<PAGE> 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 September 30, 2000
[ ] 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 0-23764
KELLSTROM INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3753725
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 INTERNATIONAL PARKWAY, SUNRISE, FLORIDA 33323
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(954) 845-0427
----------------------------------------------------
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date: 11,910,981 shares of
common stock, $.001 par value per share, were outstanding as of October 31,
2000.
<PAGE> 2
KELLSTROM INDUSTRIES, INC.
--------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART I
------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets ..................................................... 3
Condensed Consolidated Statements of Earnings ............................................. 4
Condensed Consolidated Statements of Cash Flows ........................................... 5
Notes to Condensed Consolidated Financial Statements ...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................. 17
PART II
-------
Item 1. Legal Proceedings........................................................................... 18
Item 2. Changes in Securities and Use of Proceeds .................................................. 18
Item 3. Defaults Upon Senior Securities............................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders......................................... 18
Item 5. Other Information........................................................................... 18
Item 6. Exhibits and Reports on Form 8-K............................................................ 19
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,954,668 $ 272,140
Trade receivables, net of allowances for returns and
doubtful accounts of $6,978,909 and $8,575,684
for 2000 and 1999, respectively 60,585,763 60,674,708
Inventories 219,258,237 194,490,995
Equipment under short-term operating leases, net 83,252,414 92,135,910
Prepaid expenses 5,744,571 5,199,429
Deferred tax assets 6,977,347 8,280,101
------------- -------------
Total current assets 378,773,000 361,053,283
Equipment under long-term operating leases, net 33,885,626 58,001,190
Property, plant and equipment, net 28,494,731 25,339,940
Goodwill, net 86,007,605 87,825,058
Other assets 15,069,494 9,225,952
------------- -------------
Total Assets $ 542,230,456 $ 541,445,423
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 155,911,163 $ 165,773,805
Notes payable -- 2,145,920
Current maturities of long-term debt 200,000 200,000
Accounts payable 28,606,721 17,713,220
Accrued expenses 16,711,754 18,133,718
------------- -------------
Total current liabilities 201,429,638 203,966,663
Long-term debt, less current maturities 17,520,000 17,720,000
Convertible subordinated notes 140,250,000 140,250,000
Deferred tax liabilities 8,434,941 8,295,682
------------- -------------
Total Liabilities 367,634,579 370,232,345
Stockholders' Equity:
Common stock, $ .001 par value; 50,000,000 shares authorized;
11,910,981 shares issued and outstanding
in 2000 and 1999 11,911 11,911
Additional paid-in capital 121,103,653 121,103,653
Retained earnings 55,243,449 51,668,184
Loans receivable from directors and officers (1,744,002) (1,572,730)
Accumulated other comprehensive (loss) income (19,134) 2,060
------------- -------------
Total Stockholders' Equity 174,595,877 171,213,078
------------- -------------
Total Liabilities and Stockholders' Equity $ 542,230,456 $ 541,445,423
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales revenues, net $ 96,139,438 $ 59,607,297 $241,338,213 $205,638,182
Rental revenues 4,886,796 11,123,405 16,406,032 32,375,428
------------ ------------ ------------ ------------
Total revenues 101,026,234 70,730,702 257,744,245 238,013,610
Cost of goods sold 74,344,258 40,396,903 178,682,741 139,907,012
Depreciation of equipment under operating leases 4,255,390 7,405,205 14,219,452 20,589,612
Selling, general and administrative expenses 11,888,778 10,233,587 35,154,137 29,399,496
Depreciation and amortization 1,713,661 1,405,755 4,816,439 3,916,919
Other non-recurring expenses -- -- -- 2,200,000
------------ ------------ ------------ ------------
Total operating expenses 92,202,087 59,441,450 232,872,769 196,013,039
Operating income 8,824,147 11,289,252 24,871,476 42,000,571
Interest expense, net of interest income 6,400,499 5,865,778 19,159,513 15,318,253
------------ ------------ ------------ ------------
Income before income taxes 2,423,648 5,423,474 5,711,963 26,682,318
Income taxes 904,021 2,012,122 2,136,698 10,089,643
------------ ------------ ------------ ------------
Net income $ 1,519,627 $ 3,411,352 $ 3,575,265 $ 16,592,675
============ ============ ============ ============
Earnings per common share - basic $ 0.13 $ 0.29 $ 0.30 $ 1.40
============ ============ ============ ============
Earnings per common share - diluted $ 0.13 $ 0.27 $ 0.30 $ 1.17
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic 11,910,981 11,910,981 11,910,981 11,836,984
============ ============ ============ ============
Weighted average number of common shares
outstanding - diluted 11,941,619 14,471,242 11,944,704 16,672,356
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,575,265 $ 16,592,675
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,816,439 3,916,919
Depreciation of equipment under operating leases 14,219,452 20,589,612
Amortization of deferred financing costs 1,557,477 1,523,333
Deferred income taxes 1,442,013 (641,854)
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables, net 1,441,480 (12,815,795)
Increase in inventories (10,835,380) (39,611,046)
Decrease (increase) in equipment under operating leases 5,150,512 (39,073,535)
Increase in prepaid expenses and other current assets (545,142) (2,298,635)
Increase in other assets (2,385,430) (245,792)
Increase in accounts payable 8,307,233 560,590
Increase in accrued expenses 1,060,389 470,514
Increase in income taxes payable -- (1,203,407)
------------ ------------
Net cash provided by (used in) operating activities 27,804,308 (52,236,421)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (5,927,294) (19,694,299)
Acquisition earn-out payments (3,618,646) (5,058,887)
Purchase of property, plant and equipment (3,196,007) (10,204,051)
Proceeds from sales of property, plant and equipment -- 56,763
------------ ------------
Net cash used in investing activities (12,741,947) (34,900,474)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement (10,062,642) 97,855,245
Debt repayment, including capital lease obligation (2,145,920) (5,045,207)
Proceeds from the issuance of common stock -- 1,096,538
Loans to directors and officers (171,271) (192,658)
Payment of deferred financing costs -- (474,372)
------------ ------------
Net cash (used in) provided by financing activities (12,379,833) 93,239,546
------------ ------------
NET INCREASE IN CASH & CASH EQUIVALENTS 2,682,528 6,102,651
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 272,140 1,107,102
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 2,954,668 $ 7,209,753
============ ============
</TABLE>
(continued)
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Supplemental disclosures of non-cash investing and financing activities:
Acquisition assets acquired with payment due in 2000 and 2001 $ 2,546,549 $ --
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $16,289,653 $12,116,504
=========== ===========
Income taxes $ 555,527 $14,660,263
=========== ===========
Supplemental disclosure of fair value of assets acquired and liabilities
assumed in connection with acquisitions:
Receivables -- 3,570,615
Inventory 260,000 13,014,566
Prepaid expenses and other current assets -- 453,861
Property, plant and equipment 2,116,000 --
Goodwill 1,250,000 12,933,723
Other assets 4,847,843 85,280
----------- -----------
Total assets $ 8,473,843 $30,058,045
=========== ===========
Accrued expenses $ -- $ 368,219
Accounts payable -- 4,658,250
Income taxes payable -- 423,435
Notes payable -- 2,727,224
Deferred tax liabilities -- 2,186,618
----------- -----------
Total liabilities $ -- $10,363,746
=========== ===========
Net assets acquired 8,473,843 19,694,299
Less payments due in 2000 and 2001 2,546,549 --
----------- -----------
Net cash used in acquisitions $ 5,927,294 $19,694,299
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 7
KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of Kellstrom Industries, Inc. and its subsidiaries (the
"Company") after elimination of intercompany accounts and transactions.
These statements have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The condensed consolidated balance sheet as of
December 31, 1999 has been derived from audited financial statements.
In order to prepare the financial statements in conformity with
generally accepted accounting principles, management has made a number
of estimates and assumptions relating to the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities.
Actual results could differ from those estimates. Certain information
and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such rules and regulations
of the SEC. These condensed consolidated financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's latest annual report on Form 10-K. Certain
1999 financial statement amounts have been reclassified to conform with
the 2000 presentation.
In the opinion of management of the Company, the condensed consolidated
financial statements reflect all adjustments (which consist only of
normal recurring adjustments) necessary to present fairly the condensed
consolidated financial position of the Company as of September 30,
2000, the condensed consolidated results of operations for the three
and nine month periods ended September 30, 2000 and 1999, and the
condensed consolidated statements of cash flows for the nine month
periods ended September 30, 2000 and 1999. The results of operations
for such interim periods are not necessarily indicative of the results
for the full year.
NOTE 2 - ACQUISITIONS
On April 29, 1999, the Company acquired all of the outstanding capital
stock of Certified Aircraft Parts, Inc. ("Certified") for $16.7 million
in cash, and assumed $2.7 million in debt.
During the third quarter of 2000, the Company completed two
acquisitions for $5.9 million in cash, $2.5 million in payments due in
2000 and 2001, plus up to $11.7 million cash consideration which may be
paid in the form of an earn-out payable over ten years based on certain
specified criteria. These acquisitions were accounted for using the
purchase method of accounting for business combinations and
accordingly, those companies' operating results have been included in
the Company's results of operations since the dates of acquisition.
Purchase price allocations related to these acquisitions are
preliminary.
7
<PAGE> 8
NOTE 3 - EARNINGS PER SHARE
Diluted earnings per share for the three and nine month periods ended
September 30, 2000 and 1999 were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 1,519,627 $ 3,411,352 $ 3,575,265 $16,592,675
Income adjustment relating to reduction of debt
based on the if converted method -- 488,261 -- 2,921,374
----------- ----------- ----------- -----------
Net income available to common and
common equivalent shares $ 1,519,627 $ 3,899,613 $ 3,575,265 $19,514,049
=========== =========== =========== ===========
Weighted average number of common shares
outstanding - basic 11,910,981 11,910,981 11,910,981 11,836,984
Dilutive common stock equivalents from stock
options and warrants based on the treasury
stock method 30,638 596,625 33,723 1,102,505
Dilutive convertible subordinated notes based
on the if converted method -- 1,963,636 -- 3,732,867
----------- ----------- ----------- -----------
Weighted average number of common shares
outstanding - diluted 11,941,619 14,471,242 11,944,704 16,672,356
=========== =========== =========== ===========
</TABLE>
In the computation of diluted earnings per common share for the
three-month periods ended September 30, 1999 and 2000, approximately
1.1 million and 3.6 million stock options, respectively, were excluded
because their inclusion would have been antidilutive. Conversion of the
5 1/2% convertible subordinated notes was not assumed for the
three-month period ended September 30, 1999 because of its antidilutive
effect. Additionally, conversion of the 5 1/2% and 5 3/4% convertible
subordinated notes was not assumed for the three-month period ended
September 30, 2000 because of its antidilutive effect.
In the computation of diluted earnings per common share for the
nine-month periods ended September 30, 1999 and 2000, approximately .9
million and 3.7 million stock options, respectively, were excluded
because their inclusion would have been antidilutive. Additionally,
conversion of the 5 1/2% and 5 3/4% convertible subordinated notes was
not assumed for the nine-month period ended September 30, 2000 because
of its antidilutive effect.
NOTE 4 - SEGMENT REPORTING
The Company is organized based on the products that it offers. Under
this organizational structure, the Company has four reportable
segments: (i) Commercial Engine Parts, (ii) Defense (iii) Whole Engine
and Aircraft and (iv) Airframe Avionics and Rotables. The Commercial
Engine Parts segment is involved in the business of purchasing,
overhauling (primarily through subcontractors), reselling and leasing
of engine parts for large turbo-fan engines manufactured by CFM
International, General Electric, Pratt & Whitney and Rolls Royce. The
Defense segment is an after-market reseller of aircraft parts and
turbojet engines and engine parts for helicopters and large transport
aircraft. The segment's primary focus is on the Lockheed Martin C-130
Hercules aircraft, a widely used military transport aircraft, the
Allison (Rolls Royce) T56/501 engine, which powers this aircraft, and
the Allison 250, with approximately 16,000 units actively in use by
helicopters. The acquisition of Certified on April 29, 1999 enhanced
the Company's presence in this market segment. The Whole Engine and
Aircraft segment leases and resells whole engines and aircraft. The
Airframe Avionics and Rotables segment is engaged in the sale of a wide
variety of aircraft rotables and expendable components including flight
data recorders, electrical and mechanical equipment and radar and
navigation systems.
The Company's reportable segments are managed separately because each
business requires different technology and product knowledge. The
Company has not historically allocated selling, general and
administrative expenses, depreciation and amortization, interest
expense or income taxes to its business
8
<PAGE> 9
segments. Rather, the Company evaluates performance of the business
segments based on revenue and gross margins. The accounting policies of
the segments are the same as those described in the summary of
significant accounting policies. The following table sets forth the
revenue and margins for each of the Company's business segments for the
three and nine month periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Commercial Engine Parts $ 21,946,698 $ 20,675,571 $ 65,524,127 $ 52,410,489
Defense 19,861,284 13,679,164 54,730,079 33,507,626
Airframe Avionics and Rotables 17,691,456 12,722,562 45,751,007 37,883,067
Whole Engine and Aircraft 41,526,796 23,653,405 91,739,032 114,212,428
------------ ------------ ------------ ------------
Total revenue $101,026,234 $ 70,730,702 $257,744,245 $238,013,610
============ ============ ============ ============
GROSS MARGIN
Commercial Engine Parts $ 6,103,791 $ 7,286,622 $ 21,812,580 $ 18,029,213
Defense 6,770,380 4,846,416 19,285,365 11,987,739
Airframe Avionics and Rotables 4,614,087 3,722,338 12,509,408 9,968,142
Whole Engine and Aircraft 4,938,328 7,073,218 11,234,699 37,531,892
------------ ------------ ------------ ------------
Total gross margin $ 22,426,586 $ 22,928,594 $ 64,842,052 $ 77,516,986
============ ============ ============ ============
</TABLE>
NOTE 5 - COMPREHENSIVE INCOME
The Company's total comprehensive income, comprised of net income and
foreign currency translation adjustments, for the three and nine month
periods ended September 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 1,519,627 $ 3,411,352 $ 3,575,265 $16,592,675
Foreign currency translation adjustments (10,079) 5,793 (21,194) 4,906
----------- ----------- ----------- -----------
Other comprehensive income, net of taxes (10,079) 5,793 (21,194) 4,906
----------- ----------- ----------- -----------
Total Comprehensive income $ 1,509,548 $ 3,417,145 $ 3,554,071 $16,597,581
=========== =========== =========== ===========
</TABLE>
NOTE 6 - OTHER MATTERS
On July 7, 1999, the Company settled a lawsuit brought by the Estate of
the late Mr. Joram Rosenfeld (a former Director of the Company) with
respect to, among other things, a claim alleging entitlement to a stock
option grant in late 1996. The settlement was entered into in order to
limit the expense of litigating the suit as well as the protracted use
of management's time and related corporate resources. For the second
quarter ended June 30, 1999, the Company recorded a one-time pre-tax
charge of approximately $2.2 million to fulfill its obligation under
the settlement and for accrued legal expenses.
The Company is not aware of any material legal proceedings pending
against the Company or any of its property. However, the Company may
become party to various claims, legal actions and complaints arising in
the ordinary course of business or otherwise. The Company cannot
determine whether such actions would have a material impact on the
financial condition, results of operations or cash flows of the
Company.
On September 20, 2000, the Company entered into a definitive agreement
to acquire the aircraft and engine parts resale business of Aviation
Sales Company, which is operated through its Aviation Sales
9
<PAGE> 10
Distribution Services Company ("AVSDC") subsidiary. Specifically, the
Company will acquire select AVSDC non-inventory assets and assume a
portion of AVSDC's accounts payable and accrued expenses. In connection
with this agreement, the Company and Aviation Sales Company will also
establish an off-balance sheet joint venture that will acquire the
inventory of AVSDC and enter into an exclusive arrangement with the
Company to sell the inventory through its inventory management
business. The Company expects to consolidate the operations of AVSDC
with its Solair and Commercial Engine Divisions. Consummation of the
transaction is contingent upon completion of required financing and
approval by the parties' existing lenders.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE KELLSTROM
INDUSTRIES, INC. (THE "COMPANY") UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE HEREIN. IN ADDITION,
REFERENCE SHOULD BE MADE TO THE COMPANY'S AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO AND RELATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDED IN THE COMPANY'S MOST
RECENT ANNUAL REPORT ON FORM 10-K.
Certain matters discussed in this Form 10-Q may be "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995,
with respect to the Company's business, financial condition and results of
operations. Such forward-looking statements are subject to risks, uncertainties
and other factors, which could cause actual results to differ materially from
future results expressed or implied by such forward-looking statements.
Investors are cautioned that any forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, and that actual
results may differ materially from those contemplated by such forward-looking
statements.
Factors that may cause actual future events to differ materially from
the Company's forward-looking statements include, but are not limited to the
following:
o the Company's continuing ability to effectively integrate acquired
companies and the effects of increased indebtedness as a result of
the Company's business acquisitions;
o the Company's continuing ability to acquire adequate inventory and
to obtain favorable pricing for such inventory;
o the Company's ability to arrange for the repair of aircraft engines
and engine parts by third-party contractors prior to resale or
lease;
o the Company's ability to control costs;
o competitive pricing for the Company's products;
o customer concentration;
o fluctuations in demand for the Company's products, which are
dependent upon the condition of the airline industry and the
Company's ability to collect receivables;
o changes in government regulation;
o the availability to the Company of acquisitions and expansion
opportunities on attractive terms;
o the Company's ability to develop and implement systems to manage
rapidly growing operations;
o the availability of capital to fund current operations, growth and
acquisition opportunities;
o the ability to consummate the transaction with Aviation Sales
Company; and
o adverse conditions in the capital markets or in the general economy.
GENERAL
The Company is a leader in the airborne equipment segments of the
international aviation services after-market. The Company's principal business
is the purchasing, overhauling (primarily through subcontractors), reselling and
leasing of aircraft, avionics and aircraft rotables, and aircraft engines and
engine parts. The Company's historical growth has resulted from a number of
factors, including the expansion of the Company's product lines, customer base
and market share, increases in the Company's internal growth, cost controls and
overall operating efficiencies, acquisitions in existing and adjacent markets
and significant capital investments.
On April 29, 1999 the Company acquired Certified. Additionally, during
the third quarter of 2000, the Company completed two acquisitions. These
acquisitions were accounted for using the purchase method of accounting for
business combinations and accordingly, those companies' operating results have
been included in the Company's results of operations since the respective dates
of acquisition. Consequently, the results of operations for the three and nine
month periods ended September 30, 2000 are not comparable to the corresponding
periods of the prior year in certain material respects.
On September 20, 2000, the Company entered into a definitive agreement
to acquire the aircraft and engine parts resale business of Aviation Sales
Company, which is operated through its Aviation Sales Distribution
Services Company ("AVSDC") subsidiary. Specifically, the Company will acquire
select AVSDC non-inventory assets and assume a portion of AVSDC's accounts
payable and accrued expenses. The Company expects to consolidate the operations
of AVSDC with its Solair and Commercial Engine Divisions. Consummation of the
transaction is contingent upon completion of required financing and approval by
the parties' existing lenders. Consummation of the transaction is contigent upon
completion of required financing and approval by the parties' existing lenders.
11
<PAGE> 12
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth the
percentage of certain income statement items to total revenues derived from the
Company's condensed consolidated statements of earnings.
<TABLE>
<CAPTION>
Percentage of Total Revenues Percentage of Total Revenues
-------------------------------- -------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Sales revenues, net 95.2% 84.3% 93.6% 86.4%
Rental revenues 4.8% 15.7% 6.4% 13.6%
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of goods sold 73.6% 57.1% 69.3% 58.8%
Depreciation of equipment under operating leases 4.2% 10.5% 5.5% 8.7%
Selling, general and administrative expenses 11.8% 14.5% 13.6% 12.4%
Depreciation and amortization expense 1.7% 2.0% 1.9% 1.6%
Other non-recurring expenses 0.0% 0.0% 0.0% 0.9%
Total operating expenses 91.3% 84.0% 90.4% 82.4%
Operating income 8.7% 16.0% 9.6% 17.6%
Interest expense (net of interest income) 6.3% 8.3% 7.4% 6.4%
Income before income taxes 2.4% 7.7% 2.2% 11.2%
Income taxes 0.9% 2.8% 0.8% 4.2%
Net income 1.5% 4.8% 1.4% 7.0%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Consolidated sales revenues increased by 61% to $96.1 million for the
three months ended September 30, 2000 as compared to $59.6 million for the three
months ended September 30, 1999. Sales revenues from the Company's commercial
engine parts segment increased to $21.9 million as compared with $20.7 million
for the three months ended September 30, 2000 and September 30, 1999,
respectively. Sales revenues from the Company's defense segment increased to
$19.9 million as compared with $13.7 million for the three months ended
September 30, 2000 and September 30, 1999, respectively. Sales revenues from the
Company's airframe avionics and rotables segment increased to $17.7 million as
compared with $12.7 million for the three months ended September 30, 2000 and
September 30, 1999, respectively. The increase in sales in the Company's
commercial engine parts, defense and airframe avionics and rotables segments was
primarily due to the continued expansion of the Company's nose to tail inventory
management programs, coupled with an increase in the Company's customer base due
to continued investments in marketing and higher levels of inventory
availability. Sales revenues from the Company's whole engine and aircraft
segment increased to $36.6 million as compared with $12.5 million for the three
months ended September 30, 2000 and September 30, 1999, respectively. The
increase in revenues from the sale of whole engine and aircraft are a result of
the Company's continuing efforts to reposition the lease portfolio and change
its composition to newer models.
Rental revenues from the Company's whole engine and aircraft segment
decreased by 56% to $4.9 million for the three months ended September 30, 2000
as compared to $11.1 million for the three months ended September 30, 1999. The
decrease in rental revenues was primarily due to a reduction in fleet
utilization and a reduction in the size of the fleet.
Consolidated cost of goods sold increased by 84% to $74.3 million for
the three months ended September 30, 2000 as compared to $40.4 million for the
three months ended September 30, 1999. Consolidated gross profit margin on sales
was 22.7% for the three months ended September 30, 2000 as compared with 32.2%
for the three months ended September 30, 1999. Gross margin for the three months
ended September 30, 2000 for the commercial engine parts, defense and airframe
avionics and rotables segments were 27.8%, 34.1% and 26.1%, respectively, as
compared to 35.2%, 35.4% and 29.3%, respectively, for the three months ended
September 30, 1999. The decrease in gross margins at the commercial engine parts
and airframe avionics and rotables segments
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reflects current market conditions. Gross margins from the sale of whole engines
and aircraft were 11.8% for the third quarter of 2000 as compared to 26.8% for
the third quarter of 1999, reflecting current market conditions and the
Company's efforts to reposition its lease portfolio.
Depreciation of equipment under operating leases decreased by 43% to
$4.3 million for the three months ended September 30, 2000 as compared to $7.4
million for the three months ended September 30, 1999. Gross profit margin on
rental revenues decreased to 12.9% in 2000 from 33.4% in 1999. The decrease in
the gross profit margin was primarily due to the impact of depreciation expense
incurred on a higher level of idle equipment.
Selling, general and administrative expenses increased by 16% to $11.9
million for the three months ended September 30, 2000 as compared to $10.2
million for the three months ended September 30, 1999. The increase in selling,
general and administrative expenses was primarily due to the Company's continued
investment in personnel and facilities for the defense, commercial engine parts
and airframe avionics and rotables segments in order to support the Company's
growth model.
Depreciation and amortization expense increased by 22% to $1.7 million
for the three months ended September 30, 2000 as compared to $1.4 million for
the three months ended September 30, 1999. The increase in depreciation and
amortization expense was primarily due to depreciation on recent investments in
facilities to support the Company's growth plans.
Interest expense (net of interest income) increased by 9% to $6.4
million for the three months ended September 30, 2000 as compared to $5.9
million for the three months ended September 30, 1999. The increase in interest
expense was primarily driven by an increase in interest rates partially offset
by a decrease in the Company's average debt levels.
The Company's effective tax rate for the three months ended September
30, 2000 was 37.3% as compared to 37.1% for the three months ended September 30,
1999.
Net income decreased by 55% to $1.5 million for the three months ended
September 30, 2000 as compared to $3.4 million for the three months ended
September 30, 1999. Basic earnings per common share decreased by 55% to $0.13
for the three months ended September 30, 2000 as compared to $0.29 for the three
months ended September 30, 1999. Diluted earnings per common share decreased by
52% to $0.13 for the three months ended September 30, 2000 as compared to $0.27
for the three months ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Consolidated sales revenues increased by 17% to $241.3 million for the
nine months ended September 30, 2000 as compared to $205.6 million for the nine
months ended September 30, 1999. Sales revenues from the Company's commercial
engine parts segment increased to $65.5 million as compared with $52.4 million
for the nine months ended September 30, 2000 and September 30, 1999,
respectively. Sales revenues from the Company's defense segment increased to
$54.7 million as compared with $33.5 million for the nine months ended September
30, 2000 and September 30, 1999, respectively. Sales revenues from the Company's
airframe avionics and rotables segment increased to $45.8 million as compared
with $37.9 million for the nine months ended September 30, 2000 and September
30, 1999, respectively. The increase in sales in the Company's commercial engine
parts, defense and airframe avionics and rotables segments was primarily due to
the continued expansion of the Company's nose to tail inventory management
programs, coupled with an increase in the Company's customer base due to
continued investments in marketing and higher levels of inventory availability.
In addition, sales in the Company's defense segment were impacted by the
acquisition of Certified in April 1999. Sales revenues from the Company's whole
engine and aircraft segment decreased to $75.3 million as compared with $81.8
million for the nine months ended September 30, 2000 and September 30, 1999,
respectively. The decrease in revenues from the sale of whole engine and
aircraft reflect current market conditions and the Company's decision to limit
the growth of the lease portfolio and change its composition to newer engine
models.
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Rental revenues from the Company's whole engine and aircraft segment
decreased by 49% to $16.4 million for the nine months ended September 30, 2000
as compared to $32.4 million for the nine months ended September 30, 1999. The
decrease in rental revenues was primarily due to a reduction in fleet
utilization and a reduction in the size of the fleet.
Consolidated cost of goods sold increased by 28% to $178.7 million for
the nine months ended September 30, 2000 as compared to $139.9 million for the
nine months ended September 30, 1999. Consolidated gross profit margin on sales
was 26.0% for the nine months ended September 30, 2000 as compared with 32.0%
for the nine months ended September 30, 1999. Gross margin for the nine months
ended September 30, 2000 for the commercial engine parts and airframe avionics
and rotables segments was 33.3% and 27.3%, respectively, as compared to 34.4%
and 26.3%, respectively, for the nine months ended September 30, 1999. Gross
margin for the nine months ended September 30, 2000 for the defense segment was
relatively unchanged at 35.2% as compared to 35.8% for the same period last
year. Gross margins from the sale of whole engines and aircraft were 12.0% for
the nine months ended September 30, 2000 as compared to 31.5% for the nine
months ended September 30, 1999, reflecting current market conditions and the
Company's efforts to reposition its lease portfolio.
Depreciation of equipment under operating leases decreased by 31% to
$14.2 million for the nine months ended September 30, 2000 as compared to $20.6
million for the nine months ended September 30, 1999. Gross profit margin on
rental revenues decreased to 13.3% in 2000 from 36.4% in 1999. The decrease in
the gross profit margin was primarily due to the impact of depreciation expense
incurred on a higher level of idle equipment.
Selling, general and administrative expenses increased by 20% to $35.2
million for the nine months ended September 30, 2000 as compared to $29.4
million for the nine months ended September 30, 1999. The increase in selling,
general and administrative expenses was primarily due to (i) the acquisition of
Certified being combined into the Company and (ii) the Company's continued
investment in personnel and facilities for the defense, commercial engine parts
and airframe avionics and rotables segments in order to support the Company's
growth model.
Depreciation and amortization expense increased by 23% to $4.8 million
for the nine months ended September 30, 2000 as compared to $3.9 million for the
nine months ended September 30, 1999. The increase in depreciation and
amortization expense was primarily due to amortization of goodwill related to
the Certified acquisition in addition to depreciation on recent investments in
facilities to support the Company's growth plans.
Other non-recurring expenses for the nine months ended September 30,
1999 reflect a $2.2 million charge to fulfill the Company's obligation under the
settlement of a lawsuit brought by the Estate of a late Director of the Company,
with respect to, among other things, a claim alleging entitlement to a stock
option grant in late 1996, and for accrued legal expenses incurred in connection
with the settlement.
Interest expense (net of interest income) increased by 25% to $19.2
million for the nine months ended September 30, 2000 as compared to $15.3
million for the nine months ended September 30, 1999. The increase in interest
expense was primarily driven by an increase in interest rates and the Company's
average debt levels, resulting from the acquisition of Certified and growth in
inventories offset by decreases in equipment under operating leases.
The Company's effective tax rate for the nine months ended September
30, 2000 was 37.4% as compared to 37.8% for the nine months ended September 30,
1999.
Net income decreased by 78% to $3.6 million for the nine months ended
September 30, 2000 as compared to $16.6 million for the nine months ended
September 30, 1999. Basic earnings per common share decreased by 79% to $0.30
for the nine months ended September 30, 2000 as compared to $1.40 for the nine
months ended September 30, 1999. Diluted earnings per common share decreased by
74% to $0.30 for the nine months ended September 30, 2000 as compared to $1.17
for the nine months ended September 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company's liquidity and capital resources
included cash and cash equivalents of $3.0 million and working capital of $177.3
million. At September 30, 2000, total outstanding debt was $313.9 million as
compared to $326.1 million as of December 31, 1999. As of September 30, 2000,
the outstanding principal balance on the Company's convertible subordinated
notes was $140.3 million and the Company had contractual lines of credit
totaling $256.7 million of which $162.4 million was outstanding and $26.8
million was available (excluding a temporary acquisition reserve).
Cash flow provided by operating activities for the nine months ended
September 30, 2000 was $27.8 million compared with cash flow used in operating
activities of $52.2 million for the nine months ended September 30, 1999. The
primary sources of cash from operating activities were net income of $3.6
million, adjusted for non-cash expenses related to depreciation and amortization
of $19.0 million and an increase in accounts payable of $8.3 million. The
primary use of cash for operating activities was for increases in inventories of
$10.8 million to support the Company's growth.
Cash flow used for investing activities for the nine months ended
September 30, 2000 was $12.7 million compared with $34.9 million for the nine
months ended September 30, 1999. The primary uses of cash for investing
activities were acquisitions of $5.9 million, earn-out payments of $1.4 million
and $2.2 million in connection with the acquisitions of Aero Support and ITC,
respectively, and purchases of property, plant and equipment of $3.2 million.
Cash flow used for financing activities for the nine months ended
September 30, 2000 was $12.4 million compared with cash flow provided by
financing activities of $93.2 million for the nine months ended September 30,
1999. The primary uses of cash for financing activities were a decrease in
borrowings under the Company's line of credit agreement of $10.1 million and the
repayment of a note payable of $2.1 million.
As previously noted, on September 20, 2000, the Company entered into a
definitive agreement to acquire the aircraft and engine parts resale business of
Aviation Sales Company, which is operated through its Aviation Sales
Distribution Services Company ("AVSDC") subsidiary. Specifically, the Company
will acquire select AVSDC non-inventory assets and assume a portion of AVSDC's
accounts payable and accrued expenses. In connection with this agreement, the
Company and Aviation Sales Company will also establish an off-balance sheet
joint venture that will acquire the inventory of AVSDC and enter into an
exclusive arrangement with the Company to sell the inventory through its
inventory management business. The Company expects to consolidate the operations
of AVSDC with its Solair and Commercial Engine Divisions.
The Company expects to invest approximately $50 million in the
transaction. The Company plans to finance the transaction with a combination of
funding from its current revolving credit facility and a new $30 million, 7-year
mezzanine debt financing with Key Principal Partners, LLC, an affiliate of Key
Corporation of Cleveland, Ohio. Consummation of the transaction is contingent
upon completion of required financing and approval by the parties' existing
lenders.
The Company intends to take advantage of growth opportunities that are
consistent with the Company's expansion and profit objectives. It is anticipated
that such growth opportunities will require the investment of cash
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into inventories of aircraft and aircraft parts, engines and engine parts and
avionics and rotables. Greater availability of such inventories will better
enable the Company to continue to increase its revenues as well as to encourage
the development of strategic relationships with new customers. The Company
intends to finance its inventory expansion program through its cash flows and
through its syndicated credit facility. In the future, the Company may require
additional sources of capital to continue to fund its expansion.
The Company's management believes that free cash flow (net income plus
depreciation of property, plant and equipment and amortization of goodwill),
combined with the Company's syndicated credit facility should be sufficient for
the Company's current level of operations. However, the Company may elect to
seek equity capital or other debt financing in the future depending upon market
conditions and the capital needs of the Company.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk is limited primarily to the
fluctuating interest rates associated with variable rate indebtedness
outstanding under the Company's $256.7 million bank credit facility. The bank
credit facility, which expires in 2003, bears interest at the bank's prime rate
plus 0-50 basis points or, at the Company's option, LIBOR plus 150-250 basis
points. These variable interest rates are subject to interest rate changes in
the United States and Eurodollar markets. The Company does not currently use,
and has not historically used, derivative financial instruments to hedge against
such market interest rate risk. At September 30, 2000, the Company had
approximately $162.4 million in variable rate indebtedness outstanding under the
credit facility, representing approximately 52% of the Company's total debt
outstanding, at an average interest rate of 9.1%. An increase in interest rates
by 1% would have a $250,000 quarterly impact on net income.
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PART II
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 - Amended and Restated Employment Agreement dated July
1, 2000 between Kellstrom and John S. Gleason.
27 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K dated September 27,
2000, which included a copy of a press release announcing that
the Company had entered into a definitive agreement to acquire
the aircraft and engine parts resale business of Aviation
Sales Company.
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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.
November 14, 2000 KELLSTROM INDUSTRIES, INC.
(Registrant)
/s/ Oscar E. Torres
-----------------------------------
Oscar E. Torres
Chief Financial Officer
(principal financial and
accounting officer)
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Exhibit Index
Exhibit No. Description
----------- -----------
10.1 Amended and Restated Employment Agreement dated July 1,
2000 between Kellstrom and John S. Gleason.
27 Financial Data Schedule
