10-Q 1 e10-q.txt KELLSTROM INDUSTRIES, INC. FORM 10-Q 06/30/00 1 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, 2000 [ ] 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 0-23764 KELLSTROM INDUSTRIES, INC. ------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3753725 -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1100 International Parkway, Sunrise, Florida 33323 -------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (954) 845-0427 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: 11,910,981 shares of common stock, $.001 par value per share, were outstanding as of July 31, 2000. 1 2 KELLSTROM INDUSTRIES, INC. INDEX
Page Number ----------- PART I Item 1. Financial Statements: Condensed Consolidated Balance Sheets ......................... 3 Condensed Consolidated Statements of Earnings ................. 4 Condensed Consolidated Statements of Cash Flows ............... 5 Notes to Condensed Consolidated Financial Statements .......... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk .... 15 PART II Item 1. Legal Proceedings ............................................. 16 Item 2. Changes in Securities and Use of Proceeds ..................... 16 Item 3. Defaults Upon Senior Securities ............................... 16 Item 4. Submission of Matters to a Vote of Security Holders ........... 16 Item 5. Other Information ............................................. 16 Item 6. Exhibits and Reports on Form 8-K .............................. 17
2 3 Item 1. Financial Statements KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) June 30, 2000 December 31, 1999 ------------- ----------------- Assets Current Assets: Cash and cash equivalents $ 3,811,531 $ 272,140 Trade receivables, net of allowances for returns and doubtful accounts of $8,116,409 and $8,575,684 for 2000 and 1999, respectively 49,360,082 60,674,708 Inventories 228,429,717 194,490,995 Equipment under short-term operating leases, net 68,390,243 92,135,910 Prepaid expenses 6,147,470 5,199,429 Deferred tax assets 6,675,406 8,280,101 ------------- ------------- Total current assets 362,814,449 361,053,283 Equipment under long-term operating leases, net 53,069,382 58,001,190 Property, plant and equipment, net 25,918,472 25,339,940 Goodwill, net 85,643,672 87,825,058 Other assets 8,464,215 9,225,952 ------------- ------------- Total Assets $ 535,910,190 $ 541,445,423 ============= ============= Liabilities and Stockholders' Equity Current Liabilities: Short-term debt $ 157,517,975 $ 165,773,805 Notes payable -- 2,145,920 Current maturities of long-term debt 200,000 200,000 Accounts payable 17,254,234 17,713,220 Accrued expenses 21,705,957 18,133,718 ------------- ------------- Total current liabilities 196,678,166 203,966,663 Long-term debt, less current maturities 17,520,000 17,720,000 Convertible subordinated notes 140,250,000 140,250,000 Deferred tax liabilities 8,482,726 8,295,682 ------------- ------------- Total Liabilities 362,930,892 370,232,345 Stockholders' Equity: Common stock, $ .001 par value; 50,000,000 shares authorized; 11,910,981 shares issued and outstanding in 2000 and 1999 11,911 11,911 Additional paid-in capital 121,103,653 121,103,653 Retained earnings 53,723,822 51,668,184 Loans receivable from directors and officers (1,851,033) (1,572,730) Accumulated other comprehensive (loss) income (9,055) 2,060 ------------- ------------- Total Stockholders' Equity 172,979,298 171,213,078 ------------- ------------- Total Liabilities and Stockholders' Equity $ 535,910,190 $ 541,445,423 ============= =============
See accompanying notes to condensed consolidated financial statements 3 4 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------------------ ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Sales revenues, net $ 77,364,211 $ 77,318,790 $145,198,775 $146,030,885 Rental revenues 4,882,756 10,908,109 11,519,236 21,252,023 ------------ ------------ ------------ ------------ Total revenues 82,246,967 88,226,899 156,718,011 167,282,908 Cost of goods sold 56,004,249 52,126,790 104,338,483 99,510,109 Depreciation of equipment under operating leases 4,326,479 6,887,988 9,964,062 13,184,407 Selling, general and administrative expenses 11,673,098 10,670,399 23,265,359 19,165,909 Depreciation and amortization 1,551,837 1,309,764 3,102,778 2,511,164 Other non-recurring expenses -- 2,200,000 -- 2,200,000 ------------ ------------ ------------ ------------ Total operating expenses 73,555,663 73,194,941 140,670,682 136,571,589 Operating income 8,691,304 15,031,958 16,047,329 30,711,319 Interest expense, net of interest income 6,462,046 5,294,802 12,759,014 9,452,475 ------------ ------------ ------------ ------------ Income before income taxes 2,229,258 9,737,156 3,288,315 21,258,844 Income taxes 837,648 3,704,161 1,232,677 8,077,521 ------------ ------------ ------------ ------------ Net income $ 1,391,610 $ 6,032,995 $ 2,055,638 $ 13,181,323 ============ ============ ============ ============ Earnings per common share - basic $ 0.12 $ 0.51 $ 0.17 $ 1.12 ============ ============ ============ ============ Earnings per common share - diluted $ 0.12 $ 0.41 $ 0.17 $ 0.88 ============ ============ ============ ============ Weighted average number of common shares outstanding - basic 11,910,981 11,826,704 11,910,981 11,799,984 ============ ============ ============ ============ Weighted average number of common shares outstanding - diluted 11,919,264 17,724,910 11,946,246 17,772,912 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements 4 5 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ------------------------------- 2000 1999 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,055,638 $ 13,181,323 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,102,778 2,511,164 Depreciation of equipment under operating leases 9,964,062 13,184,407 Amortization of deferred financing costs 1,038,318 1,004,174 Deferred income taxes 1,791,739 (1,605,508) Changes in operating assets and liabilities: Decrease (increase) in trade receivables, net 12,667,161 (18,941,485) Increase in inventories (20,006,860) (26,348,165) Decrease (increase) in equipment under operating leases 5,084,317 (23,504,895) Increase in prepaid expenses and other current assets (948,041) (5,953,767) Increase in other assets (394,583) (284,924) (Decrease) increase in accounts payable (498,705) 4,906,947 Increase (decrease) in accrued expenses 6,034,680 (278,072) Increase in income taxes payable -- 1,418,620 ------------ ------------ Net cash provided by (used in) operating activities 19,890,504 (40,710,181) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired -- (16,718,685) Acquisition earn-out payments (3,618,646) (4,932,999) Purchase of property, plant and equipment (1,852,414) (3,951,369) Proceeds from sales of property, plant and equipment -- 56,763 ------------ ------------ Net cash used in investing activities (5,471,060) (25,546,290) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreement (8,455,830) 71,633,019 Debt repayment, including capital lease obligation (2,145,920) (5,045,207) Proceeds from the issuance of common stock -- 1,096,536 Loans to directors and officers (278,303) 136,580 Payment of deferred financing costs -- (474,372) ------------ ------------ Net cash (used in) provided by financing activities (10,880,053) 67,346,556 ------------ ------------ NET INCREASE IN CASH & CASH EQUIVALENTS 3,539,391 1,090,085 CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 272,140 1,107,102 ------------ ------------ CASH & CASH EQUIVALENTS, END OF PERIOD $ 3,811,531 $ 2,197,187 ============ ============
(continued) See accompanying notes to condensed consolidated financial statements 5 6 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
Six Months Ended June 30, ----------- ----------- 2000 1999 ----------- ----------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $11,566,368 $ 8,194,567 =========== =========== Income taxes $ 367,500 $ 7,840,974 =========== =========== Supplemental disclosure of fair value of assets acquired and liabilities assumed in connection with acquisitions: Receivables 3,570,615 Inventory 13,014,566 Prepaid expenses and other current assets 453,861 Goodwill 9,958,109 Other assets 85,280 ----------- Total assets $27,082,431 =========== Accrued expenses $ 368,219 Accounts payable 4,658,250 Income taxes payable 423,435 Notes payable 2,727,224 Deferred tax liabilities 2,186,618 ----------- Total liabilities $10,363,746 =========== Net assets acquired 16,718,685 ----------- Net cash used in acquisitions $16,718,685 ===========
See accompanying notes to condensed consolidated financial statements 6 7 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Kellstrom Industries, Inc. and its subsidiaries (the "Company") after elimination of intercompany accounts and transactions. These statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet as of December 31, 1999 has been derived from audited financial statements. In order to prepare the financial statements in conformity with generally accepted accounting principles, management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-K. Certain 1999 financial statement amounts have been reclassified to conform with the 2000 presentation. In the opinion of management of the Company, the condensed consolidated financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the condensed consolidated financial position of the Company as of June 30, 2000, the condensed consolidated results of operations for the three and six month periods ended June 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2000 and 1999. The results of operations for such interim periods are not necessarily indicative of the results for the full year. NOTE 2 - ACQUISITIONS On April 29, 1999, the Company acquired all of the outstanding capital stock of Certified Aircraft Parts, Inc. ("Certified") for $16.7 million in cash, and assumed $2.7 million in debt. NOTE 3 - EARNINGS PER SHARE Diluted earnings per share for the three and six month periods ended June 30, 2000 and 1999 were calculated as follows:
Three Months Ended Six Months Ended June 30, June 30, ----------- ----------- ----------- ----------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Net income $ 1,391,610 $ 6,032,995 $ 2,055,638 $13,181,323 Income adjustment relating to reduction of debt based on the if converted method -- 1,216,557 -- 2,433,113 ----------- ----------- ----------- ----------- Net income available to common and common equivalent shares $ 1,391,610 $ 7,249,552 $ 2,055,638 $15,614,436 =========== =========== =========== =========== Weighted average number of common shares outstanding - basic 11,910,981 11,826,704 11,910,981 11,799,984 Dilutive common stock equivalents from stock options and warrants based on the treasury stock method 8,283 1,280,724 35,265 1,355,446 Dilutive convertible subordinated notes based on the if converted method -- 4,617,482 -- 4,617,482 ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding - diluted 11,919,264 17,724,910 11,946,246 17,772,912 =========== =========== =========== ===========
In the computation of diluted earnings per common share for the three-month periods ended June 30, 1999 and 2000, approximately 1.0 million and 3.9 million stock options, respectively, were excluded because their inclusion would have been antidilutive. Additionally, conversion of the convertible subordinated notes was not assumed for the three-month period ended June 30, 2000 because of its antidilutive effect. In the computation of diluted earnings per common share for the six-month periods ended June 30, 1999 and 2000, approximately .9 million and 3.8 million stock options, respectively, were excluded because their inclusion would have been antidilutive. Additionally, conversion of the convertible subordinated notes was not assumed for the six-month period ended June 30, 2000 because of its antidilutive effect. 7 8 NOTE 4 - SEGMENT REPORTING The Company is organized based on the products that it offers. Under this organizational structure, the Company has four reportable segments: (i) Commercial Engine Parts, (ii) Defense (iii) Whole Engine and Aircraft and (iv) Airframe Avionics and Rotables. The Commercial Engine Parts segment is involved in the business of purchasing, overhauling (primarily through subcontractors), reselling and leasing of engine parts for large turbo-fan engines manufactured by CFM International, General Electric, Pratt & Whitney and Rolls Royce. The Defense segment is an after-market reseller of aircraft parts and turbojet engines and engine parts for helicopters and large transport aircraft. The segment's primary focus is on the Lockheed Martin C-130 Hercules aircraft, a widely used military transport aircraft, the Allison (Rolls Royce) T56/501 engine, which powers this aircraft, and the Allison 250, with approximately 16,000 units actively in use by helicopters. The acquisition of Certified on April 29, 1999 enhanced the Company's presence in this market segment. The Whole Engine and Aircraft segment leases and resells whole engines and aircraft. The Airframe Avionics and Rotables segment is engaged in the sale of a wide variety of aircraft rotables and expendable components including flight data recorders, electrical and mechanical equipment and radar and navigation systems. The Company's reportable segments are managed separately because each business requires different technology and product knowledge. The Company has not historically allocated selling, general and administrative expenses, depreciation and amortization, interest expense or income taxes to its business segments. Rather, the Company evaluates performance of the business segments based on revenue and gross margins. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The following table sets forth the revenue and margins for each of the Company's business segments for the three and six month periods ended June 30, 2000 and 1999:
Three Months Ended Six Months Ended June 30, June 30, ------------------------------ ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenues Commercial Engine Parts $ 23,292,878 $ 18,209,729 $ 43,577,429 $ 31,734,918 Defense 17,673,937 10,324,140 $ 34,868,795 19,828,462 Airframe Avionics and Rotables 14,564,396 10,787,921 $ 28,059,551 25,160,505 Whole Engine and Aircraft 26,715,756 48,905,109 50,212,236 90,559,023 ------------ ------------ ------------ ------------ Total revenue $ 82,246,967 $ 88,226,899 $156,718,011 $167,282,908 ============ ============ ============ ============ Gross margin Commercial Engine Parts $ 8,794,940 $ 6,072,688 $ 15,708,789 $ 10,742,591 Defense 6,420,201 3,677,465 12,514,985 7,141,323 Airframe Avionics and Rotables 4,061,483 2,834,417 7,895,321 6,245,805 Whole Engine and Aircraft 2,639,615 16,627,551 6,296,371 30,458,673 ------------ ------------ ------------ ------------ Total gross margin $ 21,916,239 $ 29,212,121 $ 42,415,466 $ 54,588,392 ============ ============ ============ ============
8 9 NOTE 5 - COMPREHENSIVE INCOME The Company's total comprehensive income, comprised of net income and foreign currency translation adjustments, for the three and six month periods ended June 30, 2000 and 1999 was as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------------------- ------------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net income $ 1,391,610 $ 6,032,995 $ 2,055,638 $ 13,181,323 Foreign currency translation adjustments (5,287) 31,178 (11,115) (887) ------------ ------------ ------------ ------------ Other comprehensive income, net of taxes (5,287) 31,178 (11,115) (887) ------------ ------------ ------------ ------------ Total Comprehensive income $ 1,386,323 $ 6,064,173 $ 2,044,523 $ 13,180,436 ============ ============ ============ ============
NOTE 6 - OTHER MATTERS On July 7, 1999, the Company settled a lawsuit brought by the Estate of the late Mr. Joram Rosenfeld (a former Director of the Company) with respect to, among other things, a claim alleging entitlement to a stock option grant in late 1996. The settlement was entered into in order to limit the expense of litigating the suit as well as the protracted use of management's time and related corporate resources. For the second quarter ended June 30, 1999, the Company recorded a one-time pre-tax charge of approximately $2.2 million to fulfill its obligation under the settlement and for accrued legal expenses. The Company is not aware of any material legal proceedings pending against the Company or any of its property. However, the Company may become party to various claims, legal actions and complaints arising in the ordinary course of business or otherwise. The Company cannot determine whether such actions would have a material impact on the financial condition, results of operations or cash flows of the Company. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Kellstrom Industries, Inc. (the "Company") unaudited condensed consolidated financial statements and the related notes thereto included elsewhere herein. In addition, reference should be made to the Company's audited consolidated financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's most recent Annual Report on Form 10-K. This quarterly report on Form 10-Q contains or may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company's business, financial condition and results of operations. The words "estimate," "project," "intend," "expect," and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements, including those described below. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. GENERAL The Company is a leader in the airborne equipment segments of the international aviation services after-market. The Company's principal business is the purchasing, overhauling (primarily through subcontractors), reselling and leasing of aircraft, avionics and aircraft rotables, and aircraft engines and engine parts. The Company's historical growth has resulted from a number of factors, including the expansion of the Company's product lines, customer base and market share, increases in the Company's internal growth, cost controls and overall operating efficiencies, acquisitions in existing and adjacent markets and significant capital investments. On April 29, 1999 the Company acquired Certified. This acquisition was accounted for using the purchase method of accounting for business combinations and accordingly, Certified's operating results have been included in the Company's results of operations since the date of acquisition. Consequently, the results of operations for the three and six month periods ended June 30, 2000 are not comparable to the corresponding periods of the prior year in certain material respects. RESULTS OF OPERATIONS For the periods indicated, the following table sets forth the percentage of certain income statement items to total revenues derived from the Company's condensed consolidated statements of earnings. 10 11
Percentage of Total Revenues Percentage of Total Revenues Three Months Ended June 30, Six Months Ended June 30, ----------------------------- ---------------------------- 2000 1999 2000 1999 ----- ----- ----- ----- Revenues: Sales revenues, net 94.1% 87.6% 92.6% 87.3% Rental revenues 5.9% 12.4% 7.4% 12.7% Total revenues 100.0% 100.0% 100.0% 100.0% Operating expenses: Cost of goods sold 68.1% 59.1% 66.6% 59.5% Depreciation of equipment under operating leases 5.3% 7.8% 6.4% 7.9% Selling, general and administrative expenses 14.2% 12.1% 14.8% 11.5% Depreciation and amortization expense 1.9% 1.5% 2.0% 1.5% Other non-recurring expenses 0.0% 2.5% 0.0% 1.3% Total operating expenses 89.4% 83.0% 89.8% 81.6% Operating income 10.6% 17.0% 10.2% 18.4% Interest expense (net of interest income) 7.9% 6.0% 8.1% 5.7% Income before income taxes 2.7% 11.0% 2.1% 12.7% Income taxes 1.0% 4.2% 0.8% 4.8% Net income 1.7% 6.8% 1.3% 7.9%
THREE MONTHS ENDED JUNE 30, 2000 AND 1999 Consolidated sales revenues decreased by 7% to $82.2 million for the three months ended June 30, 2000 as compared to $88.2 million for the three months ended June 30, 1999. Sales revenues from the Company's commercial engine parts segment increased to $23.3 million as compared with $18.2 million for the three months ended June 30, 2000 and June 30, 1999, respectively. Sales revenues from the Company's defense segment increased to $17.7 million as compared with $10.3 million for the three months ended June 30, 2000 and June 30, 1999, respectively. Sales revenues from the Company's airframe avionics and rotables segment increased to $14.6 million as compared with $10.8 million for the three months ended June 30, 2000 and June 30, 1999, respectively. The increase in sales in the Company's commercial engine parts, defense and airframe avionics and rotables segments was primarily due to the continued expansion of the Company's nose to tail inventory management programs, coupled with an increase in the Company's customer base due to continued investments in marketing and higher levels of inventory availability. Sales revenues from the Company's whole engine and aircraft segment decreased to $21.8 million as compared with $38.0 million for the three months ended June 30, 2000 and June 30, 1999, respectively. The decrease in revenues from the sale of whole engine and aircraft reflect current market conditions and the Company's decision to limit the growth of the lease portfolio and change its composition to newer engine models. Rental revenues from the Company's whole engine and aircraft segment decreased by 55% to $4.9 million for the three months ended June 30, 2000 as compared to $10.9 million for the three months ended June 30, 1999. The decrease in rental revenues was primarily due to a customer unexpectedly ceasing operations during the fourth quarter of 1999, a reduction in fleet utilization and a reduction in the size of the fleet. Consolidated cost of goods sold increased by 7% to $56.0 million for the three months ended June 30, 2000 as compared to $52.1 million for the three months ended June 30, 1999. Consolidated gross profit margin on sales was 27.6% for the three months ended June 30, 2000 as compared with 32.6% for the three months ended June 30, 1999. Gross margin for the three months ended June 30, 2000 for the commercial engine parts, defense and airframe avionics and rotables segments were 37.8%, 36.3% and 27.9%, respectively, as compared to 33.3%, 35.6% and 26.3%, respectively, for the three months ended June 30, 1999. The increase in gross margins at these segments reflects the Company's efforts to pursue higher value-add inventory and engine management services worldwide. Gross margins from the sale of whole engines and aircraft were 9.5% for the second quarter of 2000 as compared to 33.2% for the second quarter of 1999, reflecting the Company's efforts to reposition its lease portfolio. Depreciation of equipment under operating leases decreased by 37% to $4.3 million for the three months ended June 30, 2000 as compared to $6.9 million for the three months ended June 30, 1999. Gross profit margin 11 12 on rental revenues decreased to 11.4% in 2000 from 36.9% in 1999. The decrease in the gross profit margin was primarily due to the impact of depreciation expense incurred on a higher level of idle equipment. Selling, general and administrative expenses increased by 9% to $11.7 million for the three months ended June 30, 2000 as compared to $10.7 million for the three months ended June 30, 1999. The increase in selling, general and administrative expenses was primarily due to (i) the acquisition of Certified being combined into Kellstrom and (ii) the Company's continued investment in personnel and facilities for the defense, commercial engine parts and airframe avionics and rotables segments in order to support the Company's growth model. Depreciation and amortization expense increased by 18% to $1.6 million for the three months ended June 30, 2000 as compared to $1.3 million for the three months ended June 30, 1999. The increase in depreciation and amortization expense was primarily due to amortization of goodwill related to the Certified acquisition in addition to depreciation on recent investments in facilities to support the Company's growth plans. Other non-recurring expenses for the three months ended June 30, 1999 reflect a $2.2 million charge to fulfill the Company's obligation under the settlement of a lawsuit brought by the Estate of a late Director of the Company, with respect to, among other things, a claim alleging entitlement to a stock option grant in late 1996, and for accrued legal expenses incurred in connection with the settlement. Interest expense (net of interest income) increased by 22% to $6.5 million for the three months ended June 30, 2000 as compared to $5.3 million for the three months ended June 30, 1999. The increase in interest expense was primarily driven by an increase in interest rates and the Company's average debt levels, resulting from the acquisition of Certified and growth in inventories offset by decreases in equipment under operating leases. The Company's effective tax rate for the three months ended June 30, 2000 was 37.6% as compared to 38.0% for the three months ended June 30, 1999. Net income decreased by 77% to $1.4 million for the three months ended June 30, 2000 as compared to $6.0 million for the three months ended June 30, 1999. Basic earnings per common share decreased by 76% to $0.12 for the three months ended June 30, 2000 as compared to $0.51 for the three months ended June 30, 1999. Diluted earnings per common share decreased by 71% to $0.12 for the three months ended June 30, 2000 as compared to $0.41 for the three months ended June 30, 1999. SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Consolidated sales revenues of $145.2 million for the six months ended June 30, 2000 were relatively flat as compared to $146.0 million for the six months ended June 30, 1999. Sales revenues from the Company's commercial engine parts segment increased to $43.6 million as compared with $31.7 million for the six months ended June 30, 2000 and June 30, 1999, respectively. Sales revenues from the Company's defense segment increased to $34.9 million as compared with $19.8 million for the six months ended June 30, 2000 and June 30, 1999, respectively. Sales revenues from the Company's airframe avionics and rotables segment increased to $28.0 million as compared with $25.2 million for the six months ended June 30, 2000 and June 30, 1999, respectively. The increase in sales in the Company's commercial engine parts, defense and airframe avionics and rotables segments was primarily due to the continued expansion of the Company's nose to tail inventory management programs, coupled with an increase in the Company's customer base due to continued investments in marketing and higher levels of inventory availability. In addition, sales in the Company's defense segment were impacted by the acquisition of Certified in April 1999. Sales revenues from the Company's whole engine and aircraft segment decreased to $38.7 million as compared with $69.3 million for the six months ended June 30, 2000 and June 30, 1999, respectively. The decrease in revenues from the sale of whole engine and aircraft reflect current market conditions and the Company's decision to limit the growth of the lease portfolio and change its composition to newer engine models. 12 13 Rental revenues from the Company's whole engine and aircraft segment decreased by 46% to $11.5 million for the six months ended June 30, 2000 as compared to $21.3 million for the six months ended June 30, 1999. The decrease in rental revenues was primarily due to a customer unexpectedly ceasing operations during the fourth quarter of 1999, a reduction in fleet utilization and a reduction in the size of the fleet. Consolidated cost of goods sold increased by 5% to $104.3 million for the six months ended June 30, 2000 as compared to $99.5 million for the six months ended June 30, 1999. Consolidated gross profit margin on sales was 28.1% for the six months ended June 30, 2000 as compared with 31.9% for the six months ended June 30, 1999. Gross margin for the six months ended June 30, 2000 for the commercial engine parts and airframe avionics and rotables segments was 36.0% and 28.1%, respectively, as compared to 33.9% and 24.8%, respectively, for the six months ended June 30, 1999. The increase in gross margins at these segments reflects the Company's efforts to pursue higher value-added inventory and engine management services worldwide. Gross margin for the six months ended June 30, 2000 for the defense segment was relatively unchanged at 35.9% as compared to 36.0% for the same period last year. Gross margins from the sale of whole engines and aircraft were 12.3% for the six months ended June 30, 2000 as compared to 32.3% for the six months ended June 30, 1999, reflecting the Company's efforts to reposition its lease portfolio. Depreciation of equipment under operating leases decreased by 24% to $10.0 million for the six months ended June 30, 2000 as compared to $13.2 million for the six months ended June 30, 1999. Gross profit margin on rental revenues decreased to 13.5% in 2000 from 38.0% in 1999. The decrease in the gross profit margin was primarily due to the impact of depreciation expense incurred on a higher level of idle equipment. Selling, general and administrative expenses increased by 21% to $23.3 million for the six months ended June 30, 2000 as compared to $19.2 million for the six months ended June 30, 1999. The increase in selling, general and administrative expenses was primarily due to (i) the acquisition of Certified being combined into Kellstrom and (ii) the Company's continued investment in personnel and facilities for the defense, commercial engine parts and airframe avionics and rotables segments in order to support the Company's growth model. Depreciation and amortization expense increased by 24% to $3.1 million for the six months ended June 30, 2000 as compared to $2.5 million for the six months ended June 30, 1999. The increase in depreciation and amortization expense was primarily due to amortization of goodwill related to the Certified acquisition in addition to depreciation on recent investments in facilities to support the Company's growth plans. Other non-recurring expenses for the six months ended June 30, 1999 reflect a $2.2 million charge to fulfill the Company's obligation under the settlement of a lawsuit brought by the Estate of a late Director of the Company, with respect to, among other things, a claim alleging entitlement to a stock option grant in late 1996, and for accrued legal expenses incurred in connection with the settlement. Interest expense (net of interest income) increased by 35% to $12.8 million for the six months ended June 30, 2000 as compared to $9.5 million for the six months ended June 30, 1999. The increase in interest expense was primarily driven by an increase in interest rates and the Company's average debt levels, resulting from the acquisition of Certified and growth in inventories offset by decreases in equipment under operating leases. The Company's effective tax rate for the six months ended June 30, 2000 was 37.5% as compared to 38.0% for the six months ended June 30, 1999. Net income decreased by 84% to $2.1 million for the six months ended June 30, 2000 as compared to $13.2 million for the six months ended June 30, 1999. Basic earnings per common share decreased by 85% to $0.17 for the six months ended June 30, 2000 as compared to $1.12 for the six months ended June 30, 1999. Diluted earnings per common share decreased by 81% to $0.17 for the six months ended June 30, 2000 as compared to $0.88 for the six months ended June 30, 1999. 13 14 LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, the Company's liquidity and capital resources included cash and cash equivalents of $3.8 million and working capital of $166.1 million. At June 30, 2000, total outstanding debt was $315.5 million as compared to $326.1 million as of December 31, 1999. As of June 30, 2000, the outstanding principal balance on the Company's convertible subordinated notes was $140.3 million and the Company had contractual lines of credit totaling $256.7 million of which $164.0 million was outstanding and $25.9 million was available. Cash flow provided by operating activities for the six months ended June 30, 2000 was $19.9 million compared with cash flow used in operating activities of $40.7 million for the six months ended June 30, 1999. The primary sources of cash from operating activities were a decrease in accounts receivable of $12.7 million, net income of $2.1 million, adjusted for non-cash expenses related to depreciation and amortization of $13.1 million and an increase in accrued expenses of $6.0 million. The primary use of cash for operating activities was for increases in inventories of $20.0 million to support the Company's growth. Cash flow used for investing activities for the six months ended June 30, 2000 was $5.5 million compared with $25.5 million for the six months ended June 30, 1999. The primary uses of cash for investing activities were earn-out payments of $1.4 million and $2.2 million in connection with the acquisitions of Aero Support and ITC, respectively, and purchases of property, plant and equipment of $1.9 million. Cash flow used for financing activities for the six months ended June 30, 2000 was $10.9 million compared with cash flow provided by financing activities of $67.3 million for the six months ended June 30, 1999. The primary uses of cash for financing activities were a decrease in borrowings under the Company's line of credit agreement of $8.5 million and the repayment of a note payable of $2.1 million. The Company is continuing to evaluate the possibility of establishing partnerships with financial/leasing organizations for the continued expansion of its business through off-balance-sheet initiatives. Under the proposed initiatives, the Company expects that it would retain a minority ownership stake in the proposed partnerships and continue to manage the operations of those partnerships. There are no guarantees that these initiatives will happen. The proposed initiatives are expected to take place if and when one or more appropriate financial/leasing organizations are identified and transaction terms are finalized. The Company intends to take advantage of growth opportunities that are consistent with the Company's expansion and profit objectives. It is anticipated that such growth opportunities will require the investment of cash into inventories of aircraft and aircraft parts, engines and engine parts and avionics and rotables. Greater availability of such inventories will better enable the Company to continue to increase its revenues as well as to encourage the development of strategic relationships with new customers. The Company intends to finance its inventory expansion program through its cash flows and through its syndicated credit facility. In the future, the Company may require additional sources of capital to continue to fund its expansion. The Company's management believes that free cash flow (net income plus depreciation of property, plant and equipment and amortization of goodwill), combined with the Company's syndicated credit facility should be sufficient for the Company's current level of operations. However, the Company may elect to seek equity capital or other debt financing in the future depending upon market conditions and the capital needs of the Company. 14 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk is limited primarily to the fluctuating interest rates associated with variable rate indebtedness outstanding under the Company's $256.7 million bank credit facility. The bank credit facility, which expires in 2003, bears interest at the bank's prime rate plus 0-50 basis points or, at the Company's option, LIBOR plus 150-250 basis points. These variable interest rates are subject to interest rate changes in the United States and Eurodollar markets. The Company does not currently use, and has not historically used, derivative financial instruments to hedge against such market interest rate risk. At June 30, 2000, the Company had approximately $164.0 million in variable rate indebtedness outstanding under the credit facility, representing approximately 52% of the Company's total debt outstanding, at an average interest rate of 9.1%. An increase in interest rates by 1% would not have a material impact on the financial condition, results of operations or cash flows of the Company. 15 16 PART II ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable. 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. 16 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 27 - Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K. None 17 18 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. August 14, 2000 KELLSTROM INDUSTRIES, INC. (Registrant) /s/ Oscar E. Torres ----------------------- Oscar E. Torres Chief Financial Officer (principal financial and accounting officer) 18 19 Exhibit Index EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule 19