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BEAV > SEC Filings for BEAV > Form 10-Q on 30-Oct-2013All Recent SEC Filings

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Form 10-Q for B/E AEROSPACE INC


30-Oct-2013

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 the results of our operations for the three and nine month periods ended September 30, 2013, as compared to our results of operations for the three and nine month periods ended September 30, 2012. 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 equipment for commercial aircraft and for business jets and the leading aerospace aftermarket distributor and value added service provider of aerospace fasteners and other consumable products and logistics services. We sell our manufactured products directly to virtually all of the world's major airlines and aerospace manufacturers. In addition, based on our experience, we believe that we have achieved leading global market positions in each of our major product categories, which include:

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 coffee and espresso makers, water boilers, beverage containers, refrigerators, freezers, chillers and a line of ovens that includes microwave, high efficiency convection and steam ovens;

modular lavatory systems, wastewater management systems and galley systems;

both chemical and gaseous aircraft oxygen storage, distribution and delivery systems, protective breathing equipment and a broad range of 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 and high-end furniture and cabinetry; and

a broad line of aerospace fasteners and other consumables, consisting of over one million Stock Keeping Units primarily serving the commercial aerospace and business jet industries.

We provide comprehensive aircraft cabin interior reconfiguration, program management and certification services. In addition, we also design, engineer and manufacture customized fully integrated thermal and power management solutions for participants in the defense industry, aerospace original equipment manufacturers and the airlines.

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, 2013 and September 31, 2012, respectively, were as follows:

                                   THREE MONTHS ENDED SEPTEMBER 30,                         NINE MONTHS ENDED SEPTEMBER 30,
                                   2013                        2012                        2013                         2012
                                          % of                        % of                        % of                        % of
                          Revenues      Revenues      Revenues      Revenues      Revenues      Revenues      Revenues      Revenues
Commercial aircraft      $   456.6          51.4 %   $   385.6          50.3 %   $ 1,307.8          50.7 %   $ 1,152.6           50.5 %
Consumables management       317.4          35.7         295.8          38.6         956.8          37.1         869.2           38.1
Business jet                 114.1          12.9          85.3          11.1         316.0          12.2         260.3           11.4
Total revenues           $   888.1         100.0 %   $   766.7         100.0 %   $ 2,580.6         100.0 %   $ 2,282.1          100.0 %


Revenues by geographic area (based on destination) for the three and nine month periods ended September 30, 2013 and September 30, 2012, respectively, were as follows:

                           THREE MONTHS ENDED SEPTEMBER 30,                      NINE MONTHS ENDED SEPTEMBER 30,
                            2013                      2012                       2013                       2012
                                   % of                      % of                       % of                       % of
                    Revenues     Revenues     Revenues     Revenues     Revenues      Revenues     Revenues      Revenues
United States      $  382.5         43.1 %   $  377.0         49.2 %   $ 1,147.6         44.5 %   $ 1,120.4         49.1 %
Europe                249.9         28.1        176.1         23.0         666.1         25.8         561.3         24.6
Asia, Pacific
Rim,
  Middle East
and Other             255.7         28.8        213.6         27.8         766.9         29.7         600.4         26.3
Total revenues     $  888.1        100.0 %   $  766.7        100.0 %   $ 2,580.6        100.0 %   $ 2,282.1        100.0 %

Revenues from our domestic and foreign operations for the three and nine month periods ended September 30, 2013 and September 30, 2012, respectively, were as follows:

                                          THREE MONTHS ENDED SEPTEMBER 30,            NINE MONTHS ENDED SEPTEMBER 30,
                                             2013                   2012                 2013                 2012
Domestic                              $         617.1         $         552.4     $       1,794.1       $       1,650.9
Foreign                                         271.0                   214.3               786.5                 631.2
Total revenues                        $         888.1         $         766.7     $       2,580.6       $       2,282.1

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 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 7.0% of sales during the third quarter of 2013 and is expected to be 6.0%-6.5% 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 and Airbus aircraft, our targeted capacity utilization levels, recent acquisitions and current industry conditions, we expect that our capital expenditures will be approximately $165 - $170 during 2013.

The aerospace up-cycle is in full swing, with vigorous global airline traffic growth, an unprecedented period of airline profitability, and record delivery rates and backlog at both Airbus and Boeing. Our revenue growth this quarter was driven by a double-digit increase in aftermarket demand, as well as a double-digit increase in demand related to the strong commercial aircraft delivery cycle. Approximately 58% of third quarter revenues was driven by demand for products for new-buy aircraft.

Global air travel continues to expand at a very healthy rate. August traffic rose at a robust 6.8% rate, while capacity climbed 5.6%, both compared to August 2012. This pushed load factors to a record high of 83.4%. Year-to-date, global traffic is up more than 5%, with capacity up a little more than 4%. Airline profitability continues to be strong. In September, yields for the U.S. airlines increased 3.5% year-over-year on strong domestic growth of 5.2%. The International Air Transport Association ("IATA") slightly revised its 2013 global airline profit forecast to approximately $12 billion, which is up almost 60% as compared to 2012. For 2014, IATA's initial forecast calls for profit of approximately $16.5 billion which would be up 40% over 2013. This would mark the fifth successive year of solid global airline profitability. As a result of this strong traffic growth, record load factors, yields, and profitability for the global airline industry, the airlines and leasing companies are booking orders at a robust rate and our Boeing and Airbus backlogs continue to grow. In fact, our combined Airbus and Boeing rolling 12 month book-to-bill order ratio is over 2.5 times. It now appears that 2013 orders will mark our second best year on record behind 2007 and the third year in a row in which we have booked more than 2,000 total orders for the two major original equipment manufacturers ("OEMs"), resulting in our combined OEM backlog in excess of 10,000 aircraft.


RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2013,
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2012
($ in Millions, Except Backlog and Per Share Data)

                                                REVENUES
                                    Three Months Ended September 30,
                                                                             Percent
                                       2013                   2012           Change
       Commercial aircraft      $         456.6         $         385.6        18.4 %
       Consumables management             317.4                   295.8         7.3 %
       Business jet                       114.1                    85.3        33.8 %
       Total revenues           $         888.1         $         766.7        15.8 %

Revenues for the third quarter of 2013 of $888.1 increased $121.4, or 15.8%, as compared with the same period of the prior year.

Cost of sales for the third quarter of 2013 was $545.8, or 61.5% of sales, as compared with cost of sales of $478.4, or 62.4% of sales in the same period of the prior year. The decrease in cost of sales as a percent of total revenues reflects ongoing continuous improvement activities.

Selling, general and administrative ("SG&A") expense for the third quarter of 2013 was $120.0, or 13.5% of sales, as compared with SG&A expense of $106.2, or 13.9% of sales in the same period of the prior year. The absolute amount of SG&A expense was higher in the current period primarily due to costs and expenses of $6.9 associated with the 15.8% increase in revenues and $6.9 of acquisition, integration and transition ("AIT") costs, including expenses associated with the Blue Dot Energy Services LLC ("Blue Dot") acquisition. SG&A as a percentage of sales declined year-over-year for the reasons set forth above and operating leverage at the higher revenue level and continued results from our improvement initiatives.

Research, development and engineering expense for the third quarter of 2013 was $62.2, or 7.0% of sales, as compared with $47.8 or 6.2% of sales in the same period of the prior year. The $14.4 increase in spending is primarily due to new product development activities in our commercial aircraft and business jet segments associated with our $8.8 billion backlog ($3.8 billion booked and $5.0 billion of awarded but unbooked) and activities directed toward further growing our supplier furnished equipment ("SFE") backlog.

Operating earnings for the third quarter of 2013 of $160.1 increased 19.2% on the aforementioned 15.8% increase in revenues. Operating margin was 18.0% and expanded 50 basis points as compared with the same period of the prior year. The growth in operating earnings and the improvement in operating margin occurred primarily as a result of operating leverage at the higher revenue level and ongoing operational efficiency initiatives.

Interest expense in the current period of $30.5 million was $1.3 lower than interest expense of $31.8 in the same period of the prior year. During 2012, we refinanced our 8.5% senior unsecured notes with 5.25% unsecured notes due 2022 and incurred debt prepayment costs totaling $82.1.

Earnings before income taxes for the third quarter of 2013 of $129.6 increased by $109.2, or 535.3% as compared with the same period of the prior year, as a result of a $25.8 increase in operating earnings, a $1.3 decrease in interest expense and an $82.1 debt prepayment charge in 2012.

Income tax expense in the third quarter of 2013 of $36.9, or 28.5% of earnings before income taxes, increased by $35.0 as compared with income tax expense for same period of the prior year of $1.9 as a result of the aforementioned $82.1 debt prepayment charge, which reduced third quarter 2012 earnings before income taxes to $20.4.

Third quarter 2013 net earnings and earnings per diluted share were $92.7 and $0.89 per share, increases of 401.1% and 394.4%, respectively, as compared with the prior year period.

Bookings during the third quarter of 2013 were approximately $900, representing a book-to-bill ratio of approximately 1.01 to 1. Booked backlog at September 30, 2013 stood at approximately $3.8 billion as compared with $3.75 billion at September 30, 2012 and $3.75 billion at December 31, 2012. We believe the quality of our backlog has continued to improve consistent with, and as evidenced by, the ongoing expansion in our operating margins.


Segment Results

The following is a summary of operating earnings by segment:

                                            OPERATING EARNINGS
                                     Three Months Ended September 30,
                                                                             Percent
                                          2013                  2012         Change
       Commercial aircraft        $           82.4         $       67.3        22.4 %
       Consumables management                 58.8                 54.6         7.7 %
       Business jet                           18.9                 12.4        52.4 %
       Total operating earnings   $          160.1         $      134.3        19.2 %

Third quarter 2013 commercial aircraft segment ("CAS") revenues of $456.6 increased 18.4% as compared with the prior year period. CAS third quarter 2013 operating earnings of $82.4 increased 22.4% and operating margin of 18.0% expanded 50 basis points as compared with the prior year period, due to operating leverage at the higher revenue level and ongoing operational efficiency initiatives.

Third quarter 2013 consumables management segment ("CMS") revenues of $317.4 increased 7.3% while operating earnings of $58.8 increased 7.7%, and operating margin of 18.5% was flat as compared with the prior year period. Third quarter 2013 revenues were negatively impacted by a significant year over year reduction in demand from its defense and business jet customers. Operating earnings, for the current third quarter period reflect AIT costs of $6.9, ($4.6 in 2012).

Third quarter 2013 business jet segment revenues of $114.1 increased 33.8% while operating earnings of $18.9 increased 52.4% as compared with the prior year period. Operating margin of 16.6% expanded 210 basis points as compared with the prior year period, reflecting the increase in revenues, an improved mix of revenues and ongoing operational efficiency initiatives.


NINE MONTHS ENDED SEPTEMBER 30, 2013,
AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2012

                                                REVENUES
                                     Nine Months Ended September 30,
                                                                            Percent
                                        2013                 2012           Change
        Commercial aircraft      $       1,307.8       $       1,152.6        13.5 %
        Consumables management             956.8                 869.2        10.1 %
        Business jet                       316.0                 260.3        21.4 %
        Total revenues           $       2,580.6       $       2,282.1        13.1 %

For the nine months ended September 30, 2013, revenues of $2,580.6 increased 13.1%, as compared with the prior year period.

Cost of sales for the nine months ended September 30, 2013 was $1,592.4, or 61.7% of sales, as compared with cost of sales of $1,417.0 or 62.1% of sales in the prior year period. The 40 basis point decrease in cost of sales (40 basis point increase in gross margin) is due to an improved revenue mix and ongoing manufacturing efficiency initiatives.

SG&A expense for the nine months ended September 30, 2013 was $349.5, or 13.5% of sales, as compared with SG&A expense of $323.3, or 14.2% of sales, in the same period in 2012. The higher level of SG&A expense in the current period is primarily due to $12.2 of costs and expenses associated with the 13.1% increase in revenues, AIT costs of $14.0, including expenses associated with the Blue Dot acquisition and other acquisitions completed in earlier periods. SG&A as a percentage of revenues declined due to operating leverage in the business.

Research, development and engineering expense for the nine months ended September 30, 2013 was $166.3, or 6.4% of sales as compared with $139.9 or 6.1% of sales in the same period in 2012. The $26.4 increase in spending is primarily due to new product development activities in our commercial aircraft segment associated with our $8.8 billion total backlog ($3.8 billion booked and $5.0 billion awarded but unbooked) and activities directed toward further growing our SFE backlog.

For the nine months ended September 30, 2013, operating earnings of $472.4 increased 17.5% as compared with the prior year. Operating margin in the current period of 18.3% expanded 70 basis points as compared with the prior year period.

Interest expense in the nine months ended September 30, 2013 of $91.6 decreased by $1.8 as a result of slightly lower debt levels and the opportunistic financing we completed in 2012, which resulted in 2012 debt prepayment costs of $82.1.

Earnings before income taxes in the current nine month period of $380.8 increased by $154.4, or 68.2% as compared with the prior year period, as a result of a $70.5 increase in operating earnings and the aforementioned 2012 debt prepayment charge.

Income tax expense for the nine months ended September 30, 2013 of $105.8 or 27.8% of earnings before income taxes, increased by $37.9 as compared with the prior year period income tax expense of $67.9. Our expected effective tax rate for 2013 is approximately 28.0% compared with 30.0% in 2012.

For the nine months ended September 30, 2013, net earnings and net earnings per diluted share were $275.0 and $2.65 per share, increases of 73.5% and 72.1%, respectively, as compared with the prior year.

Bookings for the nine months ended September 30, 2013 were approximately $2.6 billion, representing a book-to-bill ratio of approximately 1.0 to 1.


Segment Results

The following is a summary of operating earnings by segment:

                                            OPERATING EARNINGS
                                      Nine Months Ended September 30,
                                                                             Percent
                                          2013                  2012         Change
       Commercial aircraft        $          236.3         $      202.7        16.6 %
       Consumables management                184.9                161.9        14.2 %
       Business jet                           51.2                 37.3        37.3 %
       Total operating earnings   $          472.4         $      401.9        17.5 %

For the nine months ended September 30, 2013, CAS operating earnings of $236.3 increased 16.6% as compared with the prior year period. Operating margin of 18.1% expanded 50 basis points as compared with the prior year period due to operating leverage at the higher revenue level and ongoing operational efficiency initiatives.

For the nine months ended September 30, 2013, CMS operating earnings of $184.9 increased 14.2% as compared with the prior year period. Operating margin was 19.3%, an increase of 70 basis points as compared with operating margin for the prior year period.

For the nine months ended September 30, 2013, business jet segment operating earnings of $51.2 increased 37.3%, as compared with the prior year period. Operating margin of 16.2% expanded by 190 basis points, reflecting the 21.4% increase in revenues, an improved mix of revenues and ongoing operational efficiency initiatives.

LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition

As of September 30, 2013, our net debt-to-net capital ratio was 35.7%. Net debt was $1,385.8, which represented total debt of $1,959.6, less cash and cash equivalents of $573.8. At September 30, 2013, net capital (total debt plus total stockholders' equity less cash and cash equivalents) was $3,878.8. As of September 30, 2013, long-term debt primarily consisted of $1,300.0 aggregate principal amount ($1,314.1 inclusive of original issue premium) of our 5.25% Senior Unsecured Notes due 2022 (the "5.25% Notes") and $650.0 aggregate principal amount ($645.5 net of original issue discount) of our 6.875% Senior Unsecured Notes due 2020 (the "6.875% Notes"). We also have a five-year $950.0 Revolving Credit Facility (the "Revolving Credit Facility") pursuant to an amended and restated credit agreement dated as of August 3, 2012 (the "Revolving Credit Facility Agreement"). At September 30, 2013 there were no amounts outstanding under the Revolving Credit Facility. Cash on hand at September 30, 2013 increased by $60.1 as compared with cash on hand at December 31, 2012 primarily as a result of cash flows from operating activities of $239.4 less capital expenditures of $113.7, less net expenditures for acquisitions of $76.0. 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, 2013 was $2,221.4, an increase of $215.5 as compared with working capital at December 31, 2012. As of September 30, 2013, total current assets increased by $327.1 and total current liabilities increased by $111.6. Working capital at September 30, 2013 increased 10.7% as compared with working capital at December 31, 2012, and compares favorably with the 13.1% increase in revenues for the nine months ended September 30, 2013 as compared with the same period in the prior year. The increase in current assets was primarily due to an increase in cash of $60.1 (as described above), an increase in accounts receivable of $102.8 and an increase in inventories of $167.1 to support future revenue growth. The increase in total current liabilities was primarily due to an increase in accounts payable of $78.6 due to the increase in business activity.


Cash Flows

As of September 30, 2013, our cash and cash equivalents were $573.8 as compared to $513.7 at December 31, 2012. Cash generated from operating activities was $239.4 for the nine months ended September 30, 2013, as compared to $202.9 in the same period in the prior year. The primary sources of cash from operations during the nine months ended September 30, 2013 were net earnings of $275.0, adjusted by depreciation and amortization of $65.1, non-cash compensation of $17.6, a decrease in deferred income taxes of $36.0 and an increase in accounts payable and accrued liabilities of $121.8. Offsetting these sources of cash were an increase in accounts receivable of $91.2 as a result of increased revenues and an increase in inventories of $163.0 to support our record backlog.

Capital Spending

Our capital expenditures were $113.7 and $83.3 during the nine months ended September 30, 2013 and 2012, respectively. We expect capital expenditures of approximately $165 - $170 during 2013. These capital expenditures are needed to support our record total backlog of approximately $8.8 billion ($3.8 booked and $5.0 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 the Revolving Credit Facility.

Outstanding Debt and Other Financing Arrangements

Long-term debt at September 30, 2013 totaled $1,959.6 and consisted of our 5.25% Notes and our 6.875% Notes.

We also have a five-year, $950.0 Revolving Credit Facility, which 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, 2013, there were no amounts outstanding under the 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 Agreement 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 Agreement contains customary affirmative covenants, negative covenants, and conditions precedent for borrowings, all of which were met as of September 30, 2013.

Contractual Obligations

The following table reflects our contractual obligations and commercial commitments as of September 30, 2013. 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               2013        2014        2015        2016        2017        Thereafter        Total
Long-term debt and
other non-current
liabilities (1)          $    --     $   3.3     $   2.2     $   2.4     $   2.7     $    1,985.8     $ 1,996.4
Operating leases            11.1        41.1        38.8        35.6        32.3            161.3         320.2
Purchase obligations
(2)                          1.8         3.1          --          --          --               --           4.9
Future interest
. . .
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