B/E Aerospace, Inc.

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B/E Aerospace, Inc.

1400 Corporate Center Way
Wellington, Florida 33414
U.S.A.
(561) 791-5000
Fax: (561) 791-7900
Web site: http://www.beaerospace.com

Public Company
Incorporated: 1987 as Bach Engineering
Employees: 5600
Sales: $701.3 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: BEAV
NAIC: 336411 Aircraft Conversions; 421860 Aircraft Equipment & Supplies Wholesaling; 336321 Aircraft Lighting Fixtures Manufacturing; 336360 Aircraft Seats Manufacturing

In just a decade, B/E Aerospace, Inc. (BEA) has grown from a tiny maker of airline seats to a leading, full spectrum cabin interiors company. BEA installs seats, lighting, galley equipment (including coffee makers, ovens, refrigerators), and high-tech in-flight entertainment (IFE) systems for the world’s airlines. It does not, however, supply overhead bins or lavatories. Refurbishing cabin interiors accounts for more than half of revenue. Although BEA has acquired major names in business jet suppliers, commercial airlines accounted for 90 percent of its revenues.

Obscure Origins

Amin J. Khoury, a chemist with an M.B.A., was in charge of an investment group in the late 1980s looking for businesses in niche markets. Bach Engineering, which had revenues of under $50 million a year making passenger control units for airline seats, seemed an ideal opportunity. The group purchased the company in 1987.

In 1989, the group bought Bach’s primary competitor, EECO Avionics, which landed the company a 60 percent market share (later to grow to 70 percent). The two acquisitions gave the company its name: B/E Avionics. It went public in 1990. Revenues reached $24 million the next year, and the company acquired Trans Video Systems.

The market for cabin interior products was highly segmented, which made diversification a natural option for BEA. The company set out to compete on the basis of one-stop shopping and unique integrated products. Khoury touted the advantages in service and support this approach gave the airlines, which typically had three or four suppliers of the same type of equipment among their fleets.

In 1992 BEA paid the Pullman Co. $73 million for PTC Aerospace, a maker of airline seats, and its subsidiary Aircraft Products Co., which made equipment for in-flight kitchens. The company changed its name to B/E Aerospace (BEA) after these acquisitions. This was soon followed by the purchase of Britain’s Flight Equipment and Engineering Ltd. ($13 million) and its supplier JFB Engineering ($6 million).

BEA continued its growth-by-acquisition strategy in 1993. It bought Aircraft Furnishings Ltd. of Northern Ireland (business and first-class seating) for $7 million, Royal Inventum of the Netherlands (galley equipment) for $33 million, and Acurex Corp. of California (onboard refrigerators) for $63 million in cash and stock. The international nature of the airline industry guided BEA in its selection of acquisitions, particularly as the company would have needed to obtain separate licenses to manufacture cabin equipment in Europe. Approximately half of the company’s business was in exports.

BEA promptly integrated its seat-making operations, each of the acquisitions developing a specific type of seat. Its plant in England (formerly FEEL) worked on a unique, convertible coach/business class seat. Its Irish facility (AFL) developed business and first-class seating, while the US (PTC) and English plants worked on the coach and commuter seats.

Revenues reached $200 million in 1993. BEA sold $38 million worth of stock and refinanced $125 million of debt. By this time, BEA controlled 30 percent of the airline seat market, 60 percent of the galley inserts market, and was positioned as a key player in the emerging in-seat video market, which was estimated to be worth $200 million a year. At the time, BEA had installed more in-flight video equipment than all its competitors combined, including such giants as Sony and Philips. In Air Transport World, Khoury stressed the importance of designing electronic and video equipment into the seating itself, which made BEA’s integrated operation uniquely valuable.

BEA created B/E Services Division to upgrade and retrofit aircraft interiors, located in Seattle, Los Angeles, and London. B/E Services helped the company weather a downturn in new aircraft orders prompted by a global recession and the Gulf War.

At the end of its acquisition binge, BEA had transformed itself from a tiny niche player to an industry leader. By this time, BEA was involved in all areas of the cabin except lighting and lavatories. The company preferred to stay out of markets it could not lead. In 1995 it controlled 30 percent of the world seating market, 70 percent of the PCU (headset jacks) market; 85 percent of coffee makers; and 85 percent of refrigeration equipment. It also had the largest number of in-seat video installations and ovens.

The height of seat design was incorporated into a new seat for United Airline’s international business class passengers. It featured a massaging lumbar support, a fold-down footrest, and headrest extensions to cradle the head during sleep.

Robert J. Khoury became CEO in April 1996. His brother Amin remained chairman. From 1989 to 1996, the company spent $290 million on acquisitions. It reduced its employment by 1,500 and closed 11 facilities.

Great Expectations: 1997

BEA teamed with Harris Corp. in September 1997 to develop LiveTV, a joint venture to bring live television broadcasts to airline passengers. The market for video entertainment systems on narrow-body aircraft was estimated to be worth $3 billion. Unfortunately, the joint venture encountered difficulty finding a launch customer willing to invest the huge amount of capital needed. LiveTV used BEA’s BE 2000 video system coupled with a new antenna and receiver based on U.S. military satellite applications.

Unfortunately, BEA’s top-of-the-line MDDS system encountered some trouble proving its reliability, which resulted in British Airways canceling its order in the fall of 1997 after two years of trials. The lost business would have been worth between $155 and $225 million.

MDDS offered video and audio on-demand, in-flight shopping and reservations services, video games and gambling, and telephony. Reliability problems were not limited to BEA’s experience, particularly among interactive systems. Matsushita Avionics, Hughes-Avicom International, Interactive Flight Technologies, and Sony Trans Com were working on competing IFE programs. Some airlines operated advanced IFE systems in a non-interactive mode as an interim measure. Others, like Delta, Quantas, and El A1, simply installed less ambitious entertainment services such as Sony’s Video Walkman until interactive IFE could sort its bugs out.

BEA found another MDDS customer in Japan Airlines, which tested the system on three of its Boeing 747s. At the time, BEA was already developing the next generation of MDDS systems, scheduled to become an option on 747s in mid-1999. Some insiders scolded IFE manufacturers for not solving all the reliability problems in existing technology before taking it to the next level.

Alliances for the New Millennium

The market for IFE systems grew more competitive in the late 1990s. Hughes-Avicom International and Rockwell Collins demonstrated the viability of strategic alliances in this type of environment. Within a year of the purchase of Hughes-Avicom in November 1997, Rockwell Collins was left with a backlog of about $350 million as airlines ordered its Total Entertainment Systems by the hundreds. Hughes-Avicom had teamed with Taiwan’s Aero Vision Avionics just that July, a move calculated to strengthen Hughes-Avicom’s Pacific presence. BEA looked for its own partner, seeking both a strategic advantage and a return on its hefty investment in IFE technology.

In January 1998, BEA confessed to providing aircraft seats for five Iran Air planes in 1992 and thereby violating the U.S. embargo. A contractor in France installed the seats. The incident cost more than $4 million in fines and legal fees.

BEA bought several companies in 1998. Puritan-Bennett Aero Systems (PBASCO), a maker of oxygen delivery systems and overhead lights, cost $70 million to acquire. The purchase of Aircraft Modular Products (AMP) for $118 million gave BEA an entree into business jet interiors, a fast growing, fragmented market. Market leader AMP supplied Cessna, Gulf-stream, Dassault, and others. Holbrook, New York-based Aerospace Lighting Corporation, another of the year’s acquisition targets, also specialized in business jets. BEA also bought SMR Aerospace Inc., an Ohio design firm specializing in cabin interiors for passenger jets, and paid TI Group plc $25 million for C.F. Taylor (CFT), a U.K.-based cabin interiors firm and a major supplier for Airbus. BEA tried to pay for the SMR purchase through a secondary public offering but canceled these plans when its share prices fell due to its large debt load.

Company Perspectives:

Corporate Mission: To be the world’s Number One manufacturer of quality cabin interior products and services to the commercial airline and general aviation industries.

To achieve this objective, B/E focuses intensely on its customers’ needs through a 140 person sales and marketing organization and by providing unsurpassed product innovation, sales, manufacturing and aftermarket services. The Company continuously employs its world-class manufacturing capabilities, extensive new product development and the highest quality human resources to consolidate its position as the industry leader.

BEA organized a Flight Structures and Integration Group comprising its Jacksonville galley manufacturing business and Seattle design and integration unit, as well as the newly acquired C.F. Taylor. The Interior Systems Group made galley and storage equipment in Florida, oxygen systems and passenger service units in Kansas, ovens in the Netherlands, and refrigeration equipment in California.

In fiscal year 1998, BEA’s IFE group had revenues of $81 million. It had installed more than 34,000 video screens to date. These were mostly from its BE2000 and BE2000M product lines. By this time, the BE2000 series was the world’s most widely used non-interactive IFE system. The more advanced BE2000M units were achieving some success. United Airlines raised its initial order for the more advanced system to a value of $73 million.

Asian Crisis; Decline and Sell-Off

While United was ordering more and more IFE systems, Delta Airlines and US Airways were contracting BEA to produce premium seating. Nevertheless, BEA could not sustain its pace of rapid growth in the face of the Asian financial crisis, cutbacks in Boeing’s widebody program, and its own bank debt. Seven of BEA’s manufacturing sites were also closed and 500 of its employees laid off.

Although BEA expected some revenue growth to continue, the company sold Sextant Avionique 51 percent of its IFE business, forming Sextant In-Flight Systems, to be headquartered at existing facilities in Irving, California. (After an initial cash payment of $62 million, the final price of the unit was pegged to operating results.) Sextant Avionique’s spectrum of products included flight control and navigation systems, computers, and instruments. As a supplier of avionics (flight instrumentation and controls) and a competitor of Rockwell, which had also begun offering IFE systems, Sextant Avionique seemed a well-suited partner to elevate BEA’s reputation for reliability. Guy Baruchel was tapped to head the new joint venture.

United Airlines remained a bright blip on BEA’s radar. In February 1999, UAL announced it was ordering $40 million worth of BE2000 IFE systems for the coach class of 36 Boeing 747s. United already had 7,500 BE2000 units in operation; the BE2000M series was installed in all sections of its Boeing 767s.

Such good news may have explained the company’s top executives again buying stock in their company. They had previously sold off significant amounts in August 1997. With the world airline fleet growing and new regulations requiring stronger seats, their optimism seemed well placed. BEA spent $354 million on four major acquisitions in fiscal 1999. The company had a backlog worth $640 million in February 1999.

Principal Subsidiaries

BE Aerospace (USA), Inc.; BE Aerospace Netherlands BV; Royal Inventum, BV; BE Aerospace (Sales & Services) BV; BE Aerospace (U.K.); Holdings Limited; BE Aerospace (UK) Limited; AFI Holdings Ltd.; Fort Hill Aircraft Ltd.; CF Taylor (B/E) UK Limited; CF Taylor (Wales) Ltd.; BE Aerospace Services, Inc.; BE Advanced Thermal Technologies, Inc.; Acurex Corporation; BE Aerospace International Ltd.; Nordskog Industries, Inc.; Burns Aerospace (SARL); Puritan-Bennett Aero Systems Corporation; Sextant In-Flight Systems, LLC (49%); BE Intellectual Property, Inc.; Aerospace Interiors, Inc.; Aerospace Lighting Corporation; SMR Aerospace, Inc.; Flight Structures, Inc.; BE Aerospace Canada, Inc.; BE Aerospace (Canada) Company; BE Aerospace (France) SARL.