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BEAV > SEC Filings for BEAV > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for BE AEROSPACE INC

Form 10-Q for BE AEROSPACE INC


1-Nov-2012

Quarterly Report


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

OVERVIEW

The following discussion and analysis addresses our results of operations for the three and nine month periods ended September 30, 2012, as compared to our results of operations for the three and nine month periods ended September 30, 2011. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods.

Based on our experience in the industry, we believe we are the world's largest manufacturer of cabin interior products for commercial aircraft and for business jets and the world's leading distributor of aerospace fasteners and consumables as well as the leading provider of logistic services to the aerospace industry. We sell our products and provide our services directly to virtually all of the world's major airlines and aerospace manufacturers. Also, based on our experience, we believe that we have achieved leading global market positions in each of our major product categories, which include:

a broad line of aerospace fasteners and consumables, consisting of nearly one million stock keeping units ("SKU's") serving the commercial aerospace, business jet and military industries;

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 galley systems, lavatories, coffeemakers, water boilers, beverage containers, refrigerators, freezers, chillers and a line of ovens that includes microwave, high efficiency convection and steam ovens;

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

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.

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

Revenues by reportable segment for the three and nine month periods ended September 30, 2012 and September 30, 2011, respectively, were as follows:

                                           THREE MONTHS ENDED                                           NINE MONTHS ENDED
                            September 30, 2012            September 30, 2011            September 30, 2012             September 30, 2011
                                            % of                          % of                          % of                          % of
                          Revenues        Revenues      Revenues        Revenues      Revenues        Revenues      Revenues        Revenues
Commercial aircraft      $    385.6           50.3 %   $    333.1           52.4 %   $   1,152.6          50.5 %   $     951.9           51.6 %
Consumables management        295.8           38.6 %        238.7           37.5 %         869.2          38.1 %         709.4           38.4 %
Business jet                   85.3           11.1 %         64.2           10.1 %         260.3          11.4 %         183.8           10.0 %
Total revenues           $    766.7          100.0 %   $    636.0          100.0 %   $   2,282.1         100.0 %   $   1,845.1          100.0 %


Revenues by geographic area (based on destination) for the three and nine month periods ended September 30, 2012 and September 30, 2011, respectively, were as follows:

                                        THREE MONTHS ENDED                                             NINE MONTHS ENDED
                         September 30, 2012             September 30, 2011             September 30, 2012             September 30, 2011
                                        % of                           % of                           % of                           % of
                      Revenues        Revenues       Revenues        Revenues       Revenues        Revenues       Revenues        Revenues
United States        $    377.0            49.2 %   $    323.0            50.8 %   $   1,120.4           49.1 %   $     951.8           51.6 %
Europe                    176.1            23.0 %        147.3            23.2 %         561.3           24.6 %         450.6           24.4 %
Asia, Pacific Rim,
Middle East and
Other                     213.6            27.8 %        165.7            26.0 %         600.4           26.3 %         442.7           24.0 %
Total revenues       $    766.7           100.0 %   $    636.0           100.0 %   $   2,282.1          100.0 %   $   1,845.1          100.0 %

Revenues from our domestic and foreign operations for the three and nine month periods ended September 30, 2012 and September 30, 2011, respectively, were as follows:

                                            THREE MONTHS ENDED                          NINE MONTHS ENDED
                                                                                September 30,      September 30,
                               September 30, 2012       September 30, 2011           2012               2011
Domestic                       $             552.4      $             444.3     $      1,650.9     $      1,294.6
Foreign                                      214.3                    191.7              631.2              550.5
Total revenues                 $             766.7      $             636.0     $      2,282.1     $      1,845.1

New product development is a strategic initiative for us. Our customers regularly request that we engage in new product development and product enhancement activities. We believe these activities protect and enhance our leadership position. We believe our investments in research and development over the past several years have been a driving force behind our ongoing market share gains and the growth of our record backlog. Research, development and engineering spending was approximately 6.2% of sales during the third quarter of 2012 and is expected to remain at approximately the same percentage of sales 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 recent program awards to deliver multi-year programs for various Boeing, Airbus and business jet aircraft, our targeted capacity utilization levels, recent acquisitions and current industry conditions, we expect that our capital expenditures will be approximately $135 during 2012.

Our revenue growth continues to be driven primarily by the robust new aircraft delivery cycle. Approximately 61% of third quarter revenues were driven by demand for products for new-buy aircraft. Over the past three years, we have been booking orders well in excess of the market growth rate and have built record backlogs. We are now recording significant market share gains while delivering at a rate above the market growth rate. In addition, essentially our entire $4.5 billion supplier furnished equipment ("SFE") backlog represents additional market share gains, and, as deliveries from our SFE backlog ramp up, we expect to see our revenue generation per new aircraft continue to increase over time. Global airline industry fortunes track developments in the global economy. Sluggish growth in the U.S., economic contraction in the Euro zone and the slowdown in the Chinese economy are taking their toll. Airlines have responded with, among other things, careful capacity management, strict cost controls and cash conservation. As a result, aftermarket demand has been negatively impacted. Nevertheless, global passenger traffic continues to grow. Global traffic grew 5% year-over-year in August, compared to capacity growth of 4%. Year-to date through August global traffic is up almost 6%. Stronger international traffic is offsetting weaker domestic traffic, though a September slowdown in traffic growth appears to be widespread across most markets. Smart capacity management has helped maintain historically high airline load factors globally, which were in excess of 82% for August. In fact, the International Air Transport Association has recently increased its 2012 profit for airlines globally to $4.1 billion and forecasts nearly doubling in 2013 profits to $7.5 billion.


RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2012,
AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2011
($ in Millions, Except Backlog and Per Share Data)

Consolidated Results

                                                     REVENUES
                                         Three Months Ended September 30,
                                                                       Percent
                                      2012              2011           Change
          Commercial aircraft      $     385.6       $     333.1           15.8 %
          Consumables management         295.8             238.7           23.9 %
          Business jet                    85.3              64.2           32.9 %
          Total revenues           $     766.7       $     636.0           20.6 %

Third quarter 2012 revenues of $766.7 increased $130.7, or 20.6%, as compared with the same period of the prior year. Organic revenues, excluding the UFC and Interturbine acquisitions, increased $66.5 or 10.5%.

Cost of sales for the current period was $478.4, or 62.4% of sales, as compared with cost of sales of $398.0, or 62.6% of sales in the prior year period. The 20 basis point decrease in cost of sales (20 basis point increase in gross margin) is primarily due to ongoing continuous improvement cost reduction activities.

Selling, general and administrative ("SG&A") expenses for the third quarter of 2012 were $106.2, or 13.9% of sales, as compared with SG&A expenses of $86.9, or 13.7% of sales in the same period in 2011. The higher level of SG&A expense in the current period is primarily due to recent acquisitions ($7.9), costs and expenses associated with the growth in revenues ($6.8) and acquisition, integration and transition ("AIT") costs ($4.6).

Research, development and engineering expense for the third quarter of 2012 was $47.8, or 6.2% of sales, as compared with $39.0 or 6.1% of sales in the same period in 2011. The $8.8 increase in spending is primarily due to new product development activities in our commercial aircraft and business jet segments associated with our $8.25 billion total backlog ($3.75 billion booked and $4.50 billion awarded but unbooked).

Third quarter 2012 operating earnings of $134.3 increased 19.8% on the aforementioned 20.6% increase in revenues, and operating margin of 17.5% decreased 10 basis points as compared with the prior year period. The growth in operating earnings occurred as a result of the higher sales volume, operating leverage and ongoing operational efficiency initiatives, offset by the temporarily lower margins from recent acquisitions, a lower level of aftermarket demand in the current period and $4.6 of AIT costs in 2012.

Interest expense in the third quarter 2012 of $31.8 increased by $5.6 as a result of the higher debt level due to recent acquisitions and recent opportunistic financings. During the quarter we issued $800.0 of senior unsecured notes due 2022, priced yield to 4.9%, redeemed $600.0 of 8.5% senior unsecured notes due July 2018 and increased our cash balances by approximately $128.3. We incurred $82.1 of debt prepayment costs in connection with this note redemption.

Third quarter 2012 earnings before income taxes of $20.4 decreased by $65.5, or 76.3%, as compared with the prior year period, as a result of the above mentioned 19.8% increase in operating earnings, offset by $82.1 debt prepayment costs and a $5.6 increase in interest expense.

Income tax expense in the current period of $1.9, or 9.3% of earnings before income taxes, decreased by $18.6 as compared with the prior year period income tax expense of $20.5, which represented 23.9% of earnings before income taxes. We expect an effective tax rate of approximately 30% for 2012 as compared with our previous effective rate of approximately 32%. Our tax rate during the current three month period of 9.3% reflects the revision in expected rates during the current period arising from somewhat higher R&D tax credits realized than previously estimated, a favorable mix of revenues and other one-time tax benefit items.


Third quarter 2012 net earnings and net earnings per diluted share were $18.5 and $0.18 per share, respectively, decreases of 71.7% and 71.9%, respectively, as compared with the third quarter of 2011, for the reasons described above.

Book-to-bill ratio for the third quarter of 2012 was 1.05 to 1; bookings for the current period of approximately $800 increased by approximately 21.2% as compared with the prior year period. Backlog at September 30, 2012 was approximately $3.75 billion and total backlog, booked and awarded but unbooked, was approximately $8.25 billion, an increase of approximately 19% versus September 30, 2011.

Segment Results

The following is a summary of operating earnings by segment:

                                                 OPERATING EARNINGS
                                          Three Months Ended September 30,
                                                                        Percent
                                       2012              2011           Change
         Commercial aircraft        $      67.3       $      56.6           18.9 %
         Consumables management            54.6              47.6           14.7 %
         Business jet                      12.4               7.9           57.0 %
         Total operating earnings   $     134.3       $     112.1           19.8 %

Third quarter 2012 commercial aircraft segment ("CAS") operating earnings of $67.3 increased 18.9% as compared with the prior year period. Operating margin of 17.5% expanded 50 basis points as compared with the prior year period due to an improved revenue mix and ongoing operational efficiency initiatives, offset somewhat by a substantial increase in new product development costs to support our record booked and awarded but unbooked backlog.

Third quarter 2012 consumables management segment ("CMS") operating earnings of $54.6 increased 14.7% as compared with the prior year period and the operating margin of 18.5% reflects approximately $4.6 of AIT costs and the acquisitions of Interturbine and UFC Aerospace which currently have lower operating margins than the legacy CMS business.

Third quarter 2012 business jet segment operating earnings of $12.4 increased 57.0% as compared with the prior year period. Operating margin of 14.5% expanded by 220 basis points as compared with the prior year period, reflecting the 32.9% increase in revenues, an improved mix of revenues and ongoing operational improvements.


NINE MONTHS ENDED SEPTEMBER 30, 2012,
AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2011
($ in Millions, Except Backlog and Per Share Data)

Consolidated Results

                                                     REVENUES
                                          Nine Months Ended September 30,
                                                                       Percent
                                        2012              2011         Change
           Commercial aircraft      $    1,152.6       $    951.9          21.1 %
           Consumables management          869.2            709.4          22.5 %
           Business jet                    260.3            183.8          41.6 %
           Total revenues           $    2,282.1       $  1,845.1          23.7 %

For the nine months ended September 30, 2012, revenues of $2,282.1 increased 23.7%, as compared with the prior year period. Organic revenues, excluding the UFC and Interturbine acquisitions, increased $289.1 or 15.7%. Pro forma revenue growth, giving effect to all acquisitions completed during 2011 and 2012 as if they occurred on January 1, 2011, was 14.2%.

Cost of sales for the current nine month period was $1,417.0, or 62.1% of sales, as compared with cost of sales of $1,151.3, or 62.4% of sales in the prior year period. The 30 basis point decrease in cost of sales (30 basis point increase in gross margin) is primarily due to an improved revenue mix and ongoing manufacturing efficiency initiatives.

Selling, general and administrative ("SG&A") expenses for the nine months ended September 30, 2012 were $323.3, or 14.2% of sales, as compared with SG&A expenses of $261.6, or 14.2% of sales, in the same period in 2011. The higher level of SG&A expense in the current period is primarily due to costs and expenses associated with the growth in revenues ($32.2), recent acquisitions ($16.4) and AIT costs ($13.1).

Research, development and engineering expense for the nine months ended September 30, 2012 was $139.9, or 6.1% of sales as compared with $113.3 or 6.1% of sales in the same period in 2011. The $26.6 increase in spending is primarily due to new product development activities in our commercial aircraft segment associated with our $8.25 billion total backlog ($3.75 billion booked and $4.50 billion awarded but unbooked).

For the nine months ended September 30, 2012, operating earnings of $401.9 increased 26.0% as compared with the prior year and current period operating margin of 17.6% expanded 30 basis points as compared with the prior year period.

Interest expense in the nine months ended September 30, 2012 of $93.4 increased by $15.0 as a result of the higher debt level due to recent acquisitions and the previously discussed opportunistic financing.

Earnings before income taxes in the current nine month period of $226.4 decreased by $14.1, or 5.9% as compared with the prior year period, as a result of the $83.0 increase in operating earnings, reduced by $82.1 debt prepayment costs and a $15.0 increase in interest expense.

Income tax expense for the nine months ended September 30, 2012 of $67.9, or 30.0% of earnings before income taxes, decreased by $2.1 as compared with the prior year period income tax expense of $70.0, which represented 29.1% of earnings before income taxes. Our expected effective tax rate for 2012 is approximately 30.0%.

Net earnings for the first nine months of 2012 of $158.5 and net earnings per diluted share of $1.54 decreased $12.0 and $0.13, or 7.0% and 7.8%, respectively, as compared with the prior year period for the reasons described above.


Bookings for the nine months ended September 30, 2012 were approximately $2.4 billion, representing a book-to-bill ratio of approximately 1.1 to 1.

Segment Results

The following is a summary of operating earnings by segment:

                                                 OPERATING EARNINGS
                                           Nine Months Ended September 30,
                                                                        Percent
                                        2012              2011          Change
          Commercial aircraft        $     202.7       $     157.8          28.5 %
          Consumables management           161.9             140.5          15.2 %
          Business jet                      37.3              20.6          81.1 %
          Total operating earnings   $     401.9       $     318.9          26.0 %

For the nine months ended September 30, 2012, CAS operating earnings of $202.7 increased 28.5% as compared with the prior year period. Operating margin of 17.6% expanded 100 basis points as compared with the prior year period, due to an improved revenue mix and ongoing operational efficiency initiatives.

For the nine months ended September 30, 2012, CMS operating earnings of $161.9 increased 15.2% as compared with the prior year period and operating margin was 18.6%, a decrease of 120 basis points as compared with the operating margin for the prior year period, due to the $13.1 of AIT costs in 2012 and the acquisitions of Interturbine and UFC Aerospace which currently have lower operating margins than the legacy CMS business.

For the nine months ended September 30, 2012, business jet segment operating earnings of $37.3 increased 81.1%, as compared with the prior year period. Operating margin of 14.3% expanded by 310 basis points, reflecting the 41.6% increase in revenues, an improved mix of revenues and ongoing operational improvements.


LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition

As of September 30, 2012, our net debt-to-net-capital ratio was 43%. Net debt was $1,565.6, which represented total debt of $1,960.8, less cash and cash equivalents of $395.2. At September 30, 2012, net capital (total debt plus total stockholders' equity less cash and cash equivalents) was $3,640.5. As of September 30, 2012, long-term debt consisted of $1,300.0 aggregate principal amount ($1,315.4 inclusive of original issue premium) of our 5.25% senior unsecured notes due 2022 (the "5.25% Notes") and $650 aggregate principal amount ($645.0 net of original issue discount) of our 6.875% senior unsecured notes due 2020 (the "6.875% Notes"). At September 30, 2012 there were no amounts outstanding under our $950.0 revolving credit facility. Cash on hand at September 30, 2012 increased by $91.7 as compared with cash on hand at December 31, 2011 primarily as a result of cash flows from operating activities of $202.9, plus $1,316.0 of net proceeds from the 5.25% Notes, less capital expenditures of $83.3, less expenditures for acquisitions of $651.9, less $702.2 related to the repurchase of our 8.5% senior unsecured notes, including fees and expenses.

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 as of September 30, 2012 was $1,911.1, an increase of $306.2 as compared with working capital at December 31, 2011. As of September 30, 2012, total current assets increased by $519.3 and total current liabilities increased by $213.1. The increase in current assets was primarily due to an increase in cash of $91.7 (as described above), an increase in accounts receivable of $120.6 and an increase in inventories of $295.4 to support future revenue growth. Accounts receivable and inventories increased by $49.6 and $109.1, respectively, due to the UFC and Interturbine acquisitions. The increase in total current liabilities was primarily due to increases in accounts payable, accrued liabilities and accrued interest of $107.2, $67.7 and $38.3, respectively. Accounts payable were higher at September 30, 2012 due to the increase in business activity. Accounts payable and accrued liabilities increased by $15.7 and $37.3, respectively, due to the UFC and Interturbine acquisitions, including an adjustment to the allocation of the UFC purchase price to increase accrued liabilities by approximately $30.5 related to certain customer contracts which were priced below market and a portion of which were generating losses.

Cash Flows

As of September 30, 2012, our cash and cash equivalents were $395.2 as compared to $303.5 at December 31, 2011. Cash generated from operating activities was $202.9 for the nine months ended September 30, 2012, as compared to $224.0 in the same period in the prior year. The primary sources of cash from operations during the nine months ended September 30, 2012 were net earnings of $158.5, adjusted by depreciation and amortization of $54.1, non-cash compensation of $18.8, a decrease in deferred income taxes of $41.9 and an increase in accounts payable and accrued liabilities of $151.0, plus $82.1 of debt prepayment costs. Offsetting these sources of cash were an $81.8 increase in accounts receivable as a result of increased revenues and a $195.1 increase in inventories as a result of our record backlog.

Capital Spending

Our capital expenditures were $83.3 and $45.5 during the nine months ended September 30, 2012 and 2011, respectively. We expect capital expenditures of approximately $135 during 2012. These capital expenditures are needed to support our total backlog of $8.25 billion ($3.75 billion booked and $4.50 billion awarded but unbooked), and take into consideration our targeted capacity utilization levels, recent acquisitions and current industry conditions. We have, in the past, generally funded our capital expenditures with cash from operations and funds available to us under revolving bank credit facilities. We expect to fund future capital expenditures from cash on hand, from operations and from funds available to us under our revolving credit facility.


Outstanding Debt and Other Financing Arrangements

Long-term debt at September 30, 2012 totaled $1,960.4 and consisted of our 5.25% Notes and our 6.875% Notes.

We also have a five-year, $950.0 revolving credit facility, as amended and restated as of August 3, 2012. The revolving credit facility also provides an option to request additional incremental revolving credit borrowing capacity and incremental term loans, in each case upon the satisfaction of certain customary terms and conditions. At September 30, 2012, there were no amounts outstanding under our revolving credit facility.

Our obligations under the revolving credit facility are secured by liens on substantially all of our domestic assets, including a pledge of a portion of the capital stock of certain foreign subsidiaries owned directly by us. Amounts borrowed and outstanding under the revolving credit facility will, in certain circumstances, be required to be prepaid with the proceeds from certain asset sales, subject to certain thresholds and reinvestment rights. The revolving credit facility matures in August 2017 unless terminated earlier.

The revolving credit facility contains an interest coverage ratio financial covenant (as defined therein) that must be maintained at a level greater than 2.0 to 1. The revolving credit facility agreement also contains a total leverage ratio covenant (as defined therein) which limits net debt to a 4.25 to 1 multiple of EBITDA (as defined therein). The revolving credit facility contains customary affirmative covenants, negative covenants, and conditions precedent for borrowings, all of which were met as of September 30, 2012.

Contractual Obligations

The following table reflects our contractual obligations and commercial
commitments as of September 30, 2012. Commercial commitments include lines of
credit, guarantees and other potential cash outflows resulting from a contingent
event that requires performance by us or our subsidiaries pursuant to a funding
commitment.

Contractual Obligations         2012       2013        2014        2015        2016        Thereafter        Total
. . .
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