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UNITED STATES
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 MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 1-12380
AVIALL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 65-0433083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2750 REGENT BOULEVARD
DFW AIRPORT, TEXAS 75261-9048
(Address of principal executive offices) (Zip Code)
(972) 586-1000
(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 of common stock, par value $.01 per share, outstanding at
May 10, 2002 was 18,608,210.
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1
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AVIALL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
------------ ------------
Net sales $ 167,603 130,022
Cost of sales 129,407 100,548
------------ ------------
Gross profit 38,196 29,474
Operating and other expenses:
Selling and administrative expenses 25,186 22,675
Interest expense 5,590 2,296
------------ ------------
Earnings before income taxes 7,420 4,503
Provision for income taxes 2,894 1,801
------------ ------------
Net earnings 4,526 2,702
Less deemed dividend from beneficial conversion feature (20,533) --
Less preferred stock dividends (1,015) --
------------ ------------
Net earnings (loss) applicable to common shares $ (17,022) 2,702
============ ============
Basic net earnings (loss) per share $ (0.93) 0.15
Weighted average common shares 18,383,036 18,461,527
============ ============
Diluted net earnings (loss) per share $ (0.93) 0.15
Weighted average common and potentially dilutive common shares 23,458,085 18,493,638
============ ============
See accompanying notes to consolidated financial statements.
2
AVIALL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
---------- ----------
Net earnings $ 4,526 2,702
Other comprehensive loss:
Cumulative effect of change in accounting principle - adoption of SFAS 133
(net of income tax benefit of $165) -- 262
Fair value adjustment of derivative instruments (net of income tax benefit of $109) -- 171
---------- ----------
Comprehensive income $ 4,526 2,269
========== ==========
See accompanying notes to consolidated financial statements.
3
AVIALL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 4,764 2,526
Receivables 111,720 75,134
Inventories 250,836 241,635
Prepaid expenses and other current assets 2,942 2,567
Deferred income taxes 21,842 21,842
----------- -----------
Total current assets 392,104 343,704
----------- -----------
Property and equipment 32,143 33,460
Goodwill 46,843 46,843
Intangible assets 44,972 44,503
Deferred income taxes 46,718 49,369
Other assets 14,694 15,350
----------- -----------
Total assets $ 577,474 533,229
=========== ===========
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,995 3,591
Revolving line of credit 117,845 107,706
Accounts payable 82,234 51,090
Accrued expenses 31,601 31,659
----------- -----------
Total current liabilities 234,675 194,046
----------- -----------
Long-term debt 77,962 89,557
Other liabilities 14,195 14,623
Commitments and contingencies -- --
Convertible preferred stock (46,123 shares and 45,110 shares issued and
outstanding at March 31, 2002 and at December 31, 2001, respectively;
$1,000 aggregate liquidation preference per share) 41,174 40,161
Shareholders' equity (common stock of $.01 par value per share; 20,616,097
shares and 20,497,992 shares issued at March 31, 2002 and at December 31,
2001, respectively; 18,608,210 shares and 18,495,990 shares outstanding
at March 31, 2002 and at December 31, 2001, respectively) 209,468 194,842
----------- -----------
Total liabilities, convertible preferred stock and shareholders' equity $ 577,474 533,229
=========== ===========
See accompanying notes to consolidated financial statements.
4
AVIALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net earnings $ 4,526 2,702
Depreciation and amortization 4,101 2,468
Deferred income taxes 2,656 1,759
Compensation expense on restricted stock awards 95 57
----------- -----------
11,378 6,986
Changes in:
Receivables (36,586) (2,213)
Inventories (9,201) (23,991)
Accounts payable 31,144 11,423
Accrued expenses 117 (1,455)
Other, net (803) 2,120
----------- -----------
Net cash used for operating activities (3,951) (7,130)
----------- -----------
INVESTING ACTIVITIES:
Purchase of distribution rights (1,732) (10,415)
Capital expenditures (992) (3,423)
Sales of property, plant and equipment 120 5
----------- -----------
Net cash used for investing activities (2,604) (13,833)
----------- -----------
FINANCING ACTIVITIES:
Net change in revolving credit facility 9,435 21,603
Debt repaid (600) (1,753)
Purchase of treasury stock (40) --
Dividends paid (2) --
Issuance of common stock -- (43)
Debt issue costs paid -- (16)
----------- -----------
Net cash provided by financing activities 8,793 19,791
----------- -----------
Change in cash and cash equivalents 2,238 (1,172)
Cash and cash equivalents, beginning of period 2,526 4,865
----------- -----------
Cash and cash equivalents, end of period $ 4,764 3,693
=========== ===========
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 1,753 1,955
Income taxes $ 384 545
NONCASH INVESTING AND FINANCING ACTIVITIES:
Dividends on preferred stock $ 21,546 --
Issuance of warrants $ 11,060 --
See accompanying notes to consolidated financial statements.
5
AVIALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, these financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended March 31, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Annual Report on Form 10-K for Aviall, Inc. for the year ended December 31,
2001.
NOTE 2 - SEGMENT INFORMATION
The following tables present information by operating segment (in
thousands):
THREE MONTHS ENDED
MARCH 31,
---------------------------
NET SALES (UNAUDITED) 2002 2001
----------- -----------
Aviall Services $ 161,026 123,319
ILS 6,577 6,703
----------- -----------
Total net sales $ 167,603 130,022
=========== ===========
PROFIT (UNAUDITED)
----------- -----------
Aviall Services $ 13,807 6,597
ILS 2,208 2,541
----------- -----------
Reportable segment profit 16,015 9,138
Corporate (3,005) (2,339)
Interest expense (5,590) (2,296)
----------- -----------
Earnings before income taxes $ 7,420 4,503
=========== ===========
6
NOTE 3 - EARNINGS PER SHARE
A reconciliation of the numerator and denominator of the basic and diluted
earnings per share calculations for net earnings follows:
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------
2002 2001
--------------------------------------------------
AVERAGE AVERAGE
(IN THOUSANDS, EXCEPT SHARE DATA) INCOME SHARES INCOME SHARES
---------- ---------- ---------- ----------
Net earnings $ 4,526 2,702
Less: preferred stock dividends (21,548) --
---------- ---------- ---------- ----------
Basic (17,022) 18,383,036 2,702 18,461,527
Effect of dilutive securities:
Stock options -- 86,882 -- 32,111
Restricted stock rights -- 189,999 -- --
Warrants -- 330,109 -- --
Convertible preferred stock 21,548 4,468,059 -- --
---------- ---------- ---------- ----------
Diluted $ 4,526 23,458,085 2,702 18,493,638
========== ========== ========== ==========
Diluted net earnings per share were not dilutive, or lower than basic, for
the three months ended March 31, 2002. Therefore, diluted net earnings per share
for 2002 is presented equal to basic net earnings per share.
NOTE 4 - PREFERRED STOCK
On March 15, 2002 following stockholder approval, the Series B Senior
Convertible Participating Preferred Stock, or Series B Preferred Stock, was
automatically converted into 45,110 shares of Series D Senior Convertible
Participating Preferred Stock, or Series D Preferred Stock, which as of March
15, 2002 was convertible into 7,777,584 shares of common stock. Upon conversion
of the Series B Preferred Stock, we recorded a $20.5 million deemed dividend
reflecting the difference between the closing market price of our common stock
on the New York Stock Exchange on March 15, 2002 and the $5.80 conversion price
of the Series D Preferred Stock negotiated in December 2001.
Dividends on the Series D Preferred Stock are payable quarterly in
additional shares of Series D Preferred Stock on a cumulative basis at an annual
rate of 9.0%. On March 31, 2002, we issued an additional 1,013 shares of Series
D Preferred Stock and recorded $1.0 million in payment of the quarterly dividend
due March 31, 2002. As of March 31, 2002, there were 46,123 shares of Series D
Preferred Stock outstanding, which were convertible into 7,952,238 shares of
common stock.
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets",
or SFAS 142. SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. The statement eliminates amortization of
goodwill and intangible assets with indefinite lives and requires a transitional
impairment test of these assets within six months of the date of adoption and an
annual impairment test thereafter and in certain circumstances. We have
completed the transitional impairment tests of goodwill and intangible assets
with indefinite lives as of January 1, 2002, and no impairment was noted.
7
MARCH 31, 2002 DECEMBER 31, 2001
-----------------------------------------------------------------
AVIALL AVIALL
(IN THOUSANDS) SERVICES ILS TOTAL SERVICES ILS TOTAL
-------- -------- -------- -------- -------- --------
Balance as of beginning of period $ 42,692 4,151 46,843 44,424 4,336 48,760
Amortization -- -- -- (1,732) (185) (1,917)
Goodwill acquired during year -- -- -- -- -- --
Impairment losses -- -- -- -- -- --
Goodwill written off related to sale of
business unit -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balance as of end of period $ 42,692 4,161 46,843 42,692 4,151 46,843
======== ======== ======== ======== ======== ========
THREE MONTHS ENDED MARCH 31,
----------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) 2002 2001
------------ ------------
Reported net earnings $ 4,526 2,702
Add: Goodwill amortization -- 479
------------ ------------
Adjusted net earnings $ 4,526 3,181
============ ============
Basic net earnings (loss) per share:
Reported net earnings (loss) $ (0.93) 0.15
Goodwill amortization -- 0.02
------------ ------------
Adjusted net earnings (loss) $ (0.93) 0.17
============ ============
Diluted net earnings (loss) per share:
Reported net earnings (loss) $ (0.93) 0.15
Goodwill amortization -- 0.02
------------ ------------
Adjusted net earnings (loss) $ (0.93) 0.17
============ ============
Included in intangible assets in the accompanying consolidated balance
sheets are the following amounts:
MARCH 31, 2002 DECEMBER 31, 2001
----------------------------------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------ ------------ ------------ ------------
Distribution rights $ 52,986 (8,014) 51,254 (6,751)
------------ ------------ ------------ ------------
Total $ 52,986 (8,014) 51,254 (6,751)
============ ============ ============ ============
Amortization expense of definite lived intangible assets amounted to $1.3
million and $0.7 million for the three months ended March 31, 2002 and 2001,
respectively.
Estimated amortization expense of definite lived intangible assets for each
of the five succeeding years is as follows (in thousands):
YEARS ENDING DECEMBER 31,
---------------------------------------
2002 $ 5,196
2003 $ 5,244
2004 $ 5,244
2005 $ 5,244
2006 $ 5,244
8
NOTE 6 - DEBT
On March 15, 2002 following stockholder approval, we issued to our senior
unsecured noteholders warrants exercisable for an aggregate of 1,750,000 shares
of our common stock (subject to adjustment for antidilution events) at an
exercise price of $0.01 per share. We valued the warrants using an option
pricing model and recorded an $11.1 million discount on our senior unsecured
notes.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with
the information set forth under Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations on pages 20 through 32 of Aviall,
Inc.'s Annual Report on Form 10K for the year ended December 31, 2001.
RESULTS OF OPERATIONS-THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS
ENDED MARCH 31, 2001
NET SALES. Net sales for Aviall Services were $161.0 million, an increase
of $37.7 million or 30.6%, from the $123.3 million recorded in the first quarter
of 2001. The increase was primarily due to higher Rolls-Royce T56/501-D, or RR
T56, series turbine engine parts sales under the new contract which began in
2002, sales for the Honeywell agreements implemented in 2001, and better than
expected general aviation sales. This increase was partially offset by lower
airline segment revenues. The first quarter net sales amounts do not include
what would have been approximately $40.0 million of RR T56 sales if these sales
had been made directly by Aviall but which were actually made directly by
Rolls-Royce to the U.S. military as part of the RR T56 transition program. We
received full margin for these sales and expect to begin making this type of
sale directly to the U.S. military by the end of the second quarter of 2002.
Excluding net sales from the new RR T56 product line, only the general aviation
and the government business segments reported higher net sales year-over-year
while the airline and broker segments as well as all geographic regions posted
lower year-over-year sales.
Net sales at Inventory Locator Service, or ILS, were $6.6 million -
essentially flat year-over-year. However, ILS continued to set new customer
usage records in nearly every category.
GROSS PROFIT. Gross profit of $38.2 million increased $8.7 million or 29.6%
in the first quarter of 2002 compared to $29.5 million in the first quarter of
2001. Gross profit as a percentage of net sales was 22.8% and would adjust to
18.5% if the full sales impact of the U.S. military RR T56 sales sold directly
by Rolls-Royce were reflected in Aviall Services' net sales.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $2.5 million to $25.2 million in the first quarter of 2002 but
decreased as a percentage of net sales from 17.4% to 15.0% and would have been
12.2% if the RR T56 sales sold directly by Rolls-Royce were reflected in Aviall
Services' net sales. The increase in selling and administrative expenses is
largely attributable to the new RR T56 product line, higher depreciation costs
associated with the increased spending on technology infrastructure, and the
cost of a special meeting of stockholders held in March 2002. This increase in
selling and administrative expenses was partially offset by the implementation
of SFAS 142, which reduced goodwill amortization by $0.5 million in the first
quarter of 2002 compared to the first quarter of 2001.
EBITDA. Earnings from continuing operations before interest, taxes,
depreciation, amortization and unusual items was $16.5 million in the first
quarter of 2002 compared to $9.1 million in the first quarter of 2001. This
increase resulted primarily from the addition of the RR T56 product line.
INTEREST EXPENSE. Our interest expense, as expected, was higher than in the
first quarter of 2002 primarily due to the new capital structure which resulted
in higher borrowings, higher amortization of debt issuance costs, and increased
interest rates.
NET EARNINGS. Net earnings for the first quarter of 2002 were $4.5 million,
an increase of 68% compared to the $2.7 million reported in the first quarter of
2001.
9
DEEMED DIVIDEND. The deemed dividend of $20.5 million in 2002 resulted from
the conversion of all of the outstanding Series B Preferred Stock into 45,110
shares of Series D Preferred Stock on March 15, 2002. The deemed dividend
reflects the difference between the closing market price of our common stock on
the New York Stock Exchange on March 15, 2002 and the $5.80 conversion price of
the Series D Preferred Stock negotiated in December 2001.
PREFERRED STOCK DIVIDEND. The preferred stock dividend of $1.0 million in
March 2002 resulted from the issuance of 1,013 shares of Series D Preferred
Stock in payment of the quarterly dividend on the Series D Preferred Stock due
March 31, 2002.
INCOME TAXES
Our cash income tax expense continues to be substantially lower than the
U.S. federal statutory rate through the use of our large U.S. federal net
operating loss. Our cash tax expense is primarily related to foreign taxes on
foreign operations and U.S. federal alternative minimum tax. For U.S. federal
tax purposes as of December 31, 2001, we had an estimated net operating loss
carryforward of approximately $137.3 million, substantially expiring in
2009-2011. Based on current and expected future earnings levels, the net
operating losses may not be fully utilized for several years. If certain
substantial changes in our ownership should occur, there could be an annual
limitation on the amount of the U.S. federal net operating loss carryforward
that could be utilized. The amount of the annual limitation could vary
significantly based on certain factors existing at the date of the change in
ownership.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations, excluding working capital changes, were $11.4
million in the first quarter of 2002 compared to $7.0 million in the first
quarter of 2001. The increase in 2002 resulted primarily from higher sales and
gross margin from the new RR T56 contract. Year-over-year increases in working
capital were $15.3 million in the first quarter of 2002 compared to $14.1
million in the first quarter of 2001. The increase in 2002 was primarily due to
the addition of working capital for the new RR T56 product line. Capital
expenditures were $1.0 million in the first quarter of 2002 compared to $3.4
million in the first quarter of 2001. We expect capital expenditures will be
approximately $6.0 million in 2002. Net cash flows provided by financing
activities were $8.8 million in the first quarter of 2002 compared to $19.8
million in the first quarter of 2001.
In December 2001, we (i) sold 45,000 shares of Series B Preferred Stock for
cash proceeds of $45.0 million, (ii) sold $80.0 million of Aviall Services'
unsecured senior notes due 2007 and (iii) entered into a new $200.0 million
senior secured credit facility. The proceeds from these transactions were used
to (i) pay Rolls-Royce $90.0 million for aftermarket fulfillment rights and the
purchase of the initial parts inventory under the RR T56 engine parts agreement,
(ii) repay our former $160.0 million senior secured revolving credit facility
and term loan and (iii) fund working capital requirements.
On March 15, 2002 following stockholder approval, the Series B Preferred
Stock was automatically converted into 45,110 shares of Series D Preferred
Stock, which as of March 15, 2002 was convertible into 7,777,584 shares of
common stock. Upon conversion of the Series B Preferred Stock, we recorded a
$20.5 million deemed dividend reflecting the difference between the closing
market price of our common stock on the New York Stock Exchange on March 15,
2002 and the $5.80 conversion price of the Series D Preferred Stock negotiated
in December 2001. Dividends on the Series D Preferred Stock are payable
quarterly in additional shares of Series D Preferred Stock on a cumulative basis
at an annual rate of 9.0%. On March 31, 2002, we issued an additional 1,013
shares of Series D Preferred Stock in payment of the quarterly dividend due
March 31, 2002. As of March 31, 2002, there were 46,123 shares of Series D
Preferred Stock outstanding which were convertible into 7,952,238 shares of
common stock. The terms of the Series D Preferred Stock contain various
covenants, including limitations on debt, dividends and capital expenditures.
10
Our new senior secured credit facility consists of a $200.0 million
revolving credit and letter of credit facility due in 2006, with availability
determined by reference to a borrowing base of our eligible accounts receivable
and inventory. As of March 31, 2002, we had $81.9 million available under this
credit facility and $37.5 million available under our borrowing base. Borrowings
under our credit facility bear interest, at our option, based upon either: a
Eurodollar Rate plus an applicable margin ranging from 2.5% to 3.0% depending
upon certain of our financial ratios, or a Base Rate plus an applicable margin
ranging from 1.5% to 2.0% depending upon certain of our financial ratios. The
Base Rate is the highest of the agent bank's base rate, the federal funds rate
plus 0.5%, or the sum of (i) 0.5% per annum, (ii) the agent bank's maximum
annual assessment rate during the latest three-week period and (iii) the agent
bank's rate per annum for the latest three-week period. A commitment fee of 0.5%
is payable quarterly on the unused portion of the credit facility. Obligations
under the new credit facility are collateralized by substantially all of our
domestic assets and 65% of the stock of each of our foreign subsidiaries. Our
credit facility contains various covenants, including financial covenants and
limitations on debt, dividends and capital expenditures. Our credit facility
also contains a clause that permits the acceleration of amounts due at the
option of the agent bank, and lock-box provisions for the payment of outstanding
borrowings. Based on the terms of our new credit facility and pursuant to EITF
Issue No. 95-22, "Balance Sheet Classification of Revolving Credit Agreement
Obligations Involving Lock-Box Arrangements," we have classified amounts
outstanding under the credit facility as current. We believe that receipts of
cash as payment on accounts receivable will be sufficient to satisfy amounts
outstanding under the credit facility as they become due.
We also maintain a revolving credit facility in Canada to balance the
Canadian dollar-denominated net assets of our Canadian subsidiary. The Canadian
$6.0 million credit facility was renewed in late April and had an outstanding
balance of U.S. $3.2 million at March 31, 2002.
The $80.0 million of senior unsecured notes bear interest at 14.0% per
annum and mature on December 21, 2007, unless previously redeemed at our option.
Of the 14.0% interest rate on the senior unsecured notes, 13.0% is payable in
cash and 1.0% is payable in additional senior unsecured notes. On March 31,
2002, we paid a cash interest payment of $2.9 million, and the outstanding
principal amount on our senior unsecured notes increased by $0.2 million to
$80.2 million. On March 15, 2002 following stockholder approval, we issued to
our senior unsecured noteholders warrants exercisable for an aggregate of
1,750,000 shares of our common stock (subject to adjustment for antidilution
events) at an exercise price of $0.01 per share. We valued the warrants using an
option pricing model and recorded an $11.1 million discount on our senior
unsecured notes. The notes contain various covenants, including financial
covenants and limitations on debt, dividends and capital expenditures that are
generally less restrictive than those under our senior secured credit facility.
We expect to be in compliance with the covenants in our senior secured credit
facility and senior unsecured notes for at least the next twelve months.
We have the option to redeem the senior unsecured notes prior to their
maturity at a premium. However, we do not expect to refinance these notes in
2002 unless a significant event, such as the award of another major distribution
rights contract, exceeds our borrowing capacity. We continue to explore
opportunities to acquire additional product lines with a number of major
original equipment manufacturers but there is no certainty that any of these
discussions will lead to a major new contract in 2002 or beyond.
Additionally, we continually review opportunities for acquiring other
compatible businesses or operations. If a strategic acquisition candidate meets
our quantitative or qualitative thresholds, it is possible that such a
transaction might require us to refinance our senior unsecured notes.
We expect our interest expense to approximately double in 2002 due to the
higher borrowings, amortization of higher debt issuance costs and increased
interest rates. We believe our cash flow from operations and available credit
under our revolving lines of credit are sufficient to meet our anticipated
normal working capital and operating needs (including increased interest
expense) for the next twelve months.
11
OUTLOOK
We primarily participate in the global aviation aftermarket through Aviall
Services and ILS. Our operations and results of operations are affected by the
general economic cycle, particularly as it influences flight activity in
military, commercial, business and general aviation segments. We benefit from
our participation in the global aviation aftermarket by generating revenues from
many national economies and by actively participating in each of the aviation
sectors.
The effects of the September 11th terrorist attacks are still being felt
throughout the aviation community. Commercial air travel in the U.S. has been
significantly affected. The demand for commercial air travel in the U.S. was
significantly reduced in the period immediately following September 11th, and
the current global economic slowdown has also affected travel demand in other
regions such as Europe. The reduced flight activity and accompanying accelerated
retirement of older aircraft have reduced demand for some of the new replacement
parts we sell, particularly in the commercial aviation market. Airlines and
other aviation firms around the world are experiencing significant financial
losses, and the viability of some of these firms is questionable. We could be
negatively affected if our receivables from certain major customers become
uncollectible.
Although ILS experienced a slight decrease in aviation industry-related
subscribers after September 11th, this decrease was partially offset by an
increase in the number of government-related and general aviation subscribers.
As a result, ILS has not experienced a material adverse impact on its business
as a result of the September 11th terrorist attacks and related aftermath.
We believe the aviation industry has begun to show signs of recovery.
Travel demand is increasing and airlines are beginning to add flights back to
their schedules while the general aviation market is moving forward as well.
Over time, we believe this will result in an increase in demand for replacement
parts. However, the length of time required for a full recovery is not known,
and the recovery could be threatened by a number of factors, including slower
economic growth or additional terrorist activity. At the same time, the U.S.
military and certain foreign militaries have significantly increased their
flight activities, especially in connection with increased post-September 11th
military operations around the world. Generally, business and general aviation
flight activity, with the exception of small, piston-engine aircraft, has
remained relatively stable after the September 11th restrictions on flying were
relaxed. In 2002, we expect our net sales to be approximately 45% military, 25%
commercial airline and 30% general aviation.
In late December 2001, we were awarded exclusive ten-year worldwide
aftermarket fulfillment rights for the widely used RR T56 series engine. Under
this agreement, we paid $90.0 million for the aftermarket fulfillment rights and
the purchase of an initial inventory of parts. The award is the largest in our
history and is expected to add in excess of $3.0 billion to our net sales over
the ten-year life of the agreement, which began January 2, 2002. Sales
associated with this agreement are expected to be at least $250 million in 2002.
This includes sales by Rolls-Royce to the U.S. military during implementation,
which is expected to be completed by the end of the second quarter of 2002.
During implementation of this agreement, Rolls-Royce has temporarily continued
to ship certain orders directly to the U.S. military and is paying us a
commission on these sales equal to the gross margin we would have recognized on
these orders had we shipped them directly. For the period of time in which
Rolls-Royce continues to ship these orders directly, our net sales in 2002 will
not reflect the amount of these direct sales, though our earnings will be
unaffected. Our overall gross profit as a percentage of net sales is expected to
decline 400 basis points in 2002 due to the generally lower margins under this
agreement. However, due to the relatively limited selling and administrative
expense required to implement this product line (approximately $4.0 million),
our earnings from continuing operations before interest, taxes and unusual items
as a percentage of net sales should increase approximately 200 basis points in
2002.
Upon stockholder approval of the issuance of the Series D Preferred Stock,
we recorded a $20.5 million deemed dividend reflecting the difference between
the closing market price of the common stock on the New York Stock Exchange on
March 15, 2002 and the $5.80 conversion price of the Series D Preferred Stock
negotiated in December 2001. This one-time noncash charge reduces retained
earnings and increases paid in capital within the equity accounts and lowered
earnings per share for the first quarter and will affect the full year earnings
per share for 2002.
We believe both ILS and Aviall Services are scalable businesses, with
significant portions of their expenses being relatively fixed in the short-term.
While this scalability of the businesses produces positive results in a growing
marketplace as can be seen by the RR T56 agreement, in a shrinking marketplace
potential expense reductions can result in longer term impacts to the business,
such as delays in capital projects, and will require longer time periods to
produce cost reductions.
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CERTAIN FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) that are based
on the beliefs of our management, as well as assumptions and estimates made by
and information currently available to our management. When used in this report,
the words "anticipate," "believe," "estimate," "expect," "intend" and similar
expressions, as they relate to us or our management, identify forward-looking
statements. Such statements reflect our current views with respect to future
events and are subject to certain risks, uncertainties and assumptions relating
to our operations and results of operations as well as our customers and
suppliers, including as a result of competitive factors and pricing pressures,
shifts in market demand, general economic conditions and other factors
including, among others, those that effect flight activity in commercial,
business and general aviation, the business activities of our customers and
suppliers and developments in information and communication technology. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions or estimates prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated, expected or
intended.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have market risk exposure arising from changes in interest rates and
foreign exchange rates. From time to time, we have used financial instruments to
offset such risks. Financial instruments are not used for trading or speculative
purposes. We have experienced no significant changes in market risk during the
first quarter of 2002. Our market risk is described in more detail in our Annual
Report on Form 10-K for the year ended December 31, 2001.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held a special meeting of stockholders on March 15, 2002, and the
matters voted upon at that meeting were the following:
The approval of the terms and issuance of shares of Series D Preferred
Stock upon conversion of the Series B Preferred Stock, the issuance of shares of
Series D Preferred Stock as dividends on shares of Series D Preferred Stock, and
the issuance of shares of our common stock upon conversion of the Series D
Preferred Stock.
For Against Abstentions Broker Non-Vote
--- ------- ----------- ---------------
13,549,481 647,778 57,176 None
The approval of the terms and issuance of warrants exercisable for
1,750,000 shares of our common stock (subject to adjustment for antidilution
events) and the issuance of such common stock upon exercise of the warrants.
For Against Abstentions Broker Non-Vote
--- ------- ----------- ---------------
13,400,790 649,109 204,527 None
Approval of both proposals required the affirmative vote of a majority of
the votes cast at the special meeting of stockholders; provided, that the total
vote cast on each proposal represented over 50% in interest of all securities
entitled to vote on each proposal. Both proposals were approved at the special
meeting of stockholders.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVIALL, INC.
May 13, 2002 By /s/ Jacqueline K. Collier
----------------------------------
Jacqueline K. Collier
Vice President and Controller
Principal Accounting Officer
May 13, 2002 /s/ Cornelius Van Den Handel
----------------------------------
Cornelius Van Den Handel
Vice President and Treasurer
Principal Financial Officer
15