1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD ENDED
COMMISSION FILE NUMBER 1-12380
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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.)
2055 DIPLOMAT DRIVE
DALLAS, TEXAS 75234-8989
(Address of principal executive offices) (Zip Code)
(972) 406-2000
(Registrant's telephone number, including area code)
Indicate by check X whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
The number of shares of Common Stock, par value $.01 per share, outstanding
at November 4, 1996 was 19,525,379.
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AVIALL, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Net sales $98,637 83,111 284,399 257,841
Cost of sales 74,210 61,083 211,605 189,534
- --------------------------------------------------------------------------------------------------------------------
Gross profit 24,427 22,028 72,794 68,307
Operating and other expenses:
Selling and administrative expenses 19,378 18,025 61,051 58,051
Nonrecurring charges 2,763 (4,201) 6,613 (4,201)
Interest expense 3,503 2,827 9,656 8,587
- --------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before income taxes (1,217) 5,377 (4,526) 5,870
Provision for income taxes 1,210 2,643 1,657 3,497
- --------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations (2,427) 2,734 (6,183) 2,373
Discontinued operations:
Earnings from operations (net of income tax expense of
$1,173 and $3,678 in 1995) - 1,689 - 6,080
Gain on disposal 6,446 - 16,946 -
- --------------------------------------------------------------------------------------------------------------------
Earnings from discontinued operations 6,446 1,689 16,946 6,080
- --------------------------------------------------------------------------------------------------------------------
Net earnings before extraordinary item 4,019 4,423 10,763 8,453
- --------------------------------------------------------------------------------------------------------------------
Extraordinary loss 3,421 - 3,421 -
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 598 4,423 7,342 8,453
====================================================================================================================
Net earnings (loss) per share:
Earnings (loss) from continuing operations $ (0.13) 0.14 (0.32) 0.12
Earnings from discontinued operations 0.33 0.09 0.87 0.32
Extraordinary loss (0.17) 0.00 (0.17) 0.00
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 0.03 0.23 0.38 0.44
====================================================================================================================
Weighted average common and common equivalent shares 19,539,541 19,443,847 19,516,576 19,412,195
See accompanying notes to financial statements.
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AVIALL, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, December 31,
1996 1995
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash $ 7,082 4,690
Receivables 50,513 55,725
Inventories 72,190 100,619
Prepaid expenses and other current assets 4,335 2,953
Deferred income taxes 18,992 45,961
Net assets of discontinued operations - 238,048
- -------------------------------------------------------------------------------------------------------------
Total current assets 153,112 447,996
- -------------------------------------------------------------------------------------------------------------
Property, plant and equipment 9,578 12,129
Intangible assets 60,109 59,425
Deferred income taxes 30,219 3,249
Other assets 14,154 16,128
- -------------------------------------------------------------------------------------------------------------
Total assets $267,172 538,927
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,220 185,171
Accounts payable 26,311 48,176
Accrued expenses 67,684 86,218
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 98,215 319,565
- -------------------------------------------------------------------------------------------------------------
Long-term debt 55,239 110,439
Other liabilities 23,369 26,391
Shareholders' equity (common stock of $.01 par value per share with 80,000,000
shares authorized and 19,520,851 shares and 19,443,712 shares issued and
outstanding at September 30, 1996 and December 31, 1995, respectively;
preferred stock of $.01 par value with 10,000,000 shares authorized and no
shares issued and outstanding) 90,349 82,532
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $267,172 538,927
=============================================================================================================
See accompanying notes to financial statements.
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AVIALL, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine months ended
September 30,
---------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 7,342 8,453
Gain on disposal of discontinued operations (16,946) -
Nonrecurring charges 6,613 (4,201)
Extraordinary loss 3,421 -
Continuing operations depreciation and amortization 8,051 5,505
Discontinued operations depreciation and amortization - 16,760
Deferred income taxes (2,814) 1,277
Changes in:
Receivables (559) 2,954
Inventories 4,164 2,322
Accounts payable 6,231 (4,317)
Accrued expenses (2,637) (29,122)
Other, net (4,087) 1,546
Discontinued operations working capital changes 5,020 38,504
- ------------------------------------------------------------------------------------------------------------
13,799 39,681
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from businesses sold 261,276 76,800
Capital expenditures (1,027) (3,303)
Sales of property, plant and equipment 2,011 474
Other, net - (861)
Net change in discontinued operations property, plant and equipment 603 (11,745)
- ------------------------------------------------------------------------------------------------------------
262,863 61,365
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt proceeds 50,000 -
Net change in revolving credit facility (152,542) (27,168)
Debt repaid (169,632) (78,666)
Debt issue costs paid (2,571) -
Issuance of common stock 475 101
Dividends paid - (582)
- ------------------------------------------------------------------------------------------------------------
(274,270) (106,315)
- ------------------------------------------------------------------------------------------------------------
Change in cash 2,392 (5,269)
Cash, beginning of period 4,690 11,486
- ------------------------------------------------------------------------------------------------------------
Cash, end of period $ 7,082 6,217
============================================================================================================
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $17,583 23,025
Income taxes $ 1,123 19,195
See accompanying notes to financial statements.
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AVIALL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, these financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the three- and nine-month periods ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996. Certain prior year amounts have been reclassified to conform to the
current year presentation. For further information, refer to the financial
statements and footnotes thereto included in Aviall, Inc.'s ("Aviall" or the
"Company") Form 10-K for the year ended December 31, 1995.
NOTE 2 - NONRECURRING CHARGE
In April 1996, the Company signed a letter of intent to sell its aerospace
fastener distribution business (the "Fastener Business") and recorded a $3.9
million first quarter charge in connection with the planned sale. In the third
quarter of 1996, an additional charge of $2.8 million was recorded to reflect
the final contract terms and higher than estimated transaction-related expenses
in connection with the sale of the Fastener Business which was completed on
September 19, 1996.
NOTE 3 - DISCONTINUED OPERATIONS
In April 1996, Aviall and its wholly owned subsidiary, Aviall Services,
Inc., signed a definitive agreement with Greenwich Air Services, Inc.
("Greenwich") and its wholly owned subsidiary, GASI Engine Services, Inc., for
the sale of its engine repair operations in Dallas/Fort Worth and Prestwick,
Scotland and its component repair facility in McAllen, Texas. Also in April
1996, Aviall signed a definitive agreement with Curtiss-Wright Flight Systems,
Inc. for the sale of its Miami-based accessory services repair station. The
accessory repair services sale was completed on May 20, 1996, and the engine
repair services sale was completed on June 10, 1996. The engine repair
services sale agreement provided Greenwich the unilateral option to pay a
portion of the purchase price in stock. Greenwich did not exercise this option
and paid the full purchase price in cash (or assumed liabilities). Included in
the $212.5 million estimated loss on disposal recorded in December 1995 was a
$10.5 million provision for loss on sale of the stock which was reversed in the
second quarter of 1996.
In the third quarter of 1996, the Company recognized an additional gain on
disposal of $6.4 million as a result of changes in estimates for
transaction-related expenses and settlement of the final sale price of its
engine repair services business. The final settlement included the receipt by
Aviall of $10.4 million placed in escrow at the close of the sale pending
finalization of the audited closing date net asset statement.
NOTE 4 - EXTRAORDINARY LOSS
The $3.4 million extraordinary loss resulted from the write-off of
unamortized debt issuance costs associated with the Company's 1993 amended
credit agreement which was refinanced in the third quarter of 1996.
NOTE 5 - INVENTORIES
September 30, December 31,
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
(Unaudited)
Distribution parts $76,753 130,212
Reserves for excess and obsolete inventories (4,563) (29,593)
- --------------------------------------------------------------------------------
$72,190 100,619
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NOTE 6 - DEBT
In September 1996, the Company replaced its domestic credit facilities.
The new senior credit facilities (the "Credit Facilities") consist of a $50
million five-year amortizing secured term loan due through 2001 (the "Term
Loan"), and a $50 million five-year secured revolving loan due in 2001 (the
"Revolving Credit Facility") with availability determined by reference to a
borrowing base of eligible accounts receivable and inventory of the Company.
The Credit Facilities contain various covenants, including financial covenants,
limitations on debt and limitations on capital expenditures. As of September
30, 1996, the Company had $50 million outstanding under the Term Loan and $5
million outstanding under the Revolving Credit Facility.
Under the Credit Facilities, the Company can select between two floating
rate options: the London Interbank Offering Rate ("LIBOR") plus an applicable
margin ranging from .75% to 2.25% dependent upon certain of the Company's
ratios or the Alternate Base Rate ("ABR") which is the higher of the agent
bank's prime rate and the federal funds rate plus .5%, plus an applicable
margin ranging from zero to 1.25% dependent upon certain of the Company's
ratios. The applicable margin for the period through June 1997 will be 2% and
1% for the LIBOR and ABR, respectively. Additionally, the Credit Facilities
provide for the issuance of up to $20 million of letters of credit subject to
the borrowing base. Commitment fees ranging from .25% to .5% are payable on
the unused portion of the Revolving Credit Facility. The Credit Facilities are
secured by substantially all of the Company's domestic assets, certain foreign
assets and 65% of the stock of each of the Company's foreign subsidiaries.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW. The following discussion and analysis should be read in conjunction
with the information set forth under Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations on pages 11 through
16 of Aviall, Inc.'s Form 10K for the year ended December 31, 1995.
RESULTS OF OPERATIONS. The following table sets forth net sales, gross profit
and selling and administrative expense for the ongoing business separate from
the Fastener Business that was sold in September 1996.
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
(In thousands) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
Net sales
Ongoing business $91,244 76,496 261,314 240,391
Fastener Business 7,393 6,615 23,085 17,450
- -------------------------------------------------------------------------------------------------------------------
Total net sales $98,637 83,111 284,399 257,841
===================================================================================================================
Gross profit
Ongoing business $22,132 19,817 65,791 62,701
Fastener Business 2,295 2,211 7,003 5,606
- -------------------------------------------------------------------------------------------------------------------
Total gross profit $24,427 22,028 72,794 68,307
===================================================================================================================
Selling and administrative expense
Ongoing business $17,734 16,179 55,534 52,302
Fastener Business 1,644 1,846 5,517 5,749
- -------------------------------------------------------------------------------------------------------------------
Total selling and administrative expense $19,378 18,025 61,051 58,051
===================================================================================================================
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RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1995.
Net sales for the ongoing operations in the third quarter of 1996 were
$91.2 million, up $14.7 million, or 19%, from the $76.5 million recorded in the
same 1995 quarter. The increase was driven primarily by increased shipments to
the domestic general aviation and international aviation customers.
Gross profit for the ongoing operations of $22.1 million was $2.3 million
higher than the $19.8 million in the 1995 third quarter. Gross profit as a
percentage of sales decreased from 25.9% to 24.3%. This decrease in gross
profit percentage was a result of a focus on recapturing and expanding sales.
Selling and administrative expenses for the ongoing operations were up $1.6
million to $17.7 million in the third quarter of 1996. The increase principally
consisted of severance expenses associated with corporate staff reductions and
legal and accounting fees associated with the April 1996 amendment of the 1993
credit agreement.
Interest expense was $.7 million higher than in the third quarter 1995,
reflecting the $1.8 million acceleration of amortization of debt issuance costs
associated with the April 1996 amendment of the 1993 credit agreement offset by
lower interest expense due to reduced debt balances. The portion of interest
expense related to debt issuance amortization was $1.5 million greater than in
the same 1995 period. Additionally, as a result of the September 1996 senior
debt refinancing by the Company, the remaining $3.4 million of unamortized debt
issuance costs related to the 1993 amended credit agreement were written off as
an extraordinary item in the 1996 third quarter.
The nonrecurring charge of $2.8 million is the effect of final contract
terms and higher than estimated transaction- related expenses on the sale of
the Fastener Business.
The $6.4 million gain on disposal recorded in the third quarter of 1996
resulted from changes in estimates for transaction-related expenses and the
determination of the final sale price of the Company's commercial engine
services business.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1995.
Net sales from ongoing operations in the first nine months of 1996 were
$261.3 million, an increase of $20.9 million, or 9%, from the $240.4 million
recorded in the comparable 1995 period. Sales related to a discontinued product
line, turbine parts, decreased $10.2 million. Excluding the discontinued
turbine part sales from each period, sales in the ongoing operations increased
$31.1 million, or 14%, on increased shipments in all part sales customer
segments and higher volume in product repair services.
Gross profit from ongoing operations of $65.8 million in the first nine
months of 1996 increased $3.1 million, or 5%, from the first nine months of
1995. Gross profit as a percentage of sales decreased from 26.1% in 1995 to
25.2% in 1996. This decrease stemmed primarily from lower margins on the
disposal of excess inventory and a focus on recapturing and expanding sales.
Selling and administrative expenses for the ongoing operations were up $3.2
million to $55.5 million in the first nine months of 1996. The increase
resulted principally from additional severance charges and legal and accounting
fees associated with the April 1996 amendment of the Company's 1993 credit
agreement.
The nonrecurring charge of $6.6 million was comprised of the effect of
final contract terms and higher than estimated transaction-related expenses on
the sale of the Fastener Business.
Interest expense was $1.1 million higher than in 1995, reflecting the
accelerated amortization of debt issuance costs associated with the April 1996
amendment of the 1993 credit agreement. Additionally, as a result of the
September 1996 senior debt refinancing by the Company, the remaining $3.4
million of unamortized debt issuance costs related to the 1993 amended credit
agreement were written off as an extraordinary item.
The 1996 results include a $16.9 million gain from the disposal of
discontinued operations due to the receipt of cash rather than an anticipated
partial stock payment, changes in estimates for transaction-related expenses
and the determination of the final sale price of the Company's commercial
engine services business.
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FINANCIAL CONDITION. The following table sets forth pro forma cash flows for
the ongoing business and the Fastener Business.
Nine months ended
September 30,
----------------------
(In thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net earnings (loss) $(9,604) 8,453
Nonrecurring charges 6,613 (4,201)
Extraordinary loss 3,421 -
Depreciation and amortization 8,051 5,505
Change in working capital and other 298 (25,340)
- -----------------------------------------------------------------------------------------------------
8,779 (15,583)
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (1,027) (3,303)
Sales of property, plant and equipment 2,011 474
Other, net - (861)
- ------------------------------------------------------------------------------------------------------
984 (3,690)
- ------------------------------------------------------------------------------------------------------
Net cash flows before financing activities $9,763 (19,273)
======================================================================================================
Cash flow from operations was $8.8 million in the first nine months of 1996
compared to $(15.6) million in the 1995 period. Working capital improved
during 1996 primarily as a result of higher accounts payable. In the 1996
period, depreciation and amortization expense increased due to the acceleration
of debt issuance cost amortization as a result of the Company amending its 1993
credit agreement to provide for a maturity date of April 30, 1997. In 1995,
the negative cash flow from operating activities was primarily due to a payment
to Ryder System, Inc. for the settlement of 1993 federal income taxes pursuant
to the tax-sharing agreement entered into in connection with the spin-off in
December 1993.
The Company completed the sale of its Fastener Business in the third
quarter of 1996 resulting in cash proceeds of $18.4 million. In addition, the
Company finalized the outstanding issues related to the commercial engine
service business sale resulting in the receipt of $10.4 million placed in
escrow at the closing of such sale. These amounts were used to repay debt in
accordance with the requirements of the Company's prior credit facilities.
In September 1996, the Company completed a $100 million refinancing of its
existing domestic credit facilities. The new bank credit agreement replaces
the previously amended 1993 domestic credit agreement that had existed since
Aviall's spin-off from Ryder System, Inc. in December 1993. The new senior
credit facilities (the "Credit Facilities") consist of a $50 million five-year
amortizing secured loan due through 2001 and a $50 million five-year secured
revolving loan due in 2001 with availability determined by reference to a
borrowing base of eligible accounts receivable and inventory of the Company.
The Credit Facilities contain various covenants including financial covenants,
limitation on debt and limitation on capital expenditures. Under the Credit
Facilities, the Company can select between two floating rate options: the
London Interbank Offering Rate ("LIBOR") plus an applicable margin ranging from
.75% to 2.25% dependent upon certain of the Company's ratios or the Alternate
Base Rate ("ABR") which is the higher of the agent bank's prime rate and the
federal funds rate plus .5%, plus an applicable margin ranging from zero to
1.25% dependent upon certain of the Company's ratios. The applicable margin
for the period through June 1997 will be 2% and 1% for the LIBOR and ABR,
respectively.
The Company believes that its expected cash flow from operations and
availability under its revolving lines of credit are sufficient to meet its
current working capital needs and the funding of expenses associated with the
sale of the engine services business. The new Credit Facilities will provide
significant interest expense savings compared to the prior credit facilities.
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OUTLOOK. The Company has completed the sales of non-strategic business units
and used the net proceeds to pay down debt. The remaining domestic bank debt
was replaced with a new senior secured credit facility which is expected to
provide interest savings in future periods. Management believes the Company
has made significant progress in streamlining the corporate functions to reduce
cost and improve efficiency. The Company intends to seek further opportunities
for cost reductions and efficiency improvements in all areas of its operations.
Aviall's new focus is on the distribution of aviation parts and providing
inventory information services. Management believes this strategic focus will
enable the Company to improve profitability through participation in markets
which offer significant growth opportunities. In addition, the Company's
estimated $160 million net operating loss carryforward as of December 31, 1996
will minimize U.S. federal income tax payments for several years.
CERTAIN FORWARD-LOOKING STATEMENTS. This report contains certain
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995) relating to the Company that are based on the
beliefs of the management of the Company, as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "anticipate," "believe," "estimate," "expect," "intend" and
similar expressions, as they relate to the Company or the Company's management,
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the operations and results of
operations of the Company, including as a result of competitive factors and
pricing pressures, shifts in market demand, general economic conditions and
other factors. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Credit Agreement, dated as of September 26, 1996, by and among Aviall, Inc. and the financial
institutions parties thereto.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter for which this Form 10-Q is filed, the Company
filed a Current Report on Form 8-K dated September 19, 1996 under
Item 2 - Acquisition or Disposition of Assets.
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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.
November 8, 1996 By /s/ Jacqueline K. Collier
Jacqueline K. Collier
Vice President and Controller
(Authorized Officer/Chief Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
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10.1 Credit Agreement, dated as of September 26, 1996, by and among Aviall, Inc. and the financial
institutions parties thereto.
27.1 Financial Data Schedule.