PAGI Pemco Aviation Grp. (MM)

Pemco Aviation Group, Inc. (NASDAQ: PAGI), a leading provider of aircraft maintenance and modification services, today reported the operating results for its year ended and three months ended December 31, 2006. The Company reported that revenue increased to $160.7 million in 2006 compared to $134.8 million in 2005, an increase of 19.2%, and income from continuing operations of $0.1 million for the year ended December 31, 2006, compared to a loss from continuing operations of $6.1 million for the year ended December 31, 2005. The income from continuing operations in 2006 was positively impacted by the settlement of the H-3 Request for Equitable Adjustment with the U.S. Government, the sale of receivables related to the Northwest Airlines bankruptcy, amendments to the settlement agreement on the Falcon Air claim, and the settlement of claims by the EEOC and was negatively impacted by losses incurred on the U.S. Navy P-3 contract. The loss from continuing operations for 2005 was negatively affected by several unusual events, including the Northwest Airlines bankruptcy, the two-month lockout of the union employees at the Company�s Dothan, Alabama facility, the initial settlement of the Falcon Air claim, the temporary suspension of KC-135 inputs earlier in 2005, and losses incurred completing the U.S. Coast Guard contract. Ronald Aramini, Pemco�s President and CEO, stated �We are very pleased to return to profitable operations and report net income for 2006. In addition, we are progressing with several strategic initiatives to increase shareholder value. In the fourth quarter of 2006 we sold our Pemco Engineers subsidiary. Several companies have now approached us with an interest in purchasing our Space Vector subsidiary in California. One of those parties has signed a letter of intent, and we expect to sell Space Vector in the second quarter of 2007. In the first quarter of 2007 we engaged investment bankers to assist Pemco with either taking our Commercial Services business public or selling that business. We are presently in discussions with several interested parties. Consummation of these strategic transactions should enable to the Company to meet its goal of eliminating its debt and providing the necessary working capital to support the Government Services business. We remain very optimistic about winning the KC-135 contract. We believe we have submitted the best proposal based on our track record on highest quality, significantly lower flow days and reduced cost to our customer. We expect the U.S. Government to award the contract in May 2007.� 2006��vs. 2005 Results � �Summary of comparative results for the year ended December 31, 2006: (Dollars in Millions) � 2006� 2005� % Change� Revenue $ 160.7� $ 134.8� 19.2% Gross profit 20.7� 10.9� 89.9% Operating income/(loss) from continuing operations 3.3� (8.6) 138.4% Income/(loss) from continuing operations before taxes 0.3� (9.7) 103.1% Income/(loss) from continuing operations 0.1� (6.1) 101.6% Net income/(loss) 0.5� (5.8) 108.6% EBITDA from continuing operations 6.7� (4.3) 255.7% � (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 income/(loss) from continuing operations to EBITDA is provided at the end of this press release. Revenue at GSS increased $3.5 million primarily due to an increase in C-130 and P-3 deliveries. The KC-135 PDM program, which accounted for 84% of GSS revenue in 2006, allows for the Company to provide services on PDM aircraft, drop-in aircraft, and other aircraft related areas. Revenue from the KC-135 program increased $1.1 million during 2006. During 2006, the Company delivered 19 PDM KC-135 aircraft and two drop-ins, compared to 20 PDM aircraft and three drop-ins during 2005. The amount of non-routine work performed per aircraft varies as a result of differences in aircraft condition and model mix. Year-over-year the Company realized an increase in revenue per PDM aircraft delivered in 2006 due to an increase in the amount of work performed on each aircraft delivered. The Company delivered two USCG C-130 aircraft during 2006 compared to one USCG C-130 during 2005 for depot level maintenance. Revenue from the USCG program decreased $3.6 million due to a decrease in revenue from non-routine services which is recorded as the work is performed versus when the aircraft is redelivered for routine services revenue. GSS delivered three P-3 aircraft in 2006 compared with zero in 2005. Revenue for the P-3 program increased $4.6 million from 2005 during which no revenue was recorded. GSS revenue increased $1.4 million under contracts to perform non-routine maintenance work on other aircraft, primarily C-130 aircraft. Revenue increased as a result of more C-130 aircraft in process during 2006 which increased the amount of non-routine services provided to the program. CSS revenue increased $22.3 million, primarily due to increases in cargo conversion revenues of $11.9 million, increases in maintenance, repair and overhaul (�MRO�) revenue from Southwest Airlines of $15.5 million and increases in revenue from Northwest Airlines of $6.1 million. It was offset by decreases in revenue from various miscellaneous customers of $9.8 million. CSS delivered six cargo conversions during 2006 compared to one during 2005. Three of the six cargo conversions were performed in mainland China. Both Southwest Airlines and Northwest Airlines have maintained consistent nose-to-tail lines that provide for more efficient use of hangar space. CSS has several customers that provide drop-in aircraft on an inconsistent basis. These drop-in aircraft from various customers accounted for a larger percentage of revenue in 2005. MRO revenues were adversely impacted in the third and fourth quarters of 2005 by the bankruptcy of CSS�s largest customer and by a two-month lockout of all union employees at the Company�s Dothan, Alabama facility. Cost of sales increased to $140.0 million in 2006 from $123.9 million in 2005. Cost of sales increased at a slightly lower rate than revenue because of charges related to the USCG C-130 program and fixed expenses. Cost of sales in 2005 was adversely impacted by $5.3 million of losses on the USCG contract compared to losses of $0.5 million in 2006 to complete this program. The Company also incurred losses of $3.7 million and $0.4 million during 2006 and 2005, respectively, related to costs incurred for implementing a new maintenance line and learning curve costs for the new U.S. Navy P-3 program. Cost of sales was impacted by a charge for the Falcon Air settlement of $1.1 million in 2005 and the reversal of $1.0 million in 2006 as a result of amendments to the settlement agreement. Gross profit at GSS decreased $1.0 million due to decreased deliveries of KC-135 aircraft. Gross profit at CSS increased from $3.0 million in 2005 to $13.8 million in 2006. Gross profit in 2005 was adversely impacted by the lockout of all union employees at the Company�s Dothan, Alabama facility from August 11, 2005 to October 9, 2005, the bankruptcy of CSS�s largest customer and fewer cargo conversion deliveries in 2005. The CSS also recorded a charge of $1.1 million in 2005 related to the settlement of the Falcon Air claim, of which $1.0 million was reversed in 2006 as a result of amendments to the settlement agreement. Gross profit at CSS in 2006 was positively impacted by the settlement of the H-3 REA which resulted in an increase in revenue of $0.8 million. Overall, the Company�s gross profit percentage increased to 12.9% in 2006 from 8.1% in 2005. The increase in gross profit as a percent of revenue in 2006 is primarily due to the revenue growth at CSS from both cargo conversions and MRO activities. Gross profit in 2005 was adversely impacted by the impact of losses on the USCG program at GSS and low facility utilization at CSS as a result of the lockout of union employees in Dothan and a decline in revenue due to the bankruptcy of Northwest Airlines. Selling, general and administrative (�SG&A�) expenses increased $0.1 million, or 0.5%, to $18.1 million in 2006 from $18.0 million in 2005. As a percent of sales, SG&A expenses decreased to 11.3% in 2006 from 13.3% in 2005. The increase in SG&A expense is primarily attributable to stock option expense of $1.0 million in 2006 which was offset by cost reductions to improve the profitability of the Company. The Company also recorded a $1.5 million provision for doubtful accounts during the third quarter of 2005 related to the Chapter 11 bankruptcy filing of Northwest Airlines. The Company�s claim to the $1.5 million of accounts receivable related to the bankruptcy was sold in 2006 for $0.6 million. Fourth Quarter Results � Summary of comparative results for the three months ended December 31, 2006: (Dollars in Millions) � 2006� 2005� % Change� Revenue $ 45.9� $ 32.8� 40.0% Gross profit/(loss) 5.5� (1.0) (625.9%) Operating income/(loss) from continuing operations 1.3� (4.2) (130.3%) Income/(loss) from continuing operations before taxes 0.4� (4.7) (108.7%) Income/(loss) from continuing operations 0.2� (3.1) (107.1%) Net income/(loss) 0.5� (2.9) (119.5%) EBITDA from continuing operations 2.3� (3.2) (171.6%) � (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 income/(loss) from continuing operations to EBITDA is provided at the end of this press release. GSS revenue decreased $3.1 million, or 13.3%, due to decreased delivery of KC-135 aircraft compared with the prior year fourth quarter due to fewer inductions of aircraft. The USAF has reduced the total number of KC-135 aircraft in operation, resulting in fewer aircraft being outsourced for maintenance. The GSS delivered five KC-135 PDM aircraft during the fourth quarter of 2006, compared with six in the fourth quarter of 2005. In addition, the GSS delivered one aircraft under the USCG C-130 UDLM contract and one aircraft under a subcontract to perform maintenance services on U.S. Navy P-3 during the fourth quarter of 2006 for which there were no comparable deliveries in the fourth quarter of 2005. CSS revenue increased from $9.6 million in the fourth quarter of 2005 to $25.8 million in the fourth quarter of 2006. Fourth quarter 2006 was positively impacted by the delivery of three cargo conversions and additional work from Southwest Airlines and Northwest Airlines when compared to the fourth quarter of 2005. During the fourth quarter of 2005, revenues at CSS were adversely impacted by the lockout of union employees at the Dothan, Alabama facility which ended on October 11, 2005. Few aircraft were inducted during the two-month lockout, and it took several months for operations to return to normal levels of activity. Gross profit increased to $5.5 million during the fourth quarter of 2006, compared with ($1.0) million during the fourth quarter of 2005. The increase in gross profit quarter-over-quarter is primarily attributable to increased revenue at CSS. CSS gross profit improved from ($2.1) million in the fourth quarter of 2005 to $4.9 million in the fourth quarter of 2006 due to the delivery of three cargo conversions in the fourth quarter of 2006 and increased revenue from Southwest Airlines and Northwest Airlines. In addition, the profitability in the fourth quarter of 2006 compared to the fourth quarter of 2005 was positively impacted by the reversal of $0.5 million for a Falcon Air claim for which an accrual of $1.1 million was made in the fourth 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 also a 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 as well as for foreign and domestic commercial customers. The Company also provides aircraft parts and support and engineering services in addition to developing 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 new and 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. PEMCO AVIATION GROUP, INC. (In thousands, except per share information) � Fourth Quarter Ended December 31, 2006� 2005� Sales: Government Services Segment $ 20,159� $ 23,258� Commercial Services Segment 25,791� 9,596� Inter-segment Revenue (70) (52) Total Sales 45,880� 32,802� � Cost of Sales 40,329� 33,850� Gross Profit/(Loss) 5,551� (1,048) � Selling, General and Administrative Expenses 4,253� 3,171� � Operating Income/(Loss) from Continuing Operations 1,298� (4,219) � Other Income (Expense): Interest Expense (919) (440) � Income/(loss) from Continuing Operations Before Income Taxes 379� (4,659) Income Tax Expense/(Benefit) 175� (1,599) Income/(loss) from Continuing Operations 204� (3,060) Income from Discontinued Operations, Net of Tax 339� 202� Net Income/(Loss) $ 543� $ (2,858) � Weighted Average Common Shares Outstanding: Basic 4,126� 4,112� Diluted 4,132� 4,112� � Net Income/(Loss) Per Common Share: Basic net income/(loss) from continuing operations $ 0.05� $ (0.74) Basic net income/(loss) from discontinued operations 0.08� 0.05� Basic net income/(loss) per share $ 0.13� $ (0.70) � Diluted net income/(loss) from continuing operations $ 0.05� $ (0.74) Diluted net income/(loss) from discontinued operations 0.08� 0.05� Diluted net income/(loss) per share $ 0.13� $ (0.70) � EBITDA Reconciliation(a) Income/(Loss) from Continuing Operations $ 204� $ (3,060) Interest Expense 919� 440� Income Tax Expense/(Benefit) 175� (1,599) Depreciation and Amortization 961� 1,019� EBITDA from Continuing Operations $ 2,259� $ (3,200) � (a) See note above on Use of Non-GAAP Financial Measures. PEMCO AVIATION GROUP, INC. (In thousands, except per share information) � Year Ended December 31, 2006� 2005� Sales: Government Services Segment $ 85,499� $ 81,960� Commercial Services Segment 75,507� 53,217� Inter-segment Revenue (297) (345) Total Sales 160,709� 134,832� � Cost of Sales 140,004� 123,931� Gross Profit 20,705� 10,901� � Selling, General and Administrative Expenses 18,092� 17,997� Provision for/(Reversal of) Doubtful Accounts (638) 1,519� � Operating Income/(Loss) from Continuing Operations 3,251� (8,615) � Other Income (Expense): Other Income -� 650� Interest Expense (2,914) (1,741) � Income/(Loss) from Continuing Operations Before Income Taxes 337� (9,706) Income Tax Expense (Benefit) 207� (3,576) Income/(Loss) from Continuing Operations 130� (6,130) Income from Discontinued Operations, Net of Tax 389� 316� Net Income/(Loss) $ 519� $ (5,814) � Weighted Average Common Shares Outstanding: Basic 4,123� 4,108� Diluted 4,228� 4,108� � Net Income/(Loss) Per Common Share: � Basic net income/(loss) from continuing operations 0.03� (1.49) Basic net income from discontinued operations 0.09� 0.08� Basic net income/(loss) per share $ 0.13� $ (1.42) � Diluted net income/(loss) from continuing operations 0.03� (1.49) Diluted net income from discontinued operations 0.09� 0.08� Diluted net income (loss) per share $ 0.12� $ (1.42) � EBITDA Reconciliation(a) Income/(Loss) from Continuing Operations $ 130� $ (6,130) Interest Expense 2,914� 1,741� Income Tax Expense/(Benefit) 207� (3,576) Depreciation and Amortization 3,441� 3,704� EBITDA from Continuing Operations $ 6,692� $ (4,261) (a) See note above on Use of Non-GAAP Financial Measures.