New Product Development. The aircraft cabin interior products companies are engaged in intensive product development and marketing efforts for both new features on existing products and totally new products. These products include a broad range of amenities such as luxurious first class cabins with appointments such as lie-flat seating, mini-bars, closets, flat screen TVs and mood lighting. Other recently introduced products include electric lie-flat first and business class seats, narrow and wide-body economy class seats, full face crew masks, Pulse Oxygen™ gaseous passenger oxygen systems, a full range of business and executive jet seating and LED lighting products, protective breathing equipment, oxygen generating systems, new food and beverage preparation and storage equipment, kevlar barrier nets, de-icing systems and crew rests.
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. As cabin interior product configurations have become increasingly sophisticated and the airline industry increasingly competitive, the airlines have begun to outsource these services in order to increase productivity and reduce costs.
Outsourced services include:
· Engineering design, integration, 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.
We estimate that during 2006 the commercial and business jet cabin interior products industry had annual sales of approximately $1.7 billion and the aerospace-grade fastener industry had annual sales of over $1.6 billion. We estimate that the total worldwide installed base of commercial and general aviation aircraft cabin interior products for the principal products we manufacture was approximately $16.9 billion as of December 31, 2006.
Commercial Aircraft Industry
The commercial airline industry saw an upturn in air travel beginning in 2003, bringing global revenue passenger miles back to 2000 levels. According to IATA, during 2006, the global airline industry expanded airline capacity by approximately 4.6% in response to an approximate 5.9% increase in global air traffic. We believe increases in passenger traffic, and associated increases in airline capacity, are initially benefiting providers of aftermarket products and services. However, as the new aircraft delivery cycle begins to gain momentum, increases in original equipment manufacturer production rates are also expected. According to the Airline Monitor, the approximate number of deliveries of new large commercial aircraft are expected to grow to 925 in 2007 from 820 in 2006, and then to 1,037 in 2008, 1,086 in 2009, and 1,205 in 2010. In addition, according to the Airline Monitor, approximately 1,023 twin-aisle aircraft will be delivered during the 2007-2010 period. According to the Airline Monitor, by 2016 approximately 37% of new annual deliveries will be twin-aisle aircraft, an increase from 23% of new deliveries in 2006. An increase in twin-aisle aircraft is important to us as we believe twin-aisle aircraft require up to five to eight times the dollar value of products of the type that we manufacture as compared to a single-aisle, or narrow-body, aircraft and generate substantially more demand for spare parts and upgrade products and services.
Business Jet Industry
The business jet industry experienced a severe downturn following the events of September 11, 2001, reaching a trough in 2003. However, in 2006 approximately 840 aircraft were delivered, which represented an increase of 19% as compared to 2005 and an increase of 49% as compared to 2004. Recent industry forecasts project significant near-term growth, with total deliveries of approximately 958 aircraft in 2007, an increase of 70% over the approximately 562 aircraft delivered in 2004. Industry sources estimate that nearly 3,025 business jets will be built during the 2007 through 2009 period.
Competitive Strengths
We believe that we have a strong competitive position attributable to a number of factors, including the following:
Large Installed Base . We have a large installed base of commercial and general aviation cabin interior products, estimated to be valued at approximately $6.0 billion (for our principal products, valued at replacement prices) as of December 31, 2006. Based on our experience in the industry, we believe our installed base is substantially larger than that 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, retrofits and refurbishment programs, from the original supplier of their equipment. 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.
Operating Leverage and Low Cost Producer . Our ability to leverage our manufacturing and engineering capabilities has allowed us to expand gross and operating margins. As a result of our cost savings programs implemented following the downturn in the airline industry in 2001, and through our ongoing continuous improvement and lean manufacturing programs, our overall gross margins have increased substantially. For example, our gross margin for the fiscal year ended December 31, 2006 of 35.1% improved by 260 basis points over the fiscal year ended 2004, reflecting ongoing manufacturing efficiencies and operating leverage at the higher volume of sales. In addition, our operating earnings have been increasing at a faster rate than our net sales. For example, for the year ended December 31, 2006, operating earnings grew 58.4% over operating earnings for the year ended December 31, 2005, as compared to net sales growth of 33.7% during 2006. Our operating margin which was 13.1% for the fiscal year 2006 has expanded by approximately 200 basis points per year in each of the past two years.
Focus on Innovation and New Product Development . We believe, based on our experience in the industry, that we are a technological leader, with the largest research and development organization in the cabin interior products industry. As of December 31, 2006, we had 877 employees in engineering, research and development and program management. We believe our engineering, research and development effort 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. Our strong focus and continued investment in research and development, even during the 2001-2003 industry downturn, allows us to compete favorably in winning new business awards. For example, we believe our technological leadership and new product development capabilities were a key factor in our ability to grow our backlog to over $1.7 billion at December 31, 2006, an approximate 60% increase as compared to December 31, 2005. Backlog growth has been driven primarily by international aftermarket demand for retrofit of existing aircraft, including program awards in the emerging international super first class cabin interiors market. We believe these and other program awards, coupled with expected follow-on awards for other fleets of existing aircraft for product commonality and competitive purposes, will continue to drive sales growth and market share
gains over the 2007-2009 period. Introduction of new products has also led to improvements in the product mix of our current backlog, which, along with our continued focus on lean manufacturing processes and additional operating leverage, is expected to result in continued margin expansion.
Exposure to International Markets . Our overall net sales are diversified across multiple geographic regions. For 2006, approximately 29% of our sales were to European customers and approximately 22% of our sales were to customers in emerging markets such as the Asia/Pacific Rim and Middle East regions. These emerging market customers account for approximately 38% of our current backlog and the domestic airlines account for less than 17% of our total backlog at December 31, 2006. We believe this geographic diversification makes us less susceptible to a downturn in a specific geographic region and allows us to take advantage of regional growth trends.
Diverse Product Offering and Broad Customer Base . In addition to serving diverse geographic regions, we also provide a comprehensive line of products and services to a broad customer base. For the fiscal year ended December 31, 2006, no customer accounted for more than 10% of our net sales and our top 10 customers only accounted for approximately 36% of net sales. We have a broad range of over 200 principal customers, including essentially all of the world’s major airlines. During the fiscal year ended December 31, 2006, approximately 7% of sales were to Boeing and Airbus and approximately 7% were to business jet manufacturers for use in new business jets. Our broad product offering and customer base make us less susceptible 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. Based on our reputation for quality, service and product innovation, we believe that we are well positioned to serve the world’s airlines and aircraft manufacturers and owners and operators of business jets.
Experience with Complex Regulatory Environment . The airline industry is heavily regulated. The Federal Aviation Administration 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 European Aviation Safety Agency, the Japanese Civil Aviation Board, and the Civil Aviation Administration of China regulate these matters in other countries. In order to sell certain products or services, it is necessary to obtain the required licenses for the product or service under these various regulations. 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. We have a long history of experience with the complex regulatory environment in which we operate and believe this enables us to efficiently obtain the required approvals for new products and services.
Growth Opportunities
We believe that we will benefit from the following industry trends:
Improving Airline Industry Conditions . Improving worldwide industry conditions are resulting in increased demand for our products and services, as demonstrated by the over 40% increase in our bookings during fiscal 2006 as compared to fiscal 2005. At December 31, 2006, our backlog was over $1.7 billion, an increase of approximately 60% over our December 31, 2005 backlog. A majority of the backlog growth over the fiscal year ended December 31, 2006 was primarily the result of international aftermarket demand for the retrofit of existing aircraft. We expect demand to further increase over the course of the next several years consistent with the expected increase in wide-body and super wide-body aircraft deliveries and the expected participation by the domestic carriers in both retrofit and new-buy activity.
Worldwide Air Traffic Growth and Airline Capacity Additions Drive Resurgence in Aftermarket Activities . Our substantial installed base provides significant ongoing revenues from replacements, upgrades, repairs and the sale of spare parts. For the fiscal year ended December 31, 2006 and the fiscal year ended December 31, 2005, approximately 60% and 63% of our revenues, respectively, were derived from aftermarket activities. In addition, aftermarket revenues are generally driven by aircraft usage, and as such, they have historically tended to recover more quickly than revenues from original equipment manufacturers. As worldwide air traffic grows and airlines add capacity, we expect our aftermarket business to continue to grow. According to IATA, during the fiscal year ended December 31, 2006, the global airline industry expanded airline capacity by 4.6% in response to a 5.9% increase in global air traffic. During this same period, we experienced a 27.5% increase in aftermarket revenues. In addition, as a result of the severity of the economic downturn in the airline industry following the terrorist attacks of September 11, 2001, many carriers, particularly in the United States, deferred interior refurbishments for a number of years. We believe there are substantial growth opportunities for retrofit
programs for the twin-aisle aircraft that service international routes and that the major U.S. airlines will need to invest in cabin interiors for their international fleets or face the prospect of losing market share on their international routes. Based on industry analysts’ expectations for airline traffic and our understanding of our customers’ cabin interior products requirements, we believe that global demand to retrofit existing aircraft with commercial aircraft cabin interior products should grow at a compounded annual growth rate of approximately 19% over the 2005-2009 period and that total global demand (from both the aftermarket and new aircraft) for commercial aircraft cabin interior products of the type that we manufacture should grow at a compounded annual growth rate of nearly 18% over this same five-year period.
Record Backlog Driven by Aftermarket Demand from International Airlines Retrofitting Existing Fleets . We believe that substantially all of the major international airlines are in the process of upgrading their existing fleets of twin-aisle aircraft. This activity is being driven by both the age of the existing cabin 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 and place a strong emphasis on pleasing aesthetics, quality and finish in order to enhance their international passengers’ flight experience. As a result, we believe that the life-cycle of premium products, such as international business class seats and the products comprising our super first class suites, will continue to compress as airlines make investments in cabin interior products on a more frequent basis. For example, in 2005, British Airways selected us to outfit their wide-body fleet with our next generation horizontal lie-flat seats. In 2000, British Airways revolutionized the airline industry by introducing the first horizontal business class lie-flat seats (which were subsequently installed on their wide-body fleet during 2001-2002). We believe British Airways’ decision to select our next generation horizontal lie-flat seats may accelerate the retrofit cycle for premium class seating products for other airlines operating wide-body aircraft serving international routes. Through December 31, 2006, retrofit activity for the international airlines with twin-aisle aircraft has consisted of upgrading the premium class seating, mood lighting and food and beverage preparation equipment for the first and business class sections of their international fleets. We believe these international airlines are now beginning to address their coach class retrofit requirements, which bodes well for future bookings and revenue growth.
Growth of Wide-Body Aircraft Fleet . According to the Airline Monitor, new deliveries of wide-body aircraft totaled 186 in 2006 and are expected to total approximately 1,023 aircraft over the 2007-2010 period, averaging approximately 256 such aircraft per year or a 37% higher delivery level as compared to 2006. The Airline Monitor also predicts that nearly 3,230 twin-aisle aircraft will be delivered over the 2007-2016 timeframe or approximately 323 wide-body and super wide-body aircraft per year or some 74% higher, on average, as compared to 2006. This compares to 1,852 aircraft delivered from 1992-2005. We expect to benefit from this trend as wide-body aircraft generally carry more than five to eight times the dollar value of products of the type that we manufacture as compared to single-aisle, or narrow-body, aircraft.
Growth of Worldwide Airline Fleet . As a result of the current and projected growth in worldwide air traffic, deliveries of new aircraft are expected to grow. According to the Airline Monitor, new deliveries of large commercial aircraft grew to 820 aircraft in 2006 from 663 in 2005 and are expected to increase to 925 in 2007, 1,037 in 2008, 1,086 in 2009 and 1,205 in 2010. The worldwide fleet of passenger and cargo aircraft was approximately 18,200 as of December 31, 2006 and, according to the Airline Monitor, is expected to increase to 40,097 by December 31, 2025. As the size of the fleet expands, demand should also grow for upgrade and refurbishment programs, for cabin interior products and for maintenance products, including spares and fasteners.
Growth in New Aircraft Introductions Lead to New Cabin Interior Product Introductions and Major Retrofit Opportunities . Over the past two years, 15 customers have placed orders for 166 of the new Airbus A380 super wide-body aircraft and 33 airlines have placed orders for 448 of the new Boeing 787 wide-body aircraft, which Boeing has indicated is its most successful new product launch in its history. Emirates Airline and Qantas Airways, which together account for approximately 40% of all A380 passenger aircraft orders to date, have selected us to outfit their A380 aircraft with luxurious super first class cabin interiors, including individual passenger compartments, electrically controlled lie flat seating, luxurious cabinetry, and various state of the art lighting products. Additionally, Qantas Airways and Air France have selected us to outfit their A380 aircraft with next generation lie-flat business class seats, and Singapore Airlines and several other A380 customers have selected us to supply them with our newly-designed oven, refrigeration and beverage maker products. We believe that a number of airlines, including those that have already placed orders to date for next generation wide-body aircraft, are also evaluating their existing wide-body fleets to ensure that they can maintain fleet-wide commonality of cabin interiors as they begin to take delivery of other new aircraft types. For example, Emirates Airline has now also selected us to outfit a number of its Boeing 777 wide-body aircraft with our super first class cabin interiors and new horizontal lie-flat business class seats, and Air France has selected us to supply our new A380 business class seats on its Boeing 777 fleet. Airlines that placed orders for the new Boeing 787 wide-body
aircraft are just beginning to place orders for these cabin interiors. We expect to be selected to outfit a significant portion of these aircraft.
Growth in Business Jet and VIP Aircraft Markets . Business jet deliveries increased by 19% in 2006 as compared to 2005; and are expected to increase by approximately 14%, in 2007 as compared to 2006. We expect several larger business jet types, including the Boeing Business Jet, the Bombardier Challenger, the Global Express and the Global 5000, the Gulfstream 150, 200, 350, 450 and 550, the Falcon 900 and the Falcon 2000 and 7x, the Airbus Corporate Jet, the Cessna Citation X and the Cessna Citation Jets and Embraer Legacy to be significant contributors to growth in new general aviation aircraft deliveries in the future. Industry sources estimate that approximately 3,025 business jets will be built during the 2007 through 2009 period, with over 41% projected to be larger business jets. This is important to us because the typical cost of cabin interior products manufactured for a large business jet can be 10 times more than the cost to equip the interior of a small jet. Advances in engine technology and avionics and the continued development of fractional ownership of executive aircraft are also important growth factors for the business jet market. In addition, because the average age of the more than 14,000 general aviation and VIP aircraft existing today is approximately 15 years, we believe significant cabin interior retrofit and upgrade opportunities exist.
Opportunity to Substantially Expand Our Addressable Markets through our Fastener Distribution Business . Our fastener distribution business leverages our key strengths, including marketing and service relationships with most of the world’s airlines and airframe manufacturers. As nearly 55% of fastener demand is generated by the existing worldwide fleet, demand for fasteners is expected to increase over time as the fleet expands, similar to the market for cabin interior products. The aerospace and military OEMs are increasingly outsourcing to sub-contract manufacturers, driving a channel shift, which is benefiting distributors such as our company. The OEMs are increasing their outsourcing of manufactured parts to aerospace and defense subcontractors, many of which tend to purchase through distributors. In addition, our recent acquisition of New York Fasteners has substantially expanded our military and defense customer base.
The strong cycle of new commercial aircraft building together with our market share gains, the channel shift described above and our expanding military and defense platform, presents us with an opportunity to potentially double the size of the profitability of our distribution business over the next three years.
Business Strategy
Our business strategy is to maintain a leadership position and to best serve our customers by:
· Offering broad and innovative products and services in the industry;
· Offering a broad range of engineering services including design, integration, installation and certification services, aircraft reconfiguration, and passenger-to-freighter conversion services;
· Pursuing the highest level of quality in every facet of our operations, from the factory floor to customer support;
· Aggressively pursuing continuous improvement initiatives in all facets of our businesses and in particular our manufacturing operations, to reduce cycle time, lower cost, improve quality and expand our margins; and
· Pursuing a worldwide marketing and product support approach focused by airline and general aviation airframe manufacturer and encompassing our entire product line.
Products and Services
We conduct our operations through strategic business units that have been aggregated under five reportable segments: Seating, Interior Systems, Distribution, Business Jet, and Engineering Services.
The following is a summary of net sales for each of our segments:
|
Fiscal Year Ended December 31, |
||||||||||||||||
|
2006 |
2005 |
2004 |
||||||||||||||
|
Net |
% of |
Net |
% of |
Net |
% of |
|||||||||||
|
Seating |
|
$ |
388.5 |
|
34.4 |
% |
$ |
281.8 |
|
33.4 |
% |
$ |
251.4 |
|
34.3 |
% |
|
Interior Systems |
|
273.9 |
|
24.3 |
% |
205.5 |
|
24.4 |
% |
200.4 |
|
27.3 |
% |
|||
|
Distribution |
|
251.5 |
|
22.3 |
% |
173.9 |
|
20.6 |
% |
144.2 |
|
19.7 |
% |
|||
|
Business Jet |
|
147.5 |
|
13.1 |
% |
120.2 |
|
14.2 |
% |
75.2 |
|
10.2 |
% |
|||
|
Engineering Services |
|
66.8 |
|
5.9 |
% |
62.7 |
|
7.4 |
% |
62.3 |
|
8.5 |
% |
|||
|
Net sales |
|
$ |
1,128.2 |
|
100.0 |
% |
$ |
844.1 |
|
100.0 |
% |
$ |
733.5 |
|
100.0 |
% |
Seating Segment
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, footrests, reading lights, head/neck supports, and oxygen masks. We estimate that as of December 31, 2006, we had an aggregate installed base of approximately 1.0 million aircraft seats valued at replacement prices of approximately $3.3 billion.
First and Business Classes. Based upon major airlines’ program selection and our backlog, we believe we are the leading worldwide manufacturer of premium class seats. Our line of first class sleeper seats incorporates full electric actuation, an electric ottoman, privacy panels and sidewall-mounted tables. Our business class seats incorporate features developed over 25 years of seating design. The business class seats include electrical or mechanical actuation, PC power ports, telephones, leg rests, adjustable lumbar cushions, four-way adjustable headrests and fiberoptic reading lights. The first and business class products are substantially more expensive than tourist class seats due to these luxury appointments.
Tourist Class and Regional Jet Seats. We believe, based on our experience in the industry, that we are a leading worldwide manufacturer of tourist class seats and regional aircraft seats. We believe our Spectrum® coach class seat has become the industry’s most popular seat platform for single-aisle aircraft since its launch in late 2002. 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. Spectrum® was engineered for use across the entire single-aisle aircraft fleet, including regional jets.
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.
Interior Systems Segment
We believe, based on our experience in the industry, that we are the leading manufacturer of interior systems for both narrow and wide-body aircraft, offering a broad selection of coffee and beverage makers, water boilers, ovens, liquid containers, refrigeration equipment, oxygen delivery systems and a variety of other interior components. We estimate that as of December 31, 2006 we had an aggregate installed base of such equipment valued at replacement prices of approximately $1.6 billion.
Oxygen Delivery Systems. We believe, based on our experience in the industry, that we are the leading manufacturer of oxygen delivery systems for both commercial and business jet aircraft. We are the only manufacturer with the capability to both produce all required components and to fully integrate overhead passenger service units with either chemical or gaseous oxygen equipment. Our systems are found on almost all in-production aircraft types in the world today and on 100% of in production commercial airlines. 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 will be the first aircraft equipped with a passenger oxygen system using our advanced “Pulse Oxygen” technology. We believe the Pulse Oxygen system delivers oxygen more efficiently than traditional passenger systems and reduces overall system weight and fuel burn and facilitates lower maintenance and cabin reconfiguration costs, when compared to traditional oxygen systems.
Coffee Makers/Water Boilers. We believe, based on our experience in the industry, that we are the leading manufacturer of aircraft coffee and tea makers. We manufacture a broad line of coffee makers, including the Endura® beverage maker, coffee warmers and water boilers, and a Combi Unit® which will both brew coffee and boil water for tea while utilizing 25% less electrical power than traditional 5,000-watt water boilers. We also manufacture a cappuccino/espresso maker.
Ovens. We believe, based on our experience in the industry, that we are the leading manufacturer of a broad line of specialized ovens, including high-heat efficiency ovens, high-heat convection and steam ovens and warming ovens. Our “DS Steam Oven” uses a method of preparing in-flight food by maintaining constant temperature and
moisture in the food. It addresses the airlines’ need to provide a wider range of food offerings than can be prepared by convection ovens.
Refrigeration Equipment. 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 air chilling systems.
Distribution Segment
Through our subsidiary, M&M Aerospace Hardware, Inc. (M&M), we believe we offer one of the broadest lines of fasteners and inventory management services worldwide. Nearly 55% of our fastener sales are to the aftermarket, and over 60% of our orders are shipped within 24 hours of receipt. With over 175,000 SKUs and next-day service, we serve as a distributor for almost every major aerospace fastener manufacturer. Our service offerings include inventory management and replenishment, electronic data interchange, special packaging and bar-coding, quality assurance testing and purchasing assistance. Our seasoned purchasing and sales teams, coupled with state-of-the-art information technology and automated retrieval systems, provide the basis for our reputation for high quality and overnight delivery.
Business Jet Segment
We believe, based on our experience in the industry, that we are the leading manufacturer of a broad product line of furnishings for business jets. Our products include a complete line of business jet seating and sofa products, direct and indirect lighting, air valves and oxygen delivery systems as well as sidewalls, bulkheads, credenzas, closets, galley structures, lavatories and tables. We have the capability to provide complete interior packages, including all design services, all interior components and program management services for executive aircraft interiors. We believe we are the preferred supplier of seating products and direct and indirect lighting systems for essentially every general aviation airframe manufacturer. We estimate that as of December 31, 2006, we had an aggregate installed base of business jet equipment valued at replacement prices of approximately $1.1 billion.
We believe, based on our experience in the industry, our business jet segment, which has had decades of experience in equipping 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 were found only in VIP and head-of-state aircraft until recently.
Engineering Services Segment
Engineering Design, Integration, Installation and Certification Services. We believe, based on our experience in the industry, that we are a leader in providing engineering, design, integration, installation and 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 allow airlines to change the size of certain classes of service, modify and upgrade the seating, install telecommunications and entertainment equipment, relocate galleys, lavatories and overhead bins, and install crew rest compartments.
Passenger-to-Freighter Conversions. We believe, based on our experience in the industry, that we are a leading supplier of structural design and integration services, including airframe modifications for passenger-to-freighter conversions. In addition, we have performed conversions for Boeing 767, Boeing 747-200 Combi Unit®, Boeing 747-200 (door only) and Airbus A300 B4 aircraft. In addition, China Southern recently selected us to convert six of their A300-600 wide-body passenger aircraft to freighter aircraft. Freighter conversions require sophisticated engineering capabilities and very large and complex proprietary parts kits.
Crew Rest Compartments. We believe, based on our experience in the industry, that we are a leader in the design, certification and manufacture of crew rest compartments. Long-haul international flights can carry two flight crews and the off-duty flight crew often utilize crew rest compartments to sleep during the flight. A crew rest compartment is constructed utilizing lightweight cabin interior materials and incorporates seating, electrical, heating, ventilation and air conditioning and lavatory systems.
Research, Development and Engineering
We work closely with commercial airlines to improve existing products and identify customers’ emerging needs.
Our expenditures in research, development and engineering totaled $88.6 million, $65.6 million and $55.1 million for the three years ending December 31, 2006, respectively. We employed 877 professionals in engineering, research and development and program management as of December 31, 2006. 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, electronic and software design skills, as well as substantial expertise in materials composition and custom cabin interior layout design and certification.
Marketing and Customers
We market and sell our commercial aircraft products directly to virtually all of the world’s major airlines 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 believe that our large installed base, our timely responsiveness in connection with the custom design, manufacture, delivery and after-sales customer service and product support of our products and our broad product line and stringent customer and regulatory requirements all present barriers to entry for potential new competitors in the cabin interior products market.
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 accounted for over 80% of the purchases of products manufactured by our Seating, Interior Systems, and Engineering Services segments during the fiscal year ended December 31, 2006. 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 work closely with the 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 program management services, integrating all on-board cabin interior equipment and systems, including installation and Federal Aviation Administration certification, allowing airlines to substantially reduce costs. We believe that we are one of the only suppliers in the commercial aircraft cabin interior products industry with the size, resources, breadth of product line and global product support capability to operate in this manner.
Our program management approach assigns a program manager to each significant contract. The program manager is responsible for all aspects of the specific contract and profitability, including managing change orders, negotiating related non-recurring 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 better customer satisfaction.
We market our business jet products directly to all of the world’s general aviation airframe manufacturers, modification 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: customer design capabilities, product quality and performance, on-time delivery, after-sales customer service, product support and price. We believe that potential new competitors would face a number of barriers to entering the cabin interior products market. Barriers to entry include regulatory requirements, our large installed product base, our custom design capability, manufacturing capability, delivery, and after-sales customer service, product support and our broad product line.
We market our aerospace fasteners directly to the airlines, completion centers, general aviation airframe manufacturers, first-tier suppliers to the commercial, military and defense airframe manufacturers, the airframe manufacturers and other distributors. We believe that our key competitive advantages are the breadth of our product offerings and our ability to deliver on a timely basis. We believe that our broad product offerings of aerospace fasteners and our ability to deliver products on a next day basis and our core competencies in product information management, purchasing and logistics management provide strong barriers to entry.
As of December 31, 2006, our direct sales marketing and product support organizations consisted of 351 persons. In addition, we currently retain 58 independent sales representatives. Our sales to non-U.S. customers were approximately $645 million for the fiscal year ended December 31, 2006 and $445 million for the fiscal year ended December 31, 2005 or approximately 57% and 53%, respectively, of net sales during such periods. Approximately 82% and 84% of our total revenues were derived from airlines and other commercial aircraft operators during the
fiscal year ended December 31, 2006 and the fiscal year ended December 31, 2005, respectively. Approximately 60% of our revenues during the fiscal year ended December 31, 2006 and 63% of our revenues for the fiscal year ended December 31, 2005 were from refurbishment, spares and upgrade programs. During the fiscal years ended December 31, 2006 and December 31, 2005, no single customer accounted for more than 10% of our consolidated sales. The portion of our revenues attributable to particular customers varies from year to year with the airlines’ scheduled purchases of new aircraft and for retrofit and refurbishment programs for their existing aircraft.
Backlog
We estimate that our backlog at December 31, 2006 was in excess of $1.7 billion as compared to approximately $1.1 billion at December 31, 2005 and $700 million at December 31, 2004. Approximately 48% of our backlog at December 31, 2006, is scheduled to be deliverable within the next twelve months. While 40% of our total backlog is with North American customers, less than 17% of our total backlog is with domestic airlines. Approximately 22% is with European customers and approximately 38% is with customers in emerging markets such as Asia, Pacific Rim and the Middle East. Our backlog includes backlog from all of our businesses. Orders during the fiscal year ended December 31, 2006 of approximately $1.7 billion increased by over 40% above the order level during 2005, and our backlog at December 31, 2006 increased by over 60% compared to the backlog at December 31, 2005 despite a 33.7% year over year increase in revenues.
Customer Service
We believe that our customers place a high value on customer service and product support and that this service is a critical differentiating factor in our industry. The key elements of such service include:
· Rapid response to requests for engineering design, proposal requests 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 airlines due to the high cost to the airlines of 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 upon 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 should be sufficient to cover product liability claims.
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 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 believe that the airlines’ increasing demands will result in a consolidation of the remaining suppliers. We have participated in this consolidation through strategic acquisitions and internal growth and we intend to continue to participate in the consolidation.
Our principal competitors for seating products are Groupe Zodiac S.A. and Keiper Recaro GmbH. Our primary competitors for interior systems products are Britax PLC, JAMCO and Groupe Zodiac S.A. Our principal competitors in the passenger-to-freighter conversion business include Boeing Airplane Services, Elbe Flugzeugwerk GmbH, a division of EADS, Israel Aircraft Industries, Pemco World Air Services and Aeronavili. Our principal competitors for other product and service offerings in our engineered interior structures, components and assemblies include TIMCO, JAMCO, Britax PLC and Driessen Aircraft Interior Systems. The market for business jet products is highly fragmented, consisting of numerous competitors, the largest of which is Decrane Aircraft Holdings. Our primary competitors in the fastener distribution market are Honeywell Hardware Products Group, Wesco Aircraft Hardware, C.J. Fox and Anixeter Pentacon.
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 state-of-the-art 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.
Government Regulation
The Federal Aviation Administration (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 European Aviation Safety Administration (EASA) to design, manufacture, inspect and test aircraft seating products in Leighton Buzzard, England 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.
In March 1992, the FAA adopted Technical Standard Order C127, or TSO-C127, which provides a design approval that the FAA may issue to seat manufacturers for seats tested dynamically to meet the requirements of 14 CFR 25.562 (commonly referred to as “16g”). We have developed and certified 55 unique seat models that meet the requirements of TSO-C127 and TSO-C127a. The FAA and EASA also prescribe that seats meet certain flammability and electrical interference specifications. In October 2005, the FAA adopted 14 CFR 121.311(j), which requires dynamic testing of all seats installed in all new aircraft certified after January 1, 1988 and produced after October 27, 2009. EASA is expected to establish a similar role. B/E’s large installed base of 16G seats demonstrates our industry leadership in seat certification requirements.
On October 4, 2002, the FAA published a Supplemental Notice of Proposed Rule Making (SNPRM). This SNPRM proposed extending the current requirement for “enhanced safety” seats (16G seats) on aircraft designs registered after 1988 to all aircraft. This proposed rule would require that older design aircraft be retrofitted with new enhanced safety “16G” seats over a multi-year basis. The public comment period for the proposed retrofit rule closed on March 3, 2003. The date for final rule making and any changes to the details of the rule will be based on the comments received and the priority assigned to this proposal by the FAA.
In November 2002, our seating group became the first passenger seating supplier to sign a Partnership for Safety Plan (PSP) with the FAA. Based on established qualifications of personnel and systems, the PSP provides us with increased authority to approve test plans and reports, and to witness tests. The PSP provides us with a number of business benefits including greater planning flexibility, simplified scheduling and greater program control and eliminates variables such as FAA workload and priorities.
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 wastes. We may be subject to liability 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 wastes 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
We currently hold 202 U.S. patents and 143 international patents, as well as 107 U.S. patent applications and 179 foreign patent applications covering a variety of products. We believe that 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, 2006, we had approximately 5,058 employees. Approximately 64% of our employees are engaged in manufacturing/distribution operations and purchasing, 17% in engineering, research and development and program management, 7% in sales, marketing, and product support and 12% in finance, information technology, legal and general administration. Unions represent approximately 20% of our worldwide employees. One domestic labor contract representing approximately 6% of our employees expires May 2, 2009. The other labor contract with the only other domestic union, which represents approximately 2% of our employees, runs through May 7, 2007. We consider our employee relations to be good.
Financial Information About Segments and Foreign and Domestic Operations
Financial and other information by segment and relating to foreign and domestic operations for the fiscal years ended December 31, 2006, December 31, 2005 and December 31, 2004, is set forth in note 13 to our consolidated financial statements.
Available Information
Our filings with the Securities and Exchange Commission (SEC), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, our Proxy Statement, current reports on Form 8-K and amendments to those reports, are available free of charge on our website as soon as reasonably practicable after they are filed with, or furnished to, the SEC. Our Internet website is located at http://www.beaerospace.com. Information included in or connected to our website is not incorporated by reference in this annual report.
ITEM 1A. RISK FACTORS
You should consider carefully the following risks, along with the other information contained in or incorporated by reference in this Form 10-K. Additional risks and uncertainties also may adversely affect our business and operations including those discussed in Item 1A Risk Factors. If any of the following events actually occur, our business and financial results could be materially adversely affected.
Risks Relating to Our Industry
We are directly dependent upon the conditions in the airline and business jet industries and a severe and prolonged downturn could negatively impact our results of operations.
The September 11, 2001 terrorist attacks, SARS and the onset of the Iraq war severely impacted conditions in the airline industry. According to industry sources, in the aftermath of the attacks most major U.S. and a number of international carriers substantially reduced their flight schedules, parked or retired portions of their fleets, reduced their workforces and implemented other cost reduction initiatives. U.S. airlines further responded by decreasing domestic airfares. As a result of the decline in both traffic and airfares following the September 11, 2001 terrorist attacks, and their aftermath, as well as other factors, such as increases in fuel costs and heightened competition from low-cost carriers, the world airline industry lost a total of approximately $41.0 billion in calendar years 2001-2006. The airline industry crisis also caused 22 airlines worldwide to declare bankruptcy or cease operations in the last four years.
As a result of the foregoing, through 2006, the domestic U.S. airlines, in large part, have been seeking to conserve cash by deferring or eliminating cabin interior refurbishment programs and deferring or canceling aircraft purchases. This, together with the reduction of new business jet production, caused a substantial contraction in our business during the 2001 through 2003 period. Although the global airline industry began to recover in late 2003 and conditions continue to improve, and the business jet industry is improving as well, additional events similar to those described above or other events could cause a deterioration of conditions in our industry or end the current business cycle. The rate at which the business jet industry recovers is dependent on corporate profits, the number of used jets on the market and other factors, which could slow the rate of recovery.
The airline industry is heavily regulated and failure to comply with applicable laws could reduce our sales, or require us to incur additional costs to achieve compliance, which could reduce our results of operations.
The Federal Aviation Administration (FAA) prescribes standards and licensing requirements for aircraft components, including virtually all commercial airline and general aviation cabin interior products, and licenses component repair stations within the United States. Comparable agencies, such as the European Aviation Safety Administration (EASA), the Civil Aviation Authority of China (CAAC) and the Japanese Civil Aviation Board (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 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 recent enactment of 14 CFR 121.311(j) will require dynamic testing of all seats installed in all new aircraft produced after October 27, 2009. EASA is expected to establish a similar rule. Compliance with this rule may require industry participants to expand engineering, plant and equipment to ensure that all products meet this rule. Smaller seating companies may not have the resources, financial or otherwise, to comply with this rule and may be required to sell their business or cease operations. To the extent the FAA implements rule changes in the future, we may incur additional costs to achieve compliance.
The airline industry is subject to extensive health and environmental regulation, any violation of which could subject us to significant liabilities and penalties.
We are subject to extensive and changing federal, state and foreign laws and regulations establishing health and environmental quality standards, and may be subject to liability or penalties for violations of those standards. We are also subject to laws and regulations governing remediation of contamination at facilities currently or formerly owned or operated by us or to which we have sent hazardous substances or wastes for treatment, recycling or disposal. We may be subject to future liabilities or obligations as a result of new or more stringent interpretations of existing laws and
regulations. In addition, we may have liabilities or obligations in the future if we discover any environmental contamination or liability at any of our facilities, or at facilities we may acquire.
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 and Germany and each of our facilities sells to airlines all over the world. Our customers are located primarily in North America, Europe and the emerging markets including the Asia/Pacific Rim region, South America and the Middle East. As a result, 57% of our net sales for the year ended December 31, 2006 and 40% or more of our sales for the years ended December 31, 2005 and December 31, 2004 were to customers located outside the United States.
In addition, we have a number of subsidiaries in foreign countries (primarily in Europe), which have sales outside the United States. Approximately 35% and 30%, respectively, of our sales during the fiscal year ends December 31, 2006, and 2005 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, 2006, we reported a cumulative foreign currency translation adjustment of approximately $18.1 million in stockholders’ equity as a result of foreign currency adjustments, and we may incur additional adjustments in future periods. In addition, operating results of foreign subsidiaries are translated into 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 and the Netherlands are incurred in British pounds or euros, respectively, 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 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 operating results.
If we make acquisitions, they may be less successful than we expect, which could have a material adverse effect on our financial condition.
We may consider future acquisitions, some of which could be material to us. We explore and conduct discussions with many third parties regarding possible acquisitions. Our ability to continue to achieve our goals may depend upon our ability to effectively acquire and integrate such companies, to achieve cost efficiencies and to manage these businesses as part of our company. We may not be successful in implementing appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. Our efforts to integrate these businesses could be materially adversely affected by a number of factors beyond our control, such as regulatory developments, general economic conditions, increased competition and the loss of certain customers resulting from the acquisitions. In addition, the process of integrating these businesses could cause difficulties for us, including an interruption of, or loss of momentum in, the activities of our existing business and the loss of key personnel and customers. Further, the benefits that we anticipate from these acquisitions may not develop. Depending upon the acquisition opportunities available, we also may need to raise additional funds through the capital markets or arrange for additional bank financing in order to consummate such acquisitions.
Our total assets include substantial intangible assets. The write-off of a significant portion of unamortized intangible assets would negatively affect our results of operations.
Our total assets reflect substantial intangible assets. At December 31, 2006, goodwill and identified intangibles, net, represented approximately 41% of total assets. Intangible assets consist principally of goodwill and other identified intangible assets associated with our acquisitions. On at least an annual basis, we assess whether there has been an impairment in the value of goodwill and other intangible assets with indefinite lives. If the carrying value of the 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 current accounting rules, this would result in a charge to operating earnings. Any determination requiring the write-off of a significant portion of unamortized goodwill and identified intangible assets would negatively affect our results of operations and total capitalization, which could be material.
Our substantial indebtedness will require that a significant portion of our cash flow be used for debt service, which will limit our ability to use our cash flow for other areas of our business and could adversely affect the holders of our securities.
As of December 31, 2006, we had approximately $504 million of total indebtedness outstanding, representing approximately 42% of total capitalization, and $439 million of net indebtedness outstanding (total indebtedness less cash and cash equivalents), representing approximately 38% of net capitalization. Subject to the limits contained in our existing bank credit facility and the indentures governing our outstanding senior and senior subordinated notes, we could also incur substantial additional indebtedness in the future.
As a result of our substantial indebtedness, we have substantial debt service obligations that could have significant consequences to us, including:
· limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of those funds to fund debt service obligations;
· limiting our ability to obtain additional financing to fund our growth strategy, working capital requirements, capital expenditures, acquisitions, debt service requirements or other general corporate requirements;
· increasing our vulnerability to adverse economic and industry conditions; and
· increasing our exposure to interest rate increases because borrowings under our current bank credit facility are, and borrowings under any future bank credit facility could be, at variable interest rates.
Our ability to satisfy our debt service obligations will depend upon, among other things, our future operating performance and our ability to refinance indebtedness when necessary. Each of these factors is to a large extent dependent on economic, financial, competitive, and other factors beyond our control. If, in the future, we cannot generate sufficient cash from operations to meet our debt service obligations, we will need to refinance, obtain additional financing or sell assets. In the future, our business may not generate sufficient cash flow, or we may not be able to obtain funding, to satisfy our debt service requirements. We had a net loss for the fiscal year ended December 31, 2004, and our earnings were inadequate to cover fixed charges for this period; and for the years ended December 31, 2006, and 2005, our cash flows provided by operations were only $41.0 million and $12.6 million, respectively. Our cash flows from operations during the years ended December 31, 2006 and 2005 reflect our high rate of growth, which resulted in large growth in our receivables and inventories.
In addition to the debt service requirements of our outstanding indebtedness, we have other demands on our cash resources, including, among others, capital expenditures and operating expenses.
We have significant financial and operating restrictions in our debt instruments that may have an adverse effect on our operations.
The indentures governing our outstanding senior subordinated notes and our bank borrowings contain numerous financial and operating covenants that limit our ability to incur additional or repay existing indebtedness, to create liens or other encumbrances, to make certain payments and investments, including dividend payments, to engage in transactions with affiliates, to engage in sale/leaseback transactions, to guarantee indebtedness and to sell or otherwise dispose of assets and merge or consolidate with other entities. Agreements governing future indebtedness could also contain significant financial and operating restrictions. Our current bank credit facilities contain customary affirmative and negative covenants. A failure to comply with the obligations contained in any current or future agreement governing our indebtedness, including our indentures, could result in an event of default under our current or any future bank credit
facility, or such indentures, which could permit acceleration of the related debt and acceleration of debt under other instruments that may contain cross-acceleration or cross-default provisions. We may not have, or may not be able to obtain, sufficient funds to make any required accelerated payments.
We compete with a number of established companies, some of which have significantly greater financial, technological and marketing resources than we do, and we may not be able to compete effectively with these companies.
We compete with numerous established companies. Some of these companies, particularly in the passenger-to-freighter conversion business, have significantly greater financial, technological and marketing resources than we do. Our ability to be an effective competitor will depend on our ability to remain the supplier of retrofit and refurbishment products and spare parts on the commercial fleets on which our products are currently in service. It will also depend on our success in causing our products and the new products we may develop to be selected for installation in new aircraft, including next-generation aircraft, and in avoiding product obsolescence. Our ability to maintain or expand our market position in the passenger-to-freighter conversion business will depend on our success in being selected to convert specific aircraft, our ability to maintain and enhance our engineering design, our certification and program management capabilities and our ability to manufacture a broader range of structural components, connectors and other products used in this business.
Provisions in our charter documents may discourage potential acquisitions of our company, even those which the holders of a majority of our common stock may favor.
Our restated certificate of incorporation and by-laws contain provisions that may have the effect of discouraging a third party from making an acquisition of us by means of a tender offer, proxy contest or otherwise. Our restated certificate of incorporation and by-laws:
· 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 the board of directors to fill vacancies and newly created directorships on the board;
· restrict the ability of stockholders to call special meetings; and
· contain advance notice requirements for stockholder proposals.
Our rights plan and the ability of our board of directors to issue preferred stock may have the effect of discouraging a takeover attempt not previously approved by the board of directors.
Our board of directors has declared a dividend of one preferred share purchase right for each share of common stock outstanding. A right will also be attached to each share of common stock subsequently issued. The rights will have certain anti-takeover effects. If triggered, the rights would cause substantial dilution to a person or group of persons that acquires more than 15.0% of our common stock on terms not approved by our board of directors. The rights could discourage or make more difficult a merger, tender offer or other similar transaction.
Under our restated certificate of incorporation, our board of directors also has the authority to issue preferred stock in one or more series and to fix the powers, preferences, and rights of any such series without stockholder approval. The board of directors could, therefore, issue, without stockholder approval, preferred stock with voting and other rights that could adversely affect the voting power of the holders of common stock and could make it more difficult for a third party to gain control of us. In addition, under certain circumstances, Section 203 of the Delaware General Corporation Law makes it more difficult for an “interested stockholder”, or generally a 15% stockholder, to effect various business combinations with a corporation for a three-year period unless previously approved by our board of directors.
You may not receive cash dividends on our shares of common stock.
We have never paid a cash dividend and do not plan to pay cash dividends on our common stock in the foreseeable future. We intend to retain our earnings to finance the development and expansion of our business and to repay indebtedness. Also, our ability to declare and pay cash dividends on our common stock is restricted by covenants in our outstanding notes. Our current bank credit facility also contains customary covenants, which include covenants restricting our ability to declare and pay cash dividends.
If the price of our common stock continues to fluctuate significantly, you could lose all or part of any investment in our common stock.
The price of our common stock is subject to sudden and material increases and decreases, and decreases could adversely affect investments in our common stock. For example, since the beginning of 2004, the closing sale price of our common stock has ranged from a low of $5.20 to a high of $31.33. 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;
· changes in general market or economic conditions; and
· 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
