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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, 2001
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
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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.)
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 "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 5, 2001 was 18,495,990.
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2001 2000 2001 2000
----------- ---------- ---------- ----------
Net sales $ 127,816 124,553 392,104 361,118
Cost of sales 98,106 97,027 302,116 278,310
----------- ---------- ---------- ----------
Gross profit 29,710 27,526 89,988 82,808
Operating and other expenses:
Selling and administrative expenses 22,174 21,109 66,962 63,679
Unusual items 926 -- 926 --
Interest expense 2,647 2,096 7,508 6,403
----------- ---------- ---------- ----------
Earnings from continuing operations before income taxes 3,963 4,321 14,592 12,726
Provision for income taxes 1,857 1,596 6,215 5,294
----------- ---------- ---------- ----------
Earnings from continuing operations 2,106 2,725 8,377 7,432
Discontinued operations:
Gain on disposal (net of income tax expense of $131
in 2001 and $77 in 2000) 244 -- 244 143
----------- ---------- ---------- ----------
Earnings from discontinued operations 244 -- 244 143
----------- ---------- ---------- ----------
Net earnings $ 2,350 2,725 8,621 7,575
=========== ========== ========== ==========
Basic net earnings per share:
Earnings from continuing operations $ 0.11 0.15 0.45 0.41
Earnings from discontinued operations 0.01 -- 0.01 0.01
----------- ---------- ---------- ----------
Net earnings $ 0.12 0.15 0.46 0.42
=========== ========== ========== ==========
Weighted average common shares 18,495,281 18,332,209 18,480,302 18,306,935
=========== ========== ========== ==========
Diluted net earnings per share:
Earnings from continuing operations $ 0.11 0.15 0.45 0.41
Earnings from discontinued operations 0.01 -- 0.01 0.01
----------- ---------- ---------- ----------
Net earnings $ 0.12 0.15 0.46 0.42
=========== ========== ========== ==========
Weighted average common and potentially dilutive
common shares 18,757,428 18,337,171 18,655,098 18,337,143
=========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
2
AVIALL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
------ ----- ----- -----
Net earnings $2,350 2,725 8,621 7,575
Other comprehensive income (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 expense (benefit) of $12
and $(76)) 19 -- (119) --
------ ----- ----- -----
Comprehensive income $2,369 2,725 8,240 7,575
====== ===== ===== =====
See accompanying notes to consolidated financial statements.
3
AVIALL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,542 4,865
Receivables 83,139 83,395
Inventories 170,181 134,156
Prepaid expenses and other current assets 2,753 5,168
Deferred income taxes 9,723 9,723
-------- -------
Total current assets 268,338 237,307
-------- -------
Property, plant and equipment 26,585 17,389
Intangible assets 83,555 73,906
Deferred income taxes 56,964 62,576
Other assets 4,764 4,273
-------- -------
Total assets $440,206 395,451
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,596 9,025
Accounts payable 60,628 66,657
Accrued expenses 29,893 29,431
-------- -------
Total current liabilities 100,117 105,113
-------- -------
Long-term debt 123,587 81,397
Other liabilities 16,333 17,267
Commitments and contingencies -- --
-------- -------
Shareholders' equity (common stock of $.01 par value per share; 20,497,992
shares and 20,334,664 shares issued at September 30,
2001 and at December 31, 2000, respectively; 18,495,990 shares and
18,332,662 shares outstanding at September 30, 2001 and at December 31,
2000, respectively) 200,169 191,674
-------- -------
Total liabilities and shareholders' equity $440,206 395,451
======== =======
See accompanying notes to consolidated financial statements.
4
AVIALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 8,621 7,575
Unusual items 926 --
Gain on disposal of discontinued operations (244) (143)
Depreciation and amortization 8,313 6,832
Compensation expense on restricted stock awards 170 152
Deferred income taxes 5,720 4,321
Changes in:
Receivables (670) (15,945)
Inventories (36,215) (11,598)
Accounts payable (6,029) 9,672
Accrued expenses 462 (269)
Other, net 1,088 (1,229)
-------- -------
(17,858) (632)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of distribution rights (13,532) --
Capital expenditures (12,751) (4,931)
Sales of property, plant and equipment 6 11
-------- -------
(26,277) (4,920)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving credit facility 48,021 12,493
Debt repaid (5,257) (4,500)
Debt issue costs paid (1,037) (238)
Issuance of common stock 85 435
Purchase of treasury stock -- (16)
-------- -------
41,812 8,174
-------- -------
Change in cash and cash equivalents (2,323) 2,622
Cash and cash equivalents, beginning of period 4,865 1,385
-------- -------
Cash and cash equivalents, end of period $ 2,542 4,007
======== =======
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 6,922 5,692
Income taxes $ 1,724 1,844
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- and nine-
month periods ended September 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Annual Report on Form 10-K for Aviall, Inc. (the
"Company") for the year ended December 31, 2000.
NOTE 2 - SEGMENT INFORMATION
The following tables present information by operating segment (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2001 2000 2001 2000
--------- ------- ------- -------
NET SALES
Aviall Services $ 121,194 117,697 372,191 339,769
ILS 6,622 6,856 19,913 21,349
--------- ------- ------- -------
Total net sales $ 127,816 124,553 392,104 361,118
========= ======= ======= =======
PROFIT
Aviall Services $ 6,171 4,843 20,403 14,460
ILS 2,562 3,092 7,794 9,930
--------- ------- ------- -------
Reportable segment profit 8,733 7,935 28,197 24,390
Corporate (2,123) (1,518) (6,097) (5,261)
Interest expense (2,647) (2,096) (7,508) (6,403)
--------- ------- ------- -------
Earnings from continuing operations before income taxes $ 3,963 4,321 14,592 12,726
========= ======= ======= =======
NOTE 3 - FINANCIAL INSTRUMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities," effective January 1, 2001, which requires companies to
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value.
The Company periodically enters into interest rate swap agreements as a
means to hedge its interest rate exposure on debt instruments. In addition, the
Company's credit facilities require the Company to enter into hedging
arrangements to convert the Company's term loan floating interest rate to a
fixed rate. At September 30, 2001, the Company had two interest rate swap
agreements outstanding with an aggregate notional amount of $30.5 million. The
swap agreements effectively convert the Company's floating-rate debt to
fixed-rate debt through March 31, 2002. Under terms of these agreements, the
Company pays fixed interest rates of 6.87% and 7.02%, respectively, and receives
floating rates based on LIBOR.
Upon adoption of SFAS 133, the Company recorded the interest rate swap
agreements at fair value, which was a liability of $0.4 million, with offsets to
Other Comprehensive Income in the equity section of the consolidated balance
sheet. Changes in the fair value of derivatives that do not qualify as hedges
will be recognized in earnings when they occur. Changes in the fair value of
derivatives that qualify as hedges will generally be recognized in earnings in
the same period as the item being hedged. During the first nine months of 2001,
the Company recorded an additional $0.2 million liability as an adjustment to
the fair value of its interest rate swap agreements. Additionally, the Company
undertook an evaluation of the effectiveness of its interest rate swap
agreements and determined that no material ineffectiveness existed for the three
or nine months ended September 30, 2001.
6
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 141 ("SFAS 141"),
"Business Combinations," and Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets," were issued on July 20,
2001. SFAS 141 addresses financial accounting and reporting for business
combinations, and SFAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets. The provisions of SFAS 141 apply
to all business combinations initiated after June 30, 2001, and to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company adopted the provisions of this
statement as of July 1, 2001, and there was no financial accounting impact
associated with its adoption.
The provisions of SFAS 142 are required to be adopted effective January
1, 2002 for all goodwill and other intangible assets recognized in the financial
statements at that date. The Company is currently reviewing SFAS 142 to assess
its impact on the financial statements.
Statement of Financial Accounting Standards No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets," was issued in
August 2001. SFAS 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of.
SFAS 144 supersedes certain provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company is currently reviewing SFAS 144 to assess its impact on the consolidated
financial statements.
NOTE 5 - DEBT
In the second quarter of 2001, the Company increased its U.S. revolving
credit facility by $30 million, thereby increasing its total U.S. revolving line
of credit to $120 million and amending certain financial covenants. At September
30, 2001, the Company had $19.5 million of available borrowings under its U.S.
revolving credit facility.
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 12 through 18 of Aviall,
Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December
31, 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Net Sales. Total net sales for the third quarter of 2001 were $127.8 million, an
increase of $3.2 million or 2.6%, from $124.6 million in the same period of
2000. Net sales for the Aviall Services business were $121.2 million, up $3.5
million or 3%, from the $117.7 million recorded in the third quarter of 2000.
Aviall Services' sales by region were as follows: the Americas region increased
$1.6 million or 1.8%; the Asia-Pacific region increased $2.8 million or 15.9%;
and Europe decreased $0.9 million or 6.6%.
ILS's net sales were $6.6 million in the third quarter of 2001, down $0.3
million or 3.4%, versus the prior year of $6.9 million. The sales decrease was
primarily due to ILS's annual pricing initiative and the loss of communications
revenue as customers migrate to its ILSmart Internet platform.
Gross Profit. Total Company gross profit of $29.7 million was $2.2 million or
7.9% higher than the $27.5 million in the third quarter of 2000 due to increased
sales. Gross profit as a percentage of sales of 23.2% was slightly higher
reflecting a product mix change.
7
Selling and Administrative Expense. Selling and administrative expenses
increased $1.1 million to $22.2 million in the third quarter of 2001 due to
planned technology investments at both ILS and Aviall Services and preliminary
expenses relating to the Company's move to its new headquarters and distribution
facility.
Unusual Items. The Company recorded $0.9 million of unusual items for increased
bad debt expense, which is largely due to airline bankruptcies in the quarter
and events related to September 11th.
Interest Expense. Interest expense was slightly higher than in the third quarter
2000 reflecting increased borrowings due to higher working capital requirements
associated with the new Honeywell product line additions.
Discontinued Operations. The gain in discontinued operations for the third
quarter of 2001 was due to revised environmental liability estimates.
Net Earnings from Continuing Operations. The third quarter net earnings from
continuing operations were $2.1 million, or $0.11 per share (diluted), compared
to a reported $2.7 million, or $0.15 per share (diluted), last year in the third
quarter.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Net Sales. Total net sales for the first nine months of 2001 were $392.1
million, an increase of $31.0 million or 8.6%, from the $361.1 million recorded
in the first nine months of 2000. Aviall Services' net sales increased $32.4
million or 9.5% in the first nine months of 2001 compared to the similar period
in 2000. This sales increase has been driven by stronger Rolls-Royce sales,
continued base business market share growth and the addition of new product
lines from Honeywell in 2001. Aviall Services' sales by region during the
nine-month period were as follows: the Americas region increased $20.7 million
or 8.3%; Europe increased $1.0 million or 2.4%; and the Asia-Pacific region
increased $10.7 million or 22.3%.
ILS's net sales decreased $1.4 million or 6.7% in the 2001 period versus
the same period in 2000. This sales decrease was due primarily to subscribers
opting for a full year payment-in-advance discount initiative, which the Company
introduced in mid-2000 to combat competitive pressures, and the loss of
communications revenue as customers migrate to its ILSmart Internet platform.
Gross Profit. Gross profit increased $7.2 million or 8.7% to $90.0 million in
the first nine months of 2001 compared to the first nine months of 2000. This
increase resulted primarily from Aviall Services' higher net sales volume. Gross
profit as a percentage of sales is flat on a year over year basis.
Selling and Administrative Expense. Selling and administrative expenses
increased $3.3 million to $67.0 million for the nine months ended September 30,
2001. The increase in selling and administrative expenses was due primarily to
planned technology investment costs at both ILS and Aviall Services.
Unusual Items. The Company recorded $0.9 million of unusual items for increased
bad debt expense, which is largely due to airline bankruptcies and events
related to September 11th.
Interest Expense. Interest expense was slightly higher in the nine months ended
September 30, 2001 compared to the same period in 2000, reflecting increased
borrowings due to higher working capital requirements associated with the new
Honeywell product line additions.
Net Earnings from Continuing Operations. In the first nine months of 2001, net
earnings from continuing operations were $8.4 million, or $0.45 per share
(diluted), compared to a reported $7.4 million, or $0.41 per share (diluted),
last year in the first three quarters.
8
FINANCIAL CONDITION
Cash flows from continuing operations, excluding working capital changes,
were $23.5 million in the first three quarters of 2001 and $18.7 million in the
comparable 2000 period. This increase resulted from improved Aviall Services'
net sales and earnings. Working capital increased $41.4 million in the nine
months ended September 30, 2001. The increase reflects working capital
investments, primarily in parts inventory, in connection with the new Honeywell
product lines.
Capital expenditures were $12.8 million in the first nine months of 2001,
consisting of planned spending on technology infrastructure projects at both ILS
and Aviall Services. Due to the events on September 11th, the Company intends to
defer certain capital spending originally anticipated during the fourth quarter
and early 2002. However, some of the capital expenditures scheduled during the
fourth quarter 2001 were already in process and will be completed.
In March 2001, Aviall Services entered into a ten-year agreement to sell
Honeywell engine systems accessories and environmental control systems through
2011. In addition in June 2001, Aviall Services entered into another ten-year
agreement with Honeywell to distribute fuel control parts and assemblies for the
Rolls-Royce T56 series engine. The Company will amortize approximately $13.4
million of cost for these distribution rights over the ten-year terms of these
agreements.
Management believes the Company's expected cash flow from operations and
availability under its revolving lines of credit are sufficient to meet its
current working capital and operating needs. In the second quarter of 2001, the
Company increased its U.S. revolving credit facility by $30 million, thereby
increasing its total U.S. revolving line of credit to $120 million and amending
certain financial covenants. At September 30, 2001, the Company had $19.5
million of available borrowings under its U.S. revolving credit facility. In
addition, the Company continues to explore alternatives to expand its capital
structure to accommodate additional new product lines and strategic acquisition
opportunities. In the short-term, the Company's ability to access the financial
markets on terms acceptable to the Company may be affected by market conditions
resulting from the events of September 11th.
INCOME TAXES
The Company's cash income tax expense continues to be substantially lower
than the U.S. federal statutory rate due to the utilization of the Company's
large U.S. federal net operating loss carryforward ("NOL"). The Company's 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, 2000, the Company had an estimated net operating loss carryforward of
approximately $161.7 million, of which a substantial portion expires in
2009-2011. Based on current and expected future earnings levels, the NOLs may
not be fully utilized for several years. If certain substantial changes in the
Company's ownership should occur, there would be an annual limitation on the
amount of the NOL the Company could use. The amount of the annual limitation can
vary significantly based on certain factors existing at the date of the change.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities," effective January 1, 2001, which requires companies to
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value.
The Company periodically enters into interest rate swap agreements as a
means to hedge its interest rate exposure on debt instruments. In addition, the
Company's credit facilities require the Company to enter into hedging
arrangements to convert the Company's term loan floating interest rate to a
fixed rate. At September 30, 2001, the Company had two interest rate swap
agreements outstanding with an aggregate notional amount of $30.5 million. The
swap agreements effectively convert the Company's floating-rate debt to
fixed-rate debt through March 31, 2002. Under terms of these agreements, the
Company pays fixed interest rates of 6.87% and 7.02%, respectively, and receives
floating rates based on LIBOR.
9
Upon adoption of SFAS 133, the Company recorded the interest rate swap
agreements at fair value, which was a liability of $0.4 million, with offsets to
Comprehensive Income in the equity section of the consolidated balance sheet.
Changes in the fair value of derivatives that do not qualify as hedges will be
recognized in earnings when they occur. Changes in the fair value of derivatives
that qualify as hedges will generally be recognized in earnings in the same
period as the item being hedged. During the first nine months of 2001, the
Company recorded an additional $0.2 million liability as an adjustment to the
fair value of its interest rate swap agreements. Additionally, the Company
undertook an evaluation of the effectiveness of its interest rate swap
agreements and determined that no material ineffectiveness existed for the three
or nine months ended September 30, 2001.
Statement of Financial Accounting Standards No. 141 ("SFAS 141"),
"Business Combinations," and Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets," were issued on July 20,
2001. SFAS 141 addresses financial accounting and reporting for business
combinations, and SFAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets. The provisions of SFAS 141 apply
to all business combinations initiated after June 30, 2001, and to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company adopted the provisions of this
statement as of July 1, 2001, and there was no financial accounting impact
associated with its adoption.
The provisions of SFAS 142 are required to be adopted effective January
1, 2002 for all goodwill and other intangible assets recognized in the financial
statements at that date. The Company is currently reviewing SFAS 142 to assess
its impact on the financial statements.
Statement of Financial Accounting Standards No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets," was issued in
August 2001. SFAS 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of.
SFAS 144 supersedes certain provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company is currently reviewing SFAS 144 to assess its impact on the consolidated
financial statements.
OUTLOOK
The Company primarily participates in the global aviation aftermarket
through Aviall Services and ILS. The Company's operations and results of
operations are affected by the general economic cycle, particularly as it
influences flight activity in commercial, business and general aviation. The
Company benefits from its participation in the global aviation aftermarket by
generating revenues from several national economies and by its broad aviation
marketplace coverage.
The aftermath of the September 11th terrorist attacks still are being
felt throughout the aviation community. Shock waves continue to reverberate
throughout the industry with U.S. flying activity being significantly impacted.
The immediate outlook continues to change almost daily as marketplace events
unfold. While more recently there are several positive indicators that flying
activity is growing, the time period required to return to pre-September 11th
levels remains uncertain. The impact of the September 11th events on Aviall
Services has varied due to the wide diversity of market segments in which it
participates, as well as its global market reach. ILS has experienced no
material impact on its business, as its services are a relatively inexpensive
way to search for or sell parts in a cost conscious environment.
The shutdown of North American flying activity as a result of the
September 11th events has had a large impact on the airline industry, both
domestically and internationally. While the federal government aid package to
the airline industry improves their viability, the Company could be negatively
impacted if the collectibility of receivables becomes questionable for specific
airline customers.
The Company continues to monitor sales activity to determine the
appropriate SG&A expense level. Both ILS and Aviall Services are very scalable
businesses, even though a significant proportion of their expenses are
relatively fixed in the short-term. While this aspect of the businesses produces
very positive results in a growing marketplace, 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.
10
In November of 2001 as scheduled, the Company began to relocate its
corporate headquarters and Aviall Services' main operation center to an expanded
new state-of-the-art facility located near the Dallas/Fort Worth International
Airport. The Company has signed a ten-year lease for this facility that will
begin upon completion of the building, which is anticipated to occur in the
fourth quarter 2001. The facility replaces various Dallas facilities that have
lease expiration dates through December 2003. The Company is seeking to sublease
the various Dallas facilities with lease expiration dates after December 31,
2001. The Company will incur a one-time cost of approximately $2.0 million in
the fourth quarter of 2001 and could experience a short-term disruption in
Aviall Services' sales in connection with the warehouse relocation.
Information and communication technology is evolving rapidly and
developments with respect to the Internet could affect proprietary companies
such as ILS and traditional distribution companies. Management believes the
deployment by the Company of new innovative technologies in its websites,
AVIALL.COM and ILSMART.COM, will enable the Company to maintain its
technological leadership position and minimize the risk of obsolescence. There
are a number of entrants in the e-commerce marketplace arena that are competing
or are expected to compete with ILS, including manufacturers, distributors and
independent companies. Although some of these entities are significantly larger
than ILS, management believes a large number of these entrants intend to focus
on different segments of the global aviation parts marketplace, and some may in
fact be complementary to ILS.
ILS is in the implementation stage of their ongoing program to evolve
ILSMART.COM into a full-service, business-to-business electronic marketplace --
Contact to Contract(TM). The plans include "Purchase On-line" customer catalogs,
expanded electronic auction sites and web-hosting for ILS subscribers. In 2001,
ILS intends to spend $8.0 million in capital expenditures to implement the
Contact to Contract(TM) strategy, of which $7.2 million has been spent through
September 30, 2001.
Aviall Services' capital expenditures for 2001 are expected to be
approximately $4.5 million for various system enhancements and $2.5 million
related to the new Dallas facility, of which $5.6 million has been spent.
System-related expenditures include the next phase of the CRM system, upgrades
to the warehouse and procurement software and further enhancements to the
AVIALL.COM website. The Company believes the introduction of these system
upgrades and enhancements will continue to transform Aviall Services into the
industry-leading full-service, technology-based supply-chain highway. However,
due to current market conditions, both Aviall Services and ILS are in the
process of re-evaluating capital spending for 2002 to determine which projects
or spending can be delayed or, in some cases, cancelled.
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 and estimates 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
as well as its customers and suppliers, including as a result of competitive
factors and pricing pressures, shifts in market demand, factors relating to the
events of September 11, 2001, including the significant reduction in commercial
air travel, announced reductions in commercial flight schedules and financial
losses by a number of airlines, general economic conditions and other factors
including among others, those that effect flight activity in commercial,
business and general aviation, the business activities of the Company's
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.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has market risk exposure arising from changes in interest
rates and foreign exchange rates. The Company from time to time has used
financial instruments to offset such risks. Financial instruments are not used
for trading or speculative purposes. The Company has experienced no significant
changes in market risk during the first nine months of 2001. The Company's
market risk is described in more detail in the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
PART II - OTHER INFORMATION
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
September 30, 2001.
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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 9, 2001 By /s/ Jacqueline K. Collier
------------------------------------
Jacqueline K. Collier
Vice President and Controller
Principal Accounting Officer
November 9, 2001 /s/ Cornelius Van Den Handel
------------------------------------
Cornelius Van Den Handel
Vice President and Treasurer
Principal Financial Officer
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