10-K 1 beav-20161231x10k.htm 10-K beav_Current folio_10K

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

 

[    ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 0-18348

 

B/E AEROSPACE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

06-1209796

(I.R.S. Employer

Identification No.)

 

1400 Corporate Center Way 

Wellington, Florida 33414

(Address of principal executive offices)

(561) 791-5000

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Common Stock, $.01 Par Value

Name of each exchange on which registered

NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [X] No [ ]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [ ] No [X]

 

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 Web site, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X ]

 

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 aggregate market value of the registrant's voting stock held by non-affiliates was approximately $4,968 million on June 30, 2016 based on the closing sales price of the registrant's common stock as reported on the NASDAQ Global Select Market as of such date, which is the last business day of the registrant's most recently completed second fiscal quarter. Shares of common stock held by executive officers and directors have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not a determination for any other purpose. The number of shares of the registrant's common stock, $.01 par value, outstanding as of February 24, 2017 was 101,468,345 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain sections of the registrant's Proxy Statement to be filed with the Commission in connection with the 2017 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. With the exception of those sections that are specifically incorporated by reference in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed filed as part of this Report or incorporated by reference herein.

 


 

INDEX

 

 

 

 

PART I 

 

 

 

 

 

ITEM 1. 

Business

3

ITEM 1A. 

Risk Factors

18

ITEM 1B. 

Unresolved Staff Comments

34

ITEM 2. 

Properties

35

ITEM 3. 

Legal Proceedings

35

ITEM 4. 

Mine Safety Disclosures

36

 

 

 

PART II 

 

 

 

 

 

ITEM 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

36

 

 

 

ITEM 6. 

Selected Financial Data

38

ITEM 7. 

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

40

 

 

 

ITEM 7A. 

Quantitative and Qualitative Disclosures about Market Risk

53

ITEM 8. 

Financial Statements and Supplementary Data

54

ITEM 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

54

 

 

 

ITEM 9A. 

Controls and Procedures

54

ITEM 9B. 

Other Information

57

PART III 

 

 

ITEM 10. 

Directors, Executive Officers and Corporate Governance

57

ITEM 11. 

Executive Compensation

61

ITEM 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

61

 

 

 

ITEM 13. 

Certain Relationships and Related Transactions, and Director Independence

61

ITEM 14. 

Principal Accountant Fees and Services

61

PART IV 

 

 

ITEM 15. 

Exhibits and Financial Statement Schedules

62

 

 

 

 

Index to Exhibits

63

 

Signatures

70

 

Index to Consolidated Financial Statements and Schedule

F-1

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information to investors. This Annual Report on Form 10-K (Form “10-K”) includes forward-looking statements that reflect our current expectations and projections about our future results, performance, prospects, liquidity, expenditures, payment of dividends and repurchase of shares. Forward-looking statements include all statements that are not historical in nature or are not current facts. We have tried to identify these forward-looking statements by using words including “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “should,” “will” and similar expressions. These forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause our actual results, performance, prospects and ability to pay dividends or repurchase stock to differ materially from those expressed in, or implied by, these forward-looking statements. These factors include the risks, uncertainties, assumptions and other factors discussed under the headings “Item 1A. Risk Factors,” as well as “Item 1. Business,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-K, including: 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 that 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, 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’ suppliers 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.

 

In light of these risks and uncertainties, 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. Except as required under the federal securities laws and rules and regulations of the Securities and Exchange Commission (“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. Additional risks that we may currently deem immaterial or that are not presently known to us could also cause the forward-looking events discussed in this Form 10-K not to occur.      

 

Unless otherwise indicated, the industry data contained in this Form 10-K is from the January/February 2017 issue of the Airline Monitor, December 2016 reports of the International Air Transport Association (“IATA”), FlightGlobal Fleets Analyzer or the Airbus and The Boeing Company (“Boeing”) corporate websites.

 

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PART I

 

ITEM 1.    BUSINESS

 

Proposed Acquisition by Rockwell Collins

 

On October 23, 2016, B/E Aerospace (including its subsidiaries, the “Company” or “we”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Rockwell Collins, Inc., a Delaware corporation (“Rockwell Collins”), and Quarterback Merger Sub Corp. (“Merger Sub”), a Delaware corporation and a wholly owned subsidiary of Rockwell Collins.  Upon the terms and subject to the conditions set forth in the Merger Agreement, at the closing, Merger Sub will merge with and into the Company, with the Company surviving (the “Surviving Corporation”) as a direct or indirect wholly owned subsidiary of Rockwell Collins (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, collectively the “Transaction”). See Part I, Item IA. “Risk Factors” and Note 17, Pending Rockwell Collins Transaction, of the Notes to our Consolidated Financial Statements for additional information.

 

Our Company

 

General

 

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. We sell our products and provide our services directly to virtually all of the world’s major airlines and aerospace manufacturers. Also, based on our experience, we believe that we have achieved leading global market positions in each of our major product categories, which include:

 

·

commercial aircraft seats, including an extensive line of super first class, first class, business class, tourist class and regional aircraft seats;

 

·

a full line of aircraft food and beverage preparation and storage equipment, including coffee and espresso makers, water boilers, beverage containers, refrigerators, freezers, chillers and a line of ovens that includes microwave, high efficiency convection and steam ovens;

 

·

galley systems, modular lavatory systems and wastewater management systems;

 

·

both chemical and gaseous aircraft oxygen storage, distribution and delivery systems, protective breathing equipment and a broad range of lighting products; and

 

·

business jet and general aviation interior products, including an extensive line of executive aircraft and helicopter seats, direct and indirect overhead lighting systems, exterior lighting systems, passenger and crew oxygen systems, air valve systems and high-end furniture and cabinetry.

 

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 (“OEMs”) and the airlines.

 

Since our organization as a corporation in Delaware in 1987, we have substantially expanded the size, scope and nature of our business as a result of a number of acquisitions. Including our most recent acquisitions described in the following paragraph, we completed 31 acquisitions associated with our continuing operations between 1989 and 2014, for an aggregate purchase price of approximately $1.8 billion. We believe these acquisitions enabled us to position ourselves as a preferred global supplier to our customers. During this period we consolidated facilities and product lines, implemented lean manufacturing

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and continuous improvement programs and invested in our information technology. All of these efforts allowed us to continually improve our productivity and expand our operating margins.

 

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 $253.2 million, net of cash acquired. The Company also acquired the outstanding shares of the F+E Fischer + Entwicklungen GmbH & Co. KG group of companies, a leading Europe-based manufacturer of seating products for civilian helicopters for a purchase price of $211.7 million, net of cash acquired. The Company also acquired the outstanding shares of Wessex Advanced Switching Products Ltd., a company engaged in the production of lighting, control units and switches, based in Europe for a purchase price of $63.0 million, net of cash acquired. These acquisitions are included in the business jet segment.

 

On December 16, 2014 (the “Distribution Date”), we completed the spin-off of KLX Inc. (“KLX”) by means of the transfer of our Consumables Management Segment to KLX and the subsequent distribution to our stockholders of all the outstanding shares of KLX common stock (the “Spin-Off”). We retained our commercial aircraft and business jet segments. On the Distribution Date, each of our stockholders of record as of the close of business on December 5, 2014 (the “Record Date”) received one share of KLX common stock for every two shares of our common stock held as of the Record Date.

 

Our principal executive offices and corporate headquarters are located at 1400 Corporate Center Way, Wellington, Florida 33414-2105 and our telephone number is 561-791-5000.

 

Industry Overview

 

The commercial aircraft and business jet cabin interior products industries encompass a broad range of products and services, including aircraft seating, food and beverage preparation and storage systems, galley  and interior monument systems, passenger and crew oxygen storage, oxygen distribution and delivery systems, lavatory systems, wastewater management systems, lighting systems, overhead bins, as well as interior reconfigurations and a variety of other engineering, design, integration, installation, retrofit and certification services.

 

Historically, the aircraft cabin interior products industry has derived revenues from five sources:

 

·

New installation programs in which airlines purchase new equipment directly from interior equipment manufacturers. The airframe manufacturer receives the equipment and installs it on these newly produced aircraft prior to aircraft delivery;

 

·

Retrofit programs in which airlines purchase new interior furnishings and engineering services to upgrade the interiors of aircraft already in service;

 

·

Refurbishment programs in which airlines purchase components and services to improve the appearance and functionality of their cabin interior equipment;

 

·

Equipment to upgrade the functionality or appearance of the aircraft interior; and

 

·

Replacement spare parts.

 

The retrofit and refurbishment cycles for commercial aircraft cabin interior products differ by product category. Aircraft seating typically has a refurbishment cycle of one to two years and a retrofit cycle of four to eight years. Food and beverage preparation and storage equipment is periodically upgraded or repaired, and requires a continual flow of spare parts, but may be retrofitted only once or twice during the useful life of an aircraft.

 

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Based on industry sources and studies, we estimate that during 2016, the global commercial and business jet cabin interior products industry, for the principal products of the type which we manufacture, exclusive of service revenues, had annual sales of approximately $5.0 billion. We estimate that the total worldwide installed base of commercial and general aviation aircraft cabin interior products for the principal products of the type which we manufacture, valued at replacement prices, was approximately $30.8 billion as of December 31, 2016.

 

During 2016, global air traffic increased by 6.3% as compared with global traffic increases of 6.5% in 2015 and 6.0% in 2014. The overall increase in global traffic demand from 2014 through 2016 reflect the global macroeconomic environment. The Airline Monitor 2017 forecast projects global passenger traffic to increase approximately 6.0% and capacity growth of approximately 6.0% each as compared to 2016.

 

IATA expects the global airline industry to generate a profit of approximately $35.6 billion in 2016, an increase of approximately 1% compared to 2015. Overall performance in 2016 has been positively impacted by strong passenger traffic growth of approximately 6.3%, record load factors of approximately 80.5% reflecting disciplined capacity management, positive macroeconomic factors, and improved airline offerings that stimulate demand. The record industry profits were delivered despite modest reduction in yields as compared with 2015. For 2017, IATA expects global profits of $29.8 billion, a decrease of 16.3% as compared to 2016 driven primarily by higher fuel and labor costs.

 

The airlines have substantially strengthened their balance sheets over the past several years through operating profits and by accessing capital markets. As a result, we believe airline balance sheets are much stronger than in any time in the past ten years.

 

Approximately 653 business jets were delivered in 2016 versus 647 business jets in 2015 and 710 business jets in 2014.

 

Other factors relevant to the industries we serve include the following:

 

Long-Term Growth in Worldwide Fleet. According to the Airline Monitor, new deliveries of large commercial aircraft increased to 1,436 aircraft in 2016 driven primarily by the ramp up of Airbus’ A350 aircraft. This compares to 1,397 aircraft in 2015 and 1,352 in 2014. According to the Airline Monitor, new aircraft deliveries are expected to total 1,490 in 2017 and 1,600 in 2018. Worldwide air traffic is expected to grow by approximately 6.0% in 2017 and the Airline Monitor has forecasted revenue passenger miles to increase at a compounded annual growth rate of approximately 4.8% during the 2016-2031 period, increasing from 4.5 trillion miles in 2016 to approximately 9.1 trillion miles by 2031. As a result, the Airline Monitor expects the worldwide fleet of commercial jet aircraft to increase by approximately 73% from approximately 25,861 regional, single-aisle and twin-aisle aircraft at December 31, 2016 to approximately 44,659 aircraft at December 31, 2031.

 

Wide-Body Aircraft Deliveries. Deliveries of wide-body, long-haul aircraft constitute an increasing share of total new aircraft deliveries and are an increasing percentage of the worldwide fleet. Wide-body aircraft represented approximately 28% of all new commercial aircraft (excluding regional jets) delivered over the four-year period ended December 31, 2016. According to the Airline Monitor, 401 new wide-body aircraft were delivered in 2016 and approximately 375 are expected to be delivered in 2017. The Airline Monitor also predicts that nearly 4,835 twin-aisle aircraft will be delivered over the 2017-2027 timeframe or approximately 440 wide-body and super wide-body aircraft per year, which is 9.7% higher, on average, as compared to 2016 deliveries. The foundations of this growth are the Boeing 787, Boeing 777X and Airbus A350 two engine aircraft which replace older and less fuel efficient wide-body aircraft. These aircraft also support new demand by opening smaller markets to long range nonstop flights.  

 

Existing Installed Base. According to industry sources, the world's active commercial passenger aircraft fleet consisted of approximately 25,861 aircraft as of December 31, 2016. Additionally, based on industry sources, there are approximately 18,865 business jets currently in service. Based on such fleet numbers, we

5


 

estimate that the total worldwide installed base of commercial and general aviation aircraft cabin interior products for the principal products of the type which we manufacture, valued at replacement prices, was approximately $30.8 billion as of December 31, 2016. The size of the installed base is expected to increase as a result of the growth in the world wide fleet and is expected to generate additional and continued demand for retrofit, refurbishment and spare parts.

 

Engineering Services Markets. Historically, the airlines have relied primarily on their own in-house engineering resources to provide engineering, design, integration and installation services, as well as services related to repairing or replacing cabin interior products that have become damaged or otherwise non-functional. Cabin interior product configurations have become increasingly more sophisticated and the airline industry more globally competitive. The airlines have increasingly outsourced a number of these services in order to introduce highly branded, optimized density and contemporary interiors in sync with market cycles. As noted above, the interiors retrofit cycle runs in four to eight year cycles. The ability of an airline to source expert engineering services is an increasingly essential factor in their ability to offer a competitive interior product in their markets.

 

Outsourced services include:

 

·

Interior concept development, engineering, design, integration, integrated project management, installation and certification services;

 

·

Modifications and reconfigurations for commercial aircraft including passenger-to-freighter conversions and related kits; and

 

·

Services related to the support of product upgrades.

 

Competitive Strengths

 

We believe that we have a strong competitive position attributable to a number of factors, including the following:

 

Focus on Innovation and New Product Development.  Our aircraft cabin interior products businesses are engaged in extensive product development and marketing efforts for both new and existing products. We believe, based on our experience in the industry, that we are a technological and systems integration leader in the cabin interior products industry. The success of these and other new product development efforts are expected to increase demand for our products in both newly purchased aircraft and in aftermarket retrofits. Our focus on continuous development has allowed us to grow our backlog and improve the product mix of our current backlog. Newly introduced products include a broad range of amenities such as luxurious first class cabins (offering high privacy and high density seats) with features such as mini-bars, closets, flat screen TVs, digital light-emitting diode (“LED”) mood lighting, electric lie-flat seating, Pulse Oxygen™ gaseous passenger oxygen systems for the Boeing 787, 777X and Airbus A350, next-generation galley systems for the Airbus A350, the new award winning and market leading Essence™ suite of food and beverage preparation and storage equipment, electric fully berthing business jet seating, lightweight, lower maintenance wastewater systems for business and commercial jets and a full range of business and executive jet seating. We recently introduced our new Meridian® main cabin seating platform, which we believe is the industry’s lightest full-featured seat that significantly reduces cost of ownership, simplifies maintenance and increases overall passenger living space. We also recently introduced an update to our digital LED lighting system for the Boeing 737 Sky Interior aircraft. This innovative, lightweight LED system features adjustable lighting with full spectrum color capabilities, providing superior cabin ambiance and unprecedented lighting control. Market acceptance of our LED lighting systems has continued to gain strength, and since 2012 we have been receiving orders from various airlines to retrofit their Boeing 737, 757, 767 and 777 aircraft with our LED lighting systems.

 

6


 

As of December 31, 2016, we had 2,226 employees in engineering, research and development and program management. We believe our engineering, research and development efforts and our on-site technicians at both the airlines and airframe manufacturers enable us to play a leading role in developing and introducing innovative products to meet emerging industry trends, and thereby gain early entrant advantages.

 

Diverse Product Offering and Broad Domestic and International Customer Base. We provide a comprehensive line of products and services to a broad customer base. During the year ended December 31, 2016, Boeing and Airbus each accounted for approximately 13% of our consolidated revenues (no other customer represented more than 10% of consolidated revenues). Our commercial aircraft and business jet segments have a broad range of over 300 principal customers, including all of the world’s major airlines, commercial aircraft and business jet manufacturers and completion centers. We believe that our broad product offering and large customer base make us less vulnerable to the loss of any one customer or program. We have continued to expand our available products and services based on our belief that the airline industry increasingly will seek an integrated approach to the design, development, integration, installation, testing and sourcing of aircraft cabin interior equipment.

 

Picture 2

 

Large Installed Base. We have a large installed base of commercial and general aviation aircraft cabin interior products for the principal products of the type which we manufacture, valued at replacement prices, of approximately $13.4 billion as of December 31, 2016. Based on our experience in the industry, we believe our installed base is substantially larger than that of each of our competitors. We believe that our large installed base is a strategic advantage, as airlines tend to purchase aftermarket products and services, including spare parts, retrofit and refurbishment programs, from the original supplier. As a result, we expect our large installed base to generate continued aftermarket revenue as airlines continue to maintain, evolve and reconfigure their aircraft cabin interiors.

 

Increased Airframe Content and Diversified Backlog. Approximately ten years ago we began to leverage our deep understanding of aircraft interior systems to develop a range of new aircraft interior products that deliver differentiated value for Airbus and Boeing at point of sale, and the airlines in service. During 2011, Boeing selected our modular lavatory systems as standard equipment for Boeing’s 737 NG family of airplanes, as well as the Boeing 737 MAX. The award was initially valued in excess of $800 million, exclusive of retrofit orders. This innovative system has become standard equipment on these aircraft and will be the sole source equipment on the 737 MAX when it enters service in 2017. Our proprietary lavatory systems create the opportunity to add up to six incremental passenger seats on each 737 NG / MAX airplane.

 

We have also been selected by Boeing to manufacture our LED cabin lighting systems for the Boeing 737 Sky Interior aircraft. This has facilitated our growth of lighting retrofits for both narrow-body and wide-body aircraft where we have won several awards as we continue to offer all-LED lighting throughout the cabin into the existing worldwide fleet of aircraft. To date, we have been selected by Boeing to manufacture our patented Pulse OxygenTM system and passenger service units for the 787, 777X and 747-8, and we have been selected by Airbus to manufacture our next generation galley systems and our patented passenger oxygen delivery system for the A350. Additionally, we have been selected by major business jet

7


 

manufacturers to provide vacuum wastewater systems. As of December 31, 2016, the programs we have won are currently expected to generate approximately $5.6 billion in revenues over time, and are expected to significantly increase our content per aircraft type; however, only a small portion of these programs are included in our reported booked backlog as of December 31, 2016. This effort to develop and market new interior systems directly to the OEMs is important to us as it represents a significant potential increase in the dollar value of our products on each such aircraft type. It also offsers significant aftermarket opportunities through retrofits, repairs and spares.

 

Proven Certification Capabilities and Experience with a Complex Regulatory Environment. The airline industry is heavily regulated and we have a long history and extensive experience with the complex regulatory environments in which we operate and believe this enables us to efficiently obtain the required approvals for new products and services. The Federal Aviation Administration (the “FAA”) prescribes standards and licensing requirements for manufacturers and sellers of many 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 European Aviation Safety Agency (the “EASA”), the Japanese Civil Aviation Board (the “JCAB”), and the Civil Aviation Administration of China (the “CAAC”), prescribe standards, establish licensing requirements and regulate these matters in other countries. In addition, designing new products to meet existing regulatory requirements and retrofitting products to comply with new regulatory and airframe requirements can be both expensive and time consuming. Our proven ability to consistently conceptualize, design, manufacture and certify highly complex interiors for new and retrofit aircraft applications in compressed lead times to regulatory and airframe requirements is a key competitive strength in our market.

 

Growth Opportunities

 

We believe that we will benefit from the following industry trends:

 

Growth of Wide-Body Aircraft Fleet. New aircraft deliveries of wide-body aircraft are expected to continue to grow over the long term, reflecting the expected growth in revenue passenger miles over the 2017-2031 period and retirements of older, less fuel efficient aircraft. The growth in the wide-body aircraft global fleet is significant to us because wide-body aircraft require up to six-to-ten times the dollar value content of the principal products of the type which we manufacture as compared to narrow-body aircraft. For example, wide-body aircraft carry up to three or four times the number of seats as narrow-body aircraft and have multiple classes of service, including super first class compartments and first class and business class configurations. In addition, aircraft cabin crews on wide-body aircraft flights may make and serve between 300 and 900 meals, brew and serve more than 2,000 cups of coffee and serve more than 200 glasses of wine on a single flight, thereby generating substantial demand for seating products and food and beverage preparation and storage equipment, as well as extensive oxygen storage, distribution and delivery systems and lighting systems.  

 

Growth of Boeing and Airbus Narrow-Body Aircraft Fleet. New aircraft deliveries of Boeing’s 737 NG and Airbus’s A320neo are expected to continue to grow over the long term, reflecting the expected growth in revenue passenger miles over the 2017-2030 period and retirements of older, less fuel-efficient aircraft. For example, both Boeing and Airbus have increased their narrow body production outputs from over 34 aircraft per month in 2011 to over 42 aircraft per month in 2016 and have production schedules and backlog to deliver in excess of 57 aircraft per month in 2019. This growth is significant to us as we have market leading installed base shares on both the Boeing 737 and Airbus A320 platforms.

 

Worldwide Aircraft Fleet Creates Demand for Aftermarket Products. The size of the worldwide aircraft fleet is important to us as the proper maintenance of the fleet generates ongoing demand for spare parts and refurbishment retrofits. Our substantial existing installed base of products typically generates continued retrofit, replacement, upgrade, refurbishment, repair and spare parts revenue as airlines maintain their aircraft interiors. For the years ended December 31, 2016 and 2015, approximately 36% and 40%, respectively, of our revenues were derived from the aftermarket. In addition, aftermarket revenues are generally driven by

8


 

aircraft usage, and as such, have historically tended to recover more quickly than revenues from OEMs. As used in this Form 10-K, aftermarket sales include sales to support existing commercial and business jet fleets. We believe that there are substantial growth opportunities for retrofit programs for the wide-body aircraft that service international routes and that the major global airlines will need to invest in cabin interiors for their international fleets or face the prospect of losing market share on their international routes. Additionally, the expected growth in the worldwide fleet will serve to increase the size of our installed base.

 

Backlog Aided by Aftermarket Demand from International Airlines Retrofitting Existing Fleets. We believe that many major international airlines are in the process of planning cabin interior upgrade programs. This activity is expected to continue to be driven by the age of the existing cabin interiors, commonality with new aircraft type interiors, as well as the desire by many of the leading international carriers to achieve a competitive advantage by investing in cabin interior products that incorporate leading comfort amenities, thereby improving passenger loads and yields, or that reduce airline operating costs by reducing maintenance costs and/or providing lower weight and fuel burn. We believe that as international traffic continues to grow, the life cycle of premium products, such as lie-flat international business class seats and the products comprising our super first class suites, will continue to compress as airlines seek greater competitive advantage through state-of-the-art cabin interior products. We believe our ability to develop unique interior concepts, design, manufacture and certify these concepts in a compressed lead time to comply with international regulatory requirements supports expansion of these activities.

 

Growth in New Aircraft Introductions Leads to New Cabin Interior Product Introductions and Major Retrofit Opportunities. According to Airbus, 44 customers have placed 818 orders for new A350 aircraft. According to Boeing, 64 customers have placed orders for 1,200 of its new B787 wide-body aircraft and seven customers have placed 306 orders for new B777X aircraft. We believe the airlines often use the introduction into service of a new aircraft fleet type to introduce next generation cabin interior products. In such cases, we believe airlines will also invest in programs to retrofit their existing fleets to incorporate these new interior products and configurations in order to enhance their revenue and/or cost advantages realized on the new fleets and to maintain product and service commonality.

 

Long-Term Growth in Business Jet and VIP Aircraft Markets. Business jet deliveries totaled 653 aircraft in 2016 and increased approximately 1% in 2016 as compared to 2015; business jet deliveries in 2015 totaled 647 aircraft and were down 8.9% as compared to 2014. According to industry sources, new business jet deliveries in 2017 through 2019 are expected to decline slightly before a new up cycle begins in 2020 driven by the introduction of new large aircraft from Dassault and Bombardier and new mid-size platforms from Cessna. The growth of the very large aircraft segment is important to us as the ship set content for seating, divans and accent lighting is three times that of a smaller business jet.

 

Business Strategy

 

Our business strategy is to maintain a leadership position and to best serve our customers by:

 

·

Offering the broadest and most innovative products, integrated systems and services in the industry;

 

·

Offering a broad range of engineering services including design, integration, installation and certification services and aircraft reconfiguration;

 

·

Pursuing the highest level of quality and safety in every facet of our operations, from the factory floor to customer support;

 

·

Aggressively pursuing continuous improvement initiatives in all facets of our business, and in particular our manufacturing operations, to reduce cycle time, lower costs, improve quality and expand our margins; and

 

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·

Pursuing a worldwide marketing and product support approach focused by airline and general aviation airframe manufacturers, encompassing our entire product line.

 

Products and Services

 

We conduct our operations through strategic business units that have been aggregated under two reportable segments: commercial aircraft (“CAS”) and business jet (“BJS”).

 

The following is a summary of revenues for our reportable segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2016

 

2015

 

2014

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

% of

 

 

    

Revenues

    

Revenues

    

Revenues

    

Revenues

    

Revenues

    

Revenues

 

Commercial aircraft

    

$

2,344.0

    

79.9

%  

$

2,098.3

    

76.9

%  

$

2,058.9

    

79.2

%

Business jet

 

 

588.9

 

20.1

%  

 

631.3

 

23.1

%  

 

540.1

 

20.8

%

Total revenues

 

$

2,932.9

 

100.0

%  

$

2,729.6

 

100.0

%  

$

2,599.0

 

100.0

%

 

Commercial Aircraft Segment

 

Seating Products. We believe, based on our experience in the industry, that we are the world's leading manufacturer of aircraft seats, offering a wide selection of first class, business class, tourist class and regional aircraft seats. A typical seat manufactured and sold by us includes the seat frame, cushions, armrests, tray table and a variety of optional features such as adjustable lumbar supports, electrical actuation systems, footrests, reading lights, head/neck supports, and other comfort amenities. We also integrate a wide variety of in-flight entertainment equipment into our seats, which is supplied to us by our customers or third-party suppliers.

 

First and Business Class Seats. Based upon major airlines' program selection and our backlog, we believe we are the leading worldwide manufacturer of first and business class seats. Our line of first class lie-flat seats incorporates full electric actuation, an electric ottoman, privacy panels and sidewall-mounted tables. We leverage our differentiated expertise in executive seating, divans, cabinetry, lighting, environmental controls and reliable use of exotic materials to develop these exclusive environments. Our business class seats incorporate features developed over 25 years of seating design. We have led this sector of the industry since the development and delivery of the industry’s first mass produced lie flat seat in 2001. We offer the widest array of business class platforms in the industry to support airlines’ differing requirements for business class zone density. The business class seats include electrical or mechanical actuation, PC power ports, personal entertainment device connectivity, gaming headsets, individual video monitors, leg rests, adjustable lumbar cushions, four and six-way adjustable headrests and fiber optic reading and accent lights. The first and business class products are substantially more expensive than tourist class seats due to these luxury accoutrements. Our deep understanding of airframe and system interfaces and ability to certify these suites and cabins within required lead-times, supports our market design and manufacturing capabilities.

 

Tourist Class and Regional Jet Seats. We believe, based on our installed base, that we are a leading worldwide manufacturer of tourist class seats and regional aircraft seats. We believe our Pinnacle® coach class seat has become the industry's most popular seat platform for single-aisle aircraft since its launch in late 2009. We believe the seat improves comfort and offers significantly improved passenger living space as well as benefiting the airlines with simplified maintenance and spare parts purchasing. Pinnacle® was engineered for use across the entire single-aisle aircraft fleet. In 2015, we introduced our new patented Meridian® main cabin seating platform for single aisle aircraft, which we believe is the industry’s lightest full-featured seat. The Meridian® seat platform utilizes advanced proprietary technologies that we believe significantly reduce cost of ownership, simplify maintenance and increase overall passenger living space and comfort. Since its launch, the Meridian® has received launch orders in excess of 1,400 aircraft. In 2016, we introduced the Aspire®  seating platform for the main cabin of twin aisle aircraft. The Aspire® seat is a B/E Aerospace proprietary design that incorporates B/E’s patented technologies and has been engineered to

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provide airline passengers with enhanced living space and increased leg and shin clearance as well as a high level of integration with advanced in-flight entertainment systems.

 

Spares. Aircraft seats require regularly scheduled maintenance in the course of normal passenger use. Airlines depend on seat manufacturers and secondary suppliers to provide spare parts and kit upgrade programs. As a result, a significant market exists for spare parts and kit upgrades. We believe we offer unique engineering, planning and logistics services to our industry via our Integrated Materials Management aftermarket support platform. This service is enabled by the industry’s only manufacturing sites and supply chains dedicated to seat aftermarket support. The ability to deliver best in class logistics and material services lowers cost for the airlines and raises customer satisfaction.

 

Food and Beverage and Preparation and Storage Equipment. We believe, based on our experience in the industry, that we are the leading manufacturer of aircraft coffee and beverage makers. We manufacture a broad line of coffee makers, including the Essence® line of beverage makers, coffee warmers and water boilers. We also manufacture a cappuccino/espresso maker. We believe, based on our experience in the industry, that we are the leading manufacturer of a broad line of specialized ovens, including high efficiency convection ovens, steam ovens and warming ovens. Our DS Steam OvenTM uses a method of preparing in-flight food by maintaining constant temperature and moisture in the food. Our DS Steam OvenTM addresses the airlines' need to provide a wider range of food offerings than can be prepared by convection ovens. We believe, based on our experience in the industry, that we are the worldwide industry leader in the design, manufacture and supply of commercial aircraft refrigeration equipment. We manufacture self-contained wine and beverage chillers, refrigerators/freezers and galley air chilling systems.

 

Oxygen Delivery Systems. We believe, based on our experience in the industry, that we are the leading manufacturer of oxygen storage, distribution and delivery systems for both commercial and business jet aircraft. We have the capability to both produce all required components and to fully integrate overhead passenger service units with either chemical or gaseous oxygen equipment. Our oxygen equipment has been approved for use on all Boeing and Airbus aircraft and is also found on essentially all general aviation and VIP aircraft. The Boeing 787 was the first aircraft equipped with a passenger oxygen system using our advanced Pulse OxygenTM and passenger service unit technology. Boeing has awarded us a sole source contract for the installation of the Pulse Oxygen™ system on its new 777X platform. We also provide similar technology for passenger and crew oxygen systems for the Airbus A350. We have also been selected by both Boeing and Airbus to provide installed lavatory oxygen as their preferred line-fit solution for all platforms.

 

Interior Structures. Interior Structures includes galley systems and lavatory systems. Our innovative, modular approach to the design of galley systems allows the airlines to select galley positions and configurations for their specific operational needs, while minimizing total aircraft system weight. We provide next generation galley systems for the Airbus A350 aircraft, which is designed to accommodate the aircraft’s “flex zones” allowing airlines to select from a wide range of galley configurations. Our modular lavatory system utilizes our patented Spacewall® technology, which frees up floor space in the cabin, creating the opportunity to add up to six incremental passenger seats on each airplane. The modular lavatory systems integrate our technologically advanced Aircraft Ecosystems® vacuum toilet, long-life LED lighting and tamper proof state-of-the-art lavatory oxygen system. We believe our Aircraft Ecosystems® vacuum toilets have 25% greater reliability than existing systems and allow components to be replaced in a few minutes, as compared to up to an hour for existing systems. Our innovative modular lavatory system has become standard equipment on all Boeing 737s, as well as the 737 MAX which enters service in 2017. We believe that retrofit demand for our lavatory systems could be substantial. We have also entered the vacuum wastewater system market. Our vacuum wastewater system incorporates a proprietary design which we believe eliminates the primary cause of failure which plagues other vacuum systems. In addition, our systems include advanced proprietary components and systems that we believe will significantly lower the overall cost of ownership, simplify maintenance and improve lavatory hygiene.

 

Engineering, Design, Integration, Installation and Certification Services. We believe, based on our experience in the industry, that we are a leading supplier of engineering, design, integration, installation and

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certification services for commercial aircraft passenger cabin interiors. We also offer our customers’ in-house capabilities to design, manage, integrate, test and certify reconfigurations and modifications for commercial aircraft and to manufacture related products, including engineering kits and interface components. We provide a broad range of interior reconfiguration services which enable airlines to modify the cabin layout, install telecommunications and entertainment equipment, and relocate galleys, lavatories, overhead bins, and crew rest compartments. The expertise and resources of our engineering and certifications unit is embedded in our major interiors densification campaigns, new cabin systems and product developments. The ability to leverage our unique knowledge of the aircraft electrical, environmental and stress environments allow us to optimize platform development to comply with challenging manufacturing and certification requirements.

 

We estimate that, as of December 31, 2016, we had an aggregate installed base of products produced by our commercial aircraft segment, valued at replacement prices, of approximately $11.0 billion.

 

Business Jet Segment

 

We believe, based on our experience in the industry, that we are a leading manufacturer of a broad product line of furnishings for business jets. We believe we originated what is today’s market for “Super First Class” suites and cabins twelve years ago. Our products include a complete line of business jet seating and sofa products, including electric fully berthing lie-flat seats, both fluorescent and LED direct and indirect lighting, air valves and oxygen delivery systems as well as sidewalls, bulkheads, credenzas, closets, galley structures, lavatories, wastewater systems, de-icing systems, cabin management systems and tables. We have the capability to provide complete interior packages for business jets and executive VIP or head-of-state aircraft interiors, including design services, interior components and program management services. Our product portfolio also includes premium lightweight seats for rotorcraft airframes for civil and military applications.

 

Our business jet segment, which has had decades of experience in equipping executive, VIP and head-of-state aircraft, is the leading manufacturer of super first class cabin interior products for commercial wide-body aircraft. Super first class products incorporate a broad range of amenities such as luxurious first class cabins with appointments such as lie-flat seating, mini-bars, closets, flat screen televisions and mood lighting, which, until recently, were found only in VIP and head-of-state aircraft.

 

We estimate that, as of December 31, 2016, we had an aggregate installed base of business jet and super first class equipment, valued at replacement prices, of approximately $2.4 billion.

 

Research, Development and Engineering

 

We work closely with commercial airlines, business jet and aerospace original equipment manufacturers and global leasing companies to improve existing products and identify customers' emerging needs. Our expenditures in research, development and engineering totaled $290.7 million, $274.4 million and $284.3 million for the years ended December 31, 2016, 2015 and 2014, respectively, representing 9.9%, 10.1% and 10.9% of revenues, respectively, for each of those years. We employed 2,226 professionals in engineering, research and development and program management as of December 31, 2016. We believe, based on our experience in the industry, that we have the largest engineering organization in the cabin interior products industry, with mechanical, electrical, human machine interface and software design skills, as well as substantial expertise in program management, materials composition and custom cabin interior layout design and certification.

 

Customers, Marketing and Competition

 

The commercial aircraft cabin interior products market is relatively fragmented, with a number of competitors in each of the individual product categories. Due to the global nature of the commercial aerospace industry, competition comes from both U.S. and foreign manufacturers. However, as aircraft cabin interiors have become increasingly sophisticated and technically complex, airlines have demanded higher

12


 

levels of engineering support and customer service than many smaller cabin interior products suppliers can provide. At the same time, airlines have recognized that cabin interior product suppliers must be able to integrate a wide range of products, including sophisticated electronic components, such as video and live broadcast TV, particularly in wide-body aircraft.

 

We market and sell our commercial aircraft products directly to virtually all of the world's major airlines, aircraft leasing companies and airframe manufacturers. Airlines select manufacturers of cabin interior products primarily on the basis of custom design capabilities, product quality and performance, on-time delivery, after-sales customer service, product support and price. We market our thermal and power management products and services directly to first tier defense manufacturers, aerospace OEMs, their suppliers and the airlines.

 

We believe that airlines prefer our integrated worldwide marketing approach, which is focused by airline and encompasses our entire product line. Led by senior executives, teams representing each product line serve designated airlines that together account for the vast majority of the purchases of products manufactured by our commercial aircraft and business jet segments that serve these customers. Our teams have developed customer-specific strategies to meet each airline's product and service needs. We also staff "on-site" customer engineers at major airlines and airframe manufacturers to represent our entire product line and to work closely with customers to develop specifications for each successive generation of products required by the airlines. These engineers help customers integrate our wide range of cabin interior products and assist in obtaining the applicable regulatory certification for each particular product or cabin configuration. Through our on-site customer engineers, we expect to be able to more efficiently design and integrate products that address the requirements of our customers. We provide integrated program management services, integrating all on-board cabin interior equipment and systems, including installation and FAA certification, allowing airlines to substantially reduce costs. We believe that we are the only supplier in the commercial aircraft cabin interior products industry with the size, resources, expertise, breadth of product line and global product support capability to operate in this manner.

 

Our integrated program management approach assigns a program management team to each significant contract. The program management team leader is responsible for all aspects of the specific contract and profitability, including managing change orders, negotiating related upfront engineering charges and monitoring the progress of the contract through its delivery dates. We believe that our customers benefit substantially from our program management approach, including better on-time delivery and higher service levels. We also believe our program management approach results in higher customer satisfaction.

 

We market our business jet products directly to all of the world's general aviation airframe manufacturers, completion centers and operators. Business jet owners typically rely upon the airframe manufacturers and completion centers to coordinate the procurement and installation of their interiors. Business jet owners select manufacturers of business jet products on a basis similar to commercial aircraft interior products: custom design capabilities, product quality and performance, on-time delivery, after-sales customer service, product support and price. Barriers to entry include regulatory requirements, our large installed product base, our custom design capability, manufacturing capability, delivery, after-sales customer service, product support and our broad product line.

 

As of December 31, 2016, our direct sales, marketing and product support organizations consisted of 462 employees. In addition, we currently retain 54 independent sales representatives. Our sales to non-U.S. customers were approximately $1.8 billion, $1.8 billion and $1.7 billion during the years ended December 31, 2016, 2015 and 2014, respectively, which represents approximately 61%, 65% and 67% of revenues, respectively. Approximately 58% of our total revenues were derived from airlines, aircraft leasing companies, maintenance, repair and overhaul providers, and other commercial aircraft operators during each of the three years ended December 31, 2016. During fiscal years 2016, 2015 and 2014, approximately 36%, 40% and 40%, respectively, of our revenues were derived from the aftermarket.

 

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We believe that our large installed base, our timely responsiveness in connection with custom design, manufacture, delivery and after-sales customer service and product support, our broad product line and stringent customer and regulatory requirements, all present barriers to entry for potential new competitors in the aircraft cabin interior products market. Our principal competitors for our commercial aircraft segment are Groupe Zodiac Aerospace S.A., Thompson Aero Seating Ltd., Recaro Aircraft Seating GmbH & Co. KG, Diehl Aerosystems Holding GmBH and Jamco America, Inc. The market for business jet products is highly fragmented, consisting of numerous competitors including a wholly-owned subsidiary of United Technologies Corporation.

 

Backlog

 

Our booked backlog at December 31, 2016 was $3.5 billion, as compared with booked backlog of $3.2 billion as of December 31, 2015 and $3.0 billion as of December 31, 2014. The charts below reflect information related to booked backlog by geographic region and the expected roll-out of booked backlog.

 

Picture 4

 

We record backlog when we enter into a definitive order for the delivery of products to our customers in the future. Within backlog, we differentiate 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 we receive the delivery date specificity in writing from our customers on these long-term contracts, we include such amount in booked backlog. If a contract does not provide that level of specificity, the production requirements are generally provided to us through 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.

 

As of December 31, 2016, we had a record booked backlog of $3.5 billion. While the expected delivery dates of our backlog varies from year to year, generally about 50% of the backlog is deliverable in the following 12 months, with the balance generally deliverable over approximately the next two years. As an example, we believe approximately 50% of our December 31, 2016 booked backlog will be delivered during 2017. As of December 31, 2016, approximately 78% of booked backlog is related to CAS and 22% is related to BJS. The quality of our backlog has continued to improve as a result of partnering with key long-term customers, outstanding engineering, global sourcing and program management capabilities resulting in superior products which we believe are the most innovative cabin interior products solutions for our customers. While we do operate in a cyclical industry, program cancellations are the exception, not the norm; historically, backlog cancellations have not been significant due to the fact that airlines seek fleet commonality once they begin to outfit their fleets with a particular cabin interior product or configuration. This is important to an airline due to customer expectations for a consistent level of service, particularly on international routes as well as complexities that arise from maintaining multiple layouts and products with spare parts on a global basis, and other similar considerations. As a result, these programs tend to be deferred to later periods, rather than being cancelled. As an example in 2008 following the global credit crisis, our airline customers experienced a significant contraction in demand, which resulted in the deferral of a number of programs from delivery in the 2008-2009 period to 2009-2011. Despite the negative impacts on our customers from this severe global recession, no significant retrofit programs were cancelled. For a more detailed discussion on

14


 

risks associated with our backlog, see Item 1A. Risk Factors – We have a significant backlog that may be deferred or may not be entirely realized.

 

Program awards will be added to booked backlog when we receive purchase orders or otherwise are provided with specificity regarding delivery dates. At December 31, 2016, we estimate the value of these unbooked program awards at $5.6 billion.

 

Total backlog, both booked and awarded but unbooked, expanded to a record $9.1 billion, an increase of 3.4% from December 31, 2015.

 

Customer Service

 

We believe that our customers place a high value on customer service and product support and that this service level is a critical differentiating factor in our industry. The key elements of such service include:

 

·

Rapid response to requests for engineering, design, proposals and technical specifications;

 

·

Flexibility with respect to customized features;

 

·

On-time delivery;

 

·

Immediate availability of spare parts for a broad range of products; and

 

·

Prompt attention to customer problems, including on-site customer training.

 

Customer service is particularly important to the airlines due to the high costs associated with late delivery, malfunctions and other problems.

 

Warranty and Product Liability  

 

We warrant our products, or specific components thereof, for periods ranging from one to ten years, depending on product and component type. We establish reserves for product warranty expense after considering relevant factors such as our stated warranty policies and practices, historical frequencies of claims to replace or repair products under warranty and recent sales and claims trends. Actual warranty costs reduce the warranty reserve as they are incurred. We periodically review the adequacy of accrued product warranty reserves and revisions of such reserves are recognized in the period in which such revisions are determined.

 

We also carry product liability insurance. We believe that our insurance is sufficient to cover product liability claims.

 

Manufacturing and Raw Materials

 

Our manufacturing operations consist of both the in-house manufacturing of component parts and sub-assemblies and the assembly of our designed component parts that are purchased from outside vendors. We maintain up-to-date facilities, and we have an ongoing strategic manufacturing improvement plan utilizing lean manufacturing processes. We constantly strive for continuous improvement from implementation of these plans for each of our product lines. We have implemented common information technology platforms company-wide, as appropriate. These activities should lower our production costs, shorten cycle times and reduce inventory requirements and at the same time improve product quality, customer response and profitability. We do not believe we are materially dependent on any single supplier or assembler for any of our raw materials or specified and designed component parts and, based upon the existing arrangements with vendors, our current and anticipated requirements and market conditions, we believe that we have made adequate provisions for acquiring raw materials.

15


 

 

Government Regulation

 

The FAA prescribes standards and licensing requirements for aircraft components, and licenses component repair stations within the United States. Comparable agencies regulate such matters in other countries. We hold several FAA component certificates and perform component repairs at a number of our U.S. facilities under FAA repair station licenses. We also hold an approval issued by the EASA to design, manufacture, inspect and test aircraft seating products in Leighton Buzzard, United Kingdom and to manufacture and ship from our Kilkeel, Northern Ireland facility. We also have the necessary approvals to design, manufacture, inspect, test and repair our interior systems products in Nieuwegein, the Netherlands. Additionally we hold EASA/LBA (Luftfahrtbundesamt, the National German Aviation Authority) approval to manufacture, inspect, test and repair our commercial life support systems equipment and the approval of the German Federal Office of Defense and Procurement (BWB) to design, manufacture and repair military aviation equipment in Lübeck, Germany.

 

Our Structures and Integration Group in Everett, Washington holds an Organization Designation Authorization (“ODA”) from the FAA that includes delegated authority to issue Supplemental Type Certificates (“STC”) and produce parts under a FAA Production Certificate (“PC”). Our ODA STC allows us to reconfigure the interior of airplanes, install crew rests, install satellite communications and perform passenger-to-freighter conversions on all major transport category aircraft types. Under our ODA STC we can approve the design of an aircraft modification and the parts that go into it, and issue the STC in support of the return to service of the modified airplane. This authorization allows us to install new and prototype parts on the aircraft and upon STC issuance add these parts to our PC and designate them as airworthy approved production parts.

 

Environmental Matters

 

Our operations are subject to extensive and changing federal, state and foreign laws and regulations establishing health and environmental quality standards, including those governing discharges of pollutants into the air and water and the management and disposal of hazardous substances and waste. We may be subject to liabilities or penalties for violations of those standards. We are also subject to laws and regulations, such as the Federal Superfund Law and similar state statutes, governing remediation of contamination at facilities that we currently or formerly owned or operated or to which we send hazardous substances or waste for treatment, recycling or disposal. We believe that we are currently compliant, in all material respects, with applicable environmental laws and regulations. However, we could become 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 relating to our facilities or operations.

 

Patents and Other Intellectual Property

 

We rely upon patent, copyright, trademark, trade secret and other intellectual property laws in the United States, similar laws in other countries, and agreements with our employees, customers, suppliers and other parties to establish and maintain intellectual property rights in the products we sell and otherwise use in our operations. We currently hold 477 U.S. patents and 831 foreign patents, as well as 209 U.S. patent applications and 679 foreign patent applications covering a variety of products. We do not believe that we are dependent on one or a group of patents, and as such we believe the termination, expiration or infringement of one or more of such patents would not have a material adverse effect on us.

 

Employees

 

As of December 31, 2016, we had approximately 10,875 employees. Approximately 68% of our employees are engaged in manufacturing/distribution operations, quality and purchasing, 21% in engineering, research and development and program management, 4% in sales, marketing and product support and 7% in finance, human resources, information technology, legal and general administration. Unions represent

16


 

approximately 12% of our worldwide employees. One domestic labor contract, representing approximately 5% of our employees, expires in May 2018. The labor contract with the only other domestic union, which represents 1% of our employees, expires in October 2017. The remaining portions of our unionized employees are located in the United Kingdom and the Netherlands, which tend to have government mandated union organizations. We consider our employee relations to be good and we have not experienced a business disruption due to labor relations.

 

Financial Information about Segments and Foreign and Domestic Operations

 

Financial and other information by segment and relating to foreign and domestic operations for the years ended December 31, 2016, 2015 and 2014, is set forth in Note 13 to our Consolidated Financial Statements.

 

Available Information

 

Our filings with the SEC, including this Form 10-K, our Quarterly Reports on Form 10-Q, our Proxy Statement, Current Reports on Form 8-K and amendments to any of those reports are available free of charge on our website, http://www.beaerospace.com, as soon as reasonably practicable after they are filed with, or furnished to, the SEC. These reports may also be obtained at the SEC’s public reference room at 100F Street, N.E., Washington, DC 20549.  The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, information statements, and other information regarding SEC registrants, including B/E Aerospace, Inc. Information included in or connected to our website is not incorporated by reference in this annual report.

 

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ITEM 1A.    RISK FACTORS

 

You should carefully consider the following risks and uncertainties, along with the other information contained in or incorporated by reference in this Form 10-K. If any of the following events actually occur, our business, results of operation, financial condition and cash flows could be materially adversely affected. Any of these risks could also cause the market value of our common stock to decline. Additional risks and uncertainties that we do not presently know about or currently believe are not material may also adversely affect our business, results of operations, financial condition and cash flows.

 

See "Cautionary Statement Regarding Forward-Looking Statements."

 

Risks Relating to Our Industry

 

We are directly dependent upon the conditions in the airline and business jet industries, which are, among other things, correlated to global economic conditions and an economic downturn could negatively impact our results of operations and financial condition.

 

We are directly dependent upon the airline and business jet industries, which are sensitive to changes in global economic conditions. The airline industry is highly cyclical and the level of demand for air travel is correlated to the strength of the U.S. and global economies. Stagnant or weakening global economic conditions either in the United States or in other geographic regions, as we are currently experiencing, may have a material adverse effect on our business. Past periods of unfavorable economic conditions caused a reduction in spending for both leisure and business travel, resulting in the airline industry parking aircraft, delaying new aircraft purchases and deliveries, deferring retrofit programs and depleting existing inventories. The business jet industry is also severely impacted by both a weaker economy and by declining corporate profits. According to IATA, the economic downturn in 2008 and 2009, combined with the high fuel prices experienced during most of 2009, contributed to the worldwide airline industry’s loss of approximately $4.6 billion in 2009. Concerns over the tightening of the corporate credit markets, inflation, energy costs and other factors may continue to contribute to volatility in the global financial markets and may create further uncertainties for global economic conditions in the future. Furthermore, the environment in which the airline and business jet industries operate could continue to be affected by adverse foreign exchange impacts, fluctuating fuel prices, consolidation in the industry, changes in regulation, terrorism, safety, environmental, health concerns and labor issues. Many of these factors have, and could continue to have, a negative impact on air travel, which could materially adversely affect our business, results of operations, financial condition and cash flows.

 

Our business is also affected by risks that uniquely impact the airline and business jet industries. For instance, potential terrorist attacks, geopolitical conflict or security breaches, or fear of such events, even if not made directly on or involving the airline industry have, and could continue to have, a negative effect on the airline industry and as a result, our business as well. The global airline industry lost a total of approximately $52.8 billion during the period from 2001 to 2009 as a result of the decline in traffic and airfares caused by, among other things, the September 11, 2001 terrorist attacks, the SARS and H1N1 outbreaks, the conflicts in Iraq and Afghanistan, increases in fuel costs and heightened competition from low-cost carriers. During this period, a significant number of airlines worldwide declared bankruptcy or ceased operations. Any of these factors could potentially impact the airline and business jet industries in the future, and subsequently, materially adversely affect our business, results of operations, financial condition and cash flows.

 

We operate in cyclical industries and a continued economic downturn could negatively impact our results of operations and financial condition.

 

We operate in cyclical industries. During periods of economic expansion, when capital spending normally increases, we generally benefit from greater demand for our products. During periods of economic contraction, when capital spending normally decreases, we generally are adversely affected by declining demand for our products and services. The impact of declining demand can be exacerbated by oversupply

18


 

built during periods of expansion as there is a lag in suppliers’ reactions to contraction. Industry conditions are impacted by numerous factors over which we have no control, including political, regulatory, economic and military conditions, environmental concerns, weather conditions and fuel pricing. Any prolonged cyclical downturn could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

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 negatively impact our results of operations, financial condition and cash flows.

 

The 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 EASA, the CAAC and the JCAB, 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, reinstated 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.

 

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, the FAA dynamic testing requirements originally established in 1988 under 14 CFR 25.562 are currently required for certain new generation aircraft types. The enactment of 14 CFR 121.311(j) requires dynamic testing of all seats installed in all new aircraft produced after October 27, 2009. The EASA aligned its regulations to match FAA rule 25.562 in 2013. To the extent the FAA or the EASA implement rule changes in the future, we may incur additional costs to achieve compliance.

 

The airline industry is subject to extensive health, safety and environmental regulations, 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, safety and environmental quality standards, and may be subject to liabilities 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 waste 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.

 

Risks Relating to Our Business

 

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, the Netherlands, Germany and the Philippines. In addition, we sell our products to airlines all over the world. Our customers are located primarily in North America, Europe, Asia, the Pacific Rim, South America and the Middle East. As a result, 61%, 65% and 67% of our revenues for the years ended December 31, 2016, 2015 and 2014, respectively, were to customers located outside the United States. Volatile international economic, political and market conditions may have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

In addition, we have a number of subsidiaries in foreign countries (primarily in Europe), which have sales outside the United States. As a result, we are exposed to currency exchange rate fluctuations as a portion of

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our net sales and expenses are denominated in currencies other than the U.S. dollar. Approximately 41% of our sales during the years ended December 31, 2016 and 2015 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’ equity. At December 31, 2016, we reported a cumulative foreign currency translation and other adjustments of approximately $166.4 million in stockholders’ equity primarily 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 U.S. 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, Germany, the Netherlands and the Philippines are incurred in British pounds, Euros or Philippine pesos, but the related sales revenues are generally denominated in U.S. dollars. Changes in the value of the U.S. dollar or other currencies could result in material fluctuations in foreign currency translation amounts or the U.S. 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 business, results of operations, financial condition and cash flows. Current events, including the recent United States presidential election, the United Kingdom’s vote to exit the European Union, and tax reform proposals, create a level of uncertainty for our operations, including the potential for increased tariffs and other negative influences on U.S. trade relations with other countries. Our foreign operations are increasingly complex due to the possibility of renegotiated trade deals, revised international tax law treaties, and changes to the United States corporate tax code. Changes in U.S. political, regulatory and economic conditions or in laws and policies involving foreign trade, manufacturing, development and investment in the countries where we currently operate and sell products, and any negative sentiments towards the United States as a result of such changes, could adversely affect our business, results of operation, financial condition and cash flows.

 

 

We may be materially adversely affected by fluctuating fuel prices.

 

Fluctuations in the global supply of crude oil and the possibility of changes in government policy on jet fuel production, transportation and marketing make it impossible to predict the future availability and price volatility and cost of jet fuel. In the event of a natural disaster, changes in fuel-related governmental policy, changes in access to petroleum product pipelines and terminals, speculation in energy futures markets, changes in aircraft fuel production capacity, environmental concerns, political disruptions, outbreaks or escalation of hostilities or other conflicts or significant disruptions in oil production or delivery in oil-producing areas or elsewhere, there could be reductions in the production or importation of crude oil and significant increases in the cost of jet fuel. If there were major reductions in the availability of jet fuel or significant increases in its cost, commercial airlines will face increased operating costs. Due to the competitive nature of the airline industry, airlines are often unable to pass on future increases in fuel prices to customers by increasing fares. As a result, an increase in jet fuel could result in a decrease in net income from either lower margins or, if airlines increase ticket fares, less revenue from reduced airline travel. Decreases in airline profitability could decrease the demand for new commercial aircraft, resulting in delays of or reductions in deliveries of commercial aircraft equipped with our cabin interior products and, as a result, our business, results of operations, financial condition and cash flows could be materially adversely affected. On the other hand, significant decreases in oil and fuel prices could have

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an adverse impact on certain of our customers that generate, benefit from or are dependent on the production of oil or other fuels.

 

We incur risks associated with new programs.

 

New programs with new technologies and requirements typically carry risks associated with design changes, development of new production tools, increased capital and funding commitments, ability to meet customer specifications, delivery schedules and unique contractual requirements, supplier performance, ability of the customer to meet its contractual obligations to us, and our ability to accurately estimate costs associated with such programs. In addition, any new program may not generate sufficient demand or may experience technological problems or significant delays in regulatory or other certification or manufacturing and delivery schedules. If we were unable to perform our obligations under new programs to the customer’s satisfaction, if we were unable to manufacture products at our estimated costs, or if a new program in which we had made a significant investment was terminated or experienced weak demand, certification or other delays or technological problems, our business, results of operations, financial condition and cash flows could be materially adversely affected.

 

We may be unable to effectively and efficiently manage our inventories as we expand our business, which could have an adverse effect on our financial condition.

 

We have substantially expanded the size, scope and nature of our business through acquisitions and organic means, resulting in an increase in the breadth of our product offerings and an expansion of our business geographically. Business expansion places increasing demands on us to increase the inventories that we carry. We must anticipate demand well out into the future in order to service our extensive customer base. The inability to effectively and efficiently manage our inventories to meet current and future needs of our customers, which may vary widely from what is originally forecast due to a number of factors beyond our control, could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

We have a significant backlog that may be deferred or may not be entirely realized.

 

As of December 31, 2016, we had approximately $3.5 billion of booked backlog. Given the nature of our industry and customers, there is a risk that orders forming part of our backlog may be cancelled or deferred due to economic conditions or fluctuations in our customers’ business needs, purchasing budgets or inventory management practices. We also could be impacted if entry into service for any new aircraft platform is delayed or if the rate of delivery is lower than expected or deferred as a result of production or other manufacturing difficulties.

 

A significant portion of both our booked backlog and awarded but unbooked backlog includes programs with Boeing and Airbus, which makes us particularly vulnerable to their businesses and continued production of various airplane models. For example, at December 31, 2008, while no major retrofit programs were cancelled, several large retrofit programs that were scheduled for delivery in 2009 were deferred until 2010 and 2011, which negatively impacted our revenues and profits for 2009. Failure to realize sales from our existing or future backlog could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

The failure of our suppliers to perform to our requirements could negatively impact our results of operations, including our profit margins.

 

We depend on manufacturing firms to support our operations through the timely supply of products. Our suppliers may experience capacity constraints that may result in their inability to supply us with products in a timely fashion, with adequate quantities or at a desired price. Factors affecting the manufacturing sector can include labor disputes, general economic issues, and changes in raw material and energy costs. Natural disasters such as earthquakes or hurricanes, as well as political instability and terrorist activities, may

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negatively impact the production or delivery capabilities of our suppliers as well. These factors could lead to increased prices for our inventory, curtailment of supplies and the unfavorable allocation of product by our suppliers, which could reduce our revenues and profit margins and harm our customer relations. Significant disruptions in our supply chain could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

We have grown, and may continue to grow, at a rapid pace. Our inability to properly manage or support the growth may have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

We have experienced rapid growth in recent periods and intend to continue to grow our business both through acquisitions and internal expansion of products and services. Our growth to date has placed, and could continue to place, significant demands on our management team and our operational, administrative and financial resources. We may not be able to grow effectively or manage our growth successfully, and the failure to do so could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

We are subject to a variety of risks associated with the sale of our products and services to the U.S. Government, which could negatively affect our financial condition and results of operations.

 

As a supplier directly to the defense industry and as a subcontractor to suppliers of the U.S. Government, we face risks that are specific to doing business with the U.S. Government. The U.S. Government has the ability to unilaterally suspend the award of new contracts to us in the event of any violations of procurement laws, or reviews of the same. It could also reduce the value of our existing contracts as well as audit our costs and fees. Many of our U.S. Government contracts may be terminated for convenience by the government. Termination-for-convenience provisions typically provide that we would recover only our incurred or committed costs, settlement expenses and profit on the work that we completed prior to termination. In such an event, we would not earn the revenue that we would have originally anticipated from such a terminated contract.

 

Government reviews can be costly and time consuming, and could divert our management resources away from running our business. As a result of such reviews, we could be required to provide a refund to the U.S. Government or we could be asked to enter into an arrangement whereby our prices would be based on cost, or the U.S. Government could seek to pursue alternative sources of supply for our products. These actions could have a negative effect on our management efficiency and could reduce our revenues and results of operations. Additionally, as a U.S. Government contractor or subcontractor, we are subject to federal laws governing suppliers to the U.S. Government, including potential application of the False Claims Act.

 

Our total assets include substantial intangible assets. The write-off of a significant portion of intangible assets would negatively affect our reported financial results.

 

Our total assets reflect substantial intangible assets. At December 31, 2016, goodwill and identifiable intangibles together represented approximately 30% of our 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 tested asset exceeds its estimated fair value, impairment is deemed to have occurred. In this event, the amount is written down to fair value. Under generally accepted accounting principles in the United States, this would result in a charge to operating earnings. Any determination requiring the write-off of a significant portion of goodwill or unamortized identified intangible assets would negatively affect our results of operations and total capitalization, which could be material. We performed our annual testing of impairment of goodwill for the years ended December 31, 2014, 2015 and 2016. There were no impairment charges recorded in 2014, 2015 or 2016. As of December 31, 2016, the balances of goodwill and identifiable intangible assets were $798.7 million and $213.0 million, respectively.

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If we make acquisitions, they may be less successful than we expect, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

We have made many acquisitions in the past. We may also 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 identify attractive businesses, access financing sources on acceptable terms, negotiate favorable transaction terms and successfully consummate and integrate any businesses we acquire, achieve cost efficiencies and manage these businesses as part of our Company.

 

Our acquisition activities may involve unanticipated delays, costs and other problems. If we encounter unanticipated problems with one of our acquisitions, our senior management may be required to divert attention away from other aspects of our business. Additionally, we may fail to consummate proposed acquisitions or divestitures, after incurring expenses and devoting substantial resources, including management time, to such transactions. Acquisitions also pose the risk that we may be exposed to successor liability relating to actions by an acquired company and its management before the acquisition. The due diligence we conduct in connection with an acquisition, and any contractual guarantees or indemnities that we receive from the sellers of acquired companies, may not be sufficient to protect us from, or compensate us for, actual liabilities. Additionally, 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 or to fund capital expenditures necessary to integrate the acquired business. We also may not be able to raise the substantial capital required for acquisitions and integrations on satisfactory terms, if at all.  If any of the above situations were to occur, they could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

Our operations rely on an extensive network of information technology resources and a failure to maintain, upgrade and protect such systems from cyber or other security threats could materially adversely impact our business, financial condition and results of operations.

 

Information technology plays a crucial role in all of our operations. To remain competitive, our hardware, software and related services must interact with our suppliers and customers efficiently, record and process our financial transactions accurately, and obtain the data and information to enable the analysis of trends and plans and the execution of our strategies.

 

The failure or unavailability of our information technology systems could directly impact our ability to interact with our customers and provide them with products and services when needed. Cybersecurity threats, in particular, are evolving and include, but are not limited to, both attacks to our information technology infrastructure and attacks to the information technology infrastructure of third parties in attempts to gain unauthorized access to confidential, classified or otherwise proprietary information of us and/or our employees, customers and other third parties. Despite our efforts to mitigate potential risks to our technology and our operations from these information technology-related and other potential disruptions, cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. Such failure to properly supply or service our customers could have a material adverse effect on our business, results of operations, financial condition and cash flows. Moreover, our customer relationships could be damaged well beyond the period of the downtime of our information technology systems.

 

We may be unable to retain personnel who are key to our operations.

 

Our success, among other things, is dependent on our ability to attract, develop and retain highly qualified senior management and other key personnel. Competition for key personnel is intense, and our ability to attract and retain key personnel is dependent on a number of factors, including prevailing market conditions and

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compensation packages offered by companies competing for the same talent. The inability to hire, develop and retain these key employees may adversely affect our business.

 

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 have significantly greater financial, technological and marketing resources than we do. Our ability to be a successful competitor depends 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. It will also 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. Developing and maintaining a competitive advantage may require continued investment in product development, engineering, supply-chain management and sales and marketing, and we may not have enough resources to make such investments, which could negatively impact our results of operations and financial condition.

 

Increased leverage could adversely impact our business and results of operations.

 

We may incur additional debt under our current revolving credit facility or through new borrowings to finance our operations, capital deployment plans, or for future growth, including funding acquisitions. A high degree of leverage could have important consequences to us. For example, it could:

 

·

increase our vulnerability to adverse economic and industry conditions;

 

·

require us to dedicate a substantial portion of cash from operations to the payment of debt service, thereby reducing the availability of cash to fund working capital, capital expenditures and other general corporate purposes;

 

·

limit our ability to obtain additional financing for working capital, capital expenditures, general corporate purposes or acquisitions;

·

place us at a disadvantage compared to our competitors that are less leveraged; and

·

limit our flexibility in planning for, or reacting to, changes in our business and in our industry.

 

We have significant financial and operating restrictions in our debt instruments that may have an adverse effect on our operations.

 

The credit agreement governing our senior secured bank credit facilities (the “Credit Agreement”) contains numerous financial, operating and/or negative covenants that may 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 repurchase shares, 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. A failure to comply with the obligations contained in any current or future agreement governing our indebtedness could result in an event of default under our current or any future credit facility, or any future indenture or agreements governing our debt securities that we may issue, 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.

 

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Additional tax expense or additional tax exposures could affect our future profitability.

 

We are subject to income taxes in the United States and various international jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes.  In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Furthermore, changes in tax laws and regulations, as well as changes and conflicts in related interpretations and other tax guidance could materially impact our accounting for tax assets and liabilities and related items. Additionally, in the ordinary course of business we are subject to examinations by various tax authorities. In addition to ongoing examinations, there could be additional examinations launched in the future by governmental tax authorities in various jurisdictions, and existing examinations could be expanded. The final determinations of these tax examinations could have a material adverse effect on our financial condition and could be materially different from our historical income tax provisions and accruals. The global and diverse nature of our operations means that these risks will continue to exist and additional examinations, proceedings and contingencies may arise from time to time.

 

We cannot predict with certainty the outcome of litigation matters, government proceedings and other contingencies and uncertainties.

 

We are subject to a variety of litigation and legal compliance risks. These risks include, among other things, possible liability relating to commercial transactions, government contracts, prior acquisitions and divestitures, taxes, anti-bribery and corruption laws, employment, employee benefits plans, intellectual property, antitrust, import and export matters and environmental, health and safety matters. Additionally, our operations expose us to potential liabilities for damages, personal injury or death as a result of the failure of an aircraft component that we designed, manufactured or serviced. Accordingly, we may become subject to or be required to pay damage awards or settlements that could have a material adverse effect on our results of operations, cash flows and financial condition. Furthermore, negative publicity about an accident, catastrophe or incident involving aircraft containing our critical components could damage our reputation for quality products regardless of fault and cause a material adverse effect on our ability to retain and attract customers, which could materially adversely affect our business, results of operations, financial condition and cash flows. Due to the global nature of our business, we are subject to complex laws and regulations in the United States and other countries in which we operate. Those laws and regulations may be interpreted in different ways, and such laws and their related interpretations may change from time to time. Changes in laws or regulations could result in higher expenses and payments, and uncertainty relating to such laws or regulations may also affect how we conduct our operations and structure our investments and could limit our ability to enforce our rights.

 

While we maintain insurance for certain risks, including product liability claims, our insurers may attempt to deny coverage or the amount of our insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities. We also may not be able to maintain insurance coverage in the future at a cost acceptable to us. The incurrence of significant liabilities for which there is no or insufficient insurance coverage could materially adversely affect our business, results of operations, financial condition and cash flows.

 

Our financial performance may suffer if we cannot continue to develop, license or enforce the intellectual property rights on which our businesses depend.

 

We rely upon patent, copyright, trademark, trade secret and other intellectual property laws in the United States, similar laws in other countries, and agreements with our employees, customers, suppliers and other parties to establish and maintain intellectual property rights in the products we sell and otherwise use in our operations. Any of our intellectual property rights could be challenged, invalidated, infringed or circumvented. The theft or unauthorized use or publication of our trade secrets and other confidential information as a result of such an incident could adversely affect our competitive position and the value of our research and development. Litigation to defend and enforce our intellectual property rights may be expensive, time-consuming, disruptive to our operations and distracting to management. Additionally, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States. Therefore, in certain jurisdictions, we may

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be unable to protect our intellectual property adequately against unauthorized third-party copying or use, which could materially adversely affect our business, results of operations, financial condition and competitive position. 

 

Third parties may also claim that we or customers indemnified by us are infringing upon their intellectual property rights. Even if we believe that such intellectual property claims are without merit, they can be time-consuming and costly to defend against, and may divert management’s attention and resources away from our business. Claims of intellectual property infringement also might require us to redesign affected products, enter into costly settlement or license agreements, pay costly damage awards or face a temporary or permanent injunction preventing us from importing, marketing or selling certain of our products. Such outcomes could materially adversely affect our business, results of operations, financial condition and cash flows.

 

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, as amended, and amended and restated by-laws contain provisions that may have the effect of discouraging a third party from making an unsolicited acquisition of us by means of a tender offer, proxy contest or otherwise. Our restated certificate of incorporation, as amended, and amended and restated by-laws:

 

·

classify the Board of Directors into three classes, with directors of each class serving for a staggered three-year period;

 

·

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;

 

·

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;

 

·

permit only existing members of the Board of Directors to fill vacancies and newly created directorships on the board;

 

·

provide that only the existing members of the Board of Directors may change the number of directors on the Board of Directors;

 

·

restrict the ability of stockholders to call special meetings; and

 

·

contain advance notice requirements for stockholder proposals.

 

There can be no assurance that we will pay cash dividends.

Our Board of Directors has adopted a dividend policy that contemplates the payment of cash dividends. Whether, when and in what amounts we in fact pay such dividends remains entirely at the discretion of our Board of Directors and will depend on our future earnings, capital requirements, financial conditions, operating conditions, contractual restrictions, including those restrictions in our Credit Agreement and such other factors as our Board of Directors may deem relevant. All of these factors and their evaluation by our Board of Directors, as well as the dividend policy itself, are subject to change. Our dividend payments may change from time to time, and we cannot provide assurance that we will pay dividends in any particular amounts or at all. If we do not pay cash dividends in accordance with the policy, this could have a negative effect on our share price.

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If the price of our common stock fluctuates significantly, stockholders could incur substantial losses 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 from January 1, 2016 through December 31, 2016, the sale price of our common stock fluctuated between $60.45 and $36.38. The price of our common stock could fluctuate widely in response to:

 

·

our quarterly operating results;

 

·

changes in earnings estimates by securities analysts;

 

·

changes in our business;

 

·

changes in the market’s perception of our business;

 

·

changes in the businesses, earnings estimates or market perceptions of our competitors or customers;

 

·

changes in airline industry or business jet industry conditions;

 

·

delays in new aircraft certification, production or order rates;

 

·

changes in our key personnel;

 

·

changes in general market or economic conditions; and/or

 

·

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 changes often appear to occur without regard to specific operating performance. 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.

 

Risks Relating to our Spin-Off of KLX

 

There could be significant liability if the distribution of KLX common stock to our stockholders is determined to be a taxable transaction.

 

We received an opinion from tax counsel to the effect that, among other things, the separation and distribution of KLX qualified as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended. The opinion relied on certain facts, assumptions, representations, undertakings and covenants from us and KLX regarding the past and future conduct of ours and KLX’s respective businesses and other matters.  If any of these facts, assumptions, representations, undertakings or covenants is incorrect or not satisfied, the opinion of tax counsel may no longer be valid.

 

In addition, notwithstanding the receipt by us of the opinion of tax counsel, the Internal Revenue Service (the “IRS”) could determine on audit that the separation and distribution of KLX is taxable if it determines that any of these facts, assumptions, representations, undertakings or covenants is not correct or have been violated or if it disagrees with the conclusions in the opinion, or for other reasons, including as a result of certain significant changes in the stock ownership of us or KLX. If the distribution of KLX common stock is determined to be taxable for U.S. federal income tax purposes, we would be subject to tax as if we had sold the KLX common stock in a taxable sale for its fair market value, and our stockholders that received KLX common stock

27


 

in the distribution generally would be treated as having received a taxable dividend in an amount equal to the fair market value of the KLX common stock.  The resulting U.S. federal income tax liabilities of us and such stockholders could be significant. 

 

Under the Tax Sharing and Indemnification Agreement between KLX and us, KLX generally is required to indemnify us against (i) any taxes imposed on us with respect to the distribution of KLX common stock to the extent that such taxes result from certain events with respect to KLX, and (ii) a portion, based on the relative trading prices of our common stock and KLX common stock during the period shortly after the distribution, of any taxes imposed on us with respect to the distribution of KLX common stock if the distribution fails to qualify as a tax-free transaction for reasons other than those for which KLX or us would be responsible for pursuant to the Tax Sharing and Indemnification Agreement.

 

A court could require that we assume responsibility for obligations allocated to KLX under the Separation and Distribution Agreement.

 

Under the Separation and Distribution Agreement, from and after the Spin-Off, the Company and KLX are responsible for the debts, liabilities and other obligations related to the business or businesses which it owns and operates following the consummation of the Spin-Off. Although we do not expect to be liable for any obligations that are not allocated to us under the Separation and Distribution Agreement, a court could disregard the allocation agreed to between the parties, and require that we assume responsibility for obligations allocated to KLX (including, for example, environmental liabilities), particularly if KLX were to refuse or were unable to pay or perform the allocated obligations.

 

Certain of our directors may have actual or potential conflicts of interest because of their current positions with KLX or their ownership of KLX equity.

 

Certain of our directors are directors or officers of KLX and thus have professional relationships with KLX’s executive officers and directors. Three of our directors, including our Executive Chairman of the Board of Directors, serve on the Board of Directors of KLX. Our Executive Chairman of the Board of Directors also serves as the Chairman of the Board of Directors of KLX and as its Chief Executive Officer. In addition, several of our directors have a financial interest in KLX as a result of their ownership of KLX stock and restricted stock. These relationships and financial interests may create, or may create the appearance of, conflicts of interest when these directors face decisions that could have different implications for KLX than for us.

 

Risks Relating to the Proposed Acquisition of the Company by Rockwell Collins

 

The summary of the Merger Agreement and the descriptions of the terms and conditions therein do not purport to be complete and are qualified in their entirety by reference to the Merger Agreement.

The Merger is subject to conditions, some or all of which may not be satisfied, or completed on a timely basis, if at all. Failure to complete the Merger could have material adverse effects on the Company.

        The completion of the Merger is subject to a number of conditions, including, among other things, receipt of the Rockwell Collins Stockholder Approval, receipt of Company Stockholder Approval and receipt of certain other regulatory approvals, each of which make the completion and timing of the completion of the Merger uncertain. Also, either Rockwell Collins or the Company may terminate the Merger Agreement if the Merger has not been consummated by 5:00 p.m. (New York time) on October 21, 2017, except that this right to terminate the Merger Agreement will not be available to any party whose failure to perform or comply with any of its obligations under the Merger Agreement has been the principal cause of or resulted in the failure of the closing of the Merger to have occurred on or before that date.

        If the Merger is not completed, the Company’s ongoing business may be materially adversely affected and, without realizing any of the benefits of having completed the Merger, the Company will be subject to a number of risks, including the following:

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·

the market price of the Company’s common stock could decline;

·

the Company could owe substantial termination fees to Rockwell Collins under certain circumstances;

·

if the Merger Agreement is terminated and the Company’s Board of Directors seeks another business combination, the Company’s stockholders cannot be certain that the Company will be able to find a party willing to enter into a transaction on terms equivalent to or more attractive than the terms that Rockwell Collins has agreed to in the Merger Agreement;

·

time and resources, financial and other, committed by the Company’s management to matters relating to the Merger could otherwise have been devoted to pursuing other beneficial opportunities for the Company;

·

the Company may experience negative reactions from the financial markets or from its customers or employees; and

·

the Company may be required to pay costs relating to the Merger, such as legal, accounting, financial advisory and printing fees, whether or not the Merger is completed.

        In addition, if the Merger is not completed, the Company could be subject to litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against the Company to perform its obligations under the Merger Agreement. The materialization of any of these risks could materially and adversely impact the Company’s ongoing business.

        Similarly, delays in the completion of the Merger could, among other things, result in additional transaction costs, loss of revenue or other negative effects associated with uncertainty about completion of the Merger.

The Merger Agreement contains provisions that limit the Company’s ability to pursue alternatives to the Merger, could discourage a potential competing acquiror of the Company from making a favorable alternative transaction proposal and, in specified circumstances, could require the Company to pay substantial termination fees to Rockwell Collins.

        The Merger Agreement contains certain provisions that restrict the Company’s ability to, among other things, initiate, seek, solicit, knowingly encourage, knowingly induce or take any other action reasonably expected to lead to, or engage in negotiations or discussions relating to, or approve or recommend, any third-party acquisition proposal. Further, even if the Rockwell Collins board of directors withdraws or qualifies its recommendation with respect to the issuance of Rockwell Collins common stock forming part of the Merger consideration or if the Company’s Board of Directors withdraws or qualifies its recommendation with respect to the adoption of the Merger Agreement, in each case as permitted by the Merger Agreement, unless the Merger Agreement has also been terminated in accordance with its terms, Rockwell Collins or the Company, as the case may be, will still be required to submit each of the share issuance proposal and the merger proposal, as applicable, to a vote at their special meeting of stockholders. In addition, following receipt by the Company of any third-party acquisition proposal that constitutes a “superior proposal,” the Rockwell Collins will have an opportunity to offer to modify the terms of the transactions contemplated by the Merger Agreement before the Company’s Board of Directors may withdraw or qualify its recommendation with respect to the share issuance proposal or the merger proposal, as applicable, in favor of such superior proposal.

        In some circumstances, upon termination of the Merger Agreement, the Company could be required to pay a termination fee of $200 million to Rockwell Collins.

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        These provisions could discourage a potential third-party acquiror or merger partner that might have an interest in acquiring all or a significant portion of the Company or pursuing an alternative transaction from considering or proposing such a transaction, even if it were prepared to pay consideration with a higher per share cash or market value than the per share cash or market value proposed to be received or realized in the Merger. In particular, a termination fee, if applicable, may be substantial, and could result in a potential third-party acquiror or merger partner proposing to pay a lower price to the Company stockholders than it might otherwise have proposed to pay absent such a fee.

        If the Merger Agreement is terminated and the Company determines to seek another business combination, the Company may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Merger.

The Merger is subject to the expiration or termination of applicable waiting periods and the receipt of approvals, consents or clearances from regulatory authorities that may impose conditions that could have an adverse effect on the Company or the combined company or, if not obtained, could prevent completion of the Merger.

        Before the Merger may be completed, any applicable waiting period (and any extension thereof) under the HSR Act relating to the consummation of the Merger must have expired or been terminated, and any authorization or consent from a governmental authority required to be obtained with respect to the Merger in certain other applicable foreign antitrust laws must have been obtained. In deciding whether to grant the required regulatory authorization or consent, the relevant governmental entities will consider the effect of the Merger on competition within their relevant jurisdiction. The terms and conditions of the authorizations and consents that are granted may impose requirements, limitations or costs or place restrictions on the conduct of the combined company’s business. Under the Merger Agreement, Rockwell Collins and the Company have agreed to use their reasonable best efforts to obtain such authorizations and consents and therefore may be required to comply with conditions or limitations imposed by governmental authorities, except that Rockwell Collins will not be required to agree to sell, divest, lease, license, transfer, dispose of or otherwise encumber or impair its ability to own or operate any of its or the Company’s assets or properties if such action would require the divestiture or holding separate of any assets of Rockwell Collins or the Company or any of their subsidiaries representing more than $175 million of annual revenue generated in the 2015 calendar year.

        In addition, regulators may impose conditions, terms, obligations or restrictions in connection with their authorization of or consent to the Merger, and such conditions, terms, obligations or restrictions may delay completion of the Merger or impose additional material costs on or materially limit the revenues of the combined company following the completion of the Merger or may hinder the anticipated benefits of the Merger. There can be no assurance that regulators will choose not to impose such conditions, terms, obligations or restrictions, and, if imposed, such conditions, terms, obligations or restrictions may delay or lead to the abandonment of the Merger.

The value of the stock portion of the Merger consideration is subject to changes based on fluctuations in the value of Rockwell Collins common stock, and the Company stockholders may receive stock consideration with a value that, at the time received, is less than $27.90 per share of the Company common stock.

        The market value of Rockwell Collins common stock will fluctuate during the period before the date of the Rockwell Collins and the Company special meetings, during the 20 trading day period that the exchange ratio will be based upon, and the time between the last day of the 20 trading day period and the time the Company’s stockholders receive the Merger consideration in the form of Rockwell Collins common stock, as well as thereafter.

        Upon completion of the Merger, each issued and outstanding share of Company common stock will be converted into the right to receive the Merger consideration, which is equal to $34.10 in cash, without interest, and a fraction of a share of Rockwell Collins common stock having a value equal to $27.90, subject to

30


 

adjustment based upon a two-way collar mechanism as described below. If the Rockwell Collins stock price is greater than or equal to $77.41 and less than or equal to $89.97, the exchange ratio will be equal to the quotient of (i) $27.90 divided by (ii) the Rockwell Collins stock price, which, in each case, will result in the stock consideration having a value equal to $27.90. If Rockwell Collins stock price is greater than $89.97, the exchange ratio will be fixed at 0.3101 and the value of the stock consideration will be more than $27.90, and if the Rockwell Collins stock price is less than $77.41, the exchange ratio will be fixed at 0.3604 and the value of the stock consideration will be less than $27.90. Accordingly, the actual number of shares and the value of Rockwell Collins common stock delivered to the Company’s stockholders will depend on the Rockwell Collins stock price, and the value of the shares of Rockwell Collins common stock delivered for each such share of Company common stock may be greater than, less than or equal to $27.90.

        It is impossible to accurately predict the market price of Rockwell Collins common stock at the effective time or during the period over which the Rockwell Collins stock price is calculated and therefore impossible to accurately predict the number or value of the shares of Rockwell Collins common stock that the Company’s stockholders will receive in the Merger. You should obtain current market quotations for shares of Rockwell Collins common stock.

Each party is subject to business uncertainties and contractual restrictions while the proposed Merger is pending, which could adversely affect each party's business and operations.

        In connection with the pendency of the Merger, it is possible that some customers, suppliers and other persons with whom Rockwell Collins or the Company has a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with Rockwell Collins or the Company, as the case may be, as a result of the Merger, which could negatively affect Rockwell Collins’ or the Company’s respective revenues, earnings and cash flows, as well as the market price of Rockwell Collins common stock or Company common stock, regardless of whether the Merger is completed.  

        Under the terms of the Merger Agreement, the Company is subject to certain restrictions on the conduct of its business prior to completing the Merger which may adversely affect its ability to execute certain of its business strategies, including the ability in certain cases to enter into or amend contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures. Such limitations could adversely affect the Company’s business and operations prior to the completion of the Merger.

        Under the terms of the Merger Agreement, Rockwell Collins is subject to a more limited set of restrictions on the conduct of its business prior to completing the Merger which may adversely affect its ability to execute certain of its business strategies, including the ability in certain cases to amend its organizational documents, pay dividends and issue shares of Rockwell Collins common stock. Such limitations could adversely affect Rockwell Collins’ business and operations prior to the completion of the Merger.

        Each of the risks described above may be exacerbated by delays or other adverse developments with respect to the completion of the Merger.

Uncertainties associated with the Merger may cause a loss of management personnel and other key employees which could adversely affect the future business and operations of the combined company.

        Rockwell Collins and the Company are dependent on the experience and industry knowledge of their officers and other key employees to execute their business plans. The combined company's success after the completion of the Merger will depend in part upon the ability of Rockwell Collins and the Company to retain certain key management personnel and employees. Prior to completion of the Merger, current and prospective employees of Rockwell Collins and the Company may experience uncertainty about their roles within the combined company following the completion of the Merger, which may have an adverse effect on the ability of each of Rockwell Collins and the Company to attract or retain key management and other key

31


 

personnel. In addition, no assurance can be given that the combined company will be able to attract or retain key management personnel and other key employees of Rockwell Collins and the Company to the same extent that Rockwell Collins and the Company have previously been able to attract or retain their own employees.

Litigation filed against Rockwell Collins, the Company, Merger Sub and the members of the Company’s Board of Directors could prevent or delay the consummation of the Merger or result in the payment of damages following completion of the Merger.

        In connection with the Merger, three putative class action lawsuits seeking to enjoin the Merger, recover damages, and other relief, were filed by three different purported stockholders of the Company. Two of the lawsuits assert claims against the Company and the members of the Company’s Board of Directors and initially sought to expedite proceedings in advance of the stockholder vote; plaintiffs have withdrawn the motion to expedite as moot. The outcome of these lawsuits is uncertain. The third lawsuit asserted claims against the Company, the members of the Company’s Board of Directors, Rockwell Collins and Merger Sub; plaintiff in that case moved to enjoin the Merger but has since withdrawn the motion and dismissed the case with prejudice as to the named plaintiff.

        One of the conditions to the closing of the Merger is that no governmental authority has issued or entered any order after the date of the Merger Agreement having the effect of enjoining or otherwise prohibiting the consummation of the Merger or the other transactions contemplated by the Merger Agreement, and these lawsuits seek an order enjoining consummation of the Merger. If the cases are not resolved, these lawsuits could prevent or delay completion of the Merger and result in substantial costs to Rockwell Collins and the Company, including, but not limited to, costs associated with the indemnification of directors and officers. The defense or settlement of any lawsuit or claim that remains unresolved at the time the Merger is completed may adversely affect Rockwell Collins’ and the Company’s business, financial condition, results of operations and cash flows.

Completion of the Merger will trigger change in control or other provisions in certain agreements to which the Company is a party, which may have an adverse impact on the combined company’s business and results of operations.

        The completion of the Merger will trigger change in control and other provisions in certain agreements to which the Company is a party. If Rockwell Collins and the Company are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if Rockwell Collins and the Company are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to the Company or the combined company. Any of the foregoing or similar developments may have an adverse impact on the combined company’s business and results of operations.

The Rockwell Collins common stock to be received by the Company’s stockholders upon completion of the Merger will have different rights from shares of Company common stock.

        Upon completion of the Merger, the Company stockholders will no longer be stockholders of the Company but will instead become stockholders of Rockwell Collins and their rights as Rockwell Collins stockholders will be governed by the terms of Rockwell Collins’ certificate of incorporation and by-laws. The terms of Rockwell Collins’ certificate of incorporation and by-laws are in some respects materially different than the terms of the Company's certificate of incorporation and by-laws, which currently govern the rights of the Company’s stockholders.

32


 

The Merger could result in significant liability to Rockwell Collins and the Company if the Merger causes the KLX spin-off to fail to qualify for the KLX spin-off tax treatment.

        At the time of the KLX spin-off, the Company received an opinion of Shearman & Sterling to the effect that, subject to the limitations and assumptions set forth therein, the KLX spin-off that occurred in December 2014 will qualify for the KLX spin-off tax treatment, which generally means a transaction tax-free to the Company and its stockholders under the U.S. federal income tax rules for spin-offs in Section 355 of the Code and related provisions. If, however, the KLX spin-off were to fail to qualify for the KLX spin-off tax treatment, the Company would be subject to tax on substantial gain as if the Company had sold the KLX common stock in a taxable sale for its fair market value at the time of the KLX spin-off. In addition, if the KLX spin-off failed to qualify for tax-free treatment, each Company stockholder at the time of the KLX spin-off would be treated as if it had received a distribution from the Company in an amount equal to the fair market value of the KLX common stock that they received; this distribution generally would be taxed as a dividend to the extent of the stockholder's pro rata share of the Company's current and accumulated earnings and profits at the time of the KLX spin-off and then treated as a non-taxable return of capital to the extent of the stockholder's basis in Company common stock and finally as capital gain from the sale or exchange of Company common stock.

        Under current U.S. federal income tax law, the KLX spin-off would fail to qualify for the KLX spin-off tax treatment if the KLX spin-off was determined to have been used by the Company principally as a device for the distribution of earnings and profits by, for example, facilitating a taxable sale of the stock of the Company or KLX through a planned or intended change-in-control transaction identified prior to the KLX spin-off rather than principally to achieve one or more valid corporate business purposes. Furthermore, even if the KLX spin-off were otherwise to qualify for tax-free treatment under Section 355 and related provisions of the Code, it would be taxable to the Company (but not to the Company's stockholders) under Section 355(e) of the Code, if the KLX spin-off was determined to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, stock representing a 50% or greater interest in the Company or KLX.

        If it is determined that the KLX spin-off fails to qualify for the KLX spin-off tax treatment as a result of the Merger (for example, if the Merger is viewed as part of a plan or series of related transactions that includes the KLX spin-off or the KLX spin-off is found to have been used principally as a device for the distribution of earnings and profits), or because of the failure of the KLX spin-off to initially qualify for the KLX spin-off tax treatment, the Company could incur significant tax liabilities. Because the Company will be a wholly owned subsidiary of Rockwell Collins following the consummation of the Merger, any such tax liabilities of the Company could also adversely affect Rockwell Collins. If the KLX spin-off fails to qualify for the KLX spin-off tax treatment, this may also result in adverse tax consequences to stockholders of the Company at the time of the KLX spin-off because they would be taxed on the distribution of KLX stock as described above.

        In connection with the signing of the Merger Agreement, Rockwell Collins and the Company each received an opinion from their respective counsel, Skadden, Arps, Slate, Meagher & Flom LLP, which is referred to as Skadden, and Shearman & Sterling to the effect that the Merger will not cause the KLX spin-off to fail to qualify for the KLX spin-off tax treatment. The Merger is conditioned upon receipt by Rockwell Collins and the Company of tax opinions to the same effect at the time of the consummation of the Merger; provided, however, that if either party's tax counsel indicates it is unwilling or unable to deliver a tax opinion at the time of the consummation of the Merger, the tax opinion condition of either Rockwell Collins or the Company may be satisfied by such party's receipt of similar tax opinions from both the other party's tax counsel and the additional tax counsel.

        The tax opinions received by Rockwell Collins and the Company in connection with the signing of the Merger Agreement rely on certain representations, assumptions, undertakings and covenants, and the opinions to be delivered at the consummation of the Merger will be based on similar representations, assumptions, undertakings and covenants, including representation letters from each of Rockwell Collins and the Company. These representations relate to, among other items, confirming the accuracy of the

33


 

representations and warranties originally made with respect to the KLX spin-off, along with compliance with covenants, the actions taken in pursuit of the corporate business purposes of the KLX spin-off, the interaction of the parties, and business developments since the KLX spin-off. If any of the factual representations in any of the representation letters, or any of the assumptions in the tax opinions is untrue or incomplete, an undertaking or covenant is not complied with or the facts upon which a tax opinion is based are materially different from the facts at the time of the Merger, the opinions may not be valid. Moreover, opinions of counsel are not binding on the IRS or the courts. As a result, the conclusions expressed in the tax opinions could be challenged by the IRS, and a court may sustain such a challenge. None of Rockwell Collins, the Company or KLX has requested a ruling from the IRS regarding the impact of the Merger on the qualification of the KLX spin-off for the KLX spin-off tax treatment.

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

 

None.

 

 

34


 

ITEM 2.    PROPERTIES

 

As of December 31, 2016, we had 26 principal operating locations, one administrative facility, and one research and development facility, which comprised an aggregate of approximately 3.4 million square feet of space. The following table describes the principal facilities and indicates the location, function, approximate size, and ownership status of each location.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facility

 

 

 

 

 

 

 

 

 

Size

 

 

 

Segment

    

Location

    

Purpose

    

(Sq. Feet)

    

Ownership

 

 

 

 

 

 

 

 

 

 

 

Commercial Aircraft

    

Winston-Salem, North Carolina

    

Manufacturing

    

653,000

    

Leased/Owned

 

 

 

Batangas, Philippines

 

Manufacturing

 

290,500

 

Leased/Owned

 

 

 

Everett, Washington

 

Manufacturing

 

240,500

 

Leased

 

 

 

Kilkeel, United Kingdom

 

Manufacturing

 

198,500

 

Leased/Owned

 

 

 

Leighton Buzzard, United Kingdom

 

Manufacturing

 

143,800

 

Leased/Owned

 

 

 

Lenexa, Kansas

 

Manufacturing

 

130,000

 

Leased

 

 

 

Anaheim, California

 

Manufacturing

 

108,900

 

Leased

 

 

 

Simpsonville, South Carolina

 

Manufacturing

 

95,000

 

Owned

 

 

 

Corona, California

 

Manufacturing

 

93,000

 

Leased

 

 

 

Lübeck, Germany

 

Manufacturing

 

91,200

 

Leased

 

 

 

Westminster, California

 

Manufacturing

 

85,000

 

Leased

 

 

 

Mountainhome, Pennsylvania

 

Manufacturing

 

75,000

 

Owned

 

 

 

Nieuwegein, the Netherlands

 

Manufacturing

 

60,000

 

Leased

 

 

 

Savannah, Georgia

 

Manufacturing

 

50,500

 

Leased

 

 

 

Hampton, New Hampshire

 

Manufacturing

 

49,000

 

Leased

 

 

 

Rockford, Illinois

 

Manufacturing

 

38,000

 

Leased

 

Business Jet

 

Nogales, Mexico

 

Manufacturing

 

247,400

 

Leased

 

 

 

Miami, Florida

 

Manufacturing

 

156,800

 

Leased

 

 

 

Fenwick, West Virginia

 

Manufacturing

 

148,800

 

Owned

 

 

 

Tucson, Arizona

 

Manufacturing

 

142,500

 

Leased

 

 

 

New Berlin, Wisconsin

 

Manufacturing

 

97,850

 

Leased

 

 

 

Bohemia, New York

 

Manufacturing

 

60,000

 

Leased

 

 

 

Hyderabad, India

 

R&D

 

48,900

 

Leased

 

 

 

Winnipeg, Canada

 

Manufacturing

 

37,600

 

Leased

 

 

 

Landshut, Germany

 

Manufacturing

 

26,900

 

Owned

 

 

 

Havant, United Kingdom

 

Manufacturing

 

24,000

 

Leased

 

 

 

Great Falls, Montana

 

Manufacturing

 

20,200

 

Leased

 

Corporate

 

Wellington, Florida

 

Administrative

 

31,300

 

Leased/Owned

 

 

 

 

 

 

 

3,444,150

 

 

 

 

We believe that our facilities are suitable for their present intended purposes and are adequate for our present and anticipated level of operations.

 

ITEM 3.    LEGAL PROCEEDINGS

 

We are 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 our business, results of operations or financial condition.

 

There are no material pending legal proceedings, other than the ordinary routine litigation incidental to the business discussed above, to which we, or any of our subsidiaries, are a party or of which any of our property is the subject.

 

35


 

ITEM 4.    MINE SAFETY DISCLOSURES

 

      Not applicable.

 

 

PART II 

 

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is quoted on the NASDAQ Global Select Market under the symbol "BEAV.” The following table sets forth, for the periods indicated, the range of high and low per share sales prices for the common stock as reported by NASDAQ as well as the amount of cash dividends paid per share during such periods.

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Cash Dividends

 

High

 

Low

 

 

Per Share

Fiscal 2015:

 

 

 

 

 

 

 

 

First Quarter

$

64.58

    

$

55.13

 

$

0.19

Second Quarter

 

64.38

 

 

54.34

 

 

0.19

Third Quarter

 

55.85

 

 

42.65

 

 

0.19

Fourth Quarter

 

49.41

 

 

40.39

 

 

0.19

 

 

 

 

 

 

 

 

 

Fiscal 2016:

 

 

 

 

 

 

 

 

First Quarter

$

48.03

    

$

36.38

 

$

0.21

Second Quarter

 

50.89

 

 

42.57

 

 

0.21

Third Quarter

 

52.87

 

 

44.29

 

 

0.21

Fourth Quarter

 

60.45

 

 

49.46

 

 

0.21

 

On February 24, 2017, the last reported sale price of our common stock as reported by NASDAQ was $63.13 per share. As of such date, based on information provided to us by Computershare, our transfer agent, we had approximately 1,426 registered holders, and because many of these shares are held by brokers and other institutions on behalf of the beneficial holders, we are unable to estimate the number of beneficial stockholders represented by these holders of record.

 

    During each quarter of 2016, we declared a cash dividend of $0.21 per share on our common stock, resulting in total dividends of $85.8. During each quarter of 2015, we declared a cash dividend of $0.19 per share on our common stock, resulting in total dividends of $80.4.  The payments of future dividends are at the discretion of our Board of Directors and will depend on our future earnings, capital requirements, financial conditions, operating conditions, contractual restrictions, including those restrictions in the Credit Agreement (which are described under the heading “Outstanding Debt and Other Financing Arrangements” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and such other factors as our Board of Directors may deem relevant.

 

36


 

The graph below matches B/E Aerospace, Inc.'s cumulative 5-Year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index, the S&P 500 index, and the Dow Jones US Aerospace & Defense index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from December 31, 2011 to December 31, 2016.

 

 

Picture 1

 

Issuer Purchases of Equity Securities

 

    The following table provides information on the Company’s repurchases of our common stock during the fourth quarter of 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Period

    

Total Number of Shares Purchased(1)

    

Average Price Paid per Share(1)

    

Total Number of Shares Purchased as Part of Publicly Announced Program(2)

    

Approximate Value of Shares That May Yet Be Purchased Under the Program(2)

October 1-31, 2016

 

3,215

 

$

55.91

 

 

 -

 

 

174,730,434

November 1-30, 2016

 

117,025

 

 

59.22

 

 

 -

 

 

 -

December 1-31, 2016

 

45,567

 

 

59.44

 

 

 -

 

 

 -

Total

 

165,807

 

$

59.22

 

 

 -

 

 

 

 

(1)

All shares purchased during the current period were purchased from employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting of restricted stock grants under the B/E Aerospace, Inc. 2005 Long-Term Incentive Plan.

 

(2)

On November 11, 2014, the Board of Directors authorized a share repurchase program for the repurchase of outstanding shares of the Company’s common stock having an aggregate purchase price of up to $400 million. The share repurchase program expired November 10, 2016.

37


 

ITEM 6.    SELECTED FINANCIAL DATA

(In millions, except per share data)

 

The financial data for each of the years in the five-year period ended December 31, 2016 have been derived from audited financial statements. The following financial information is qualified by reference to, and should be read in conjunction with, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements, including notes thereto, which are included in Item 15 of this Form 10-K. Our historical results are not necessarily indicative of our future results.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

    

2016

    

2015

    

2014

    

2013

    

2012

 

Statements of Earnings Data:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Revenues

 

$

2,932.9

 

$

2,729.6

 

$

2,599.0

 

$

2,203.3

 

$

1,914.3

 

Cost of sales

 

 

1,799.5

 

 

1,642.5

 

 

1,582.8

 

 

1,296.0

 

 

1,113.7

 

Selling, general and administrative

 

 

336.1

 

 

360.4

 

 

347.9

 

 

323.5

 

 

315.9

 

Research, development and engineering

 

 

290.7

 

 

274.4

 

 

284.3

 

 

220.9

 

 

191.7

 

Operating earnings

 

 

506.6

 

 

452.3

 

 

384.0

 

 

362.9

 

 

293.0

 

Operating margin

 

 

17.3

%  

 

16.6

%  

 

14.8

%  

 

16.5

%  

 

15.3

%

Interest expense, net

 

 

91.1

 

 

94.8

 

 

130.6

 

 

123.4

 

 

124.2

 

Debt prepayment costs(1)

 

 

 —

 

 

0.9

 

 

243.6

 

 

 —

 

 

82.1

 

Earnings before income taxes

 

 

415.5

 

 

356.6

 

 

9.8

 

 

239.5

 

 

86.7

 

Income tax (benefit) expense

 

 

104.4

 

 

70.9

 

 

(47.9)

 

 

44.6

 

 

7.1

 

Earnings from continuing operations

 

 

311.1

 

 

285.7

 

 

57.7

 

 

194.9

 

 

79.6

 

Earnings from discontinued operations, net of income taxes

 

 

 —

 

 

 —

 

 

46.6

 

 

170.7

 

 

154.1

 

Net earnings

 

$

311.1

 

$

285.7

 

$

104.3

 

$

365.6

 

$

233.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share from continuing operations

 

$

3.10

 

$

2.75

 

$

0.55

 

$

1.89

 

$

0.78

 

Net earnings per share from discontinued operations

 

 

 —

 

 

 —

 

 

0.45

 

 

1.65

 

 

1.51

 

Net earnings per share - basic

 

$

3.10

 

$

2.75

 

$

1.00

 

$

3.54

 

$

2.29

 

Weighted average common shares

 

 

100.4

 

 

104.0

 

 

104.0

 

 

103.2

 

 

102.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share from continuing operations

 

$

3.08

 

$

2.73

 

$

0.55

 

$

1.88

 

$

0.77

 

Net earnings per share from discontinued operations

 

 

 —

 

 

 —

 

 

0.45

 

 

1.64

 

 

1.50

 

Net earnings per share - diluted

 

$

3.08

 

$

2.73

 

$

1.00

 

$

3.52

 

$

2.27

 

Weighted average common shares

 

 

100.9

 

 

104.5

 

 

104.5

 

 

103.9

 

 

102.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.84

 

$

0.76

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (end of period):(2)(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

1,011.5

 

$

836.2

 

$

852.8

 

$

2,251.4

 

$

1,963.6

 

Goodwill, intangible and other assets, net

 

 

1,094.5

 

 

1,091.3

 

 

1,139.1

 

 

2,077.9

 

 

2,000.7

 

Total assets

 

 

3,370.1

 

 

3,140.9

 

 

3,173.1

 

 

5,633.9

 

 

5,027.9

 

Long-term debt, net of current maturities

 

 

2,037.0

 

 

2,034.1

 

 

2,147.3

 

 

1,926.5

 

 

1,924.0

 

Stockholders' equity

 

 

216.5

 

 

55.5

 

 

10.1

 

 

2,609.2

 

 

2,178.9

 

Other Data:(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

83.6

 

$

85.3

 

$

142.3

 

$

89.6

 

$

75.0

 

 

38


 

(1)

During the year ended December 31, 2015, we repaid $136.0 of our term loan facility. During the year ended December 31, 2014, we incurred a loss on debt extinguishment of $243.6 related to unamortized debt issue costs and fees and expenses related to the repurchase of our 5.25% and 6.875% Notes in connection with the Spin-Off. During the year ended December 31, 2012, we incurred a loss on debt extinguishment of $82.1 related to unamortized debt issue costs and fees and expenses related to the repurchase of our 8.5% Notes. 

 

(2)

Includes KLX for periods 2012-2013.

 

(3)

Includes KLX for periods 2012-2014.

 

39


 

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(In millions, except per share data)

 

OVERVIEW

 

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. We sell our products and provide our services directly to virtually all of the world’s major airlines and aerospace manufacturers. In addition, based on our experience, we believe that we have achieved leading global market positions in each of our major product categories, which include:

 

·

commercial aircraft seats, including an extensive line of super first class, first class, business class, tourist class and regional aircraft seats;

 

·

a full line of aircraft food and beverage preparation and storage equipment, including coffee and espresso makers, water boilers, beverage containers, refrigerators, freezers, chillers and a line of ovens that includes microwave, high efficiency convection and steam ovens;

 

·

galley systems, modular lavatory systems and wastewater management systems;

 

·

both chemical and gaseous aircraft oxygen storage, distribution and delivery systems, protective breathing equipment and a broad range of lighting products; and

 

·

business jet and general aviation interior products, including an extensive line of executive aircraft and helicopter seats, direct and indirect overhead lighting systems, exterior lighting systems, passenger and crew oxygen systems, air valve systems, and high-end furniture and cabinetry.

 

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 OEMs and the airlines.

 

On October 23, 2016, we entered into the Merger Agreement to be acquired by Rockwell Collins and Merger Sub summarized in Note 17, Pending Rockwell Collins Transaction, of the Notes to our Consolidated Financial Statements. If the Merger is consummated, we will become a wholly-owned subsidiary of Rockwell Collins. Accordingly, this Annual Report on Form 10-K should be read with the understanding that, should the Merger be completed, Rockwell Collins will have the power to control the conduct of our business.

 

On December 16, 2014 (the “Distribution Date”), we completed the spin-off of KLX Inc. (“KLX”) by means of the transfer of our Consumables Management Segment (“CMS”) to KLX and the subsequent distribution to B/E Aerospace stockholders of all the outstanding shares of KLX common stock (the “Spin-Off”). We retained our commercial aircraft and business jet segments. On the Distribution Date, each of our stockholders of record as of the close of business on December 5, 2014 (the “Record Date”) received one share of KLX common stock for every two shares of our common stock held as of the Record Date.

 

We generally derive our revenues from the sale of our cabin interior equipment for new aircraft deliveries for the new build market and from refurbishment or upgrade programs for the existing worldwide fleets of commercial and general aviation aircraft and the aftermarket. For the fiscal years 2016, 2015 and 2014, approximately 36%, 40%, and 40%, respectively, of our revenues were derived from the aftermarket, with the remaining portions attributable to the sale of cabin interior equipment associated with new aircraft deliveries. We believe our large installed base of commercial and general aviation aircraft cabin interior products for the principal products of the type which we manufacture, valued at replacement prices, of approximately $13.4 billion as of December 31, 2016, gives us a significant advantage over our competitors in obtaining orders both for spare parts and for refurbishment programs, principally due to the tendency of the airlines to

40


 

purchase equipment for such programs from the incumbent supplier. Approximately 50% of our booked backlog is expected to be delivered over the next twelve months, and approximately 29% is expected to be delivered over the following twelve month period. 

 

We conduct our operations through strategic business units that have been aggregated under two reportable segments: commercial aircraft and business jet.

 

Revenues by reportable segment for the years ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

    

Revenues

    

Revenues

    

 

Revenues

    

Revenues

    

 

Revenues

    

Revenues

 

Commercial aircraft

 

$

2,344.0

 

79.9

%  

 

$

2,098.3

 

76.9

%  

 

$

2,058.9

 

79.2

%

Business jet

 

 

588.9

 

20.1

%  

 

 

631.3

 

23.1

%  

 

 

540.1

 

20.8

%

Total revenues

 

$

2,932.9

 

100.0

%  

 

$

2,729.6

 

100.0

%  

 

$

2,599.0

 

100.0

%

 

Substantially all of our sales are denominated in U.S. dollars, which is consistent with the industry. Revenues by domestic and foreign operations for the years ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

    

2016

    

2015

    

2014

 

Domestic

    

$

1,722.0

    

$

1,619.3

    

$

1,552.8

 

Foreign

 

 

1,210.9

 

 

1,110.3

 

 

1,046.2

 

Total revenues

 

$

2,932.9

 

$

2,729.6

 

$

2,599.0

 

 

Revenues by geographic segment (based on destination) for the years ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

    

Revenues

    

Revenues

    

 

Revenues

    

Revenues

    

 

Revenues

    

Revenues

 

U.S.

 

$

1,131.8

 

38.6

%

 

$

966.3

 

35.4

%

 

$

859.1

 

33.1

%

Europe

 

 

663.2

 

22.6

%

 

 

663.5

 

24.3

%

 

 

684.6

 

26.3

%

Asia, Pacific Rim, Middle East and Other

 

 

1,137.9

 

38.8

%

 

 

1,099.8

 

40.3

%

 

 

1,055.3

 

40.6

%

Total revenues

 

$

2,932.9

 

100.0

%

 

$

2,729.6

 

100.0

%

 

$

2,599.0

 

100.0

%

 

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 that these activities protect and enhance our leadership position. We believe our investments in research and development over the past several years have been the driving force behind our ongoing market share gains and the growth of our backlog. As of December 31, 2016 we employed approximately 2,226 engineers and program managers. Engineering, research and development (“ER&D”) expense was approximately 10.0% of revenues during 2016. We expect research and development expense to approximate 10.0% of revenues during 2017.

 

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 enhance our productivity. Taking into consideration recent program awards to deliver multi-year programs for various Airbus and Boeing aircraft, our targeted capacity utilization levels, recent acquisitions and current industry conditions, we expect that capital expenditures will be approximately $125 during 2017.

 

41


 

RESULTS OF OPERATIONS

 

Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

 

Revenues for each of our segments are set forth in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

    

2016

    

2015

    

Change

    

Change

 

Commercial aircraft

    

$

2,344.0

    

$

2,098.3

    

$

245.7

    

11.7

%

Business jet

 

 

588.9

 

 

631.3

 

 

(42.4)

 

-6.7

%

Total revenues

 

$

2,932.9

 

$

2,729.6

 

$

203.3

 

7.4

%

 

The following is a summary of operating earnings performance by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

    

2016

    

2015

    

Change

    

Change

 

Commercial aircraft

    

$

429.5

    

$

367.5

    

$

62.0

 

16.9

%

Business jet

 

 

77.1

 

 

84.8

 

 

(7.7)

 

-9.1

%

Total operating earnings

 

$

506.6

 

$

452.3

 

$

54.3

 

12.0

%

 

 

    For the year ended December 31, 2016, consolidated revenues of $2,932.9 increased $203.3, or 7.4% over the prior year. Commercial Aircraft Segment (“CAS”) 2016 revenues of $2,344.0 increased $245.7, or 11.7%, as compared with 2015 as a result of higher volumes of buyer furnished equipment sold directly to our airline and leasing customers and seller furnished equipment programs sold to the aircraft OEMs. Business Jet Segment (“BJS”) 2016 revenues of $588.9 decreased $42.4, or 6.7%, as compared with 2015 as a result of the broad-based downturn in the new business jet and civilian helicopter markets and lower volumes of first class seating products.

 

    During 2016, the Company recognized charges totaling $21.9 related to costs associated with the Transaction and restructuring charges. During 2015, the Company recognized a $49.0 charge in connection with its 2015 cost reduction program. This program includes costs associated with facilities consolidation, product rationalization, workforce reductions and program discontinuance. These costs are included in the amounts and descriptions below.

 

    Cost of sales for 2016 was $1,799.5, or 61.4% of revenues, as compared with cost of sales of $1,642.5, or 60.2% of revenues, in 2015. Gross margin decreased 120 basis points as compared with 2015 primarily due to lower revenues and an unfavorable product mix at BJS and higher volumes of the development programs, partially offset by lower restructuring charges in the current year period.

 

    Selling, general and administrative (“SG&A”) expense for 2016 was $336.1, or 11.5% of revenues, as compared with $360.4, or 13.2% of revenues in 2015. SG&A expense as a percentage of revenues decreased 170 basis points as compared with 2015 primarily as a result of cost reduction initiatives and lower restructuring charges in the current year period.

 

    ER&D expense for 2016 was $290.7, or 9.9% of revenues as compared with $274.4, or 10.1% of revenues in 2015. ER&D expense as a percentage of revenues decreased 20 basis points as compared with 2015.

 

    For the year ended December 31, 2016, operating earnings of $506.6 increased $54.3, or 12.0%, and operating margin of 17.3% increased 70 basis points, each as compared with 2015. Operating earnings increased primarily due to strong revenue growth at CAS and lower restructuring charges in the current year period, partially offset by lower revenues and an unfavorable mix of products sold at BJS.

42


 

 

Interest expense for 2016 of $91.1 decreased by $3.7 as compared with 2015 as a result of lower average borrowing costs for the year ended December 31, 2016.

 

    The effective tax rate for 2016 was 25.1% as compared with 19.9% in 2015. The effective tax rate increased as a result of a greater percentage of income being generated in higher tax jurisdictions and the unfavorable tax treatment of the costs associated with the Transaction incurred in the current year period.

 

2016 net earnings and earnings per diluted share were $311.1 and $3.08 per share. Excluding costs associated with the Transaction and restructuring charges of $21.9, net earnings were $331.1 and net earnings per diluted share were $3.28 per share. Net earnings per share in the current year benefitted from fewer shares outstanding as a result of the Company’s share repurchase program.

 

    SEGMENT RESULTS

 

    For the year ended December 31, 2016, CAS revenues of $2,344.0 increased 11.7% as compared with 2015. The revenue increase was driven by higher volumes of both buyer furnished equipment and seller furnished equipment. Operating earnings of $429.5 increased 16.9% and operating margin of 18.3% increased 80 basis points, each as compared with 2015.

 

    For the year ended December 31, 2016, BJS revenues of $588.9 decreased 6.7% as compared with 2015. The year-over-year revenue decline reflects the broad-based downturn in the new business jet and civilian helicopter markets as well as lower volumes of super first class seating products. Operating earnings of $77.1 decreased 9.1% and operating margin of 13.1% decreased 30 basis points, each as compared with 2015 reflecting the lower level of revenues and unfavorable mix of products sold.

 

 

43


 

Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014

 

Revenues for the year ended December 31, 2015 were $2,729.6, an increase of 5.0% as compared to 2014.

 

Revenues for each of our segments are set forth in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,