurred and expensed approximately
$175 of such costs (including approximately $74 of cash costs) since the
terrorist attacks of September 11, 2001, increasing the number of
facilities consolidated to 22, and our headcount reductions to
approximately 4,500 employees.
We incurred costs related to this program as follows:
Fiscal Ten-Month
Year Year Transition Period Period Fiscal Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, February 23,
2003 2002 2002 2001 2002
----------------- --------------- ----------------- -------------- --------------
Cash charges (severance, integration
costs, lease termination costs,
relocation, training, facility
preparation) $19.9 $36.7 $32.5 $ 17.1 $ 21.3
Write-down of property, plant,
equipment, inventory and other
assets 10.9 7.0 7.0 62.9 62.9
Impaired intangible assets -- -- -- 20.4 20.4
----- ----- ----- ------ ------
$30.8 $43.7 $39.5 $100.4 $104.6
===== ===== ====== ====== ======
The consolidation and integration costs have been included as a component
of cost of sales.
We also incurred acquisition-related expenses of $6.8 during the fiscal
year ended February 23, 2002 and the ten-month period ended December 31,
2001, which have been included as a component of selling, general and
administrative expenses.
(b) In February 2003, we received an adverse arbitration award related to the
amounts due us from the Thales Group, which reduced the amount due by
$29.5. This non-cash charge is included in selling, general and
administrative expenses.
(c) A loss on debt extinguishment of $1.2 for unamortized debt issue costs
associated with the downsizing of our bank credit facility following the
sale of $175.0 of senior notes in October 2003 has been included in our
statement of operations for fiscal 2003. A loss on debt extinguishment of
$9.3 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 has been included in our consolidated statement of
operations for the ten-month period ended December 31, 2001 and the
fiscal year ended February 23, 2002, respectively.
(d) Our operating results during fiscal 2001 were negatively impacted by
costs related to 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.
(e) Our operating results during fiscal 2000 were negatively impacted due to
operational problems in our seating operations. Those problems 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.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in millions, except per share data)
OVERVIEW
Based on our experience in the industry, we believe we are the world's
largest manufacturer of cabin interior products for commercial aircraft and for
business jets and a leading aftermarket aerospace distributor of fasteners. We
sell our manufactured products directly to virtually all of the world's major
airlines and airframe manufacturers and a wide variety of business jet
customers. In addition, based on our experience, we believe that we have
achieved leading global market positions in each of our major product
categories, which include:
o commercial aircraft seats, including an extensive line of first class,
business class, tourist class and regional aircraft seats;
o a full line of aircraft food and beverage preparation and storage
equipment, including coffeemakers, water boilers, beverage containers,
refrigerators, freezers, chillers and microwave, high heat convection
and steam ovens;
o both chemical and gaseous aircraft oxygen delivery systems;
o business jet and general aviation interior products, including an
extensive line of executive aircraft seats, direct and indirect overhead
lighting systems, oxygen delivery systems, air valve systems, high-end
furniture and cabinetry; and
o a broad line of aftermarket fasteners, covering over 100,000 SKUs.
We also design, develop and manufacture a broad range of cabin interior
structures and provide comprehensive aircraft cabin interior reconfiguration and
passenger-to-freighter conversion engineering services and component kits.
We 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. For fiscal 2003, the ten month
transition period ended December 31, 2002 and fiscal 2002, approximately 57%,
60% and 63%, respectively, of our revenues were derived from the aftermarket,
with the remaining portions attributable to new aircraft deliveries. We believe
our large installed base of products, estimated to be over $4.4 billion as of
December 31, 2003 (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 conduct our operations through strategic business units that have been
aggregated under three reportable segments: Commercial Aircraft Products,
Business Jet Products and Fastener Distribution.
Net sales by line of business were as follows:
Fiscal Year Ended Ten-Month Period Ended Fiscal Year Ended
December 31, 2003 December 31, 2002 February 23, 2002
---------------------- ----------------------------- ------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
--------- ------------ ------------ ---------------- ---------- -------------
Commercial aircraft products:
Seating products $217.9 34.9% $144.6 28.7% $247.8 36.4%
Interior systems products 137.5 22.0% 116.0 23.0% 152.6 22.4%
Engineering services and
engineered structures
and components 99.9 16.0% 93.9 18.7% 150.2 22.1%
-------- ------------ ------------ ---------------- ---------- -------------
455.3 72.9% 354.5 70.4% 550.6 80.9%
Business jet products 65.4 10.5% 71.1 14.1% 85.6 12.6%
Fastener distribution 103.7 16.6% 78.0 15.5% 44.3 6.5%
--------- ------------ ------------ ---------------- ---------- -------------
Net sales $624.4 100.0% $503.6 100.0% $680.5 100.0%
========= ============ ============ ================ ========== =============
21
Net sales by domestic and foreign operations were as follows:
Fiscal Ten-Month Period Fiscal Year
Year Ended Ended Ended
December 31, December 31, February 23,
2003 2002 2002
------------------- ----------------------- ------------------
United States $408.0 $362.4 $535.7
Europe 216.4 141.2 144.8
------------------- ----------------------- ------------------
Total $624.4 $503.6 $680.5
=================== ======================= ==================
Net sales by geographic segment (based on destination) were as follows:
Fiscal Year Ended Ten-Month Period Ended Fiscal Year Ended
December 31, 2003 December 31, 2002 February 23, 2002
----------------------------- ------------------------------------- ----------------------------
Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales
----------- ----------------- --------------- --------------------- ----------- ----------------
Americas $342.0 54.8% $303.6 60.3% $446.1 65.6%
Europe 168.4 27.0% 121.0 24.0% 136.8 20.1%
Asia 114.0 18.2% 79.0 15.7% 97.6 14.3%
----------- ----------------- --------------- --------------------- ----------- ----------------
$624.4 100.0% $503.6 100.0% $680.5 100.0%
=========== ================= =============== ===================== =========== ================
We have substantially expanded the size, scope and nature of our business
through a number of acquisitions. Since 1989, we have completed 24 acquisitions,
including one acquisition during fiscal 2003, one acquisition during the
transition period ended December 31, 2002 and three during fiscal 2002, for an
aggregate purchase price of approximately $983, in order to position ourselves
as the preferred global supplier to our customers.
During the period from 1989 to 2000, we integrated the acquired businesses,
closing 17 facilities, reducing our workforce by 3,000 positions and
implementing common information technology platforms and lean manufacturing
initiatives company-wide. This integration effort resulted in costs and charges
totaling approximately $125.
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused us to implement a facility consolidation
and integration plan designed to re-align our capacity and cost structure with
changed conditions in the airline industry. The facility consolidation and
integration plan included closing five facilities and reducing workforce by
approximately 1,500 employees. We believe these initiatives will enable us to
substantially expand profit margins when industry conditions improve and demand
increases, strengthen the global business management focus on our core product
categories and more effectively leverage our resources. The total cost of this
program was approximately $175, including approximately $74 of cash charges.
New product development is a strategic initiative for our company. Our
customers regularly request that we engage in new product development and
enhancement activities. We believe that these activities, if properly focused
and managed, will protect and enhance our leadership position. 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 three
years, annual capital expenditures ranged from $11 - $17. Taking into
consideration our recent capital expenditure investments, current industry
conditions and the recent acquisitions, we expect that annual capital
expenditures will be approximately $12 - 14 for the next few years.
22
RESULTS OF OPERATIONS
Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002
Net sales for the year ended December 31, 2003 were $22.9 or 3.8% higher,
compared to the prior year.
Net sales for each of our segments are set forth in the following table:
Year Year
Ended % of Ended % of
Dec. 31, 2003 Net Sales Dec. 31, 2002 Net Sales Change
----------------- -------------- ----------------- --------------- -----------------------
Commercial Aircraft Products $455.3 72.9% $420.8 70.0% $34.5 8.2 %
Business Jet Products 65.4 10.5% 84.2 14.0% (18.8) (22.3)%
Fastener Distribution 103.7 16.6% 96.5 16.0% 7.2 7.5 %
----------------- -------------- ----------------- --------------- ---------- ------------
Total $624.4 100.0% $601.5 100.0% $22.9 3.8 %
================= ============== ================= =============== ========== ============
Sales within the commercial aircraft products segment were up $34.5 or 8.2%
compared to the prior year. Substantially all of the commercial aircraft
products' revenue growth during 2003 was driven by increased aftermarket demand
for seats. In the business jet segment, sales were down $18.8 or 22.3% compared
to the prior year, reflecting the 32% decline in deliveries of new business
jets. Fastener distribution sales in 2003 were up $7.2 or 7.5% compared to the
prior year due to market share gains.
Gross profit was $170.8, or 27.4% of net sales for the year ended December
31, 2003, compared to $183.6, or 30.5% of net sales last year. The decrease in
gross profit is primarily due to poor operating results at our business jet
segment throughout the year, weaker margins at our commercial aircraft products
group due to product mix during the first half of 2003 and an approximately $8.0
adverse impact from the weakening U.S. dollar versus the British pound. We are
subject to fluctuations in foreign exchange rates due to significant sales from
our European facilities, substantially all of which are currently denominated in
U. S. dollars, while the corresponding labor, material and overhead costs are
denominated in British pounds or euros.
Research, development and engineering expenses were $44.7 or 7.2% of net
sales in 2003 as compared with $40.8 or 6.8% of net sales for the prior year.
The increase in expenses was primarily attributable to new product development
programs associated with the launch of the Airbus A380 aircraft.
Selling, general and administrative expenses were $105.8 or 16.9% of net
sales for the year ended December 31, 2003, down $41.4 compared to $147.2 or
24.5% of net sales a year ago. Such costs in the prior year included a $29.5
non-cash write-off related to the Sextant litigation.
During 2003 we received $9.0 in connection with the resolution of final
matters related to the 1999 sale of our In-Flight Entertainment business. The
benefit was offset by charges totaling $7.0 primarily related to inventories,
increasing our allowance for bad debts, and impairment charges to reduce
properties held for sale to estimated current values.
Our initiative to resize our company to better adapt to the dramatic change
in industry conditions, by reducing excess capacity and lowering our cost
structure has been completed. In the process, we closed five facilities,
relocated 12 major production lines and reduced workforce by approximately 1,500
positions or 31%. Total consolidation costs in 2003 were approximately $31, of
which $11 was non-cash. This compares to $44 of such costs in 2002, of which $7
were non-cash costs. Such costs were included in cost of sales in both periods.
We expect that annual cash savings from the consolidation activities of these
past two years will be approximately $45 during 2004.
23
Operating earnings were $4.8 lower in 2003 than in 2002, exclusive of the
$29.5 non-cash charge related to the Sextant litigation. Operating earnings of
$20.3 reflect $30.8 of consolidation costs, including $10.9 of non-cash charges,
as compared to consolidation costs of $43.7 in 2002. Exclusive of the prior year
non-cash legal settlement charge, the commercial aircraft products segment
operating earnings improved by $12.9 on a $34.5 increase in revenues. The
business jet segment generated a $(9.5) operating loss, an $18.4 decrease from
the prior year, on a $18.8 or 22% decrease in revenues. Operating earnings at
our fastener distribution segment increased to $18.0 on sales of $103.7, which
were up 7% year-over-year.
Interest expense, net was $70.6 for the year ended December 31, 2003, or
$1.6 greater than interest expense of $69.0 for the prior year. The increase in
interest expense was due to the increase in debt following our October 2003 sale
of senior notes.
We recorded a $1.2 loss on debt extinguishment during 2003 in connection
with the downsizing of our revolving credit facility following our October 2003
notes offering.
Net loss was $(53.5) or $(1.49) per share for the year ended December 31,
2003 as compared to a net loss of $(76.1) or $(2.19) per share for the prior
year.
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24
RESULTS OF OPERATIONS
The Transition Period from February 24, 2002 to December 31, 2002 Compared to
the Ten-Month Period from February 25, 2001 to December 31, 2001
Consolidated Results
Revenues were negatively impacted by the severe change in industry
conditions following the terrorist attacks on September 11, 2001. Net sales for
the transition period ended December 31, 2002 were $503.6, which is $79.0 or
13.6% lower than net sales of $582.6 for the comparable period in the prior
year, which was also negatively impacted by the events of September 11, 2001.
Net sales for each of our segments are set forth in the following table:
Transition Ten-Month
Period Ended % of Period Ended % of
Dec. 31, 2002 Net Sales Dec. 31, 2001 Net Sales Change
------------------ -------------- -------------------- ---------------- ---------------------------
Commercial Aircraft Products $354.5 70.4% $476.5 81.8% $(122.0) (25.6)%
Business Jet Products 71.1 14.1% 75.7 13.0% (4.6) (6.1)%
Fastener Distribution 78.0 15.5% 30.4 5.2% 47.6 156.6 %
------------------ -------------- -------------------- ---------------- -------------- ------------
Total $503.6 100.0% $582.6 100.0% $ (79.0) (13.6)%
================== ============== ==================== ================ ============== ============
Sales of commercial aircraft products were $122.0 or 25.6% lower than sales
in the prior year, due to the recession in the airline industry and the further
downturn in industry conditions following September 11, 2001. Sales of business
jet products and fastener distribution products also reflected restrained demand
due to the aviation industry downturn. Because we acquired M&M in September
2001, the current period reflects the full ten-month transition period of
fastener distribution revenue compared with four months in the comparable period
in the prior year.
Gross profit was $151.3, or 30.0% of net sales for the transition period
ended December 31, 2002 as compared to $118.2, or 20.3% of sales for the
ten-month period ended December 31, 2001. The period over period increase in
gross margin as a percentage of net sales occurred despite the 13.6% decrease in
revenues and was due to a $60.9 reduction in facility consolidation and
integration costs and the positive impact of our facility consolidation efforts,
lean manufacturing and continuous improvement programs. Included in facility
consolidation costs for the ten months ended December 31, 2001 was an impairment
charge of $20.4 related to certain intangible assets, primarily comprised of
technical plans and drawings and product approvals, in the Commercial Aircraft
Products segment which management determined had been permanently impaired as a
result of the decline in industry conditions and the facility consolidation.
Selling, general and administrative expenses, excluding the $29.5 adverse
result in the Thales arbitration, were $98.5 or 19.6% of net sales for the
transition period ended December 31, 2002 as compared to $120.2 or 20.6% of net
sales for the comparable period in the prior year. The $21.7 decrease in
selling, general and administrative expenses was due to lower spending,
primarily as a result of our facility consolidation and integration program and
austerity measures, together with a decrease of $13.4 related to the adoption of
SFAS No. 142. Because we acquired M & M in September 2001, the transition period
ended December 31, 2002 reflects the full ten-month period of selling, general
and administrative expenses of $12.0, as compared with $6.1 of such costs during
the four months in the comparable period in the prior year.
Research, development and engineering expenses were $34.1 or 6.8% of net
sales for the transition period ended December 31, 2002 as compared with $36.7
or 6.3% of sales for the comparable period in the prior year. The period over
period decrease in research, development and engineering expenses is primarily
attributable to austerity measures, which were implemented subsequent to the
September 11, 2001 terrorist attacks.
25
In February 2003, we received an adverse result in an arbitration
proceeding, which had been ongoing since October 2000. The decision reduced the
amounts we originally sought in connection with the dispute, resulting in a net
amount of $7.8 million due to us. The dispute concerned the sale of our
in-flight entertainment business to Thales. Under the terms of the purchase and
sale agreement, we received $62 million during 1999, and were to receive two
additional payments totaling $31.4 million, and a third and final payment based
on actual sales and bookings. Thales did not pay the $31.4 million, or the third
and final payment. We initiated arbitration proceedings to compel payment in
December 2000. Thales counterclaimed against us, alleging various breaches of
the purchase and sale agreement. Previously, we had recorded a receivable of
$38.5 million in connection with the sale of the business to Thales. As a result
of the arbitration award, we reduced our note receivable by $29.5 as of December
31, 2002, representing the difference between the arbitration panel's award and
our previously recorded amounts.
Despite a 13.6% decrease in net sales, our operating loss for the transition
period ended December 31, 2002 decreased by $27.9 compared to the operating loss
in the comparable period in the prior year due to a $60.9 decrease in facility
consolidation and integration costs, and a $24.3 decrease in operating expenses,
excluding the $29.5 arbitration result, arising from austerity measures and the
implementation of SFAS No. 142.
Interest expense, net was $57.3 for the transition period ended December 31,
2002, or $8.5 greater than interest expense of $48.8 for the comparable period
in the prior year. The increase in interest expense is due to an increase in
debt following the acquisition of M & M in September 2001 and higher interest
rates on our bank borrowings.
The lower level of revenues, which was partially offset by lower facility
consolidation and integration costs during the transition period ended December
31, 2002, resulted in a loss before income taxes of $(68.1) or $28.7 less than
the $(96.8) loss before income taxes in the comparable period in the prior year.
Income tax expense for the transition period ended December 31, 2002 was
$2.7 as compared to $2.0 in the comparable period in the prior year.
Net loss was $(70.8) or $(2.03) per share for the transition period ended
December 31, 2002 as compared to a net loss of $(98.8) or $(3.05) per share for
the comparable period in the prior year.
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26
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
Our liquidity requirements consist of working capital needs, ongoing capital
expenditures and payments of interest and principal on our indebtedness. Our
primary requirements for working capital are directly related to the level of
our operations; working capital primarily consists of accounts receivable and
inventories, which fluctuate with the sales of our products. Our working capital
was $274.3 as of December 31, 2003, as compared to $262.9 as of December 31,
2002 and $304.8 as of February 23, 2002. The increase in working capital from
December 31, 2002 to December 31, 2003 was primarily due to the $15.0 repayment
of our bank credit facility with the net proceeds from our October 2003 senior
notes offering.
At December 31, 2003, our cash and cash equivalents were $147.6, as compared
to $156.9 at December 31, 2002 and $159.5 at February 23, 2002. The decrease in
cash and cash equivalents from December 31, 2002 to December 31, 2003 was
primarily due to the $144.0 paydown of our bank credit facility, our net loss
and other changes in working capital, partially offset by the $175.0 senior
notes offering.
Cash Flows
At December 31, 2003, our cash and bank credit available under our current
bank credit facility was $190.2 compared to $157.3 at December 31, 2002. Cash
used in operating activities was $25.5 for the year ended December 31, 2003 and
$13.5 during the transition period ended December 31, 2002. The primary use of
cash during the year ended December 31, 2003 was a net loss of $53.5 and $0.7 of
uses related to changes in our operating assets and liabilities, offset by
non-cash charges from amortization and depreciation of $28.3. The primary
sources of cash during the transition period ended December 31, 2002 were a
non-cash impairment charge of $7.0, charges for depreciation and amortization of
$24.7, a non-cash legal settlement charge of $29.5 and a decrease in accounts
receivable of $22.2. The primary uses of cash during the transition period were
a net loss of $70.8, an increase in inventories of $8.5 and a decrease in
payables and accruals of $15.9.
The primary use of cash from investing activities during the year ended
December 31, 2003 was related to capital expenditures for the implementation of
new information system enhancements and plant modernization. The primary source
of cash from investing activities during the transition period ended December
31, 2002 was $33.4 of proceeds received from real estate sales and
sales-leaseback transactions. The primary uses of cash from investing activities
during such transition period were related to capital expenditures to implement
new information system enhancements and plant modernization along with $6.5 of
cash used for acquisitions.
Capital Spending
Our capital expenditures were $11.2 and $17.4 during the year ended December
31, 2003 and the transition period ended December 31, 2002, respectively. The
decrease in capital expenditures during 2003 is primarily attributable to the
timing of plant consolidation and modernization efforts. We anticipate ongoing
annual capital expenditures of approximately $12 - 14 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 bank credit facilities. We expect to fund future
capital expenditures from cash on hand, from operations and from funds available
to us under our current or any future bank credit facility. In addition, since
1989, we have completed 24 acquisitions for an aggregate purchase price of
approximately $983. Following these acquisitions, we rationalized the
businesses, reduced headcount by approximately 4,500 employees and eliminated 22
facilities. We have financed these acquisitions primarily through issuances of
debt and equity securities, including our outstanding 8%, 8 7/8% and 9 1/2%
senior subordinated notes and bank credit facilities.
Outstanding Debt and Other Financing Arrangements
During 2003 and in February 2004 we obtained several amendments to our
credit facility with JPMorgan Chase Bank to provide us with additional financial
flexibility. The amendments reduced the size of the credit facility from $150 to
$50 as part of the consideration to modify several financial covenants. The
amendments had the effect of eliminating maintenance financial covenants
consisting of interest coverage ratio, leverage ratio and minimum net worth.
Under the amended and restated credit facility there are no maintenance
financial covenants as long as cash is above $25 and there are no borrowings
outstanding under this facility. If borrowings under the bank credit facility
are outstanding and if cash is less than $70, the interest coverage ratio (as
defined) must be at least 1.15:1 for the trailing 12 month period. The bank
credit facility expires in February 2007, is collateralized by substantially all
of our assets and bears interest at rates ranging from 250 to 400 basis
27
points over the Eurodollar rate as defined in the agreement. At December 31,
2003, indebtedness under the bank credit facility consisted of letters of credit
aggregating approximately $7.4. The amount available under the bank credit
facility was $42.6 as of December 31, 2003. The bank credit facility contains
customary affirmative covenants, negative covenants and conditions of
borrowings, all of which were met as of December 31, 2003.
Long-term debt consists principally of our 8 1/2% senior notes, 8 7/8%
senior subordinated notes, 9 1/2% senior subordinated notes and 8% senior
subordinated notes. The $250 of 8% notes mature on March 1, 2008, the $200 of 9
1/2% notes mature on November 1, 2008, the $175 of 8 1/2% senior notes mature on
October 1, 2010 and the $250 of 8 7/8% notes mature on May 1, 2011. The senior
subordinated notes are unsecured senior subordinated obligations and are
subordinated to all of our senior indebtedness. The senior notes are unsecured
obligations and are senior to all of our subordinated indebtedness, but
subordinate to our secured borrowings under our bank credit facility. Each of
the 8% notes, 8 1/2% ,8 7/8% notes and 9 1/2% notes contains restrictive
covenants, including limitations on future indebtedness, restricted payments,
transactions with affiliates, liens, dividends, mergers and transfers of assets,
all of which we met as of December 31, 2003. A breach of these covenants, or the
covenants under our current or any future bank credit facility, that continues
beyond any grace period can constitute a default, which can limit the ability to
borrow and can give rise to a right of the lenders to terminate the applicable
facility and/or require immediate repayment of any outstanding debt.
Contractual Obligations
The following charts reflect our known contractual obligations and
commercial commitments as of December 31, 2003. Commercial commitments include
lines of credit, guarantees and other potential cash outflows resulting from a
contingent event that requires performance by us or our subsidiaries pursuant to
a funding commitment.
Contractual Obligations 2004 2005 2006 2007 2008 Thereafter Total
------------ ------------ ---------- ----------- ------------ --------------- --------------
Bank credit facility $ -- $ -- $ -- $ -- $ -- $ -- $ --
Other long-term debt 1.9 0.6 4.4 0.4 449.7 425.0 882.0
Operating leases 11.7 10.6 9.8 9.6 8.9 42.2 92.8
Purchase obligations (1) 65.5 11.3 1.6 0.7 -- -- 79.1
----- ----- ----- ----- ------ ------ --------
Total $79.1 $22.5 $15.8 $10.7 $458.6 $467.2 $1,053.9
===== ===== ===== ===== ====== ====== ========
Commercial Commitments
Letters of Credit $ -- $ -- $ -- $ 7.4 $ -- $ -- $ 7.4
(1) Occasionally we enter into purchase commitments for production materials
and other items, which are reflected in the table above. We also enter into
unconditional purchase obligations with various vendors and suppliers of
goods and services in the normal course of operations through purchase
orders or other documentation or are undocumented except for an invoice.
Such obligations are generally outstanding for periods less than a year and
are settled by cash payments upon delivery of goods and services and are
not reflected in the total unconditional purchase obligations presented in
this line item.
We believe that our cash flows, together with cash on hand provide us with
the ability to fund our operations, make planned capital expenditures and make
scheduled debt service payments for the foreseeable future. However, such cash
flows are dependent upon our future operating performance, which, in turn, is
subject to prevailing economic conditions and to financial, business and other
factors, including the conditions of our markets, some of which are beyond our
control. If, in the future, we cannot generate sufficient cash from operations
to meet our debt service obligations, we will need to refinance such debt
obligations, obtain additional financing or sell assets. We cannot assure you
that our business will generate cash from operations, or that we will be able to
obtain financing from other sources, sufficient to satisfy our debt service or
other requirements.
Sale-Leaseback
In September 2002, we entered into two sale-leaseback transactions involving
four of our facilities. Under the transactions, the facilities were sold for
$27.0, net of transaction costs and have been leased back for periods ranging
from 15 to 20 years. The leasebacks have been accounted for as operating leases.
The future lease payments have been included in the above tables. A gain of $4.8
resulting from the sale has been deferred and is being amortized to rent expense
over the initial term of the leases.
28
Off-balance Sheet Arrangements
Lease Arrangements
We finance our use of certain equipment under committed lease arrangements
provided by various financial institutions. Since the terms of these
arrangements meet the accounting definition of operating lease arrangements, the
aggregate sum of future minimum lease payments is not reflected on our
consolidated balance sheet. At December 31, 2003, future minimum lease payments
under these arrangements approximated $92.8.
Indemnities, Commitments and Guarantees
During the normal course of business, we made certain indemnities,
commitments and guarantees under which we may be required to make payments in
relation to certain transactions. These indemnities include non-infringement of
patents and intellectual property indemnities to our customers in connection
with the delivery, design, manufacture and sale of our products, indemnities to
various lessors in connection with facility leases for certain claims arising
from such facility or lease, and indemnities to other parties to certain
acquisition agreements. The duration of these indemnities, commitments and
guarantees varies, and in certain cases, is indefinite. We believe that
substantially all of our indemnities, commitments and guarantees provide for
limitations on the maximum potential future payments we could be obligated to
make. However, we are unable to estimate the maximum amount of liability related
to our indemnities, commitments and guarantees because such liabilities are
contingent upon the occurrence of events which are not reasonably determinable.
Management believes that any liability for these indemnities, commitments and
guarantees would not be material to our accompanying condensed consolidated
financial statements.
Product Warranty Costs -- Estimated costs related to product warranties are
accrued at the time products are sold. In estimating our future warranty
obligations, we consider various relevant factors, including our stated warranty
policies and practices, the historical frequency of claims and the cost to
replace or repair our products under warranty. The following table provides a
reconciliation of the activity related to our accrued warranty expense:
Fiscal Transition Fiscal Year
Year Ended Period Ended Ended
December 31, December 31, February 23,
2003 2002 2002
------------------- ------------------- ------------------
Beginning accrual $ 8.9 $11.3 $ 9.9
Charges to expense 6.7 2.5 8.4
Costs incurred (3.7) (4.9) (7.0)
------------------- ------------------- ------------------
Ending accrual $11.9 $ 8.9 $11.3
=================== =================== ==================
Deferred Tax Assets
We established a valuation allowance, which was $136.3 as of December 31,
2003, related to the utilization of our deferred tax assets because of
uncertainties that preclude us from determining that it is more likely than not
that we will be able to generate taxable income to realize such assets during
the federal operating loss carryforward period, which begins to expire in 2012.
Such uncertainties include recent cumulative losses, the highly cyclical nature
of the industry in which we operate, risks associated with our facility
consolidation plan, our high degree of financial leverage, risks associated with
new product introductions, recent increases in the cost of fuel and its impact
on our airline customers, and risks associated with the integration of acquired
businesses. We monitor these uncertainties, as well as other positive and
negative factors that may arise in the future, as we assess the necessity for a
valuation allowance for our deferred tax assets.
29
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supersedes SAB
101, "