Pemco Aviation Group Inc.

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Pemco Aviation Group Inc.

1943 N. 50th Street
Birmingham, Alabama 35212
U.S.A.
Telephone: (205) 592-0011
Fax: (205) 592-0195
Website: http://www.pemcoaviationgroup.com

Public Company
Incorporated: 1951 as Hayes Aircraft Corp.
Employees: 2,100
Sales: $162.86 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: PAGI
NAIC: 336411 Aircraft Manufacturing

Pemco Aviation Group Inc. performs a variety of aerospace-related work through its three main subsidiaries. Pemco Aeroplex, Inc., in Birmingham, Alabama, has been maintaining and modifying KC-135 tankers (in-flight refueling aircraft) and Hercules C-130 transports since the 1960s. Pemco World Air Services, Inc., in Dothan, Alabama, performs heavy maintenance for commercial clients. Pemco Engineers, in Corona, California, specializes in cargo handling systems. Military work accounts for about two-thirds of the company’s business.

Origins

The company that would become known as Pemco started in Birmingham, Alabama, in 1951 as Hayes Aircraft Corp. The company refurbished military aircraft and, during its heyday, employed some 12,000 workers.

Hayes began performing depot maintenance for U.S. Air Force (USAF) Hercules C-130 aircraft in 1965. This versatile plane, first built by Lockheed in the mid-1950s, was one of the most ubiquitous ever built. Originally designed as a troop transport, it was used by militaries all over the world in a variety of roles, from gunship to tanker. The U.S. military was still operating 700 of them in the mid-1990s. Maintenance on KC-135 tankers, another USAF mainstay, began in 1968.

According to SEC filings, the more immediate legal predecessor to Pemco Aviation Group—the survivor of the Hayes business—was founded in 1983 as PR Inc. Its name was changed to Precision Standard Inc. (PSI) a few years later. By this time, the company’s headquarters had shifted to Denver.

Aiming its resources squarely at the military market, in April 1987 PSI acquired Monarch Aviation, an aircraft maintenance company based in Miami. Monarch, which became the basis of PSI’s Maintenance and Modification Division after the takeover, had an $18 million contract to convert civilian DC-9 cargo systems to military specs for the U.S. Navy.

PSI’s annual revenues were $4.6 million after the acquisition. The company had bid with the Air Force to install cargo systems on the McDonnell Douglas C-17 transports then under development. Pressure to cut military spending in fact helped offset the cyclical nature of the defense industry for PSI, observed Colorado Business Magazine. A conversion in lieu of procurement philosophy prevailed at the Pentagon. Colorado Business also predicted the end of having major aircraft manufacturers perform maintenance on military transports, since smaller contractors such as PSI were more flexible and less expensive.

The company closed its small, unprofitable Consolidated Tire subsidiary, which distributed specialty tires, in 1990. In the same year, PSI’s Pemco Aeroplex subsidiary announced plans for a new facility in Dothan, Alabama, to employ 200 workers. However, plans for a new widebody hangar in Birmingham were on hold.

Up and Down in 1991

A five-year USAF contract for KC-135 maintenance awarded in 1991 had a total value of $260 million. However, the early 1990s were terrible ones for the aviation industry, and PSI’s fortunes faltered as well. In fact, its stock was nearly delisted from the NASDAQ stock exchange, reaching a low of 40 cents a share in 1991. Nevertheless, the company held on to long-term military contracts during the recession, while attempting to build overseas commercial business.

The Air Force awarded Precision Standard a five-year C-130 maintenance contract in 1991. By 1995, the company had processed more than 3,000 of these planes; 740 of the tankers remained in the U.S. fleet.

Also in 1991, Precision Standard began converting Boeing 737 airliners from passenger-to-freighter and passenger-to-Quick Change configurations, which allowed airlines to carry either cargo or passengers. It converted 29 of the planes by the end of 1994. A similar conversion program for the Boeing 757 began in September 1992. A 1993 agreement to create a joint stock company for converting Russian-made Tupolev Tu-204 airliners had not progressed by 1995.

Precision Standard had added many other aircraft types to its repertoire, performing maintenance and modifications to Boeing 707, 727, 737, 747, and 757 airliners; McDonnell Douglas DC-8s and DC-9s; Airbus A300s; British Aerospace BAe 146s; T-34 military trainers; and Navy H-2 helicopters. In spite of the proliferation of civil types, the U.S. government accounted for two-thirds of Precision Standard’s revenues in the mid-1990s.

PSI had a good year in 1993—in fact the Birmingham News named its stock as Alabama’s “highest flying” for the year. Its share price grew nearly 300 percent in 1993, after doubling in 1992.

In 1993, a judge barred Pacific Aircraft Maintenance Corp. from doing business under the name PAMCO, due to its similarity to Pemco, the name of a PSI subsidiary. PSI’s revenues were $170 million in 1993, up 16 percent. They fell to $149 million in 1994, with earnings up from $6 million to $11 million, mostly due to a one-time $8 million tax benefit.

By 1994, Precision Standard was involved in a number of different lines of aerospace-related work. Its main subsidiary, Pemco Aeroplex, Inc., performed maintenance and conversion work on large civil and military transports (this comprised 80 percent of company revenues), as well as producing aerial targets. The Space Vector Corporation (SVC) produced rocket launch vehicles and guidance systems. Pemco Engineers Aircraft Cargo Systems Division produced aircraft cargo handling systems, while the Springs and Components Division produced precision springs and components. Pemco Air Support Services, Inc. (PASS) supplied parts and follow-up support for large transports; and Pemco Nacelle Services, Inc., only created in 1993, performed maintenance and overhaul work on engine nacelles (covers), including thrust-reversers, for large jets.

Entering Europe in 1994

Pemco World Air Services, A/S, the company’s Danish subsidiary, began leasing a maintenance center at Copenhagen Airport in May 1994. The facility was certified by both European and U.S. authorities to perform maintenance checks, repairs, and overhauls of jet airliners. It was believed to be the first European base established by an independent (not airline-owned) operator.

A major, seven-year USAF contract awarded in August 1994 provided for the maintenance of up to 406 KC-135 aircraft, tankers used to refuel other Air Force jets. The deal had a potential value of more than $250 million. Precision Standard had processed more than 2,000 of these planes for the Air Force since 1968.

Precision Standard restructured its holdings into four groups in September 1994: the Commercial Aircraft Maintenance and Modification Group (including the Aeroplex’s Dothan Division and Pemco World Air Services, A/S); the Government and Military Aircraft Services Group (the Birmingham Division of the Aeroplex); the Maintenance and Overhaul Group (Aircraft Cargo Systems, Springs and Components Divisions of Pemco Engineers, Pemco Nacelle Services, Inc., the Targets Division, and Space Vector Corporation); and the Aviation Support Services Group.

The company announced plans to relocate Nacelle Services to its Clearwater, Florida facility in 1995. Maintenance had earlier been suspended at the facility “to adjust its staffing to current work levels.” Precision Standard had about 2,400 employees at the time. Plans were also announced to open bases in California, Russia, and Asia.

PSI’s losses in 1995 would put all of this on hold. PSI blamed the government’s late delivery of materials for the losses. In March 1996, the company lost a military contract to maintain C-141 transports that would have allowed it to begin operations in California, reported the Birmingham News.

Heavy Turbulence in 1996

As if this were not enough, a rowdy strike by the United Auto Workers (UAW) helped push PSF s losses to nearly $2 million in the summer quarter of 1996 alone. The unsuccessful strike ultimately lasted six months. By September, the company was in danger of defaulting on loans from its largest lender.

Legal difficulties compounded PSI’s problems in 1997. It won a False Claims Act suit from the government, but faced an appeal. It lost a $4 million sexual harassment suit but planned to appeal that. The company’s Danish subsidiary filed bankruptcy in November.

Company Perspectives:

We are the world’s leading independent provider of maintenance, repair, and overhaul services in the aerospace industry. We pride ourselves on the work we do both for the military and for our commercial customers. Without our reputation for quality work, we would not have been as successful as we are today. Of course, standing behind that quality are the people of Pemco who make the difference everyday. The future of our company is filled with promise.

The Pemco Aeroplex subsidiary sold its Hayes Targets division to British aerospace firm Meggitt PLC for $5 million in February 1998. At the same time, Precision Standard announced its common stock was moving down to the NASDAQ small cap market after being granted an exception from net assets and bid price requirements.

Civil aviation was becoming a more important source of business for the company. Military prospects at Pemco Aeroplex were also looking up. In early 1993, it announced new contracts from Northrup Grumman and the Air Force in addition to one from Mesa Airlines.

In July 1998, PSI’s Pemco World Air Services unit opened its new facility at Southern California International Airport—formerly George Air Force Base—in the town of Victorville. Two hangars, which had years before covered F-105 and F-4 fighters, and 11 other buildings at the site gave Pemco 200,000 square feet of space. With the new facility, the company became the first independent heavy maintenance provider to have operations on both U.S. coasts. Pemco’s other site, in Dothan, Alabama, was about twice the size of the Victorville facility. Though nearly 90 percent of Pemco’s customers were domestic, the new location made the company more convenient to Asian airlines. Another factor that drew Pemco to the site, besides big hangars and a good location, was a city-county tax incentive package that provided credits worth up to 50 percent of local workers’ salaries, plus sales tax credits on equipment purchases, a 15-year net operating loss carry-forward tax credit, and other deductions on property purchases, recorded Air Transport World.

In late 1998, Pemco Aeroplex sued to protest losing a KC-135 maintenance contract to the Boeing Aerospace Support Center at Kelly Air Force Base in Texas and Hill AFB in Utah, citing a General Accounting Office ruling that the bidding process was unfair. It also sued over a contract at Sacramento’s McClellan Air Force Base, arguing that bundling all of the KC-135 maintenance operations into one package put smaller contractors at a disadvantage. In spite of the negative factors, PSI again posted a positive net income in 1998 after two years of heavy losses.

In 1999, Denver businessman Matt Gold, owner of Pemco’s corporate parent Precision Standard, sold the company to a group of investors led by Michael Tennenbaum, who became the new chairman.

Refurbished in 2000

Tennenbaum took the company public and in January 2000 relocated corporate headquarters to Birmingham after several years in Denver. Ron Aramini, a former America West Airlines executive, joined PSI as CEO and president in January 2000. The Birmingham Business Journal reported on the changes he brought, one of the most visible being the decision to replace the dilapidated, aging hulks of jets that had previously lined the drive to the Birmingham airport with newly painted and refurbished planes. The company’s venerable million-square-foot hangar there was also revamped.

In addition, Aramini restructured the company into three divisions and refinanced its debt. PSI changed its name to Pemco Aviation Group Inc. in May 2000 while changing its state of incorporation from Colorado to Delaware.

The new Pemco announced a partnership agreement with Officine Meccaniche Aeronautiche, S.p.A (O.M.A) in August 2000. The pair teamed to convert Boeing 737 passenger jets to freighters.OMA had over 50 years experience in this field. For 2002, the company reported revenues of $162.86 million and net income of $8.8 million.

Principal Subsidiaries

Pemco Aeroplex, Inc.; Pemco World Air Services, Inc.; Pemco Engineers; Pemco Nacelle Services, Inc.; Pemco Capital Corp.; Pemco Air Services System, Inc.; Pemco, Inc.; Hayes Holdings I, Inc.; Hayes Holdings II, Inc.; Space Vector Corporation; Air International Incorporated.

Principal Competitors

The Boeing Company; DaimlerChrysler AG; Lockheed Martin Corporation; Goodrich Corporation; TIMCO Aviation Services, Inc.; Banner Aerospace, Inc.

Key Dates:

1951:: Hayes Aircraft Corp. is founded in Birmingham.
1965:: Hayes begins maintenance of the Hercules C-130.
1987:: Precision Standard (PSI), the survivor of the Hayes business, acquires basis of its Maintenance and Modification Division.
1991:: Share price falls to 40 cents in industry recession.
1993:: Rebounding stock is Alabama’s “highest flying” for year.
1994:: Danish operations commence.
1998:: California base is opened.
2000:: PSI begins year with new CEO and new headquarters; reorganizes and changes name to Pemco Aviation Group, Inc.