B/E Aerospace is a manufacturer of commercial and business jet interiors that is overleveraged with high debt levels. The company cannot cover interest payments with projected earnings given its 79% debt ratio. The recommendation is for B/E Aerospace to reduce debt by issuing $41 million in new equity shares and using $50 million in cash to achieve an optimal capital structure of 35% debt. This would lower the weighted average cost of capital and improve the company's financial stability.

1. B/E Aerospace Case Optimizing Capital Structure Team 1 Wednesday, February 10, 2010

2. Executive Summary Background Issues B/E is a manufacturer of commercial and business jet airplane interiors Post 9/11 Recovering industry High levels of uncertainty due to cyclical nature of industry Company is over levered with 79% Debt & 21% Equity Company cannot cover interest with projected earnings Current sales backlog of $615M Optimizing Capital Structure Recommendation Lowest WACC: 8.077% Optimal Capital Structure: 35% Debt/ 65% Equity Reduce debt with $50M cash on hand Issue equity for remainder Achieve capital structure of 35% Use tax carry forward of $175M 2

3. Agenda Situational analysis Current concerns Optimizing capital structure Recommendation Conclusion 3

6. Airline capacity and OEM production

7. Consumer habits

8. Combined industry annual sales

9. Commercial and business jets - $1.1B

10. Aerospace grade fastener - $1.2B

11. Competitors: Boeing, Britax, Zodiac, C&DDespite recent turmoil, the industry is recovering and outlook is bright. International Monetary Fund, World Economic Outlook Database, October 2009

12. Internal Analysis Growth through acquisitions Focus on R&D Manufacturer of commercial and business jet airplane cabin interiors and distributor of aerospace fasteners Broad product and services offering International presence BEAV Business Segments

14. Backlog Clearance

15. 2% Revenue Increase

16. Economic shock

17. No Backlog ClearedWorst case projections show revenues decreasing significantly. 6

18. 7 B/E Current Situation – Base Case Debt Ratio 79% WACC 8.93% WACC 8.93% Debt Ratio 79% Revenue Growth 10% Terminal Growth 5% Terminal growth 5% Revenue growth 10% B/E is unable to meet interest payments through earnings.

19. 8 B/E Current Situation – Worst Case Debt Ratio 79% WACC 8.93% WACC 8.93% Debt Ratio 79% Revenue growth (-8% ) yr 1 2% > yr 1 Terminal Growth 2% Terminal growth 5% Revenue growth 10% B/E cannot sustain another shock with current capital structure.

20. B/E Current Interest Payments 9 Interest payments are too high, making B/E’s current capital structure unsustainable.

21. Optimal Capital Structure Optimal Capital Structure – 35% Debt/ 65% Equity BEAV Current Capital Structure Currently, B/E is operating with a sub-optimal capital structure. There is room to reduce WACC. 10 See Appendix 1 for Calculation

22. B/E’s Debt Retirement Options 11 Any decisions made to retire debt should meet the following criteria: Using excess cash and equity is the optimal method of reducing debt. See Appendix 2a & 2b for assumptions and projected financials

23. 1. Reduce Debt with $50M Cash 12 Use $50M Excess Cash Current WACC 8.93% Total Equity 180M Total Debt 679M Debt Ratio 79% Debt Ratio 78% Total Equity 180M Total Debt 649M WACC 8.93% Terminal growth 5% Revenue growth 10% Projections

24. 1. Reduce Debt with $50M Cash 13 Base Conditions Worst Case EV is $ 1,722.44 EV is $ 1,077.85

25. Current 2. Reduce Debt by Issuing Equity 14 Raise $378M in Equity 44.5M Stocks @ $8.5 each WACC 8.93% Total Equity 180M Total Debt 679M Debt Ratio 79% Debt Ratio 35% Total Equity 558M Total Debt 300M WACC 8.08% Terminal growth 5% Revenue growth 10% Projections

26. 2. Reduce Debt by Issuing Equity 15 Base Conditions Worst Case EV is $ 2,115.35 EV is $ 1,186.29

27. 3. Reduce Debt Using Cash + Equity 16 Raise $348M in Equity 41.0M Stocks @ $8.5 each Current WACC 8.93% Total Equity 180M Total Debt 679M Debt Ratio 79% Debt Ratio 35% Total Equity 526M Total Debt 283M WACC 8.08% Terminal growth 5% Revenue growth 10% Projections

28. 3. Reduce Debt Using Cash + Equity 17 Base Conditions Worst Case EV is $ 2,115.35 EV is $ 1,186.29

29. Recommendation 18 Retire debt with cash and equity Decision Action Results Use excess cash and issue stock to reduce debt Issue 41M shares at $8.5 each Debt ratio 35% Using proceeds from stock issuance and excess cash will result in an immediate debt ratio reduction from 79% to 35%

30. Risks Dilution How will stock issuance affect share price? Underwriter fees 19

31. Alternative Options 20 Decrease Debt with with Retained Earnings Base Conditions Worst Case The net income for the projected years are negative; therefore, the accumulation of retained earnings is not a feasible option

32. Going forward Consider divesture of underperforming division (Business Jets) Buyer synergies Work to increase margins Reduce COGS & Reduce SG&A Increase plant capacity Will reach capacity by 2008 Direct R&D towards manufacturing processes 21

33. 22 Appendix

34. Appendix 1 - Optimal Capital Structure 23 WACC Calculation WACC Graph Used to determine beta unlevered

35. Appendix 2a: General Assumptions Tax Rate = 35% (2004 US Federal Rate)1 Debt Extinguishment Penalty = 0.59% (Historical) RD= 9.34% Tax Credit = 179 24 1. KPMG Corporate Tax Rate Survey – January 2004, KPMG

36. Appendix 2b:Snapshot of Projected Financials

37. 26 1. Reduce Debt Using $50M Cash - Base

38. 27 1. Reduce Debt Using $50M Cash - Worse

39. 28 2. Reduce Debt Using Cash+Equity - Base

40. 29 2. Reduce Debt Using Cash+Equity - Worse

41. 30 3. Issue New Equity - Base

42. 31 3. Issue New Equity - Worse