BEAV B/E Aerospace, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For The Quarterly Period Ended September 30, 2010

 

Commission File No. 0-18348

BE AEROSPACE, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE	06-1209796
(State of Incorporation)	(I.R.S. Employer Identification No.)

 

1400 Corporate Center Way

Wellington, Florida  33414

(Address of principal executive offices)

 

(561) 791-5000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES[X]  NO[ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( § 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X]  NO [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: Large accelerated filer [X]   Accelerated filer [  ]  Non-accelerated filer (do not check if a smaller reporting company) [  ] Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ]  NO [X ]

The registrant has one class of common stock, $0.01 par value, of which 102,260,394 shares were outstanding as of November 1, 2010.

BE AEROSPACE, INC.

Form 10-Q for the Quarter Ended September 30, 2010

Table of Contents

 

		Page
Part I	Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009	3
	Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2010 and September 30, 2009	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and September 30, 2009	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	22
Part II	Other Information
Item 6.	Exhibits	23
Signatures		24

 

PART I - FINANCIAL INFORMATION

ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BE AEROSPACE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Millions, Except Share Data)

 

 

See accompanying notes to condensed consolidated financial statements.

BE AEROSPACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(In Millions, Except Per Share Data)

 

See accompanying notes to condensed consolidated financial statements.

 

BE AEROSPACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Millions)

 

See accompanying notes to condensed consolidated financial statements.

 

BE AEROSPACE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - In Millions, Except Per Share Data)

Note 1.     Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  All adjustments which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the condensed consolidated financial statements.  The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period.  The information included in these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the BE Aerospace, Inc. (the “Company”) Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and related disclosures.  Actual results could differ from those estimates.

 

 

On February 24, 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-09 Subsequent Events - Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09), which amends FASB Accounting Standards Codification (ASC) 855, Subsequent Events .  According to this standard, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements.  ASU No. 2010-09 was effective immediately and the Company adopted these new requirements in the first quarter of 2010.

In the first quarter of 2009, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures (ASC 820), for financial assets and liabilities recognized or disclosed at fair value.  ASC 820 defines fair value and expands disclosures about fair value measurements.  These definitions apply to other accounting standards that use fair value measurements and may change the application of certain measurements used in current practice.  For non-financial assets and liabilities, the effective date was the beginning of fiscal year 2010, except for items that are recognized or disclosed at fair value on a recurring basis.  The adoption of ASC 820 for these assets and liabilities did not have a material effect on the Company’s consolidated financial statements.

Note 3.     Inventories

Inventories are stated at the lower of cost or market. Cost is determined using FIFO or the weighted average cost method.  Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. In accordance with industry practice, costs in inventory include amounts relating to long-term contracts with long production cycles and inventory items with long procurement cycles, some of which are not expected to be realized within one year.  Inventories consist of the following:

Note 4.     Goodwill and Intangible Assets

The table below sets forth the intangible assets by major asset class, all of which were acquired through business purchase transactions:

 

 

Amortization expense on identifiable intangible assets was approximately $5.2 for the three month periods ended September 30, 2010 and 2009,  and $15.5 and $15.4 for the nine month periods ended September 30, 2010 and 2009, respectively. The Company expects to report amortization expense of approximately $23 in each of the next five fiscal years. The Company expenses costs to renew or extend the term of a recognized intangible asset.

Goodwill declined approximately $8.4 during the nine months ended September 30, 2010 as a result of foreign currency translations.

Note 5.     Long-Term Debt

The Credit Agreement contains an interest coverage ratio financial covenant (as defined in the Credit Agreement) that must be maintained at a level greater than 2.50 to 1. The Credit Agreement also contains a total leverage ratio covenant (as defined in the Credit Agreement) which limits net debt to a 4.00 to 1 multiple of EBITDA (as defined in the Credit Agreement).  The Credit Agreement is collateralized by substantially all of the Company’s assets and contains customary affirmative covenants, negative covenants and conditions precedent for borrowings.  The Company was in compliance with all of the covenants in the Credit Agreement as of September 30, 2010.

 

 

Note 6.     Fair Value Measurements

 

All financial instruments are carried at amounts that approximate estimated fair value. The fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. Assets measured at fair value are categorized based upon the lowest level of significant input to the valuations.

 

 

Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities.

 

The carrying amounts of cash and cash equivalents (which the Company classifies as Level 1 assets), accounts receivable-trade, and accounts payable represent their respective fair values due to their short term nature.  The carrying amount of the Company’s debt under the Term Loan Facility is a reasonable estimate of its fair value as interest is based upon floating market rates. The fair value of the Company’s 8.5% Notes, based on market prices for publicly-traded debt, was $654.0 and $636.0 as of September 30, 2010, and December 31, 2009, respectively. The fair value of the Company’s 6.875% Notes, based on market prices for publicly-traded debt was $663.0 as of September 30, 2010.

 

Note 7.     Commitments, Contingencies and Off-Balance Sheet Arrangements

Lease Commitments — The Company finances its use of certain facilities and equipment under committed lease arrangements provided by various institutions.  Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected on the condensed consolidated balance sheet.  At September 30, 2010, future minimum lease payments under these arrangements totaled approximately $145.5; the majority of which related to the long-term real estate leases.

Indemnities, Commitments and Guarantees — During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions.  These indemnities include non-infringement of patents and intellectual property indemnities to the Company's customers in connection with the delivery, design, manufacture and sale of its products, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to other parties to certain acquisition agreements.  The duration of these indemnities, commitments and guarantees varies, and in certain cases is indefinite.  The Company believes that substantially all of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments the Company could be obligated to make. However, the Company is unable to estimate the maximum amount of liability related to its indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events which are not reasonably determinable.  Management believes that any liability for these indemnities, commitments and guarantees would not have a material effect on the Company’s condensed consolidated financial statements.  Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.

Product Warranty Costs – Estimated costs related to product warranties are accrued at the time products are sold. In estimating its future warranty obligations, the Company considers various relevant factors, including the Company's stated warranty policies and practices, the historical frequency of claims and the cost to replace or repair its products under warranty.

 

 

Note 8.     Accounting for Stock-Based Compensation

The Company has a Long Term Incentive Plan (LTIP) under which the Company’s Compensation Committee has the authority to grant stock options, stock appreciation rights, restricted stock, restricted stock units or other forms of equity.

The Company has established a qualified Employee Stock Purchase Plan which allows qualified employees (as defined in the Employee Stock Purchase Plan) to purchase shares of the Company's common stock at a price equal to 85% of the closing price at the end of each semi-annual stock purchase period.  Compensation cost for this plan was not material to any of the periods presented.

 

The Company is organized based on the products and services it offers.  The Company’s reportable segments, which are also its operating segments, are comprised of consumables management, commercial aircraft and business jet.

The Company has six reporting units, which were determined based on materiality and on the guidelines contained in FASB ASC Topic 350, Subtopic 20, Section 35.  Each reporting unit represents either (a) an operating segment (which is also a reportable segment) or (b) a component of an operating segment, which constitutes a business, for which there is discrete financial information available that is regularly reviewed by segment management.

The Company evaluates segment performance based on segment operating earnings or losses. Each segment reports its results of operations and makes requests for capital expenditures and acquisition funding to the Company’s chief operating decision-making group. This group is presently comprised of the Chairman and Chief Executive Officer, the President and Chief Operating Officer, and the Senior Vice President and Chief Financial Officer. Each operating segment has separate management teams and infrastructures dedicated to providing a full range of products and services to their respective customers.

The Company has not included product line information due to the similarity of commercial aircraft segment (CAS) product offerings and the impracticality of determining such information for the consumables management segment (CMS).

 

 

 

(1)   Operating earnings include an allocation of corporate general and administrative and employee benefits costs based on the proportion of each segment’s revenues and number of employees, respectively.

 

The following table presents capital expenditures by reportable segment:

 

 

 

The following table presents total assets by reportable segment:

(2)     Corporate assets (primarily cash) of $874.1 and $144.6 at September 30, 2010 and December 31, 2009, respectively, have been allocated to the above segments based on each segment’s respective percentage of total assets.

 

 

Note 10.     Net Earnings Per Common Share

Basic net earnings per common share is computed using the weighted average common shares outstanding during the period. Diluted net earnings per common share is computed by using the weighted average common shares outstanding including the dilutive effect of stock options, shares issued under the Employee Stock Purchase Plan and restricted shares based on an average share price during the period.  For the three months ended September 30, 2010 and 2009 and for the nine months ended September 30, 2010 and 2009, securities totaling approximately 0.5 and 0.8, and 0.5 and 1.1, respectively, were excluded from the determination of diluted earnings per common share because their effect would have been anti-dilutive. The computations of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009, respectively, are as follows:

 

 

Note 11.              Comprehensive Earnings

Comprehensive earnings is defined as all changes in a company's net assets except changes resulting from transactions with stockholders. It differs from net earnings in that certain items currently recorded to equity would be a part of comprehensive earnings.

The following table sets forth the computation of comprehensive earnings for the periods presented:

 

Note 12.     Accounting for Uncertainty in Income Taxes

In accordance with FASB ASC 740 Income Taxes , the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

As of September 30, 2010 and December 31, 2009, the Company had $17.2 and $15.9, respectively, of net unrecognized tax benefits.  This amount of unrecognized tax benefits, if recognized, would affect the effective tax rate.

The Company classifies interest and penalties related to tax matters as a component of income tax expense. As of September 30, 2010 and December 31, 2009, the accrual related to interest and penalties was insignificant.

The Company recently completed its U.S. federal income tax examination for fiscal year 2006 with immaterial adjustments, and with minor exceptions, the Company is currently open to audit by the tax authorities for the three tax years ending December 31, 2009. There are currently no income tax audits in progress.

 

Note 13.     Subsequent Events

 

On October 26, 2010, the Company acquired the TSI Group (TSI) for approximately $310 million in cash. TSI is the market leader in the design, engineering and manufacturing of customized, fully integrated, thermal management and interconnect solutions that address complex power management requirements of a broad range of customers in the aerospace industry.

 

On October 27, 2010, the Company acquired the aerospace fastener distribution business of Satair A/S (“Satair”), a distributor of consumables to European and Asia Pacific aerospace manufacturers and their suppliers. The purchase price was approximately $162 million in cash.

 

Given the recent timing of the TSI and Satair acquisitions, the Company has not yet completed the initial accounting in this Form 10-Q for those acquisitions and accordingly has not included all the required disclosures for business combinations.

 

 

BE AEROSPACE, INC.

 

 

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
	AND RESULTS OF OPERATIONS
	(In Millions, Except Per Share Data)

 

OVERVIEW

The following discussion and analysis addresses the results of our operations for the three and nine months ended September 30, 2010, as compared to our results of operations for the three and nine months ended September 30, 2009. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods.

Based on our experience in the industry, we believe that we are the world’s largest manufacturer of cabin interior products for commercial aircraft and for business jets, and the leading aftermarket distributor and value added service provider of aerospace fasteners and other consumable products. We sell our manufactured products directly to virtually all of the world’s major airlines and aerospace manufacturers. 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:

•

distribution of a broad line of aerospace fasteners and consumables such as seals, bearings and electrical components, covering over 275,000 stock keeping units (SKUs) serving the commercial aircraft, business jet and military and defense industries;

•

the world’s largest manufacturer of aircraft cabin equipment such as, commercial aircraft seats, including an extensive line of super first class, first class, business class, tourist class and regional aircraft seats;

•

a full line of aircraft food and beverage preparation and storage equipment, including coffeemakers, water boilers, beverage containers, refrigerators, freezers, chillers and a line of ovens which includes microwave, high heat convection and steam ovens;

•

both chemical and gaseous aircraft oxygen delivery, distribution and storage systems, protective breathing equipment and lighting products; and

•

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.

We also provide comprehensive aircraft cabin interior reconfiguration and passenger-to-freighter conversion engineering services and component kits.

We conduct our operations through strategic business units that have been aggregated under three reportable segments: consumables management, commercial aircraft and business jet.

Revenues by reportable segment for the three and nine month periods ended September 30, 2010 and September 30, 2009, respectively, were as follows:

 

 

 

 

 

RESULTS OF OPERATION

 

THREE MONTHS ENDED SEPTEMBER 30, 2010,

AS COMPARED TO THREE MONTHS ENDED SEPTMEBER 30, 2009

($ in Millions, Except Per Share Data)

Consolidated Results

 

 

 

 

Segment Results

The following is a summary of operating earnings by segment: