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| BEAV > SEC Filings for BEAV > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
Quarterly Report
OVERVIEW
The following discussion and analysis addresses the results of our operations for the three and six months ended June 30, 2009, as compared to our results of operations for the three and six months ended June 30, 2008. In addition, the discussion and analysis addresses our liquidity, financial condition and other matters for these periods.
Based on our experience in the industry, we believe that we are the world's largest manufacturer of cabin interior products for commercial aircraft and for business jets and the leading aftermarket distributor of aerospace fasteners and other consumable products. 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:
• a broad line of aerospace fasteners, covering over 275,000 stock keeping units (SKUs) serving the commercial aircraft, business jet and military and defense 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 coffeemakers, water boilers, beverage containers, refrigerators, freezers, chillers and microwave, high heat, convection and steam ovens;
• both chemical and gaseous aircraft oxygen delivery, distribution and storage systems, protective breathing equipment and lighting products; and
• business jet and general aviation interior products, including an extensive line of executive aircraft seats, direct and indirect overhead lighting systems, oxygen delivery systems, air valve systems, high-end furniture and cabinetry.
We also 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 conduct our operations through strategic business units that have been aggregated under three reportable segments: consumables management, commercial aircraft and business jet.
Net sales by reportable segment for the three and six month periods ended June 30, 2009 and June 30, 2008, respectively, were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
Net % of Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales Sales Net Sales
Consumables
management $ 196.6 41.4 % $ 123.6 23.7 % $ 436.0 43.7 % $ 245.6 24.7 %
Commercial
aircraft 223.9 47.2 % 326.2 62.4 % 449.8 45.0 % 604.7 60.7 %
Business jet 54.3 11.4 % 72.4 13.9 % 112.7 11.3 % 145.1 14.6 %
Total $ 474.8 100.0 % $ 522.2 100.0 % $ 998.5 100.0 % $ 995.4 100.0 %
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Net sales by geographic area (based on destination) for the three and six month periods ended June 30, 2009 and June 30, 2008, respectively, were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
Net % of Net % of Net % of Net % of
Sales Net Sales Sales Net Sales Sales Net Sales Sales Net Sales
United States $ 236.9 49.9 % $ 232.4 44.5 % $ 504.6 50.5 % $ 450.3 45.2 %
Europe 96.8 20.4 % 116.7 22.3 % 226.3 22.7 % 224.9 22.6 %
Asia, Pacific Rim,
Middle East and
Other 141.1 29.7 % 173.1 33.2 % 267.6 26.8 % 320.2 32.2 %
Total $ 474.8 100.0 % $ 522.2 100.0 % $ 998.5 100.0 % $ 995.4 100.0 %
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Net sales from our domestic and foreign operations for the three and six month periods ended June 30, 2009 and June 30, 2008, respectively, were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
Domestic $ 336.2 $ 332.7 $ 721.4 $ 651.0
Foreign 138.6 189.5 277.1 344.4
Total $ 474.8 $ 522.2 $ 998.5 $ 995.4
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In July 2008, we acquired Honeywell International Inc.'s Consumable Solutions distribution business (HCS). The HCS business distributes consumable parts and supplies to aviation industry manufacturers, airlines, and aircraft repair and overhaul facilities. The combination of HCS with our consumables management segment (formerly our distribution segment) created the leading global distributor and value added supply chain manager of aerospace hardware and other consumable products. The combined business serves as a distributor for every major aerospace fastener manufacturer in the world.
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 the driving force behind our ongoing market share gains. Research, development and engineering spending has been approximately 6% - 8% of sales for the past several years but is expected to decline as a percentage of sales in the future due to our recently implemented stringent cost initiatives and as a result of the HCS acquisition.
We also believe in providing our businesses with the tools required to remain competitive. In that regard, we have invested, and intend to continue to invest, in property and equipment that enhances our productivity. Over the past three years, annual capital expenditures ranged from $24 - $32. Taking into consideration our backlog, targeted capacity utilization levels, recent capital expenditure investments and current industry conditions, we anticipate capital expenditures of approximately $40 over the next twelve months.
International passenger traffic has declined by more than 7% from January 2009 to May 2009 compared with the same period ending in 2008, and the International Air Transport Association (IATA) now expects passenger traffic to fall by an unprecedented 8% for 2009, compared with the same period in 2008. International cargo traffic, which began falling in June 2008, was down by more than 21% from January 2009 to May 2009 compared with the same period in 2008 and IATA expects cargo traffic to be down 17% for 2009 compared to the same period a year ago. Air freighters are currently being parked at unprecedented rates and demand for passenger to freighter conversions is expected to be low for the foreseeable future. The resulting lower yields for the global airline industry are causing our customers to increase the number of parked aircraft and to further defer new aircraft deliveries. In addition, due to the factors discussed above, business jet manufacturers have slashed their delivery rates by, in some cases, up to 40%. We also believe that major commercial airframe manufacturers will further reduce their delivery rates in 2010. We have responded to these events by initiating further cost reduction efforts. For example, since June 30, 2008 we have reduced our headcount by approximately 20%.
RESULTS OF OPERATION
In order to present our financial results on a more comparable basis, certain information in the following discussion and analysis is presented giving effect to the HCS acquisition. Amounts presented as on a "proforma" basis have been calculated as if the HCS acquisition had occurred on January 1, 2008.
THREE MONTHS ENDED JUNE 30, 2009,
AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2008
The following is a summary of net sales by segment:
NET SALES
Three Months Ended June 30,
2009 2008 2008 Percent
As Reported Proforma Change (vs Proforma)
Consumables management $ 196.6 $ 123.6 $ 281.0 (30.0 %)
Commercial aircraft 223.9 326.2 326.2 (31.4 %)
Business jet 54.3 72.4 72.4 (25.0 %)
Total $ 474.8 $ 522.2 $ 679.6 (30.1 %)
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Net sales for the second quarter of $474.8 decreased by $47.4, or 9.1%, as compared with the second quarter of the prior year. The $47.4 decrease in net sales was the result of the $73.0, or 59.1%, increase in net sales at the consumables management segment (formerly our distribution segment) due to the HCS acquisition, offset by a $102.3, or 31.4% decrease in net sales at the commercial aircraft segment and a $18.1, or 25.0% decrease in net sales at the business jet segment. Proforma net sales (including the HCS acquisition in both periods) declined 30.1% as compared with the second quarter of 2008.
Cost of sales for the current period were $309.5, or 65.2% of net sales, as compared to $342.4, or 65.6% of net sales, in the second quarter of the prior year. The 40 basis point decrease in cost of sales was due to successful cost reduction activities and manufacturing efficiencies, more efficient consumables management purchasing in the current period and initial synergies arising from the HCS acquisition offset by the acquisition of HCS in July 2008 which was less profitable than our legacy consumables management segment.
Selling, general and administrative (SG&A) expenses for the second quarter of 2009 were $68.1, or 14.3% of sales, as compared to $61.7, or 11.8% of sales, in the same period in 2008. SG&A expenses increased by $6.4, or 10.4%, due to $2.9 of acquisition, integration and transition costs associated with the HCS acquisition (AIT costs) and $4.8 of unfavorable foreign exchange expenses mainly due to the weakening of the U.S. dollar versus the British pound, partially offset by the Company's cost reduction initiatives including an 20% reduction in headcount as compared to our 2008 proforma headcount.
Research, development and engineering expense for the second quarter of 2009 was $23.3, or 4.9% of sales, as compared to $33.8, or 6.5% of sales, in the same period in 2008. The lower level of spending is primarily due to cost initiatives at our commercial aircraft segment and inclusion of HCS in 2009.
Operating earnings for the second quarter of 2009 of $73.9 decreased $10.4, or 12.3% as compared to the same period in 2008, reflecting the $47.4 decrease in net sales, a 40 basis point reduction in cost of sales as a percentage of net sales, $6.0 of AIT costs and $4.8 of foreign exhcange losses. Including HCS in both periods, second quarter 2009 operating earnings decreased 30.8% as compared with second quarter 2008 proforma operating earnings of $106.8, reflecting the 30.1% year over year decrease in proforma revenues, $6.0 of AIT costs and $4.8 of foreign exchange losses in the current three month period.
Interest expense for the second quarter of 2009 of $22.5 was $20.2 higher than the interest expense in the same period in the prior year due to the increase in long-term debt associated with the HCS acquisition in July 2008.
Earnings before income taxes for the three months ended June 30, 2009 of $51.4 decreased by $30.6, or 37.3%, as compared to the same period in the prior year as a result of the 9.1% decrease in revenues, $6.0 of AIT costs, $4.8 of foreign exchange losses and a $20.2 increase in interest expense.
Income taxes in the second quarter of 2009 were $16.7, or 32.5% of earnings before income taxes, as compared to $28.1, or 34.3% of earnings before income taxes, in the second quarter of 2008. Income taxes as a percentage of earnings before income taxes decreased in the current period as a result of tax planning initiatives implemented during the 2009 period.
Net earnings for the second quarter of 2009 were $34.7, or $0.35 per diluted share, as compared with net earnings of $53.9, or $0.59 per diluted share, in the second quarter of 2008. Net earnings decreased by $19.2, or 35.6%, as compared with the second quarter of the prior year as a result of the lower level of revenues, $6.0 of AIT costs and $4.8 of foreign exchange losses mainly related to the weakening of the US dollar versus the British pound.
The following is a summary of operating earnings by segment:
OPERATING EARNINGS
Three Months Ended June 30,
2009 2008 2008 Percent
As Reported Proforma Change (vs Proforma)
Consumables management $ 35.8 $ 31.6 $ 54.1 (33.8 %)
Commercial aircraft 31.6 43.6 43.6 (27.5 %)
Business jet 6.5 9.1 9.1 (28.6 %)
Total $ 73.9 $ 84.3 $ 106.8 (30.8 %)
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Consumables management segment net sales were $196.6, which was $73.0, or 59.1%, greater than the prior year due to the HCS acquisition. Reflecting the HCS acquisition in both periods, consumables management segment net sales were 30.0% lower than second quarter 2008 proforma net sales of $281.0. The significant decline in consumables management segment net sales in the current period was due to a global destocking of consumables by airlines, maintenance, repair and overhaul centers (MROs) and aerospace manufacturers. Consumables management segment operating earnings, which include $6.0 of AIT costs, were $35.8. Second quarter 2009 operating earnings, adjusted to exclude AIT costs, were $41.8, or 21.3% of net sales as compared with second quarter 2008 proforma operating earnings of $54.1, or (19.3% of sales). Second quarter 2009 adjusted operating margin expanded 200 basis points as compared with proforma operating margin in the prior year period primarily due to lower margins in the HCS business in the prior year period, more efficient purchasing in the current period and initial synergies arising from the HCS acquisition.
Commercial aircraft segment net sales of $223.9 decreased 31.4% reflecting retrofit program push outs, refurbishment deferrals and lower spares revenues. Second quarter 2009 operating earnings were $31.6, or 14.1% of sales. Second quarter operating margin increased by 70 basis points as compared with the same period in the prior year, reflecting successful cost reduction activities and improved manufacturing efficiencies partially offset by approximately $4.5 of foreign exchange losses due to the rapid decline in the U.S. dollar during the current period.
Business jet segment second quarter net sales of $54.3 decreased by $18.1, or 25.0%, and operating earnings decreased by $2.6, or 28.6%, reflecting the slow down in both business jet deliveries and Super First Class products demand.
SIX MONTHS ENDED JUNE 30, 2009,
AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2008
The following is a summary of net sales by segment:
NET SALES
Six Months Ended June 30,
2009 2008 2008 Percent
As Reported Proforma Change (vs Proforma)
Consumables management $ 436.0 $ 245.6 $ 550.4 (20.8 %)
Commercial aircraft 449.8 604.7 604.7 (25.6 %)
Business jet 112.7 145.1 145.1 (22.3 %)
Total $ 998.5 $ 995.4 $ 1,300.2 (23.2 %)
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Net sales for the six months ended June 30, 2009 of $998.5 were essentially unchanged, as compared with the same period of the prior year of $995.4. Net sales at the consumables management segment increased by $190.4, or 77.5%, due to the HCS acquisition and were offset by a $154.9, or 25.6%, decrease in net sales at the commercial aircraft segment and a $32.4, or 22.3%, decrease in net sales at the business jet segment. Proforma net sales (including the HCS acquisition in both periods) declined by $301.7 or 23.2%, as compared with the same period of the prior year.
Cost of sales for the six months ended June 30, 2009 were $656.5, or 65.7% of sales, as compared with cost of sales of $646.5, or 64.9% of sales, in the prior year. The 80 basis point increase in cost of sales was due to the acquisition of HCS in July 2008 which had a higher cost of sales than our business, offset by improved manufacturing efficiencies and successful cost reduction activities, more efficient consumables management purchasing in the current period and initial synergies arising from the HCS acquisition.
Selling, general and administrative (SG&A) expenses for the six months ended June 30, 2009 were $140.1, or 14.0% of sales, as compared with SG&A of $118.0, or 11.9% of sales, in the same period in 2008. SG&A expenses increased by $22.1, or 18.7%, due to the acquisition of HCS, $5.6 of AIT costs and approximately $8.6 of unfavorable foreign exchange expenses mainly due to the weakening of the U.S. dollar versus the British pound during the current period partially offset by the Company's cost reduction initiatives. SG&A expenses are expected to further decline in 2010 as we complete the integration of HCS and the elimination of duplicative costs and expenses.
Research, development and engineering expense for the six months ended June 30, 2009 was $47.3, or 4.7% of sales, as compared with $69.2, or 7.0%, of sales in the same period in 2008. The lower level of spending is primarily due to cost initiatives in place at our commercial aircraft segment and inclusion of HCS in 2009.
Operating earnings of $154.6 decreased $7.1, or 4.4%, reflecting the $3.1 increase in net sales, an 80 basis point increase in cost of sales as a percentage of net sales as a result of the acquisition of HCS which had a higher cost of sales than our business, $9.7 of AIT costs and $8.6 of foreign exchange losses. Including HCS in both periods, 2009 operating earnings of $154.6 decreased 22.6% as compared with 2008 proforma operating earnings of $199.8, reflecting the 23.2% year over year decrease in proforma revenues, $9.7 of AIT costs and $8.6 of foreign exchange losses in the current six month period.
Interest expense for the six months ended June 30, 2009 of $45.0 was $39.9 higher than the interest expense in the same period in the prior year, primarily due to the increase in long-term debt associated with the July 2008 HCS acquisition.
Earnings before income taxes for the six months ended June 30, 2009 of $109.6 decreased by $47.0, or 30.0%, as compared to the same period in the prior year as a result of the $39.9 increase in interest expense, $9.7 of AIT costs and $8.6 of unfavorable foreign exchange losses mainly due to the weakening of the U.S. dollar versus the British pound.
Income taxes were $37.0, or 33.8% of earnings before income taxes, as compared to $54.2, or 34.6% of earnings before income taxes, in 2008.
Net earnings of $72.6 decreased by $29.8 or 29.1% as compared with the prior year as a result of $9.7 of AIT costs and $8.6 of unfavorable foreign exchange expenses mainly due to the weakening of the US dollar versus the British pound.
The following is a summary of operating earnings by segment:
OPERATING EARNINGS
Six Months Ended June 30,
2009 2008 2008 Percent
As Reported Proforma Change (vs Proforma)
Consumables management $ 83.2 $ 66.9 $ 105.0 (20.8 %)
Commercial aircraft 60.1 75.1 75.1 (20.0 %)
Business jet 11.3 19.7 19.7 (42.6 %)
Total $ 154.6 $ 161.7 $ 199.8 (22.6 %)
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Consumables management net sales were $436.0 or 77.5% higher than revenues of $245.6 in the prior year period due to the HCS acquisition in July 2008. Including the HCS acquisition in both periods, consumables management net sales of $436.0 were $114.4 or 20.8% lower than 2008 proforma revenues of $550.4. Consumables management segment operating earnings, which include $9.7 of AIT costs were $83.2. Operating earnings, adjusted to exclude AIT costs were $92.9, or (21.3% of net sales), as compared with 2008 operating earnings of $66.9 (27.2% of net sales) and as further compared with 2008 proforma operating earnings of $105.0, or 19.1% of sales. Operating margin expanded 220 basis points as compared with proforma operating margin primarily due to lower margins in the HCS business in the prior year, more efficient purchasing in the current period and initial synergies arising from the HCS acquisition.
Commercial aircraft segment net sales of $449.8 decreased 25.6% reflecting retrofit program pushouts and lower spares revenues. Spares revenues in the current period declined significantly due to reduced air travel, reduced fleet capacity and airline cash conservation measures. Operating earnings in the 2009 period were $60.1, or 13.4% of sales, an increase of 100 basis points as compared with the same period in the prior year, reflecting improved manufacturing efficiencies and successful cost reduction activities, partially offset by an unfavorable mix due to the substantially lower level of spares revenues.
Business jet segment net sales decreased by $32.4, or 22.3%, to $112.7 and operating earnings decreased by $8.4, or 42.6%, reflecting the negative impact of reduced operating leverage and an unfavorable mix of products sold in the 2009 period as compared to the same period in 2008.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
As of June 30, 2009, our net debt-to-net-capital ratio was 41.6%. Net debt was $973.6, which represents total debt of $1,120.0, less cash and cash equivalents of $146.4. There were no borrowings outstanding under the Revolving Credit Facility of our Credit Agreement and we have no debt maturities until 2014.
Working capital as of June 30, 2009 was $1,253.7, up $80.0 as compared with working capital at December 31, 2008. During the first half of 2009, we successfully completed our initiative to bring HCS inventories in line with our stocking distribution model. The investments in inventories at the consumables management segment was the principal reason for the increase in working capital.
Cash Flows
At June 30, 2009, our cash and cash equivalents were $146.4 compared to $168.1 at December 31, 2008. Cash provided by operating activities for the three months ended June 30, 2009 was $34.0, as compared to $46.1 for the three months ended June 30, 2008. Cash used in operating activities was $5.5 for the six months ended June 30, 2009, as compared to $11.2 of cash generated from operations in the same period in the prior year. The primary source of cash from operations during the six months ended June 30, 2009 were net earnings of $72.6, adjusted by depreciation and amortization of $24.1, non-cash compensation of $11.5, a $26.4 decrease in deferred tax asset and a $24.3 decrease in accounts receivable. Offsetting these sources of cash were a higher level of inventories ($130.6) and the lower level of payables and accruals ($57.1).
Capital Spending
Our capital expenditures were $15.5 and $13.3 during the six months ended June 30, 2009 and 2008, respectively. 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 with 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 Revolving Credit Facility of our Credit Agreement.
Outstanding Debt and Other Financing Arrangements
Long-term debt at June 30, 2009 consisted principally of $519.8 of term loan borrowings under our Term Loan Facility of our Credit Agreement and $600.0 aggregate principal amount of 8.5% Senior Notes due 2018.
Borrowings under our Term Loan Facility bear interest at an annual rate equal to LIBOR (as defined) plus 275 basis points or prime (as defined) plus 175 basis points, which was 5.75% at June 30, 2009. Borrowings under our Revolving Credit Facility would bear interest at an annual rate equal to, at the Company's option, LIBOR (as defined) plus 275 basis points or prime (as defined) plus 175 basis points. There were no amounts outstanding under the Revolving Credit Facility as of June 30, 2009.
Contractual Obligations During the six-month period ended June 30, 2009, there were no material changes in our long-term debt. The following chart reflects our contractual obligations, represented by operating leases and purchase obligations, and commercial commitments as of June 30, 2009. 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 (1) 2009 2010 2011 2012 2013 Thereafter Total Long-term debt and other non-current liabilities $ 5.5 $ 6.4 $ 5.8 $ 5.7 $ 5.7 $ 1,105.5 $ 1,134.6 . . . |
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