FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2005

 

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
incorporation or organization)
  (I.R.S. Employer
Identification No.)
2750 Regent Boulevard
DFW Airport, Texas
  75261-9048
(Address of principal executive offices)   (Zip Code)

 

(972) 586-1000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  þ    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  þ    No  ¨

 

The number of shares of common stock, par value $0.01 per share, outstanding at April 25, 2005 was 33,461,987.

 



AVIALL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share data)

(Unaudited)

 

     Three Months Ended March 31,

     2005

   2004

Net sales

   $ 291,448    283,532

Cost of sales

     238,281    236,434
    

  

Gross profit

     53,167    47,098

Selling and administrative expense

     28,086    27,599
    

  

Operating income

     25,081    19,499

Interest expense, net

     5,103    4,345
    

  

Earnings before income taxes

     19,978    15,154

Provision for income taxes

     6,978    5,177
    

  

Net earnings

   $ 13,000    9,977
    

  

Basic net earnings per share

   $ 0.40    0.31

Weighted average common shares

     32,847,388    31,744,620
    

  

Diluted net earnings per share

   $ 0.38    0.30

Weighted average common and potentially dilutive common shares

     34,605,983    33,242,755
    

  

 

See accompanying notes to consolidated financial statements.

 

2


AVIALL, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)

(Unaudited)

 

     March 31,
2005


    December 31,
2004


 

Assets

              

Current assets:

              

Cash and cash equivalents

   $ 10,741     91,632  

Receivables, net

     154,979     144,087  

Inventories

     308,021     328,129  

Prepaid expenses and other current assets

     5,330     2,953  

Deferred income taxes

     33,798     40,432  
    


 

Total current assets

     512,869     607,233  
    


 

Property and equipment

     34,179     33,929  

Goodwill

     46,843     46,843  

Intangible assets

     200,886     46,525  

Deferred income taxes

     3,226     3,229  

Other assets

     12,843     11,717  
    


 

Total assets

   $ 810,846     749,476  
    


 

Liabilities and Shareholders’ Equity

              

Current liabilities:

              

Current portion of long-term debt

   $ 1,190     1,440  

Revolving line of credit

     82,218     —    

Cash overdrafts due to outstanding checks

     23,602     43,023  

Accounts payable

     86,534     98,629  

Accrued expenses

     40,454     46,741  
    


 

Total current liabilities

     233,998     189,833  
    


 

Long-term debt

     200,449     201,990  

Other liabilities

     7,435     8,652  

Commitments and contingencies

     —       —    

Shareholders’ equity:

              

Common stock ($0.01 par value per share, 80,000,000 shares authorized; 35,507,978 shares and 34,582,746 shares issued at March 31, 2005 and December 31, 2004, respectively)

     355     346  

Additional paid-in capital

     454,152     447,060  

Accumulated deficit

     (49,130 )   (62,130 )

Treasury stock, at cost (2,050,411 shares and 2,035,124 shares at March 31, 2005 and December 31, 2004, respectively)

     (28,589 )   (28,218 )

Unearned compensation - restricted stock

     (1,446 )   (1,679 )

Accumulated other comprehensive loss

     (6,378 )   (6,378 )
    


 

Total shareholders’ equity

     368,964     349,001  
    


 

Total liabilities and shareholders’ equity

   $ 810,846     749,476  
    


 

 

See accompanying notes to consolidated financial statements.

 

3


AVIALL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Three Months Ended March 31,

 
     2005

    2004

 

Operating activities:

              

Net earnings

   $ 13,000     9,977  

Depreciation and amortization

     5,372     4,293  

Deferred income taxes

     6,634     4,328  

Compensation expense on restricted stock awards

     233     183  

Changes in:

              

Receivables, net

     (10,892 )   (10,328 )

Inventories

     20,108     6,418  

Accounts payable

     (12,095 )   12,258  

Accrued expenses

     (6,287 )   2,893  

Other, net

     (4,468 )   (1,625 )
    


 

Net cash provided by operating activities

     11,605     28,397  
    


 

Investing activities:

              

Purchase of distribution rights

     (157,000 )   (800 )

Capital expenditures

     (2,713 )   (1,432 )

Sales of property, plant and equipment

     300     6  
    


 

Net cash used for investing activities

     (159,413 )   (2,226 )
    


 

Financing activities:

              

Net change in revolving credit facility

     82,218     (36 )

Cash overdrafts due to outstanding checks

     (19,421 )   (37,990 )

Issuance of common stock

     7,101     1,170  

Debt issuance cost paid

     (1,898 )   (99 )

Debt repaid

     (712 )   (860 )

Purchase of treasury stock

     (371 )   (351 )
    


 

Net cash provided by (used for) financing activities

     66,917     (38,166 )
    


 

Change in cash and cash equivalents

     (80,891 )   (11,995 )

Cash and cash equivalents, beginning of period

     91,632     23,424  
    


 

Cash and cash equivalents, end of period

   $ 10,741     11,429  
    


 

Cash paid (received) for interest and income taxes:

              

Interest

   $ 7,902     431  

Income taxes

   $ 597     (266 )

 

See accompanying notes to consolidated financial statements.

 

4


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, or GAAP, 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 GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

NOTE 2 - STOCK-BASED COMPENSATION

 

We account for our stock-based compensation plans in accordance with the recognition and measurement principles of Accounting Principles Board Opinion No. 25, or APB 25, “Accounting for Stock Issued to Employees,” and related interpretations. All options granted under our plans have an exercise price equal to the market value of the underlying common stock on the date of grant. Therefore, no compensation cost related to these plans is included in net earnings. We also make the appropriate disclosures as required by Statement of Financial Accounting Standards No. 123, or SFAS 123, “Accounting for Stock-Based Compensation,” and Statement of Financial Accounting Standards No. 148, or SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FAS 123.” Awards of restricted stock are valued at the market price of our common stock on the date of grant and recorded as unearned compensation within shareholders’ equity. The unearned compensation is amortized to compensation expense over the vesting period of the restricted stock.

 

The following table illustrates the effect on net earnings and earnings per share, or EPS, if we had applied the fair-value recognition provisions of SFAS 123 to stock-based employee compensation:

 

     Three Months Ended
March 31,


 

(In Thousands, Except Per Share Data)


   2005

    2004

 

Net earnings, as reported

   $ 13,000     9,977  

Deduct: Total stock-based compensation expense determined under fair-value-based method for all awards, net of related tax effects

     (663 )   (451 )
    


 

Pro forma net earnings for purposes of computing basic net EPS

   $ 12,337     9,526  
    


 

Earnings per share:

              

Basic - as reported

   $ 0.40     0.31  

Basic - pro forma

   $ 0.38     0.30  

Diluted - as reported

   $ 0.38     0.30  

Diluted - proforma

   $ 0.36     0.29  

 

5


NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS

 

In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 123 (revised 2004), or SFAS 123R, “Share-Based Payment,” which replaces Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FAS 123.” SFAS 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and generally would require that such transactions be accounted for using a fair-value-based method and recognized as expense over the period during which an employee is required to provide services in exchange for the award. SFAS 123R is effective for annual periods beginning after June 15, 2005. As such, we will implement the provisions of SFAS 123R effective January 1, 2006. We are in the process of evaluating the three allowable methods of transition to SFAS 123R but have not yet determined which method will be used. In 2006, we will incur compensation expense under SFAS 123R, as currently written, related to unvested options granted prior to January 1, 2006.

 

NOTE 4 - SEGMENT INFORMATION

 

The following tables present information by operating segment (in thousands):

 

     Three Months Ended
March 31,


 
     2005

    2004

 

Net Sales

              

Aviall Services

   $ 284,023     276,421  

ILS

     7,425     7,111  
    


 

Total net sales

   $ 291,448     283,532  
    


 

Profit

              

Aviall Services

   $ 26,417     20,266  

ILS

     2,811     2,548  
    


 

Reportable segment profit

     29,228     22,814  

Corporate

     (4,147 )   (3,315 )

Interest expense, net

     (5,103 )   (4,345 )
    


 

Earnings before income taxes

   $ 19,978     15,154  
    


 

 

6


NOTE 5 - EARNINGS PER SHARE

 

A reconciliation of the denominator of the basic and diluted EPS calculations for net earnings follows:

 

     Three Months Ended
March 31,


     2005

   2004

Denominator

         

Weighted average common shares

   32,847,388    31,744,620

Effect of dilutive securities:

         

Stock options

   1,257,315    931,338

Restricted stock rights

   238,880    304,467

Warrants

   262,400    262,330
    
  

Weighted average common and dilutive potential common shares

   34,605,983    33,242,755
    
  

 

Basic EPS is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net earnings by the weighted average number of common and dilutive potential common shares outstanding during the period.

 

NOTE 6 - INCOME TAXES

 

Our effective tax rate increased from 27.6% at December 31, 2004 to 34.9% at March 31, 2005. The lower effective rate at December 31, 2004 is primarily due to the release in 2004 of a $3.4 million valuation allowance for state tax net operating loss carryforwards.

 

NOTE 7 - INTANGIBLE ASSETS

 

In January 2005, we entered into a distribution agreement with GE Engine Services, LLC and General Electric, or GE, whereby GE has appointed us as the exclusive worldwide distributor of unique parts for the GE CF6-50 and CF6-80A, or CF6, engines for as long as these engines remain in service. As a result of the GE CF6 agreement, we recorded $157.0 million for distribution rights.

 

NOTE 8 - DEBT

 

On January 28, 2005, we entered into an amendment to our senior secured credit facility, or the Credit Facility, to increase the facility size, restructure the borrowing base, extend the termination date and change certain financial ratios and covenants. As of March 31, 2005, our amended Credit Facility consists of a $260.0 million revolving credit and letter of credit facility due as a balloon payment in 2008. As of March 31, 2005, we had $82.2 million of borrowings outstanding under the Credit Facility.

 

NOTE 9 - PENSION PLANS AND POSTRETIREMENT BENEFITS

 

The following table sets forth the components of net pension expense for all our plans:

 

     Three Months Ended
March 31,


 

(In Thousands)


   2005

    2004

 

Service cost

   $ 736     615  

Interest cost

     1,028     969  

Expected return on plan assets

     (1,086 )   (963 )

Transition obligation amortization

     34     35  

Prior service cost amortization

     1     1  

Net loss recognition

     297     117  
    


 

Net pension expense

   $ 1,010     774  
    


 

 

7


The following table sets forth the components of net postretirement benefit income for all our plans:

 

     Three Months Ended
March 31,


 

(In Thousands)


   2005

    2004

 

Service cost

   $ —       —    

Interest cost

     18     22  

Net amortization and deferral

     (35 )   (34 )
    


 

Net postretirement benefit income

   $ (17 )   (12 )
    


 

 

NOTE 10 - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS

 

Our senior unsecured notes, or the Senior Notes, are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by each direct and indirect domestic subsidiary of Aviall, Inc., or Aviall, each a guarantor subsidiary. Each guarantor subsidiary is directly or indirectly 100% owned by Aviall. The Senior Notes are not guaranteed by any direct or indirect foreign subsidiary of Aviall, each a nonguarantor subsidiary.

 

The unaudited consolidating financial information presents the consolidating balance sheets as of March 31, 2005 and December 31, 2004 and the related statements of operations and cash flows for the three-month periods ended March 31, 2005 and 2004 with separate columns for:

 

  a) Aviall, the parent;

 

  b) the guarantor subsidiaries on a combined basis;

 

  c) the nonguarantor subsidiaries on a combined basis; and

 

  d) total consolidated amounts.

 

The information includes elimination entries necessary to consolidate Aviall, the parent, with the guarantor and nonguarantor subsidiaries.

 

Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor and nonguarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Separate financial statements for the guarantor and nonguarantor subsidiaries are not presented because management believes such financial statements would not be meaningful to investors.

 

Pursuant to the terms of the Credit Facility, no subsidiary of Aviall other than Aviall Services, Inc., or Aviall Services, may pay cash dividends to Aviall, other than to fund limited repurchases or redemptions of outstanding securities. In addition, Aviall Services may pay cash dividends to Aviall for the purpose of funding (i) ordinary operating expenses and scheduled debt service, (ii) payments by Aviall of taxes in respect of Aviall and its subsidiaries, up to the amount that would be payable by Aviall Services, on a consolidated basis, if it were the taxpayer and (iii) any repurchase of the Senior Notes permitted under the terms of the Credit Facility. Additionally, the Credit Facility restricts intercompany loans made to Aviall from its direct and indirect subsidiaries, with the exception of intercompany loans made to fund limited repurchases or redemptions of outstanding securities and loans made by Aviall Services to fund required payments under the Senior Notes. The net assets of consolidating subsidiaries subject to these restrictions were $706.4 million and $714.8 million at March 31, 2005 and December 31, 2004, respectively.

 

8


CONSOLIDATED STATEMENT OF OPERATIONS

 

     Three Months Ended March 31, 2005

(In Thousands)


   Parent

    Guarantor
Subsidiaries


    Nonguarantor
Subsidiaries


   Eliminations

    Consolidated
Total


Net sales

   $ —       272,297     35,293    (16,142 )   291,448

Cost of sales

     —       225,654     28,769    (16,142 )   238,281
    


 

 
  

 

Gross profit

     —       46,643     6,524    —       53,167

Selling and administrative expense

     —       23,846     4,240    —       28,086
    


 

 
  

 

Operating income

     —       22,797     2,284    —       25,081

Interest expense (income)

     (4,645 )   9,682     66    —       5,103

Equity in (earnings) loss of subsidiaries

     (10,037 )   (1,981 )   —      12,018     —  
    


 

 
  

 

Earnings (loss) before income taxes

     14,682     15,096     2,218    (12,018 )   19,978

Provision for income taxes

     1,682     5,059     237    —       6,978
    


 

 
  

 

Net earnings (loss)

   $ 13,000     10,037     1,981    (12,018 )   13,000
    


 

 
  

 

 

CONSOLIDATED STATEMENT OF OPERATIONS

 

     Three Months Ended March 31, 2004

(In Thousands)


   Parent

    Guarantor
Subsidiaries


    Nonguarantor
Subsidiaries


   Eliminations

    Consolidated
Total


Net sales

   $ —       268,185     31,554    (16,207 )   283,532

Cost of sales

     —       227,260     25,381    (16,207 )   236,434
    


 

 
  

 

Gross profit

     —       40,925     6,173    —       47,098

Selling and administrative expense

     —       24,292     3,307    —       27,599
    


 

 
  

 

Operating income

     —       16,633     2,866    —       19,499

Interest expense (income)

     (4,243 )   8,497     91    —       4,345

Equity in (earnings) loss of subsidiaries

     (7,270 )   (2,037 )   —      9,307     —  
    


 

 
  

 

Earnings (loss) before income taxes

     11,513     10,173     2,775    (9,307 )   15,154

Provision for income taxes

     1,536     2,903     738    —       5,177
    


 

 
  

 

Net earnings (loss)

   $ 9,977     7,270     2,037    (9,307 )   9,977
    


 

 
  

 

 

9


CONSOLIDATED BALANCE SHEET

 

     March 31, 2005

 

(In Thousands)


   Parent

    Guarantor
Subsidiaries


    Nonguarantor
Subsidiaries


   Eliminations

    Consolidated
Total


 

Assets

                               

Current assets:

                               

Cash and cash equivalents

   $ (30 )   8,040     2,731    —       10,741  

Receivables, net

     —       128,768     26,211    —       154,979  

Inventories

     —       294,838     13,183    —       308,021  

Prepaid expenses and other current assets

     —       5,159     171    —       5,330  

Deferred income taxes

     —       33,776     22    —       33,798  
    


 

 
  

 

Total current assets

     (30 )   470,581     42,318    —       512,869  
    


 

 
  

 

Property and equipment

     —       33,624     555    —       34,179  

Investment in subsidiaries

     752,142     36,265     —      (788,407 )   —    

Intercompany receivables

     —       204,046     —      (204,046 )   —    

Goodwill

     —       44,904     1,939    —       46,843  

Intangible assets

     —       200,886     —      —       200,886  

Deferred income taxes

     —       2,816     410    —       3,226  

Other assets

     6,248     6,592     3    —       12,843  
    


 

 
  

 

Total assets

   $ 758,360     999,714     45,225    (992,453 )   810,846  
    


 

 
  

 

Liabilities and Shareholders’ Equity

                               

Current liabilities:

                               

Current portion of long-term debt

   $ —       1,179     11    —       1,190  

Revolving line of credit

     —       82,218     —      —       82,218  

Cash overdrafts due to outstanding checks

     5     23,597     —      —       23,602  

Accounts payable

     —       85,394     1,140    —       86,534  

Accrued expenses

     3,845     33,436     3,173    —       40,454  
    


 

 
  

 

Total current liabilities

     3,850     225,824     4,324    —       233,998  
    


 

 
  

 

Long-term debt

     200,000     442     7    —       200,449  

Intercompany payables

     185,546     —       18,500    (204,046 )   —    

Other liabilities

     —       7,435     —      —       7,435  

Commitments and contingencies

     —       —       —      —       —    

Shareholders’ equity

                               

Common stock

     355     33     7,542    (7,575 )   355  

Additional paid-in capital

     454,152     867,920     9,919    (877,839 )   454,152  

Retained earnings (accumulated deficit)

     (49,130 )   (95,562 )   4,933    90,629     (49,130 )

Treasury stock, at cost

     (28,589 )   —       —      —       (28,589 )

Unearned compensation - restricted stock

     (1,446 )   —       —      —       (1,446 )

Accumulated other comprehensive income

     (6,378 )   (6,378 )   —      6,378     (6,378 )
    


 

 
  

 

Total shareholders’ equity

     368,964     766,013     22,394    (788,407 )   368,964  
    


 

 
  

 

Total liabilities and shareholders’ equity

   $ 758,360     999,714     45,225    (992,453 )   810,846  
    


 

 
  

 

 

10


CONSOLIDATED BALANCE SHEET

 

     December 31, 2004

 

(In Thousands)


   Parent

    Guarantor
Subsidiaries


    Nonguarantor
Subsidiaries


   Eliminations

    Consolidated
Total


 

Assets

                               

Current assets:

                               

Cash and cash equivalents

   $ (35 )   83,002     8,665    —       91,632  

Receivables, net

     —       116,938     27,149    —       144,087  

Inventories

     —       315,298     12,831    —       328,129  

Prepaid expenses and other current assets

     —       2,824     129    —       2,953  

Deferred income taxes

     —       40,410     22    —       40,432  
    


 

 
  

 

Total current assets

     (35 )   558,472     48,796    —       607,233  
    


 

 
  

 

Property and equipment

     —       33,318     611    —       33,929  

Investment in subsidiaries

     764,005     34,284     —      (798,289 )   —    

Intercompany receivables

     —       235,007     —      (235,007 )   —    

Goodwill

     —       44,904     1,939    —       46,843  

Intangible assets

     —       46,525     —      —       46,525  

Deferred income taxes

     —       2,816     413    —       3,229  

Other assets

     6,498     5,214     5    —       11,717  
    


 

 
  

 

Total assets

   $ 770,468     960,540     51,764    (1,033,296 )   749,476  
    


 

 
  

 

Liabilities and Shareholders’ Equity

                               

Current liabilities:

                               

Current portion of long-term debt

   $ —       1,429     11    —       1,440  

Revolving line of credit

     —       —       —      —       —    

Cash overdrafts due to outstanding checks

     4     42,969     50    —       43,023  

Accounts payable

     —       97,368     1,261    —       98,629  

Accrued expenses

     7,723     35,827     3,191    —       46,741  
    


 

 
  

 

Total current liabilities

     7,727     177,593     4,513    —       189,833  
    


 

 
  

 

Long-term debt

     200,000     1,981     9    —       201,990  

Intercompany payables

     213,740     —       21,267    (235,007 )   —    

Other liabilities

     —       8,652     —      —       8,652  

Commitments and contingencies

     —       —       —      —       —    

Shareholders’ equity

                               

Common stock

     346     33     7,542    (7,575 )   346  

Additional paid-in capital

     447,060     862,357     9,918    (872,275 )   447,060  

Retained earnings (accumulated deficit)

     (62,130 )   (83,698 )   8,515    75,183     (62,130 )

Treasury stock, at cost

     (28,218 )   —       —      —       (28,218 )

Unearned compensation - restricted stock

     (1,679 )   —       —      —       (1,679 )

Accumulated other comprehensive (loss) income

     (6,378 )   (6,378 )   —      6,378     (6,378 )
    


 

 
  

 

Total shareholders’ equity

     349,001     772,314     25,975    (798,289 )   349,001  
    


 

 
  

 

Total liabilities and shareholders’ equity

   $ 770,468     960,540     51,764    (1,033,296 )   749,476  
    


 

 
  

 

 

11


CONSOLIDATED STATEMENT OF CASH FLOWS

 

     Three Months Ended March 31, 2005

 

(In Thousands)


   Parent

    Guarantor
Subsidiaries


    Nonguarantor
Subsidiaries


    Eliminations

    Consolidated
Total


 

Operating activities:

                                

Net earnings (loss)

   $ 13,000     10,037     1,981     (12,018 )   13,000  

Depreciation and amortization

     250     5,064     58     —       5,372  

Deferred income taxes

     —       6,634     —       —       6,634  

Compensation expense on restricted stock awards

     233     —       —       —       233  

Changes in:

                                

Receivables, net

     —       (11,830 )   938     —       (10,892 )

Inventories

     —       20,460     (352 )   —       20,108  

Intercompany receivables and payables

     (6,294 )   14,625     (8,331 )   —       —    

Accounts payable

     —       (11,974 )   (121 )   —       (12,095 )

Accrued expenses

     (3,878 )   (2,391 )   (18 )   —       (6,287 )

Other, net

     —       (4,432 )   (36 )   —       (4,468 )
    


 

 

 

 

Net cash provided by (used for) operating activities

     3,311     26,193     (5,881 )   (12,018 )   11,605  
    


 

 

 

 

Investing activities:

                                

Capital expenditures

     —       (2,712 )   (1 )   —       (2,713 )

Purchase of distribution rights

     —       (157,000 )   —       —       (157,000 )

Investment in subsidiaries

     (10,037 )   (1,981 )   —       12,018     —    

Sales of property, plant and equipment

     —       300     —       —       300  
    


 

 

 

 

Net cash provided by (used for) investing activities

     (10,037 )   (161,393 )   (1 )   12,018     (159,413 )
    


 

 

 

 

Financing activities:

                                

Debt issue costs paid

     —       (1,898 )   —       —       (1,898 )

Issuance of common stock

     7,101     —       —       —       7,101  

Purchase of treasury stock

     (371 )   —       —       —       (371 )

Net change in revolving credit facility

     —       82,218     —       —       82,218  

Cash overdrafts due to outstanding checks

     1     (19,372 )   (50 )   —       (19,421 )

Debt repaid

     —       (710 )   (2 )   —       (712 )
    


 

 

 

 

Net cash provided by (used for) financing activities

     6,731     60,238     (52 )   —       66,917  
    


 

 

 

 

Change in cash and cash equivalents

     5     (74,962 )   (5,934 )   —       (80,891 )

Cash and cash equivalents, beginning of period

     (35 )   83,002     8,665     —       91,632  
    


 

 

 

 

Cash and cash equivalents, end of period

   $ (30 )   8,040     2,731     —       10,741  
    


 

 

 

 

 

12


CONSOLIDATED STATEMENT OF CASH FLOWS

 

     Three Months Ended March 31, 2004

 

(In Thousands)


   Parent

    Guarantor
Subsidiaries


    Nonguarantor
Subsidiaries


    Eliminations

    Consolidated
Total


 

Operating activities:

                                

Net earnings (loss)

   $ 9,977     7,270     2,037     (9,307 )   9,977  

Depreciation and amortization

     255     3,968     70     —       4,293  

Deferred income taxes

     —       4,337     (9 )   —       4,328  

Compensation expense on restricted stock awards

     183     —       —       —       183  

Changes in:

                                

Receivables

     —       (6,366 )   (3,962 )   —       (10,328 )

Inventories

     —       7,262     (844 )   —       6,418  

Intercompany receivables and payables

     (9,174 )   3,782     5,392     —       —    

Accounts payable

     (33 )   12,122     169     —       12,258  

Accrued expenses

     3,812     (2,167 )   1,248     —       2,893  

Other, net

     1,536     (3,130 )   (31 )   —       (1,625 )
    


 

 

 

 

Net cash provided by (used for) operating activities

     6,556     27,078     4,070     (9,307 )   28,397  
    


 

 

 

 

Investing activities:

                                

Capital expenditures

     —       (1,432 )   —       —       (1,432 )

Purchase of distribution rights

     —       (800 )   —       —       (800 )

Investment in subsidiaries

     (7,270 )   (2,037 )   —       9,307     —    

Sales of property, plant and equipment

     —       5     1     —       6  
    


 

 

 

 

Net cash provided by (used for) investing activities

     (7,270 )   (4,264 )   1     9,307     (2,226 )
    


 

 

 

 

Financing activities:

                                

Debt issue costs paid

     (99 )   —       —       —       (99 )

Issuance of common stock

     1,170     —       —       —       1,170  

Purchase of treasury stock

     (351 )                     (351 )

Net change in revolving credit facility

     —       —       (36 )   —       (36 )

Cash overdrafts

     —       (37,999 )   9     —       (37,990 )

Debt repaid

     —       (857 )   (3 )   —       (860 )
    


 

 

 

 

Net cash provided by (used for) financing activities

     720     (38,856 )   (30 )   —       (38,166 )
    


 

 

 

 

Change in cash and cash equivalents

     6     (16,042 )   4,041     —       (11,995 )

Cash and cash equivalents, beginning of period

     —       21,187     2,237     —       23,424  
    


 

 

 

 

Cash and cash equivalents, end of period

   $ 6     5,145     6,278     —       11,429  
    


 

 

 

 

 

13


Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Executive Overview

 

We are the largest independent global provider of new parts, supply-chain management and other related value-added services to the aerospace aftermarket. The aerospace aftermarket consists of parts needed for the scheduled and unscheduled maintenance, repair and modification of aircraft already in use but does not include parts used in the construction of new aircraft or engines. We serve this market through our two wholly owned subsidiaries, Aviall Services, Inc., or Aviall Services, and Inventory Locator Service, LLC, or ILS. Aviall Services provides new parts and related supply-chain management services to the aerospace industry, and ILS operates electronic marketplaces for buying and selling parts, equipment and services for the global aerospace, defense and marine industries.

 

Aviall Services purchases a broad range of new parts, components and supplies from over 220 original equipment manufacturers, or OEMs, including in some cases several business units within such manufacturers, and resells them to over 18,500 government/military, general aviation/corporate and commercial airline customers, including over 300 airlines. Aviall Services also provides value-added services to our customers and suppliers, such as repair and assembly services, supply-chain management services and information-gathering and delivery services.

 

ILS operates electronic marketplaces for buying and selling parts, equipment and services for the global aerospace, defense and marine industries. With more than 14,000 users in more than 85 countries, ILS’s electronic marketplaces contain more than 55 million line items representing over five billion parts for sale. ILS also maintains databases of over 119 million cross-referenced United States, or U.S., government records, allowing users to research manufacturers and prices for specific parts, locate alternate parts, find additional uses and markets for parts and review U.S. government procurement histories.

 

Our first quarter 2005 net earnings of $13.0 million or $0.38 diluted earnings per share increased 30.0% compared to net earnings of $10.0 million or $0.30 diluted earnings per share in the first quarter of 2004. Our operating income in the first quarter of 2005 was $25.1 million, an increase of $5.6 million or 28.7% from the same quarter in 2004. These results were driven by the addition of commissions received for the sales of unique parts for General Electric, or GE, CF6-50 and CF6-80A, or CF6, engines which commenced in February 2005. During the GE transition, only commissions on parts directly shipped by GE will be recorded until we commence shipping, which is estimated to begin in the third quarter of 2005. In addition, our selling and administrative expense increased only $0.5 million in the first quarter of 2005 compared to the first quarter of 2004 largely due to year-over-year higher salary and benefit expenses offset by lower bad debt expense. This continues our leveraging of selling and administrative expense as a percentage of sales. Accordingly, our first quarter 2005 selling and administrative expense as a percentage of sales was 9.6% compared to 9.7% in the first quarter of 2004.

 

Market conditions continue to be challenging during the first quarter of 2005. The combination of record high fuel costs, a slowing of growth in the economies of many regions and the uncertain future being faced by many of our airline customers and some general aviation aircraft operators have combined to make our future performance and opportunities less certain. However, we believe that these conditions also continue to support the need for the services offered by Aviall Services and ILS, which we believe is the principal reason for Aviall’s improved results in 2004 and into 2005.

 

Our future strategy will continue to focus on the acquisition of new long-term supplier contracts as well as adding other traditional supplier relationships, delivering superior customer service and investing in technology and infrastructure to increase supplier and customer efficiencies. We will also continue to evaluate potential strategic acquisitions and changes to our capital structure. We believe our ability to grow at a pace similar to that which we have experienced since 2000 will depend on the award of one or a series of new long-term supplier contracts, the expansion of our traditional supplier base and product offerings and/or completion of a strategic acquisition. The timing and length of the process to procure new long-term agreements or relationships or a strategic acquisition is unpredictable. We are currently actively pursuing a number of opportunities for additional growth, including possible significant, new long-term supplier agreements. No assurance can be given that we will be able to procure any such new arrangements. To the extent we do secure any such relationship, the economies of scale derived from recent contracts may not be indicative of our future results, particularly in the early stages of new contract implementation. As an example of the implementation of this strategy, we signed two additional exclusive distribution services agreements with Hamilton Sundstrand in April 2005, bolstering our relationship which began in 2004. The multi-product agreements award us exclusive worldwide distribution rights for Hamilton Sundstrand-built spare parts that are unique to the 60kVA family of generators, the JT8D mechanical fuel controls, and the JT9D engine accessories. These parts are used on a wide range of aircraft, and we expect the agreements to generate approximately $100 million of revenue over the next ten years.

 

14


We previously announced that net earnings from continuing operations in 2005 would be in the range of approximately $55.0 million to $57.5 million or equivalent to approximately $1.60 to $1.66 per diluted share based upon the then-existing number of diluted shares. Aviall remains comfortable with the previous earnings estimate given in February 2005.

 

Critical Accounting Policies

 

For a discussion of our critical accounting policies, refer to “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2004. There have been no material changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

Results of Operations-Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

 

Net Sales. Net sales for Aviall Services were $284.0 million, an increase of $7.6 million or 2.7% from the $276.4 million recorded in the first quarter of 2004.

 

The following table presents sales for Aviall Services in each of its geographic regions and in all market sectors (amounts in millions):

 

    

Amount of
Increase/

(Decrease)


   

Percentage

Increase/

(Decrease)


 

Geographic region:

              

Europe

   $ 5.5     27.9 %

Asia-Pacific

   $ 2.8     10.3 %

Americas

   $ (0.7 )   (0.3 )%

Market sector:

              

Commercial airline

   $ 8.6     13.2 %

General Aviation/corporate

   $ 1.8     2.7 %

Government/military

   $ (2.8 )   (1.9 )%

 

Sales in the commercial airline sector increased primarily due to stronger sales volumes in the sector as well as the addition of GE CF6 engine parts sales commissions, which commenced in February 2005. Sales in the general aviation/corporate sector increased modestly because of increased flight activity tempered by the effect of fuel prices. Sales in the government/military sector decreased slightly primarily due to lower deliveries of military-related parts under the Rolls-Royce T-56, or RR T56, distribution agreement. Sales of RR T56 products were $119.3 million in the first quarter of 2005 and $126.0 million in the first quarter of 2004. Aggregate sales of products supplied by Rolls-Royce and Honeywell were $180.3 million and $185.9 million in the first quarter of 2005 and 2004, respectively.

 

Net sales for ILS were $7.4 million, an increase of $0.3 million or 4.2% from the $7.1 million recorded in the first quarter of 2004.

 

Gross Profit. Gross profit of $53.2 million increased $6.1 million or 13.0% in the first quarter of 2005 compared to $47.1 million in the first quarter of 2004. Gross profit as a percentage of net sales was 18.2% in the first quarter of 2005 as compared to 16.6% in the first quarter of 2004. The increased gross profit percentage was due to the addition of the GE CF6 engine parts sales commissions, which commenced in February 2005. During the GE transition, only commissions on parts directly shipped by GE will be recorded until we commence shipping, which is estimated to begin in the third quarter of 2005.

 

Selling and Administrative Expense. Selling and administrative expense increased $0.5 million to $28.1 million in the first quarter of 2005 but decreased as a percentage of net sales to 9.6% from 9.7% in the first quarter of 2004. Selling and administrative expense increased largely as a result of higher salary and benefit expenses offset by lower bad debt expense.

 

Interest Expense. Interest expense increased $0.7 million to $5.1 million in the first quarter of 2005 from $4.4 million in the first quarter of 2004. Noncash interest expense amounted to $0.4 million in both 2005 and 2004. Our net interest expense increased primarily due to the initial funding of the GE CF6 agreement and the continued borrowings outstanding under our senior secured credit facility, or the Credit Facility, which had a balance of $82.2 million at March 31, 2005.

 

15


Provision for Income Taxes. Our income tax expense for the first quarter of 2005 was $7.0 million, and our effective tax rate was 34.9%. Our income tax expense for the first quarter of 2004 was $5.2 million, and our effective tax rate was 34.2%. The increase in our effective tax rate from 34.2% in 2004 to 34.9% in 2005 resulted primarily from a decrease in the allowable benefit for 2005 from the Extraterritorial Income exclusion.

 

Our effective tax rate increased from 27.6% at December 31, 2004 to 34.9% at March 31, 2005. The lower effective rate at December 31, 2004 is primarily due to the release in 2004 of a $3.4 million valuation allowance for state tax net operating loss, or NOL, carryforwards.

 

Cash payments made for federal, state and foreign income taxes were $0.6 million in the first quarter of 2005. Cash refunds received for federal, state and foreign income taxes were $0.3 million in the first quarter of 2004. Our cash income tax expense is primarily comprised of Alternative Minimum Tax and foreign taxes on our foreign operations. Our cash income tax expense continues to be substantially lower than the U.S. federal statutory rate through the use of our U.S. federal NOL carryforward.

 

Liquidity and Capital Resources

 

Cash Flow. Net cash flow provided by operations was $11.6 million in the first three months of 2005 compared to $28.4 million in the first three months of 2004. The $16.8 million decrease in cash provided by operating activities in 2005 compared to the same period in 2004 primarily resulted from a low March 31, 2005 ending accounts payable balance due to the timing of month end settlements with our suppliers and a decrease in accrued expenses related to interest payment timing on the $200 million of senior unsecured notes, or the Senior Notes, partially offset by increased cash earnings in 2005 and lower inventory levels at March 31, 2005. Aviall Services’ inventory turns in March 2005 remained unchanged from December 2004 at 3.2 turns. The days’ sales outstanding for Aviall’s receivables decreased from 51 days at December 31, 2004 to 47 days at March 31, 2005 due to increased sales volume.

 

Capital expenditures were $2.7 million in the first three months of 2005 compared to $1.4 million in the first three months of 2004. Capital spending in both 2005 and 2004 was primarily for upgrades to Aviall Services’ enterprise resource planning software, computer hardware and operations infrastructure. Based on the capital projects approved by our board of directors, we expect to make capital expenditures, including noncash capital amounts, totaling approximately $11.0 million in 2005. These projects include upgrades and enhancements associated with both our systems and operations infrastructure at Aviall Services and ILS. We review our capital expenditure program periodically and modify it as required to meet current business needs. Under the Credit Facility, our capital expenditure limit is approximately $17.2 million, comprised of a $12.0 million limit for 2005 plus $5.2 million of carryover amounts from prior years.

 

In January 2005, we entered into a distribution agreement with GE Engine Services, LLC and GE, whereby GE has appointed us as the exclusive worldwide distributor of unique parts for the CF6 engines for as long as these engines remain in service. As a result of the GE CF6 agreement, we recorded $160.1 million for distribution rights and inventory.

 

Variable Working Capital (see definition below) increased $2.9 million in the first three months of 2005 as compared to a decrease of $8.3 million in the first three months of 2004. In 2005, we invested $159.4 million in net capital expenditures and distribution rights as compared to $2.2 million in 2004. The combined cash used in the first three months of 2005 of $147.8 million by both operating and investing activities was funded by $7.1 million received for common stock issued pursuant to the exercise of options, $82.2 million of net borrowings under the Credit Facility and a majority of the $91.6 million of cash on hand at the beginning of 2005. In addition, our cash overdraft position decreased $19.4 million in the first quarter of 2005. As a result, our cash balance decreased by $80.9 million.

 

By way of comparison, the combined cash provided in the first three months of 2004 of $26.2 million for both operating and investing activities together with the $1.2 million received for common stock issued pursuant to the exercise of options and the use of $12.0 million of the cash on hand at the beginning of 2004 funded the $38.0 million decrease in our cash overdraft position last year. Overdraft positions arise when we settle our accounts payable by issuing checks at month-end, and the recipients of these checks have not presented them to our banks for payment before our cut-off for accounting purposes. We classify these overdraft positions as a separate current liability in our accompanying consolidated balance sheet because no right of offset existed against other cash accounts within the same bank. Generally accepted accounting principles, or GAAP, treat these amounts similar to debt in the statement of cash flows by presenting cash overdrafts as a financing activity. We expect to continue large month-end settlements with our major suppliers, but the overdrafts will change in accordance with the variable amounts of products shipped to us from time to time.

 

16


Assuming our current level of internal growth, profitability, and the present relationship between increased revenues, Variable Working Capital requirements and our annual capital expenditures, we expect to generate strong positive cash flows from operations although these may be offset from time to time by overdraft obligations and increases in Variable Working Capital, particularly when our business is growing. Assuming the foregoing, we project cash flow in 2005 for operating activities will exceed $50.0 million. Our cash flow from operating activities also depends on the timing of the delivery and payment for inventory as discussed above. In some months, we receive much larger deliveries than the average of the preceding several months. These larger deliveries can significantly alter our cash flow for that month and on a cumulative basis for both the quarter and the fiscal year to date.

 

In 2005, we expect to fund our internal growth and any related capital expenditures out of cash flow from operations and borrowings under the Credit Facility. If we are awarded one or more additional long-term supplier agreements in 2005 that require significant investments in distribution rights and inventory, we may be required to increase availability and borrow significant amounts under the Credit Facility or we may be required to sell debt, equity or other securities under our shelf registration statement or otherwise to fund the costs associated with the investment. Likewise, if we enter into a strategic acquisition or if our current projections prove to be inaccurate in 2005, we may be required to borrow significant amounts under the Credit Facility or to sell securities.

 

The following table presents a reconciliation of our Variable Working Capital to working capital for the periods presented:

 

     Three Months Ended March 31,

 

(In Thousands)


   2005

    2004

 

Receivables, net

   $ 154,979     149,607  

Plus: Inventories

     308,021     321,442  

Less: Accounts payable

     (86,534 )   (107,080 )
    


 

Variable Working Capital

     376,466     363,969  
    


 

Plus:

              

Cash and cash equivalents

     10,741     11,429  

Prepaid expenses and other current assets

     5,330     3,759  

Deferred income taxes

     33,798     19,075  

Less:

              

Current portion of long-term debt

     (1,190 )   (2,920 )

Cash overdrafts due to outstanding checks

     (23,602 )   (5,625 )

Revolving line of credit

     (82,218 )   (473 )

Accrued expenses

     (40,454 )   (42,460 )
    


 

Working capital

   $ 278,871     346,754  
    


 

 

We define Variable Working Capital as receivables plus inventories less accounts payable. In no event should Variable Working Capital be considered as an alternative to working capital or any GAAP measure as an indicator of our performance, nor should Variable Working Capital be considered as an alternative to working capital as an indicator of our relative liquidity to meet our obligations within an ordinary business cycle. We believe that Variable Working Capital is a useful measure, along with measurements under GAAP, in evaluating our financial performance and our ability to leverage sales and earnings from our Variable Working Capital. In addition, we use Variable Working Capital as a financial measure to evaluate our management of working capital and as a metric to measure contract and supplier performance.

 

Senior Unsecured Debt. We have $200.0 million of Senior Notes outstanding. The Senior Notes bear interest at 7.625% per annum and mature on July 1, 2011, unless previously redeemed at our option. We may redeem some or all of the Senior Notes at specified redemption prices at any time after July 1, 2007. In addition, prior to July 1, 2006, we may redeem up to 35% of the Senior Notes from the proceeds of qualifying equity offerings.

 

The Senior Notes are our senior unsecured obligations and are equal in right of payment to all of our senior indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of our domestic subsidiaries.

 

In November 2003, we entered into an interest rate swap agreement to manage interest rate risk exposure on $50.0 million of the $200.0 million principal amount of Senior Notes. Under this agreement which expires in 2011, we pay floating interest amounts in exchange for giving up the right to pay a fixed amount without an exchange of the underlying principal amount.

 

17


Senior Secured Debt. On January 28, 2005, we entered into an amendment to the Credit Facility in connection with the GE CF6 agreement. As amended, the Credit Facility consists of a $260.0 million revolving credit and letter of credit facility due as a balloon payment in 2008, with availability determined by reference to a borrowing base calculated using our eligible accounts receivable and inventory and after deducting reserves required by the lenders. As of March 31, 2005, we had $82.2 million of borrowings outstanding under the Credit Facility and had issued letters of credit for $0.9 million. In addition, we had $140.7 million available for additional borrowings under the Credit Facility and our borrowing base was $223.8 million. As of March 31, 2005, borrowings under the Credit Facility bear interest based upon either: (1) a Eurodollar Rate plus an applicable margin ranging from 1.5% to 2.5% depending upon our financial ratios or (2) a Base Rate plus an applicable margin ranging from 0.5% to 1.5% depending upon the same financial ratios. We expect to utilize both of these interest rate options during 2005. As of March 31, 2005, the weighted average interest rate on the Credit Facility was 4.90%. An annual commitment fee of 0.5% is payable monthly in arrears on the daily unused portion of the Credit Facility. Obligations under the Credit Facility are collateralized by substantially all of our domestic assets and 65% of the stock of certain of our foreign subsidiaries. The Credit Facility also contains default clauses that permit the acceleration of all amounts due following an event of default at the discretion of the lenders, and lock-box provisions that apply our cash collections to outstanding borrowings. Based on the terms of the Credit Facility and pursuant to EITF Issue No. 95-22, “Balance Sheet Classification of Revolving Credit Agreement Obligations Involving Lock-Box Arrangements,” we classify amounts outstanding under the Credit Facility, if any, as current.

 

We also maintain a Canadian $6.0 million secured revolving credit facility, or the Canadian Revolver. As of March 31, 2005, we had no borrowings outstanding under the Canadian Revolver.

 

Debt Covenants. The Credit Facility contains various restrictive operating and financial covenants, including several that are based on earnings before interest, taxes, depreciation, amortization, extraordinary gains or losses, and one-time items, or Adjusted EBITDA. We must comply with a maximum leverage ratio covenant that measures the ratio of our outstanding debt to our Adjusted EBITDA for the trailing four quarters. We must maintain a maximum leverage ratio of: 4.50 to 1 for the fiscal quarters ending on or before June 30, 2005; 4.00 to 1 for the fiscal quarter ending September 30, 2005; 3.50 to 1 for the fiscal quarter ending December 31, 2005; and 3.25 to 1 for the fiscal quarters ending on or after March 31, 2006. This maximum leverage ratio covenant was 4.50 to 1 at March 31, 2005. We must also comply with a minimum interest coverage ratio covenant that measures the ratio of our Adjusted EBITDA for the trailing four quarters to our interest expense during the trailing four quarters. The minimum interest coverage ratio covenant was 3.50 to 1 at March 31, 2005 and will remain at that level for all periods thereafter. Furthermore, we must maintain a tangible net worth of not less than $205.8 million plus 75% of the cumulative consolidated net income for each fiscal quarter ending on or after June 30, 2004. As of March 31, 2005, the required tangible net worth was $240.4 million. We are permitted to make capital expenditures under the Credit Facility in any fiscal year up to $12.0 million, plus any unused carryover of up to $10.0 million from prior years. As a result, we must limit our capital expenditures in 2005 to no more than $17.2 million, which includes $5.2 million of allowed carryover spending from prior years.

 

The Senior Notes also contain various restrictive covenants. We may not incur additional indebtedness unless we maintain a consolidated interest coverage ratio of at least 2.0 to 1.0 or unless the debt is otherwise permitted under the indenture. The consolidated interest coverage ratio measures the ratio of our EBITDA, as defined in the indenture relating to the Senior Notes, for the trailing four quarters to our interest expense for such quarters. Subject to specified exceptions, we may not make payments on or redeem our capital stock, make certain investments or make other restricted payments unless we maintain a consolidated interest coverage ratio of at least 2.0 to 1.0 and otherwise have available 50% of cumulative consolidated net income or capital stock sale proceeds from which such payments may be made. We are unable to incur liens unless expressly permitted under the Senior Notes or unless the Senior Notes are equally and ratably secured. We may not sell or otherwise dispose of any of the capital stock of our subsidiaries unless specifically authorized. We must receive fair market value for any asset sales and the consideration must be paid at least 75% in cash, cash equivalents or assumed liabilities. To the extent such proceeds are received, we must reinvest any proceeds exceeding $10 million in additional assets within a period of 365 days or thereafter repay senior debt or repurchase Senior Notes. Additionally, we must repurchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes upon a change of control. The indenture relating to the Senior Notes also contains additional covenants.

 

We are currently, and expect to remain, in compliance for at least the next twelve months in all material respects with the covenants in the Credit Facility and the Senior Notes.

 

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The following table presents a reconciliation of our EBITDA and Adjusted EBITDA, as defined in the Credit Facility, to net earnings for the trailing four quarters ended March 31, 2005:

 

(In Thousands)


   Second
Quarter
2004


   Third
Quarter
2004


    Fourth
Quarter
2004


    First
Quarter
2005


    Total

 

Net earnings

   $ 13,465    10,021     9,706     13,000     46,192  

Plus:

                               

Income tax expense

     2,819    3,961     4,472     6,978     18,230  

Interest expense

     4,207    4,169     4,021     5,103     17,500  

Depreciation and amortization expense

     3,914    4,020     3,736     4,876     16,546  
    

  

 

 

 

EBITDA

     24,405    22,171     21,935     29,957     98,468  

Noncash losses (gains)

     615    (490 )   (110 )   (78 )   (63 )
    

  

 

 

 

Adjusted EBITDA

   $ 25,020    21,681     21,825     29,879     98,405  
    

  

 

 

 

 

The Adjusted EBITDA calculation above is prepared in accordance with the terms of the Credit Facility. The noncash gains and losses, which are included in the Adjusted EBITDA calculation in accordance with the terms of the Credit Facility, may occur again. The depreciation and amortization expense above excludes debt issuance cost amortization. Adjusted EBITDA is presented solely to provide information on our debt covenants, and EBITDA and Adjusted EBITDA should not be considered an alternative to operating results or cash flows calculated in accordance with GAAP.

 

Contractual Obligations. With the exception of the $82.2 million of new borrowings outstanding under the Credit Facility as of March 31, 2005, there have been no material changes in our contractual obligations as set forth in “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

New Accounting Pronouncements. In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 123 (revised 2004), or SFAS 123R, “Share-Based Payment,” which replaces Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FAS 123.” SFAS 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and generally would require that such transactions be accounted for using a fair-value-based method and recognized as expense over the period during which an employee is required to provide services in exchange for the award. SFAS 123R is effective for annual periods beginning after June 15, 2005. As such, we will implement the provisions of SFAS 123R effective January 1, 2006. We are in the process of evaluating the three allowable methods of transition to SFAS 123R but have not yet determined which method will be used. In 2006, we will incur compensation expense under SFAS 123R, as currently written, related to unvested options granted prior to January 1, 2006.

 

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Forward-Looking Statements

 

This report contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) that are based on the beliefs of our management, as well as assumptions and estimates made by, and information currently available to, our management. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or our management, identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to risks, uncertainties and assumptions relating to our operations and results of operations as well as those of our customers and suppliers, including as a result of competitive factors and pricing pressures, shifts in market demand, general economic conditions and other factors including, among others, those that effect flight activity in the commercial, business, government/military, and general/corporate aviation segments, the business activities of our customers and suppliers and developments in information and communication technology. Additional risks are set forth in our Annual Report on Form 10-K for the year ended December 31, 2004. 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 in the forward-looking statements.

 

Item 3: Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risk from changes in interest rates and foreign exchange rates. From time to time, we have used financial instruments to offset these risks. These financial instruments are not used for trading or speculative purposes. We did not experience any significant changes in market risk during the first three months of 2005. Our market risk is described in more detail in “Item 7A: Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

Item 4: Controls and Procedures

 

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

 

There were no changes to our internal control over financial reporting during our first quarter of 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1: Legal Proceedings

 

Not applicable.

 

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table summarizes repurchases of our common stock in the quarter ended March 31, 2005:

 

Period


   Total
Number of
Shares
Purchased(1)


   Average
Price Paid
per Share


   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs


  

Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet

be Purchased Under the
Plans or Programs


January 1, 2005 - January 31, 2005

   13,294    $ 23.70    —      —  

February 1, 2005 - February 28, 2005

   —      $ —      —      —  

March 1, 2005 - March 31, 2005

   1,993    $ 28.31    —      —  
    
         
  

Total

   15,287    $ 24.30    —      —  
    
         
  

 

(1) The 15,287 total number of shares purchased were shares of restricted stock withheld for the payment of withholding taxes upon vesting of restricted stock.

 

Item 3: Defaults Upon Senior Securities

 

Not applicable.

 

Item 4: Submission of Matters to a Vote of Security Holders

 

Not applicable.

 

Item 5: Other Information

 

Not applicable.

 

Item 6: Exhibits

 

31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1    Certifications pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

21


 

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.

April 28, 2005      

By:

  /s/    COLIN M. COHEN        
                Colin M. Cohen
                Senior Vice President and Chief Financial Officer
                (Principal Financial Officer)

 

22


 

INDEX TO EXHIBITS

 

Exhibit No.

  

Description


31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1    Certifications pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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