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 August 28, 1999
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 33414-2105
(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[ ]
The registrant has one class of common stock, $.01 par value, of which
24,826,454 shares were outstanding as of September 23, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Unaudited Audited
as of as of
August 28, February 27,
1999 1999
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 29,828 $ 39,500
Accounts receivable - trade, less allowance for doubtful
accounts of $2,440 (August 28, 1999)
and $2,633 (February 27, 1999) 137,023 140,782
Inventories, net 142,280 119,247
Other current assets 16,778 14,086
---------- -----------
Total current assets 325,909 313,615
---------- -----------
Property and equipment, net 152,125 138,730
Intangibles and other assets, net 447,805 451,954
---------- ------------
$ 925,839 $ 904,299
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 76,566 $ 63,211
Accrued liabilities 84,022 97,065
Current portion of long-term debt 8,007 9,916
---------- ------------
Total current liabilities 168,595 170,192
---------- ------------
Long-term debt 580,971 583,715
Other liabilities 36,080 34,519
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares outstanding - -
Common stock, $.01 par value; 50,000,000 shares authorized;
24,711,219 (August 28, 1999) and 24,602,915
(February 27, 1999) shares issued and outstanding 247 246
Additional paid-in capital 247,447 245,809
Accumulated deficit (98,942) (124,077)
Accumulated other comprehensive loss (8,559) (6,105)
---------- ------------
Total stockholders' equity 140,193 115,873
---------- ------------
$ 925,839 $ 904,299
========== ============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- -----------------------------
August 28, August 29, August 28, August 29,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 191,895 $ 156,352 $ 376,927 $ 296,343
Cost of sales 121,558 96,752 240,003 184,863
---------- ---------- ----------- ----------
Gross profit 70,337 59,600 136,924 111,480
Operating expenses:
Selling, general and administrative 21,295 19,042 43,323 37,041
Research, development and engineering 12,280 12,770 23,525 24,742
Amortization 5,856 5,381 11,552 9,414
Acquisition-related expenses - 46,902 - 79,155
---------- ---------- ----------- ----------
Total operating expenses 39,431 84,095 78,400 150,352
---------- ---------- ----------- ----------
Operating earnings (loss) 30,906 (24,495) 58,524 (38,872)
Equity in losses of unconsolidated subsidiary 562 - 1,289 -
Interest expense, net 13,195 8,664 25,817 16,446
---------- ---------- ---------- ----------
Earnings (loss) before income taxes 17,149 (33,159) 31,418 (55,318)
Income taxes 3,429 2,336 6,283 4,052
---------- ---------- ----------- ----------
Net earnings (loss) $ 13,720 $ (35,495) $ 25,135 $ (59,370)
========= ========== ========== ==========
Basic net earnings (loss) per common share $ .56 $ (1.44) $ 1.02 $ (2.49)
========= ========= ========== ==========
Diluted net earnings (loss) per common share $ .55 $ (1.44) $ 1.01 $ (2.49)
========= ========= ========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------
August 28, August 29,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 25,135 $ (59,370)
Adjustments to reconcile net earnings (loss) to net cash flows
provided by operating activities:
Acquisition-related expenses - 79,155
Depreciation and amortization 20,402 18,312
Deferred income taxes 24 (70)
Non-cash employee benefit plan contributions 1,193 1,055
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable 3,293 6,163
Inventories (23,423) (45,435)
Other current assets (3,213) (1,115)
Accounts payable 13,569 1,916
Accrued liabilities (12,489) 11,174
---------- ----------
Net cash flows provided by operating activities 24,491 11,785
---------- ----------
Cash flows from investing activities:
Capital expenditures (22,919) (20,210)
Change in intangible and other assets (8,136) (3,991)
Acquisitions, net of cash acquired - (209,636)
--------- ----------
Net cash flows used in investing activities (31,055) (233,837)
--------- ----------
Cash flows from financing activities:
Net borrowings under bank credit facilities - 119,542
Proceeds from issuances of stock, net of expenses 427 2,604
Principal payments on long-term debt (3,457) (35,962)
--------- ----------
Net cash flows provided (used in) by financing activities (3,030) 86,184
--------- ----------
Effect of exchange rate changes on cash flows (78) 386
--------- ----------
Net decrease in cash and cash equivalents (9,672) (135,482)
Cash and cash equivalents, beginning of period 39,500 164,685
---------- ----------
Cash and cash equivalents, end of period $ 29,828 $ 29,203
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest, net $ 25,853 $ 4,897
Income taxes, net $ 2,278 $ 460
Schedule of non-cash transactions:
Fair market value of assets acquired in acquisitions $ - $ 372,359
Cash paid for businesses acquired in acquisitions $ - $ 210,986
Common stock issued in connection with acquisitions $ - $ 117,213
Liabilities assumed and accrued acquisition costs
incurred in connection with acquisitions $ - $ 54,600
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
Notes to Condensed Consolidated Financial Statements
August 28, 1999 and August 29, 1998
(Unaudited - Dollars in thousands, except per share data)
Note 1. BASIS OF PRESENTATION
The condensed consolidated financial statements of BE
Aerospace, Inc. and its wholly-owned subsidiaries (the "Company" or
"B/E") have been prepared by the Company and are unaudited pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information related to the Company's
organization, significant accounting policies and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of management, these unaudited
condensed consolidated financial statements reflect all material
adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of operations and
statements of financial position for the interim periods presented.
These results are not necessarily indicative of a full year's results
of operations. Certain reclassifications have been made to the
financial statements to conform to the August 28, 1999 presentation.
Although the Company believes that the disclosures provided
are adequate to make the information presented not misleading, these
unaudited interim condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended February 27, 1999.
Note 2. FISCAL 1999 ACQUISITIONS/DISPOSITION
On April 13, 1998, the Company completed its acquisition of
Puritan-Bennett Aero Systems Co. ("PBASCO") for approximately $67,900
in cash and the assumption of approximately $9,200 of liabilities,
including related acquisition costs and certain liabilities arising
from the acquisition. PBASCO is a manufacturer of commercial aircraft
oxygen delivery systems and "WEMAC" air valve components and, in
addition, supplies overhead lights and switches, crew masks and
protective breathing devices for both commercial and general aviation
aircraft.
On April 21, 1998, the Company acquired substantially all of
the assets of Aircraft Modular Products ("AMP") for approximately
$117,300 in cash and the assumption of approximately $12,800 of
liabilities, including related acquisition costs and certain
liabilities arising from the acquisition. AMP is a manufacturer of
cabin interior products for general aviation (business jet) and
commercial-type VIP aircraft, providing a broad line of products
including seating, sidewalls, bulkheads, credenzas, closets, galley
structures, lavatories, tables and sofas, along with related spare
parts.
On August 7, 1998, the Company acquired all of the capital
stock of SMR Aerospace, Inc. and its affiliates, SMR Developers LLC
and SMR Associates (together, "SMR") for an aggregate purchase price
of approximately $141,500 in cash and the assumption of approximately
$32,600 of liabilities, including related acquisition costs and
certain liabilities arising from the acquisition. The Company paid
for the acquisition of SMR by issuing four million shares (the "SMR
Shares") of Company stock (then valued at approximately $30 per
share) to the former stockholders of SMR and paying them $2,000 in
cash. The Company also paid $22,000 in cash to the employee stock
ownership plan ("ESOP") of a subsidiary of SMR Aerospace to purchase
the minority equity interest in such subsidiary held by the ESOP. The
Company agreed to register for sale the SMR Shares with the
Securities and Exchange Commission. If the net proceeds from the sale
of the shares, which included the $2,000 in cash already paid, was
less than $120,000, the Company agreed to pay such difference in cash
to the selling stockholders. Because of the market price for the
Company's common stock and the Company's payment obligation to the
selling stockholders described above, the Company decided to
repurchase the SMR Shares with approximately $118,000 of the proceeds
<PAGE>
from the sale of 9 1/2% Senior Subordinated Notes instead of
registering the shares for sale (the $118,000 payment represents the
net proceeds of $120,000 the Company was obligated to pay the selling
stockholders, less the $2,000 in cash the Company already paid them).
SMR provides design, integration, installation and
certification services for commercial aircraft passenger cabin
interiors. SMR provides a broad range of interior reconfiguration
services that allow airlines to change the size of certain classes of
service, modify and upgrade the seating, install telecommunications or
entertainment options, relocate galleys, lavatories, and overhead bins
and install crew rest compartments. SMR is also a supplier of
structural design and integration services, including airframe
modifications for passenger-to-freighter conversions. In addition, SMR
provides a variety of niche products and components that are used for
reconfigurations and conversions. SMR's services are performed
primarily on an aftermarket basis and its customers include major
airlines such as United Airlines, Japan Airlines, British Airways, Air
France, Cathay Pacific and Qantas, as well as Airborne Express,
Federal Express and Boeing.
As a result of the acquisitions of PBASCO, AMP and SMR (the
"1999 Acquisitions"), the Company recorded a charge aggregating
$79,155 for the write-off of acquired in-process research and
development and acquisition-related expenses associated with these and
other transactions.
The Company determined that these projects ranged from 25% -
90% complete at August 28, 1999 and estimates that the cost to
complete these projects will aggregate approximately $10,600, and will
be incurred over a five year period.
The 1999 Acquisitions have been accounted for using purchase
accounting.
On February 25, 1999, the Company sold a 51% interest in its
In-Flight Entertainment ("IFE") subsidiary (the "IFE Sale") to a
wholly-owned subsidiary of Sextant Avionique SA for an initial sale
price of $62,000 (subject to adjustment based on the actual results of
operations during the two years following the IFE Sale). As a result
of the IFE Sale, the Company accounts for its remaining 49% interest
in IFE using the equity method of accounting. On September 3, 1999,
the Company announced that it had sold its remaining 49% interest in
IFE. See Note 7.
Note 3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as all changes in a
company's net assets except changes resulting from transactions with
shareholders. It differs from net income (loss) in that certain items
<PAGE>
currently recorded to equity would be a part of comprehensive income
(loss). The following table sets forth the computation of
comprehensive income (loss) for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- ------------------------
August 28, August 29, August 28, August 29,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net earnings (loss) $ 13,720 $ (35,495) $ 25,135 $ (59,370)
Other comprehensive income:
Foreign exchange translation adjustment (803) 943 (2,454) 415
--------- --------- --------- ----------
Comprehensive income (loss) $ 12,917 $ (34,552) $ 22,681 $ (58,955)
========= ========= ========= ==========
</TABLE>
Note 4. SEGMENT REPORTING
The Company is currently organized based on customer-focused
operating groups operating in a single segment. Each group reports its
results of operations and makes requests for capital expenditures and
acquisition funding to the Company's chief operation decision-making
group. This group is comprised of the Chairman, the Vice Chairman and
Chief Executive Officer, the President and Chief Operating Officer,
the Corporate Senior Vice President of Administration and Chief
Financial Officer and the Executive Vice President, Marketing and New
Product Development. Under this organizational structure, the
Company's operating groups were aggregated into two reportable
segments. The Aircraft Cabin Interior Products and Services segment
("ACIPS") is comprised of four operating groups: the Seating Products
Group, the Interior Systems Group, the Flight Structures and
Integration Group and the Services Group, each of which have separate
management teams and infrastructures dedicated to providing a full
range of products to their commercial and general aviation operator
customers. Each of these groups demonstrates similar economic
performance and utilizes similar distribution methods and
manufacturing processes. Customers are supported by a single worldwide
after-sale service organization. As described in Note 2, the Company
sold a 51% interest in IFE on February 25, 1999 (see also Note 7). IFE
was a separate, reportable segment. The Company evaluates the
performance of its operating segments based primarily on sales, gross
profit before special costs and charges, operating earnings before
special costs and charges, and working capital management.
<PAGE>
The following table presents sales and other financial
information by business segment for the three month and six month
periods ended:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 28, 1999 August 28, 1999
---------------------- -----------------------
ACIPS ACIPS
----- -----
<S> <C> <C>
Net sales $ 191,895 $ 376,927
Gross profit 70,337 136,924
Operating earnings
as reported 30,906 58,524
Operating earnings
before special
charges 30,906 58,524
Working capital 157,314 157,314
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 29, 1998 August 29, 1998
------------------------------------- ------------------------------------
ACIPS IFE Total ACIPS IFE Total
----- --- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 133,859 $ 22,493 $ 156,352 $ 251,989 $ 44,354 $ 296,343
Gross profit 51,916 7,684 59,600 97,239 14,241 111,480
Operating (losses)
as reported (24,202) (293) (24,495) (29,878) (8,994) (38,872)
Operating earnings
(loss) before
special charges 22,700 (293) 22,407 41,737 (1,454) 40,283
Working capital 151,811 30,653 182,464 151,811 30,653 182,464
</TABLE>
<PAGE>
Note 5. EARNINGS (LOSS) PER COMMON SHARE
Basic net earnings (loss) per common share is computed using
the weighted average common shares outstanding during the period.
Diluted net earnings (loss) per common share is computed by using the
average share price during the period when calculating the dilutive
effect of stock options. Shares outstanding for the periods presented
were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- -------------------------
August 28, August 29, August 28, August 29,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 24,696 24,575 24,664 23,822
Dilutive effect of employee stock options 332 - 285 -
------ ------ ------ ------
Diluted shares outstanding 25,018 24,575 24,949 23,822
====== ====== ====== ======
</TABLE>
Note 6. Restructuring Charge
During the fourth quarter of fiscal 1999, the Company began to
implement a restructuring plan designed to lower its cost structure
and improve its long-term competitive position. This plan includes
consolidating seven facilities reducing the total number from 21 to
14, reducing its employment base by approximately 8% and rationalizing
its product offerings. The restructuring costs and charges are
comprised of $61,089 related to impaired inventories and property,
plant and equipment as a result of the rationalization of its product
offerings, plus severance and related separation costs, lease
termination and other costs of $4,949. The Company anticipates that it
will be substantially complete with this restructuring by the end of
the current fiscal year.
The assets impacted by this program include inventories,
factories, warehouses, assembly operations, administration facilities
and machinery and equipment.
The following table summarizes the utilization of the
restructuring accrual:
<TABLE>
<CAPTION>
Balance at Balance at
Feb. 27, 1999 Utilized Aug 28, 1999
--------------------- ---------------- -----------------
<S> <C> <C> <C>
Severance, lease termination and other costs $ 4,298 $ 1,533 $ 2,765
Impaired inventories, property and equipment 19,911 11,278 8,633
--------------------- ---------------- -----------------
$24,209 $12,811 $11,398
===================== ================ =================
</TABLE>
<PAGE>
Note 7. Subsequent Event
On September 3, 1999, the Company announced that it had entered
into an agreement to sell its remaining 49% equity interest in IFE to
Sextant. Total consideration for 100% of its equity interest in IFE,
and for the provision of marketing, product and technical consulting
services will range from a minimum of $83,300 up to $123,300
(inclusive of the $62,000 received in February 1999 for the sale of a
51% interest in IFE - see Note 2). Terms of the agreement provide for
the Company to receive payments of approximately $15,800 on the first
and second anniversary of the closing of this transaction. The
agreement, which is subject to Hart-Scott-Rodino Act approval, is
expected to close in October 1999. The third and final payment will be
based on the actual sales and booking performances over the period
from March 1, 1999 to December 31, 2001. The Company intends to use
the proceeds from this transaction to reduce indebtedness.
[Remainder of page intentionally left blank]
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except per share data)
The following discussion and analysis addresses the results of the
Company's operations for the three months ended August 28, 1999, as
compared to the Company's results of operations for the three months
ended August 29, 1998. The discussion and analysis then addresses the
results of the Company's operations for the six months ended August 28,
1999, as compared to the Company's results of operations for the six
months ended August 29, 1998. The discussion and analysis then addresses
the liquidity and financial condition of the Company and other matters.
For comparability purposes, the Company has provided additional pro
forma information giving effect to each of the acquisitions (the "1999
Acquisitions") and disposition (the "IFE Sale") the Company completed
during fiscal 1999, exclusive of any acquisition-related expenses, as if
they all occurred at the beginning of the year.
THREE MONTHS ENDED AUGUST 28, 1999, AS COMPARED TO THE RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 29, 1998
Net sales for the three-month period ended August 28, 1999 of
$191,895 were $35,543 and 22.7% greater than sales of $156,352 for the
comparable period in the prior year. The increase in sales is primarily
due to an increase in sales of seating products and the impact of 1999
Acquisitions, offset by the impact of the sale of the Company's IFE
business. On a pro forma basis, sales increased by $30,045, or 18.6%.
Gross profit was $70,337 or 36.7% of sales for the three months
ended August 28, 1999. This was $10,737, or 18.0%, greater than the
comparable period in the prior year of $59,600, which represented 38.1%
of sales. The increase in gross profit in the current period is primarily
due to the impact of the 1999 Acquisitions offset by the IFE Sale and
lower gross margins realized on the Company's seating products. The lower
gross margin is due to the Company's seating business, which is currently
experiencing operational inefficiencies associated with the number of new
products introduced and the implementation of the Company's new
integrated information technology system. Future margin expansion will
largely depend on the success of the seating business in three areas:
achieving planned efficiencies for recently-introduced products, becoming
more proficient with the new management information system and
rationalizing facilities and personnel. While management expects its
seating operations to improve over the next six months, there can be no
assurance that the improvements will occur or that the negative impact of
operational inefficiencies will not be material.
<PAGE>
Selling, general and administrative expenses were $21,295 or 11.1%
of sales for the three months ended August 28, 1999. This was $2,253, or
11.8% greater than the comparable period in the prior year of $19,042 or
12.2% of sales. Selling, general and administrative expenses for the
three months ended August 28, 1999 was $518, or 2.5% greater than pro
forma selling, general and administrative expenses for the comparable
period in the prior year.
Research, development and engineering expenses were $12,280 or
6.4% of sales for the three months ended August 28, 1999, a decrease of
$490 over the comparable period in the prior year of $12,770 or 8.2% of
sales.
The Company generated operating earnings of $30,906, or 16.1% of
sales as compared to operating loss of $(24,495) or (15.7%) during the
comparable period in the prior year. Operating earnings in the prior
year, exclusive of acquisition-related expenses were $22,407. The
increase in operating earnings in the current period is the result of the
increase in gross profit along with lower operating expenses as a
percentage of sales. Operating earnings for the current quarter of
$30,906, or 16.1% of sales, were $6,961 or 29.1% greater than pro forma
operating earnings of $23,945 or 14.8% of sales, for the comparable
period in the prior year.
Interest expense, net was $13,195 for the three months ended
August 28, 1999, or $4,531 greater than interest expense of $8,664 for
the comparable period in the prior year. The increase in interest expense
is due to the increase in the Company's long-term debt used, in part, to
finance the 1999 Acquisitions.
Earnings before income taxes in the current quarter were $17,149,
as compared to earnings before acquisition-related expenses and income
taxes of $13,743 in the prior year's comparable period. Income tax
expense for the quarter ended August 28, 1999 was $3,429, as compared to
$2,336 in the prior year's comparable period. The Company recorded net
earnings and earnings per share of $13,720 and $.55 (diluted),
respectively, as compared to a net loss and diluted net loss per share in
the prior year of $(35,495) and $(1.44), respectively. On a pro forma
basis, net earnings and net earnings per share increased by $2,175 and
$.11 (diluted), respectively, over the comparable amounts in the prior
year.
SIX MONTHS ENDED AUGUST 28, 1999, AS COMPARED TO THE RESULTS OF
OPERATIONS FOR THE SIX MONTHS ENDED AUGUST 29, 1998
Net sales for the fiscal 2000 six-month period were $376,927, an
increase of $80,584 or 27.2% over the comparable period in the prior
year. The increase in sales is primarily attributable to an increase in
the sale of seating products and the 1999 Acquisitions, offset by the IFE
Sale. On a pro forma basis, sales increased by $52,717 or 16.3%, which
was principally due to an increase in the sale of seating products.
<PAGE>
Gross profit was $136,924 (36.3% of sales) for the six months
ended August 28, 1999. This was $25,444 or 22.8%, greater than the
comparable period in the prior year of $111,480, which represented 37.6%
of sales. Gross profit increased due to the impact of the 1999
acquisitions, offset by the IFE sale and lower gross margins realized by
the Company's seating products. The primary reasons for the decline in
gross margins are lower margins realized on its seating products, offset
somewhat by higher margins on its other lines of business. The Company's
seating business is currently experiencing operational inefficiencies
associated with the number of new products introduced and the
implementation of the Company's new integrated information technology
system resulting in lower gross margins. Future margin expansion will
largely depend on the success of the seating business in three areas:
achieving planned efficiencies for recently-introduced products, becoming
more proficient with the new management information system and
rationalizing facilities and personnel. While management expects its
seating operations to improve over the next six months, there can be no
assurance that the improvements will occur or that the negative impact of
operational inefficiencies will not be material.
Selling, general and administrative expenses were $43,323 (11.5% of
sales) for the six months ended August 28, 1999. This was $6,282 or
17.0%, greater than the comparable period in the prior year of $37,041
(12.5% of sales). The increase in selling, general and administrative
expenses was primarily due to inclusion of the relevant expenses of the
acquired companies along with increases associated with internal growth.
Selling, general and administrative expenses for the six months ended
August 28, 1999 was $623 or 1.5% greater than pro forma selling, general
and administrative expenses for the comparable period in the prior year.
Research, development and engineering expenses were $23,525 (6.2%
of sales) for the six months ended August 28, 1999, a decrease of $1,217
over the comparable period in the prior year. The decrease in research,
development and engineering expense in the current period is primarily
attributable to a lower level of on-going new product development
activities.
Amortization expense for the six months ended August 28, 1999 of
$11,552 was $2,138 greater than the amount recorded in the comparable
period in the prior year.
Based on management's assumptions, a portion of the 1999
Acquisitions' purchase price was allocated to purchased research and
development that had not reached technological feasibility and had no
future alternative use. During the first six months of fiscal 1999, the
Company recorded a charge of $79,155 for the write-off of the acquired
in-process research and development and acquisition-related expenses.
<PAGE>
The Company generated operating earnings of $58,524 (15.5% of
sales) for the six months ended August 28, 1999, as compared to an
operating loss of $(38,872) in the comparable period of the prior year.
Operating earnings for the current six month period were $18,241 or 45.3%
greater than operating earnings before acquisition-related expenses for
the comparable period in the prior year. Operating earnings for the
current six month period were $12,419 or 26.9% greater than pro forma
operating earnings in the prior year.
Interest expense, net was $25,817 for the six months ended August
28, 1999, or $9,371 greater than interest expense of $16,446 for the
comparable period in the prior year and is due to the increase in the
Company's long-term debt.
Net earnings for the six months ended August 28, 1999 were $25,135
or $1.01 per share (diluted), as compared to a net loss of $(59,370) or
$(2.49) per share (diluted), for the comparable period in the prior year.
Net earnings for the current year were $5,130 or 25.6% greater than
pro forma net earnings for the comparable period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements consist of working capital
needs, on-going capital expenditures and scheduled payments of interest
and principal on its indebtedness. B/E's primary requirements for working
capital have been directly related to increased accounts receivable and
inventory levels as a result of both acquisitions and revenue growth.
B/E's working capital was $157,314 as of August 28, 1999, as compared to
$143,423 as of February 27,1999.
At August 28, 1999, the Company's cash and cash equivalents were
$29,828, as compared to $39,500 at February 27, 1999. Cash provided
from operating activities was $24,491 for the six months ended August
28, 1999. The primary source of cash during the six months ended
August 28, 1999 was the net earnings of $25,135, offset by non-cash
charges for depreciation and amortization of $20,402, a decrease in
accounts receivable of $3,293 and increase in accounts payable of
$13,569, offset by a use of cash of $26,636 related to increases in
inventories and other current assets and $12,489 related to decreases
in accrued liabilities.
The Company's capital expenditures were $22,919 and $20,210 during
the six months ended August 28, 1999 and August 29, 1998, respectively.
The increase in capital expenditures was primarily attributable to (1)
acquisitions completed during fiscal 1999, (2) the purchase of previously
leased facilities, (3) the development of a new management information
system to replace the Company's existing systems, many of which were
inherited in acquisitions and (4) expenditures for plant modernization.
The Company anticipates on-going annual capital expenditures of
approximately $33,000 for the next several years to be in line with the
expanded growth in business and the recent acquisitions.
<PAGE>
The Company has credit facilities with The Chase Manhattan Bank (the
"Bank Credit Facility"). The Bank Credit Facility consists of a $100,000
revolving credit facility (of which $50,000 may be utilized for
acquisitions) and an acquisition facility of $35,100. The revolving credit
facility expires in April 2004 and the acquisition facility is
amortizable over five years beginning in August 1999. The Bank Credit
Facility is collateralized by the Company's accounts receivable,
inventories and by substantially all of its other personal property. At
August 28, 1999, indebtedness under the existing Bank Credit Facility
consisted of letters of credit aggregating approximately $3,053 and
outstanding borrowings under the acquisition facility aggregating $35,100
(bearing interest at LIBOR plus 1.0%, or approximately 7.5% as of August
28, 1999). The Bank Credit Facility contains customary affirmative
covenants, negative covenants and conditions of borrowing, all of which
were met by the Company as of August 28, 1999.
The Company believes that the cash flow from operations and
availability under the Company's Bank Credit Facility will provide
adequate funds for its working capital needs, planned capital
expenditures and debt service requirements through the term of the Bank
Credit Facility. The Company believes that it will be able to refinance
the Bank Credit Facility prior to its termination, although there can be
no assurance that it will be able to do so. The Company's ability to fund
its operations, make planned capital expenditures, make scheduled
payments and refinance its indebtedness depends on its future operating
performance and cash flow, which, in turn, are subject to prevailing
economic conditions and to financial, business and other factors, some of
which are beyond its control.
Deferred Tax Assets
The Company has established a valuation allowance related to the
utilization of its deferred tax assets because of uncertainties that
preclude it from determining that it is more likely than not that it will
be able to generate taxable income to realize such assets during the
operating loss carryforward period, which begins to expire in 2011. Such
uncertainties include recent cumulative losses by the Company, the highly
cyclical nature of the industry in which it operates, economic conditions
in Asia which is impacting the airframe manufacturers and the airlines,
the Company's high degree of financial leverage, risks associated with
the implementation of its integrated management information system and
risks associated with the integration of acquisitions. The Company
monitors these uncertainties, as well as other positive and negative
factors that may arise in the future, as it assesses the necessity for a
valuation allowance for its deferred tax assets.
Year 2000 Costs
The "Year 2000" ("Y2K") issue is the result of computer programs
using two digits rather than four to define the applicable year. Because
of this programming convention, software, hardware or firmware may
recognize a date using "00" as the year 1900 rather than the year 2000.
Use of non-Y2K compliant programs could result in system failures,
miscalculations or errors causing disruptions of operations or other
business problems, including, among others, a temporary inability to
process transactions and invoices or engage in similar normal business
activities.
<PAGE>
B/E Technology Initiatives Program. The Company has experienced
substantial growth as a result of having completed 15 acquisitions since
1989. Essentially all of the acquired businesses were operating on
separate information systems, using different hardware and software
platforms. In fiscal 1997, the Company analyzed its systems, both
pre-existing and acquired, for Y2K compliance with a view to replacing
non-compliant systems and creating an integrated Y2K compliant system. In
addition, the Company has developed a comprehensive program to address
the Y2K issue with respect to the following non-system areas: (1) network
switching, (2) the Company's non-information technology systems (such as
buildings, plant, equipment and other infrastructure systems that may
contain embedded microcontroller technology) and (3) the status of major
vendors, third-party network service providers and other material service
providers (insofar as they relate to the Company's business). As
explained below, the Company's efforts to assess its systems as well as
non-system areas related to Y2K compliance involve: (1) a wide-ranging
assessment of the Y2K problems that may affect the Company, (2) the
development of remedies to address the problems discovered in the
assessment phase and (3) testing of the remedies.
Assessment Phase. The Company has identified substantially all of its
major hardware and software platforms in use as well as the relevant
non-system areas described above. The Company has determined its systems
requirements on a company-wide basis and has begun the implementation of
an enterprise resource planning ("ERP") system, which is intended to be a
single system database onto which all the Company's individual systems
will be migrated. In relation thereto, the Company has signed contracts
with substantially all of its significant hardware, software and other
equipment vendors and third-party network service providers related to
Y2K compliance.
Remediation and Testing Phase. In implementing the ERP system, the
Company undertook and has completed a remediation and testing phase of
all internal systems, LANs, WANs and PBXs. This phase was intended to
address potential Y2K problems of the ERP system in relation to both
information technology and non-information technology systems and then to
demonstrate that the ERP software was Y2K compliant. ERP system software
was selected and applications implemented by a team of internal users,
outside system integrator specialists and ERP application experts. The
ERP system was tested between June 1997 and March 1998 by this team of
experts. To date, ten locations have been fully implemented on the ERP
system. This company-wide solution is being deployed to all other B/E
sites in a manner that is designed to meet full implementation for all
non-Y2K compliant sites by the year 2000.
Program to Assess and Monitor Progress of Third Parties. As noted above,
B/E has also undertaken an action plan to assess and monitor the progress
of third-party vendors in resolving Y2K issues. To date, the Company has
(1) obtained guidance from outside counsel to ensure legal compliance,
(2) generated correspondence to each of its third-party vendors to assess
the Y2K readiness of these vendors and (3) contracted a `Vendor Y2K'
fully automated tracking program to track all correspondence to/from
vendors, to track timely responses via an automatic computer generated
`trigger' to provide an electronic folder for easy reference and
retention and to specifically track internally identified `critical'
vendors. The Company is also currently in the midst of developing an
<PAGE>
internal consolidated database of the Company's vendors. To date, more
than 50% of the Company's vendors have responded. The Company is directly
contacting those vendors who have not responded and will evaluate the
feasibility of establishing second source parts to other vendors, where
possible. The Company intends to obtain compliance or second source
non-compliant vendors before January 1, 2000.
Contingency Plans. The Company is analyzing contingency plans to handle
the worst-case Y2K scenarios that the Company believes reasonably could
occur and, if necessary, intends to develop a timetable for completing
such contingency plans.
Costs Related to the Y2K Issue. The Company has incurred approximately
$38,000 in costs related to the implementation of the ERP system and for
routine replacement of hardware and software. The Company currently
estimates the total ERP implementation, including routine replacement of
hardware and software, will cost approximately $52,000 and a portion of
the costs have and will be capitalized to the extent permitted under
generally accepted accounting principles.
Risks Related to the Y2K Issue. Although the Company's efforts to be Y2K
compliant are intended to minimize the adverse effects of the Y2K issue
on the Company's business and operations, the actual effects of the issue
will not be known until the year 2000. Difficulties in implementing the
ERP system or failure by the Company to fully implement the ERP system or
the failure of its major vendors, third-party network service providers,
and other material service providers and customers to adequately address
their respective Y2K issues in a timely manner would have a material
adverse effect on the Company's business, results of operations, and
financial condition. The Company's capital requirements may differ
materially from the foregoing estimate as a result of regulatory,
technological and competitive developments (including market developments
and new opportunities) in the Company's industry.
Fiscal 1999 Acquisitions
During fiscal 1999, the Company completed four major acquisitions and two
smaller transactions. In April 1998, the Company acquired Puritan-
Bennett Aero Systems Co., a manufacturer of commercial aircraft oxygen
systems, "WEMAC" air valve components, overhead lights and switches, crew
masks and protective breathing devices for both general aviation and
commercial aircraft. Also during April 1998, the Company acquired
Aircraft Modular Products, a manufacturer of business jet seating,
cabinetry and structures. In August 1998, the Company acquired SMR
Aerospace, Inc. and its affiliates, which is a leading supplier of
design, integration, installation and certification services for the
reconfiguration of aircraft, allowing an airline to modify or upgrade the
seating arrangements, install telecommunications, move galley structures
or modify overhead containers or sidewalls, etc. SMR also manufactures
<PAGE>
and installs crew rest compartments, and performs the engineering
required to make structural modifications and supplies the kits necessary
for the conversion of passenger to freighter aircraft. In September 1998,
the Company acquired CF Taylor, a leading manufacturer of galley
equipment for both narrow and wide-body aircraft, including galley
structures, crew rests.
Fiscal 1999 Disposition
In February 1999, the Company sold a 51% interest in its In-Flight
Entertainment subsidiary (the "IFE Sale") to a wholly-owned subsidiary of
Sextant Avionique SA for an initial sale price of $62,000 (subject to
adjustment based on the actual results of operations during the two years
following the IFE Sale). See Note 7 to the unaudited interim condensed
consolidated financial statements for the period ended August 28, 1999.
Fiscal 1999 Restructuring Plan
During the fourth quarter of fiscal 1999, the Company began to
implement a restructuring plan designed to lower its costs structure and
improve its long-term competitive position. This plan includes
eliminating seven of its principal facilities, reducing the total number
from 21 to 14, reducing its employment base by approximately eight
percent and rationalizing its product offerings. The Company identified
seven facilities, four domestic and three in Europe, for consolidation.
The consolidation activities commenced during the first quarter of fiscal
2000 and will be substantially complete by the end of the fiscal year.
When fully implemented, management expects that this program will
generate pretax savings of approximately $15,000 - $20,000 annually.
The worldwide reduction in facilities, personnel and product
offerings is expected to aid the Company in several ways. It will
strengthen the global business management focus on the core product
categories, achieve a more effective leveraging of resources and improve
the Company's ability to rapidly react to changing business conditions.
The rationalization of product offerings, which was brought about as a
result of the 1999 Acquisitions and the large number of new product
introductions during the past year, will provide an on-going benefit of
a generally lower cost structure.
The assets impacted by this program include factories, warehouses,
assembly operations, administration facilities, machinery and equipment
and inventories. Management anticipates that the Company will continue to
incur pressure on its gross margins during the upcoming year as it
achieves learning-curve efficiencies associated with the introduction of
new products in volume for the first time and as it implements its
integrated management information system throughout the Company, and such
costs could be material.
Dependence upon Conditions in the Airline Industry
The Company's principal customers are the world's commercial
airlines. As a result, the Company's business is directly dependent upon
the conditions in the highly cyclical and competitive commercial airline
<PAGE>
industry. In the late 1980s and early 1990s, the world airline industry
suffered a severe downturn, which resulted in record losses and several
air carriers seeking protection under bankruptcy laws. As a consequence,
during such period, airlines sought to conserve cash by reducing or
deferring scheduled cabin interior refurbishment and upgrade programs and
by delaying purchases of new aircraft. This led to a significant
contraction in the commercial aircraft cabin interior products industry
and a decline in our business and profitability. Since early 1994, the
airlines have experienced a turnaround in operating results, leading the
domestic airline industry to record operating earnings during calendar
years 1995 through 1998. This financial turnaround has, in part, been
driven by record load factors, rising fare prices and declining fuel
costs. The airlines have substantially improved their balance sheets
through cash generated from operations and the sale of debt and equity
securities. As a result, the levels of airline spending on refurbishment
and new aircraft purchases have expanded. However, due to the volatility
of the airline industry and the current general economic and financial
turbulence, the current profitability of the airline industry may not
continue and the airlines may not be able to maintain or increase
expenditures on cabin interior products for either existing fleet or new
aircraft.
In addition, the airline industry is undergoing a process of
consolidation and significantly increased competition. Such consolidation
could result in a reduction of future aircraft orders as overlapping
routes are eliminated and airlines seek greater economies through higher
aircraft utilization. Increased airline competition may also result in
airlines seeking to reduce costs by promoting greater price competition
from airline cabin interior products manufacturers, thereby adversely
affecting our revenues and margins.
Recently, turbulence in the financial and currency markets of many
Asian countries has led to uncertainty with respect to the economic
outlook for these countries. Although not all carriers have been affected
by the current economic events in the Pacific Rim, certain carriers,
including non-Asian carriers that have substantial Asian routes, could
cancel or defer their existing orders. In addition, Boeing has announced
that in light of the continued severe economic conditions in Asia, it
will be substantially scaling back production of a number of aircraft
types, including particularly wide-body aircraft which require up to five
times the dollar content for B/E's products as compared to narrow-body
aircraft.
This report includes forward-looking statements which involve
risks and uncertainties. The Company's actual experience may differ
materially from that anticipated in such statements. Factors that might
cause such a difference include, but are not limited to, those discussed
in the Company's most recent proxy statement and "Risk Factors" contained
in Exhibit 99 of the Company's Annual Report on Form 10-K for the fiscal
year ended February 27, 1999, as well as future events that may have the
effect of reducing the Company's available operating income and cash
balances, such as unexpected operating losses, delays in the integration
of the Company's acquired businesses, conditions in the airline industry,
customer delivery requirements, new or expected refurbishments, capital
<PAGE>
expenditures, cash expenditures related to possible future acquisitions,
the completion of the recently-announced sale of the Company's in-flight
entertainment business, delays in the implementation of the Company's
integrated management information system, labor disputes involving the
Company, its significant customers or airframe manufacturers, delays or
inefficiencies in the introduction of new products or fluctuations in
currency exchange rates.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
During the six months ended August 28, 1999, there were no
material changes to the disclosure about market risk included in the
Company's Annual Report on Form 10-K for the fiscal year ended February
27, 1999.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Not applicable.
Item 2. Changes in Securities Not applicable.
Item 3. Defaults Upon Senior Securities Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
1. Annual meeting took place on August 4, 1999
2. Directors elected (Class II) - Robert J. Khoury and Hansjorg Wyss
3. Directors whose term of office continued after meeting (Class I
and III) - Amin J. Khoury, Paul E. Fulchino, Jim C. Cowart,
Richard G. Hamermesh and Brian H. Rowe
4. Amended and Restated 1989 Stock Option Plan Amendment
5. MacBride Principles
1. Election of two Class II Directors
For Withheld
Robert J. Khoury 21,376,371 1,249,409
Hansjorg Wyss 21,377,572 1,248,208
2. Proposal to amend the Amended and Restated 1989 Stock Option Plan
For Against Abstain Unvoted
18,708,011 3,538,782 85,987 293,000
3. Proposal to adopt the MacBride Principles
For Against Abstain Unvoted
2,296,249 12,793,231 805,525 6,730775
Item 5. Other Information None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
1. Exhibit 10.48 Amendment to the Amended and Restated 1989 Stock
Option Plan
2. Exhibit 27 Financial Data Schedule for the six months ended
August 28, 1999
b. Reports on Form 8-K None.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BE AEROSPACE, INC.
Date: September 27, 1999 By: /s/ Robert J. Khoury
--------------------------------
Vice Chairman and
Chief Executive Officer
Date: September 27, 1999 By: /s/ Thomas P. McCaffrey
-----------------------------
Corporate Senior Vice President of
Administration and Chief
Financial Officer
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AMENDMENT TO THE
BE AEROSPACE, INC.
AMENDED AND RESTATED 1989 STOCK OPTION PLAN
WHEREAS, BE Aerospace, Inc., a Delaware corporation (the "Company"), has
established the Amended and Restated 1989 Stock Option Plan (the "Plan"),
which provides that, the Board of Directors of the Company (the "Board") may
extend the term of the Plan at any time upon approval of the stockholders;
WHEREAS, the Board has resolved to revise the Plan in the manner set
forth below; and
WHEREAS, at the Company's annual meeting of stockholders held on August
4, 1999, the Company's stockholders have approved the amendment to the Plan;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Paragraph 2 of Section 3 of the Plan is amended and restated in its
entirety as follows:
"No option shall be granted under the Plan after July 18, 2004;
however, options previously granted may extend beyond that date."
2. Except as set forth herein, the Plan is hereby ratified and confirmed
in all respects.
IN WITNESS WHEREOF, this Amendment has been executed as of this 4th day
of August, 1999.
BE AEROSPACE, INC.
By: ____________________________
Name:
Title:
