1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 1-12380
----------
AVIALL, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 65-0433083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2075 DIPLOMAT DRIVE
DALLAS, TEXAS 75234-8999
(Address of principal executive offices) (Zip Code)
(972) 406-2000
(Registrant's telephone number, including area code)
Indicate by check [X] whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
--- ---
The number of shares of Common Stock, par value $.01 per share,
outstanding at May 4, 2001 was 18,483,726.
================================================================================
1
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AVIALL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
----------- -----------
Net sales $ 130,022 114,905
Cost of sales 100,548 87,640
----------- -----------
Gross profit 29,474 27,265
Operating and other expenses:
Selling and administrative expenses 22,675 21,355
Interest expense 2,296 2,101
----------- -----------
Earnings before income taxes 4,503 3,809
Provision for income taxes 1,801 1,626
----------- -----------
Net earnings $ 2,702 2,183
=========== ===========
Basic net earnings per share $ 0.15 0.12
Weighted average common shares 18,461,527 18,276,474
=========== ===========
Diluted net earnings per share $ 0.15 0.12
Weighted average common and potentially dilutive common shares 18,493,638 18,341,995
=========== ===========
See accompanying notes to consolidated financial statements.
2
3
AVIALL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------ ------
Net earnings $2,702 2,183
Other comprehensive loss:
Cumulative effect of change in accounting principle - adoption of SFAS 133
(net of income tax benefit of $165) 262 --
Fair value adjustment of derivative instruments (net of income tax benefit of $109) 171 --
------ ------
Comprehensive income $2,269 2,183
====== ======
See accompanying notes to consolidated financial statements.
3
4
AVIALL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 3,693 4,865
Receivables 85,608 83,395
Inventories 157,956 134,156
Prepaid expenses and other current assets 2,627 5,168
Deferred income taxes 9,723 9,723
-------- --------
Total current assets 259,607 237,307
-------- --------
Property, plant and equipment 19,707 17,389
Intangible assets 83,323 73,906
Deferred income taxes 61,090 62,576
Other assets 4,123 4,273
-------- --------
Total assets $427,850 395,451
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,278 9,025
Accounts payable 78,080 66,657
Accrued expenses 27,976 29,431
-------- --------
Total current liabilities 115,334 105,113
-------- --------
Long-term debt 100,994 81,397
Other liabilities 17,565 17,267
Commitments and contingencies -- --
-------- --------
Shareholders' equity (common stock of $.01 par value per share; 20,485,728
shares and 20,334,664 shares issued at March 31, 2001 and at December 31, 2000,
respectively; 18,483,726 shares and 18,332,662 shares outstanding at
March 31, 2001 and at December 31, 2000, respectively) 193,957 191,674
-------- --------
Total liabilities and shareholders' equity $427,850 395,451
======== ========
See accompanying notes to consolidated financial statements.
4
5
AVIALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,702 2,183
Depreciation and amortization 2,468 2,200
Deferred income taxes 1,759 1,338
Compensation expense on restricted stock awards 57 51
Changes in:
Receivables (2,213) (15,560)
Inventories (23,991) (6,831)
Accounts payable 11,423 5,899
Accrued expenses (1,455) (907)
Other, net 2,120 (603)
-------- --------
(7,130) (12,230)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of distribution rights (10,415) --
Capital expenditures (3,423) (505)
Sales of property, plant and equipment 5 10
-------- --------
(13,833) (495)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving credit facility 21,603 16,253
Debt repaid (1,753) (1,500)
Issuance of common stock (43) 330
Debt issue costs paid (16) (181)
Purchase of treasury stock -- (16)
-------- --------
19,791 14,886
-------- --------
Change in cash and cash equivalents (1,172) 2,161
Cash and cash equivalents, beginning of period 4,865 1,385
-------- --------
Cash and cash equivalents, end of period $ 3,693 3,546
======== ========
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 1,955 1,115
Income taxes $ 545 937
See accompanying notes to consolidated financial statements.
5
6
AVIALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, these financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended March 31, 2001 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2001. For further information,
refer to the consolidated financial statements and footnotes thereto included in
Aviall, Inc.'s Form 10-K for the year ended December 31, 2000.
NOTE 2 - SEGMENT INFORMATION
The following tables present information by operating segment (in
thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------
REVENUES (UNAUDITED) 2001 2000
--------- ---------
Parts Distribution $ 123,319 107,578
ILS 6,703 7,327
--------- ---------
Total revenue $ 130,022 114,905
========= =========
PROFIT (UNAUDITED)
Parts Distribution $ 6,597 4,258
ILS 2,541 3,500
--------- ---------
Reportable segment profit 9,138 7,758
Corporate (2,339) (1,848)
Interest expense (2,296) (2,101)
--------- ---------
Earnings before income taxes $ 4,503 3,809
========= =========
NOTE 3 - FINANCIAL INSTRUMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities", effective January 1, 2001, which requires companies to
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value.
The Company periodically enters into interest rate swap agreements as a
means to hedge its interest rate exposure on debt instruments. In addition, the
Company's credit facilities require the Company to enter into a hedging
arrangement to convert the Company's term loan floating interest rate to a fixed
rate. At March 31, 2001, the Company had two interest rate swap agreements
outstanding with an aggregate notional amount of $34 million. The swap
agreements effectively convert the Company's floating-rate debt to fixed-rate
debt through March 31, 2002. Under terms of these agreements, the Company pays
fixed interest rates of 6.87% and 7.02%, respectively, and receives floating
rates based on LIBOR.
Upon adoption of SFAS 133, the Company recorded the interest rate swap
agreements at fair value, which was a liability of $0.4 million, with offsets to
"Accumulated Other Comprehensive Earnings" in the equity section of the
consolidated balance sheet. Changes in the fair value of derivatives that do not
qualify as hedges will be recognized in earnings when they occur. Changes in the
fair value of derivatives that qualify as hedges will generally be recognized in
earnings in the same period as the item being hedged. During the quarter, the
Company recorded an additional $0.3 million liability as an adjustment to the
fair value of its interest rate swap agreements. Additionally, the Company
undertook an evaluation of the effectiveness of its interest rate swap
agreements and determined that no material ineffectiveness existed for the three
months ended March 31, 2001.
6
7
NOTE 4 - SUBSEQUENT EVENT
On May 4, 2001, the Company amended its bank credit facility to
increase the borrowing capacity on its revolving loan by $30 million, thereby
increasing the total revolving line of credit to $120 million and amending
certain financial covenants. Borrowings under the amended credit facilities bear
interest, at the option of the Company, based upon either of two floating-rate
options: the Eurodollar Rate plus an applicable margin ranging from 1.5% to
2.5%, depending upon certain of the Company's financial ratios, or the Base
Rate. The Base Rate is the higher of the agent bank's prime rate or the federal
funds rate plus 0.5%, plus an applicable margin ranging from 0.5% to 1.5%,
depending upon certain of the Company's financial ratios.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW. The following discussion and analysis should be read in conjunction
with the information set forth under Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations on pages 12 through 18
of Aviall, Inc.'s (the "Company") Annual Report on Form 10-K for the year ended
December 31, 2000.
RESULTS OF OPERATIONS-THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS
ENDED MARCH 31, 2000.
Net sales for the Aviall Services' business were $123.3 million, up $15.7
million or 14.6%, from the $107.6 million recorded in the same 2000 quarter. The
continued sharp sales growth was driven by stronger than anticipated core
business and higher Rolls-Royce Model 250 ("RR250") turbine engine line sales.
All major business segments and geographic regions posted increases except Latin
America which was down only slightly. ILS revenues were $6.7 million -- down
$0.6 million year-over-year. However, ILS continued to set new customer usage
records and showed signs of recovery from competitive loss-leader induced
pricing declines experienced in the comparable period last year.
Total Company gross profit of $29.5 million was $2.2 million higher
than the $27.3 million in the 2000 first quarter. Gross profit as a percentage
of sales of 22.7% reflected a stronger base of Rolls-Royce sales having a
slightly lower margin.
Selling and administrative expenses increased $1.3 million to $22.7
million in the first quarter of 2001 but decreased as a percentage of revenues
from 18.6% to 17.4%. The increase in selling and administrative expenses can be
attributed to a large degree to exchange losses incurred in Australian and
Canadian markets and planned increased technology infrastructure costs at both
ILS and Aviall Services and to a lesser degree to higher sales.
Interest expense was slightly higher than in the first quarter 2000
primarily due to increased debt levels required for the up-front inventory
purchases associated with the new Honeywell RR250 contract signed in December
2000.
The first quarter 2001 net earnings were $2.7 million or $0.15 per
share (diluted), compared to $2.2 million or $0.12 per share (diluted), as
reported last year in the first quarter.
FINANCIAL CONDITION. Cash flows from operations were a negative $7.1 million in
the first three months of 2001 and a negative $12.2 million in the comparable
2000 period. The negative operating cash flow resulted from increased working
capital investment for the new Honeywell RR250 contract in 2001 and the net
working capital investment for the RR250 product line in 2000.
The Company's cash income tax expense continues to be substantially
lower than the U.S. federal statutory rate due to the utilization of the large
U.S. federal net operating loss ("NOL"). The Company's cash tax expense is
primarily related to foreign taxes on foreign operations and U.S. federal
alternative minimum tax. For U.S. federal tax purposes as of December 31, 2000,
the Company had an estimated NOL carryforward of approximately $161.7 million,
substantially expiring in 2009-2011. Based on current and expected future
earnings levels, the NOLs may not be fully utilized for several years. If
certain substantial changes in the Company's ownership should occur, there would
be an annual limitation on the amount of the U.S. federal NOL carryforward that
can be utilized. The amount of the annual limitation can vary significantly
based on certain factors existing at the date of the change.
7
8
The Company believes that its expected cash flow from operations and
availability under its revolving lines of credit are sufficient to meet its
normal working capital and operating needs. On May 4, 2001, the Company amended
its bank credit facility to increase the borrowing capacity on its revolving
loan by $30 million, thereby increasing the total revolving line of credit to
$120 million and amending certain financial covenants. Borrowings under the
amended credit facilities bear interest, at the option of the Company, based
upon either of two floating-rate options: the Eurodollar Rate plus an applicable
margin ranging from 1.5% to 2.5%, depending upon certain of the Company's
financial ratios, or the Base Rate. The Base Rate is the higher of the agent
bank's prime rate or the federal funds rate plus 0.5%, plus an applicable margin
ranging from 0.5% to 1.5%, depending upon certain of the Company's financial
ratios.
NEW ACCOUNTING PRONOUNCEMENTS. The Company adopted the provisions of Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities", effective January 1, 2001, which
requires companies to recognize all derivatives as either assets or liabilities
and measure those instruments at fair value.
The Company periodically enters into interest rate swap agreements as a
means to hedge its interest rate exposure on debt instruments. In addition, the
Company's credit facilities require the Company to enter into a hedging
arrangement to convert the Company's term loan floating interest rate to a fixed
rate. At March 31, 2001, the Company had two interest rate swap agreements
outstanding with an aggregate notional amount of $34 million. The swap
agreements effectively convert the Company's floating-rate debt to fixed-rate
debt through March 31, 2002. Under terms of these agreements, the Company pays
fixed interest rates of 6.87% and 7.02%, respectively, and receives floating
rates based on LIBOR.
Upon adoption of SFAS 133, the Company recorded the interest rate swap
agreements at fair value, which was a liability of $0.4 million, with offsets to
"Accumulated Other Comprehensive Earnings" in the equity section of the
consolidated balance sheet. Changes in the fair value of derivatives that do not
qualify as hedges will be recognized in earnings when they occur. Changes in the
fair value of derivatives that qualify as hedges will generally be recognized in
earnings in the same period as the item being hedged. During the quarter, the
Company recorded an additional $0.3 million liability as an adjustment to the
fair value of its interest rate swap agreements. Additionally, the Company
undertook an evaluation of the effectiveness of its interest rate swap
agreements and determined that no material ineffectiveness existed for the three
months ended March 31, 2001.
OUTLOOK. Aviall primarily participates in the global aviation aftermarket
through Aviall Services and ILS. The Company's operations and results of
operations are affected by the general economic cycle, particularly as it
influences flight activity in commercial, business and general aviation. The
Company benefits from its participation in the global aviation aftermarket by
generating revenues from several national economies. Aviall serves a number of
customers in the Asia-Pacific and Latin American regions. During 1999, countries
in these regions experienced financial market volatility and the currencies of
certain countries fell in value relative to the U.S. dollar. These factors
reduced demand for air travel in the Asia-Pacific region in 1999, which
negatively impacted Aviall's sales in that region. Key Asian economies began a
slow recovery in late 1999 which accelerated sharply in 2000 and 2001 resulting
in the Company experiencing a positive revenue impact in that region. Continued
volatility in Latin America, compounded by significantly higher fuel prices, led
to financial difficulties for major air carriers in that region and
significantly hampered the general aviation business in Latin America.
Management believes the Company's results in 2001 have and will continue to
reflect financial stabilization in the Asia-Pacific region; however, volatility
in Latin America is expected to continue.
Commercial airlines in North America and Europe continue to effectively
manage their capacity by retiring older aircraft as new aircraft are delivered,
thereby limiting growth in demand for replacement parts. Management actively
continues to seek new sources of supply for airline products to expand Aviall's
growth in this segment, such as the recent contract signed with Honeywell for
cabin pressurization and air conditioning parts for aircraft maintained by
certain commercial and regional airlines.
8
9
Over the past twelve months, aviation operators have responded to
significantly higher fuel prices and resulting higher operating costs by
reducing inventories of new parts. Aviall first felt the impact from these
changes in the airline market, although general aviation operators have also
reacted by reducing flying activity and inventory levels. Management believes
Aviall Services' competitive strengths in service and availability position the
Company to benefit from the resumption in purchasing activity expected to occur
as key customers achieve inventory reduction targets. In addition, general
economic conditions tend to have a greater impact on aircraft original equipment
manufacturing than on the purchasing of aftermarket replacement parts. Despite
the challenges Aviall Services has faced in 2000 and into 2001, the Company was
able to grow through the addition of the RR250 product line and several new
Honeywell product lines, and the recapture of market share in its core North
American general aviation business.
Aviall Services' ability to manage its inventory is affected by the
relative efficiency of its suppliers and the inventory investments required to
secure new suppliers. Also, changes in Aviall Services' portfolio of products
and suppliers can result in periodic noncash charges to write-down inventory of
discontinued products.
Information and communication technology is evolving rapidly and
developments on the Internet could affect proprietary database companies such as
ILS and traditional distribution companies. Management believes that the active
deployment by the Company of these new innovative technologies in its website,
aviall.com, and ILS's website, ILSmart.com, will enable the Company to maintain
its technological leadership and minimize the risk of obsolescence. There are a
number of entrants in the e-commerce marketplace arena that are competing or are
expected to compete with ILS, including manufacturers, distributors and
independent companies. The Company recognizes that some of these entities are
significantly larger than ILS. Management believes a large number of these
entrants intend to focus on different segments of the global aviation parts
marketplace, and some may in fact be complementary to ILS.
The Company will relocate its corporate headquarters and Aviall
Services' main operation center to an expanded new state-of-the-art facility
located at Dallas/Fort Worth Airport. The Company signed a ten-year lease for
this facility that will commence upon completion of the building, which is
anticipated to occur in the fourth quarter 2001. The facility replaces various
Dallas facilities with lease expiration dates between 2001 and December 2003.
The Company will seek to sublease the various Dallas facilities with a lease
expiration date after December 31, 2001. The Company will incur a one-time cost
of approximately $2.0 million and could experience a short-term disruption in
Aviall Services' sales in connection with the warehouse relocation.
Aviall Services' capital expenditures for 2001 are expected to be
approximately $4.5 million on various system enhancements and $2.5 million
related to the new Dallas facility. System-related expenditures include the next
phase of the customer relationship module system, upgrades to the warehouse and
procurement software and further enhancements to the aviall.com website. The
Company believes the introduction of these system upgrades and enhancements will
continue to transform Aviall Services into the industry-leading, full-service,
technology-based supply-chain highway.
As a resource for its customers, ILS is in the implementation stage of
its ongoing program to evolve ILSmart.com into a full-service,
business-to-business electronic marketplace -- Contact to Contract(TM). The
plans include "Purchase On-line" customer catalogs, expanded electronic auction
sites and web-hosting for ILS subscribers. In 2001, ILS expects to incur an
additional $1.5 million in expenses and $8 million in capital expenditures to
implement the Contact to Contract(TM) strategy.
The Company has amended its revolving credit facility to increase the
revolving line of credit by $30 million in order to finance the working capital
requirements of its new aftermarket parts logistics agreements. Additionally,
Aviall is currently pursuing various other long-term aftermarket parts logistics
agreements and other strategic opportunities. In parallel, the Company is
actively engaged in efforts to expand its current debt structure to accommodate
the capital requirements for these accretive new revenue opportunities.
9
10
CERTAIN FORWARD-LOOKING STATEMENTS. This report contains certain forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) relating to the Company that are based on the beliefs of management
of the Company, as well as assumptions and estimates made by and information
currently available to the Company's management. When used in this report, the
words "anticipate," "believe," "estimate," "expect," "intend" and similar
expressions, as they relate to the Company or the Company's management, identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the operations and results of
operations of the Company as well as its customers and suppliers, including as a
result of competitive factors and pricing pressures, shifts in market demand,
fuel prices, general economic conditions and other factors including among
others, those that affect flight activity in commercial, business and general
aviation, the business activities of the Company's customers and suppliers,
parts sales under its long-term supplier agreements, and developments in
information and communications technology. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions or estimates prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has market risk exposure arising from changes in interest
rates and foreign exchange rates. The Company from time to time has used
financial instruments to offset such risks. Financial instruments are not used
for trading or speculative purposes. The Company has experienced no significant
changes in market risk during the first quarter of 2001. The Company's market
risk is described in more detail in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Amendment to Revolving Credit and Term Loan
Agreement, dated May 4, 2001, among Aviall, Inc. and
the financial institutions thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 2001.
10
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVIALL, INC.
May 10, 2001 By /s/ Jacqueline K. Collier
----------------------------
Jacqueline K. Collier
Vice President and Controller
Principal Accounting Officer
May 10, 2001 /s/ Cornelius Van Den Handel
----------------------------
Cornelius Van Den Handel
Vice President and Treasurer
Principal Financial Officer
11
12
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
10.1 Second Amendment to Revolving Credit and Term Loan Agreement,
dated May 4, 2001, among Aviall, Inc. and the financial
institutions thereto.
12