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BE Aerospace 10-Q 2014
beav_Current_Folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

 

For The Quarterly Period Ended September 30, 2014

 

 

Commission File No. 0-18348

 

 

B/E AEROSPACE, INC.

 

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

 

06-1209796

 

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

 

 

1400 Corporate Center Way

Wellington, Florida 33414-2105

(Address of principal executive offices)

 

 

(561) 791-5000

(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 105,305,503 shares were outstanding as of October 23, 2014.

 


 

B/E AEROSPACE, INC.

 

Form 10-Q for the Quarter Ended September 30, 2014

 

Table of Contents

 

 

 

 

 

 

Page

Part I 

Financial Information

 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

 

 

 

 

Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three Months and Nine Months Ended September 30, 2014 and 2013

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

27 

 

 

 

Item 4. 

Controls and Procedures

28 

 

 

 

Part II  Other Information 

 

 

 

 

Item 5. 

Exhibits

29 

 

 

 

Signatures 

30 

 

 

 

2


 

PART I - FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

B/E AEROSPACE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS  (UNAUDITED)

(In  Millions, Except  Share Data)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2014

    

2013

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

289.3 

 

$

637.8 

 

Accounts receivable – trade, less allowance for doubtful accounts ( $12.3 at September 30, 2014 and $10.4 at December 31, 2013)

 

 

676.9 

 

 

484.1 

 

Inventories

 

 

2,175.4 

 

 

1,943.8 

 

Deferred income taxes

 

 

32.2 

 

 

29.4 

 

Other current assets

 

 

122.7 

 

 

64.6 

 

Total current assets

 

 

3,296.5 

 

 

3,159.7 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation ( $352.0 at September 30, 2014 and $289.0 at December 31, 2013)

 

 

681.6 

 

 

425.7 

 

Goodwill

 

 

2,253.6 

 

 

1,571.0 

 

Identifiable intangible assets, net of accumulated amortization ( $209.4 at September 30, 2014 and $179.8 at December 31, 2013)

 

 

651.5 

 

 

472.2 

 

Other assets

 

 

74.9 

 

 

67.6 

 

 

 

 

6,958.1 

 

 

5,696.2 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

463.2 

 

$

357.9 

 

Accrued liabilities

 

 

686.1 

 

 

521.2 

 

Total current liabilities

 

 

1,149.3 

 

 

879.1 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

2,626.7 

 

 

1,959.4 

 

Deferred income taxes

 

 

200.4 

 

 

165.0 

 

Other non-current liabilities

 

 

92.0 

 

 

83.5 

 

 

 

 

 

 

 

 

 

Commitments, contingencies and off-balance sheet arrangements (Note 8)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 1.0 million shares authorized; no shares outstanding

 

 

--

 

 

--

 

Common stock, $0.01 par value; 200.0 million shares authorized; 105.9 million shares issued as of September 30, 2014 and 105.7 million shares issued as of December 31, 2013

 

 

1.1 

 

 

1.1 

 

Additional paid-in capital

 

 

1,722.7 

 

 

1,688.8 

 

Retained earnings

 

 

1,243.1 

 

 

923.3 

 

Accumulated other comprehensive loss

 

 

(77.2)

 

 

(4.0)

 

Total stockholders’ equity

 

 

2,889.7 

 

 

2,609.2 

 

 

 

$

6,958.1 

 

$

5,696.2 

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

 

B/E AEROSPACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS  

AND COMPREHENSIVE INCOME (UNAUDITED)

(In  Millions, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

 

NINE MONTHS ENDED

 

 

 

SEPTEMBER 30,

 

 

SEPTEMBER 30,

 

 

   

2014

   

2013

   

2014

   

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,102.4 

 

$

888.1 

 

$

3,203.1 

 

$

2,580.6 

 

Cost of sales

 

 

736.0 

 

 

545.8 

 

 

2,053.4 

 

 

1,592.4 

 

Selling, general and administrative

 

 

146.2 

 

 

120.0 

 

 

419.5 

 

 

349.5 

 

Research, development and engineering

 

 

71.7 

 

 

62.2 

 

 

213.4 

 

 

166.3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

 

 

148.5 

 

 

160.1 

 

 

516.8 

 

 

472.4 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings, as percentage of revenues

 

 

13.5 

%

 

18.0 

%

 

16.1 

%

 

18.3 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

34.2 

 

 

30.5 

 

 

96.5 

 

 

91.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

 

114.3 

 

 

129.6 

 

 

420.3 

 

 

380.8 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

 

12.1 

 

 

36.9 

 

 

100.5 

 

 

105.8 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

102.2 

 

 

92.7 

 

 

319.8 

 

 

275.0 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment and other

 

 

(82.5)

 

 

43.6 

 

 

(73.2)

 

 

12.6 

 

Comprehensive income

 

$

19.7 

 

$

136.3 

 

$

246.6 

 

$

287.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.98 

 

$

0.90 

 

$

3.08 

 

$

2.67 

 

Diluted

 

$

0.98 

 

$

0.89 

 

$

3.06 

 

$

2.65 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

103.9 

 

 

103.2 

 

 

103.9 

 

 

103.2 

 

Diluted

 

 

104.6 

 

 

104.0 

 

 

104.5 

 

 

103.9 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

B/E AEROSPACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In  Millions)

 

 

 

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED

 

 

 

SEPTEMBER 30,

 

 

   

2014

   

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net earnings

 

$

319.8 

 

$

275.0 

 

Adjustments to reconcile net earnings to net cash flows provided by operating activities, net of effects from acquisitions:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

105.3 

 

 

65.1 

 

Deferred income taxes

 

 

21.4 

 

 

36.0 

 

Non-cash compensation

 

 

21.6 

 

 

17.6 

 

Provision for doubtful accounts

 

 

1.7 

 

 

0.8 

 

Loss on disposal of property and equipment

 

 

2.9 

 

 

1.4 

 

Tax benefits realized from restricted stock vesting and exercises of employee stock options

 

 

(9.1)

 

 

(6.2)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(142.5)

 

 

(91.2)

 

Inventories

 

 

(218.1)

 

 

(163.0)

 

Other current and non-current assets

 

 

(61.1)

 

 

(17.9)

 

Accounts payable and accrued liabilities

 

 

161.6 

 

 

121.8 

 

Net cash provided by operating activities

 

 

203.5 

 

 

239.4 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

 

(183.0)

 

 

(113.7)

 

Acquisitions, net of cash acquired

 

 

(1,043.1)

 

 

(76.0)

 

Other

 

 

0.1 

 

 

0.1 

 

Net cash used in investing activities

 

 

(1,226.0)

 

 

(189.6)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from common stock issued

 

 

3.7 

 

 

3.3 

 

Purchase of treasury stock

 

 

(0.1)

 

 

(0.4)

 

Tax benefits realized from restricted stock vesting and exercises of employee stock options

 

 

9.1 

 

 

6.2 

 

Principal payments on long-term debt

 

 

-

 

 

(0.3)

 

Borrowings on line of credit

 

 

668.0 

 

 

-

 

Debt origination costs

 

 

(2.0)

 

 

-

 

Net cash provided by financing activities

 

 

678.7 

 

 

8.8 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(4.7)

 

 

1.5 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(348.5)

 

 

60.1 

 

Cash and cash equivalents, beginning of period

 

 

637.8 

 

 

513.7 

 

Cash and cash equivalents, end of period

 

$

289.3 

 

$

573.8 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during period for:

 

 

 

 

 

 

 

Interest

 

$

62.3 

 

$

60.0 

 

Income taxes

 

 

114.2 

 

 

73.9 

 

 

 

 

 

 

 

 

 

Supplemental schedule of noncash investing activities:

 

 

 

 

 

 

 

Accrued property additions

 

$

9.1 

 

$

8.3 

 

Contingent consideration

 

 

102.0 

 

 

-

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

B/E AEROSPACE, INC.

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, 2013.

 

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 June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12, Compensation-Stock Compensation,  which updated the guidance in ASC Topic 718, Compensation – Stock Compensation. The update is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The adoption of ASU 2014-12 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers,  which updated the guidance in ASC Topic 606,  Revenue from Contracts with Customers.  The amendments in this update are effective for annual reporting periods beginning after December 15, 2016.  Early application is not permitted.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the

6


 

contract and recognize revenue when (or as) the entity satisfies a performance obligation. The Company is currently evaluating the impact this guidance will have on its consolidated financial condition, results of operations, cash flows and disclosures and is currently unable to estimate the impact of adopting this guidance.

 

In April 2014, FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment,  which updated the guidance in ASC Topic 360, Property, Plant and Equipment. The updated guidance is effective prospectively for years beginning on or after December 15, 2014, with early application permitted. The amendments in this update change the requirements for reporting discontinued operations in Subtopic 205-20. Under this updated guidance, a discontinued operation will include a disposal of a major part of an entity’s operations and financial results such as a separate major line of business or a separate major geographical area of operations. The guidance raises the threshold to be a major operation but no longer precludes discontinued operations presentation where there is significant continuing involvement or cash flows with a disposed component of an entity. The guidance expands disclosures to include cash flows where there is significant continuing involvement with a discontinued operation and the pre-tax profit or loss of disposal transactions not reported as discontinued operations. The adoption of ASU 2014-08 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In July 2013, FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which updated the guidance in ASC Topic 740, Income Taxes. The update was effective for interim periods beginning on or after December 15, 2013, and generally provides guidance for the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met. The adoption of ASU 2013-11 did not have a material impact on the Company’s consolidated financial statements.

 

Note 3.Business Combinations

 

Energy Services Acquisitions

 

In April 2014, the Company acquired the assets of the Vision Oil Tools, LLC group of companies (“Vision”), a provider of technical services and associated rental equipment and logistics services to the energy sector. Vision established a new geographical base of operations for the Company in the North Dakota (Williston/Bakken) and Rocky Mountain regions. The purchase price was initially $140.0 with the potential for an additional $35.0 in 2015 if Vision generates its planned 2014 EBITDA. The Company has performed an assessment of the progress to date and determined it is likely that Vision will achieve this amount, and accordingly has recorded the $35.0 as a liability as of September 30, 2014. During the quarter ended September 30, 2014, Vision’s acquired working capital was finalized resulting in an additional purchase price of $0.7 and customary working capital adjustments as of the closing date which were not material individually or in the aggregate. The Company has not yet completed the remainder of its evaluation and allocation of the purchase price for Vision. During the June 2014, the Company also acquired the assets of the Cornell group of companies (“Cornell”), which provides technical services, associated logistic services and rental equipment to the energy sector in the Eagle Ford and Permian basins. The purchase price was $70.7 with the potential for an additional $67.0 based on achieving 2014 planned EBITDA. The Company has performed an assessment of the results to date and determined it is likely that such amount will be realized and accordingly, has recorded the $67.0 as a liability as of September 30, 2014. In April 2014, the Company also acquired the assets of the Marcellus group of companies (“MGS”) engaged in manufacturing and rental of equipment in the Marcellus/Utica basin for approximately $45.0. In January 2014, the Company acquired the assets of the LT Energy Services group of companies (“LT”), an Eagle Ford basin provider of rental equipment, for a net purchase price of approximately $102.5. In February 2014, the Company acquired the assets of Wildcat Wireline LLC

7


 

(“Wildcat”), a provider of wireline services primarily in the Eagle Ford basin, and also in the Marcellus/Utica basin, for a net purchase price of approximately $153.4.

 

For the 2014 energy services acquisitions, based on our preliminary purchase price allocation, the excess of the purchase price over the fair value of the identifiable assets acquired approximated $442.2, of which $109.0 was allocated to identified intangible assets, consisting of customer contracts and relationships and covenants not to compete, and $333.2 is included in goodwill. The useful life assigned to the customer contracts and relationships is eleven years, and the covenants not to compete are being amortized over their contractual periods of five years.

 

During the third and fourth quarters of 2013, the Company acquired the assets of Blue Dot Energy Services, LLC (“Blue Dot”) and Bulldog Frac Rentals, LLC (“Bulldog”), providers of technical services and associated rental equipment and logistics services to the energy sector, for a net purchase price of $114.0.  For the 2013 Acquisitions, the excess of the purchase price over the fair value of the identifiable assets acquired approximated $70.6, of which $28.5 was allocated to identified intangible assets, consisting of customer contracts and relationships and covenants not to compete, and $42.1 is included in goodwill. The useful lives assigned to the customer contracts and relationships range from 11‑20 years, and the covenants not to compete are being amortized over their contractual periods of five years.

 

All of the aforementioned acquisitions are included in the consumables management segment and collectively referred to as the “Energy Services Acquisitions”.

 

Manufacturing Acquisitions

 

In June 2014, the Company acquired the outstanding shares of the EMTEQ, Inc. group of companies, a domestic provider of aircraft interior and exterior lighting systems, as well as aircraft cabin management and power systems for a purchase price of $256.3, net of cash acquired. The Company also acquired the outstanding shares of the F+E Fischer + Entwicklungen GmbH & Co. KG group of companies (“Fischer”) a leading Europe-based manufacturer of seating products for civilian helicopters for a purchase price of $212.3, net of cash acquired. During the second quarter, the Company also acquired the outstanding shares of one smaller business, engaged in the production of lighting, control units and switches, based in Europe for a purchase price of $63.0, net of cash acquired. These acquisitions are included in the business jet segment and collectively referred to as the “Manufacturing Acquisitions.”

 

For the Manufacturing Acquisitions, based on our preliminary purchase price allocation, the excess of the purchase price over the fair value of the identifiable assets acquired approximated $499.0, of which $98.5 was allocated to identified intangible assets, consisting of customer contracts and relationships, developed technologies, trademarks and patents and covenants not to compete, and $400.5 is included in goodwill. The useful life assigned to the customer contracts and relationships and developed technologies is 20 years, the useful life assigned to trademarks and patents is 15 years, and the covenants not to compete are being amortized over their contractual periods of three to five years.

 

The Energy Services Acquisitions and Manufacturing Acquisitions were accounted for as purchases under FASB ASC 805, Business Combinations (“ASC 805”). The assets purchased and liabilities assumed for the Energy Services Acquisitions and Manufacturing Acquisitions have been reflected in the accompanying consolidated balance sheet as of September 30, 2014, and the results of operations for the Energy Services Acquisitions and Manufacturing Acquisitions are included in the accompanying consolidated statements of earnings from their respective dates of acquisition.

 

The valuation of certain assets, principally intangible assets, is not yet complete, and as such, the Company has not yet finalized its allocation of the purchase prices for the Energy Services Acquisitions and Manufacturing Acquisitions except for the Blue Dot acquisition.

 

8


 

The Company completed its evaluation and allocation of the Blue Dot purchase price during the quarter ended September 30, 2014 which resulted in an $8.0 increase in identified intangibles, a $3.9 increase in accounts receivable and an $11.9 decrease in goodwill.

 

The following table summarizes the current estimates of fair values of assets acquired and liabilities assumed in the Energy Services Acquisitions in accordance with ASC 805, which are currently recorded based on management’s estimates as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other 2014

 

 

 

 

 

 

 

 

   

 

Wildcat

 

 

Vision

 

 

Cornell

 

 

acquisitions

 

 

2014

   

2013

 

Accounts receivable-trade

 

$

0.4 

 

$

10.8 

 

$

10.5 

 

$

15.1 

 

$

36.8 

 

$

14.8 

 

Inventories

 

 

1.3 

 

 

--

 

 

--

 

 

0.4 

 

 

1.7 

 

 

3.9 

 

Other current and non-current assets

 

 

--

 

 

2.4 

 

 

--

 

 

0.1 

 

 

2.5 

 

 

0.2 

 

Property and equipment

 

 

26.9 

 

 

44.7 

 

 

28.7 

 

 

41.2 

 

 

141.5 

 

 

35.5 

 

Goodwill

 

 

97.3 

 

 

89.3 

 

 

74.7 

 

 

71.9 

 

 

333.2 

 

 

42.1 

 

Identified intangibles

 

 

27.5 

 

 

30.0 

 

 

24.5 

 

 

27.0 

 

 

109.0 

 

 

28.5 

 

Accounts payable

 

 

--

 

 

(1.5)

 

 

(0.7)

 

 

(4.0)

 

 

(6.2)

 

 

(10.0)

 

Other current and non-current liabilities

 

 

--

 

 

(35.0)

 

 

(67.0)

 

 

(4.2)

 

 

(106.2)

 

 

(1.0)

 

Total purchase price

 

$

153.4 

 

$

140.7 

 

$

70.7 

 

$

147.5 

 

$

512.3 

 

$

114.0 

 

 

All of the goodwill and other intangible assets related to the Energy Services Acquisitions are expected to be deductible for tax purposes.

 

The following table summarizes the current estimates of fair values of assets acquired and liabilities assumed in the Manufacturing Acquisitions in accordance with ASC 805, which are currently recorded based on management’s estimates as follows:

 

 

 

 

 

 

 

 

 

 

 

   

Domestic

   

Foreign

 

Accounts receivable-trade

 

$

12.2 

 

$

12.8 

 

Inventories

 

 

16.1 

 

 

8.0 

 

Other current and non-current assets

 

 

1.3 

 

 

0.5 

 

Property and equipment

 

 

6.6 

 

 

5.6 

 

Goodwill

 

 

189.1 

 

 

211.4 

 

Identified intangibles

 

 

46.1 

 

 

52.4 

 

Accounts payable

 

 

(4.3)

 

 

(3.7)

 

Other current and non-current liabilities

 

 

(10.8)

 

 

(11.7)

 

Total purchase price

 

$

256.3 

 

$

275.3 

 

 

The majority of the goodwill and intangible assets related to the Manufacturing Acquisitions are not expected to be deductible for tax purposes.

 

Revenues and net earnings from Energy Services Acquisitions for the three and nine month periods ended September 30, 2014 were $126.9 and $24.9 and $261.8 and $42.6, respectively. Revenues and net earnings from Manufacturing Acquisitions for the three and nine month periods ended September 30, 2014 were $37.4 and $3.8 and $48.1 and $4.9, respectively.

 

Consolidated unaudited pro forma revenues, net earnings, and diluted net earnings per share for the three and nine month periods ended September 30, 2014 and 2013, respectively, giving effect to all acquisitions as if they had occurred on January 1, 2013 were as follows:

 

 

9


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED 

 

NINE MONTHS ENDED

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

   

Pro forma

   

Pro forma

   

Pro forma

   

Pro forma

 

Revenues

 

$

1,102.5 

 

$

1,006.1 

 

$

3,347.1 

 

$

2,935.9 

 

Net earnings

 

 

102.2 

 

 

103.3 

 

 

345.6 

 

 

302.0 

 

Diluted net earnings per share

 

 

0.98 

 

 

0.99 

 

 

3.31 

 

 

2.91 

 

 

 

 

 

 

 

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 of $115.3 and $107.5 and capitalized development costs on long-term seller furnished equipment contracts of $287.7 and $213.4 as of September 30, 2014 and December 31, 2013, respectively. Finished goods inventories primarily consist of aerospace fasteners. Inventory reserves were approximately $76.6 and $64.4 as of September 30, 2014 and December 31, 2013, respectively. Inventories, net of reserves, consist of the following:

 

 

 

 

 

 

 

 

 

 

 

   

September 30, 2014

   

December 31, 2013

 

Purchased materials and component parts

 

$

305.3 

 

$

243.4 

 

Work-in-process

 

 

572.1 

 

 

484.0 

 

Finished goods

 

 

1,298.0 

 

 

1,216.4 

 

 

 

$

2,175.4 

 

$

1,943.8 

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

 

Useful

 

 

 

 

 

Net

 

 

 

Life

 

Original

 

Accumulated

 

Book

 

 

    

(Years)

    

Cost

    

Amortization

    

Value

 

Customer contracts and relationships

 

8-30

 

$

582.0 

 

$

106.3 

 

$

475.7 

 

Acquired technologies

 

5-34

 

 

152.1 

 

 

57.9 

 

 

94.2 

 

Replacement parts annuity and product approvals

 

7-22

 

 

7.8 

 

 

6.5 

 

 

1.3 

 

Technical qualifications, plans and drawings

 

10-22

 

 

17.7 

 

 

15.4 

 

 

2.3 

 

Trademarks and patents

 

3-20

 

 

24.9 

 

 

16.3 

 

 

8.6 

 

Covenants not to compete and other
identified intangibles

 

4-5

 

 

36.7 

 

 

5.7 

 

 

31.0 

 

Trade names

 

15 - Indefinite

 

 

39.7 

 

 

1.3 

 

 

38.4 

 

 

 

 

 

$

860.9 

 

$

209.4 

 

$

651.5 

 

 

Amortization expense associated with identifiable intangible assets was approximately $13.3 and $7.5 for the three month periods ended September 30, 2014 and 2013, respectively, and $33.0 and $22.6 for the nine month periods ended September 30, 2014 and 2013, respectively. The Company currently expects to recognize amortization expense of approximately $50.0 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 such as changes in

10


 

exchange rates for assets acquired outside the United States. The Company expenses costs to renew or extend the term of a recognized intangible asset. Goodwill increased $682.6 during the nine months ended September 30, 2014, $717.1 due to our preliminary estimate of goodwill associated with acquisitions completed in 2013 and 2014, partially offset by foreign currency translations.

 

Note 6.Long-Term Debt

 

As of September 30, 2014, long-term debt consisted of $1,300.0 aggregate principal amount ($1,312.7 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 ($646.0 net of original issue discount) of 6.875% senior unsecured notes due 2020 (the “6.875% Notes). The Company also has a $1,400.0 revolving credit facility pursuant to  Amendment No.1 to the Second Amended and Restated Credit Agreement as of June 26, 2014 (the “Revolving Credit Facility”), $668.0 of which was drawn at September 30, 2014. The amendment to increase the size of the Revolving Credit Facility from $950.0 to $1,400.0 did not change any other material terms under the agreement. The Revolving Credit Facility matures in August 2017 unless terminated earlier.

 

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. As of September 30, 2014, the rate under the Revolving Credit Facility was approximately 2.22%.

 

Letters of credit outstanding under the Revolving Credit Facility aggregated $6.9 at September 30, 2014 ($6.1 at December 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 September 30, 2014.

 

Note 7.Fair Value Measurements

 

All short-term financial instruments are generally 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. The carrying amount of the $668.0 outstanding under the Revolving Credit Facility as of September 30, 2014 (none at December 31, 2013) represents fair value due to its floating interest rate. 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 $2,103.1 and $2,058.5 as of September 30, 2014 and December 31, 2013, respectively. The fair value of the contingent consideration recognized on the

11


 

acquisition dates of Vision and Cornell was determined based on the likelihood of achieving performance targets, significant inputs not observable in the market referred to as Level 3 inputs.

 

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 September 30, 2014, future minimum lease payments under these arrangements approximated $321.1, 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 $7.0 and $20.4, and $5.5 and $16.6 was recognized during the three and nine month periods ended September 30, 2014 and 2013, 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 $48.1 at September 30, 2014.

 

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.

 

12


 

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 is currently evaluating the appropriate structure and reporting classification of its business segments and reporting units in light of the Company’s announcement of its intention to spin-off its consumables management segment and depending on the results of this evaluation our reportable segments and reporting units may change in the future.

 

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 Co-Chief Executive Officer, the President and Co-Chief Executive 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, aircraft manufacturing and logistics 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 and the similarity of the product offerings and services for the consumables management segment.

 

The following table presents revenues and operating earnings by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED 

 

NINE MONTHS ENDED

 

 

 

SEPTEMBER 30,

 

SEPTEMBER 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial aircraft

 

$

513.9 

 

$

456.6 

 

$

1,578.4 

 

$

1,307.8 

 

Consumables management

 

 

448.7 

 

 

317.4 

 

 

1,242.0 

 

 

956.8 

 

Business jet

 

 

139.8 

 

 

114.1 

 

 

382.7 

 

 

316.0 

 

 

 

$

1,102.4 

 

$

888.1 

 

$

3,203.1 

 

$

2,580.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial aircraft

 

$

80.4 

 

$

82.4 

 

$

271.8 

 

$

236.3 

 

Consumables management

 

 

75.0 

 

 

58.8 

 

 

214.9 

 

 

184.9 

 

Business jet

 

 

(6.9)

 

 

18.9 

 

 

30.1 

 

 

51.2 

 

 

 

 

148.5 

 

 

160.1 

 

 

516.8 

 

 

472.4 

 

Interest expense