Pemco Aviation Group to Restate Financial Statements for First
Three Quarters of 2003; Expected 2003 Results Also Announced
BIRMINGHAM, Ala., March 31 /PRNewswire-FirstCall/ -- Pemco Aviation Group, Inc. announced today its preliminary results for the fiscal year ended December 31,
2003 and that it has completed an investigation which resulted in restating its
financial results for the first three quarters of fiscal year 2003. Although
completion of the audit of fiscal year 2003 and restatement of the quarters will
delay the filing of the Company's Annual Report on Form 10-K for fiscal year
2003, the Company expects to file its 2003 Form 10-K and amendments to its
Quarterly Reports on Form 10-Q by April 15, 2004.
While theCompany's independent auditor, Ernst & Young LLP, has not completed
its audit of the Company's financial statements for 2003, the Company expects on
a preliminary basis to report record sales ranging from approximately $188
million to $192 million for 2003, an increase of approximately 15-18% over sales
of $162.9 million in 2002, with sales increases for both the Government Services
and Commercial Services segments. Gross profit for 2003 is estimated to range
from approximately $41.0 million to $43.0million, compared to $35.8 million in
2002, an increase of approximately 15-20%. Operating income for 2003 is
estimated to range from approximately $16.0 million to $17.0 million, compared
to $14.3 million in 2002, an increase of approximately 12-19%.Net earnings for
2003 are estimated to range from approximately $9.9 million to $10.2 million,
compared to $8.8 million in 2002, an increase of approximately 12-16%. The
Company expects basic earnings per share to range from $2.45 to $2.52 and
diluted earnings per share to range from $2.25 to $2.32, compared to $2.24 and
$2.02 respectively for 2002, representing increases of approximately 9-12% and
11-15%.
The investigation was conducted by the Company's outside counsel, Latham &
Watkins LLP, withthe oversight of the Company's Audit Committee. The
investigation arose out of a concern expressed by Ernst & Young LLP regarding
the appropriateness of, and accuracy of accounting for, certain aircraft
maintenance contracts performed by the Company'swholly-owned subsidiary, Pemco
World Air Services, Inc., based in Dothan, Alabama. The investigation concluded
that (1) the Company's failure to record a loss on a contract in the first
quarter of 2003, overstatement of revenues in the second quarter of 2003 and
understatement of revenues in the third quarter of 2003 resulted from good faith
but incorrect applications of accounting principles; (2) the underlying
transactions were appropriate and were reflected in the Company's records; and
(3) neither the Company nor any individual personnel had intended to cause
incorrect accounting to occur.
The Company has not yet completed its review and analysis of revenue recognition
for the first three quarters of 2003. As a result of the analysis conducted to
date, the Company estimates that its revenues were overstated in the second
quarter of 2003 by approximately $1.4 million. Of this total amount,
approximately $300,000 was recognized prematurely and approximately $228,000 was
improperly recognized. Of the $300,000 recognized prematurely, the Company
expects to recognize approximately $150,000 during each of the third and fourth
quarters of 2003. In addition, the Company expects to reverse $900,000 of
revenue during the second quarter of 2003 and to reverse a charge to bad debt
expense of equal amount associated with this revenue during the third quarter of
2003.
The Company's total estimated contract revenues because the Company provides for
losses on uncompleted contracts in the period inwhich its management determines
that the estimated total costs under a contract will exceed the estimated total
contract revenues. The Company expects that reductions of total estimated
contract revenues will affect the Company's calculation of its provision for
losses on uncompleted contracts and that it will include the effect of these
revenue adjustments in the Company's reserve for contract loss calculations,
which will result in an increase to cost of sales of approximately $937,000,
$640,000 and $1,141,000, and a corresponding increase to the reserve for
contract losses for the first, second and third quarters of fiscal year 2003,
respectively. The expected accrual of these loss provisions during the first,
second and third quarters of fiscal year 2003 will result in an adjustment to
decrease cost of sales previously recorded during the second, third and fourth
quarters of fiscal year 2003 by approximately $937,000, $640,000 and $1,141,000,
respectively.
The restatement is not expected to have any impact on the Company's financial
condition, results of operations or liquidity for any period prior to 2003.
In addition, Ernst & Young LLP has advised the Company of a material weakness in
internal controls over financial reporting involving incorrect applications of
generally accepted accounting principles as a result of personnel in certain
areas of the Company who did not have a full understanding of pertinent
accounting and financial reporting principles and as a result of the untimely
resolution of errors. The incorrect applications of accounting principles
involve revenue recognition and estimates to complete certain contracts made in
connection with projecting losses on contracts for recognition in a current
period. The untimely resolution of errors involved inventory accounting and the
reconciliation of intercompany transactions. The Company has taken proactive
steps to remediate the material weakness, including retention of a manager of
corporate accounting, increased training of its corporate and accounting staff
to heighten awareness of revenue recognition, estimates of contract completion,
inventory accounting and reconciliation of intercompany transactions by
corporate and accounting personnel and enhanced coordination between management
and the Company's accounting staff with respect to these issues. In addition,
the Company has transferred its corporate vice president of finance to Pemco
World Air Services, Inc., in Dothan to oversee accounting functions there.
Following the Company's determination to restate its financial statements for
the first three quarters of 2003, the Company has also made other adjustments to
the quarters based upon a thorough examination of transactions during 2003.
These adjustments include balance sheet reclassifications of approximately
$271,000, cost of sales reclassifications between quarters in the net amount of
approximately $344,000 and the characterization of the Company's method of
contract accounting for the third quarter of 2003.
Subject to the completion by Ernst & Young LLP of its review of the restated
financial statements, the Company expects the restatement to result in an
aggregate decrease in revenue of $1.1 million, a decrease in gross profit of
$0.2 million, and a decrease in net income of $0.1 million for the year ended
December 31, 2003.
The Company expects the restatement to have the following impact on its
financial statements for the first three quarters of fiscal year 2003: First Three Quarters of Fiscal Year 2003
(in thousands, except per share data) Quarter Ended 3/31/03
As As Net
Reported Restated Change Net Sales $35,669 $35,669 $--
Gross Profit 7,442 6,505 (937)
Net Income 1,273 693 (580)
Net Income per Share:
Basic $0.32 $0.17 $(0.15)
Diluted $0.29 $0.16 $(0.13)
Quarter Ended 6/30/03
As As Net
Reported Restated Change Net Sales $48,681 $47,253 $(1,428)
Gross Profit 12,251 11,120 (1,131)
Net Income 2,830 2,129 (701)
Net Income per Share:
Basic $0.70 $0.53 $(0.17)
Diluted $0.65 $0.49 $(0.16)
Quarter Ended 9/30/03
As As Net
Reported Restated Change Net Sales $43,946 $44,095 $149
Gross Profit 12,453 12,657 204
Net Income 3,840 3,967 127
Net Income per Share:
Basic $0.95 $0.98 $0.03
Diluted $0.88 $0.91 $0.03 The Company expects its results for the fourth quarter of fiscal year 2003 and
for the overall fiscal year 2003 will be within the following ranges: Expected Results
Fourth Quarter 2003 and Fiscal Year 2003
(in thousands, except per share data) Quarter
Ended 12/31/2003 Fiscal Year 2003
Low High Low High Net Sales $60,983 $64,983 $188,000 $192,000
Gross Profit 10,718 12,718 41,000 43,000
Net Income 3,111 3,411 9,900 10,200
Net Income per Share:
Basic $0.77 $0.84 $2.45 $2.52
Diluted $0.69 $0.76 $2.25 $2.32 In addition to the effect of the restatement on net sales, gross profits and net
income in the first three quarters of fiscal year 2003, the restatement will
have the following effect on net sales, gross profits and net income in the
fourth quarter of 2003 and for fiscal year 2003 overall: Quarter Quarter Quarter Quarter 2003
Ended Ended Ended Ended Aggregate
3/31/03 6/30/03 9/30/03 12/31/03 Impact
(in thousands) Net Sales Increase
(Decrease) $-- $(1,428) $149 $150 $(1,129)
Gross Profit Increase
(Decrease) (937) (1,131) 204 1,636 (228)
Net Income Increase
(Decrease) (580) (701) 127 1,014 (140) The unaudited information presented herein may differ materially from the
Company's financial statements that are finally issued following the completion
by Ernst & Young LLP of its audit of the results of the Company's 2003 fiscal
year and the review by Ernst & Young LLP of the first three quarters of 2003.
Following the completion of the annual audit and quarterly review, changes in
the information presented herein could be material, individually or in the
aggregate, to the Company's business, financial condition, results of operations
or liquidity.
Safe Harbor Statement This press release contains forward-looking statements made in reliance on the
safe harbor provisions of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements may be identified by their use of words, such as "estimate,"
"expect," "intend" and other words and terms of similar meaning, in connection
with any discussion of the Company's financial statements, business, financial
condition, results of operations or liquidity. Factors that could affect the
Company's forward-looking statements include, among other things: the audit of
2003 and the review of the restatement of the first three quarters of 2003 by
Ernst & Young LLP; negative reactions from the Company's stockholders, creditors
or customers to the results of the investigation and restatement or further
delay in providing financial information caused by the investigation and
restatement; the impact and result of any litigation (including private
litigation), any action by The Nasdaq Stock Market, or of any investigation by
the Securities and Exchange Commission (SEC) or any investigationby any other
governmental agency related to the Company; the Company's ability to obtain any
necessary waivers from its creditors in the event of a further delay in, or
other adverse developments relating to, the restatement; the Company's ability
to manage its operations during and after the financial statement restatement
process; the Company's ability to successfully implement internal controls and
procedures that remediate the material weakness and ensure timely, effective and
accurate financial reporting; changes in economic conditions; the Company's
ability to obtain additional contracts and perform under existing contracts; and
other risks detailed from time to time in the Company's SEC reports, including
its Annual Report on Form 10-K, as amended, for the fiscal year ended December
31, 2002. The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date on which they are
made. The Company does not undertake any obligation to update or revise any
forward-looking statements and is not responsible for changes made to this
release by wire services or Internet services.
About Pemco Pemco Aviation Group, Inc., with executive offices in Birmingham, Alabama, and
facilities in Alabama, Florida and California, performs maintenance and
modification of aircraft for the U. S. Government and for foreign and domestic
commercial customers. The Company also provides aircraft parts and support and
engineering services, in addition to developing and manufacturing aircraft cargo
systems, rocket vehicles and control systems, and precision components. For more
information: http://www.pemcoaviationgroup.com/ . DATASOURCE: Pemco Aviation Group, Inc.
CONTACT: John R. Lee, Senior Vice President, Chief Financial Officer of Pemco Aviation Group, Inc., +1-205-510-4051 Web site: http://www.pemcoaviationgroup.com/
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