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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 SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD ENDED 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 November 6, 2000 was 18,332,662.
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AVIALL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 123,581 92,811 358,294 275,537
Cost of sales 95,611 68,528 274,338 202,603
------------ ------------ ------------ ------------
Gross profit 27,970 24,283 83,956 72,934
Operating and other expenses:
Selling and administrative expenses 21,553 18,907 64,827 55,574
Nonrecurring item -- 1,772 -- 1,772
Interest expense 2,096 889 6,403 2,405
------------ ------------ ------------ ------------
Earnings from continuing operations before income taxes 4,321 2,715 12,726 13,183
Provision for income taxes 1,596 1,171 5,294 5,471
------------ ------------ ------------ ------------
Earnings from continuing operations 2,725 1,544 7,432 7,712
Discontinued operations:
Gain on disposal (net of income tax expense of $77
in 2000 and $661 and $1,429 in 1999) -- 1,228 143 2,654
------------ ------------ ------------ ------------
Earnings from discontinued operations -- 1,228 143 2,654
------------ ------------ ------------ ------------
Net earnings $ 2,725 2,772 7,575 10,366
============ ============ ============ ============
Basic net earnings per share:
Earnings from continuing operations $ 0.15 0.08 0.41 0.42
Earnings from discontinued operations -- 0.07 0.01 0.15
------------ ------------ ------------ ------------
Net earnings $ 0.15 0.15 0.42 0.57
============ ============ ============ ============
Weighted average common shares 18,332,209 18,241,764 18,306,935 18,215,104
============ ============ ============ ============
Diluted net earnings per share:
Earnings from continuing operations $ 0.15 0.08 0.41 0.42
Earnings from discontinued operations -- 0.07 0.01 0.14
------------ ------------ ------------ ------------
Net earnings $ 0.15 0.15 0.42 0.56
============ ============ ============ ============
Weighted average common and potentially dilutive
common shares 18,337,171 18,590,107 18,337,143 18,538,951
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
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AVIALL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,007 1,385
Receivables 78,697 62,752
Inventories 119,329 107,562
Prepaid expenses and other current assets 1,999 2,424
Deferred income taxes 12,393 12,809
------------- ------------
Total current assets 216,425 186,932
------------- ------------
Property, plant and equipment 12,466 10,637
Intangible assets 69,444 72,902
Deferred income taxes 61,734 65,746
Other assets 4,285 4,423
------------- ------------
Total assets $ 364,354 340,640
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,354 8,811
Accounts payable 44,735 35,063
Accrued expenses 29,225 29,493
------------- ------------
Total current liabilities 82,314 73,367
------------- ------------
Long-term debt 77,650 69,200
Other liabilities 17,011 18,840
Commitments and contingencies -- --
------------- ------------
Shareholders' equity (common stock of $.01 par value per share; 20,334,664
shares and 20,272,596 shares issued at September 30, 2000 and at December 31,
1999, respectively; 18,332,662 shares and 18,272,596 shares outstanding
at September 30, 2000 and at December 31, 1999, respectively) 187,379 179,233
------------- ------------
Total liabilities and shareholders' equity $ 364,354 340,640
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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AVIALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 7,575 10,366
Gain on disposal of discontinued operations (143) (2,654)
Nonrecurring item -- 1,772
Depreciation and amortization 6,832 4,971
Compensation expense on restricted stock awards 152 97
Deferred income taxes 4,321 2,638
Changes in:
Receivables (15,945) (7,113)
Inventories (11,598) (9,854)
Accounts payable 9,672 284
Accrued expenses (269) (3,178)
Other, net (1,229) (2,230)
---------- ----------
(632) (4,901)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,931) (3,379)
Sales of property, plant and equipment 11 121
---------- ----------
(4,920) (3,258)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving credit facility 12,493 17,255
Debt repaid (4,500) (9,004)
Issuance of common stock 435 686
Debt issue costs paid (238) --
Purchase of treasury stock (16) --
---------- ----------
8,174 8,937
---------- ----------
Change in cash and cash equivalents 2,622 778
Cash and cash equivalents, beginning of period 1,385 3,136
---------- ----------
Cash and cash equivalents, end of period $ 4,007 3,914
========== ==========
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 5,692 2,260
Income taxes $ 1,844 1,259
</TABLE>
See accompanying notes to consolidated financial statements.
4
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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- and nine-
month periods ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. 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,
1999.
NOTE 2 - SEGMENT INFORMATION
The following tables present information by operating segment (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
REVENUES (UNAUDITED) 2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Parts Distribution $ 116,725 85,295 336,945 253,132
ILS 6,856 7,516 21,349 22,405
---------- ---------- ---------- ----------
Total revenue $ 123,581 92,811 358,294 275,537
========== ========== ========== ==========
PROFIT (UNAUDITED)
---------- ---------- ---------- ----------
Parts Distribution $ 4,843 2,619 14,460 9,147
ILS 3,092 4,222 9,930 12,726
---------- ---------- ---------- ----------
Reportable segment profit 7,935 6,841 24,390 21,873
Corporate (1,518) (1,465) (5,261) (4,513)
Interest expense (2,096) (889) (6,403) (2,405)
Nonrecurring item -- (1,772) -- (1,772)
---------- ---------- ---------- ----------
Earnings from continuing operations before income taxes $ 4,321 2,715 12,726 13,183
========== ========== ========== =========
</TABLE>
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
The Emerging Issues Task Force ("EITF") reached a consensus on Issue 00-10,
"Accounting for Shipping and Handling Revenues and Costs" ("EITF 00-10") that
all amounts billed to a customer related to shipping and handling represent
revenues earned for the goods provided and should be classified as revenue.
Additionally, the classification of shipping and handling costs is an accounting
policy decision that should be disclosed.
EITF 00-10 is required to be applied by no later than the fourth quarter of
fiscal years beginning after December 15, 1999. Accordingly, the Company will
reclassify comparative financial statements for all prior periods presented to
reflect the classification proscribed by EITF 00-10. The Company does not expect
the application of this consensus to have a significant net impact on the
consolidated financial statements.
5
<PAGE> 6
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 11 through 17
of Aviall, Inc.'s ("Aviall" or the "Company") Form 10-K for the year ended
December 31, 1999.
RESULTS OF OPERATIONS-THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1999. Net sales for the Parts Distribution business
were $116.7 million, up $31.4 million or 37%, from the $85.3 million recorded in
the same 1999 quarter. The continued successful implementation of the
Rolls-Royce product line drove most of this increase as all of the major
business segments and geographic regions posted increases. ILS revenues were
down 9% versus the prior year due to increased customer acceptance of ILS's
discount for full-year payment-in-advance pricing initiatives and pricing
actions by competitors.
Total Company gross profit of $28.0 million was $3.7 million higher than
the $24.3 million in the 1999 third quarter. Gross profit as a percentage of
sales of 22.6% reflected the lower margin anticipated with the full
incorporation of the Rolls-Royce business into Parts Distribution.
Selling and administrative expenses were 14%, or $2.6 million, higher
compared to the third quarter of 1999 but decreased as a percentage of revenues
from 20.4% to 17.4%. The increase in selling and administrative expenses was due
primarily to planned developmental expenses for new Internet initiatives,
incremental operational expenses for the new Rolls-Royce product line, and
currency translation losses.
Interest expense was higher than in the third quarter 1999 resulting from
higher rates and Rolls-Royce working capital requirements.
In the third quarter of 1999, a discontinued operations gain of $1.2
million was recorded due to changes in estimates for certain retained
liabilities.
The third quarter earnings from continuing operations were $2.7 million, or
$0.15 per share (diluted), compared to a reported $1.5 million, or $0.08 per
share (diluted), last year in the third quarter.
RESULTS OF OPERATIONS-NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1999. Net sales for the first nine months of 2000
were $358.3 million, an increase of $82.8 million or 30%, from the $275.5
million recorded in the same period of 1999. The implementation of the
Rolls-Royce product line was the single largest contributor to this increase as
all of the major business segments and geographic regions posted increases. ILS
revenues were down versus the prior year due to increased customer acceptance of
ILS's discount for full-year payment-in-advance pricing initiatives and pricing
actions by competitors.
Gross profit of $84.0 million was $11.0 million higher than the $72.9
million in the first three quarters of 1999. Gross profit as a percentage of
sales decreased as expected to 23.4% from 26.5% due to the addition of the
Rolls-Royce business.
Selling and administrative expenses increased $9.3 million to $64.8 million
in the first nine months of 2000. The increase was due primarily to planned
developmental expenses for new Internet initiatives, incremental operational
expenses for the new Rolls-Royce product line, and additional depreciation
relating to the new ERP system.
Interest expense was higher in the first three quarters of 2000 reflecting
the higher rates and increased Rolls-Royce working capital requirements.
Earnings from continuing operations for the first nine months of 2000 were
$7.4 million, or $0.41 per share (diluted), compared to a reported $7.7 million,
or $0.42 per share (diluted), last year in the first three quarters.
6
<PAGE> 7
FINANCIAL CONDITION. Cash flows from operations were a negative $0.6 million in
the first nine months of 2000 and a negative $4.9 million in the comparable 1999
period. The negative operating cash flow for the year 2000 resulted primarily
from increased working capital investments for the Rolls-Royce product line.
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, 1999, the Company
had an estimated NOL carryforward of approximately $167 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.
The Company is working to increase its borrowing capacity to fund the
recently announced agreement to purchase Superior Air Parts, Inc. (See
"Outlook").
OUTLOOK. Aviall primarily participates in the global aviation aftermarket
through its core aviation Parts Distribution and ILS businesses. The Company is
affected by the general economic cycle and fuel prices, particularly as they
influence flight activity in commercial, business and general aviation. The
Company's 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 the Company's portfolio of products and suppliers can result in
periodic noncash charges to write down inventory of discontinued products.
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 is actively
seeking new sources of supply for airline products to expand Aviall's growth in
this segment.
While the U.S. economy continues to be strong, aviation operators have
responded to significantly higher fuel prices and the resulting higher operating
costs by slowing their inventory purchases of new parts. The impact from these
changes was felt first in the airline market, although general aviation
operators have also reacted by reducing flying activity and inventory levels.
Management still believes that Aviall's competitive strengths in service and
availability position the Company to benefit from the resumption in purchasing
activity that is expected to occur as key customers achieve inventory reduction
targets.
Information and communication technology is evolving rapidly and
developments on the Internet could affect proprietary database companies, such
as ILS, as well as traditional distribution businesses, such as Parts
Distribution. Management believes that the active deployment by the Company of
new innovative technologies in their websites, AVIALL.COM and ILSMART.COM, will
enable the Company to maintain its technological leadership and minimize the
risk of obsolescence. ILS expects to further partner with various companies in
further developing the ILS e-commerce capabilities. The Company recognizes that
there are a number of entrants in the e-commerce marketplace arena that compete
with ILS, including manufacturers, distributors and independent companies.
The Company has extended one of its existing Dallas warehouse leases for
one year and the second lease for a period of three years. The Company is
continuing to evaluate whether to relocate its Dallas warehouse in 2001. If
management decides to relocate this facility, the Company will incur a one-time
cost of approximately $2.0 million and could experience a short-term disruption
in Parts Distribution sales in connection with the relocation.
In 2000, the Company expects to spend approximately $4 million in Parts
Distribution to enhance AVIALL.COM to a full service web-based order management
system for both customers and suppliers, and implement a new customer
relationship module ("CRM") into Parts Distribution's standard order management
system. Aviall intends to expand AVIALL.COM services and functionality,
including transforming the e-catalog into a highly searchable database and
utilizing supplier technical information and customer data to develop additional
value-added OEM-to-customer supply chain features. The CRM system enhancement is
aimed at creatively making the customer interface very friendly and service
oriented.
In addition, the Parts Distribution business has enhanced its sales
coverage model through improved organization, training and recruitment of the
Company's sales professionals. The Company believes the introduction of the new
processes and system will raise productivity and increase the flow of
information regarding product performance, sales activities and customer
feedback. The Company expects to incur up to $1.5 million in expenses in 2000
related to enhancements to the sales coverage model and start-up expenses for
the new CRM software.
7
<PAGE> 8
ILS has advanced rapidly with its development initiatives to offer
ILSMART.COM as a full transaction management resource for its customers. The
plans include an advanced "Purchase On-line" customer catalog product, an
expanded on-line Surplus Sales Auction site, and web-hosting for ILS customers.
During 2000, ILS expects to incur an additional $3 million in expenses and $6
million in capital expenditures to complete the first phase of its Contact to
Contract(tm) strategy.
In October 2000, the Company announced that it had entered into an
agreement to acquire Superior Air Parts, Inc. ("Superior") for $43 million in
cash, subject to financing and other customary conditions. The Company has
received early termination of the waiting period under the Hart-Scott-Rodino
process. In order to fund the purchase price for Superior, Aviall is working to
expand its existing credit facility and obtain subordinated debt to increase
its borrowing capacity from approximately $130 million to $160 million. The
Company believes it may take until the middle of the first quarter of 2001 to
obtain the required financing. The current owners of Superior have the right to
terminate the transaction at any time after November 15, 2000 if approval for
the increased borrowing capacity has not been obtained. The Company expects
interest expense to increase under the expanded facility due to increased
interest rate spreads and the additional borrowings. Superior's 2000 sales are
estimated to be approximately $50 million and are estimated to generate an
EBITDA of approximately $7 million before any potential savings have been
implemented.
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 the
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,
the new Rolls-Royce distribution agreement, success in renegotiating its credit
facility, integrating Superior into the Company's operations, general economic
conditions and other factors including among others, those that effect flight
activity in commercial, business and general aviation, the business activities
of the Company's customers and suppliers and developments in information and
communication 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 nine months of 2000. 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, 1999.
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
8
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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.
November 8, 2000 By /s/ Jacqueline K. Collier
-----------------------------------
Jacqueline K. Collier
Vice President and Controller
Principal Accounting Officer
November 8, 2000 /s/ Cornelius Van Den Handel
-----------------------------------
Cornelius Van Den Handel
Vice President and Treasurer
Principal Financial Officer
9
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- ------------------------------------------------------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
