PAGI Pemco Aviation Grp. (MM)

Pemco Aviation Group, Inc. (NASDAQ:PAGI), a leading provider of aircraft maintenance and modification services, today announced the operating results of its second quarter and six months ended June 30, 2006. Net income for the second quarter of 2006 was $0.45 million ($0.10 per share) compared to a net loss for the second quarter of 2005 of $0.37 million ($0.09 per share). Revenue for the second quarter of 2006 was $49.6 million versus revenue of $38.6 million in the second quarter of 2005, an increase of 28.5%. Net income for the first six months of 2006 was $0.52 million ($0.12 per share) compared with net income of $0.79 million ($0.18 per share) in the first two quarters of 2005. Revenue for the six months ended June 30, 2006 was $87.3 million, compared to $82.6 million in the six months ended June 30, 2005, an increase of 5.7%. The Company's results of operations was impacted by a $0.36 million positive adjustment in a warranty reserve due to additional regulatory approvals issued during the second quarter of 2006 and the reversal of $0.64 million of a $1.50 million provision for accounts receivable recorded during the third quarter of 2005 to reflect the net realizable value of the receivable based on offers to purchase the receivable recently received by the Company. Furthermore, in the second quarter of 2005, the Company recorded a gain of $0.65 million on the assignment of a lease located at the St. Petersburg-Clearwater International Airport. Ronald Aramini, Pemco's President and CEO, stated "Pemco's second quarter results reflect improvement in gross profit and operating income in all three business segments. Revenue growth accelerated in the second quarter due to increased deliveries from several new programs added over the past year. The U.S. Navy P-3 Orion maritime patrol and antisubmarine warfare aircraft program at our Birmingham, Alabama facility began delivering aircraft in the second quarter. At our Dothan, Alabama facility, we delivered the first-ever conversion of B737-400 passenger aircraft to a freighter aircraft for Alaska Airlines. The second Alaska Airlines conversion is scheduled for delivery in the third quarter of 2006 and work on the third Alaska conversion has already begun. During the first quarter of 2006, Dothan teamed with Taikoo (Xiamen) Aircraft Engineering Co. Ltd. ("TAECO") in Mainland China on a passenger to freighter conversion which delivered on August 9, 2006. Work has already begun on an additional conversion with TAECO in 2006 and increased conversion deliveries are expected in 2006 and 2007. Revenue at the Dothan, Alabama facility also benefited from the maintenance work for Southwest Airlines which began earlier in 2006. All of these new programs will play a key role in the growth and diversification of Pemco. However, winning the KC-135 contract for 2008 and after is critical for our Company." Michael E. Tennenbaum, Pemco's Chairman, said "The KC-135 business has been the key to Pemco's past as it is to its future. Our skilled and experienced workforce delivers the planes with outstanding speed and quality. Also, we are certain that our costs are lower than any other vendor's. The KC-135 is vital to our nation's fighting capability, and preserving Pemco's capacity to maintain the aircraft is prudent policy. All Pemco stakeholders - employees, shareholders, civic leaders - must pull together to assure that Pemco will do this work after 2007." For the six months ended June 30, 2006, the Company violated a debt covenant requiring the Company to achieve income before income taxes of $1.0 million. The default of the debt covenant as of June 30, 2006 has not been waived. In addition, our lenders have not extended the October 15, 2006 Revolving Credit Facility maturity date. As a result, our lenders may request payment of all debts outstanding at any time, but the Company is actively involved in working with our lenders on a waiver and an extension of the maturity date. The Company also has contacted other lenders about obtaining additional financing. We will continue to monitor our financial results and liquidity position and, if necessary, implement further reductions in expenses and capital expenditures. -0- *T Second Quarter 2006 vs. 2005 Results Summary of comparative results for the second quarter ended June 30, 2006: (Dollars in Millions) 2006 2005 Change ---------- ---------- ---------- Revenue $49.65 $38.60 28.6% Gross Profit 6.70 4.97 34.8% Operating income (loss) 1.60 (0.76) 310.5% Income (loss) before taxes 0.75 (0.58) 229.3% Net income (loss) 0.45 (0.37) 221.6% EBITDA(a) 2.58 0.72 258.3% (a) A description of the Company's use of non-GAAP information is provided below under "Use of Non-GAAP Financial Measures." A reconciliation of net income to EBITDA is provided at the end of this press release. *T Government Services Segment ("GSS") revenue increased $5.4 million due to the delivery of two additional KC-135 aircraft pursuant to a contract with the U.S. Air Force and the delivery of one P-3 aircraft under a contract with the U.S. Navy, offset by a reduction in revenue under a contract with the U.S. Coast Guard. GSS delivered one additional aircraft under the KC-135 Programmed Depot Maintenance ("PDM") in the second quarter of 2006 compared to the second quarter of 2005, and one additional KC-135 unscheduled depot level maintenance ("UDLM") in the second quarter of 2006, resulting in a revenue increase of $7.0 million. The first P-3 aircraft for the U.S. Navy was delivered in the second quarter of 2006 and generated additional revenue of $1.0 million. The end of the Coast Guard contract resulted in a revenue decrease of $3.0 million versus the second quarter of 2005. In addition, non-routine services performed under the C-130 U.S. Air Force UDLM contract generated an additional $0.4 million of revenue during the second quarter of 2006. Commercial Services Segment ("CSS") revenue for the quarter ended June 30, 2006 increased approximately 32%, or $5.0 million, from the quarter ended June 30, 2005. For the three-month period ended June 30, 2006, delivery of two cargo conversions generated $6.3 million of additional revenue whereas the second quarter of 2005 included no revenue from cargo conversions. Offsetting the increase in cargo conversion revenue was a decrease in maintenance, repair and overhaul ("MRO") revenue of $1.3 million, or 8%, for the three months ended June 30, 2006, when compared to the second quarter of 2005. Manufacturing and Components Segment ("MCS") revenue for the three months ended June 30, 2006 was consistent with that of the same three-month period of 2005. Revenue at Pemco Engineers, relating to sales of high precision machined parts and other aircraft components, remained relatively flat during the second quarter of 2006, compared to the second quarter of 2005. Revenue at Space Vector related to both the government launch vehicle program and related engineering design services also remained flat during the second quarter of 2006, as compared to the same period of 2005. Consolidated cost of sales increased $9.3 million, or 27.7%, to $43.0 million during the second quarter of 2006, as a result of the higher revenue base. As a percentage of revenue, quarter-to-date cost of sales at June 30, 2006 was 86.5%, compared to 87.1% during the second quarter of 2005. Cost of sales at GSS decreased from 91.6% of revenue to 90.5% of revenue, primarily due to losses recorded on the U.S. Coast Guard contract during the second quarter of 2005. Cost of sales at CSS decreased from 85.5% of revenue to 85.0% of revenue primarily due to better profit margins on cargo conversion deliveries and a $0.4 million positive adjustment in the estimated cost to settle a claim, due to additional regulatory approval issued during the second quarter of 2006. Cost of sales at MCS decreased slightly from $3.2 million to $3.1 million. Selling, General and Administrative ("SG&A") expenses remained consistent at $5.7 million for each of the second quarters of 2006 and 2005. Expense reductions during the second quarter of 2006 were offset by additional stock-based compensation expenses during the second quarter. During the second quarter of 2006, the Company reversed $0.6 million of a $1.5 million provision for accounts receivable recorded during the third quarter of 2005 related to the Chapter 11 bankruptcy filing by the Company's largest commercial customer. The provision for accounts receivable was adjusted to reflect the net realizable value of the receivables based on purchase offers from unrelated third parties. In the second quarter of 2005, the Company recorded a gain of $0.65 million on the assignment of a lease located at the St. Petersburg-Clearwater International Airport. Interest expense increased $0.4 million due to increases in the total debt outstanding and increases in variable interest rates on debt compared to the second quarter of 2005. -0- *T Six Months 2006 vs. 2005 Results Summary of comparative results for the six months ended June 30, 2006: (Dollars in Millions) 2006 2005 Change ---------- ---------- ---------- Revenue $87.29 $82.65 5.6% Gross Profit 13.51 13.15 2.7% Operating income 2.39 1.62 47.5% Income before taxes 0.88 1.36 (35.3%) Net income 0.52 0.79 (34.2%) EBITDA(a) 4.30 4.00 7.5% (a) A description of the Company's use of non-GAAP information is provided below under "Use of Non-GAAP Financial Measures." A reconciliation of net income to EBITDA is provided at the end of this press release. *T GSS revenue increased $6.0 million for the six-month period ended June 30, 2006 versus the six-month period ended June 30, 2005. Revenue under the KC-135 PDM contract increased $5.4 million in 2006 compared to 2005 due to additional material sales of $2.0 million and an increase in revenue from non-routine services due to a reduction in flow days for aircraft under this program. The P-3 aircraft program, which began in the fourth quarter of 2005, generated additional revenue of $1.2 million in the first six months of 2006. The first P-3 aircraft for the U.S. Navy was delivered in the second quarter of 2006. The termination of the Coast Guard contract resulted in a revenue decrease of $0.9 million versus the first six months of 2005 due to lower non-routine services performed during 2006. CSS revenue decreased $2.5 million in 2006 as compared to the first six months of 2005. The decrease was caused by a reduction in MRO revenues during the first six months of 2006. MRO revenue for the six months ended June 30, 2006 decreased $6.5 million. Revenue from the largest customer of CSS decreased $12.0 million, which was partially offset by additional revenue from new customers of approximately $5.5 million. The delivery of one additional cargo conversion during 2006, as compared to 2005, produced an additional $3.4 million in revenue. The decreases were further offset by $0.8 million of revenue related to settlement of the H3 Request for Equitable Adjustment ("REA") claim described in Note 10 of the Financial Statements included in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. Revenue at MCS increased 3.5% in the first half of 2006, versus the first half of 2005. Pemco Engineer's revenue decreased $0.4 million as shipments of aircraft cargo system parts were lower when compared to the first six months of 2005. Revenues at Space Vector increased $0.5 million due to billing adjustments on U.S. government launch vehicle programs. Consolidated cost of sales increased $4.3 million to $73.8 million during the six-month period ended June 30, 2006, as a result of the higher revenue base. As a percentage of revenue, cost of sales for the first six months of 2006 was 84.5%, compared to 84.1% during 2005. Cost of sales at GSS increased from 86.7% of revenue to 88.7% of revenue, primarily due to losses recorded on the U.S. Navy P-3 contract of $0.3 million and losses recorded for non-routine services performed under C-130 U.S. Air Force UDLM contract of $0.8 million. Cost of sales at CSS decreased from 84.7% of revenue to 82.0% of revenue, primarily due to better profit margins on cargo conversion deliveries and a $0.4 million positive adjustment in the estimated cost to settle a claim due to additional regulatory guidance issued during the second quarter of 2006. Cost of sales at MCS decreased from 73.7% of revenue to 71.3% of revenue primarily due to an increase in revenue at Space Vector and a decrease in revenue at Pemco Engineers. Historically, profit margins have been greater at Space Vector than at Pemco Engineers. SG&A expenses increased $0.2 million, or 2.0%, to $11.8 million in 2006. As a percentage of sales, SG&A expenses decreased to 13.5% in 2006 from 14.0% in 2005 primarily as a result of increased revenue and expense controls implemented, and offset by stock-based compensation expense recorded in 2006. During the second quarter of 2006, the Company reversed $0.6 million of a $1.5 million provision for accounts receivable recorded during the third quarter of 2005 related to the Chapter 11 bankruptcy filing by the Company's largest commercial customer. The provision for accounts receivable was adjusted to reflect the net realizable value of the receivables based on purchase offers from unrelated third parties. In the second quarter of 2005, the Company recorded a gain of $0.65 million on the assignment of a lease located at the St. Petersburg-Clearwater International Airport. Interest expense increased $0.6 million due to increases in the total debt outstanding and increases in variable interest rates on debt compared to the second quarter of 2005. (a) Use of Non-GAAP Financial Measures EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Pemco presents EBITDA because its management uses the measure to evaluate the Company's performance and to allocate resources. In addition, EBITDA has been used as one of the components to calculate the Company's debt covenants. Pemco believes EBITDA is a also measure of performance used by some commercial banks, investment banks, investors, analysts and others to make informed investment decisions. EBITDA is an indicator of cash generated to service debt and fund capital expenditures. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered as a substitute for or superior to other measures of financial performance reported in accordance with GAAP. EBITDA as presented herein may not be comparable to similarly titled measures reported by other companies. See the reconciliation of net income to EBITDA at the end of this release. About Pemco Pemco Aviation Group, Inc., with executive offices in Birmingham, Alabama, and facilities in Alabama 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: www.pemcoaviationgroup.com. 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 "believe," "expect," "intend," "anticipate," "estimate" and other words and terms of similar meaning, in connection with any discussion of the Company's prospects, financial statements, business, financial condition, revenues, results of operations or liquidity. Factors that could affect the Company's forward-looking statements include, among other things: changes in global or domestic economic conditions; the loss of one or more of the Company's major customers; the Company's ability to obtain additional contracts and perform under existing contracts; the outcome of pending and future litigation and the costs of defending such litigation; financial difficulties experienced by the Company's customers; potential environmental and other liabilities; the inability of the Company to obtain additional financing; material weaknesses in the Company's internal control over financial reporting; regulatory changes that adversely affect the Company's business; loss of key personnel; and other risks detailed from time to time in the Company's SEC reports, including its most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. 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. -0- *T PEMCO AVIATION GROUP, INC. (In thousands except per share information) Second Quarter Ended June 30, ---------------------- 2006 2005 ---------- ---------- Sales: Government Services Segment $ 24,639 $ 19,196 Commercial Services Segment 20,909 15,883 Manufacturing and Components Segment 4,273 4,236 Inter-segment Revenue (174) (716) ---------- ---------- Total Sales 49,647 38,599 Cost of Sales 42,951 33,633 ---------- ---------- Gross Profit 6,696 4,966 Selling, General and Administrative Expenses 5,735 5,728 Reversal of provision for doubtful accounts (638) - ---------- ---------- Income (Loss) from Operations 1,599 (762) Other Income (Expense): Other income - 650 Interest expense (854) (466) ---------- ---------- Income (Loss) Before Income Taxes 745 (578) Income Tax Expense (Benefit) 300 (210) ---------- ---------- Net Income (Loss) $ 445 $ (368) ========== ========== Weighted Average Common Shares Outstanding: Basic 4,121 4,105 ========== ========== Diluted 4,252 4,105 ========== ========== Net Income Per Common Share: Basic $ 0.11 $ (0.09) ========== ========== Diluted $ 0.10 $ (0.09) ========== ========== EBITDA Reconciliation(a) ------------------------ Net Income (Loss) $ 445 $ (368) Interest Expense 854 466 Income Tax Expense (Benefit) 300 (210) Depreciation and Amortization 980 827 ---------- ---------- EBITDA $ 2,579 $ 715 ========== ========== (a) See note above on Use of Non-GAAP Financial Measures. PEMCO AVIATION GROUP, INC. (In thousands except per share information) Six Months Ended June 30, ---------------------- 2006 2005 ---------- ---------- Sales: Government Services Segment $ 46,669 $ 40,661 Commercial Services Segment 32,963 35,447 Manufacturing and Components Segment 8,056 7,790 Inter-segment Revenue (398) (1,251) ---------- ---------- Total Sales 87,290 82,647 Cost of Sales 73,779 69,497 ---------- ---------- Gross Profit 13,511 13,150 Selling, General and Administrative Expenses 11,764 11,533 Reversal of provision for doubtful accounts (638) - ---------- ---------- Income from Operations 2,385 1,617 Other Income (Expense): Other income - 650 Interest expense (1,509) (908) ---------- ---------- Income Before Income Taxes 876 1,359 Income Tax Expense 352 568 ---------- ---------- Net Income $ 524 $ 791 ========== ========== Weighted Average Common Shares Outstanding: Basic 4,120 4,105 ========== ========== Diluted 4,300 4,389 ========== ========== Net Income Per Common Share: Basic $ 0.13 $ 0.19 ========== ========== Diluted $ 0.12 $ 0.18 ========== ========== EBITDA Reconciliation(a) ------------------------ Net Income $ 524 $ 791 Interest Expense 1,509 908 Income Tax Expense 352 568 Depreciation and Amortization 1,917 1,733 ---------- ---------- EBITDA $ 4,302 $ 4,000 ========== ========== (a) See note above on Use of Non-GAAP Financial Measures. *T