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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 JUNE 30, 2000
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 August 4, 2000 was 18,332,662.
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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 Six months ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 120,750 95,318 234,713 182,726
Cost of sales 92,269 70,753 178,727 134,075
----------- ----------- ----------- -----------
Gross profit 28,481 24,565 55,986 48,651
Operating and other expenses:
Selling and administrative expenses 21,679 18,457 43,274 36,667
Interest expense 2,206 796 4,307 1,516
----------- ----------- ----------- -----------
Earnings from continuing operations before income taxes 4,596 5,312 8,405 10,468
Provision for income taxes 2,072 2,230 3,698 4,300
----------- ----------- ----------- -----------
Earnings from continuing operations 2,524 3,082 4,707 6,168
Discontinued operations:
Gain on disposal (net of income tax expense of $77 in
2000 and $768 in 1999) 143 1,426 143 1,426
----------- ----------- ----------- -----------
Earnings from discontinued operations 143 1,426 143 1,426
----------- ----------- ----------- -----------
Net earnings $ 2,667 4,508 4,850 7,594
=========== =========== =========== ===========
Basic net earnings per share:
Earnings from continuing operations $ 0.14 0.17 0.26 0.34
Earnings from discontinued operations 0.01 0.08 0.01 0.08
----------- ----------- ----------- -----------
Net earnings $ 0.15 0.25 0.27 0.42
=========== =========== =========== ===========
Weighted average common shares 18,311,844 18,211,120 18,294,159 18,201,197
=========== =========== =========== ===========
Diluted net earnings per share:
Earnings from continuing operations $ 0.14 0.17 0.26 0.33
Earnings from discontinued operations 0.01 0.07 0.01 0.08
----------- ----------- ----------- -----------
Net earnings $ 0.15 0.24 0.27 0.41
=========== =========== =========== ===========
Weighted average common and potentially dilutive
common shares 18,331,984 18,554,391 18,336,990 18,512,795
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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AVIALL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,240 1,385
Receivables 78,035 62,752
Inventories 116,379 107,562
Prepaid expenses and other current assets 1,521 2,424
Deferred income taxes 12,393 12,809
-------- --------
Total current assets 214,568 186,932
-------- --------
Property, plant and equipment 10,558 10,637
Intangible assets 70,604 72,902
Deferred income taxes 62,929 65,746
Other assets 4,333 4,423
-------- --------
Total assets $362,992 340,640
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,460 8,811
Accounts payable 42,065 35,063
Accrued expenses 29,100 29,493
-------- --------
Total current liabilities 79,625 73,367
-------- --------
Long-term debt 81,500 69,200
Other liabilities 17,369 18,840
Commitments and contingencies -- --
-------- --------
Shareholders' equity (common stock of $.01 par value per share; 20,313,846
shares and 20,272,596 shares issued at June 30, 2000 and at December 31,
1999, respectively; 18,311,844 shares and 18,272,596 shares outstanding at
June 30, 2000 and at December 31, 1999, respectively) 184,498 179,233
-------- --------
Total liabilities and shareholders' equity $362,992 340,640
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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AVIALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
2000 1999
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 4,850 7,594
Gain on disposal of discontinued operations (143) (1,426)
Depreciation and amortization 4,503 3,228
Compensation expense on restricted stock awards 101 111
Deferred income taxes 3,141 3,263
Changes in:
Receivables (15,283) (7,028)
Inventories (8,710) (11,530)
Accounts payable 7,002 7,796
Accrued expenses (394) (6,435)
Other, net (306) (659)
-------- --------
(5,239) (5,086)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,969) (1,748)
Sales of property, plant and equipment 10 61
-------- --------
(1,959) (1,687)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving credit facility 14,949 11,408
Debt repaid (3,000) (6,004)
Issuance of common stock 330 536
Debt issue costs paid (210) --
Purchase of treasury stock (16) --
-------- --------
12,053 5,940
-------- --------
Change in cash and cash equivalents 4,855 (833)
Cash and cash equivalents, beginning of period 1,385 3,136
-------- --------
Cash and cash equivalents, end of period $ 6,240 2,303
======== ========
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 2,869 1,423
Income taxes $ 1,186 933
</TABLE>
See accompanying notes to consolidated financial statements.
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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 six-
month periods ended June 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 Six months ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues (Unaudited)
Parts Distribution $ 113,584 87,811 220,220 167,837
ILS 7,166 7,507 14,493 14,889
--------- --------- --------- ---------
Total revenue $ 120,750 95,318 234,713 182,726
========= ========= ========= =========
Profit (Unaudited)
Parts Distribution $ 5,359 3,186 9,617 6,528
ILS 3,338 4,240 6,838 8,504
--------- --------- --------- ---------
Reportable segment profit 8,697 7,426 16,455 15,032
Corporate (1,895) (1,318) (3,743) (3,048)
Interest expense (2,206) (796) (4,307) (1,516)
--------- --------- --------- ---------
Earnings from continuing operations before income taxes $ 4,596 5,312 8,405 10,468
========= ========= ========= =========
</TABLE>
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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 16
of Aviall, Inc.'s (the "Company") Form 10-K for the year ended December 31,
1999.
RESULTS OF OPERATIONS-THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS
ENDED JUNE 30, 1999. Net sales for the Parts Distribution business were $113.6
million, up $25.8 million or 29%, from the $87.8 million recorded in the same
1999 quarter. The continued successful implementation of the Rolls-Royce product
line drove this increase as most of the major business segments and geographic
regions posted increases in Parts Distribution despite continuing indications of
weakness in the domestic aviation marketplace owing to higher fuel prices and
tighter managed capacity by many airlines. ILS revenues were down slightly
versus the prior year due to increased competition. However, subscriber accesses
were at an all-time high.
Total Company gross profit of $28.5 million was $3.9 million higher than
the $24.6 million in the 1999 second quarter. Gross profit as a percentage of
sales of 23.6% reflected the lower margin anticipated with the full
incorporation of the Rolls-Royce business into Parts Distribution.
Selling and administrative expenses increased $3.2 million to $21.7 million
in the second quarter of 1999 as expected, but decreased as a percentage of
revenues from 19.4% to 18.0%. The increase in selling and administrative
expenses was due primarily to planned development expenses for new Internet
initiatives at both ILS and Parts Distribution, incremental operational expenses
for the new Rolls-Royce product line, and additional depreciation relating to
the new ERP system.
Interest expense was higher than in the second quarter 1999 resulting from
higher interest rates and the increased borrowings primarily due to Rolls-Royce
working capital requirements.
A gain in discontinued operations resulted from revised estimates for
retained liabilities. In the second quarter of 2000 the gain was due to revised
insurance estimates, while in the second quarter of 1999 the gain was primarily
due to revised sales and use tax reserve estimates.
The second quarter net earnings from continuing operations were $2.5
million, or $0.14 per share (diluted) compared to a reported $3.1 million, or
$0.17 per share (diluted) last year in the second quarter.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1999. Net sales for the first half of 2000 were $234.7 million,
an increase of $52.0 million or 28.5%, from the $182.7 million recorded in the
same half of 1999. The implementation of the Rolls-Royce product line drove this
increase as most major business segments and geographic regions posted increases
owing to higher fuel prices and tighter managed capacity by many airlines. ILS
revenues were down slightly versus the prior year due to increased competition.
However, subscriber accesses were at an all-time high.
Gross profit of $56.0 million was $7.3 million higher than the $48.7
million in the first half of 1999. Gross profit as a percentage of sales
decreased as expected to 23.9% from 26.7% due, principally, to the addition of
the Rolls-Royce business.
Selling and administrative expenses increased $6.6 million to $43.3 million
in the first half of 2000. The increase was due primarily to planned development
expenses for new Internet initiatives at both ILS and Parts Distribution,
incremental operational expenses for the new Rolls-Royce product line, and
additional depreciation relating to the new ERP system.
Interest expense was higher than in the first half of 2000 reflecting
higher interest rates and increased borrowings primarily due to Rolls-Royce
working capital requirements.
First half of 2000 net earnings from continuing operations were $4.7
million, or $0.26 per share (diluted), compared to a reported $6.2 million, or
$0.33 per share (diluted), last year in the first half.
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FINANCIAL CONDITION. Cash flows from operations were a negative $5.2 million in
the first six months of 2000 and a negative $5.1 million in the comparable 1999
period. The negative operating cash flow in 2000 resulted from increased working
capital investment for the Rolls-Royce product line offsetting favorable
earnings.
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 believes that its expected cash flow from operations and
borrowings under its revolving line of credit are sufficient to meet its current
working capital and operating needs. The Company increased its revolving line of
credit in late 1999 to fund the up-front fees and working capital needs due to
the new contract with Rolls-Royce.
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, particularly as it influences flight
activity in commercial, business and general aviation.
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. In response, Management
is actively seeking new sources of supply for airline products and increased
participation in spare parts replacements on new aircraft to expand Aviall's
growth in this segment.
While a strong domestic economy continues into 2000, all aviation operators
began to respond to significantly higher fuel prices and resulting higher
operating costs by reducing inventories of new parts. 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.
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.
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. There are a number of new entrants, including manufacturers,
distributors and independent companies, in the e-commerce marketplace arena that
are competing for parts reselling services with ILS and new parts distribution
support services with Parts Distribution. The Company, recognizing its
customers' success drivers, has embarked upon new innovative, technological
development initiatives including major enhancements to its websites, aviall.com
and ILSmart.com, sales system upgrades, operating infrastructure improvements,
and implementation of customized services for both suppliers and end-customers.
Management believes that the active deployment by the Company of these new
innovative technologies will enable the Company to maintain its technological
leadership and minimize the risk of obsolescence.
The Company's existing Dallas warehouse lease was to have expired in the
fourth quarter of 2000. Short-term lease extensions were signed or being
negotiated with the anticipation of being signed near term while the Company
evaluates options associated with the location of the Dallas warehouse. If
management decides to relocate this facility, the Company will incur a one-time
cost of approximately $2.5 million and could experience a short-term disruption
in Parts Distribution sales in connection with the relocation. Due primarily to
site availability, a relocation would not be expected to occur until mid-2001.
In the second half of 2000, the Company expects to spend approximately $3.5
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
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value-added OEM-to-customer supply chain features. The CRM system enhancement is
aimed at creatively making the customer interface easier to use and more service
oriented.
In addition, as mentioned previously, 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 system will raise productivity and increase the flow of
information regarding product performance, sales activities and customer
feedback. The Company expects to incur additional SG&A expenses of up to $1
million in the second half of 2000 related to start-up costs for the new CRM and
aviall.com initiatives.
ILS has advanced rapidly its development initiatives to position
ILSmart.com as a full transaction management resource for its customers. These
initiatives include an advanced "Purchase On-line" customer catalog product, an
expanded on-line Surplus Sales Auction site and web-hosting. During the second
half of 2000, ILS expects to incur an additional $2 million in expenses and $4
million in capital expenditures to bring its Contact to Contract(tm) strategy to
fruition.
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,
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 half 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 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 28, 2000, at
which meeting the stockholders took action with respect to three proposals, (i)
the election of Paul E. Fulchino to serve as a director of the Company for a
term expiring at the Company's 2003 Annual Meeting of Stockholders, (ii) the
approval of an amendment to the Aviall, Inc. 1998 Stock Incentive Plan and (iii)
the ratification of the appointment of PricewaterhouseCoopers LLP to serve as
independent auditors for the Company and its subsidiaries for the fiscal year
ending December 31, 2000.
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The number of votes cast for, against or withheld, as well as the number of
abstentions as to each proposal is set forth below. There were no broker
non-votes with respect to any of the proposals.
Election of Director
<TABLE>
<CAPTION>
For Against Abstain
---------- --------- -------
<S> <C> <C> <C>
Paul E. Fulchino 16,046,684 837,367 0
</TABLE>
Approval of Amendment to the Aviall, Inc. 1998 Stock Incentive Plan
<TABLE>
<CAPTION>
For Against Abstain
---------- --------- -------
<S> <C> <C> <C>
11,764,892 5,076,086 43,073
</TABLE>
Ratification of Selection of Independent Auditors
<TABLE>
<CAPTION>
For Against Abstain
---------- --------- -------
<S> <C> <C> <C>
16,168,794 695,969 19,288
</TABLE>
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.
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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.
August 9, 2000 By /s/ Jacqueline K. Collier
-----------------------------
Jacqueline K. Collier
Vice President and Controller
Principal Accounting Officer
August 9, 2000 /s/ Cornelius Van Den Handel
----------------------------
Cornelius Van Den Handel
Vice President and Treasurer
Principal Financial Officer
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INDEX TO EXHIBITS
<TABLE>
Exhibit
Number Description
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
