<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 June 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 July 31, 2000.
1
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KELLSTROM INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <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 ......................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk .... 15
PART II
Item 1. Legal Proceedings ............................................. 16
Item 2. Changes in Securities and Use of Proceeds ..................... 16
Item 3. Defaults Upon Senior Securities ............................... 16
Item 4. Submission of Matters to a Vote of Security Holders ........... 16
Item 5. Other Information ............................................. 16
Item 6. Exhibits and Reports on Form 8-K .............................. 17
</TABLE>
2
<PAGE> 3
Item 1. Financial Statements
KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,811,531 $ 272,140
Trade receivables, net of allowances for returns and
doubtful accounts of $8,116,409 and $8,575,684
for 2000 and 1999, respectively 49,360,082 60,674,708
Inventories 228,429,717 194,490,995
Equipment under short-term operating leases, net 68,390,243 92,135,910
Prepaid expenses 6,147,470 5,199,429
Deferred tax assets 6,675,406 8,280,101
------------- -------------
Total current assets 362,814,449 361,053,283
Equipment under long-term operating leases, net 53,069,382 58,001,190
Property, plant and equipment, net 25,918,472 25,339,940
Goodwill, net 85,643,672 87,825,058
Other assets 8,464,215 9,225,952
------------- -------------
Total Assets $ 535,910,190 $ 541,445,423
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt $ 157,517,975 $ 165,773,805
Notes payable -- 2,145,920
Current maturities of long-term debt 200,000 200,000
Accounts payable 17,254,234 17,713,220
Accrued expenses 21,705,957 18,133,718
------------- -------------
Total current liabilities 196,678,166 203,966,663
Long-term debt, less current maturities 17,520,000 17,720,000
Convertible subordinated notes 140,250,000 140,250,000
Deferred tax liabilities 8,482,726 8,295,682
------------- -------------
Total Liabilities 362,930,892 370,232,345
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 53,723,822 51,668,184
Loans receivable from directors and officers (1,851,033) (1,572,730)
Accumulated other comprehensive (loss) income (9,055) 2,060
------------- -------------
Total Stockholders' Equity 172,979,298 171,213,078
------------- -------------
Total Liabilities and Stockholders' Equity $ 535,910,190 $ 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 Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales revenues, net $ 77,364,211 $ 77,318,790 $145,198,775 $146,030,885
Rental revenues 4,882,756 10,908,109 11,519,236 21,252,023
------------ ------------ ------------ ------------
Total revenues 82,246,967 88,226,899 156,718,011 167,282,908
Cost of goods sold 56,004,249 52,126,790 104,338,483 99,510,109
Depreciation of equipment under operating leases 4,326,479 6,887,988 9,964,062 13,184,407
Selling, general and administrative expenses 11,673,098 10,670,399 23,265,359 19,165,909
Depreciation and amortization 1,551,837 1,309,764 3,102,778 2,511,164
Other non-recurring expenses -- 2,200,000 -- 2,200,000
------------ ------------ ------------ ------------
Total operating expenses 73,555,663 73,194,941 140,670,682 136,571,589
Operating income 8,691,304 15,031,958 16,047,329 30,711,319
Interest expense, net of interest income 6,462,046 5,294,802 12,759,014 9,452,475
------------ ------------ ------------ ------------
Income before income taxes 2,229,258 9,737,156 3,288,315 21,258,844
Income taxes 837,648 3,704,161 1,232,677 8,077,521
------------ ------------ ------------ ------------
Net income $ 1,391,610 $ 6,032,995 $ 2,055,638 $ 13,181,323
============ ============ ============ ============
Earnings per common share - basic $ 0.12 $ 0.51 $ 0.17 $ 1.12
============ ============ ============ ============
Earnings per common share - diluted $ 0.12 $ 0.41 $ 0.17 $ 0.88
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic 11,910,981 11,826,704 11,910,981 11,799,984
============ ============ ============ ============
Weighted average number of common shares
outstanding - diluted 11,919,264 17,724,910 11,946,246 17,772,912
============ ============ ============ ============
</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>
Six Months Ended June 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,055,638 $ 13,181,323
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,102,778 2,511,164
Depreciation of equipment under operating leases 9,964,062 13,184,407
Amortization of deferred financing costs 1,038,318 1,004,174
Deferred income taxes 1,791,739 (1,605,508)
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables, net 12,667,161 (18,941,485)
Increase in inventories (20,006,860) (26,348,165)
Decrease (increase) in equipment under operating leases 5,084,317 (23,504,895)
Increase in prepaid expenses and other current assets (948,041) (5,953,767)
Increase in other assets (394,583) (284,924)
(Decrease) increase in accounts payable (498,705) 4,906,947
Increase (decrease) in accrued expenses 6,034,680 (278,072)
Increase in income taxes payable -- 1,418,620
------------ ------------
Net cash provided by (used in) operating activities 19,890,504 (40,710,181)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired -- (16,718,685)
Acquisition earn-out payments (3,618,646) (4,932,999)
Purchase of property, plant and equipment (1,852,414) (3,951,369)
Proceeds from sales of property, plant and equipment -- 56,763
------------ ------------
Net cash used in investing activities (5,471,060) (25,546,290)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement (8,455,830) 71,633,019
Debt repayment, including capital lease obligation (2,145,920) (5,045,207)
Proceeds from the issuance of common stock -- 1,096,536
Loans to directors and officers (278,303) 136,580
Payment of deferred financing costs -- (474,372)
------------ ------------
Net cash (used in) provided by financing activities (10,880,053) 67,346,556
------------ ------------
NET INCREASE IN CASH & CASH EQUIVALENTS 3,539,391 1,090,085
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 272,140 1,107,102
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 3,811,531 $ 2,197,187
============ ============
</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>
Six Months Ended June 30,
----------- -----------
2000 1999
----------- -----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $11,566,368 $ 8,194,567
=========== ===========
Income taxes $ 367,500 $ 7,840,974
=========== ===========
Supplemental disclosure of fair value of assets acquired and liabilities assumed
in connection with acquisitions:
Receivables 3,570,615
Inventory 13,014,566
Prepaid expenses and other current assets 453,861
Goodwill 9,958,109
Other assets 85,280
-----------
Total assets $27,082,431
===========
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 16,718,685
-----------
Net cash used in acquisitions $16,718,685
===========
</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 June 30, 2000, the
condensed consolidated results of operations for the three and six
month periods ended June 30, 2000 and 1999, and the condensed
consolidated statements of cash flows for the six month periods ended
June 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.
NOTE 3 - EARNINGS PER SHARE
Diluted earnings per share for the three and six month periods ended
June 30, 2000 and 1999 were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------- ----------- ----------- -----------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 1,391,610 $ 6,032,995 $ 2,055,638 $13,181,323
Income adjustment relating to reduction of debt
based on the if converted method -- 1,216,557 -- 2,433,113
----------- ----------- ----------- -----------
Net income available to common and
common equivalent shares $ 1,391,610 $ 7,249,552 $ 2,055,638 $15,614,436
=========== =========== =========== ===========
Weighted average number of common shares
outstanding - basic 11,910,981 11,826,704 11,910,981 11,799,984
Dilutive common stock equivalents from stock
options and warrants based on the treasury
stock method 8,283 1,280,724 35,265 1,355,446
Dilutive convertible subordinated notes based
on the if converted method -- 4,617,482 -- 4,617,482
----------- ----------- ----------- -----------
Weighted average number of common shares
outstanding - diluted 11,919,264 17,724,910 11,946,246 17,772,912
=========== =========== =========== ===========
</TABLE>
In the computation of diluted earnings per common share for the
three-month periods ended June 30, 1999 and 2000, approximately 1.0
million and 3.9 million stock options, respectively, were excluded
because their inclusion would have been antidilutive. Additionally,
conversion of the convertible subordinated notes was not assumed for
the three-month period ended June 30, 2000 because of its antidilutive
effect.
In the computation of diluted earnings per common share for the
six-month periods ended June 30, 1999 and 2000, approximately .9
million and 3.8 million stock options, respectively, were excluded
because their inclusion would have been antidilutive. Additionally,
conversion of the convertible subordinated notes was not assumed for
the six-month period ended June 30, 2000 because of its antidilutive
effect.
7
<PAGE> 8
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 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 six month periods ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Commercial Engine Parts $ 23,292,878 $ 18,209,729 $ 43,577,429 $ 31,734,918
Defense 17,673,937 10,324,140 $ 34,868,795 19,828,462
Airframe Avionics and Rotables 14,564,396 10,787,921 $ 28,059,551 25,160,505
Whole Engine and Aircraft 26,715,756 48,905,109 50,212,236 90,559,023
------------ ------------ ------------ ------------
Total revenue $ 82,246,967 $ 88,226,899 $156,718,011 $167,282,908
============ ============ ============ ============
Gross margin
Commercial Engine Parts $ 8,794,940 $ 6,072,688 $ 15,708,789 $ 10,742,591
Defense 6,420,201 3,677,465 12,514,985 7,141,323
Airframe Avionics and Rotables 4,061,483 2,834,417 7,895,321 6,245,805
Whole Engine and Aircraft 2,639,615 16,627,551 6,296,371 30,458,673
------------ ------------ ------------ ------------
Total gross margin $ 21,916,239 $ 29,212,121 $ 42,415,466 $ 54,588,392
============ ============ ============ ============
</TABLE>
8
<PAGE> 9
NOTE 5 - COMPREHENSIVE INCOME
The Company's total comprehensive income, comprised of net income and
foreign currency translation adjustments, for the three and six month
periods ended June 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 1,391,610 $ 6,032,995 $ 2,055,638 $ 13,181,323
Foreign currency translation adjustments (5,287) 31,178 (11,115) (887)
------------ ------------ ------------ ------------
Other comprehensive income, net of taxes (5,287) 31,178 (11,115) (887)
------------ ------------ ------------ ------------
Total Comprehensive income $ 1,386,323 $ 6,064,173 $ 2,044,523 $ 13,180,436
============ ============ ============ ============
</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.
9
<PAGE> 10
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.
This quarterly report on Form 10-Q contains or may contain certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the Company's business, financial
condition and results of operations. The words "estimate," "project," "intend,"
"expect," and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements, including those described
below. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
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. This acquisition was
accounted for using the purchase method of accounting for business combinations
and accordingly, Certified's operating results have been included in the
Company's results of operations since the date of acquisition. Consequently, the
results of operations for the three and six month periods ended June 30, 2000
are not comparable to the corresponding periods of the prior year in certain
material respects.
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.
10
<PAGE> 11
<TABLE>
<CAPTION>
Percentage of Total Revenues Percentage of Total Revenues
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Sales revenues, net 94.1% 87.6% 92.6% 87.3%
Rental revenues 5.9% 12.4% 7.4% 12.7%
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of goods sold 68.1% 59.1% 66.6% 59.5%
Depreciation of equipment under operating leases 5.3% 7.8% 6.4% 7.9%
Selling, general and administrative expenses 14.2% 12.1% 14.8% 11.5%
Depreciation and amortization expense 1.9% 1.5% 2.0% 1.5%
Other non-recurring expenses 0.0% 2.5% 0.0% 1.3%
Total operating expenses 89.4% 83.0% 89.8% 81.6%
Operating income 10.6% 17.0% 10.2% 18.4%
Interest expense (net of interest income) 7.9% 6.0% 8.1% 5.7%
Income before income taxes 2.7% 11.0% 2.1% 12.7%
Income taxes 1.0% 4.2% 0.8% 4.8%
Net income 1.7% 6.8% 1.3% 7.9%
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Consolidated sales revenues decreased by 7% to $82.2 million for the
three months ended June 30, 2000 as compared to $88.2 million for the three
months ended June 30, 1999. Sales revenues from the Company's commercial engine
parts segment increased to $23.3 million as compared with $18.2 million for the
three months ended June 30, 2000 and June 30, 1999, respectively. Sales revenues
from the Company's defense segment increased to $17.7 million as compared with
$10.3 million for the three months ended June 30, 2000 and June 30, 1999,
respectively. Sales revenues from the Company's airframe avionics and rotables
segment increased to $14.6 million as compared with $10.8 million for the three
months ended June 30, 2000 and June 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 decreased to $21.8 million as compared with $38.0
million for the three months ended June 30, 2000 and June 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.
Rental revenues from the Company's whole engine and aircraft segment
decreased by 55% to $4.9 million for the three months ended June 30, 2000 as
compared to $10.9 million for the three months ended June 30, 1999. The decrease
in rental revenues was primarily due to a customer unexpectedly ceasing
operations during the fourth quarter of 1999, a reduction in fleet utilization
and a reduction in the size of the fleet.
Consolidated cost of goods sold increased by 7% to $56.0 million for
the three months ended June 30, 2000 as compared to $52.1 million for the three
months ended June 30, 1999. Consolidated gross profit margin on sales was 27.6%
for the three months ended June 30, 2000 as compared with 32.6% for the three
months ended June 30, 1999. Gross margin for the three months ended June 30,
2000 for the commercial engine parts, defense and airframe avionics and rotables
segments were 37.8%, 36.3% and 27.9%, respectively, as compared to 33.3%, 35.6%
and 26.3%, respectively, for the three months ended June 30, 1999. The increase
in gross margins at these segments reflects the Company's efforts to pursue
higher value-add inventory and engine management services worldwide. Gross
margins from the sale of whole engines and aircraft were 9.5% for the second
quarter of 2000 as compared to 33.2% for the second quarter of 1999, reflecting
the Company's efforts to reposition its lease portfolio.
Depreciation of equipment under operating leases decreased by 37% to
$4.3 million for the three months ended June 30, 2000 as compared to $6.9
million for the three months ended June 30, 1999. Gross profit margin
11
<PAGE> 12
on rental revenues decreased to 11.4% in 2000 from 36.9% 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 9% to $11.7
million for the three months ended June 30, 2000 as compared to $10.7 million
for the three months ended June 30, 1999. The increase in selling, general and
administrative expenses was primarily due to (i) the acquisition of Certified
being combined into Kellstrom 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 18% to $1.6 million
for the three months ended June 30, 2000 as compared to $1.3 million for the
three months ended June 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 three months ended June 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 22% to $6.5
million for the three months ended June 30, 2000 as compared to $5.3 million for
the three months ended June 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 three months ended June 30,
2000 was 37.6% as compared to 38.0% for the three months ended June 30, 1999.
Net income decreased by 77% to $1.4 million for the three months ended
June 30, 2000 as compared to $6.0 million for the three months ended June 30,
1999. Basic earnings per common share decreased by 76% to $0.12 for the three
months ended June 30, 2000 as compared to $0.51 for the three months ended June
30, 1999. Diluted earnings per common share decreased by 71% to $0.12 for the
three months ended June 30, 2000 as compared to $0.41 for the three months ended
June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Consolidated sales revenues of $145.2 million for the six months ended
June 30, 2000 were relatively flat as compared to $146.0 million for the six
months ended June 30, 1999. Sales revenues from the Company's commercial engine
parts segment increased to $43.6 million as compared with $31.7 million for the
six months ended June 30, 2000 and June 30, 1999, respectively. Sales revenues
from the Company's defense segment increased to $34.9 million as compared with
$19.8 million for the six months ended June 30, 2000 and June 30, 1999,
respectively. Sales revenues from the Company's airframe avionics and rotables
segment increased to $28.0 million as compared with $25.2 million for the six
months ended June 30, 2000 and June 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
$38.7 million as compared with $69.3 million for the six months ended June 30,
2000 and June 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 46% to $11.5 million for the six months ended June 30, 2000 as
compared to $21.3 million for the six months ended June 30, 1999. The decrease
in rental revenues was primarily due to a customer unexpectedly ceasing
operations during the fourth quarter of 1999, a reduction in fleet utilization
and a reduction in the size of the fleet.
Consolidated cost of goods sold increased by 5% to $104.3 million for
the six months ended June 30, 2000 as compared to $99.5 million for the six
months ended June 30, 1999. Consolidated gross profit margin on sales was 28.1%
for the six months ended June 30, 2000 as compared with 31.9% for the six months
ended June 30, 1999. Gross margin for the six months ended June 30, 2000 for the
commercial engine parts and airframe avionics and rotables segments was 36.0%
and 28.1%, respectively, as compared to 33.9% and 24.8%, respectively, for the
six months ended June 30, 1999. The increase in gross margins at these segments
reflects the Company's efforts to pursue higher value-added inventory and engine
management services worldwide. Gross margin for the six months ended June 30,
2000 for the defense segment was relatively unchanged at 35.9% as compared to
36.0% for the same period last year. Gross margins from the sale of whole
engines and aircraft were 12.3% for the six months ended June 30, 2000 as
compared to 32.3% for the six months ended June 30, 1999, reflecting the
Company's efforts to reposition its lease portfolio.
Depreciation of equipment under operating leases decreased by 24% to
$10.0 million for the six months ended June 30, 2000 as compared to $13.2
million for the six months ended June 30, 1999. Gross profit margin on rental
revenues decreased to 13.5% in 2000 from 38.0% 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 21% to $23.3
million for the six months ended June 30, 2000 as compared to $19.2 million for
the six months ended June 30, 1999. The increase in selling, general and
administrative expenses was primarily due to (i) the acquisition of Certified
being combined into Kellstrom 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 24% to $3.1 million
for the six months ended June 30, 2000 as compared to $2.5 million for the six
months ended June 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 six months ended June 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 35% to $12.8
million for the six months ended June 30, 2000 as compared to $9.5 million for
the six months ended June 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 six months ended June 30, 2000
was 37.5% as compared to 38.0% for the six months ended June 30, 1999.
Net income decreased by 84% to $2.1 million for the six months ended
June 30, 2000 as compared to $13.2 million for the six months ended June 30,
1999. Basic earnings per common share decreased by 85% to $0.17 for the six
months ended June 30, 2000 as compared to $1.12 for the six months ended June
30, 1999. Diluted earnings per common share decreased by 81% to $0.17 for the
six months ended June 30, 2000 as compared to $0.88 for the six months ended
June 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company's liquidity and capital resources
included cash and cash equivalents of $3.8 million and working capital of $166.1
million. At June 30, 2000, total outstanding debt was $315.5 million as compared
to $326.1 million as of December 31, 1999. As of June 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 $164.0 million was outstanding and $25.9 million was available.
Cash flow provided by operating activities for the six months ended
June 30, 2000 was $19.9 million compared with cash flow used in operating
activities of $40.7 million for the six months ended June 30, 1999. The primary
sources of cash from operating activities were a decrease in accounts receivable
of $12.7 million, net income of $2.1 million, adjusted for non-cash expenses
related to depreciation and amortization of $13.1 million and an increase in
accrued expenses of $6.0 million. The primary use of cash for operating
activities was for increases in inventories of $20.0 million to support the
Company's growth.
Cash flow used for investing activities for the six months ended June
30, 2000 was $5.5 million compared with $25.5 million for the six months ended
June 30, 1999. The primary uses of cash for investing activities were 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 $1.9 million.
Cash flow used for financing activities for the six months ended June
30, 2000 was $10.9 million compared with cash flow provided by financing
activities of $67.3 million for the six months ended June 30, 1999. The primary
uses of cash for financing activities were a decrease in borrowings under the
Company's line of credit agreement of $8.5 million and the repayment of a note
payable of $2.1 million.
The Company is continuing to evaluate the possibility of establishing
partnerships with financial/leasing organizations for the continued expansion of
its business through off-balance-sheet initiatives. Under the proposed
initiatives, the Company expects that it would retain a minority ownership stake
in the proposed partnerships and continue to manage the operations of those
partnerships. There are no guarantees that these initiatives will happen. The
proposed initiatives are expected to take place if and when one or more
appropriate financial/leasing organizations are identified and transaction terms
are finalized.
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 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 June 30, 2000, the Company had approximately
$164.0 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 not have a material impact on the financial condition, results of
operations or cash flows of the Company.
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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.
27 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
None
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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.
August 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
27 Financial Data Schedule
19
