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 and the leading aftermarket distributor and value added service provider of aerospace fasteners and other consumables products and services. We sell our manufactured products 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:
? a broad line of aerospace fasteners and other consumables, consisting of over
one million SKUs, primarily serving the commercial aerospace and business jet
? 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 makers, water boilers, beverage containers, refrigerators,
freezers, chillers and a line of ovens that includes microwave, high efficiency
convection and steam ovens;
? modular lavatory systems, wastewater management systems and galley systems;
? both chemical and gaseous aircraft oxygen storage, distribution and delivery
systems, protective breathing equipment and a broad range of lighting products;
? business jet and general aviation interior products, including an extensive
line of executive aircraft seats, direct and indirect overhead 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. We generally derive our revenues from refurbishment or upgrade programs for the existing worldwide fleets of commercial and general aviation aircraft and from the sale of our cabin interior equipment for new aircraft deliveries as well as consumable products for both the new build market and the aftermarket. For the 2013, 2012 and 2011 years, approximately 40%, 39% and 40% of our revenues, respectively, 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
$10.3 billionas of December 31, 2013, 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 purchase equipment for such programs from the incumbent supplier. Approximately 58% of our backlog is expected to be delivered over the next twelve months, and approximately 27% is expected to be delivered over the following twelve month period.
We conduct our operations through strategic business units that have been aggregated under three reportable segments: commercial aircraft, consumables management and business jet.
27 -------------------------------------------------------------------------------- Revenues by reportable segment for the years ended
December 31, 2013, 2012 and 2011 were as follows: Year Ended December 31, 2013 2012 2011 % of % of % of Revenues Revenues Revenues
Revenues Revenues Revenues
$ 1,784.751.2 % $ 1,551.250.3 % $ 1,302.052.1 % Consumables management 1,280.4 36.8 % 1,171.0 37.9 % 943.5 37.7 % Business jet 418.6 12.0 % 363.1 11.8 % 254.3 10.2 % Total revenues $ 3,483.7100.0 % $ 3,085.3
Substantially all of our sales and purchases are denominated in U.S. dollars, which is consistent with the industry. Revenues by domestic and foreign operations for the years ended
December 31, 2013, 2012 and 2011 were as follows: Year Ended December 31, 2013 2012 2011 Domestic $ 2,420.9 $ 2,230.1 $ 1,750.2Foreign 1,062.8 855.2 749.6 Total revenues $ 3,483.7 $ 3,085.3 $ 2,499.8
Revenues by geographic segment (based on destination) for the years ended
Year Ended December 31, 2013 2012 2011 % of % of % of Revenues Revenues Revenues
Revenues Revenues Revenues
$ 1,533.344.0 % $ 1,499.548.6 % $ 1,296.451.9 % Europe 894.0 25.7 % 755.9 24.5 % 606.0 24.2 % Asia, Pacific Rim, Middle East and other 1,056.4 30.3 % 829.9 26.9 % 597.4 23.9 % Total revenues $ 3,483.7100.0 % $ 3,085.3100.0 % $ 2,499.8100.0 % Between 1989 and 2011, we substantially expanded the size, scope and nature of our business through 35 acquisitions for an aggregate purchase price of approximately $2.7 billion. In January 2012, we acquired UFC, a leading provider of complex supply chain management and inventory logistics solutions, for a net purchase price of approximately $405. In July 2012, we acquired Interturbine for a net purchase price of approximately $245. Interturbine's product range includes chemicals, lubricants, hydraulic fluids, adhesives, coatings and composites. Interturbine also supplies fasteners, cables and wires, electronic components, electrical and electromechanical materials, tools, hot bonding equipment and ground equipment to its primary customer base of airlines and MROs globally. UFC and Interturbine are included as components of our consumables management segment. Our consumables management segment completed two acquisitions, one in the third quarter, the acquisition of Blue Dot, one in the fourth quarter, the acquisition of Bulldog, and reached agreements to acquire two additional companies, LT and Wildcat, all in the oilfield rental equipment and services business. Revenues from Bulldog, LT and Wildcat were approximately $145for all of 2013, none of which is included in our 2013 results. We expect to pay approximately $310, including acquisition costs, for Bulldog, LT and Wildcat. As a result of these transactions, we will have established rental equipment and services businesses in both the northeast and southwest regions of the United States. Assuming the acquisitions were completed on January 1, 2013, 2013 pro forma aggregate revenues from all of these transactions would have comprised about 5% of our pro forma 2013 revenues. 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. At December 31, 2013we employed approximately 1,979 engineers and program managers. Research, development and engineering spending was approximately 6.3% of sales during 2013. We expect research and development expenditures to remain at a similar percentage of sales for the next several years. 28 -------------------------------------------------------------------------------- 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 $170during 2014.
RESULTS OF OPERATIONS
Revenues for the year ended
Revenues for each of our segments are set forth in the following table:
Year Ended December 31, Percent 2013 2012 Change Change Commercial aircraft
$ 1,784.7 $ 1,551.2 $ 233.515.1 % Consumables management 1,280.4 1,171.0 109.4 9.3 % Business jet 418.6 363.1 55.5 15.3 % Total revenues $ 3,483.7 $ 3,085.3 $ 398.412.9 % For the year ended December 31, 2013, consolidated revenues of $3,483.7increased $398.4, or 12.9%, as a result of a higher level of new aircraft deliveries, a higher level of aftermarket activity associated with the retrofit of existing aircraft, and an increase in activity in the second half of 2013 to support the maintenance of the global fleet of aircraft. CAS 2013 revenues of $1,784.7increased by $233.5, or 15.1%, as compared with 2012. CMS 2013 revenues of $1,280.4increased by $109.4, or 9.3%, as compared with 2012. BJS 2013 revenues of $418.6increased by $55.5, or 15.3%. Cost of sales for 2013 of $2,154.8increased by $233.6, as compared with the prior year, primarily due to the higher level of revenues. Cost of sales as a percentage of revenues was 61.9% in 2013 and decreased by 40 basis points as compared with 2012, primarily due to an improved mix of products sold, ongoing manufacturing efficiencies and global supply chain and program management initiatives. Selling, general and administrative ("SG&A") expenses for 2013 were $478.7, or 13.7% of revenues, as compared with $432.4, or 14.0% of revenues in 2012. The higher level of SG&A expense in the current year is primarily due to costs and expenses associated with the 12.9% increase in revenues and $24.2of acquisition, integration and transition ("AIT") costs in 2013 ( $17.2in 2012). Exclusive of such costs in both periods, SG&A as a percentage of revenues were 13.0% in 2013 and 13.5% in 2012 reflecting the operating leverage in our business. Research, development and engineering expense for 2013 was $220.9, or $6.3% of sales as compared with $191.7or 6.2% of sales in 2012. The $29.2increase in spending is primarily due to new product development activities in our commercial aircraft segment associated with our $8.8 billiontotal backlog ( $3.8 billionbooked and $5.0 billionawarded but unbooked) and activities directed toward further growing our SFE backlog. During 2013, we applied for 225 U.S. and foreign patents as compared with 184 during 2012. For the year ended December 31, 2013, operating earnings of $629.3increased $89.3, or 16.5% as compared with the prior year. Operating margin in 2013 of 18.1% expanded 60 basis points as compared with 2012 as a result of operating leverage at the higher level of sales volume and ongoing operational efficiency initiatives. 29
The following is a summary of operating earnings performance by segment:
Year Ended December 31, Percent 2013 2012 Change Change Commercial aircraft
$ 320.3 $ 271.3 $ 49.018.1 % Consumables management 240.0 216.7 23.3 10.8 % Business jet 69.0 52.0 17.0 32.7 % Total operating earnings $ 629.3 $ 540.0 $ 89.316.5 % For the year ended December 31, 2013, CAS operating earnings of $320.3increased 18.1% as compared with the prior year and operating margin of 17.9% expanded by 40 basis points due to operating leverage at the higher revenue level and ongoing operational efficiency initiatives. For the year ended December 31, 2013, CMS operating earnings of $240.0increased 10.8% and operating margin of 18.7% expanded by 20 basis points as compared with the prior year. Operating earnings, adjusted to exclude AIT costs of $24.2, were $264.2, an increase of 13.0% and adjusted operating margin was 20.6%, an increase of 60 basis points, as compared with the prior year similarly adjusted to exclude AIT costs. For the year ended December 31, 2013, BJS operating earnings of $69.0increased 32.7% as compared with the prior year period. Operating margin of 16.5% expanded 220 basis points, reflecting the increase in revenues, an improved mix of revenues and ongoing operational efficiency initiatives.
Interest expense for the year ended
2013 income tax expense of
$141.2(27.9% effective tax rate) increased by $41.4as compared with 2012 income tax expense of $99.8(29.9% effective tax rate) due to the higher level of earnings before income taxes and the lower effective tax rate in 2013 as compared with 2012. Our effective tax rate in 2013 was lower than 2012 primarily due to the timing of tax legislation which required companies to defer recognition of their 2012 R&D tax credits until enacted by law in January 2013.
2013 net earnings and earnings per diluted share were
Revenues for the year ended
Revenues for each of our segments are set forth in the following table:
Year Ended December 31, Percent 2012 2011 Change Change Commercial aircraft
$ 1,551.2 $ 1,302.0 $ 249.219.1 % Consumables management 1,171.0 943.5 227.5 24.1 % Business jet 363.1 254.3 108.8 42.8 % Total revenues $ 3,085.3 $ 2,499.8 $ 585.523.4 % For the year ended December 31, 2012, consolidated revenues of $3,085.3increased $585.5, or 23.4%, as a result of a higher level of new aircraft deliveries, a higher level of aftermarket activity associated with the retrofit of existing aircraft, and ongoing maintenance of the global fleet of aircraft. CAS 2012 revenues of $1,551.2increased by $249.2, or 19.1%, as compared with 2011. CMS 2012 revenues of $1,171.0increased by $227.5, or 24.1%, as compared with 2011. BJS 2012 revenues of $363.1increased by $108.8, or 42.8%. Organic revenue growth, excluding the UFC and Interturbine acquisitions completed in 2012, was approximately 14.9%. Cost of sales for 2012 of $1,921.2increased by $357.7, as compared with the prior year, primarily due to the higher level of revenues. Cost of sales as a percentage of revenues was 62.3% in 2012 and decreased by 20 basis points as compared with 2011, primarily due to an improved mix of products sold, ongoing manufacturing efficiencies and global supply chain and program management initiatives. 30
SG&A expenses for 2012 were
Research, development and engineering expenses for 2012 were
$191.7, or 6.2% of sales, as compared to $158.6, or 6.3%, of sales in 2011 and reflected the higher level of spending associated with customer specific engineering activities. Research, development and engineering expenses in 2012 included new product development activities and certification efforts related to a number of new products, including our modular lavatory system for the Boeing 737, lightweight vacuum wastewater management systems, trash compactors and LED lighting. The $33.1increase in research, development and engineering expenses as a percentage of sales was primarily due to the higher level of new product development activities in our commercial aircraft segment associated with our record $8.25 billionbooked and unbooked backlog. During 2012, we applied for 184 U.S. and foreign patents as compared with 145 during 2011. For the year ended December 31, 2012, operating earnings of $540.0increased 26.2% as compared with the prior year. Operating margin in 2012 of 17.5% expanded 40 basis points as compared with 2011 as a result of operating leverage at the higher level of sales volume and ongoing operational efficiency initiatives.
The following is a summary of operating earnings performance by segment:
Year Ended December 31, Percent 2012 2011 Change Change Commercial aircraft
$ 271.3 $ 216.0 $ 55.325.6 % Consumables management 216.7 183.1 33.6 18.4 % Business jet 52.0 28.9 23.1 79.9 % Total operating earnings $ 540.0 $ 428.0 $ 112.026.2 % For the year ended December 31, 2012, CAS revenues of $1,551.2increased 19.1% as compared with 2011. Operating earnings in 2012 were $271.3, an increase of 25.6% as compared with 2011. Operating margin in 2012 of 17.5% expanded by 90 in 2012 basis points. The increase in 2012 operating earnings was primarily due to operating leverage at the higher revenue level and ongoing operational efficiency initiatives. For the year ended December 31, 2012, CMS revenues of $1,171.0increased 24.1% as compared with the prior year. CMS 2012 operating earnings were $216.7, an increase of 18.4% as compared with 2011. Operating margin in 2012 of 18.5% decreased by 90 basis points as compared with 2011 due to AIT costs ( $17.2) and the acquisitions of UFC and Interturbine, which currently have lower operating margins than the legacy CMS business. Operating margin excluding AIT costs was approximately 20.0%, up 10 basis points as compared with 2011. For the year ended December 31, 2012, BJS revenues of $363.1increased 42.8% and operating earnings of $52.0increased $23.1, or 79.9%, as compared with 2011, primarily as a result of the increase in revenues, an improved mix of revenues and ongoing operational improvements. Interest expense in 2012 of $124.4was $19.4, or 18.5% higher than 2011, as a result of the higher debt level due to recent acquisitions and opportunistic financing completed in 2012. During 2012 we issued $1,300.0of senior unsecured notes due 2022 at a weighted average effective yield of approximately 5.0%. We also redeemed $600.0of 8.5% senior unsecured notes due July 2018, incurring $82.1of debt prepayment costs.
Earnings before income taxes in 2012 were
Income taxes during 2012 and 2011 were
Net earnings and net earnings per diluted share in 2012 were
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
December 31, 2013, our net debt-to-net-capital ratio was 33.6%. Net debt was $1,321.6, which represented total debt of $1,959.4, less cash and cash equivalents of $637.8. At December 31, 2013, net capital (total debt plus total stockholders' equity less cash and cash equivalents) was $3,930.8. As of December 31, 2013, long-term debt consisted of $1,300.0aggregate principal amount ( $1,313.7inclusive of original issue premium) of our 5.25% senior unsecured notes due 2022 (the "5.25% Notes") and $650.0aggregate principal amount ( $645.7net of original issue discount) of our 6.875% senior unsecured notes due 2020 (the "6.875% Notes"). At December 31, 2013, there were no amounts outstanding under our five-year $950.0revolving credit facility, as amended and restated as of August 3, 2012(the "Revolving Credit Facility"). Cash on hand at December 31, 2013increased by $124.1as compared with cash on hand at December 31, 2012primarily as a result of cash flows from operating activities of $379.1, less expenditures for acquisitions of $118.1and less capital expenditures of $154.9. Our liquidity requirements consist of working capital needs, ongoing capital expenditures and payments of interest and principal on our indebtedness. Our primary requirements for working capital are directly related to the level of our operations. Our sources of liquidity are from cash on hand, our revolving line of credit, and cash flow from operations. At December 31, 2013, we had approximately $638of cash and cash equivalents and a $950revolving line of credit with no borrowings outstanding and no maturities in the near term. In addition, the substantial majority of our cash is held within the United Statesand all of our foreign cash may be brought back into the United Statesin a tax efficient manner. Working capital as of December 31, 2013was $2,280.6, an increase of $274.7as compared with working capital at December 31, 2012. As of December 31, 2013, total current assets increased by $393.1and total current liabilities increased by $118.4. The increase in current assets related to the $124.1increase in cash as described above, a $82.4increase in accounts receivable, and an increase in inventories of $190.9to support future revenue growth. Accounts receivable and inventories increased by $11.7and $4.5, respectively, due to the Blue Dot and Bulldog acquisitions and to support future revenue growth. The increase in total current liabilities was primarily due to an increase in accounts payable of $71.7and an increase in accrued liabilities of $47.0. Accounts payable were higher at December 31, 2013primarily due to the increase in business activity. Accrued liabilities increased due to higher levels of accrued compensation expense ( $9.4) and deferred revenues ( $34.7) primarily. Accounts payable and accrued liabilities increased by $7.5and $3.9, respectively, due to the Blue Dot and Bulldog acquisitions.
December 31, 2013, cash and cash equivalents were $637.8as compared to $513.7at December 31, 2012. Cash provided by operating activities was $379.1for the year ended December 31, 2013as compared to $355.1for the year ended December 31, 2012. The primary sources of cash provided by operating activities during 2013 were net earnings of $365.6, adjusted by depreciation and amortization of $89.6, non-cash compensation of $24.2, and deferred income taxes of $32.9. The primary uses of cash in operating activities during the year ended December 31, 2013were related to a $181.8net increase in inventories, a $67.2increase in accounts receivable and $9.2of tax benefits realized from the prior exercises of employee stock options and restricted stock. The primary sources of cash provided by operating activities during 2012 were net earnings of $233.7, adjusted by depreciation and amortization of $75.0, non-cash compensation of $24.5, and a deferred income tax provision of $37.3. The primary uses of cash in operating activities during the year ended December 31, 2012were related to a $169.7net increase in inventories, a $32.0increase in accounts receivable and $7.0of tax benefits realized from the prior exercises of employee stock options and restricted stock. The primary uses of cash in investing activities during the year ended December 31, 2013were related to capital expenditures of $154.9and acquisitions of $118.1. The primary uses of cash in investing activities during the year ended December 31, 2012were related to capital expenditures of $125.4and acquisitions of $649.7. In March 2012, we issued $500.0aggregate principal amount of 5.25% Notes, in an offering pursuant to the Securities Act of 1933, as amended. The notes are senior unsecured debt obligations. In July 2012, we issued $800.0additional 5.25% Notes priced to yield 4.9% as an add-on to the existing 5.25% Notes. During 2012, we redeemed $600.0of our 8.5% Notes. We incurred a loss on debt extinguishment of $82.1related to unamortized debt issue costs and fees and expenses related to the repurchase of our 8.5% Notes. 32 --------------------------------------------------------------------------------
Our capital expenditures were
$154.9and $125.4during the years ended December 31, 2013and 2012, respectively. Taking into consideration our backlog, including approximately $5,000of awarded but unbooked backlog, targeted capacity utilization levels, recent capital expenditure investments, recent acquisitions and current industry conditions, we anticipate capital expenditures of approximately $170during 2014. We have no material commitments for capital expenditures. We have, in the past, generally funded our capital expenditures from cash from operations and funds available to us under bank credit facilities. We expect to fund future capital expenditures from cash on hand, from operations and from funds available to us under the Revolving Credit Facility. Between 1989 and 2011, we completed 35 acquisitions for an aggregate purchase price of approximately $2.7 billion. During these acquisitions, we rationalized the businesses, reduced headcount by approximately 5,500 employees and eliminated 26 facilities. In January 2012, we acquired UFC for a net purchase price of approximately $405, and in July 2012, we acquired Interturbine for a net purchase price of approximately $245. Our consumables management segment completed two acquisitions, one in the third quarter, Blue Dot, one in the fourth quarter, Bulldog, and reached agreements to acquire two additional companies, LT and Wildcat, all in the oilfield rental equipment and services business. Revenues from Bulldog, LT and Wildcat were approximately $145for all of 2013, none of which is included in our 2013 results. We expect to pay approximately $310, including acquisition costs, for Bulldog, LT and Wildcat. As a result of these transactions, we will have established rental equipment and services businesses in both the northeast and southwest regions of the United States. Assuming the acquisitions were completed on January 1, 2013, 2013 pro forma aggregate revenues from all of these transactions would have comprised about 5% of our pro forma 2013 revenues.
All of our acquisitions over the past four years were financed with cash on hand, our existing credit facilities or new debt issuances.
Outstanding Debt and Other Financing Arrangements
Long-term debt at
December 31, 2013primarily consisted of $1,300.0aggregate principal amount ( $1,313.7inclusive of original issue premium) of our 5.25% Notes and $650.0aggregate principal amount ( $645.7net of original issue discount) of our 6.875% Notes.
We also have the Revolving Credit Facility. The Revolving Credit Facility provides an option to request additional incremental revolving credit borrowing capacity and incremental term loans, in each case upon the satisfaction of certain customary terms and conditions. At
Our obligations under the Revolving Credit Facility are secured by liens on substantially all of our domestic assets, including a pledge of a portion of the capital stock of certain foreign subsidiaries owned directly. Amounts borrowed and outstanding under the Revolving Credit Facility will, in certain circumstances, be required to be prepaid with the proceeds from certain asset sales, subject to certain thresholds and reinvestment rights. Unless terminated earlier, the Revolving Credit Facility will mature in
August 2017. The Revolving Credit Facility contains an interest coverage ratio financial covenant (as defined in the facility) that must be maintained at a level greater than 2.0 to 1. The Revolving Credit Facility also contains a total leverage ratio covenant (as defined in the facility) which limits net debt to a 4.25 to 1 multiple of EBITDA (as defined in the facility). The Revolving Credit Facility contains customary affirmative covenants, negative covenants, restrictions on the payment of dividends, and conditions precedent for borrowing. We were in compliance with all of the covenants, restrictions and conditions precedent in the Revolving Credit Facility as of December 31, 2013. 33 --------------------------------------------------------------------------------
The following chart reflects our contractual obligations and commercial commitments as of
December 31, 2013. Commercial commitments include lines of credit, guarantees and other potential cash outflows resulting from a contingent event that requires performance by us or our subsidiaries pursuant to a funding commitment. Contractual Obligations 2014 2015 2016 2017 2018 Thereafter Total Long-term debt and other non-current liabilities (1) $ -- $ 5.1 $ 2.4 $ 2.7 $ 3.1 $ 1,984.6 $ 1,997.9Operating leases 42.8 40.3 38.0 33.7 30.1 137.5 322.4 Purchase obligations (2) 3.3 0.3 -- -- -- -- 3.6 Future interest payment on outstanding debt (3) 116.5 116.5 116.5 116.5 116.5 331.8 914.3 Total $ 162.6 $ 162.2 $ 156.9 $ 152.9 $ 149.7 $ 2,453.9 $ 3,238.2Commercial Commitments Letters of Credit $ 6.1-- -- -- -- -- $ 6.1
(1) Our liability for unrecognized tax benefits of
been omitted from the above table because we cannot determine with certainty
when this liability will be settled. It is reasonably possible that the
amount of liability for unrecognized tax benefits will change in the next
twelve months; however, we do not expect the change to have a material impact
on our consolidated financial statements.
(2) Occasionally, we enter into purchase commitments for production materials and
other items, which are reflected in the table above. We also enter into
unconditional purchase obligations with various vendors and suppliers of
goods and services in the normal course of operations through purchase orders
or other documentation or just with an invoice. Such obligations are
generally outstanding for periods less than a year and are settled by cash
payments upon delivery of goods and services and are not reflected in purchase obligations.
(3) Interest payments include interest payments due on the 5.25% Notes and the
6.875% Notes based on the stated rates of 5.25% and 6.875%, respectively. To
the extent we incur interest on the Revolving Credit Facility, interest
payments would fluctuate based on
of the Revolving Credit Facility.
We believe that our cash flows, together with cash on hand and the availability under the Revolving Credit Facility, provide us with the ability to fund our operations, make planned capital expenditures and make scheduled debt service payments for at least the next twelve months. However, such cash flows are dependent upon our future operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors, including the conditions of our markets, some of which are 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 such debt obligations, obtain additional financing or sell assets. We cannot assure you that our business will generate cash from operations, or that we will be able to obtain financing from other sources, sufficient to satisfy our debt service or other requirements.
Off-Balance Sheet Arrangements
We finance our use of certain equipment under committed lease arrangements provided by various financial institutions. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected in our consolidated balance sheet. Future minimum lease payments under these arrangements aggregated approximately
Indemnities, Commitments and Guarantees
During the normal course of business, we made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include non-infringement of patents and intellectual property indemnities to our customers in connection with the delivery, design, manufacture and sale of our products, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to other parties to certain acquisition agreements. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. We believe that many of our indemnities, commitments and guarantees provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities, commitments and guarantees because such liabilities are contingent upon the occurrence of events that are not reasonably determinable. We believe that any liability for these indemnities, commitments and guarantees would not be material to our consolidated financial statements. 34 -------------------------------------------------------------------------------- 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. Substantially all of our unbooked backlog relates to CAS programs. For consumables contracts, we include in booked backlog, open but unfulfilled purchase orders plus an amount that we believe necessary to support our customers' production activities under long-term contracts. In addition, purchase orders for end items and spares are generally received and recorded as backlog when we accept their terms.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see note 1 to our consolidated financial statements.
Product revenues are recorded when the earnings process is complete. This generally occurs when the products are shipped to the customer in accordance with the contract or purchase order, risk of loss and title has passed to the customer, collectability is reasonably assured and pricing is fixed and determinable. In instances where title does not pass to the customer upon shipment, we recognize revenue upon delivery or customer acceptance, depending on the terms of the sales contract.
Service revenues primarily consist of engineering activities and logistics related services, including revenue from oilfield rental equipment and services, are recorded when services are performed.
Revenues and costs under certain long-term contracts are recognized using contract accounting under the percentage-of-completion method in accordance with ASC 605-35, Construction-Type and Production-Type Contracts, with the majority of the contracts accounted for under the cost-to-cost method. Under the cost-to-cost method, the revenues related to the long-term contracts are recognized based on the ratio of actual costs incurred to total estimated costs to be incurred. We also use the units-of-delivery method to account for certain of our contracts. Under the units-of-delivery method, revenues are recognized based on the contract price of units delivered. The percentage-of-completion method requires the use of estimates of costs to complete long-term contracts. Due to the duration of these contracts as well as the technical nature of the products involved, the estimation of these costs requires management judgment in connection with assumptions and projections related to the outcome of future events. Management's assumptions include future labor performance and rates and projections relative to material and overhead costs, as well as the quantity and timing of product deliveries. We reevaluate our contract estimates periodically and reflect changes in estimates in the current period using the cumulative catch-up method. There were no significant changes in our contract estimates during 2013, 2012 or 2011 that resulted in material cumulative catch-up adjustments to operating earnings. Revenues associated with any contractual claims are recognized when it is probable that the claim will result in additional contract revenue and the amount can be reasonably estimated. Anticipated losses on contracts are recognized in the period in which the losses become evident and determinable. Advance payments and engineering development costs on certain long-term contracts are deferred and included in revenues and research, development and engineering, respectively, when the products are shipped. 35 --------------------------------------------------------------------------------
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current creditworthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. If the actual uncollected amounts significantly exceed the estimated allowance, our operating results would be significantly adversely affected. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Inventories We value our inventories at the lower of cost to purchase, using FIFO or weighted average cost method, or market. The inventory balance, which includes the cost of raw material, purchased parts, labor and production overhead costs, is recorded net of a reserve for excess, obsolete or unmarketable inventories. We regularly review inventory quantities on hand and record a reserve for excess, obsolete and unmarketable inventories based primarily on historical usage and on our estimated forecast of product demand and production requirements. In accordance with industry practice, costs in inventory include amounts relating to long-term contracts with long production cycles and to inventory items with long procurement cycles, some of which are not expected to be realized within one year. Demand for our products can fluctuate significantly. Our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess, obsolete and unmarketable inventories. In the future, if our inventories are determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventories are determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale.
Long-Lived Assets and Goodwill
Goodwill, identifiable intangible assets, net and property and equipment, net were
$1,571.0, $472.2, and $425.7and $1,484.2, $484.5and $302.9at December 31, 2013and 2012, respectively. To conduct our global business operations and execute our strategy, we acquire tangible and intangible assets, which affect the amount of future period amortization expense and possible impairment expense that we may incur. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. In accordance with ASC 350, Intangibles - Goodwill and Other ("ASC 350"), we assess potential impairment to goodwill of a reporting unit and to indefinite-lived intangible assets on an annual basis, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit or indefinite-lived intangible asset below its carrying amount. In accordance with ASC 360, Property, Plant, and Equipment, we assess potential impairment to long-lived assets (property and equipment and amortized intangible assets) when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Our judgment regarding the existence of impairment indicators and future cash flows related to intangible assets is based on operational performance of our acquired businesses, expected changes in the global economy, aerospace industry projections, discount rates and other judgmental factors. Future events could cause us to conclude that impairment indicators exist and that goodwill or other acquired tangible or intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have an adverse impact on our results of operations. As of December 31, 2013and 2012, management believes the estimated fair value of each of our reporting units with goodwill balances, our indefinite-lived intangible assets and each of our long-lived assets were substantially in excess of their carrying values. There were no indicators of goodwill or intangible asset impairment at December 31, 2013or 2012.
Accounting for Income Taxes
Significant management judgment is required in evaluating our tax positions and in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of
$31.1as of December 31, 2013, due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of our foreign net operating losses. The valuation allowance is based on our estimates of taxable income by jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates, or we revise these estimates in future periods, we may need to adjust the valuation allowance which could materially impact our financial position and results of operations. We have not provided for any residual U.S. income taxes on approximately $800of earnings from our foreign subsidiaries because such earnings are intended to be indefinitely reinvested. It is not practicable to determine the amount of U.S. income and foreign withholding tax payable in the event all such foreign earnings are repatriated. We have no current plans to repatriate cash or cash equivalents held by our foreign subsidiaries. 36 --------------------------------------------------------------------------------
Effect of Inflation
Inflation has not had and is not expected to have a significant effect on our operations.