ITEM 1. BUSINESS
Our 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 the leading aftermarket distributor of aerospace fasteners. We sell our 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:
• 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 ovens, including microwave, high heat convection and steam ovens;
• both chemical and gaseous aircraft oxygen storage, distribution and delivery systems, protective breathing equipment and lighting products;
• business jet and general aviation interior products, including an extensive line of executive aircraft seats, direct and indirect overhead lighting systems, passenger and crew
oxygen systems, air valve systems, high-end furniture and cabinetry; and
• a broad line of aerospace fasteners, consisting of over 200,000 Stock Keeping Units (SKUs) serving the commercial aircraft, business jet and military and defense industries.
We also provide comprehensive aircraft cabin interior reconfiguration and passenger-to-freighter conversion engineering services and component kits.
We were 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. Between 1989 and 2001, we completed 22 acquisitions, for an aggregate purchase price of approximately $1 billion. We believe these acquisitions enabled us to position ourselves as a preferred global supplier to our customers. In addition, we have undertaken three major facility and product line consolidation efforts, eliminating 22 facilities, since 1992. We 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 our operating margins. During the 2002 - 2005 period, we made no significant acquisitions, focusing instead on consolidating and improving the operations efficiency of our businesses. During 2006, we completed two strategic acquisitions: Draeger GmbH (“Draeger”) which strengthened our Interior Systems segment and New York Fasteners Corp. (“New York Fasteners”) which expanded the customer base and product line breadth of our Distribution segment.
Our principal executive offices and corporate headquarters are located at 1400 Corporate Center Way, Wellington, Florida 33414 and our telephone number is 561-791-5000.
Industry Overview
The commercial and business jet aircraft cabin interior products industries encompass a broad range of products and services, including aircraft seating, passenger entertainment and service systems, food and beverage preparation and storage systems, passenger and crew oxygen storage, distribution and 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:
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New installation programs in which airlines purchase new equipment directly from interior equipment manufacturers to outfit these newly purchased aircraft;
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Retrofit programs in which airlines purchase new interior furnishings to upgrade the interiors of aircraft already in service;
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Refurbishment programs in which airlines purchase components and services to improve the appearance and functionality of their cabin interior equipment;
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Equipment to upgrade the functionality or appearance of the aircraft interior; and
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Replacement spare parts.
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 is periodically upgraded or repaired, and requires a continual flow of spare parts, but may be retrofitted only once or twice during the useful life of an aircraft.
There is a direct relationship between demand for fastener products and fleet size, aircraft utilization and aircraft age. All aircraft must be serviced at prescribed intervals which also drives aftermarket demand for aerospace fasteners.
Aerospace fastener revenues have been derived from the following sources:
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Demand for aerospace fasteners for new build aircraft from the original equipment manufacturers (OEMs) and their suppliers;
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Demand for structural modifications, cabin interior modifications and passenger-to-freighter conversions;
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Mandated maintenance and replacement of specified parts; and
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Aerospace and defense subcontractors, most of whom tend to purchase through distributors as a result of the channel shift due to outsourcing by aerospace and military aircraft OEMs.
Based on industry sources and studies, we estimate that during 2007, the commercial and business jet cabin interior products industry, for the principal products of the type which we manufacture, exclusive of service revenues, had annual sales of approximately $1.8 billion and the aerospace-grade fastener industry had annual sales of approximately $4.5 billion.
Airline passenger traffic rebounded in 2004 and demonstrated strong continued growth through 2007. Global air traffic growth in 2007 increased by approximately 7.4% over 2006, following a 5.9% increase in 2006 over 2005. The airline industry responded to the strong year-over-year increases in passenger traffic with additions to global capacity. Global capacity increased by approximately 6.2% during 2007 as compared to the prior year.
During 2007, the global airline industry, including the U.S. airline industry, generated significant profitability. According to the International Air Transport Association (IATA), the worldwide airline industry is expected to generate approximately $5 billion in profits during 2008.
The business jet industry also experienced a resurgence in demand beginning in 2004. Approximately 1,039 aircraft were delivered in 2007 (versus approximately 840 aircraft in 2006) and industry experts expect deliveries of approximately 1,121 aircraft in 2008, which represents an increase of 59% over the approximately 706 aircraft delivered in 2005, an increase of 33% over 2006. Industry sources estimate that over 3,500 business jets will be built during the 2008 through 2010 period.
Since the second half of 2003, we have experienced a surge in demand for our products, primarily from the large foreign international carriers. Our backlog achieved record levels in both 2006 and 2007 growing 60% to $1.7 billion in 2006 and by nearly 30% to approximately $2.2 billion in 2007. Our book to bill ratio was 1.2:1 during 2007. Our $2.2 billion backlog at December 31, 2007 increased by 30% compared to our December 31, 2006 backlog, despite a nearly 50% year-over-year increase in revenues. The vast majority of our backlog growth during 2007 was generated by foreign carriers; 15% of our backlog at December 31, 2007 was with domestic airlines. While some retrofit programs for major U.S. carriers have begun, through December 31, 2007, the domestic airlines have generally continued to conserve cash, in part by deferring aircraft expenditures. However, we believe that essentially all of the major U.S. carriers have begun to upgrade their international fleets to compete on international routes. We believe there are substantial growth opportunities for retrofit programs, particularly for the twin-aisle aircraft that service international routes.
Other factors expected to affect the cabin interior products industry are the following:
Existing Installed Base. Existing installed base of products typically generates continued retrofit, refurbishment and spare parts revenue as airlines maintain their aircraft interiors. According to industry sources, the world's active commercial passenger aircraft fleet consisted of approximately 17,160 aircraft as of December 31, 2007. Additionally, based on industry sources, there are approximately 15,000 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, for the principal products of the type which we manufacture, valued at replacement prices, was approximately $13.6 billion as of December 31, 2007.
Growth in Worldwide Fleet. The expansion of the worldwide fleet is expected to generate significant 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. According to the Airline Monitor, worldwide air traffic is projected to grow at a compounded average rate of 5.0% per year during the 2007-2022 period, increasing annual revenue passenger miles from approximately 2.8 trillion in 2007 to approximately 5.8 trillion by 2022.
New Aircraft Deliveries. The number of new aircraft delivered each year is generally regarded as cyclical in nature. According to the Airline Monitor, new deliveries of large commercial jets increased to 888 in 2007 (versus 820 in 2006) and the approximate amount of new deliveries is expected to increase to 1,005 in 2008, 1,130 in 2009, and 1,220 in 2010.
Wide-Body Aircraft Deliveries. The trend toward a global fleet with a higher percentage of wide-body aircraft is significant to us because wide-body aircraft require up to five to eight times the dollar value content for our products as compared to narrow-body aircraft. According to Airline Monitor wide-body aircraft deliveries are expected to grow at a nearly 20% compounded annual growth rate over the four year period ending 2011. 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 approximately 22% of all new commercial aircraft (excluding regional jets) delivered in 2007. Importantly, according to Airline Monitor, over the 2008 to 2011 time period, approximately 1,217 wide-body and super wide-body aircraft are expected to be delivered by Boeing and Airbus. 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 luxurious super first class compartments, first class and business class configurations, our average revenue per aircraft on a wide-body aircraft is substantially higher than on a narrow-body aircraft. Aircraft cabin crews on wide-body aircraft flights today 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 200 glasses of wine on a single flight thereby generating substantial demand for seating products and food and beverage preparation and storage equipment, as well as extensive oxygen storage, delivery distribution systems, and lighting systems.
Military and Defense as a New Platform. New product development activities and our acquisitions of Draeger and New York Fasteners have substantially increased our presence in the military and defense market. Key military end products include a full line of oxygen systems, food and beverage preparation and storage equipment and a growing number of fasteners for a broad range of military aircraft.
Growth in Passenger-to-Freighter Conversion Business. Industry sources project that the size of the worldwide freighter fleet will almost double over the next twenty years, with almost 3,400 aircraft being added. Industry sources also estimate that nearly 2,500 of these aircraft are expected to come from converting commercial passenger jets to use as freighters. The company has developed the engineering certification packages and kits to convert B747-200, B767-200 and A300-B4 aircraft types to use as freighters and is currently working on the Airbus A300-600.
New Product Development. The aircraft cabin interior products companies are engaged in extensive product 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 luxurious first class cabins with appointments such as lie-flat seating, mini-bars, closets, flat screen TVs and mood lighting. Other recently introduced products include electric lie-flat first and business class seats, narrow and wide-body economy class seats, full face crew masks, Pulse Oxygen™ gaseous passenger oxygen systems for the Boeing 787 and Airbus A350 XWB, electric fully berthing business jet seating, 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.
Outsourced services include:
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Engineering design, integration, project management, installation and certification services;
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Modifications and reconfigurations for commercial aircraft including passenger-to-freighter conversions and related kits; and
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Services related to the support of product upgrades.
We estimate that during 2007 the commercial and business jet cabin interior products industry, for the principal products of the type which we manufacture, exclusive of service revenues, had annual sales of approximately $1.8 billion and the aerospace-grade fastener industry had annual sales of approximately $4.5 billion. We estimate that the total worldwide installed base of commercial and general aviation aircraft cabin interior products for the principal type of products which we manufacture, valued at replacement prices, was approximately $13.6 billion as of December 31, 2007.
Commercial Aircraft Industry
The commercial airline industry saw an upturn in air travel beginning in 2003. According to IATA, during 2007, the global airline industry expanded airline capacity by approximately 6.2% in response to an approximate 7.4% increase in global air traffic. We believe increases in passenger traffic, and associated increases in airline capacity, initially benefit providers of aftermarket products and services. However, as the new aircraft delivery cycle begins to gain momentum, increases in original equipment manufacturer production rates are also expected. According to the Airline Monitor, the approximate number of deliveries of new large commercial aircraft are expected to grow to 1,005 in 2008 from 888 in 2007, and then 1,130 in 2009, 1,220 in 2010, and 1,190 in 2011. In addition, according to the Airline Monitor, approximately 1,217 twin-aisle aircraft will be delivered during the 2008-2011 period. According to the Airline Monitor, by 2016 approximately 37.6% of new annual deliveries will be twin-aisle aircraft, an increase from 22.2% of new deliveries in 2007. An increase in twin-aisle aircraft is important to us as we believe twin-aisle aircraft require up to five to eight times the dollar value of products of the type that we manufacture as compared to a single-aisle, or narrow-body, aircraft and generate substantially more demand for spare parts and upgrade products and services.
Business Jet Industry
The business jet industry experienced a severe downturn following the events of September 11, 2001, reaching a trough in 2003. Since 2004, annual delivery rates of new business jet deliveries have increased each year. In 2007 approximately 1,039 aircraft were delivered, which represented an increase of 24% as compared to 2006 and an increase of 47% as compared to 2005. Recent industry forecasts project significant near-term growth, with total deliveries of approximately 1,121 aircraft in 2008, an increase of 59% over the 706 aircraft delivered in 2005. Industry sources estimate that over 3,500 business jets will be built during the 2008 through 2010 period.
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 valued at approximately $6.7 billion (for the principal type of products which we manufacture, valued at replacement prices) as of December 31, 2007. Based on our experience in the industry, we believe our installed base is substantially larger than that of our competitors. We believe that our large installed base is a strategic advantage as airlines tend to purchase aftermarket products and services, including spare parts, retrofits and refurbishment programs, from the original supplier of their equipment. As a result, we expect our large installed base to generate continued aftermarket revenue as airlines continue to maintain, evolve and reconfigure their aircraft cabin interiors.
Operating Leverage and Low Cost Producer. Our ability to leverage our manufacturing and engineering capabilities has allowed us to expand operating margins. As a result of our cost savings programs implemented following the downturn in the airline industry in 2001, and through our ongoing continuous improvement and lean manufacturing programs, our operating margins have increased substantially. For example, our margin for the fiscal year ended December 31, 2007 of 14.7% improved by 590 basis points over the fiscal year ended 2004, reflecting ongoing manufacturing efficiencies and operating leverage at the higher volume of sales. In addition, our operating earnings have been increasing at a faster rate than our net sales. For example, for the year ended December 31, 2007, operating earnings grew 66.6% over operating earnings for the year ended December 31, 2006, as compared to net sales growth of 48.7% during 2007. Our operating margin which was 14.7% for the fiscal year 2007 has expanded in the range of 160 - 230 basis points per year over the past three years.
Focus on Innovation and New Product Development. We believe, based on our experience in the industry, that we are a technological leader, with the largest research and development organization in the cabin interior products industry. As of December 31, 2007, we had 1,000 employees in engineering, research and development and program management. We believe our engineering, 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 thereby gain early entrant advantages. Our strong focus and continued investment in research and development, even during the 2001-2003 industry downturn, allows us to compete favorably in winning new business awards. For example, we believe our technological leadership and new product development capabilities were a key factor in our ability to grow our backlog to approximately $2.2 billion at December 31, 2007, a nearly 30% increase as compared to December 31, 2006 and a 100% increase as compared to December 31, 2005. Backlog growth has been driven primarily by international aftermarket demand for retrofit of existing aircraft, including program awards in the emerging international super first class cabin interiors market. We expect to see an increase in orders for new interior equipment for new aircraft beginning in 2008. To date, airlines have not yet begun to place large amounts of orders for cabin interiors. We believe these and other program awards, coupled with expected follow-on awards for other fleets of existing aircraft for product commonality and competitive purposes, will continue to drive sales growth and market share gains over the 2008-2010 period. Introduction of new products has also led to improvements in the product mix of our current backlog, which, along with our continued focus on lean manufacturing processes and additional operating leverage, is expected to result in continued margin expansion.
Exposure to International Markets. Our overall net sales are diversified across multiple geographic regions. For 2007, approximately 28% of our sales were to European customers and approximately 24% of our sales were to customers in emerging markets such as the Asia/Pacific Rim and Middle East regions. These emerging market customers account for approximately 39% of our current backlog with domestic airlines accounting for 15% of our total backlog at December 31, 2007. We believe this geographic diversification makes us less susceptible to a downturn in a specific geographic region and allows us to take advantage of regional growth trends.
Diverse Product Offering and Broad Customer Base. In addition to serving diverse geographic regions, we also provide a comprehensive line of products and services to a broad customer base. For the fiscal years ended December 31, 2007, 2006 and 2005 no single customer accounted for more than 10% of our consolidated sales. We have a broad range of over 200 principal customers, including all of the world’s major airlines. During the fiscal year ended December 31, 2007, approximately 6% of sales were to Boeing and Airbus and approximately 6% were to business jet manufacturers for use in new business jets. Our broad product offering and customer base make us less susceptible to the loss of any one customer or program. We have continued to expand our available products and services based on our belief that the airline industry increasingly will seek an integrated approach to the design, development, integration, installation, testing and sourcing of aircraft cabin interior equipment. Based on our reputation for quality, service and product innovation, we believe that we are well positioned to serve the world’s airlines and aircraft manufacturers and owners and operators of business jets.
Experience with Complex Regulatory Environment. The airline industry is heavily regulated. The Federal Aviation Administration (the “FAA”) prescribes standards and licensing requirements for aircraft components, including virtually all commercial airline and general aviation cabin interior products, and licenses component repair stations within the United States. Comparable agencies, such as the European Aviation Safety Agency (the “EASA”), the Japanese Civil Aviation Board (the “JCAB”), and the Civil Aviation Administration of China (the “CAAC”) regulate these matters in other countries. In order to sell certain products or services, it is necessary to obtain the required licenses for the product or service under these various regulations. In addition, designing new products to meet existing regulatory requirements and retrofitting installed products to comply with new regulatory requirements can be both expensive and time consuming. We have a long history of experience with the complex regulatory environment in which we operate and believe this enables us to efficiently obtain the required approvals for new products and services.
Growth Opportunities
We believe that we will benefit from the following industry trends:
Improving Airline Industry Conditions. Improving worldwide industry conditions are resulting in increased demand for our products and services, as demonstrated by the approximate 30% year over year increase in 2007 backlog to $2.2 billion. A majority of the backlog growth over the fiscal year ended December 31, 2007 was primarily the result of international aftermarket demand for the retrofit of existing aircraft. We expect demand to further increase over the course of the next several years consistent with the expected increase in wide-body and super wide-body aircraft deliveries and the expected participation by the domestic carriers in both retrofit and new-buy activity.
Worldwide Air Traffic Growth and Airline Capacity Additions Drive Resurgence in Aftermarket Activities. Our substantial installed base provides significant ongoing revenues from replacements, upgrades, repairs and the sale of spare parts. For each of the fiscal years ended December 31, 2007 and 2006 approximately 60% of our revenues were derived from aftermarket activities. In addition, aftermarket revenues are generally driven by aircraft usage, and as such, they have historically tended to recover more quickly than revenues from original equipment manufacturers. As worldwide air traffic grows and airlines add capacity, and our installed base grows, we expect our aftermarket business to continue to grow. According to IATA, during the fiscal year ended December 31, 2007, the global airline industry expanded airline capacity by 6.2% in response to a 7.4% increase in global air traffic. We believe there are substantial growth opportunities for retrofit programs for the twin-aisle aircraft that service international routes and that the major U.S. airlines will need to invest in cabin interiors for their international fleets or face the prospect of losing market share on their international routes.
Record Backlog Driven by Aftermarket Demand from International Airlines Retrofitting Existing Fleets. We believe that substantially all of the major international airlines are in the process of upgrading, or planning to upgrade, their existing fleets of twin-aisle aircraft. This activity is being driven by both the age of the existing cabin interiors as well as the desire by many of the leading international carriers to achieve a competitive advantage by investing in cabin interior products that incorporate leading comfort amenities and place a strong emphasis on pleasing aesthetics, quality and finish in order to enhance their international passengers’ flight experience. As a result, we believe that the life-cycle of premium products, such as international business class seats and the products comprising our super first class suites, will continue to compress as airlines make investments in cabin interior products on a more frequent basis. For example, in 2005, British Airways selected us to outfit their wide-body fleet with our next generation horizontal lie-flat seats. In 2000, British Airways revolutionized the airline industry by introducing the first horizontal business class lie-flat seats (which were subsequently installed on their wide-body fleet during 2001-2002). We believe actions such as British Airways’ decision to select our next generation horizontal lie-flat seats have accelerated the retrofit cycle for premium class seating products for other airlines operating wide-body aircraft serving international routes. Through December 31, 2007, retrofit activity for the international airlines with twin-aisle aircraft has consisted of upgrading the premium class seating, mood lighting and food and beverage preparation equipment for the first and business class sections of their international fleets. We believe these international airlines are now beginning to address their coach class retrofit requirements, which bodes well for future bookings and revenue growth.
Growth of Wide-Body Aircraft Fleet. According to the Airline Monitor, new deliveries of wide-body aircraft totaled 197 in 2007 and are expected to total approximately 1,217 aircraft over the 2008-2011 period, averaging approximately 304 such aircraft per year or a 54% higher delivery level as compared to 2007. The Airline Monitor also predicts that nearly 3,697 twin-aisle aircraft will be delivered over the 2008-2017 timeframe or approximately 370 wide-body and super wide-body aircraft per year or some 88% higher, on average, as compared to 2007. We expect to benefit from this trend as wide-body aircraft generally carry more than five to eight times the dollar value of products of the type that we manufacture as compared to single-aisle, or narrow-body, aircraft.
Growth of Worldwide Airline Fleet. As a result of the current and projected growth in worldwide air traffic, deliveries of new aircraft are expected to grow. According to the Airline Monitor, new deliveries of large commercial aircraft grew to 888 aircraft in 2007 from 820 in 2006 and are expected to increase to 1,005 in 2008, 1,130 in 2009 and 1,220 in 2010. The worldwide fleet of passenger and cargo aircraft was approximately 19,000 as of December 31, 2007 and, according to the Airline Monitor, is expected to increase to 39,356 by December 31, 2025. As the size of the fleet expands, demand is also expected to grow for upgrade and refurbishment programs, for cabin interior products and for maintenance products, including spares and fasteners.
Growth in New Aircraft Introductions Lead to New Cabin Interior Product Introductions and Major Retrofit Opportunities. Through December 31, 2007, 16 customers have placed orders for 189 of the new Airbus A380 super wide-body aircraft and 53 customers have placed orders for 817 of the new Boeing 787 wide-body aircraft, which Boeing has indicated is its most successful new product launch in its history. In addition, during 2007 Airbus announced that it will develop a new A350 XWB with long term delivery projections similar to those of the Boeing 787.
Growth in Business Jet and VIP Aircraft Markets. Business jet deliveries increased by 24% in 2007 as compared to 2006 and are expected to increase by approximately 8% in 2008 as compared to 2007. We expect several larger business jet types, including the Boeing and Airbus Business Jet, the Bombardier Challenger, the Global Express and the Global 5000, the Gulfstream 450 and 550, the Falcon 900 and the Falcon 2000 and 7x, the Cessna Citation X and Embraer Legacy to be significant contributors to growth in new general aviation aircraft deliveries in the future. Industry sources estimate that over 3,500 business jets will be built during the 2008 through 2010 period, with approximately 42% projected to be larger business jets. This is important to us because the typical cost of cabin interior products manufactured for a large business jet can be 10 times more than the cost to equip the interior of a small jet. Advances in engine technology and avionics and the continued development of fractional ownership of executive aircraft are also important growth factors for the business jet market. In addition, because the average age of the more than 14,000 general aviation and VIP jet aircraft existing today is approximately 15 years, we believe significant cabin interior retrofit and upgrade opportunities exist.
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. As 60% of fastener demand is generated by the existing worldwide fleet, demand for fasteners is expected to increase over time as the fleet expands, similar to the market for cabin interior products. The aerospace and military OEMs are increasingly outsourcing to sub-contract manufacturers, driving a channel shift, which is benefiting distributors such as our company. The OEMs are increasing their outsourcing of manufactured parts to aerospace and defense subcontractors, many of which tend to purchase through distributors.
Business Strategy
Our business strategy is to maintain a leadership position and to best serve our customers by:
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Offering the broadest and most innovative products and services in the industry;
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Offering a broad range of engineering services including design, integration, installation and certification services, aircraft reconfiguration, and passenger-to-freighter conversion services;
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Pursuing the highest level of quality in every facet of our operations, from the factory floor to customer support;
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Aggressively pursuing continuous improvement initiatives in all facets of our businesses and in particular our manufacturing operations, to reduce cycle time, lower cost, improve quality and expand our margins; and
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Pursuing a worldwide marketing and product support approach focused by airline and general aviation airframe manufacturer and encompassing our entire product line.
Products and Services
We conduct our operations through strategic business units that have been aggregated under five reportable segments: Seating, Interior Systems, Distribution, Business Jet and Engineering Services.
The following is a summary of net sales for each of our segments:
Seating Segment
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 aircraft seats. A typical seat manufactured and sold by us includes the seat frame, cushions, armrests, tray table and a variety of optional features such as adjustable lumbar supports, footrests, reading lights, head/neck supports, and oxygen masks. We estimate that as of December 31, 2007, we had an aggregate installed base of approximately 1.0 million aircraft seats valued at replacement prices of approximately $3.8 billion.
First and Business Classes. Based upon major airlines' program selection and our backlog, 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 developed over 25 years of seating design. The business class seats include electrical or mechanical actuation, PC power ports, telephones, leg rests, adjustable lumbar cushions, four-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.
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 Spectrum® coach class seat 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® 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 and kit upgrades.
Interior Systems Segment
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, liquid containers, ovens, refrigeration equipment, oxygen delivery systems and a variety of other interior components. We estimate that as of December 31, 2007 we had an aggregate installed base of such equipment valued at replacement prices of approximately $1.9 billion.
Oxygen Delivery Systems. We believe, based on our experience in the industry, that we are the leading manufacturer of oxygen storage, distribution and delivery systems for both commercial and business jet aircraft. We have the capability to both produce all required components and 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. The Boeing 787 will be the first aircraft equipped with a passenger oxygen system using our advanced “Pulse Oxygen” technology. We believe the Pulse Oxygen system delivers oxygen more efficiently than traditional passenger systems and reduces overall system weight and fuel burn and facilitates lower maintenance and cabin reconfiguration costs, when compared to traditional oxygen systems. Airbus has also selected us to provide similar “Pulse” technology on its passenger and crew oxygen systems for the A350 XWB.
Coffee Makers/Water Boilers. We believe, based on our experience in the industry, that we are the leading manufacturer of aircraft coffee and tea makers. We manufacture a broad line of coffee makers, including the Endura® beverage maker, coffee warmers and water boilers, and a Combi 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 in-flight food by maintaining constant temperature and moisture in the food. It addresses the airlines' need to provide a wider range of food offerings 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 self-contained wine and beverage chillers, refrigerators/freezers and air chilling systems.
Distribution Segment
Through our subsidiary, M&M Aerospace Hardware, Inc. (M&M), we are the leading distributor of aerospace grade fasteners for the aftermarket and we believe we offer one of the broadest lines of fasteners and inventory management services worldwide. Approximately 60% of our fastener sales are to the aftermarket, and nearly 65% of our orders are shipped within 24 hours of receipt of the order. With over 200,000 SKUs and next-day service, we serve as a distributor for almost every major aerospace fastener manufacturer. Our service offerings include inventory management and replenishment, electronic data interchange, special packaging and bar-coding, parts kitting, quality assurance testing and purchasing assistance. Our seasoned purchasing and sales teams, coupled with state-of-the-art information technology and automated retrieval systems, provide the basis for our reputation for high quality and overnight delivery.
Business Jet Segment
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 and sofa products, including electric fully berthing lie flat seats, direct and indirect lighting, air valves and oxygen delivery systems as well as sidewalls, bulkheads, credenzas, closets, galley structures, lavatories and tables. 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 most of the business jet manufacturers. We estimate that as of December 31, 2007, we had an aggregate installed base of business jet equipment valued at replacement prices of approximately $1.0 billion.
We believe, based on our experience in the industry, our business jet segment, which has had decades of experience in equipping VIP and head of state aircraft, is the leading manufacturer of super first class cabin interior products for commercial wide-body aircraft. Super first class products incorporate a broad range of amenities such as luxurious first class cabins with appointments such as lie-flat seating, mini-bars, closets, flat screen televisions and mood lighting, which were found only in VIP and head-of-state aircraft until recently.
Engineering Services Segment
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.
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 have performed conversions for Boeing 767, Boeing 747-200 Combi Unit®, Boeing 747-200 (exclusive of door surround) and Airbus A300 B4 aircraft. In addition, China Southern has selected us to convert six of their A300-600 wide-body passenger aircraft to freighter aircraft. Freighter conversions require sophisticated engineering capabilities and very large and complex proprietary parts kits.
Crew Rest Compartments. We believe, based on our experience in the industry, that we are a leader in the design, certification and manufacture of crew rest compartments. Long-haul international flights can carry two flight crews and the off-duty flight crew often utilize crew rest compartments to sleep during the flight. A crew rest compartment is constructed utilizing lightweight cabin interior materials and incorporates seating, electrical, heating, ventilation and air conditioning and lavatory systems.
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 $127.9 million, $88.6 million and $65.6 million representing 7.6%, 7.9% and 7.8% of net sales for the years ending December 31, 2007, 2006, and 2005, respectively. We employed 1,000 professionals in engineering, research and development and program management as of December 31, 2007. We believe, based on our experience in the industry, that we have the largest engineering organization in the cabin interior products industry, with mechanical, electrical, electronic and software design skills, as well as substantial expertise in program management, 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 airframe 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 senior executives, teams representing each product line serve designated airlines that together accounted for over 80% of the purchases of products manufactured by our Seating, Interior Systems, and Engineering Services segments during the fiscal year ended December 31, 2007. 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 the only supplier 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.
Our program management approach assigns a program manager to each significant contract. The program manager is responsible for all aspects of the specific contract and profitability, including managing change orders, negotiating related up front engineering charges and monitoring the progress of the contract through its delivery dates. 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.
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 commercial aircraft interior products: customer design capabilities, product quality and performance, on-time delivery, after-sales customer service, product support and price. We believe that potential new competitors would face a number of barriers to entering the cabin interior products market. Barriers to entry include regulatory requirements, our large installed product base, our custom design capability, manufacturing capability, delivery, and after-sales customer service, product support and our broad product line.
We market our aerospace fasteners directly to the airlines, completion centers, general aviation airframe manufacturers, first-tier suppliers to the commercial, military and defense 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.
As of December 31, 2007, our direct sales, marketing and product support organizations consisted of 426 persons. In addition, we currently retain 50 independent sales representatives. Our sales to non-U.S. customers were approximately $928 million for the fiscal year ended December 31, 2007 and $645 million for the fiscal year ended December 31, 2006 or approximately 55% and 57%, respectively, of net sales during those periods. Approximately 82% of our total revenues were derived from airlines and other commercial aircraft operators during each of the two fiscal years ended December 31, 2007. Approximately 60% of our revenues during the fiscal years ended December 31, 2007 and 2006 were from refurbishment, spares and upgrade programs. During the fiscal year ended December 31, 2007, 2006 and 2005 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, 2007 was approximately $2.2 billion as compared to $1.7 billion at December 31, 2006 and approximately $1.1 billion at December 31, 2005. Approximately 60% of our backlog at December 31, 2007, is scheduled to be deliverable within the next twelve months. While 38% of our total backlog is with North American customers, only 15% of our total backlog is with domestic airlines. Approximately 23% of our current backlog is with European customers. Importantly, approximately 39% of backlog is with customers in emerging markets such as the Asia/Pacific Rim and the Middle East regions. Our backlog includes backlog from all of our businesses. Our backlog at December 31, 2007 increased by approximately 30% compared to the backlog at December 31, 2006 despite a nearly 50% year over year increase in revenues.
Customer Service
We believe that our customers place a high value on customer service and product support and that this service level is a critical differentiating factor in our industry. The key elements of such service include:
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Rapid response to requests for engineering design, proposal requests and technical specifications;
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Flexibility with respect to customized features;
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On-time delivery;
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Immediate availability of spare parts for a broad range of products; and
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Prompt attention to customer problems, including on-site customer training.
Customer service is particularly important to airlines due to the high cost to the airlines of late delivery, malfunctions and other problems.
Warranty and Product Liability
We warrant our products, or specific components thereof, for periods ranging from one to ten years, depending upon product 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 we intend to continue to participate in the consolidation.
Our principal competitors for our seating segment are Groupe Zodiac S.A. and Keiper Recaro GmbH. Our primary competitors for interior systems segment are Groupe Zodiac S.A., JAMCO, and Premium Aircraft Interiors Group (PAIG, formerly Britax). Our principal competitors for other product and service offerings in our engineering services segment include Driessen Aircraft Interior Systems, JAMCO, PAIG, and TIMCO. The market for business jet products is highly fragmented, consisting of numerous competitors, the largest of which is Decrane Aircraft Holdings. Our primary competitors in the fastener distribution market are Honeywell Consumable Solutions, Wesco Aircraft Hardware and Anixter 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 up-to-date 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 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 EASA 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.
In March 1992, the FAA adopted Technical Standard Order C127, or TSO-C127, which provides a design approval that the FAA may issue to seat manufacturers for seats tested dynamically to meet the requirements of 14 CFR 25.562 (commonly referred to as “16G”). We believe we have developed and certified more seat models that meet the requirements of TSO-C127 and TSO-C127a than our competitors. The FAA and EASA also prescribe that seats meet certain flammability and electrical interference specifications. In October 2005, the FAA adopted 14 CFR 121.311(j), which requires dynamic testing of all seats installed in all new aircraft certified after January 1, 1988 and produced after October 27, 2009. EASA is expected to establish a similar role. Our large installed base of 16G seats demonstrates our industry leadership in seat certification requirements.
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.
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 compliant, in all material respects, with applicable 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 229 U.S. patents and 217 international patents, as well as 114 U.S. patent applications and 209 foreign patent applications 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 us.
Employees
As of December 31, 2007, we had approximately 6,298 employees. Approximately 70% of our employees are engaged in manufacturing/distribution operations and purchasing, 16% in engineering, research and development and program management, 7% in sales, marketing and product support and 7% in finance, information technology, legal and general administration. Unions represent approximately 20% of our worldwide employees. One domestic labor contract representing approximately 6% of our employees expires May, 2009. The other labor contract with the only other domestic union, which represents approximately 2% of our employees, expires June, 2010. The balance of our union employees are located in the U.K., the Netherlands and Germany, which tend to have government mandated union organizations. 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 years ended December 31, 2007, December 31, 2006 and December 31, 2005, is set forth in note 14 to our consolidated financial statements.
Available Information
Our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, our Proxy Statement, 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 or connected to our website is not incorporated by reference in this annual report.
ITEM 1A.
ITEM 1A. RISK FACTORS
You should consider carefully the following risks and uncertainties, along with the other information contained in or incorporated by reference in this Form 10-K. Additional risks and uncertainties that we do not presently know about or currently believe are not material may also adversely affect our business and operations. If any of the following events actually occur, our business, financial condition and financial results could be materially adversely affected.
Risks Relating to Our Industry
We are directly dependent upon the conditions in the airline and business jet industries and a severe and prolonged downturn could negatively impact our results of operations.
The September 11, 2001 terrorist attacks, SARS and the onset of the Iraq war severely impacted conditions in the airline industry. According to industry sources, in the aftermath of the attacks most major U.S. and a number of international carriers substantially reduced their flight schedules, parked or retired portions of their fleets, reduced their workforces and implemented other cost reduction initiatives. U.S. airlines further responded by decreasing domestic airfares. As a result of the decline in both traffic and airfares following the September 11, 2001 terrorist attacks, and their aftermath, as well as other factors, such as increases in fuel costs and heightened competition from low-cost carriers, the world airline industry lost a total of approximately $41.0 billion in calendar years 2001-2007. The airline industry crisis also caused 22 airlines worldwide to declare bankruptcy or cease operations in the last seven years.
As a result of the foregoing, through 2007, the domestic U.S. airlines, in large part, have been seeking to conserve cash by deferring cabin interior refurbishment programs and deferring or canceling aircraft purchases. This, together with the reduction of new business jet production, caused a substantial contraction in our business during the 2001 through 2003 period. Although the global airline industry began to recover in late 2003 and conditions continue to improve, and the business jet industry is improving as well, additional events similar to those described above or other events could cause a deterioration of conditions in our industry or end the current business cycle. The rate at which the business jet industry recovers is dependent on corporate profits, the number of used jets on the market and other factors, which could slow the rate of recovery.
The airline industry is heavily regulated and failure to comply with applicable laws could reduce our sales, or require us to incur additional costs to achieve compliance, which could reduce our results of operations.
The FAA prescribes standards and licensing requirements for aircraft components, including virtually all commercial airline and general aviation cabin interior products, and licenses component repair stations within the United States. Comparable agencies, such as the EASA, the CAAC and the JCAB, regulate these matters in other countries. If we fail to obtain a required license for one of our products or services or lose a license previously granted, the sale of the subject product or service would be prohibited by law until such license is obtained or renewed. In addition, designing new products to meet existing regulatory requirements and retrofitting installed products to comply with new regulatory requirements can be both expensive and time consuming.
From time to time these regulatory agencies propose new regulations. These new regulations generally cause an increase in costs to comply with these regulations. For example, the FAA dynamic testing requirements originally established in 1988 under 14 CFR 25.562 are currently required for certain new generation aircraft types. The recent enactment of 14 CFR 121.311(j) will require dynamic testing of all seats installed in all new aircraft produced after October 27, 2009. EASA is expected to establish a similar rule. Compliance with this rule may require industry participants to expand engineering, plant and equipment to ensure that all products meet this rule. Smaller seating companies may not have the resources, financial or otherwise, to comply with this rule and may be required to sell their business or cease operations. To the extent the FAA implements rule changes in the future, we may incur additional costs to achieve compliance.
The airline industry is subject to extensive health and environmental regulation, any violation of which could subject us to significant liabilities and penalties.
We are subject to extensive and changing federal, state and foreign laws and regulations establishing health and environmental quality standards, and may be subject to liability or penalties for violations of those standards. We are also subject to laws and regulations governing remediation of contamination at facilities currently or formerly owned or operated by us or to which we have sent hazardous substances or wastes for treatment, recycling or disposal. We may be 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 at any of our facilities, or at facilities we may acquire.
Risks Relating to Our Business
There are risks inherent in international operations that could have a material adverse effect on our business operations.
While the majority of our operations are based domestically, we have significant manufacturing operations based internationally with facilities in the United Kingdom, the Netherlands and Germany. In addition, we sell our products to airlines all over the world. Our customers are located primarily in North America, Europe and the emerging markets including the Asia/Pacific Rim region, South America and the Middle East. As a result, 55% of our net sales for the year ended December 31, 2007 and 57% of our sales for the year ended December 31, 2006 were to customers located outside the United States.
In addition, we have a number of subsidiaries in foreign countries (primarily in Europe), which have sales outside the United States. Approximately 38% and 35%, respectively, of our sales during the fiscal years ended December 31, 2007 and 2006 came from our foreign operations. Fluctuations in the value of foreign currencies affect the dollar value of our net investment in foreign subsidiaries, with these fluctuations being included in a separate component of stockholders’ equity. At December 31, 2007, we reported a cumulative foreign currency translation adjustment of approximately $9.8 million in stockholders’ equity as a result of foreign currency adjustments, and we may incur additional adjustments in future periods. In addition, operating results of foreign subsidiaries are translated into U.S. dollars for purposes of our statement of operations at average monthly exchange rates. Moreover, to the extent that our revenues are not denominated in the same currency as our expenses, our net earnings could be materially adversely affected. For example, a portion of labor, material and overhead costs for goods produced in our production facilities in the United Kingdom, Germany and the Netherlands are incurred in British pounds or euros, but the related sales revenues are generally denominated in U.S. dollars. Changes in the value of the U.S. dollar or other currencies could result in material fluctuations in foreign currency translation amounts or the U.S. dollar value of transactions and, as a result, our net earnings could be materially adversely affected.
Historically we have not engaged in hedging transactions. However, we may engage in hedging transactions in the future to manage or reduce our foreign exchange risk. Our attempts to manage our foreign currency exchange risk may not be successful and, as a result, our results of operations and financial condition could be materially adversely affected.
Our foreign operations could also be subject to unexpected changes in regulatory requirements, tariffs and other market barriers and political, economic and social instability in the countries where we operate or sell our products and offer our services. The impact of any such events that may occur in the future could subject us to additional costs or loss of sales, which could materially adversely affect our operating results.
If we make acquisitions, they may be less successful than we expect, which could have a material adverse effect on our financial condition.
We have made many acquisitions in the past some of which are still integrating into our business. We may consider future acquisitions, some of which could be material to us. We explore and conduct discussions with many third parties regarding possible acquisitions. Our ability to continue to achieve our goals may depend upon our ability to effectively acquire and integrate such companies, to achieve cost efficiencies and to manage these businesses as part of our company. We may not be successful in implementing appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. Our efforts to integrate these businesses could be materially adversely affected by a number of factors beyond our control, such as regulatory developments, general economic conditions, increased competition and the loss of certain customers resulting from the acquisitions. In addition, the process of integrating these businesses could cause difficulties for us, including an interruption of, or loss of momentum in, the activities of our existing business and the loss of key personnel and customers. Further, the benefits that we anticipate from these acquisitions may not develop. Depending upon the acquisition opportunities available, we also may need to raise additional funds through the capital markets or arrange for additional bank financing in order to consummate such acquisitions. We also may not be able to raise the substantial capital required for acquisitions and integrations on satisfactory terms, if at all.
Increased leverage could adversely impact our business and results of operations.
We may incur additional debt under our credit facility or through new borrowings to finance our operations or for future growth. A high degree of leverage could have important consequences to us. For example, it could:
· increase our vulnerability to adverse economic and industry conditions;
· require us to dedicate a substantial portion of cash from operations to the payment of debt service, therebyreducing the availability of cash to fund working capital, capital expenditures and other general corporate purposes;
· limit our ability to obtain additional financing for working capital, capital expenditures, general corporate purposes or acquisitions;
· place us at a disadvantage compared to our competitors that are less leveraged; and
· limit our flexibility in planning for, or reacting to, changes in our business and in our industry.
Our total assets include substantial intangible assets. The write-off of a significant portion of unamortized intangible assets would negatively affect our financial results.
Our total assets reflect substantial intangible assets. At December 31, 2007, goodwill and identified intangibles, net, represented approximately 35% of total assets. Intangible assets consist principally of goodwill and other identified intangible assets associated with our acquisitions. On at least an annual basis, we assess whether there has been an impairment in the value of goodwill and other intangible assets with indefinite lives. If the carrying value of the tested asset exceeds its estimated fair value, impairment is deemed to have occurred. In this event, the amount is written down to fair value. Under current accounting rules, this would result in a charge to operating earnings. Any determination requiring the write-off of a significant portion of unamortized goodwill and identified intangible assets would negatively affect our results of operations and total capitalization, which could be material.
We have significant financial and operating restrictions in our debt instruments that may have an adverse effect on our operations.
The credit agreement governing our senior bank borrowings contains numerous financial and operating covenants that limit our ability to incur additional or repay existing indebtedness, to create liens or other encumbrances, to make certain payments and investments, including dividend payments, to engage in transactions with affiliates, to engage in sale/leaseback transactions, to guarantee indebtedness and to sell or otherwise dispose of assets and merge or consolidate with other entities. Agreements governing future indebtedness could also contain significant financial and operating restrictions. A failure to comply with the obligations contained in any current or future agreement governing our indebtedness could result in an event of default under our current or any future bank credit facility, any future indentures or agreements governing our debt securities, which could permit acceleration of the related debt and acceleration of debt under other instruments that may contain cross-acceleration or cross-default provisions. We may not have, or may not be able to obtain, sufficient funds to make any required accelerated payments.
We compete with a number of established companies, some of which have significantly greater financial, technological and marketing resources than we do, and we may not be able to compete effectively with these companies.
We compete with numerous established companies. Some of these companies, particularly in the passenger-to-freighter conversion business, have significantly greater financial, technological and marketing resources than we do. Our ability to be an effective competitor will depend on our ability to remain the supplier of retrofit and refurbishment products and spare parts on the commercial fleets on which our products are currently in service. It will also depend on our success in causing our products and the new products we may develop to be selected for installation in new aircraft, including next-generation aircraft, and in avoiding product obsolescence. Our ability to maintain or expand our market position in the passenger-to-freighter conversion business will depend on our success in being selected to convert specific aircraft, our ability to maintain and enhance our engineering design, our certification and program management capabilities and our ability to manufacture a broader range of structural components, connectors and other products used in this business.
Provisions in our charter documents may discourage potential acquisitions of our company, even those which the holders of a majority of our common stock may favor.
Our restated certificate of incorporation and by-laws contain provisions that may have the effect of discouraging a third party from making an acquisition of us by means of a tender offer, proxy contest or otherwise. Our restated certificate of incorporation and by-laws:
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classify the board of directors into three classes, with directors of each class serving for a staggered three-year period;
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provide that directors may be removed only for cause and only upon the approval of the holders of at least two-thirds of the voting power of our shares entitled to vote generally in the election of such directors;
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require at least two-thirds of the voting power of our shares entitled to vote generally in the election of directors to alter, amend or repeal the provisions relating to the classified board and removal of directors described above;
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permit the board of directors to fill vacancies and newly created directorships on the board;
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restrict the ability of stockholders to call special meetings; and
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contain advance notice requirements for stockholder proposals.
Our rights plan and the ability of our board of directors to issue preferred stock may have the effect of discouraging a takeover attempt not previously approved by the board of directors.
Our board of directors has declared a dividend of one preferred share purchase right for each share of common stock outstanding. A right will also be attached to each share of common stock subsequently issued. The rights will have certain anti-takeover effects. If triggered, the rights would cause substantial dilution to a person or group of persons that acquires more than 15.0% of our common stock on terms not approved by our board of directors. The rights could discourage or make more difficult a merger, tender offer or other similar transaction.
Under our restated certificate of incorporation, our board of directors also has the authority to issue preferred stock in one or more series and to fix the powers, preferences, and rights of any such series without stockholder approval. The board of directors could, therefore, issue, without stockholder approval, preferred stock with voting and other rights that could adversely affect the voting power of the holders of common stock and could make it more difficult for a third party to gain control of us. In addition, under certain circumstances, Section 203 of the Delaware General Corporation Law makes it more difficult for an “interested stockholder”, or generally a 15% stockholder, to effect various business combinations with a corporation for a three-year period unless previously approved by our board of directors.
You may not receive cash dividends on our shares of common stock.
We have never paid a cash dividend and do not plan to pay cash dividends on our common stock in the foreseeable future. We intend to retain our earnings to finance the development and expansion of our business and to repay indebtedness. Also, our ability to declare and pay cash dividends on our common stock is restricted by customary covenants in our bank credit facility and may be restricted by customary covenants in our future agreements governing future debt.
If the price of our common stock continues to fluctuate significantly, you could lose all or part of any investment in our common stock.
The price of our common stock is subject to sudden and material increases and decreases, and decreases could adversely affect investments in our common stock. For example, since the beginning of 2004 through the end of 2007, the closing sale price of our common stock has ranged from a low of $5.20 to a high of $53.91. The price of our common stock could fluctuate widely in response to:
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our quarterly operating results;
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changes in earnings estimates by securities analysts;
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changes in our business;
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changes in the market’s perception of our business;
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changes in the businesses, earnings estimates or market perceptions of our competitors or customers;
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changes in airline industry or business jet industry conditions;
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changes in our key personnel;
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changes in general market or economic conditions; and
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changes in the legislative or regulatory environment.
In addition, the stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies, including companies in our industry. The changes often appear to occur without regard to specific operating performance. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company and these fluctuations could materially reduce our stock price.
We have grown, and continue to grow, at a rapid pace. Our inability to properly manage or support the growth may have a material adverse effect on our business, financial condition, and results of operations and could cause the market value of our common stock to decline.
We have experienced rapid growth in recent periods and intend to continue to grow our business both through acquisitions and internal expansion of products and services. Our growth to date has placed, and could continue to place, significant demands on our management team and our operational, administrative and financial resources. We may not be able to grow effectively or manage our growth successfully, and the failure to do so could have a material adverse effect on our business, financial condition, and results of operations and could cause the market value of our common stock to decline.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 2007, we had 16 principal operating facilities and one administrative facility, which comprised an aggregate of approximately 1.9 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.
We believe that our facilities are suitable for their present intended purposes and adequate for our present and anticipated level of operations.
ITEM 3.
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.
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.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
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 tock as reported by Nasdaq.
On February 14, 2008, the last reported sale price of our common stock as reported by NASDAQ was $39.82 per share. As of such date, based on information provided to us by Computershare, our transfer agent, we had approximately 1,266 registered holders, and because many of these shares are held by brokers and other institutions on behalf of the beneficial holders, we are unable to estimate the number of beneficial shareholders represented by these holders of record. 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 credit agreement governing our bank credit facilities permit the declaration of cash dividends only in certain circumstances described therein.
The following line graph compares the annual percentage change in the Company’s cumulative total shareholder return on our common stock relative to the cumulative total returns of the NASDAQ Composite index, the Dow Jones US Airlines index and the Dow Jones US Aerospace & Defense index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in the company's common stock and in each of the indexes on 12/31/2002 and its relative performance is tracked through 12/31/2007.
We made no repurchases of our common stock during the last quarter of 2007.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share data)
The financial data for each of the years in the five year period ended December 31, 2007 have been derived from financial statements that have been audited by our independent registered public accounting firm. The following financial information is qualified by reference to, and should be read in conjunction with, Item 7
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 business jets and a leading aftermarket distributor of aerospace fasteners. We sell our manufactured products directly to virtually all of the world’s major airlines and airframe manufacturers and a wide variety of business jet customers. In addition, based on our experience, we believe that we have achieved leading global market positions in each of our major product categories, which include:
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commercial aircraft seats, including an extensive line of super first class, first class, business class, tourist class and regional aircraft seats;
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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;
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both chemical and gaseous aircraft oxygen delivery, distribution and storage systems, protective breathing equipment and lighting products;
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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
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a broad line of aerospace fasteners, covering over 200,000 Stock Keeping Units (SKUs) serving the commercial aircraft, business jet and military and defense industries.
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 refurbishment or upgrade programs for the existing worldwide fleets of commercial and general aviation aircraft and from the sale of our cabin interior equipment for new aircraft deliveries. For the 2007, 2006 and 2005 fiscal years, approximately 60% of our revenues were derived from our aftermarket products, with the remaining portions attributable to the sale of cabin interior equipment associated with new aircraft deliveries. We believe our large installed base of products, estimated to be approximately $6.7 billion as of December 31, 2007 (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 incumbent supplier.
We conduct our operations through strategic business units that have been aggregated under five reportable segments: Seating, Interior Systems, Distribution, Business Jet and Engineering Services.
Net sales by reportable segment for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 were as follows:
Net sales by domestic and foreign operations for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 were as follows:
Net sales by geographic segment (based on destination) for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 were as follows:
Between 1989 and 2001, we substantially expanded the size, scope and nature of our business through 22 acquisitions for an aggregate purchase price of approximately $1 billion. From 2002 through June 2006, essentially all of our revenue growth was organic since we did not make any significant acquisitions during that period.
During the third quarter of 2006, we acquired Draeger and New York Fasteners for, in the aggregate, $146.7 in cash. Draeger manufactures components and integrated systems to supply oxygen systems for both civil and military aircraft, with well-established strengths in both chemical and gaseous oxygen systems. Draeger is the prime contractor for the oxygen systems in the Eurofighter Typhoon, and provides maintenance and repair services for Germany’s Air Force in-service oxygen systems. The integration of Draeger with our existing oxygen business allows us to offer the broadest oxygen system product lines in the industry. New York Fasteners is a distributor of a wide variety of aerospace fasteners and hardware primarily to the military sector. The integration of New York Fasteners into our distribution segment has significantly expanded our overall penetration into the military and defense sector.
New product development is a strategic initiative for us. Our customers regularly request that we engage in new product development and enhancement activities. We believe that these activities protect and enhance our leadership position. We believe our investments in research and development over the past several years have been the driving force behind our ongoing market share gains. Research, development and engineering spending has been approximately 7% - 8% of sales for the past several years and is expected to comprise a somewhat lower percentage of revenues for the next several years.
We also believe in providing our businesses with the tools required to remain competitive. In that regard, we have invested, and will continue to invest in, property and equipment that enhances our productivity. Taking into consideration our record backlog, targeted capacity utilization levels, recent capital expenditure investments, recent acquisitions and current industry conditions, we expect that capital expenditures will be approximately $40 over the next twelve months.
International airline competition for higher margin international travelers and improving worldwide industry conditions have resulted in increasing demand for our products and services, as demonstrated by record bookings of approximately $2.1 billion during fiscal 2007. At December 31, 2007, backlog was approximately $2.2 billion, an increase of approximately 30% as compared to our December 31, 2006 backlog. We expect strong demand for the next several years as industry conditions continue to improve. As worldwide air traffic grows and airlines add capacity and upgrade the cabin interiors of existing active aircraft, we expect our aftermarket activities to continue to grow. According to IATA, during the year ended December 31, 2007, the global airline industry expanded airline capacity by approximately 6.2% in response to an approximately 7.4% increase in global air traffic. In addition, as a result of the severity of the post-September 11, 2001 downturn, many carriers, particularly in the United States, have deferred
interior maintenance and upgrades. The U.S. carriers have just begun the process of upgrading their international fleets and we believe there are substantial additional growth opportunities with domestic carriers for retrofit programs, particularly for the twin-aisle aircraft that service international routes.
RESULTS OF OPERATIONS
Year Ended December 31, 2007 Compared to the Year Ended December 31,
Net sales for the year ended December 31, 2007 were $1,677.7, an increase of $549.5 or 48.7% as compared to the prior year. Revenue growth was driven by robust market conditions and market share gains, and included strong retrofit program deliveries as well as an increase in demand related to growth in new aircraft deliveries.
Net sales for each of our segments are set forth in the following table:
The 62.8% increase in revenue for the Seating segment reflects significant market share gains and was driven by a substantially higher level of aftermarket, retrofit and refurbishment activity, as well as demand created by new aircraft deliveries. The Interior Systems segment revenue growth of 27.1% reflected the higher level of new aircraft deliveries as well as substantial aftermarket demand.
The Distribution segment revenue growth of 53.7% reflects a higher level of revenues from first and second tier aerospace manufacturers and from higher military sales.
Business Jet segment revenue increased by $45.6 or 30.9%, reflecting the higher level of new business jet deliveries and higher revenues from super first class products. Engineering Services segment revenue growth of $50.7 or 75.9% reflects the higher level of engineering design, program management and certification activities.
Cost of sales for the current period of $1,107.6, or 66.0% of net sales, increased by $375.9 compared to $731.7, or 64.9% of net sales in the prior year. The $375.9, or 51.4%, increase in cost of sales was primarily due to the 48.7% increase in net sales. Cost of sales as a percentage of net sales increased by 110 basis points during the current year period primarily due to the higher level of Engineering Services segment revenues, which has gross margins which are lower than the company average. The $50.7 increase in Engineering Services revenues accounted for 40 basis points of this increase. The balance was primarily related to the 2006 Draeger and New York Fasteners acquisitions and integration costs related thereto and start up and learning curve costs on major programs in the Business Jet and Seating segments.
Selling, general and administrative expenses in 2007 were $195.2, or 11.6% of sales, versus $159.6 or 14.1% in 2006 reflecting the higher level of selling, marketing and product support costs ($6.3), the acquisitions of Draeger and New York Fasteners ($6.1), and higher commissions, compensation and benefits ($19.0) associated with the 48.7% increase in revenues and a nearly 30% increase in backlog from December 31, 2006. Selling, general and administrative expenses as a percentage of sales decreased by 250 basis points, reflecting the operating leverage in our business.
Research, development and engineering expenses for 2007 were $127.9, or 7.6% of sales, versus $88.6 or 7.9% of sales in the prior year and reflect the higher level of spending associated with customer specific engineering activities, new product development activities (primarily at the Seating and Interior Systems segments), certification efforts related to a number of new products including products for the new Boeing 787 Dreamliner Aircraft, Airbus A350 XWB, and acquisitions. During 2007, we applied for 88 U.S. and foreign patents versus 73 during 2006.
Operating earnings for 2007 were $247.0 or 66.6% greater than 2006. The operating earnings growth was driven by the 48.7% revenue growth and a 160 basis point expansion in operating margin to 14.7% of sales reflecting the high in quality backlog and operating leverage at the higher revenue level, offset by the 2006 Draeger and New York Fasteners acquisitions and integration costs related thereto and learning curve costs in the Seating, Business Jet and Engineering Services segments. Operating earnings growth, exclusive of acquisitions was 68%.
The following is a summary of operating earnings performance by segment:
For the year ended December 31, 2007, Seating segment operating earnings of $72.8 increased by $35.2, or 93.6%, due to both a 62.8% increase in revenue and a 180 basis point expansion in operating margin. Interior Systems segment operating earnings of $64.8, or 18.6% of sales, increased by $13.6, or 26.6%, as compared with the same period in the prior year primarily due to a 27.1% increase in revenue. The Draeger acquisition integration costs negatively impacted Interior Systems segment margin. The operating margins at the Seating and Interior Systems segments are expected to significantly improve during 2008 and beyond due to their high in quality backlogs, operational efficiency initiatives, operating leverage and, with respect to interior systems, the now substantially complete Draeger integration activities.
Distribution segment operating earnings of $85.5 increased by $35.1, or 69.6%, due to a 53.7% increase in revenue and a 210 basis point increase in operating margin. The Distribution segment operating margin of 22.1%, which reflects the segment’s highly efficient information technology and automated retrieval systems, was negatively impacted by the New York Fasteners acquisition and integration costs related thereto. Business Jet segment operating earnings of $19.7, increased by $10.3, or 109.6%, as compared with the prior year as a result of the 30.9% increase in revenue and the 380 basis point expansion in operating margin. This margin expansion reflects substantially improved operating results for the super first class product line and operating leverage at the higher sales level. Engineering Services segment operating earnings improved by $4.5 as this segment continued its transition to a profit contributor.
Interest expense was $23.5 for 2007 and decreased by $19.3 as compared to 2006, due to the redemption of our $250 8-7/8% senior subordinated notes due 2011 and prepayment of $100 of bank term debt during 2007, which together generated $11.0 of debt prepayment costs.
Earnings before income taxes of $215.1 were $125.1, or 139.0% greater than in 2006. The large increase in earnings before income taxes was due to the $98.7 or 66.6% increase in operating earnings and the $19.3 decrease in interest expense offset by $11.0 of debt prepayment costs.
The Company’s tax expense of $67.8 for 2007 reflects approximately $8.7 of tax benefits associated with one-time tax planning initiatives finalized during 2007. The Company’s tax expense of $4.4 for 2006 reflected a tax benefit for the recognition of our U.K. deferred tax asset in the amount of $22.9.
Net earnings for 2007 of $147.3 were $61.7, or 72.1%, greater than net earnings of $85.6 in 2006. Net earnings per diluted share for 2007 of $1.66 increased $0.56 per diluted share, or 50.9%, as compared to 2006, reflecting the $98.7, or 66.6%, increase in operating earnings in 2007, a 31.5% effective tax rate in 2007 versus a 4.9% effective tax rate in 2006, and a 14% increase in weighted average shares outstanding during 2007.
RESULTS OF OPERATIONS
Year Ended December 31, 2006 Compared to the Year Ended December 31,
Net sales for the year ended December 31, 2006 were $1,128.2, an increase of $284.1 or 33.7% as compared to the prior year. Sales in 2006 increased over the 2005 level primarily due to a higher level of customer demand for products offered by each of our five segments, market share gains and recent acquisitions.
Net sales for each of our segments are set forth in the following table:
The increase in sales volume for the Seating, Interior Systems, and Engineering Services segments was driven by a higher level of retrofit activity, demand created by new deliveries of large commercial jets (which increased by 24% versus deliveries in 2005), and market share gains. Interior Systems segment’s revenue growth rate exclusive of the impact of the Draeger acquisition was 20.5%. The Distribution segment delivered revenue growth of 44.6% in 2006, primarily due to a broad-based increase in aftermarket demand for aerospace fasteners, continued market share gains and the acquisition of New York Fasteners. The Distribution segment’s revenue growth rate exclusive of the impact of the New York Fasteners acquisition was 29.7%. Business Jet segment revenues increased by 22.7% in 2006, reflecting strong business jet deliveries, offset by a lower level of super first class revenues associated with A380 delivery delays. The acquisitions of Draeger (interior systems) and New York Fasteners (distribution) accounted for approximately $52.1 of the consolidated revenue growth. Revenue growth during 2006, exclusive of these acquisitions, was approximately 27.5%.
Cost of sales during 2006 of $731.7, or 64.9%, of sales, increased by $183.2 or 33.4%, as compared to 2005.
Selling, general and administrative expenses in 2006 were $159.6, or 14.2% of sales, versus $136.4 or 16.2% in 2005 reflecting the higher level of selling, marketing and product support costs ($4.9), the acquisitions of Draeger and New York Fasteners ($4.5), and higher salaries, benefits, incentive compensation and commissions ($10.3) associated with the 33.7% increase in revenues and the over 60% increase in backlog from December 31, 2005. Selling, general and administrative expenses for 2005 were reduced by $1.8 of net reimbursed legal fees in connection with the resolution of two legal matters. Selling, general and administrative expenses as a percentage of sales decreased by 200 basis points, reflecting the operating leverage in our business.
Research, development and engineering expenses for 2006 were $88.6, or 7.9% of sales, versus $65.6 or 7.8% of sales in 2005 and reflect the higher level of spending associated with customer specific engineering, new product development activities (primarily at the Seating and Interior Systems segments), and acquisitions. During 2006, we applied for 73 U.S. and foreign patents versus 43 during 2005.
Operating earnings of $148.3 for 2006 were $54.7 or 58.4% greater than 2005 due to both the 33.7% revenue growth and a 200 basis point expansion in operating margin to 13.1% of sales. Operating earnings growth, exclusive of acquisitions was 51.2%. The substantial increase in operating earnings was driven primarily by continued revenue growth ($284.1), earnings growth ($54.7) and margin expansion in the Seating, Interior Systems and Engineering Services segments. The consolidated 200 basis point expansion in operating margin was achieved in spite of very poor absorption of overhead costs due to delays in the A380 deliveries and the initially lower margins from acquisitions.
The following is a summary of operating earnings performance by segment:
For 2006, the Seating segment’s operating earnings of $37.6 increased by 47.5%, due to both a 37.9% increase in revenue and continued expansion in operating margin to 9.7% of sales. Operating earnings at the Interior Systems segment of $51.2 increased by $18.9 or 58.5% as compared to 2005, due both to a 33.3% increase in revenue and a 300 basis point expansion in operating margin to 18.7% of sales. The margin expansion at the Seating and Interior Systems segments was primarily due to ongoing manufacturing efficiencies, product mix and operating leverage at the higher sales volume.
The Distribution segment’s operating earnings of $50.4 during 2006 increased by $15.5 or 44.4% on a 44.6% increase in sales, reflecting further operating efficiencies at the higher sales level and despite the temporary drag on margins caused by the New York Fasteners acquisition. The Business Jet segment’s operating earnings were $9.4 in 2006, up 20.5% versus 2005, reflecting the solid operating performance from the Company’s core Business Jet operating results, offset by the improving, but still unsatisfactory super first class product line operating results. The operating results at the Engineering Services segment improved by $6.6 as compared to 2005 due to higher sales volume, better product mix and ongoing operational efficiencies.
Interest expense was $42.8 for 2006 and decreased by $18.0 as compared to 2005, due to the redemption of $250 of our senior subordinated notes due 2008, the redemption of approximately $175 of senior notes and the prepayment of $50.0 of bank term debt, which together generated $19.4 of debt prepayment costs.
Earnings before income taxes were $90.0 (and which reflected $19.4 of debt prepayment costs), as compared to pre-tax earnings of $34.3 for 2005. The large increase in earnings before income taxes was due to the $54.7 or 58.4% increase in operating earnings and the $18.0 decrease in interest expense which was partially offset by $19.4 of debt prepayment costs.
We recognized our U.K. deferred tax asset during the third quarter of 2006, resulting in a tax benefit of approximately $22.9. The deferred tax asset was recorded as a result of the improving financial performance and improving outlook for our U.K. operations (including substantially increased backlog during 2006 related to U.K. operations). Previously, we were unable to conclude that this asset would be realized due to cumulative losses and lower levels of backlog. At December 31, 2006 we had net operating loss carryforwards in the United States, United Kingdom and Germany of approximately $305, $75 and $7, respectively, available to offset future taxable income.
Net earnings for 2006 were $85.6, or $1.10 per diluted share, based on approximately 78.0 million diluted shares and include one-time debt prepayment costs of $19.4 and a one-time tax benefit of $22.9 associated with the recognition of our U.K. deferred tax asset. Net earnings for 2005 were $84.6, or $1.39 per diluted share, on 60.8 million diluted shares and included a one-time tax benefit of $51.9 associated with the recognition of our U.S. net operating loss carryforward.
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 $711.6 as of December 31, 2007, as compared to $456.0 as of December 31, 2006 consistent with the nearly 50% increase in revenues. Factors impacting the change in working capital include a $215.4 increase in inventories associated with product line expansion in the distribution segment and to support the delivery of our record backlog, and a $45.1 increase in accounts receivable related to our 48.7% revenue growth, which were offset by a $39.0 increase in accounts payable and accrued liabilities. At December 31, 2007, our debt to capital ratio was 11%. Long term debt, less cash and cash equivalents, at December 31, 2007 stood at $70.3, which represents total debt of $151.9 less cash and cash equivalents of $81.6. At December 31, 2007, there was $150.0 in term debt outstanding under the senior secured credit facility, which consists of a $200.0 revolving credit facility and a $300.0 term loan. There were no borrowings outstanding under the revolving credit component of our senior secured credit facility. In May 2007 we redeemed the $250.0 aggregate principal amount of 8-7/8% senior subordinated notes due 2011.
Cash Flows
At December 31, 2007, cash and cash equivalents was $81.6 as compared to $65.0 at December 31, 2006. Cash provided by operating activities was $22.0 for the year ended December 31, 2007 as compared to $41.0 during the year ended December 31, 2006. The primary sources of cash provided by operating activities during 2007 were net earnings of $147.3, non-cash charges for depreciation and amortization of $35.0, reduction in deferred income taxes totaling $58.5, non-cash compensation aggregating $11.0 and the non-cash impact from debt prepayment costs of $11.0. The primary use of cash in operating activities during the year ended December 31, 2007 was $241.9 related to changes in our operating assets and liabilities, primarily related to substantial investments in inventories offset by an increase in our accounts payable. The primary source of cash provided by operating activities during 2006 were net earnings of $85.6 plus non-cash charges for depreciation and amortization of $29.4, plus the non-cash impact from loss on debt extinguishment of $19.4. The primary use of cash in operating activities during the year ended December 31, 2006 was $97.1 related to changes in our operating assets and liabilities primarily related to investments in inventory, offset by an increase in our accounts payable.
The primary use of cash in investing activities during the year ended December 31, 2007 was related to capital expenditures of $32.1. The primary use of cash from investing activities during the year ended December 31, 2006 was related to cash paid for acquisitions, net of cash acquired, of $145.3 and capital expenditures of $24.1.
During 2007, we redeemed $250.0 of our 8-7/8% senior subordinated notes and repaid $100.0 of our bank term loan with proceeds from our March 2007 common stock offering. During 2006, we redeemed $250.0 of our 8% senior subordinated notes with the proceeds from our December 2005 common stock offering.
Capital Spending
Our capital expenditures were $32.1 and $24.1 during the years ended December 31, 2007 and 2006, respectively. Taking into consideration our record backlog, targeted capacity utilization levels, recent capital expenditure investments, recent acquisitions and current industry conditions, we anticipate capital expenditures of approximately $40 for the next twelve months. We have no material commitments for capital expenditures. We have, in the past, generally funded our capital expenditures from cash from operations and funds available to us under bank credit facilities. We expect to fund future capital expenditures from cash on hand, from operations and from funds available to us under our senior secured credit facility.
Between 1989 and 2001, we completed 22 acquisitions for an aggregate purchase price of approximately $1,000. 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. As discussed in Note 2 to our Consolidated Financial Statements we recently completed two strategic acquisitions for $146.7 in cash.
Outstanding Debt and Other Financing Arrangements
Long-term debt at December 31, 2007 consisted principally of $150.0 term loan borrowings under our senior secured credit facility. Long term debt at December 31, 2006 consisted principally of $250 of 8-7/8% senior subordinated notes, which were redeemed in full on May 1, 2007, and $250.0 of term borrowings under our senior secured credit facility.
Revolving credit borrowings under the senior secured credit facility bear interest at an annual rate equal to the London interbank offered rate (LIBOR) plus 125 basis points. There are no amounts outstanding under the revolving credit facility at December 31, 2007. Term loan borrowings under the senior secured credit facility bear interest at an annual rate equal to LIBOR plus 175 basis points (6.73% at December 31, 2007).
Contractual Obligations
The following charts reflect our contractual obligations and commercial commitments as of December 31, 2007. 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.
(1)
Our liability for unrecognized tax benefits of $9.2 at December 31, 2007 has been omitted from the above table because we cannot determine with certainty when this liability will be settled. It is reasonably possible that the amount of liability for unrecognized tax benefits will change in the next twelve months; however, we do not expect the change to have a material impact on our consolidated financial statements.
(2)
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 just with 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 purchase obligations.
(3)
Interest payments include estimated amounts due on the $150.0 outstanding on the term loan of our senior secured credit facility based on the actual interest rate at December 31, 2007. Actual interest payments will fluctuate based on LIBOR pursuant to the terms of the senior secured credit facility.
We believe that our cash flows, together with cash on hand and the availability under the senior secured credit facility, provide us with the ability to fund our operations, make planned capital expenditures and make scheduled debt service payments for at least the next twelve months. However, such cash flows are dependent upon our future operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors, including the conditions of our markets, some of which are beyond our control. If, in the future, we cannot generate sufficient cash from operations to meet our debt service obligations, we will need to refinance such debt obligations, obtain additional financing or sell assets. We cannot 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.
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 in our consolidated balance sheet. Future minimum lease payments under these arrangements aggregated approximately $136.8 at December 31, 2007.
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 consolidated financial statements.
Deferred Tax Assets
During the third quarter of 2006 we recognized our U.K. deferred tax asset resulting in a tax benefit of approximately $22.9. The deferred tax asset was recorded as a result of our improved performance and outlook for our U.K. operations.
We maintained a valuation allowance of $9.8 as of December 31, 2007 primarily related to our domestic capital loss carryforwards because of uncertainties that preclude us from determining that it is more likely than not that we will be able to generate sufficient capital gain income and realize this tax benefit during the applicable carryforward period.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (SFAS 157) which provides guidance for measuring assets and liabilities at fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 157 is not expected to have a material impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 allows companies to measure at fair value most financial assets and liabilities that are currently required to be measured in a different manner, such as based on their carrying amount. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material impact on the Company’s consolidated financial statements.
On December 4, 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (FAS 141 (R)) and No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (FAS 160)”. FAS 141(R) will change how business acquisitions are accounted for and FAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. FAS 141(R) and FAS 160 are effective for fiscal years beginning on or after December 15, 2008 (January 1, 2009 for our company). The adoption of FAS 141(R) and FAS 160 are not expected to have a material impact on the Company’s consolidated financial statements.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see Note 1 to our Consolidated Financial Statements.
Revenue Recognition
Sales of products are recorded when the earnings process is complete. This generally occurs when the products are shipped to the customer in accordance with the contract or purchase order, risk of loss and title has passed to the customer, collectibility is reasonably assured and pricing is fixed and determinable. In instances where title does not pass to the customer upon shipment, we recognize revenue upon delivery or customer acceptance, depending on the terms of the sales contract.
Service revenues primarily consist of engineering activities and are recorded when services are performed.
Revenues and costs under certain long-term contracts are recognized using contract accounting under the percentage-of-completion method, generally using the cost-to-cost method. The percentage-of-completion method requires the use of estimates of costs to complete long-term contracts. The estimation of these costs requires judgment on the part of management due to the duration of these contracts as well as the technical nature of the products involved. Adjustments to these estimated costs are made on a consistent basis. Revenues associated with any contractual claims are recognized when it is probable that the claim will result in additional contract revenue and the amount can be reasonably estimated. A provision for contract losses is recorded when such facts are determinable.
We sell our products primarily to airlines and aircraft manufacturers worldwide, including occasional sales collateralized by letters of credit. We perform ongoing credit evaluations of our customers and maintain reserves for estimated credit losses. Actual losses have been within management's expectations. We apply judgment to ensure that the criteria for recognizing sales are consistently applied and achieved for all recognized sales transactions.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current creditworthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. If the actual uncollected amounts significantly exceed the estimated allowance, our operating results would be significantly adversely affected. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past.
Inventories
We value our inventories at the lower of cost to purchase (FIFO or weighted average cost method), or market. The inventory balance, which includes the cost of raw material, purchased parts, labor and production overhead costs, is recorded net of a reserve for excess, obsolete or unmarketable inventories. We regularly review inventory quantities on hand and record a reserve for excess and obsolete inventories based primarily on historical usage and on our estimated forecast of product demand and production requirements. In accordance with industry practice, costs in inventory include amounts relating to long-term contracts with long production cycles and to inventory items with long procurement cycles, some of which are not expected to be realized within one year. As demonstrated since the events of September 11, 2001, demand for our products can fluctuate significantly. Our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventories. In the future, if our inventories are determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventories are determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale.
Long-Lived Assets and Goodwill
To conduct our global business operations and execute our strategy, we acquire tangible and intangible assets, which affect the amount of future period amortization expense and possible impairment expense that we may incur. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. We assess potential impairment to goodwill of a reporting unit and other intangible assets on an annual basis or when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Our judgment regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of our acquired businesses, expected changes in the global economy, aerospace industry projections, discount rates and other judgmental factors. Future events could cause us to conclude that impairment indicators exist and that goodwill or other acquired tangible or intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have an adverse impact on our results of operations.
Accounting for Income Taxes
Significant management judgment is required in evaluating our tax positions and in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $9.8 as of December 31, 2007, due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of our domestic capital loss and foreign tax credit carryforwards. The valuation allowance is based on our estimates of taxable income by jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates, or we revise these estimates in future periods, we may need to adjust the valuation allowance which could materially impact our financial position and results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency fluctuations and changes in interest rates affecting the cost of our variable-rate debt.
Foreign currency - We have direct operations in Europe that receive revenues from customers primarily in U.S. dollars and we purchase raw materials and component parts from foreign vendors primarily in British pounds or euros. Accordingly, we are exposed to transaction gains and losses that could result from changes in foreign currency exchange rates relative to the U.S. dollar. The largest foreign currency exposure results from activity in British pounds and euros.
From time to time, we and our foreign subsidiaries may enter into foreign currency exchange contracts to manage risk on transactions conducted in foreign currencies. At December 31, 2007, we had no outstanding foreign currency exchange contracts. In addition, we have not entered into any other derivative financial instruments.
Interest Rates - At December 31, 2007, we had adjustable rate debt of $150.0. The weighted average interest rate for the adjustable rate debt was approximately 6.7% at December 31, 2007. If interest rates on variable rate debt were to increase by 10% above current rates, the impact on our financial statements would be to reduce pretax income by $1.0. We do not engage in transactions intended to hedge our exposure to changes in interest rates.
As of December 31, 2007, we maintained a portfolio of securities consisting mainly of taxable, interest-bearing deposits with weighted average maturities of less than three months. If short-term interest rates were to increase or decrease by 10%, we estimate interest income would increase or decrease by approximately $0.3.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this section is set forth beginning from page of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of December 31, 2007, of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic filings with the SEC and in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of BE Aerospace, Inc. and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive and principal financial officers, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making the assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on its assessment, management believes that, as of December 31, 2007, the Company’s internal control over financial reporting is effective.
The registered public accounting firm that audited the financial statements included in this annual report has issued an attestation report on the Company’s internal control over financial reporting.
By:
/s/ Amin J. Khoury
By:
/s/ Thomas P. McCaffrey
Amin J. Khoury
Thomas P. McCaffrey
Chairman and Chief Executive Officer
Senior Vice President, Chief Financial Officer and Treasurer
February 15, 2008
February 15, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
BE Aerospace, Inc.
Wellington, Florida
We have audited the internal control over financial reporting of BE Aerospace, Inc. and subsidiaries (the “Company”) as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2007, of the Company and our report dated February 15, 2008, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule and included an explanatory paragraph regarding the Company’s adoption of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 15, 2008
ITEM 9B.
ITEM 9B. OTHER INFORMATION
On February 15, 2008, our compensation committee unanimously approved amendments to the 2005 B/E Aerospace, Inc. Management Incentive Plan (the "Plan"), under which the following individuals are eligible to receive bonuses with respect to calendar year 2008: the Chairman and Chief Executive Officer; the President and Chief Operating Officer; the Senior Vice President, Chief Financial Officer and Treasurer; and the other Vice Presidents (including all of the named executive officers), General Managers, and other members of management. The Plan is intended to reward and encourage significant contributions to the success of the Company and its respective businesses. The Plan was amended to provide that the 2008 bonuses will be based upon the achievement of two components: performance objectives (weighted at 80%) and individual strategic initiatives (weighted at 20%). The performance objectives for 2008 are EBIT (weighted at 30%), Operating Cash Flow (as defined) (weighted at 30%), Bookings (weighted at 20%) and Operating Margin (weighted at 20%).
The 2008 targets for each performance measure were approved by our compensation committee. The Plan now provides that, in general, no payments will be made under the Plan with respect to a particular performance objective unless the Company or the participant’s business unit exceeds 80% of the targets for the applicable performance objective. Previously this threshold level for performance objectives was 90%, and bonuses were awarded based on achievement of the performance objectives.
Named executive officer participants in the Plan will be eligible to receive a target bonus of 68-85% of their base salaries and a targeted maximum bonus of 80-100% of base salary, depending on their title and position, If the Company or the participant’s business unit (as appropriate) exceeds the target performance objectives by 110% or more, and the participant’s individual performance is at a superior level, the participant will be eligible to receive up to an additional 10% or 20% of his or her base salary (depending on the participant’s title), resulting in a maximum bonus of up to 100%-120% of the participant's base salary, depending on their title and position. Previously, a participant could realize up to an additional 5% for each financial performance objective which exceeded targeted levels, resulting in a maximum bonus of up to 120% of their base salary.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth information regarding our directors and executive officers as of February 15, 2008. Officers of the Company are elected annually by the Board of Directors.
________
(1)
Member, Audit Committee
(2)
Member, Compensation Committee
(3)
Member, Nominating and Governance Committee
Director Classification
Our restated certificate of incorporation provides that the Board of Directors is to be divided into three classes, each nearly as equal in number as possible, so that each director (in certain circumstances after a transitional period) will serve for three years, with one class of directors being elected each year. The Board is currently comprised of two Class I Directors (Jim C. Cowart and Arthur E. Wegner), two Class II Directors (Robert J. Khoury and Jonathan M. Schofield) and three Class III Directors (Amin J. Khoury, Charles L. Chadwell and Richard G. Hamermesh). The terms of the Class I, Class II and Class III Directors expire at the end of each respective three-year term and upon the election and qualification of successor directors at annual meetings of stockholders held at the end of each fiscal year. Our executive officers are elected annually by the Board of Directors following the annual meeting of stockholders and serve at the discretion of the Board of Directors.
Current Directors
Amin J. Khoury has been the Chairman of the Board since July 1987 when he founded the company. Effective December 31, 2005, Mr. Amin J. Khoury was appointed Chief Executive Officer. Mr. Amin J. Khoury also served as the company’s Chief Executive Officer until April 1, 1996. Since 1986, Mr. Khoury has been a director of Synthes, Inc., the world’s leading manufacturer and marketer of orthopedic trauma implants and a leading global manufacturer and marketer of cranial-maxillofacial and spine implants. Mr. Khoury is a member of the board of directors of the Aerospace Industries Association. Mr. Khoury is the brother of Robert J. Khoury.
Charles L. Chadwell has been a Director since January 2007. He was the Vice President and General Manager, Commercial Engine Operations for GE Aircraft Engines, from which he retired in 2002. After joining General Electric in 1965, he held a variety of management positions, including: Program Manager, CF6-80C program; Plant Manager, GE Aircraft Engines’ Wilmington, North Carolina plant; General Manager, GE Aircraft Engines’ Sourcing Operations; General Manager; Production Operations, GE Aircraft Engines’ Lynn, Massachusetts plant; Vice President, GE Aircraft Engines Human Resources; and Vice President and General Manager, Production and Procurement, GE Aircraft Engines.
Jim C. Cowart has been a Director since November 1989. Since September 2005, Mr. Cowart has been a Director of EAG Limited, a company listed on the London Stock Exchange, which is a provider of microanalytic laboratory services including surface analysis and materials characterization. Since September 2004, Mr. Cowart has been Chairman and Chief Executive Officer of Auriga Medical Products GmbH, a distributor of medical devices. He is a Principal of Cowart & Co. LLC and Auriga Partners, Inc., private capital firms that provide strategic planning, competitive analysis, financial relations and other services. From August 1999 to May 2001, he was Chairman of QualPro Corporation, an aerospace components manufacturing company. From January 1993 to November 1997, he was the Chairman and CEO of Aurora Electronics Inc. Previously, Mr. Cowart was a founding general partner of Capital Resource Partners, a private investment capital manager, and held various positions in investment banking and venture capital with Lehman Brothers, Shearson Venture Capital and Kidder, Peabody & Co.
Richard G. Hamermesh has been a Director since July 1987. Dr. Hamermesh has been a Professor of Management Practice at Harvard Business School since July 1, 2002. From 1987 to 2001, he was a co-founder and a Managing Partner of The Center for Executive Development, an executive education and development consulting firm. From 1976 to 1987, Dr. Hamermesh was a member of the faculty of Harvard Business School. He is also an active investor and entrepreneur, having participated as a principal, director and investor in the founding and early stages of more than 15 organizations.
Robert J. Khoury has been a Director since July 1987, when he co-founded the company. On December 31, 2005, Mr. Khoury retired from service as the company’s President and Chief Executive Officer, a position he held since August 2000. From April 1996 through August 2000, he served as Vice Chairman. Mr. Khoury is the brother of Amin J. Khoury.
Jonathan M. Schofield has been a Director since April 2001. From December 1992 through February 2000, Mr. Schofield served as Chairman of the Board and CEO of Airbus North America Holdings, a subsidiary of Airbus Industrie, a manufacturer of large civil aircraft, and served as Chairman from February 2000 until his retirement in March 2001. From 1989 until he joined Airbus, Mr. Schofield was President of United Technologies International Corporation. Mr. Schofield is currently a member of the board of directors of Aero Sat, Inc., Nordam Group and TurboCombustor Technology, Inc.; and is a trustee of LIFT Trust.
Arthur E. Wegner has been a Director since January 2007. Mr. Wegner retired in 2000 as Executive Vice President of Raytheon Company and Chairman of Raytheon Aircraft. He joined Raytheon Company in July 1993 as a Senior Vice President and was appointed Chairman and CEO of Raytheon’s Beech Aircraft Corporation. In September 1994, he was appointed Chairman and CEO of Raytheon Aircraft, which was formed by the merger of Raytheon subsidiaries, Beech Aircraft and Raytheon Corporate Jets. He became Chairman of Raytheon Aircraft in 2000. He was elected an Executive Vice President of Raytheon Company in March of 1995. Mr. Wegner came to Raytheon Company after 20 years with United Technologies Corporation (UTC), where he was Executive Vice President and President of UTC’s Aerospace and Defense Sector. Prior to that he was President of UTC’s Pratt and Whitney Division. Mr. Wegner is past Chairman of the Board of Directors of the General Aviation Manufacturers Association and the Aerospace Industries Association.
Executive Officers
Michael B. Baughan has been President and Chief Operating Officer since December 31, 2005. From July 2002 to December 31, 2005, Mr. Baughan served as Senior Vice President and General Manager of Commercial Aircraft Segment. From May 1999 to July 2002, Mr. Baughan was Vice President and General Manager of Seating Products. From September 1994 to May 1999, Mr. Baughan was Vice President, Sales and Marketing for Seating Products. Prior to 1994, Mr. Baughan held various positions including President of AET Systems, Manager of Strategic Initiatives at The Boston Company (American Express) and Sales Representative at Dow Chemical Company.
Thomas P. McCaffrey has been Senior Vice President and Chief Financial Officer since May 1993. From August 1989 through May 1993, Mr. McCaffrey was a Director with Deloitte & Touche LLP, and from 1976 through 1989 served in several capacities, including Audit Partner, with Coleman & Grant LLP.
Werner Lieberherr has been Vice President and General Manager of our Commercial Aircraft Products Group, which is comprised of our Seating, Interior Products and Engineering Systems segments; since July 2006. Prior to joining our company, Mr. Lieberherr spent 20 years with Alstom Power, Inc., where he served in various senior management positions in Europe, Asia, and North America, including President, Managing Director, Vice President Project Management Worldwide, and General Manager-Sales.
Wayne R. Exton has been Vice President and General Manager, Business Jet Segment since May 2006. From November 2005 to April 2006, Mr. Exton served as Vice President and General Manager of the super first class division of the Business Jet Segment. Prior to joining our company, Mr. Exton spent nine years at the Britax Automotive and Aerospace Divisions of Britax PLC, serving in a variety of senior management positions including President, Vice President Operations and Director of Global Marketing and Sales. Before joining Britax PLC, Mr. Exton held several senior management positions at Magneti Marelli (a division of Fiat), and Lucas Electrical.
Robert A. Marchetti has been Vice President and General Manager of Fastener Distribution Segment since April 2002. From February 2001 to April 2002, Mr. Marchetti was Vice President of Machined Products Group. From 1997 to January 2001 Mr. Marchetti was employed by Fairchild Corporation’s Fasteners Division with his last position being Senior Vice President and Chief Operating Officer. From 1990 to 1997, Mr. Marchetti served as a corporate officer of UNC Inc. where he held several senior positions such as Corporate VP of Marketing, President of Tri-Remanufacturing and Chief Operating Officer of the Accessory Overhaul Division. From 1989 to 1990, he served as President of AWA Incorporated. From 1986 through 1989, Mr. Marchetti was Vice President of Marketing at General Electric Aircraft Engines and General Manager for a Component Repair Division. From 1965 through 1986 he held several sales and general management positions with Copperweld Corporation and Carlisle Corporation.
Edmund J. Moriarty has been Vice President-Law, General Counsel and Secretary since November 1995. From 1991 to 1995, Mr. Moriarty served as Vice President and General Counsel to Rollins, Inc., a national service company. From 1982 through 1991, Mr. Moriarty served as Vice President and General Counsel to Old Ben Coal Company, a wholly owned coal subsidiary of The Standard Oil Company.
Stephen R. Swisher has been Vice President-Finance and Controller since August 1999. Mr. Swisher has been Controller since 1996 and served as Director of Finance from 1994 to 1996. Prior to 1994, Mr. Swisher held various management positions at Burger King Corporation and Deloitte & Touche LLP.
Audit Committee
We have a separately-designated standing Audit Committee established in accordance with section 3(a)(58)(A) of the Exchange Act. Messrs. Cowart, Hamermesh and Wegner currently serve as members of the Audit Committee. Under the current SEC rules and the rules of the Nasdaq, all of the members are independent. Our Board of Directors has determined that Mr. Cowart is an “audit committee financial expert” in accordance with current SEC rules. Mr. Cowart is also independent, as that term is used in Item 407 of Regulation S-K of the federal securities laws.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater-than-ten-percent shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports furnished to us and, with respect to our officers and directors, written representations that no other reports were required, during the fiscal year ended December 31, 2007, all Section 16(a) filing requirements applicable to our officers, directors and greater-than-ten-percent beneficial owners were complied with.
In making the above statements, we have relied on the written representations of our directors and officers and copies of the reports that have been filed with the SEC.
Code of Ethics
We have adopted a code of ethics, or Code of Business Conduct, to comply with the rules of the SEC and Nasdaq. The Code of Business Conduct applies to our directors, officers and employees worldwide, including our principal executive officer and senior financial officers. A copy of our Code of Business Conduct is maintained on our website at www.beaerospace.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated by reference herein. The Compensation Committee Report will be included in the Proxy Statement and is not incorporated herein.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information set forth under the captions "Security Ownership of Certain Beneficial Owners and Management" and “Equity Compensation Plan Information” in the Proxy Statement is incorporated by reference herein.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information set forth under the caption "Certain Relationships and Related Transactions" in the Proxy Statement is incorporated by reference herein.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information set forth under the caption “Principal Accountant Fees and Services” in the Proxy Statement is incorporated by reference herein.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of report on Form 10-K
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2007 and December 31, 2006
Consolidated Statements of Earnings and Comprehensive Income for the Fiscal Years Ended December 31, 2007, 2006, and 2005
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended December 31, 2007, 2006, and 2005
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2007, 2006, and 2005
Notes to Consolidated Financial Statements for the Fiscal Years Ended December 31, 2007, 2006, and 2005
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other consolidated financial statement schedules are omitted because such schedules are not required or the information required has been presented in the aforementioned consolidated financial statements.
3. Exhibits - The exhibits listed in the following "Index to Exhibits" are filed with this Form 10-K or incorporated by reference as set forth below.
(b)
The exhibits listed in the "Index to Exhibits" below are filed with this Form 10-K or incorporated by
reference as set forth below.
(c)
Additional Financial Statement Schedules - None.
INDEX TO EXHIBITS
Exhibit
Description
Number
Exhibit
Articles of Incorporation and By-Laws
3.1
Amended and Restated Certificate of Incorporation (1)
3.2
Certificate of Amendment of the Restated Certificate of Incorporation (2)
3.3
Certificate of Amendment of the Restated Certificate of Incorporation (4)
3.4
Certificate of Amendment of the Restated Certificate of Incorporation (12)
3.5
Amended and Restated By-Laws (13)
3.6
Certificate of Amendment of the Restated Certificate of Incorporation (15)
Exhibit
Instruments Defining the Rights of Security Holders, including debentures
4.1
Specimen Common Stock Certificate (1)
4.2
Rights Agreement between the Registrant and BankBoston, N.A., as rights agent, dated as of November 12, 1998 (5)
Exhibit 10(i)
Material Contracts
10.1
Credit Agreement, dated as of July 26, 2006, among the Registrant, J.P. Morgan Securities Inc., UBS Securities LLC and Credit Suisse Securities (USA) LLC, as Joint Lead Arrangers and Joint Bookrunners, and JPMorgan Chase Bank, N.A., as Administrative Agent (16)
10.2
Amended and Restated Credit Agreement, dated as of August 24, 2006, among the Registrant, J.P. Morgan Securities Inc., UBS Securities LLC and Credit Suisse Securities (USA) LLC, as Joint Lead Arrangers and Joint Bookrunners, and JPMorgan Chase Bank, N.A., as Administrative Agent (17)
Exhibit 10(iii)
Management Contracts and Executive Compensation Plans, Contracts and Arrangements
10.3
Amended and Restated Employment Agreement for Amin J. Khoury dated as of April 27, 2007 (20)
10.4
Amended and Restated Employment Agreement for Thomas P. McCaffrey dated as of April 27, 2007 (20)
10.5
Amended and Restated Employment Agreement for Michael B. Baughan dated as of April 27, 2007 (20)
10.6
Employment Agreement dated as of January 15, 2001 between the Registrant and Mark D. Krosney (11)
10.7
Employment Agreement dated as of February 26, 2001 between the Registrant and Robert A. Marchetti (11)
10.8
Retirement Agreement dated as of December 31, 2005 between the Registrant and Robert J. Khoury (19)
10.9
Consulting Agreement dated as of December 31, 2005 between the Registrant and Robert J. Khoury (19)
10.10
Amended and Restated 1989 Stock Option Plan (9)
10.11
Amendment No. 1 to Amended and Restated 1989 Stock Option Plan (7)
10.12
Directors' Stock Option Plan (3)
10.13
United Kingdom 1992 Employee Share Option Scheme (2)
10.14
Stock Option Plan (9)
10.15
Amendment No. 1 to the 1996 Stock Option Plan (7)
10.16
Amendment No. 2 to the 1996 Stock Option Plan (8)
10.17
Stock Option Plan (10)
10.18
Directors' Stock Option Plan (10)
10.19
Supplemental Executive Deferred Compensation Plan III (6)
10.20
BE Aerospace, Inc. Management Incentive Plan (100%) - FY 2008*
10.21
BE Aerospace, Inc. Management Incentive Plan (80%) - FY 2008*
10.22
BE Aerospace, Inc. Management Incentive Plan (60%) - FY 2008*
10.23
Long-Term Incentive Plan (14)
10.24
Standard Form of Restricted Stock Award Agreement (20)
10.25
Form of Restricted Stock Award Agreement for Amin J. Khoury (20)
10.26
Form of Restricted Stock Award Agreement for Thomas P. McCaffrey (20)
10.27
Form of Restricted Stock Award Agreement for Michael B. Baughan (20)
10.28
Form of Restricted Stock Award Agreement for Robert A. Marchetti (20)
10.29
Amended and Restated 1994 Employee Stock Purchase Plan (18)
Exhibit
Code of Ethics
14.1
Code of Business Conduct (13)
Exhibit
Subsidiaries of the Registrant
21.1
Subsidiaries*
Exhibit
Consents of Experts and Counsel
23.1
Consent of Independent Registered Public Accounting Firm - Deloitte & Touche LLP*
Exhibit
Rule 13a-14(a)/15d-14(a) Certifications
31.1
Certification of Chief Executive Officer*
31.2
Certification of Chief Financial Officer*
Exhibit
Section 1350 Certifications
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350*
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350*
__________________
* Filed herewith.
(1)
Incorporated by reference to the Company’s Registration Statement on Form S-1, as amended (No. 33-33689), filed with the Commission on March 7, 1990.
(2)
Incorporated by reference to the Company’s Registration Statement on Form S-1, as amended (No. 333-54146), filed with the Commission on November 3, 1992.
(3)
Incorporated by reference to the Company’s Registration Statement on Form S-8 (No. 333-48010), filed with the Commission on May 26, 1992.
(4)
Incorporated by reference to the Company’s Registration Statement on Form S-3 (No. 333-60209), filed with the Commission on July 30, 1998.
(5)
Incorporated by reference to the Company’s Current Report on Form 8-K dated November 12, 1998, filed with the Commission on November 18, 1998.
(6)
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 29, 1999, filed with the Commission on July 9, 1999.
(7)
Incorporated by reference to the Company’s Registration Statement on Form S-8 (No. 333-89145), filed with the Commission on October 15, 1999.
(8)
Incorporated by reference to the Company’s Registration Statement on Form S-8 (No. 333-30578), filed with the Commission on February 16, 2000.
(9)
Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-14037), filed with the Commission on October 15, 1996.
(10)
Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-71442), filed with the Commission on October 11, 2001.
(11)
Incorporated by reference to the Company's Annual Report on Form 10-K/A for the fiscal year ended February 23, 2002, filed with the Commission on May 29, 2002.
(12)
Incorporated by reference to the Company’s Registration Statement on Form S-3 (No. 333-112493), as amended, filed with the Commission on February 5, 2004.
(13)
Incorporated by reference to the Company’s Transition Report on Form 10-K for the ten-month transition period ended December 31, 2002, filed with the Commission March 26, 2003.
(14)
Incorporated by reference to the Company’s Current Report on Form 8-K dated July 26, 2005, filed with the Commission on July 26, 2005.
(15)
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, filed with the Commission on August 7, 2006.
(16)
Incorporated by reference to the Company’s Current Report on Form 8-K dated July 26, 2006, filed with the Commission on July 31, 2006.
(17)
Incorporated by reference to the Company’s Current Report on Form 8-K dated August 24, 2006, filed with the Commission on August 29, 2006.
(18)
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed with the Commission on November 7, 2006.
(19)
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 filed with the Commission on March 15, 2006.
(20)
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, filed with the Commission on May 9,
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: February 15, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Amin J. Khoury
Chairman and Chief Executive Officer
February 15, 2008
Amin J. Khoury
/s/ Thomas P. McCaffrey
Senior Vice President, Chief Financial Officer and Treasurer
February 15, 2008
Thomas P. McCaffrey
(principal financial and accounting officer)
/s/ Charles L. Chadwell
Director
February 15, 2008
Charles L. Chadwell
/s/ Jim C. Cowart
Director
February 15, 2008
Jim C. Cowart
/s/ Richard G. Hamermesh
Director
February 15, 2008
Richard G. Hamermesh
/s/ Robert J. Khoury
Director
February 15, 2008
Robert J. Khoury
/s/ Jonathan M. Schofield
Director
February 15, 2008
Jonathan M. Schofield
/s/ Arthur E. Wegner
Director
February 15, 2008
Arthur E. Wegner
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2007 and
Consolidated Statements of Earnings and Comprehensive Income for the Fiscal Years Ended December 31, 2007, 2006, and
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended December 31, 2007, 2006, and
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2007, 2006, and 2005
Notes to Consolidated Financial Statements for the Fiscal Years Ended December 31, 2007, 2006, and 2005
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the Fiscal Years Ended December 31, 2007, 2006, and 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
BE Aerospace, Inc.
Wellington, Florida
We have audited the accompanying consolidated balance sheets of BE Aerospace, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of earnings and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in item 15(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of BE Aerospace, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 10 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, in 2007.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 15, 2008 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 15, 2008
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 2007 AND
(In millions, except per share data)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In millions, except per share data)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(In millions)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(In millions)
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In millions, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation- BE Aerospace, Inc. and its wholly owned subsidiaries (the "Company") designs, manufactures, sells and services commercial aircraft and business jet cabin interior products consisting of a broad range of seating, interior systems, including structures as well as all food and beverage storage and preparation equipment and distributes aerospace fasteners. The Company’s principal customers are the operators of commercial and business jet aircraft and aircraft manufacturers. As a result, the Company’s business is directly dependent upon the conditions in the commercial airline, business jet and aircraft manufacturing industries. The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.
Consolidation - The accompanying consolidated financial statements include the accounts of BE Aerospace, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Financial Statement Preparation- The preparation of the consolidated 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.
Revenue Recognition- Sales of products are recorded when the earnings process is complete. This generally occurs when the products are shipped to the customer in accordance with the contract or purchase order, risk of loss and title has passed to the customer, collectibility is reasonably assured and pricing is fixed and determinable. In instances where title does not pass to the customer upon shipment, the Company recognizes revenue upon delivery or customer acceptance, depending on the terms of the sales contract.
Service revenues primarily consist of engineering activities and are recorded when services are performed.
Revenues and costs under certain long-term contracts are recognized using contract accounting under the percentage-of-completion method, generally using the cost-to-cost method. The percentage-of-completion method requires the use of estimates of costs to complete long-term contracts. The estimation of these costs requires judgment on the part of management due to the duration of these contracts as well as the technical nature of the products involved. Adjustments to these estimated costs are made on a consistent basis. Revenues associated with any contractual claims are recognized when it is probable that the claim will result in additional contract revenue and the amount can be reasonably estimated. A provision for contract losses is recorded when such facts are determinable.
Income Taxes- The Company provides deferred income taxes for temporary differences between amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. Deferred income taxes are computed using enacted tax rates that are expected to be in effect when the temporary differences reverse. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized.
Cash Equivalents - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable - The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current creditworthiness, as determined by review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. Credit losses have historically been within management's expectations and the provisions established. Our allowance for doubtful accounts at December 31, 2007 and 2006 was $4.5 and $4.7, respectively.
Inventories - The Company values inventory at the lower of cost (FIFO or weighted average cost method) or market. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on historical demand, as well as, an estimated forecast of product demand and production requirements. Demand for the Company’s products can fluctuate significantly. In accordance with industry practice, costs in inventory include amounts relating to long-term contracts with long production cycles and to inventory items with long procurement cycles, some of which are not expected to be realized within one year.
Debt Issuance Costs - Costs incurred to issue debt are deferred and amortized as interest expense over the term of the related debt.
Goodwill and Identified Intangible Assets- Under Statement of Financial Accounting Standards (“SFAS”) No. 142, "Goodwill and Other Intangible Assets”, goodwill and other intangible assets with indefinite lives are not amortized, but are reviewed at least annually for impairment. Acquired intangible assets with definite lives are amortized over their individual useful lives. In addition to goodwill, intangible assets with indefinite lives consist of the M & M trademark. Patents and other intangible assets are amortized using the straight-line method over periods ranging from one to thirty years (see Note 5). On at least an annual basis, management assesses whether there has been any impairment in the value of goodwill or intangible assets with indefinite lives by comparing the fair value to the net carrying value of reporting units. If the carrying value exceeds its estimated fair value, an impairment loss would be recognized if the implied fair value of the asset being tested was less than its carrying value. In this event, the asset is written down accordingly. In accordance with SFAS No. 142, the Company completed step one of the impairment tests and fair value analysis for goodwill and other intangible assets, and there were no impairments or impairment indicators present and no impairment loss was recorded during the fiscal years ended December 31, 2007, 2006 or 2005.
Long-Lived Assets- The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the asset's carrying value exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results.
Product Warranty Costs- Estimated costs related to product warranties are accrued at the time products are sold. In estimating its future warranty obligations, the Company considers various relevant factors, including the Company's stated warranty policies and practices, the historical frequency of claims and the cost to replace or repair its products under warranty. The following table provides a reconciliation of the activity related to the Company's accrued warranty expense:
Accounting for Stock-Based Compensation - Prior to January 1, 2006 the Company applied Accounting Principles Board Opinion No. 25 “Accounting for Stock Issues to Employees”, and related interpretations in accounting for its stock option and purchase plans. Effective January 1, 2006, the Company began accounting for share-based compensation arrangements in accordance with the provisions of SFAS No. 123(R), “Share Based Payment” (SFAS No. 123(R)) whereby share-based compensation cost is measured on the date of grant, based on the fair value of the award, and is recognized over the requisite service period. The Company elected to use the modified prospective transition method as permitted by SFAS No. 123(R) and therefore has not restated the financial results for prior periods.
Commencing January 1, 2006, compensation cost includes all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). No compensation cost has been recognized during 2006 or 2007 for share-based payments granted prior to January 1, 2006 as the vesting of all remaining unvested awards were accelerated in December 2005 and no options were granted during the two year period ended December 31, 2007. The following table illustrates the effects of options and employee purchase rights granted prior to January 1, 2006 on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123(R) for the fiscal year ended December 2005. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for options granted during the year ended December 31, 2005; risk free rate of 4.1%, dividend yield of 0%, volatility of 65%, and expected life (years) of 2.2.
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits from tax deductions in excess of deferred tax asset (hypothetical and actual) recorded for stock compensation costs (excess tax benefits) to be classified as financing cash flows.
The Company has established a qualified Employee Stock Purchase Plan. The Plan allows qualified employees (as defined) to participate in the purchase of designated 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. The value of employee purchase rights granted pursuant to the Company’s Employee Stock Purchase Plan during the years ended December 31, 2007, 2006 and 2005 was $0.5, $0.4 and $1.7, respectively. The fair value of those purchase rights represents the difference between the closing price of the Company’s shares on the date of purchase and the purchase price of the shares.
Research and Development - Research and development expenditures are expensed as incurred.
Foreign Currency Translation- The assets and liabilities of subsidiaries located outside the United States are translated into U.S. dollars at the rates of exchange in effect at the balance sheet dates. Revenue and expense items are translated at the average exchange rates prevailing during the period. Gains and losses resulting from foreign currency transactions are recognized currently in income, and those resulting from translation of financial statements are accumulated as a separate component of stockholders’ equity. The Company's European subsidiaries utilize the British pound or the Euro as their local functional currency.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (SFAS 157) which provides guidance for measuring assets and liabilities at fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 157 is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 allows companies to measure at fair value most financial assets and liabilities that are currently required to be measured in a different manner, such as based on their carrying amount. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (FAS 141 (R)) and No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (FAS 160)”. FAS 141(R) will change how business acquisitions are accounted for and FAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. FAS 141(R) and FAS 160 are effective for fiscal years beginning on or after December 15, 2008 (January 1, 2009 for the Company). The adoption of FAS 141(R) and FAS 160 will not have a material impact on the Company’s consolidated financial statements.
2. BUSINESS COMBINATIONS
During 2006, the Company completed two acquisitions which were accounted for as purchases under SFAS No. 141, “Business Combinations”. The assets purchased and liabilities assumed for these acquisitions have been reflected in the accompanying consolidated balance sheet as of December 31, 2006 and the results of operations for the acquisitions are included in the accompanying consolidated statement of earnings from the respective dates of acquisition.
Draeger Aerospace GmbH
On July 26, 2006, the Company acquired Draeger Aerospace GmbH (Draeger), from Cobham PLC of Dorset, England for $79.4 in cash.
Draeger manufactures components and integrated systems to supply chemical and gaseous oxygen systems for both civil and military aircraft. The integration of Draeger with the Company’s existing oxygen systems business will provide for a broadening of the Company’s oxygen systems product line and an expansion of its customer base.
The excess of the purchase price over the fair value of the identifiable net tangible assets acquired approximated $57.7 of which $13.7 has been allocated to intangible assets and $44.0 is included in goodwill. Adjustments to identified assets and goodwill relate to changes to deferred tax balances resulting in part from the finalization of the acquisition appraisal during 2007.
New York Fasteners Corp.
On September 1, 2006, the Company acquired New York Fasteners Corp. (New York Fasteners), a privately-held company, for $67.3 in cash.
New York Fasteners is a distributor of aerospace fasteners and hardware primarily to the military sector. The integration of New York Fasteners into the Company’s distribution segment is expected to create procurement and operations synergies and significantly expand the Company’s overall penetration into the military sector.
The estimated excess of the purchase price over the fair value of identifiable net tangible assets acquired was $48.3 of which $5.5 has been allocated to intangible assets and $42.8 is included in goodwill.
The following table summarizes the fair values of assets acquired and liabilities assumed:
Goodwill of $42.8 and other intangibles of $5.5 related to the New York Fasteners acquisition are expected to be deductible for U.S. tax purposes.
Consolidated pro forma revenues for fiscal years 2006 and 2005, giving effect to the New York Fasteners and Draeger acquisitions as if they had occurred on January 1, 2006 and 2005 were $1,190.0 and $919.6, respectively. Consolidated pro forma net earnings, and diluted net earnings per share giving effect to the New York Fasteners and Draeger acquisitions as if they had occurred on January 1, 2006 and 2005 were $82.8 and $82.5, and $1.06 and $1.36, respectively.
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. Inventories consist of the following:
4.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated and amortized generally on the straight-line method over their estimated useful lives of three to fifty years (or the lesser of the term of the lease for leasehold improvements, as appropriate). Property and equipment consist of the following:
Aggregate depreciation expense was $23.9, $19.1 and $18.8 for the fiscal years ended December 31, 2007, 2006 and 2005 respectively.
5. GOODWILL AND INTANGIBLE ASSETS
In accordance with SFAS No. 142, the Company’s goodwill and indefinite life intangible assets are not amortized, but are subject to an annual impairment test. The following sets forth the intangible assets by major asset class, all of which were acquired through business acquisition transactions:
Aggregate amortization expense of intangible assets was $11.1, $10.2 and $9.8 for the fiscal years ended December 31, 2007, 2006 and 2005, respectively. Amortization expense associated with identified intangible assets is expected to be approximately $12 to $13 in each of the next five years.
Changes to the original cost basis of goodwill during the calendar year ended December 31, 2007 were due to completing acquisition appraisals and foreign currency fluctuations. The changes in the carrying amount of goodwill for the fiscal years ended December 31, 2007 and 2006 are as follows:
6.
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
7.
LONG-TERM DEBT
Long-term debt consists of the following:
7/8% Senior Subordinated Notes
The 8-7/8% senior subordinated notes were redeemed in full on May 1, 2007.
Bank Credit Facilities
On July 26, 2006 and, as amended and restated, on August 24, 2006, the Company entered into a senior secured credit facility (the “Senior Secured Credit Facility”), consisting of a $200.0 revolving credit facility and a $300.0 term loan. The revolving credit facility terminates on August 24, 2011 and the term loan terminates on August 24, 2012. The Senior Secured Credit Facility provides for the ability of the Company to add additional term loans in the amount of up to $75.0 upon satisfaction of certain customary conditions, including commitments from lenders.
Revolving credit borrowings under the Senior Secured Credit Facility bear interest at an annual rate equal to the London interbank offered rate (LIBOR) plus 125 basis points. Term loan borrowings under the Senior Secured Credit Facility bear interest at an annual rate equal to LIBOR plus 175 basis points (6.73% at December 31, 2007).
The Senior Secured Credit Facility contains an interest coverage ratio (as defined in the Credit Agreement) maintenance financial covenant that currently must be maintained at a level greater than 2.25 to 1 through December 31, 2007 and 2.50 to 1 thereafter. The Senior Secured Credit Facility also contains a total leverage ratio covenant (as defined in the Credit Agreement) which limits net debt to a 4.25 to 1 multiple of EBITDA (as defined in the Credit Agreement) through December 31, 2007 and 4.00 to 1 thereafter. The Senior Secured Credit Facility is collateralized by substantially all of the Company’s assets and contains customary affirmative covenants, negative covenants and conditions precedent for borrowings, all of which were met as of December 31, 2007.
There are no borrowings outstanding on the revolving credit facility portion of the Senior Secured Credit Facility at December 31, 2007. Term loan borrowings at December 31, 2007 were $150.0. Letters of credit outstanding under the Senior Secured Credit Facility aggregated approximately $24.0 at December 31, 2007.
Royal Inventum B.V., one of the Company’s subsidiaries, has a revolving credit agreement aggregating $0.7 that renews annually. This credit agreement is collateralized by accounts receivable and inventories. There were no borrowings outstanding under Royal Invention B.V.’s credit agreement as of December 31, 2007.
Maturities of long-term debt are as follows:
During the second quarter of 2007, the Company prepaid $100.0 of bank debt. Interest expense amounted to $23.5 for the year ended December 31, 2007, $42.8 for the year ended December 31, 2006 and $60.8 for the year ended December 31, 2005.
8.
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS
Lease Commitments - The Company finances its use of certain facilities and equipment under committed lease arrangements provided by various institutions. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected on the consolidated balance sheet. At December 31, 2007, future minimum lease payments under these arrangements approximated $136.8, of which $124.8 is related to long-term real estate leases.
Rent expense for the years ended December 31, 2007, 2006 and 2005 was $20.4, $16.8 and $15.1, respectively. Future payments under operating leases with terms currently greater than one year are as follows:
Litigation - The Company is 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 the Company's consolidated financial statements.
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. Substantially all of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments the Company could be obligated to make. However, the company is unable to estimate the maximum amount of liability related to its indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events which are not reasonably determinable. Management believes that any liability for these indemnities, commitments and guarantees would not be material to the accompanying condensed consolidated financial statements. Accordingly, no significant amounts have been accrued for indemnities, commitments and guarantees.
Employment Agreements - The Company has employment and compensation agreements with three key officers of the Company. Agreements for one of the officers provides for the officer to earn a minimum of $1.0 per year through a three-year period ending from any date after which it is measured, adjusted annually for changes in the consumer price index (as defined) or as determined by the Company's Board of Directors, as well as a retirement compensation equal to 150% of base salary.
Two other agreements provide for the officers to each receive annual minimum compensation of $0.5 per year through a three-year period ending from any date after which it is measured, adjusted annually for changes in the consumer price index (as defined) or as determined by the Company's Board of Directors, as well as a retirement compensation equal to the product of the number of years worked times one-half of each officer’s average three years' annual salary (as defined).
Retirement compensation has been accrued as provided for under the above-mentioned employment agreements. Through December 31, 2007, the Company fully funded these and other retirement compensation obligations, all of which were maintained in grantor trusts on behalf of the individuals. In addition, the Company has employment agreements with certain other key members of management expiring on various dates through the year 2008. The Company's employment agreements generally provide for certain protections in the event of a change of control. These protections generally include the payment of severance and related benefits under certain circumstances in the event of a change of control, and for the Company to reimburse such officers for the amount of any excise taxes associated with such benefits.
9.
INCOME TAXES
The components of earnings before incomes taxes were:
Income tax expense (benefit) consists of the following:
The difference between income tax expense and the amount computed by applying the statutory U.S. federal income tax rate (35%) to the pretax earnings consists of the following:
Through December 31, 2004, the Company had maintained a valuation allowance to fully reserve its net deferred tax assets based on the Company’s assessment that the realization of the net deferred tax assets did not meet the “more likely than not” criterion under SFAS No. 109, “Accounting for Income Taxes”. During 2006 and 2005, the Company reversed its valuation allowance on its U.S. and U.K. deferred tax assets as a result of improved performance and outlook for its operations and expected reductions in interest costs resulting from note redemptions.
The tax effects of temporary differences and carryforwards that give rise to deferred income tax assets and liabilities consist of the following:
The Company maintained a valuation allowance of $9.8 as of December 31, 2007 primarily related to the Company’s domestic capital loss carryforwards because of uncertainties that preclude the Company from determining that it is more likely than not that we will be able to generate sufficient capital gain income and realize this tax benefit during the applicable carryforward period. During 2007, both our valuation allowance and deferred tax assets decreased by $5.7 as a result of tax planning initiatives which utilized a portion of our capital loss carryforward.
As of December 31, 2007, the Company had federal, state and foreign net operating loss carryforwards of approximately $215, $103 and $24, respectively. The federal and state net operating loss carryforwards begin to expire in 2012 and 2008, respectively. In addition, the Company has a federal capital loss carryover of approximately $16 which is scheduled to expire in 2008.
As of December 31, 2007, the Company had a federal research and development tax credit carryforward of $19.2 which begins to expire in 2008.
The Company has not provided for any residual U.S. income taxes on the approximately $74.0 of earnings from its foreign subsidiaries because such earnings are intended to be indefinitely reinvested. Such residual U.S. income taxes, if provided for, would not be material.
Through 2007, the Company recognized cumulative tax deductions of $81.8 related to stock option exercises and $3.3 related to the vesting of restricted shares. In accordance with the Company’s methodology for determining when these deductions are deemed realized under SFAS No. 123(R), the Company will assume that it utilizes its net operating loss carryforwards to reduce its taxes payable during 2007 rather than these deductions. Pursuant to the principles of SFAS No. 123(R), these deductions are not deemed realized until they provide an incremental benefit by reducing taxes payable. To the extent deductions of $85.1 are treated as reducing taxes payable in the future, the Company expects to record a credit to additional paid-in capital of $33.1.
10.
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. Upon the adoption, the liability for unrecognized tax benefits at January 1, 2007 was $4.9, which was accounted for as a $2.3 increase to accumulated deficit, a $2.3 increase in long term deferred tax assets, and a $0.3 reduction in income taxes payable. During the year ended December 31, 2007, mainly as a result of the finalization of a tax credit study related to prior periods and other tax planning initiatives, the Company’s liability for unrecognized tax benefits increased by $4.3 to $9.2. This liability, if recognized, would affect the Company’s effective tax rate. It is reasonably possible that the amount of liability for unrecognized tax benefits will change in the next twelve months; however, the Company does not expect the change to have a material impact on the Company’s consolidated financial statements.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefit are as follows:
The difference between the gross uncertain tax position of $11.8 and the liability for unrecognized tax benefits of $9.2 is due to the netting of certain items when calculating the liability for unrecognized tax benefits.
The Company is not currently undergoing any income tax examinations in the U.S. federal, state or non-U.S. jurisdictions in which the Company operates. With minor exceptions, the Company is currently open to audit by the tax authorities for the tax years ending December 31, 2004 through December 31, 2007.
The Company classifies interest and penalties related to income tax as income tax expense. The amount included in the Company’s liability for unrecognized tax benefits for interest and penalties as of the date of adoption was under $1.0 and this amount did not materially change as of December 31, 2007.
11.
EMPLOYEE RETIREMENT PLANS
The Company sponsors and contributes to a qualified, defined contribution Savings and Investment Plan covering substantially all U.S. employees. In addition, the Company and its subsidiaries participate in government-sponsored programs in certain European countries. In general, the Company’s policy is to fund these plans based on legal requirements, tax considerations, local practices and investment opportunities.
The BE Aerospace Savings and Investment Plan was established pursuant to Section 401(k) of the Internal Revenue Code. Under the terms of the plan, covered employees may contribute up to 100% of their pay, limited to certain statutory maximum contributions for 2007. Effective July 1, 2006, participants are vested in matching contributions immediately and the matching percentage was revised to 100% of the first 3% of employee contributions and 50% on the next 2% of employee contributions. Total expense for the plan was $5.6, $3.9 and $3.0 for the calendar years ended December 31, 2007, 2006 and 2005, respectively.
The BE Aerospace, Inc. Hourly Tax-Sheltered Retirement Plan was established pursuant to Section 401(k) of the Internal Revenue Code. Under terms of the plan, covered employees may contribute from 1% to 20% of their compensation, limited to certain statutory maximum contributions for 2007. The Company matches 50% of employee contributions, up to 8% of a participant’s compensation. Participants become fully vested in the Company’s contributions after six years of service with the Company. Total expense for the plan was $0.2, $0.3 and $0.2 for the calendar years ended December 31, 2007, 2006 and 2005, respectively.
The Company also has two defined benefit plans, The SMR Technologies, Inc. Defined Benefit Pension Plan for Union Employees and The Draeger Aerospace GmbH Defined Benefit Plan. These plans were adopted by the Company when the related subsidiary companies were acquired. Under terms of these plans participants are entitled to certain defined benefits upon retirement. The number of employees covered by these plans as of December 31, 2007 totaled 275. The Company’s funding contribution to these plans was $0.5, $0.2 and $0.0 for the calendar years ended December 31, 2007, 2006 and 2005, respectively.
12.
STOCKHOLDERS' EQUITY
Earnings Per Share. Basic earnings per common share is computed using the weighted average of common shares outstanding during the year. Diluted earnings per common share is computed by using the average share price during the year when calculating the dilutive effect of stock options, shares issued under the Employee Stock Purchase Plan and restricted shares.
The following table sets forth the computation of basic and diluted net earnings per share for the fiscal years ended December 31, 2007, 2006 and 2005:
Long Term Incentive Plan. The Company has a Long Term Incentive Plan (“LTIP”) under which the Company’s Stock Option and Compensation Committee may grant stock options, stock appreciation rights, restricted stock, restricted stock units or other forms of equity based or equity related awards. The LTIP replaced the Company’s 2001 Stock Option Plan, the 1996 Stock Option Plan, the United Kingdom 1992 Employee Share Option Scheme and the Company’s Amended and Restated 1989 Stock Option Plan (collectively, the “Prior Plans”). As further described below, as of December 31, 2007 stock options and restricted stock have been granted in accordance with the terms of the LTIP and the Prior Plans. The number of shares available for grant under the LTIP as of December 31, 2007 were 1,722,319.
Restricted Stock Grants - During 2006 and 2007, the Company granted restricted stock to certain members of the Company’s Board of Directors and management. Restricted stock grants vest over two or four year terms and are granted at the discretion of the Compensation Committee of the Board of Directors. Compensation cost is recorded on a straight-line basis over the vesting term of the shares based on the grant date value using the closing trading price. Share based compensation of $10.3 and $2.0 was recorded during 2007 and 2006, respectively. Unrecognized compensation cost related to these grants was $41.0 at December 31, 2007. The following table summarizes shares granted, forfeited and outstanding:
Stock Option Grants. In December 2005, the Compensation Committee of the Board of Directors approved the acceleration of the vesting of 1.9 million stock options, which represented all remaining unvested stock options at that time. The Company recorded a charge of $1.2 during the fourth quarter of 2005 as a result of the acceleration of the vesting of such stock options. The estimated per share fair value of options granted during the year ended December 31, 2005 was $4.52. No stock options were granted during the years ended December 31, 2006 and 2007.
The following table summarizes options granted, canceled, forfeited and outstanding:
The Company issues new shares of common stock upon exercise of stock options. During the year ended December 31, 2007, 0.9 million stock options were exercised with an aggregate intrinsic value of $20.8 determined as of the date of option exercise. The aggregate intrinsic value of outstanding options as of December 31, 2007 was $10.2.
13.
EMPLOYEE STOCK PURCHASE PLAN
The Company has established a qualified Employee Stock Purchase Plan, the terms of which allow for qualified employees (as defined in the Plan) to participate in the purchase of designated 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. The Company issued approximately 67,000, 110,000 and 241,000 shares of common stock during the fiscal years ended December 31, 2007, 2006 and 2005, respectively, pursuant to this plan at a weighted average price per share of $39.46, $20.51, and $11.45, respectively.
14.
SEGMENT REPORTING
The Company is organized based on the products and services it offers. Under this organizational structure, the Company has five reportable segments: Seating, Interior Systems, Distribution, Business Jet and Engineering Services. The Seating, Interior Systems and Distribution segments consist of three, five and four principal operating facilities, respectively. Business Jet and Engineering Services segments consist of three and one principal operating facilities, respectively.
Each segment reports its results of operations and makes requests for capital expenditures and acquisition funding to the Company’s chief operational decision-making group. This group is presently comprised of the Chairman 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 commercial, business jet and aircraft-manufacturing customers.
The following table presents net sales and other financial information by business segment:
(1) Operating earnings (loss) includes an allocation of corporate IT costs, employee benefits and general and administrative costs based on the proportion of each segments’ systems users, number of employees and sales, respectively.
(2) Corporate assets (including cash and cash equivalents) of $139.2, $117.7 and $462.1 at December 31, 2007, 2006 and 2005, respectively, have been allocated to the above segments based on each segments respective percentage of total assets. During 2007 certain operations with total assets of approximately $31.5 were transferred from Distribution to Interior Systems.
Net sales for these business segments for the fiscal years ended December 31, 2007, 2006 and 2005 are presented below:
Geographic Origination
The Company operated principally in three geographic areas, the United States, Europe (primarily the United Kingdom) and emerging markets, i.e., Asia, Pacific Rim, Middle East, etc. during the fiscal years ended December 31, 2007, 2006 and 2005. There were no significant transfers between geographic areas during these periods. Identifiable assets are those assets of the Company that are identified with the operations in each geographic area.
The following table presents net sales and operating earnings for the fiscal years ended December 31, 2007, 2006 and 2005 and identifiable assets as of December 31, 2007, 2006 and 2005 by geographic area:
Geographic Destination
Export sales from the United States to customers in foreign countries amounted to approximately $437.1, $307.6 and $241.9 in the fiscal years ended December 31, 2007, 2006 and 2005, respectively.
Net sales by geographic area (based on destination) for the fiscal years ended December 31, 2007, December 31, 2006, and 2005 were as follows:
Major customers (i.e., customers representing more than 10% of net sales) change from year to year depending on the level of refurbishment activity and/or the level of new aircraft purchases by such customers. During the fiscal years ended December 31, 2007, 2006 and 2005 no single customer accounted for more than 10% of our consolidated sales.
15.
FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial instruments at December 31, 2007 and 2006 is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments”. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies; however, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The carrying amounts of cash and cash equivalents, accounts receivable-trade, and accounts payable and term debt are a reasonable estimate of their fair values as interest is based upon floating market rates. The fair value of the Company’s 8-7/8% Notes as of December 31, 2006 was $260.0.
The fair value information presented herein is based on pertinent information available to management at December 31, 2007 and December 31, 2006, respectively. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since those dates, and current estimates of fair value may differ significantly from the amounts presented herein.
16. SELECTED QUARTERLY DATA (Unaudited)
Summarized quarterly financial data for the fiscal years ended December 31, 2007 and December 31, 2006 are as follows:
(1)
Net earnings per share are computed individually for each quarter presented. Therefore, the sum of the quarterly net earnings per share may not necessarily equal the total for the year.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(In millions)