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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
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.)
2075 DIPLOMAT DRIVE
DALLAS, TEXAS 75234-8999
(Address of principal executive offices) (Zip Code)
(972) 406-2000
(Registrant's telephone number, including area code)
Indicate by checkmark 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 August 3, 2001 was 18,483,726.
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AVIALL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------
Net sales $ 134,266 121,660 264,288 236,565
Cost of sales 103,462 93,643 204,010 181,283
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Gross profit 30,804 28,017 60,278 55,282
Operating and other expenses:
Selling and administrative expenses 22,113 21,215 44,788 42,570
Interest expense 2,565 2,206 4,861 4,307
------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes 6,126 4,596 10,629 8,405
Provision for income taxes 2,557 2,072 4,358 3,698
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Earnings from continuing operations 3,569 2,524 6,271 4,707
Discontinued operations:
Gain on disposal (net of income tax expense of
$77 in 2000) -- 143 -- 143
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Earnings from discontinued operations -- 143 -- 143
------------------------------------------------------------------------------------------------------------
Net earnings $ 3,569 2,667 6,271 4,850
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Basic net earnings per share:
Earnings from continuing operations $ 0.19 0.14 0.34 0.26
Earnings from discontinued operations -- 0.01 -- 0.01
------------------------------------------------------------------------------------------------------------
Net earnings $ 0.19 0.15 0.34 0.27
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Weighted average common shares 18,483,726 18,311,844 18,472,688 18,294,159
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Diluted net earnings per share:
Earnings from continuing operations $ 0.19 0.14 0.34 0.26
Earnings from discontinued operations -- 0.01 -- 0.01
------------------------------------------------------------------------------------------------------------
Net earnings $ 0.19 0.15 0.34 0.27
------------------------------------------------------------------------------------------------------------
Weighted average common and potentially dilutive
common shares 18,713,855 18,331,984 18,603,808 18,336,990
------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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AVIALL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------
2001 2000 2001 2000
--------------------------------------------------------------------------------------------
Net earnings $3,569 2,667 6,271 4,850
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 $21
and $(88)) 33 -- (138) --
--------------------------------------------------------------------------------------------
Comprehensive income $3,602 2,667 5,871 4,850
--------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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AVIALL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
----------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 4,959 4,865
Receivables 89,633 83,395
Inventories 165,598 134,156
Prepaid expenses and other current assets 2,826 5,168
Deferred income taxes 9,723 9,723
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Total current assets 272,739 237,307
--------------------------------------------------------------------------------------------
Property, plant and equipment 20,998 17,389
Intangible assets 85,340 73,906
Deferred income taxes 58,777 62,576
Other assets 4,990 4,273
--------------------------------------------------------------------------------------------
Total assets $442,844 395,451
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,510 9,025
Accounts payable 60,338 66,657
Accrued expenses 28,427 29,431
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Total current liabilities 96,275 105,113
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Long-term debt 131,889 81,397
Other liabilities 17,064 17,267
Commitments and contingencies -- --
--------------------------------------------------------------------------------------------
Shareholders' equity (common stock of $.01 par value per share;
20,485,728 shares and 20,334,664 shares issued at June 30, 2001
and at December 31, 2000, respectively; 18,483,726 shares
and 18,332,662 shares outstanding at June 30, 2001 and at
December 31, 2000, respectively) 197,616 191,674
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Total liabilities and shareholders' equity $442,844 395,451
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See accompanying notes to consolidated financial statements.
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AVIALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 6,271 4,850
Gain on disposal of discontinued operations -- (143)
Depreciation and amortization 5,219 4,503
Compensation expense on restricted stock awards 114 101
Deferred income taxes 4,055 3,141
Changes in:
Receivables (6,238) (15,283)
Inventories (31,649) (8,710)
Accounts payable (6,319) 7,002
Accrued expenses (1,004) (394)
Other, net 1,359 (306)
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(28,192) (5,239)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of distribution rights (13,767) --
Capital expenditures (5,878) (1,969)
Sales of property, plant and equipment 5 10
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(19,640) (1,959)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving credit facility 52,485 14,949
Debt repaid (3,505) (3,000)
Debt issue costs paid (1,011) (210)
Issuance of common stock (43) 330
Purchase of treasury stock -- (16)
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47,926 12,053
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Change in cash and cash equivalents 94 4,855
Cash and cash equivalents, beginning of period 4,865 1,385
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Cash and cash equivalents, end of period $ 4,959 6,240
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CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 4,695 2,869
Income taxes $ 1,385 1,186
See accompanying notes to consolidated financial statements.
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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 six-
month periods ended June 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
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NET SALES 2001 2000 2001 2000
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Aviall Services $ 127,678 114,494 250,997 222,072
ILS 6,588 7,166 13,291 14,493
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Total net sales $ 134,266 121,660 264,288 236,565
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PROFIT
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Aviall Services $ 7,635 5,359 14,232 9,617
ILS 2,691 3,338 5,232 6,838
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Reportable segment profit 10,326 8,697 19,464 16,455
Corporate (1,635) (1,895) (3,974) (3,743)
Interest expense (2,565) (2,206) (4,861) (4,307)
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Earnings from continuing operations before income
taxes $ 6,126 4,596 10,629 8,405
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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 June 30, 2001, the Company had two interest rate swap agreements
outstanding with an aggregate notional amount of $32.3 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
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 half 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 six months
ended June 30, 2001.
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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 applied starting with fiscal
years beginning after December 15, 2001, and must be applied at the beginning of
a fiscal year and to 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. The Company will adopt the
provisions of this statement on January 1, 2002.
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 June 30,
2001, the Company had $8.9 million of available borrowings under its U.S.
revolving credit facility. In addition, the Company continues to organize the
expansion of its capital structure to accommodate additional new product lines
and strategic acquisition opportunities.
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 JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Net Sales. Total net sales for the second quarter of 2001 were $134.3 million,
an increase of $12.6 million or 10.4%, from $121.7 million in the same period of
2000. Aviall Services' net sales were $127.7 million, an increase of $13.2
million or 11.5%, from $114.5 million in the second quarter of 2000. The
continued sales growth at Aviall Services was primarily due to stronger
Rolls-Royce Model 250 engine parts sales, continued core business market share
growth and the addition of new product lines from Honeywell in 2001. Aviall
Services' net sales increased in each major segment of the aviation industry and
in all geographic regions. Aviall Services' sales by region were: the Americas
region increased $8.6 million or 10.4%; Europe increased $0.3 million or 1.7%;
and the Asia-Pacific region increased $4.3 million or 26.1%.
ILS's net sales decreased $0.6 million or 8.1% in the second quarter of 2001
to $6.6 million from $7.2 million in 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.
Gross Profit. Total Company gross profit of $30.8 million was $2.8 million or
10.0% higher than the $28.0 million in the second quarter of 2000. Gross profit
as a percentage of sales was 22.9% in the second quarter of 2001, which was
slightly lower than in the second quarter of 2000, reflecting increased
year-over-year sales of lower margin Rolls-Royce Model 250 engine parts and a
lower percentage of higher margin ILS net sales to total Company sales.
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Selling and Administrative Expense. Selling and administrative expense increased
$0.9 million to $22.1 million in the second quarter of 2001 from the same period
in 2000. This increase was due primarily to planned increased technology
infrastructure costs at both ILS and Aviall Services. However, selling and
administrative expense decreased as a percentage of net sales from 17.4% in the
second quarter of 2000 to 16.5% in the second quarter of 2001.
Interest Expense. Interest expense increased $0.4 million in the second quarter
of 2001 from the second quarter of 2000, due primarily to increased debt levels
required for up-front inventory purchases associated with our new Honeywell
contracts.
Discontinued Operations. The gain in discontinued operations in the second
quarter of 2000 was due to a revised estimate for an insurance tail expense.
Net Earnings from Continuing Operations. Net earnings from continuing operations
in the second quarter of 2001 were $3.6 million, or $0.19 per share (diluted),
compared to $2.5 million, or $0.14 per share (diluted), in the second quarter of
2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net Sales. Total net sales for the first half of 2001 were $264.3 million, an
increase of $27.7 million or 11.7%, from $236.6 million in the same period of
2000. Aviall Services' net sales increased $28.9 million or 13.0% in the six
months ended June 30, 2001 compared to the first half of 2000. This sales
increase was primarily due to stronger Rolls-Royce Model 250 engine parts sales,
continued core business market share growth and the addition of new product
lines from Honeywell in 2001. Aviall Services' net sales increased in each major
segment of the aviation industry and in all geographic regions. Aviall Services'
sales by region were as follows: the Americas region increased $19.1 million or
11.7%; Europe increased $1.9 million or 6.6%; and the Asia-Pacific region
increased $7.9 million or 26.0%.
ILS's net sales decreased $1.2 million or 8.3% in the six months ended June
30, 2001 compared to 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.
Gross Profit. Gross profit increased $5.0 million or 9.0% to $60.3 million in
the first half of 2001 compared to the first half of 2000. This increase
resulted primarily from Aviall Services' higher net sales volume. Gross profit
as a percentage of sales declined 60 basis points to 22.8% in the first half of
2001 from 23.4% in the first half of 2000. The decrease in gross margin
percentage was due primarily to increased year-over-year sales of Rolls-Royce
Model 250 engine parts, which generally have lower margins than other product
lines and a lower percentage of higher margin ILS net sales to total Company
sales.
Selling and Administrative Expense. Selling and administrative expenses
increased $2.2 million to $44.8 million in the first half of 2001 as compared to
the first half of 2000. The increase in selling and administrative expenses was
due primarily to planned increased technology infrastructure costs at both ILS
and Aviall Services.
Interest Expense. Interest expense increased $0.6 million in the first half of
2001 from the first half of 2000, reflecting increased borrowings due to higher
working capital requirements associated with our new Honeywell contracts.
Discontinued Operations. The gain in discontinued operations in the first half
of 2000 was due to a revised estimate for an insurance tail expense.
Net Earnings from Continuing Operations. In the first half of 2001, net earnings
from continuing operations were $6.3 million, or $0.34 per share (diluted),
compared to a reported $4.7 million, or $0.26 per share (diluted), in the first
half of 2000.
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FINANCIAL CONDITION
Cash flows from continuing operations, excluding working capital changes,
were $15.7 million in the first six months of 2001 compared to $12.5 million in
the comparable 2000 period. This increase resulted from improved
Aviall Services' net sales and earnings. Working capital increased $43.9 million
in the six months ended June 30, 2001. The increase reflects working capital
investments, primarily in parts inventory, in connection with our new Honeywell
contracts.
Capital expenditures were $5.9 million in the first half of 2001, consisting
of planned spending on technology infrastructure projects at both ILS and Aviall
Services. Based upon current plans for improving information technology
capabilities, the Company expects capital expenditures to be approximately $15.0
million in 2001, not including any expenditures for acquiring businesses or new
product lines, including the new Honeywell product lines referred to in the
following paragraph.
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 Model T56 series engine. The Company will amortize approximately
$13.8 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 June 30, 2001, the Company had $8.9 million of
available borrowings under its U.S. revolving credit facility. In addition, the
Company continues to organize the expansion of its capital structure to
accommodate additional new product lines and strategic acquisition
opportunities.
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 that 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 June 30, 2001, the Company had two interest rate swap agreements
outstanding with an aggregate notional amount of $32.3 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.
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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 half 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 six months
ended June 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 applied starting with fiscal
years beginning after December 15, 2001, and must be applied at the beginning of
a fiscal year and to 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. The Company will adopt the
provisions of this statement on January 1, 2002.
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.
The Company serves a number of customers in the Asia-Pacific and Latin
American regions. During 1999, countries in these regions experienced financial
market volatility and the currencies of certain countries fell in value relative
to the U.S. dollar. These factors reduced demand for air travel in the
Asia-Pacific region in 1999, which negatively impacted the Company's sales in
that region. Key Asian economies began a slow recovery in late 1999, which
accelerated sharply in 2000 and 2001 and had a positive effect on the Company's
revenue in that region. Continued volatility in Latin America, compounded by
significantly higher fuel prices, led to financial difficulties for major air
carriers in that region and significantly hampered the general aviation business
in Latin America. Management believes the Company's results in 2001 have
reflected and will continue to reflect financial stabilization in the
Asia-Pacific region; however, volatility in Latin America is expected to
continue.
Commercial airlines in North America and Europe continue to effectively
manage their capacity by retiring older aircraft as new aircraft are delivered,
thereby limiting growth in demand for replacement parts. Management actively
continues to seek new sources of supply for airline products to expand the
Company's growth in this segment.
Over the first six months of 2001, aviation operators have responded to the
softening U.S. economy by closely monitoring their inventory of new parts.
Management believes that Aviall Services' competitive strengths in service and
availability have enabled the Company to increase its market share in a
weakening marketplace. In addition, general economic conditions tend to have a
greater impact on aircraft original equipment manufacturing than on the purchase
of aftermarket replacement parts. Despite the challenges Aviall Services has
faced in 2000 and into 2001, the Company was able to grow through the addition
of the Rolls-Royce Model 250 engine parts product line and several new Honeywell
product lines, and the recapture of market share in its core North American
general aviation business.
Aviall Services' ability to manage its inventory is affected by the relative
efficiency of its suppliers and the inventory investments required to secure new
suppliers. Also, changes in Aviall Services' portfolio of products and suppliers
can result in periodic noncash charges to write-down inventory of discontinued
products.
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Information and communication technology is evolving rapidly and
developments with respect to the Internet could affect proprietary database
companies such as ILS and traditional distribution companies. Management
believes the active 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 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.
The Company expects to relocate its corporate headquarters and Aviall
Services' main operation center to an expanded new state-of-the-art facility
located at the Dallas/Fort Worth International Airport. The Company 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 of 2001. The
facility is expected to replace 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 and could
experience a short-term disruption in Aviall Services' sales in connection with
the warehouse relocation.
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. System-related expenditures include the next
phase of Aviall Services' customer relationship module system, upgrades to its
warehouse and procurement software and further enhancements to the AVIALL.COM
website. Management 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. Aviall
Services has spent $3.2 million in capital expenditures through June 30, 2001.
ILS is in the implementation stage of its 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 expects to incur an additional $1.5 million in expenses and $8.0 million in
capital expenditures to implement the Contact to Contract(TM) strategy, of which
$2.7 million has been spent through June 30, 2001.
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, 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.
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 half 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.
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PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 7, 2001, at
which meeting the stockholders took action with respect to three proposals, (i)
the election of Donald R. Muzyka and Jonathan M. Schofield to serve as directors
of the Company for a term expiring at the Company's 2004 Annual Meeting of
Stockholders, (ii) the approval of an amendment to the Aviall, Inc. 1998 Stock
Incentive Plan and (iii) the ratification of the appointment of
PricewaterhouseCoopers LLP to serve as independent auditors for the Company and
its subsidiaries for the fiscal year ending December 31, 2001.
The number of votes cast for, against or withheld, as well as the number of
abstentions as to each proposal is set forth below. There were no broker
non-votes with respect to any of the proposals.
Election of Directors
---------------------
For Withheld
--- --------
Donald R. Muzyka 14,631,761 2,222,057
Jonathan M. Schofield 14,657,687 2,196,131
Approval of Amendment to the Aviall, Inc. 1998 Stock Incentive Plan
-------------------------------------------------------------------
For Against Abstain
11,626,457 5,195,034 32,327
Ratification of Selection of Independent Auditors
-------------------------------------------------
For Against Abstain
16,802,322 38,593 12,903
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Aviall, Inc. 1998 Stock Incentive Plan
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 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.
August 10, 2001 By /s/ Jacqueline K. Collier
--------------------------------
Jacqueline K. Collier
Vice President and Controller
Principal Accounting Officer
August 10, 2001 /s/ Cornelius Van Den Handel
--------------------------------
Cornelius Van Den Handel
Vice President and Treasurer
Principal Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
-------------------------------------------------------------------------------
10.1 Amended and Restated Aviall, Inc. 1998 Stock Incentive Plan
14