BE Aerospace 10-Q 2013
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarterly Period Ended March 31, 2013
Commission File No. 0-18348
B/E AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
1400 Corporate Center Way
Wellington, Florida 33414-2105
(Address of principal executive offices)
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES[X] NO[ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer (do not check if a smaller reporting company) [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X ]
The registrant has one class of common stock, $0.01 par value, of which 104,732,332 shares were outstanding as of April 23, 2013.
B/E AEROSPACE, INC.
Form 10-Q for the Quarter Ended March 31, 2013
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Millions, Except Share Data)
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME (UNAUDITED)
(In Millions, Except Per Share Data)
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - In Millions, Except Per Share Data)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown are of a normal recurring nature and have been reflected in the condensed consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. The information included in these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the B/E Aerospace, Inc. (the “Company”) Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
The preparation of 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.
Note 2. Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which is intended to improve the reporting of reclassifications out of accumulated other comprehensive income. The ASU requires an entity to report, either on the face of the income statement or in the notes to the financial statements, the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the income statement if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other required disclosures that provide additional detail about those amounts. The adoption of ASU 2013-02, effective January 1, 2013, did not impact the Company’s consolidated financial statements as there were no reclassifications out of accumulated other comprehensive income during the period.
Note 3. Business Combinations
During 2012, the Company completed two acquisitions for a net aggregate purchase price of approximately $649.7 in cash (“2012 Acquisitions”). The 2012 Acquisitions were accounted for as purchases under FASB Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). The assets purchased and liabilities assumed for the 2012 Acquisitions have been reflected in the accompanying condensed consolidated balance sheets as of March 31, 2013 and December 31, 2012, and the results of operations for the 2012 Acquisitions are included in the accompanying condensed consolidated statement of earnings and comprehensive income from the respective dates of acquisition.
On January 30, 2012, the Company acquired 100% of the outstanding stock of UFC Aerospace Corp. (“UFC”), a provider of complex supply chain management and inventory logistics solutions, for a net purchase price of $404.7.
On July 26, 2012, the Company acquired 100% of Interturbine Aviation Logistics GmbH, Interturbine Logistics Solutions GmbH and Interturbine Technologies GmbH (collectively “Interturbine”), a provider of material management logistical services to global airlines and maintenance, repair and overhaul (“MRO”) providers, for a net purchase price of $245.0. Interturbine’s product range includes chemicals, lubricants, hydraulic fluids, adhesives, coatings and composites. Interturbine also supplies fasteners, cables and wires, electronic components, electrical and electromechanical materials, tools, hot bonding equipment and ground equipment to its primary customer base of airlines and MRO providers globally.
The Company completed its evaluation and allocation of the purchase price for the UFC acquisition during the period ended December 31, 2012. The Company completed its evaluation and allocation of the purchase price for the Interturbine acquisition during the three months ended March 31, 2013 and increased goodwill by $4.6 for certain tax liabilities.
The following table summarizes the fair values of assets acquired and liabilities assumed in the UFC and Interturbine acquisitions in accordance with ASC 805, which are recorded based on management’s estimates as follows:
The majority of the goodwill and other intangible assets related to the UFC acquisition is expected to be deductible for tax purposes. None of the goodwill and other intangible assets related to the Interturbine acquisition is expected to be deductible for tax purposes.
Consolidated unaudited pro forma revenues, net earnings and net earnings per diluted share, giving effect to the UFC and Interturbine acquisitions as if they had occurred on January 1, 2012, were $793.9, $71.9, and $0.70, for the three months ended March 31, 2012, respectively. The Company has begun transferring legacy UFC and Interturbine customers into its consumables management segment systems. As a result, it is not practicable to report stand-alone revenues and operating earnings of the acquired businesses since the respective acquisition dates.
Note 4. 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. In accordance with industry practice, costs in inventory include amounts relating to long-term contracts with long production cycles and inventory items with long procurement cycles, some of which are not expected to be realized within one year. Work-in-process inventories include costs and estimated earnings in excess of billings on uncompleted contracts and excess over average costs on long-term contracts. Finished goods inventories primarily consist of aerospace fasteners. Inventories consist of the following:
Note 5. Goodwill and Intangible Assets
The table below sets forth the intangible assets by major asset class, all of which were acquired through business purchase transactions:
Amortization expense associated with identifiable intangible assets was approximately $7.7 and $6.9 for the three months ended March 31, 2013 and 2012, respectively. The Company expects to recognize amortization expense of approximately $30 in each of the next five fiscal years. The future amortization amounts are estimates. Actual future amortization expense may be different due to future acquisitions, impairments, changes in amortization periods or other factors. The Company expenses costs to renew or extend the term of a recognized intangible asset.
Goodwill decreased $4.4 during the three months ended March 31, 2013, primarily as a result of foreign currency translations, partially offset by the aforementioned adjustment to the Interturbine purchase price allocation.
Note 6. Long-Term Debt
In March 2012, the Company issued $500.0 aggregate principal amount of 5.25% senior notes due 2022 (the “5.25% Notes”), in an offering pursuant to the Securities Act of 1933, as amended. The notes are senior unsecured debt obligations of the Company. In July 2012, the Company issued $800.0 additional 5.25% Notes, at an effective yield of 4.9% as an add-on to the existing 5.25% Notes. During 2012, the Company redeemed $600.0 of its 8.5% senior unsecured notes due 2018 (the “8.5% Notes”). The Company incurred a loss on debt extinguishment of $82.1 related to unamortized debt issue costs and fees and expenses related to the repurchase of its 8.5% Notes.
As of March 31, 2013, long-term debt consisted of $1,300.0 aggregate principal amount ($1,314.7 inclusive of original issue premium) of its 5.25% Notes, which had an effective yield of approximately 5.0%, and $650.0 aggregate principal amount ($645.3 net of original issue discount) of 6.875% senior unsecured notes due 2020 (the “6.875% Notes). The Company also has a $950.0 revolving credit facility pursuant to an amended and restated credit agreement dated as of August 3, 2012, (the “Revolving Credit Facility”), none of which was drawn at March 31, 2013.
Borrowings under the Revolving Credit Facility bear interest at an annual rate equal to the London interbank offered rate (“LIBOR”) (as defined in the Revolving Credit Facility) plus 200 basis points or Prime (as defined in the Revolving Credit Facility) plus 100 basis points. If drawn, as of March 31, 2013, the rate under the Revolving Credit Facility would have been approximately 2.28%.
Letters of credit outstanding under the Revolving Credit Facility aggregated $10.3 at March 31, 2013.
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 and 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 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 March 31, 2013.
Note 7. Fair Value Measurements
All financial instruments are carried at amounts that approximate estimated fair value. The fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. Assets measured at fair value are categorized based upon the lowest level of significant input to the valuations.
Level 1 – quoted prices in active markets for identical assets and liabilities.
Level 2 – quoted prices for identical assets and liabilities in markets that are not active, or observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.
The carrying amounts of cash and cash equivalents (which the Company classifies as Level 1 assets), accounts receivable – trade and accounts payable represent their respective fair values due to their short- term nature. There was no debt outstanding under the Revolving Credit Facility as of March 31, 2013. The fair value of the Company’s senior notes, based on market prices for publicly-traded debt (which the Company classifies as Level 2 inputs), was $2,063.2 and $2,103.8 as of March 31, 2013 and December 31, 2012, respectively.
Note 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 condensed consolidated balance sheets. At March 31, 2013, future minimum lease payments under these arrangements approximated $319.1, the majority of which related to long-term real estate leases.
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 condensed 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. Many 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 that 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.
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.
Note 9. Accounting for Stock-Based Compensation
The Company has a Long Term Incentive Plan (“LTIP”) under which the Company’s Compensation Committee has the authority to grant stock options, stock appreciation rights, restricted stock, restricted stock units or other forms of equity-based or equity-related awards.
Compensation cost generally is recognized on a straight-line basis over the vesting period of the shares. Share-based compensation of $5.5 and $5.9 was recognized during the three months ended March 31, 2013 and 2012, respectively, related to the equity grants made pursuant to the LTIP. Unrecognized compensation expense related to equity grants, including the estimated impact of any future forfeitures, was $45.7 at March 31, 2013.
The Company has established a qualified Employee Stock Purchase Plan which allows qualified employees (as defined in the Employee Stock Purchase Plan) to purchase 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. Compensation cost for this plan was not material to any of the periods presented.
Note 10. Segment Reporting
The Company is organized based on the products and services it offers. The Company’s reportable segments, which are also its operating segments, are comprised of commercial aircraft, consumables management and business jet.
The Company has six reporting units, which were determined based on materiality and on the guidelines contained in FASB ASC Topic 350, Subtopic 20, Section 35. Each reporting unit represents either (a) an operating segment (which is also a reportable segment) or (b) a component of an operating segment, which constitutes a business, for which there is discrete financial information available that is regularly reviewed by segment management.
The Company evaluates segment performance based on segment operating earnings or losses. Each segment regularly reports its results of operations and makes requests for capital expenditures and acquisition funding to the Company’s chief operating decision-making group. This group is 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, military, MRO, aircraft leasing and aircraft manufacturing customers.
The Company has not included product line information due to the similarity of commercial aircraft segment product offerings and the impracticality of determining such information for the consumables management segment.
The following table presents revenues and operating earnings by reportable segment:
The following table presents capital expenditures by reportable segment:
The following table presents goodwill by reportable segment:
The following table presents total assets by reportable segment:
Note 11. Net Earnings Per Common Share
Basic net earnings per common share is computed using the weighted average common shares outstanding during the period. Diluted net earnings per common share is computed by using the weighted average common shares outstanding including the dilutive effect of stock options, shares issued under the Employee Stock Purchase Plan and restricted shares based on an average share price during the period. For the three months ended March 31, 2013 and 2012, approximately 0.1 and 0.5 shares of the Company’s common stock, respectively, were excluded from the determination of diluted earnings per common share because their effect would have been anti-dilutive. The computations of basic and diluted earnings per share for the three months ended March 31, 2013 and 2012, respectively, are as follows:
Note 12. Accounting for Uncertainty in Income Taxes
In accordance with FASB ASC 740, Income Taxes (“ASC 740”), the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. As of March 31, 2013 and December 31, 2012, the Company had $37.8 and $32.1, respectively, of net unrecognized tax benefits. This liability, if recognized, would affect the Company’s effective tax rate. The Company is currently open to audit by the tax authorities for the six tax years ended December 31, 2012. There are currently no material income tax audits in progress.
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 was less than $1.0 as of March 31, 2013 and December 31, 2012.
Income tax expense in the first quarter of 2013 reflects the recognition of our 2012 R&D credit resulting from the recently enacted tax legislation in January 2013, and which benefited diluted earnings per share for the period by approximately $0.03 per diluted share. Our expected effective tax rate for 2013, which includes the impact of current and prior year research and development tax credits as well as other tax planning initiatives, is approximately 29.0%.
The following discussion and analysis addresses the results of our operations for the three months ended March 31, 2013, as compared to our results of operations for the three months ended March 31, 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 products for commercial aircraft and for business jets and the leading aftermarket distributor and value added service provider of aerospace fasteners and other consumable products and 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:
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 months ended March 31, 2013 and March 31, 2012, respectively, were as follows:
Revenues by geographic area (based on destination) for the three months ended March 31, 2013 and March 31, 2012, respectively, were as follows:
Revenues from our domestic and foreign operations for the three months ended March 31, 2013 and March 31, 2012, respectively, were as follows:
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 6.3% of sales during the first quarter of 2013 and is expected to remain at a similar 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 and Airbus aircraft, our targeted capacity utilization levels, recent acquisitions and current industry conditions, we expect that our capital expenditures will be approximately $135 - $145 during 2013.
Our revenue growth continues to be driven primarily by the robust new aircraft delivery cycle. Approximately 61 percent of first quarter revenues was driven by demand for products for new-buy aircraft, reflecting both increased new aircraft deliveries and continued softness in aftermarket demand. During March 2013, the International Air Transport Association (“IATA”) made an upward revision to its financial outlook for the global airline industry. For 2013, airlines are now expected to report a profit of approximately $10.6 billion, up from the IATA December forecast of $8.4 billion. For 2013, IATA expects global profits to be about 40% higher than 2012, and importantly, reversing a three-year trend of declining profits. The 2013 IATA forecast is based on a 2013 global passenger traffic increase of around 5.4%, up from the initial forecast of 4.5%, and capacity growth of about 4%. Regionally, traffic and capacity growth is forecast to be slower in North America and particularly in Europe, and stronger in the emerging markets, Middle East, Asia-Pacific and Latin America. Passenger traffic has been strong to begin the year. IATA reported that February 2013 traffic was up 1.2% compared to January 2013. October 2012 appears to have been a turning point for air travel markets. Since October, passenger demand has been growing at an annualized rate of 9%. The strong growth in air travel during the October to February period, combined with slower expansion in capacity, drove load factors to record levels. After seasonal adjustment, load factors were above 80%, which helped to offset continuing high jet fuel prices.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2013,
AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2012
($ in Millions, Except Backlog and Per Share Data)
Revenues for the first quarter of 2013 of $842.2 increased $94.9, or 12.7%, as compared with the same period of the prior year.
Cost of sales for the first quarter of 2013 was $523.1, or 62.1% of sales, as compared with cost of sales of $463.8, or 62.1% of sales in the same period of the prior year. The increase in cost of sales is due to the 12.7% increase in revenues and a similar healthy revenue mix as compared to prior year and ongoing manufacturing, engineering and program management continuous improvement initiatives, offset by slightly higher expenses.
Selling, general and administrative (“SG&A”) expenses for the first quarter of 2013 were $112.2, or 13.3% of sales, as compared with SG&A expenses of $107.3, or 14.4% of sales in the same period of the prior year. The higher level of SG&A expense in the first quarter of 2013 is primarily due to the 12.7% increase in revenues and $5.1 due to recent acquisitions offset partially by ongoing cost management initiatives. 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.
Research, development and engineering expense for the first quarter of 2013 was $53.3, or 6.3% of sales, as compared with $46.4, or 6.2% of sales in the same period of the prior year. The $6.9 increase in spending is primarily due to new product development activities in our commercial aircraft segment associated with our record $8.3 billion backlog (booked and awarded but unbooked).
Operating earnings for the first quarter of 2013 of $153.6 increased 18.3% on the aforementioned 12.7% increase in revenues. Operating margin was 18.2% and expanded 80 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 sales volume and ongoing operational efficiency initiatives.
Interest expense in the first quarter of 2013 of $30.6 increased by $2.2 as a result of the higher debt level due to the acquisitions completed in 2012, offset by an approximately 300 basis point reduction in effective interest cost on long-term debt refinanced in 2012.
Earnings before income taxes for the first quarter of 2013 of $123.0 increased 21.3% as compared with the same period of the prior year, reflecting the aforementioned 18.3% increase in operating earnings, offset by a $2.2 increase in interest expense.
Income tax expense in the first quarter of 2013 of $33.1, or 26.9% of earnings before income taxes, increased by $0.5 as compared with income tax expense for same period of the prior year of $32.6, which represented 32.1% of earnings before income taxes. Income tax expense as a percentage of pretax earnings in the first quarter of 2013 reflects the recognition of our 2012 R&D credit resulting from the recently enacted tax legislation in January 2013, and which benefited diluted earnings per share for the period by approximately $0.03 per diluted share. Our expected effective tax rate for 2013, which includes the impact of current and prior year research and development tax credits as well as other tax planning initiatives, is approximately 29.0%.
Net earnings for the first quarter of 2013 of $89.9 and earnings per diluted share of $0.87, increased 30.7% and 29.9%, respectively, as compared with the same period of the prior year.
Bookings during the first quarter of 2013 were approximately $845, representing a book-to-bill ratio of approximately 1.0 to 1. Booked backlog at March 31, 2013 stood at approximately $3.8 billion as compared with $3.7 billion at March 31, 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.
The following is a summary of operating earnings by segment:
First quarter 2013 commercial aircraft segment (“CAS”) revenues of $420.0 increased 12.1% as compared with the prior year period. CAS first quarter 2013 operating earnings of $74.2 increased 13.3% and operating margin of 17.7% expanded 20 basis points as compared with the prior year period, primarily due to operating leverage at the higher revenue level and ongoing operational efficiency initiatives.
First quarter 2013 consumables management segment (“CMS”) revenues of $326.7 increased 13.9% as compared with the prior year period and operating margin of 19.8% reflects approximately $4.1 of acquisition, integration and transition costs and a full quarter of revenue for the UFC and Interturbine acquisitions which have lower operating margins than the legacy CMS business.
First quarter 2013 business jet segment revenues of $95.5 increased 11.3% as compared with the prior year period. Operating earnings of $14.6 increased $2.1, or 16.8%, as compared with the prior year period. Current period operating margin of 15.3% expanded by 70 basis points, reflecting the increase in revenues, an improved mix of revenues and ongoing operational efficiency initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
As of March 31, 2013, our net debt-to-net capital ratio was 39.0%. Net debt was $1,428.6, which represented total debt of $1,960.1, less cash and cash equivalents of $531.5. At March 31, 2013, net capital (total debt plus total stockholders’ equity less cash and cash equivalents) was $3,666.2. As of March 31, 2013, long-term debt primarily consisted of $1,300.0 aggregate principal amount ($1,314.7 inclusive of original issue premium) of our 5.25% Senior Unsecured Notes due 2022 (the “5.25% Notes”) and $650.0 aggregate principal amount ($645.3 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 March 31, 2013 there were no amounts outstanding under the Revolving Credit Facility. Cash on hand at March 31, 2013 increased by $17.8 as compared with cash on hand at December 31, 2012 primarily as a result of cash flows from operating activities of $59.2 less capital expenditures of $37.2. 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 March 31, 2013 was $2,076.5, an increase of $70.6 as compared with working capital at December 31, 2012. As of March 31, 2013, total current assets increased by $141.1 and total current liabilities increased by $70.5. The increase in current assets was primarily due to an increase in cash of $17.8 (as described above), an increase in accounts receivable of $81.0 and an increase in inventories of $55.6 to support future revenue growth. The increase in total current liabilities was primarily due to an increase in accounts payable of $64.9 and an increase in accrued interest of $28.3. Accounts payable were higher at March 31, 2013 due to the increase in business activity.
As of March 31, 2013, our cash and cash equivalents were $531.5 as compared to $513.7 at December 31, 2012. Cash generated from operating activities was $59.2 for the three months ended March 31, 2013, as compared to $47.7 in the same period in the prior year. The primary sources of cash from operations during the three months ended March 31, 2013 were net earnings of $89.9, adjusted by depreciation and amortization of $20.4, non-cash compensation of $6.0, a decrease in deferred income taxes of $8.4 and an increase in accounts payable and accrued liabilities of $88.9. Offsetting these sources of cash were an increase in accounts receivable of $88.1 as a result of increased revenues and an increase in inventories of $69.0 to support our record backlog.
Our capital expenditures were $37.2 and $23.3 during the three months ended March 31, 2013 and 2012, respectively. We expect capital expenditures of approximately $135-$145 during 2013. These capital expenditures are needed to support our record total backlog of approximately $8.3 billion ($3.8 booked and $4.5 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 March 31, 2013 totaled $1,960.0 and consisted of our 5.25% Notes and our 6.875% Notes.
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 March 31, 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 March 31, 2013.
The following table reflects our contractual obligations and commercial commitments as of March 31, 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.
We believe that our cash flows, together with cash on hand and the availability under the Revolving 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
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 sheets. Our aggregate future minimum lease payments under these arrangements total approximately $319.1 at March 31, 2013.
Indemnities, Commitments and Guarantees
During the normal course of business, we have 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 design, manufacture, sale and delivery 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 many 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 consolidated financial statements.
The Company records backlog when it enters into a definitive order for the delivery of products to its customers in the future. Within backlog, the Company differentiates between booked backlog and awarded but unbooked backlog. For manufacturing programs, generally if there are definitive delivery dates then the backlog is considered booked. When the Company receives the delivery date specificity in writing from its customers on these long-term contracts, management includes such amount in booked backlog. If a contract does not provide that level of specificity, the production requirements are generally provided to the Company through periodic purchase orders issued against the underlying contracts at which point the amount of the purchase orders is classified as booked. The remaining portion of the underlying contract is considered awarded but unbooked. For consumables contracts, the Company includes in booked backlog, open but unfulfilled purchase orders plus an amount that it believes necessary to support its customers’ production activities under long-term contracts. In addition, purchase orders for end items and spares are generally received and recorded as backlog when the Company accepts their terms.
Deferred Tax Assets
We maintained a valuation allowance of approximately $26.5 as of March 31, 2013 primarily related to foreign net operating losses.
Critical Accounting Policies
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 in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. There have been no changes to our critical accounting policies since December 31, 2012.
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, (the “Exchange Act”). Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “expectations,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “will,” “should,” “see,” “guidance,” “confident” and other words of similar meaning in connection with a discussion of future operating or financial performance. Forward-looking statements include, but are not limited to, all statements that do not relate solely to historical or current facts, including statements regarding acquisitions, the expected benefits derived from acquisitions, implementation and expected benefits of lean manufacturing and continuous improvement plans, our dealings with customers and partners, the consolidation of facilities, reduction of our workforce, integration of acquired businesses, ongoing capital expenditures, our ability to grow our business, the impact of the large number of grounded aircraft on demand for our products and our underlying assets, the adequacy of funds to meet our capital requirements, the ability to refinance our indebtedness, if necessary, the reduction of debt, the potential impact of new accounting pronouncements, and the impact on our business of the decreases in passenger traffic and the size of the airline fleet. Such forward-looking statements include risks and uncertainties and our actual experience and results may differ materially from the experience and results anticipated in such statements. Factors that might cause such a difference include those discussed in our filings with the SEC, under the heading "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 as well as future events that may have the effect of reducing our available operating income and cash balances, such as unexpected operating losses, the impact of rising fuel prices on our airline customers, outbreaks in national or international hostilities, terrorist attacks, prolonged health and environmental issues which reduce air travel demand, delays in, or unexpected costs associated with, the integration of our acquired businesses, conditions in the airline industry, conditions in the business jet industry, regulatory developments, litigation costs, problems meeting customer delivery requirements, our success in winning new or expected refurbishment contracts from customers, capital expenditures, increased leverage, possible future acquisitions, facility closures, product transition costs, labor disputes involving us, our significant customers or airframe manufacturers, the impact of a prolonged global recession, the possibility of a write-down of intangible assets, delays or inefficiencies in the introduction of new products, fluctuations in currency exchange rates or our inability to properly manage our rapid growth.
Except as required under the federal securities laws and rules and regulations of the SEC, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented herein. These statements should be considered only after carefully reading the risk factors and the other information in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and this entire quarterly report on Form 10-Q.
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. Our 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 March 31, 2013, we had no outstanding forward currency exchange contracts. In addition, we have not entered into any other derivative financial instruments.
Interest Rates – As of March 31, 2013, we have no adjustable rate debt outstanding. We do not engage in transactions intended to hedge our exposure to changes in interest rates.
As of March 31, 2013, we maintained a portfolio of cash and 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 less than $0.1.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 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 of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act), as of March 31, 2013. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
There were no changes in our internal control over financial reporting that occurred during the first quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.