SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No. 0-13829
September 30, 2000
PEMCO AVIATION GROUP, INC.
(FORMERLY PRECISION STANDARD, INC.)
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-0985295
---------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1943 North 50th Street
Birmingham, Alabama 35212
-------------------------------------
(Address of Principal Executive Offices)
(205) 591-3009
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark 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 outstanding of each of the issuer's classes of common
stock, as of the last practicable date:
CLASS OF SECURITIES OUTSTANDING SECURITIES
------------------- ----------------------
$.0001 Par Value 4,027,815 shares
Common Shares Outstanding November 10, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
-------
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------- ---------
<S> <C> <C>
Current assets:
Cash $ 0 $ 527
Accounts receivable, net 16,134 21,131
Inventories 15,723 17,035
Prepaid expenses and other 898 763
Deferred taxes 4,117 3,000
-------- --------
Total current assets 36,872 42,456
Property, plant and equipment,
at cost:
Leasehold improvements 14,809 12,634
Machinery and equipment 24,299 19,780
-------- --------
Less accumulated depreciation (23,236) (20,858)
-------- --------
Net property, plant
and equipment 15,872 11,556
-------- --------
Other non-current assets:
Prepaid pension costs 867 1,780
Intangible assets, net 100 225
Deposits and other 1,171 1,386
-------- --------
2,138 3,391
-------- --------
Total assets $ 54,882 $ 57,403
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------- ---------
<S> <C> <C>
Current liabilities:
Current portion of debt $ 7,437 $15,104
Accounts payable and accrued
Expenses 31,636 34,970
------- -------
Total current liabilities 39,073 50,074
Long-term debt 4,514 4,168
Other long-term liabilities 3,021 3,023
------- -------
Total liabilities 46,608 57,265
------- -------
Stockholders' equity:
Common stock, $.0001 par value,
12,000,000 shares authorized,
4,027,815 and 3,978,137 shares
issued and outstanding at
September 30, 2000 and December 31,
1999, respectively 1 1
Additional paid-in capital 5,054 4,769
Retained earnings (deficit) 3,219 (4,632)
------- -------
Total stockholders' equity 8,274 138
------- -------
Total liabilities and
stockholders' equity $54,882 $57,403
======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Net sales $40,363 $45,891
Cost of sales 32,416 36,944
------- -------
Gross profit 7,947 8,947
Selling, general and
administrative expenses 4,957 5,484
------- -------
Income from operations 2,990 3,463
Other expense:
Interest 566 825
Other (income), net (127) 801
------- -------
Income before income
Taxes 2,551 1,837
Provision for income taxes 952 50
------- -------
Net income $ 1,599 $ 1,787
======= =======
Net income per common share:
Basic $0.40 $0.45
Diluted $0.37 $0.43
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Net sales $127,539 $125,494
Cost of sales 103,213 100,048
-------- --------
Gross profit 24,326 25,446
Selling, general and
administrative expenses 15,265 14,860
-------- --------
Income from operations 9,061 10,586
Other expense:
Interest 2,018 2,447
Other, net 16 1,343
-------- --------
Income before income
taxes 7,027 6,796
Provision (credit) for income taxes (824) 230
-------- --------
Net income $ 7,851 $ 6,566
======== ========
Net income per common share:
Basic $1.96 $1.65
Diluted $1.85 $1.61
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
--------------------------------------
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,851 $ 6,566
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 2,378 1,917
Deferred taxes (1,117) 0
Pension cost in excess of
Funding 913 913
Intangible assets, net 125 0
Changes in assets and liabilities:
Accounts receivable, net 4,997 (2,120)
Inventories 1,312 (4,896)
Prepaid expenses and other (135) (202)
Deposits and other 215 (118)
Other long-term liabilities (2) 0
Accounts payable and accrued
expenses (3,334) 4,532
------ ------
Total adjustments 5,352 26
------ ------
Net cash provided by
operating activities 13,203 6,592
------ ------
Cash flows from investing
activities:
Capital expenditures (6,694) (2,223)
------ ------
Net cash used in investing
activities (6,694) (2,223)
------ ------
Cash flows from financing
activities:
Net (repayments) under
revolving credit facility (5,392) (1,715)
Repayments under Sr. subordinated
debt (1,230) 0
Net repayments under short-term
obligations (699) (1,094)
Proceeds from exercise of
stock options 285 0
Net cash used in
financing activities (7,036) (2,809)
------ ------
Net increase (decrease) in
Cash (527) 1,560
Cash beginning of period 527 193
------ ------
Cash end of period $ 0 $ 1,753
====== ======
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest $ 2,018 $ 2,447
Income taxes $ 284 $ 230
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated interim financial statements have been prepared by
the Company without audit. In the opinion of management, all
adjustments necessary for a fair presentation are reflected in the
interim financial statements. Such adjustments are of a normal and
recurring nature. The results of operations for the period ended
September 30, 2000 are not necessarily indicative of the operating
results expected for the full year. The interim financial statements
should be read in conjunction with the audited financial statements
and notes thereto included in the Company's 1999 Annual Report on
Form 10-K.
2. INVENTORIES
Inventories of the Company consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Work in-process $27,211 $31,335
Finished goods 3,157 3,365
Raw materials and supplies 2,499 2,704
------- -------
Total $32,867 $37,404
Less progress payments
and customer deposits (17,144) (20,369)
------- -------
$15,723 $17,035
======= =======
</TABLE>
3. NET INCOME PER SHARE
Basic Earnings Per Share ("EPS") was computed by dividing net income
by the weighted average number of shares of common stock outstanding
during the periods. Diluted EPS was computed by dividing net income
by the weighted average number of shares of common stock and the
dilutive effects of the shares awarded under the Company's Stock
Option Plan, based on the treasury stock method using an average fair
market value of the stock during the respective periods.
The following table represents the net income per share calculations
for the three and nine months ended September 30, 2000 and 1999:
(All numbers in thousands except Income Per Share)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
<S> <C> <C>
2000
Net Income $1,599 $ 7,851
Weighted Average Shares 4,023 4,006
Basic Net Income Per Share .40 1.96
Dilutive securities:
Options 273 229
Diluted Weighted Average Shares 4,296 4,235
Diluted Net Income Per Share .37 1.85
1999
Net income $1,787 $ 6,566
Weighted Average Shares 3,978 3,978
Basic Net Income Per Share .45 1.65
Dilutive Securities:
Options 174 110
Diluted Weighted Average shares 4,152 4,088
Diluted Net Income Per Share .43 1.61
</TABLE>
Options to purchase approximately 46,000 and 125,000 shares of common
stock related to September 30, 2000 and 1999, respectively were
excluded from the computation of diluted income per share because the
option exercise price was greater than the average market price of
the shares.
4. NOTES PAYABLE
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revolving credit facility $ 6,387 $11,779
Senior Subordinated Loan
interest at 13.5% 4,920 6,150
Other obligations: interest
from 9.1% to 14.5%, collateralized
by security interests in
certain equipment 644 1,343
------ -------
Total debt 11,951 19,272
Less portion reflected
as current 7,437 15,104
------ -------
Long term debt, net of
current portion $4,514 $ 4,168
====== =======
</TABLE>
During 2000 the Company has maintained a $20.0 million revolving
credit facility which matures on August 31, 2001. Borrowing
availability under the facility is tied to percentages of accounts
receivable and inventory and, as a result of certain subordination
provisions, cannot exceed $17.0 million. There was $6.5 million
available under the credit facility at September 30, 2000, based on
the calculation which defines the borrowing base. Interest on the
revolving credit facility accrues at prime rate plus 3.5% with
provisions for both reductions in the interest rate based on specific
operating performance targets and increases related to certain events
of default.
On November 2, 2000, the Company entered into new credit facilities
which will be used to pay off and terminate the existing facility.
The new facilities consist of a $20.0 million revolving credit
facility, two term loans totaling $5.0 million in the aggregate, and
a capital equipment acquisition facility of $3.1 million. At the
Company's option, subject to meeting certain pre-defined conditions
and obtaining the lender's approval, it may borrow an additional $1.9
million as a discretionary loan. The new facilities have an initial
three-year term, which term may be extended for up to two additional
one-year periods upon mutual agreement of the parties. The revolving
credit facility, the capital equipment acquisition facility and one
of the term loans ($2.9 million) bear interest at prime rate plus
0.5%. The other term loan ($2.1 million) and the discretionary loan
bear interest at prime rate plus 0.75%.
The Company has the option, prior to December 31, 2001, to convert up
to $1.9 million of the revolving credit facility into additional
availability under the capital equipment facility, bringing its total
up to $5.0 million, or to fold the $3.1 million capital equipment
facility into the revolving credit facility, bringing its total up to
$23.1 million. Borrowing availability under the revolving credit
facility is tied to percentages of eligible accounts receivable and
inventory. Under the capital equipment facility, borrowing
availability is tied to a percentage of the value of certain capital
assets acquired since January 1, 2000 and capital assets that are
acquired in the future. All of the new facilities have provisions
for increases in the interest rate during any period when an event of
default exists.
The $2.1 million term loan will be repaid over 24 installments
commencing on November 30, 2000. The $2.9 million term loan will be
repaid based on a 5-year amortization schedule commencing on November
30, 2002 with a balloon payment of the remaining balance upon the
termination of the credit facility. Upon the Company borrowing the
entire amount of the available capital equipment acquisition facility
or on October 31, 2001, which ever occurs first, the Company will
commence repayment of the amounts borrowed based on a 5-year
amortization schedule with a balloon payment of the remaining balance
upon the termination of the credit facility. The discretionary loan,
if borrowed, will be repaid commencing the month after it is borrowed
based on 24 installments with a balloon payment of the remaining
balance upon the termination of the credit facility.
The Company's Senior Subordinated Debt is being repaid over five
equal quarterly installments which commenced on August 31, 2000, with
a final payment due on June 30, 2001.
The above loans are collateralized by substantially all of the assets
of the Company and have various covenants which limit or prohibit the
Company from incurring additional indebtedness, disposing of assets,
merging with other entities, declaring dividends, or making capital
expenditures in excess of certain amounts in any fiscal year.
Additionally, the Company is required to maintain various financial
ratios and minimum net worth amounts.
5. CONTINGENCIES
United States Government Contracts
The Company, as a U.S. Government contractor, is subject to audits,
reviews, and investigations by the government related to its
negotiation and performance of government contracts and its
accounting for such contracts. Failure to comply with applicable
U.S. Government standards by a contractor may result in suspension
from eligibility for award of any new government contract and a
guilty plea or conviction may result in debarment from eligibility
for awards. The government may, in certain cases, also terminate
existing contracts, recover damages, and impose other sanctions and
penalties. The Company believes, based on all available information,
that the outcome of any U.S. Government audits, reviews, and
investigations will not have a materially adverse effect on the
Company's consolidated results of operations, financial position, or
cash flows.
LITIGATION
Pemco World Air Services A/S Bankruptcy and Sterling Lawsuit
The Company has been involved in certain bankruptcy litigation since
1997 relating to the Company's Danish subsidiary, Pemco World Air
Services A/S (Pemco World). As previously reported, during the
quarter ended June 30, 2000 the Company made the $2.25 million of
escrow payments called for in its March 28, 2000 settlement agreement
with Sterling Airways A/S and the bankruptcy trustees of Pemco World.
The escrowed amounts could only be released to the trustees upon
their satisfaction of certain conditions. These conditions included,
among other things, that the trustees must obtain releases from all
of the Danish subsidiary's unsecured creditors that are asserting
claims in excess of $100,000 on or before October 5, 2000.
On October 4, 2000 the Company received notice from the bankruptcy
trustees that they had received releases from all of the Pemco
World's unsecured creditors that were asserting claims in excess of
$100,000 and that the trustees had no knowledge of written claims, or
demands for payment, or threats of litigation against the Company
from the remaining unsecured creditors. Based upon this notification,
on October 19, 2000, the Company released the $2.25 million held in
the escrow account. The Company has adopted a wait and see approach
as to the possible actions, if any, of the remaining unsecured
creditors whose claims were under $100,000 and who were not required
to affirmatively release the Company prior to release of the escrowed
funds. The Company will vigorously defend any claim brought by
creditors of the Danish subsidiary not released in connection with
the settlement agreement.
Government Lawsuit
On October 13, 1998, the Company filed a complaint in the U.S.
District Court, Northern District of Alabama seeking to compel the
United States Air Force to reopen for competition a KC-135 PDM
contract awarded to the McDonnell Douglas subsidiary of Boeing and
to enforce the General Accounting Office (GAO) decision in favor of
the Company which stated that the manner in which the contract was
put up for bids violated the Competition in Contracting Act by
unduly restricting competition. On October 5, 1999, the Court
issued a summary judgment in favor of McDonnell Douglas. While the
Company continues to believe that the GAO correctly decided the
issue, it determined that pursuing the complaint further was not
necessarily in its best interests. Accordingly, in the interest of
promoting a better relationship with one of its primary customers,
the Company filed a motion for dismissal with the court to end this
litigation. The motion was granted on July 7, 2000.
GATX Lawsuit
The Company's Pemco Aeroplex subsidiary, successor to Hayes
International, is a defendant in several suits seeking damages and
indemnity for claims arising from an Airworthiness Directive issued
by the FAA. That Directive restricts the cargo capacity of Boeing
747 aircraft converted pursuant to a Supplemental Type Certificate
(STC) for such conversions. Hayes International had performed
engineering for the development of the STC. Certain of the suits
also allege fraud, misrepresentation and violations of the
Racketeer Influenced and Corrupt Organizations Act. During the
third quarter of 2000 the parties involved in the dispute came to
an agreement on nine of the ten aircraft involved. A trial is
currently scheduled for January 2001 on the remaining aircraft.
Management believes that the result of this lawsuit will not have a
material adverse effect on the Company's consolidated financial
position or results of operations.
Employment Lawsuits
On December 9, 1999 the Company and its Pemco Aeroplex subsidiary
were served with a purported class action in the U.S. District Court,
Northern District of Alabama, seeking declaratory, injunctive relief
and other compensatory and punitive damages based upon alleged
unlawful employment practices of race discrimination and racial
harassment by the Company's managers, supervisors, and other
employees. The complaint seeks damages in the amount of $75 million.
On July 27, 2000 the U.S. District Court, Northern District of
Alabama determined that the group would not be certified as a class.
The Company has acted promptly with respect to any specific complaint
by any employee, and will continue to vigorously defend any
litigation resulting from this case. The EEOC has filed a complaint
on its own behalf and is expected to be consolidated into the case.
Other
In addition to the above, the Company is involved in various legal
proceedings arising in the normal course of business. Management
does not believe the ultimate outcome of all such litigation will
have a material adverse effect on the Company's consolidated
financial position or results of operations.
6. INCOME TAXES
The Company establishes a valuation allowance for its deferred income
taxes unless realization is considered more likely than not. As a
result of the Company's losses during 1997, the Company provided a
valuation allowance through its tax provision to fully reserve for
its deferred tax assets at December 31, 1997. In 1998, 1999 and
during the first nine months of 2000, the Company returned to
profitability and generated taxable income for which net operating
loss carry-forwards were utilized. During the second quarter of 2000
the Company decreased its valuation allowance through its tax
provision to restore approximately $2.1 million to deferred tax
assets. The net deferred tax assets at September 30, 2000 reflect
that portion of total deferred taxes which management considers will
more likely than not be realized through future taxable income.
7. CLAIMS
The Company as a Government Contractor utilizes the U.S. Government's
Request For Equitable Adjustment (REA) process as provided by the
Federal Acquisition Regulation when it seeks to recover costs from
the Government due to Government caused delays, errors in
specifications and designs, contract terminations, change orders in
dispute or unapproved as to both scope and price, or other causes of
unanticipated additional costs. The Company recognizes revenue on
these claims if, (1) there is a legal basis for the claim, (2) the
additional costs are caused by circumstances that were unforeseen at
the contract date, (3) the costs associated with the claim are
identifiable or otherwise determinable in view of the work performed,
and, (4) the evidence supporting the claim is objective and
verifiable. The amount of revenue recognized is management's best
estimate of the amount it will be able to realize based upon the
claim. During the third quarter of 2000 the Company recognized $1.0
million of revenue associated with claims pertaining to one of its
contracts with the U.S. Government.
8. SEGMENT AND RELATED INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, at December 31, 1998 which
changed the way the Company reports information about its operating
segments. The Company has provided this segment information for the
three months and nine months ended September 30, 2000 and September
30, 1999.
The Company has three reportable segments: Government Services Group,
Commercial Services Group, and Manufacturing and Overhaul Group. The
Government Services Group, located primarily in Birmingham, Alabama,
provides aircraft maintenance and modification services for the
government and military customers. The Commercial Services Group,
located in Dothan, Alabama, and Victorville, California provides
commercial aircraft maintenance and modification services on a
contract basis to the owners and operators of large commercial
aircraft. (During the third quarter of 2000 the Company made the
decision to close its Victorville, Ca. facility and concentrate its
commercial Maintenance Repair and Overhaul (MRO) operations in
Dothan, Al.) The Manufacturing and Overhaul Group, located in
California and Florida, designs and manufactures a wide array of
proprietary aerospace products including various space systems, such
as guidance control systems and launch vehicles; aircraft cargo-
handling systems; and precision parts and components for aircraft.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies in the
audited financial statements and notes thereto included in the
Company's 1999 Annual Report on Form 10-K. The Company evaluates
performance based on total (external and intersegment) revenues,
gross profits and operating income. The Company accounts for
intersegment sales and transfers as if the sales or transfers were to
third parties, that is at current market prices. The Company does not
allocate income taxes, interest income and interest expense to
segments. The amount of intercompany profit is not material.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each business requires different operating and marketing
strategies. However, the Commercial and Manufacturing and Overhaul
segments may generate sales to Governmental entities and the
Government segment may generate sales to commercial entities.
During the quarter the Company restated $1.2 million of international
sales previously reported in the Commercial Services Group to the
Manufacturing and Overhaul Group. The restatement had no effect on
overall sales or earnings for the Company.
The following table presents information about segment profit or loss for
the quarter ended September 30, 2000:
<TABLE>
<CAPTION>
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul dated
---------- ---------- -------- -------
<S> <C> <C> <C> <C>
Revenues from
external,
domestic
customers $29,158 $7,908 $ 3,188 $ 40,254
Revenues from
external
foreign
customers 0 (1,196) 1,305 109
Intersegment
revenues 466 0 2 468
------- ------ ------ ------
Total
Segment
Revenues $29,624 $6,712 $ 4,495 $40,831
Elimination (468)
-------
Total Revenues $40,363
=======
Gross Profit 7,636 (722) 1,033 7,947
Segment Operating
Income 5,115 (2,075) (50) 2,990
Interest
Expense 566
Other (127)
Income taxes 952
Net $ 1,599
=======
Assets $30,665 $12,691 $11,526 $ 54,882
Deprec/Amort 391 117 112 620
Cap. Additions 1,621 676 104 2,401
</TABLE>
The following table presents information about segment profit or loss for
the quarter ended September 30, 1999:
<TABLE>
<CAPTION>
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul dated
---------- ---------- -------- -------
<S> <C> <C> <C> <C>
Revenues from
external,
domestic
customers $23,379 $12,566 $ 6,624 $ 42,569
Revenues from
external
foreign
customers 0 3,322 0 3,322
Intersegment
revenues 16 0 175 191
------- ------ ------ ------
Total
Segment
Revenues $23,395 $15,888 $ 6,799 $46,082
Elimination (191)
-------
Total Revenues $45,891
=======
Gross Profit 5,287 2,331 1,329 8,947
Segment Operating
Income 2,771 447 245 $ 3,463
Interest
Expense 825
Other 801
Income taxes 50
Net $ 1,787
=======
Assets $27,964 $14,920 $14,874 $57,758
Deprec/Amort 161 331 95 587
Cap. Additions 781 109 153 1,043
</TABLE>
The following table presents information about segment profit or loss for
the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul dated
---------- ---------- -------- -------
<S> <C> <C> <C> <C>
Revenues from
external,
domestic
customers $82,741 $30,417 $13,076 $126,234
Revenues from
external
foreign
customers 0 0 1,305 1,305
Intersegment
revenues 694 0 14 708
------- ------ ------ ------
Total
Segment
Revenues $83,435 $30,417 $14,395 $128,247
Elimination (708)
-------
Total Revenues $127,539
=======
Gross Profit 20,699 432 3,195 24,326
Segment Operating
Income 13,429 (4,326) (42) 9,061
Interest
Expense 2,018
Other 16
Benefit
for income
taxes (824)
Net Income $ 7,851
=======
Assets $30,665 $12,691 $11,526 $ 54,882
Deprec/Amort 1,166 412 256 1,834
Cap. Additions 4,684 1,702 308 6,694
</TABLE>
The following table presents information about segment profit or loss for
the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul dated
---------- ---------- -------- -------
<S> <C> <C> <C> <C>
Revenues from
external,
domestic
customers $64,662 $31,645 $19,882 $116,189
Revenues from
external
foreign
customers 0 9,305 0 9,305
Intersegment
revenues 51 0 299 350
------- ------ ------ ------
Total
Segment
Revenues $64,713 $40,950 $20,181 $125,844
Elimination (350)
-------
Total Revenues $125,494
=======
Gross Profit 15,243 6,201 4,002 25,446
Segment Operating
Income 8,691 1,241 654 10,586
Interest
Expense 2,447
Other 1,343
Benefit
for income
taxes 230
Net Income $ 6,566
=======
Assets $27,964 $14,920 $14,874 $ 57,758
Deprec/Amort 517 542 277 1,336
Cap. Additions 1,259 369 595 2,223
</TABLE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included herein.
In the third quarter of 2000, the Company completed a new five-year
contract with the International Association of Machinists and Aerospace
Workers (IAM). The new contract represents an increase in term over the
previous three-year contract. The new agreement calls for wage increases
over the life of the contract and increases in pension benefits.
During the third quarter of 2000, the Company reported operating income of
approximately $3.0 million, a decrease of $0.5 million over the same
period of 1999. Total income before taxes for the third quarter of 2000
was approximately $2.6 million vs. $1.8 million for the same period in
1999. During the first nine months of 2000, the Company reported operating
income of approximately $9.1 million, a decrease of $1.5 million over the
same period of 1999. Total income before taxes for the first nine months
of 2000 was approximately $7.0 million vs. $6.8 million for the same
period in 1999.
RESULTS OF OPERATIONS
Three months ended September 30, 2000
versus three months ended September 30, 1999
Revenues from operations for the third quarter of 2000 were lower than the
third quarter of 1999, decreasing 12.0% from $45.9 million in 1999 to
$40.4 million in 2000. Government segment sales increased approximately
26.5% from $23.4 million in 1999 to $29.6 million in 2000. Commercial
segment sales decreased 57.9% from $15.9 million in 1999 to $6.7 million
in 2000. Sales in the Manufacturing and Overhaul segment decreased 33.8%
from $6.8 million in 1999 to $4.5 million in 2000. The Company's overall
mix of business between government and commercial customers moved from
49.2% commercial and 50.8% government in 1999 to 27.4% commercial and
72.6% government in 2000.
Government segment sales in the third quarter of 2000 increased
approximately $6.2 million. $5.2 million of this amount was due primarily
to increases in deliveries and sales under the Birmingham facility's KC-
135 and C-130 contracts. $1.0 million was due to a Request for Equitable
Adjustment (REA) pertaining to an element of the KC-135 contract.
Commercial segment sales decreased $9.2 million under commercial aircraft
maintenance/modification contracts at the Dothan and Victorville
facilities. During the third quarter of 2000 the Company made the decision
to close its Victorville, Ca. facility and concentrate its commercial
Maintenance Repair and Overhaul (MRO) operations in Dothan, Al.
Sales of the Manufacturing and Overhaul segment decreased $2.3 million
principally due to lower sales in both the Space Vector operating unit and
at Pemco Nacelle (whose operations were curtailed at the end of the first
quarter of 2000).
Cost of sales decreased during the third quarter from $36.9 million in
1999 to $32.4 million in 2000. The ratio of cost of sales to net sales
decreased, slightly, from 80.5% in the third quarter of 1999 to 80.3% in
2000.
Selling, general and administrative (SG&A) expenses decreased from $5.5
million in the third quarter of 1999 to $5.0 million in 2000. Selling,
general and administrative expenses increased, slightly, as a percentage
of revenue from 12.0% in the third quarter of 1999 to 12.3% during the
same period of 2000. During the third quarter of 2000 the Company
continued its overall corporate restructuring focusing in particular on
developing an improved corporate legal structure, pursuing a new and
increased credit facility, and implementing new compensation packages for
the Company.
Interest expense was $0.8 million in third quarter of 1999 versus $0.6
million in 2000. The average interest rate in the third quarter of 2000
on the revolving credit facility was 13.0% as compared to 11.6% during the
third quarter of 1999. The lower interest charge in the third quarter of
2000 is a result of the Company borrowing less money against its revolving
credit facility and making the first payment, of a total of five, on its
Senior Subordinated Debt.
Nine months ended September 30, 2000
versus nine months ended September 30,1999
Revenues from operations for the first nine months of 2000 grew slightly
over the first nine months of 1999, increasing 1.6% from $125.5 million in
1999 to $127.5 million in 2000. Government segment sales increased
approximately 28.9% from $64.7 million in 1999 to $83.4 million in 2000.
Commercial segment sales decreased 25.7% from $41.0 million in 1999 to
$30.4 million in 2000. Sales in the Manufacturing and Overhaul segment
decreased 28.7 % from $20.2 million in 1999 to $14.4 million in 2000. The
Company's overall mix of business between government and commercial
customers moved from 48.6% commercial and 51.4% government in 1999 to
34.9% commercial and 65.1% government in 2000.
Government segment sales in the first nine months of 2000 increased
approximately $18.7 million. Of this amount $17.7 was due primarily to
increases in deliveries and sales under the Birmingham facility's KC-135
and C-130 contracts. $1.0 million was due to a Request for Equitable
Adjustment (REA) pertaining to an element of the KC 135 contract.
Commercial segment sales decreased $10.5 million under commercial aircraft
maintenance/modification contracts at the Dothan and Victorville
facilities. During the third quarter of 2000 the Company made the decision
to close its Victorville, Ca. facility and concentrate its commercial
Maintenance Repair and Overhaul (MRO) operations in Dothan, Al.
Sales of the Manufacturing and Overhaul segment decreased $5.8 million
principally due to lower sales in both the Space Vector operating unit and
at Pemco Nacelle (whose operations were curtailed at the end of the first
quarter of 2000), partially offset by slightly higher sales at Pemco
Engineers.
Cost of sales increased during the first nine months of the year growing
from $100.0 million in 1999 to $103.2 million in 2000. The ratio of cost
of sales to net sales increased from 79.7% in the first nine months of
1999 to 80.9% in 2000. Most of this increase is attributable to the
Commercial segment which experienced losses on several aircraft delivered
during the second quarter, a slow down of work during the second and third
quarters, and minimal margins on its final deliveries of H-3 helicopters
during the year.
Selling, general and administrative expenses increased from $14.9 million
in the first nine months of 1999 to $15.3 million in 2000. Selling,
general and administrative expenses as a percentage of revenue increased
from 11.8% for the first nine months of 1999 to 12.0% during the same
period of 2000.
Interest expense was $2.4 million in the nine months ending September 30 of
1999 versus $2.0 million for the same period in 2000. The average interest
rate in the first nine months of 2000 on the revolving credit facility was
12.6% as compared to 11.4% during the first nine months of 1999. The lower
interest charge during 2000 is a result of the Company borrowing less
money against its revolving credit facility and making the first payment,
of a total of five, on its Senior Subordinated Debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash resources showed significant improvement over the nine
months ended September 30, 1999. In the first nine months of 2000 the
Company generated cash from operating activities of $13.2 million vs.$6.6
million during the same period of 1999.
The following is a discussion of the significant items in the Company's
Consolidated Statement of Cash Flows for the nine months ended September
30, 1999 and 2000.
The Company's pension expense as determined by its actuary is $1.1 million
for 1999 and 2000. In the first nine months of 1999 and 2000, the Company
made no contributions to the pension plan and expensed approximately $0.9
million.
Accounts payable and accrued expenses decreased by $3.3 million from $35.0
million at December 31, 1999 to $31.6 million at the end of the first nine
months of 2000. During the same period of 1999 accounts payable and
accrued expenses increased $4.5 million. There was no accrued interest
payment at September 30, 2000 a decrease of $0.2 million over the amount
due at September 30, 1999.
Accounts receivable decreased $5.0 million in the nine months ended
September 30, 2000, dropping from $21.1 million at December 31, 1999 to
$16.1 million at September 30, 2000. During the same period of 1999
accounts receivable increased $2.1 million. Net inventories decreased $1.1
million during the first nine months of 2000. In 1999 net inventories grew
by $4.9 million during the same period.
During the first three quarters of 2000, the Company significantly
increased the cash used in investing activities, spending approximately
$6.7 million, primarily on leasehold improvements and capital assets whose
acquisition had been deferred during prior years. In 1999 the Company
invested $2.2 million in the same period.
At September 30, 2000, the Company had open borrowing capacity under its
lines of credit of $6.5 million versus $4.5 million at September 30, 1999.
On November 2, 2000 the Company entered into new credit facilities which
will be used to pay off and terminate the existing facility as described
in Note 4 to the Consolidated Financial Statements included herein.
During 1999 and 2000, inflation and changing prices have had no
significant impact on the Company's net sales or revenues or on income
from continuing operations.
BACKLOG
The following table presents the Company's backlog (in thousands of
dollars) at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
U.S. Government $120,211 $168,604
Commercial 14,294 17,668
-------- -------
$134,505 $186,272
======== =======
</TABLE>
As of September 30, 2000, 89.4% of the Company's backlog related to work
for the U.S. Government versus 90.5% for the period ended September 30,
1999. The Company's Government backlog decreased $48.4 million as
compared to the first nine months of 1999. Of this amount $30.0 million
represents the Company ceasing to include its estimated share of the Space
Vector operating unit, of the Manufacturing & Overhaul Group, - CTTS
Program in its reported backlog. The Government Services Group's backlog
is lower by $5.2 million primarily related to increased deliveries of
aircraft under the KC-135 contract offset partially by increased backlog
for the C-130 paint program. The completion of the AIT II contract at the
Company's Space Vector operating unit accounts for $5.8 million of the
year to year reduction and the remaining $7.4 million is due to the
winding down of the Commercial Services Group's H-3 Helicopter program.
Overall Commercial backlog decreased $3.4 million. Most of this reduction
is in the Commercial Services Group and represents weaker than anticipated
orders during the first nine months of 2000. This decrease in the
Commercial Services Group was offset, partially, by an increase in backlog
of $1.9 million at the Pemco Engineers operating unit of the Manufacturing
and Overhaul Group. Based upon recent business development activities, it
is management's opinion that both Government and Commercial backlog will
increase in the coming months, although there can be no assurance as to
the magnitude of any such increase, or that such increase will occur at
all.
CONTINGENCIES
See Note 5 to the Consolidated Financial Statements included herein.
FORWARD LOOKING STATEMENTS
Some of the information under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere
in this Quarterly Report are forward-looking statements. These
forward-looking statements include, but are not limited to, statements
about the Company's plans, objectives, expectations and intentions, award
of contracts, the outcome of pending or future litigation, estimates of
backlog and other statements contained in this Quarterly Report that are
not historical facts. When used in this Quarterly Report, the words
"expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions are generally intended to identify
forward-looking statements. Such forward-looking statements are
necessarily estimates reflecting the Company's best judgment based on
current information. Because these forward-looking statements involve
risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by
these forward-looking statements. Such factors include those identified
from time to time in the Company's Securities and Exchange Commission
filings and other public announcements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates as
part of its normal operations. The Company maintains various debt
instruments to finance its business operations. The debt consists of
fixed and variable rate debt. The variable rate debt is related to the
Company's revolving line of credit as described in Note 4 to the
Consolidated Financial Statements herein and bears interest at prime plus
3.5% with provisions for both reductions in the interest rate based on
specific operating performance targets and increases related to certain
events of default (13.0% at September 30, 2000). If the prime rate
increased 100 basis points, the effect on net income would approximate a
$76,000 reduction in net income on an annual basis, $19,000 for the third
quarter of 2000.
PEMCO AVIATION GROUP, INC.
OTHER INFORMATION
PART II.
Item 1 Legal Proceedings
See Note 5 to Part I, Financial Statements
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Credit and Security Agreement dated November 2, 2000
between Pemco Aviation Group, Inc. and Wells Fargo Business
Credit, Inc.
10.2 Subordination Agreement dated November 1, 2000 by and
among WELLS FARGO BUSINESS CREDIT, INC., BANK OF NEW YORK,
as Securities Agent, SPECIAL VALUE BOND FUND, LLC, and
PEMCO AVIATION GROUP, INC.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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.
PEMCO AVIATION GROUP, INC.
Date: 11/14/00 By: /s/ Ronald A. Aramini
---------------------------
Ronald A. Aramini, Chief
Executive Officer
(Principal Executive Officer)
Date: 11/14/00 By: /s/ John R. Lee
----------------------------
John R. Lee
Sr. Vice President, Chief Financial
Officer (Principal Finance & Accounting
Officer)
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Credit and Security Agreement dated November 2, 2000
between Pemco Aviation Group, Inc. and Wells Fargo Business
Credit, Inc.
10.2 Subordination Agreement dated November 1, 2000 by and among
WELLS FARGO BUSINESS CREDIT, INC., BANK OF NEW YORK, as
Securities Agent, SPECIAL VALUE BOND FUND, LLC, and PEMCO
AVIATION GROUP, INC.
27.1 Financial Data Schedule
All of the foregoing exhibits are filed electronically herewith.
