| BE AEROSPACE INC ITEM 1A Risk Factors |
| 16 ITEM 1A RISK FACTORS Risks Relating to Our Business We are directly dependent upon the conditions in the airline and business jet industries and a severe and prolonged downturn could negatively impact our results of operations The September 11, 2001 terrorist attacks, SARS and the onset of the Iraq war severely impacted conditions in the airline industry |
| According to industry sources, in the aftermath of the attacks most major US and a number of international carriers substantially reduced their flight schedules, parked or retired portions of their fleets, reduced their workforces and implemented other cost reduction initiatives |
| US airlines further responded by decreasing domestic airfares |
| As a result of the decline in both traffic and airfares following the September 11, 2001 terrorist attacks, and their aftermath, as well as other factors, such as increases in fuel costs and heightened competition from low-cost carriers, the world airline industry lost a total of approximately dlra42 billion in calendar years 2001-2005, including approximately dlra7dtta4 billion in 2005 |
| The airline industry crisis also caused 22 airlines worldwide to declare bankruptcy or cease operations in the last four years |
| As a result of the foregoing, the domestic US airlines have been seeking to conserve cash in part by deferring or eliminating cabin interior refurbishment programs and deferring or canceling aircraft purchases |
| This, together with the reduction of new business jet production, caused a substantial contraction in our business during the 2001 through 2003 period |
| Although the global airline industry began to recover in late 2003 and conditions continue to improve, and the business jet industry is improving as well, additional events similar to those described above or other events could cause a deterioration of conditions in our industry or end the current business cycle |
| The rate at which the business jet industry recovers is dependent on corporate profits, the number of used jets on the market and other factors, which could slow the rate of recovery |
| The airline industry is heavily regulated and failure to comply with applicable laws could reduce our sales, or require us to incur additional costs to achieve compliance, which could reduce our results of operations The Federal Aviation Administration (FAA) prescribes standards and licensing requirements for aircraft components, including virtually all commercial airline and general aviation cabin interior products, and licenses component repair stations within the United States |
| Comparable agencies, such as the UK Civil Aviation Authority and the Japanese Civil Aviation Board, regulate these matters in other countries |
| If we fail to obtain a required license for one of our products or services or lose a license previously granted, the sale of the subject product or service would be prohibited by law until such license is obtained or renewed |
| In addition, designing new products to meet existing regulatory requirements and retrofitting installed products to comply with new regulatory requirements can be both expensive and time consuming |
| 16 From time to time these regulatory agencies propose new regulations |
| These new regulations generally cause an increase in costs to comply with these regulations |
| For example, when the FAA first enacted Technical Standard Order C127 in March 1992, requiring that all seats on certain new generation commercial aircraft installed after such date be certified to meet a number of safety requirements, including the ability to withstand a 16 G Force, all seating companies were required to meet these new rules |
| Compliance with this rule required industry participants to spend millions of dollars on engineering, plant and equipment to comply with the regulation |
| A number of smaller seating companies decided that they did not have the resources, financial or otherwise, to comply with these rules and they either sold their businesses or ceased operations |
| To the extent the FAA implements rule changes in the future, we may incur additional costs to achieve compliance |
| The airline industry is subject to extensive health and environmental regulation, any violation of which could subject us to significant liabilities and penalties We are subject to extensive and changing federal, state and foreign laws and regulations establishing health and environmental quality standards, and may be subject to liability or penalties for violations of those standards |
| We are also subject to laws and regulations governing remediation of contamination at facilities currently or formerly owned or operated by us or to which we have sent hazardous substances or wastes for treatment, recycling or disposal |
| We may be subject to future liabilities or obligations as a result of new or more stringent interpretations of existing laws and regulations |
| In addition, we may have liabilities or obligations in the future if we discover any environmental contamination or liability at any of our facilities, or at facilities we may acquire |
| There are risks inherent in international operations that could have a material adverse effect on our business operations While the majority of our operations are based domestically, we have significant manufacturing operations based internationally with facilities in the United Kingdom and the Netherlands, and each of our facilities sells to airlines all over the world |
| Our customers are located primarily in North America, Europe and the Asia/Pacific Rim region, including Australia, China and New Zealand, and we also have customers in most other geographic regions, including South America and the Middle East |
| As a result, 40prca or more of our net sales for the past three fiscal years were to customers located outside the United States and we expect this percentage to increase in the future |
| In addition, we have a number of subsidiaries in foreign countries (primarily in Europe), which have sales outside the United States |
| Approximately 30prca and 32prca, respectively, of our sales during the fiscal year ends December 31, 2005, and 2004 came from our foreign operations |
| Fluctuations in the value of foreign currencies affect the dollar value of our net investment in foreign subsidiaries, with these fluctuations being included in a separate component of stockholders &apos equity |
| At December 31, 2005, we reported a cumulative foreign currency translation loss of approximately dlra4dtta7 million in stockholders &apos equity as a result of foreign currency adjustments, and we may incur additional adjustments in future periods |
| In addition, operating results of foreign subsidiaries are translated into US dollars for purposes of our statement of operations at average monthly exchange rates |
| Moreover, to the extent that our revenues are not denominated in the same currency as our expenses, our net earnings could be materially adversely affected |
| For example, a portion of labor, material and overhead costs for goods produced in our production facilities in the United Kingdom and the Netherlands are incurred in British pounds or euros, respectively, but the related sales revenues are generally denominated in US dollars |
| Changes in the value of the US dollar or other currencies could result in fluctuations in foreign currency translation amounts or the US dollar value of transactions and, as a result, our net earnings could be materially adversely affected |
| Historically we have not engaged in hedging transactions |
| However, we may engage in hedging transactions in the future to manage or reduce our foreign exchange risk |
| Our attempts to manage our foreign currency exchange risk may not be successful and, as a result, our results of operations and financial condition could be materially adversely affected |
| Our foreign operations could also be subject to unexpected changes in regulatory requirements, tariffs and other market barriers and political, economic and social instability in the countries where we operate or sell our products and offer our services |
| The impact of any such events that may occur in the future could subject us to additional costs or loss of sales, which could materially adversely affect our operating results |
| 17 Our total assets include substantial intangible assets |
| The write-off of a significant portion of unamortized intangible assets would negatively affect our results of operations Our total assets reflect substantial intangible assets |
| At December 31, 2005, goodwill and identified intangibles, net, represented approximately 35prca of total assets |
| Intangible assets consist principally of goodwill and other identified intangible assets associated with our acquisitions |
| On at least an annual basis, we assess whether there has been an impairment in the value of goodwill and other intangible assets with indefinite lives |
| If the carrying value of the asset exceeds the estimated fair value of the related business, an impairment is deemed to have occurred |
| In this event, the amount is written down accordingly |
| Under current accounting rules, this would result in a charge to operating earnings |
| Any determination requiring the write-off of a significant portion of unamortized goodwill and identified intangible assets would negatively affect our results of operations and total capitalization, which could be material |
| If we make acquisitions, they may be less successful than we expect, which could have a material adverse effect on our financial condition We may consider future acquisitions, some of which could be material to us |
| We explore and conduct discussions with many third parties regarding possible acquisitions |
| Our ability to continue to achieve our goals may depend upon our ability to effectively acquire and integrate such companies, to achieve cost efficiencies and to manage these businesses as part of our company |
| We may not be successful in implementing appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions |
| Our efforts to integrate these businesses could be materially adversely affected by a number of factors beyond our control, such as regulatory developments, general economic conditions, increased competition and the loss of certain customers resulting from the acquisitions |
| In addition, the process of integrating these businesses could cause difficulties for us, including an interruption of, or loss of momentum in, the activities of our existing business and the loss of key personnel and customers |
| Further, the benefits that we anticipate from these acquisitions may not develop |
| Depending upon the acquisition opportunities available, we also may need to raise additional funds through the capital markets or arrange for additional bank financing in order to consummate such acquisitions |
| Our substantial indebtedness will require that a significant portion of our cash flow be used for debt service, which will limit our ability to use our cash flow for other areas of our business and could adversely affect the holders of our securities As of December 31, 2005, we had approximately dlra678dtta9 million of total indebtedness outstanding, representing approximately 54prca of total capitalization, and dlra322dtta9 million of net indebtedness outstanding (total indebtedness less cash and cash equivalents), representing approximately 36prca of net capitalization |
| Subject to the limits contained in our existing bank credit facility and the indentures governing our outstanding senior and senior subordinated notes, we could also incur substantial additional indebtedness in the future |
| As a result of our substantial indebtedness, we have substantial debt service obligations that could have significant consequences to us, including: o limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of those funds to fund debt service obligations; o limiting our ability to obtain additional financing to fund our growth strategy, working capital requirements, capital expenditures, acquisitions, debt service requirements or other general corporate requirements; o increasing our vulnerability to adverse economic and industry conditions; and o increasing our exposure to interest rate increases because borrowings under our current bank credit facility are, and borrowings under any future bank credit facility could be, at variable interest rates |
| Our ability to satisfy our debt service obligations will depend upon, among other things, our future operating performance and our ability to refinance indebtedness when necessary |
| Each of these factors is to a large extent dependent on economic, financial, competitive, and other factors 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, obtain additional financing or sell assets |
| In the future, our business may not generate sufficient cash flow, or we may not be able to obtain funding, to satisfy our debt service requirements |
| We had net losses for the fiscal years ended December 31, 2004 and 2003, and our earnings were inadequate to cover fixed charges at the end of each of these periods, and for the years ended December 31, 2005, and 2004 our cash flows provided by operations were only dlra12dtta6 million and dlra0dtta3 million |
| In addition to the debt service requirements of our outstanding indebtedness, we have other demands on our cash resources, including, among others, capital expenditures and operating expenses |
| 18 We have significant financial and operating restrictions in our debt instruments that may have an adverse effect on our operations The indentures governing our outstanding senior and senior subordinated notes contain numerous financial and operating covenants that limit our ability to incur additional or repay existing indebtedness, to create liens or other encumbrances, to make certain payments and investments, including dividend payments, to engage in transactions with affiliates, to engage in sale/leaseback transactions, to guarantee indebtedness and to sell or otherwise dispose of assets and merge or consolidate with other entities |
| Agreements governing future indebtedness could also contain significant financial and operating restrictions |
| Our current bank credit facility contains customary affirmative and negative covenants |
| A failure to comply with the obligations contained in any current or future agreement governing our indebtedness, including our indentures, could result in an event of default under our current or any future bank credit facility, or such indentures, which could permit acceleration of the related debt and acceleration of debt under other instruments that may contain cross-acceleration or cross-default provisions |
| We may not have, or may not be able to obtain, sufficient funds to make any required accelerated payments |
| We compete with a number of established companies, some of which have significantly greater financial, technological and marketing resources than we do, and we may not be able to compete effectively with these companies We compete with numerous established companies |
| Some of these companies, particularly in the passenger-to-freighter conversion business, have significantly greater financial, technological and marketing resources than we do |
| Our ability to be an effective competitor will depend on our ability to remain the supplier of retrofit and refurbishment products and spare parts on the commercial fleets on which our products are currently in service |
| It will also depend on our success in causing our products and the new products we may develop to be selected for installation in new aircraft, including next-generation aircraft, and in avoiding product obsolescence |
| Our ability to maintain or expand our market position in the passenger-to-freighter conversion business will depend on our success in being selected to convert specific aircraft, our ability to maintain and enhance our engineering design, our certification and program management capabilities and our ability to manufacture a broader range of structural components, connectors and other products used in this business |
| Provisions in our charter documents may discourage potential acquisitions of our company, even those which the holders of a majority of our common stock may favor Our restated certificate of incorporation and by-laws contain provisions that may have the effect of discouraging a third party from making an acquisition of us by means of a tender offer, proxy contest or otherwise |
| Our restated certificate of incorporation and by-laws: o classify the board of directors into three classes, with directors of each class serving for a staggered three-year period; o provide that directors may be removed only for cause and only upon the approval of the holders of at least two-thirds of the voting power of our shares entitled to vote generally in the election of such directors; o require at least two-thirds of the voting power of our shares entitled to vote generally in the election of directors to alter, amend or repeal the provisions relating to the classified board and removal of directors described above; o permit the board of directors to fill vacancies and newly created directorships on the board; o restrict the ability of stockholders to call special meetings; and o contain advance notice requirements for stockholder proposals |
| 19 Our rights plan and the ability of our board of directors to issue preferred stock may have the effect of discouraging a takeover attempt not previously approved by the board of directors Our board of directors has declared a dividend of one preferred share purchase right for each share of common stock outstanding |
| A right will also be attached to each share of common stock subsequently issued |
| The rights will have certain anti-takeover effects |
| If triggered, the rights would cause substantial dilution to a person or group of persons that acquires more than 15dtta0prca of our common stock on terms not approved by our board of directors |
| The rights could discourage or make more difficult a merger, tender offer or other similar transaction |
| Under our restated certificate of incorporation, our board of directors also has the authority to issue preferred stock in one or more series and to fix the powers, preferences and rights of any such series without stockholder approval |
| The board of directors could, therefore, issue, without stockholder approval, preferred stock with voting and other rights that could adversely affect the voting power of the holders of common stock and could make it more difficult for a third party to gain control of us |
| In addition, under certain circumstances, Section 203 of the Delaware General Corporation Law makes it more difficult for an "e interested stockholder, "e or generally a 15prca stockholder, to effect various business combinations with a corporation for a three-year period unless previously approved by our board of directors |
| You may not receive cash dividends on our shares of common stock We have never paid a cash dividend and do not plan to pay cash dividends on our common stock in the foreseeable future |
| We intend to retain our earnings to finance the development and expansion of our business and to repay indebtedness |
| Also, our ability to declare and pay cash dividends on our common stock is restricted by covenants in our outstanding notes |
| Our current bank credit facility also contains customary covenants, which include covenants restricting our ability to declare and pay cash dividends |
| If the price of our common stock continues to fluctuate significantly, you could lose all or part of any investment in our common stock The price of our common stock is subject to sudden and material increases and decreases, and decreases could adversely affect investments in our common stock |
| For example, since the beginning of 2003, the closing sale price of our common stock has ranged from a low of dlra1dtta25 to a high of $ 24dtta99 |
| The price of our common stock could fluctuate widely in response to: o our quarterly operating results; o changes in earnings estimates by securities analysts; o changes in our business; o changes in the marketapstas perception of our business; o changes in the businesses, earnings estimates or market perceptions of our competitors or customers; o changes in airline industry or business jet industry conditions; o changes in general market or economic conditions; and o changes in the legislative or regulatory environment |
| In addition, the stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies, including companies in our industry |
| The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company and these fluctuations could materially reduce our stock price |
| 20 FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 31E of the Securities Exchange Act of 1934 |
| Forward-looking statements include all statements that do not relate solely to historical or current facts, including statements regarding 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, 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, the impact on our business from the September 11, 2001 terrorist attacks, SARS outbreak and war in Iraq and the impact on our business of the recent increases in passenger traffic and projected increases in passenger traffic and the size of the airline fleet |
| These forward-looking statements include risks and uncertainties, and our actual experience may differ materially from that anticipated in such statements |
| Factors that might cause such a difference include those discussed in our filings with the Securities and Exchange Commission, under the heading "e Risk Factors "e in this Form 10-K, 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 issues which reduce air travel demand (eg, SARS), delays in, or unexpected costs associated with, the integration of our acquired or recently consolidated businesses, conditions in the airline industry, conditions in the business jet industry, problems meeting customer delivery requirements, our success in winning new or expected refurbishment contracts from customers, capital expenditures, cash expenditures related to possible future acquisitions, facility closures, product transition costs, labor disputes involving us, our significant customers or airframe manufacturers, the possibility of a write-down of intangible assets, delays or inefficiencies in the introduction of new products or fluctuations in currency exchange rates |
| 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 this entire Form 10-K |