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AIRT > SEC Filings for AIRT > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for AIR T INC

Form 10-Q for AIR T INC


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Company operates in three business segments. The overnight air cargo segment, comprised of the Company's Mountain Air Cargo, Inc. ("MAC") and CSA Air, Inc. ("CSA") subsidiaries, operates in the air express delivery services industry. The ground equipment sales segment, comprised of the Company's Global Ground Support, LLC ("GGS") subsidiary, manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the U.S. military and industrial customers. The ground support services segment, comprised of the Company's Global Aviation Services, LLC ("GAS") subsidiary, provides ground support equipment maintenance and facilities maintenance services to domestic airlines and aviation service providers. Each business segment has separate management teams and infrastructures that offer different products and services. The Company evaluates the performance of its operating segments based on operating income.


Following is a table detailing revenues by segment and by major customer category:

(In thousands)
                         Three Months Ended September 30,                  Six Months Ended September 30,
                             2012                     2011                    2012                    2011

Overnight Air
Cargo Segment:
  FedEx            $   12,051          57 %   $ 12,340        48 %   $   22,785        50 %   $ 23,167        55 %
Ground Equipment
Sales Segment:
  Military                816           4 %      5,339        21 %        4,840        11 %      5,423        13 %
  Commercial -
Domestic                3,571          17 %      4,533        18 %        8,711        19 %      6,730        16 %
  Commercial -
International           1,699           8 %      1,302         5 %        3,278         7 %      3,192         8 %
                        6,086          29 %     11,174        44 %       16,829        37 %     15,345        37 %

Ground Support
Services Segment        3,025          14 %      1,947         8 %        6,036        13 %      3,511         8 %
                   $   21,162         100 %   $ 25,461       100 %   $   45,650       100 %   $ 42,023       100 %

MAC and CSA are short-haul express airfreight carriers and provide air cargo services to one primary customer, FedEx Corporation ("FedEx"). MAC will also on occasion provide maintenance services to other airline customers and the U.S. Military. Under the terms of dry-lease service agreements, which currently cover all of the 81 revenue aircraft, the Company receives a monthly administrative fee based on the number of aircraft operated and passes through to its customer certain cost components of its operations without markup. The cost of fuel, flight crews, landing fees, outside maintenance, parts and certain other direct operating costs are included in operating expenses and billed to the customer as cargo and maintenance revenue, at cost. As a result, the fluctuating cost of fuel has not had any direct impact on our air cargo operating results. Pursuant to such agreements, FedEx determines the type of aircraft and schedule of routes to be flown by MAC and CSA, with all other operational decisions made by the Company. These agreements are renewable on two to five-year terms and may be terminated by FedEx at any time upon 30 days' notice. The Company believes that the short term and other provisions of its agreements with FedEx are standard within the airfreight contract delivery service industry. FedEx has been a customer of the Company since 1980. Loss of its contracts with FedEx would have a material adverse effect on the Company. We are presently in the process of negotiating replacement agreements with FedEx. The terms of the replacement agreements may differ from the terms of our current agreements, which may affect our results going forward.

MAC and CSA combined contributed approximately $22,785,000 and $23,167,000 to the Company's revenues for the six-month periods ended September 30, 2012 and 2011, respectively, a current year decrease of $382,000 (2%).

GGS manufactures and supports aircraft deicers and other specialized industrial equipment on a worldwide basis. GGS manufactures five basic models of mobile deicing equipment with capacities ranging from 700 to 2,800 gallons. GGS also provides fixed-pedestal-mounted deicers. Each model can be customized as requested by the customer, including single operator configuration, fire suppressant equipment, open basket or enclosed cab design, a patented forced-air deicing nozzle and on-board glycol blending system to substantially reduce glycol usage, color and style of the exterior finish. GGS also manufactures five models of scissor-lift equipment, for catering, cabin service and maintenance service of aircraft, and has developed a line of decontamination equipment, flight-line tow tractors, glycol recovery vehicles and other special purpose mobile equipment. GGS competes primarily on the basis of the quality, performance and reliability of its products, prompt delivery, customer service and price.

On July 15, 2009, the Company announced that GGS had been awarded a new contract to supply deicing trucks to the United States Air Force ("USAF"). The contract award was for one year with four additional one-year extension options that may be exercised by the USAF. In June 2012, the third option period under the contract was exercised, extending the contract to July 2013.

In September 2010, GGS was awarded a contract to supply flight line tow tractors to the USAF. The contract award is for one year commencing September 28, 2010 with four additional one-year extension options that may be exercised by the USAF. In August 2012, the second option period under the contract was exercised, extending the contract to September 2013. The value of the contract, as well as the number of units to be delivered, will be determined based upon annual requirements and available funding of the USAF. Margins on the flight line tow tractors are lower than deicing equipment margins.

GGS contributed approximately $16,829,000 and $15,345,000 to the Company's revenues for the six-month periods ended September 30, 2012 and 2011, respectively, representing a $1,484,000 (10%) increase. At September 30, 2012, GGS's order backlog was $15.5 million compared to $20.0 million at September 30, 2011 and $15.3 million at March 31, 2012.


GAS was formed in September 2007 to operate the aircraft ground support equipment and airport facility maintenance services business of the Company. GAS is providing aircraft ground support equipment and airport facility maintenance services to a wide variety of customers at a number of locations throughout the country.

GAS contributed approximately $6,036,000 and $3,511,000 to the Company's revenues for the six-month periods ended September 30, 2012 and 2011, respectively, representing a $2,525,000 (72%) increase. GAS has been successful in the past year in adding new customers and locations to build its revenue base.

Second Quarter Highlights

Revenues from the air cargo segment decreased 2% compared to the second quarter of the prior fiscal year, while operating income decreased 12%, continuing the trend that we experienced in the first quarter of this fiscal year. The air cargo segment has added a number of key management personnel in both its flight and maintenance departments in the past year which is the principal cause for the decrease in operating income this quarter. The segment continues to generate steady profits.

Revenues for GGS decreased by 46% compared to the second quarter of the prior fiscal year. GGS generated an operating loss of approximately $164,000 for the quarter, compared to operating income of $218,000 in the prior year comparable quarter. The principal factor in the decrease in revenues and operating profits was a $4,523,000 decrease in sales to the USAF in the second quarter compared to the prior year quarter. GGS revenues from the USAF were high in the first quarter of the current fiscal year, but dropped off in the second quarter. GGS backlog at September 30, 2012 includes $11.2 million of orders from the USAF which will be delivered over the remainder of this fiscal year. In addition, during the second quarter, GGS observed general weakening in domestic market demand for commercial deicing units which it believes is attributable in part to mild weather conditions in the United States this past winter. GGS continues to see increased pressure on margins in highly competitive domestic, international and military equipment markets, although gross margins did increase by approximately four percentage points this quarter over the prior year comparable quarter, partially attributable to a change in customer mix to a higher percentage of commercial deicing units and partially due to improving production efficiencies.

During the quarter ended September 30, 2012, revenues from our GAS subsidiary increased by $1,079,000 (55%) as a result of the company's growth in new customers and locations. GAS operating income was $52,000 this quarter, down from income of $157,000 in the prior year comparable quarter, as the company incurred higher than normal costs in the startup up of several new large stations and has added additional management staff to manage the growth.

Critical Accounting Policies and Estimates

The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions to determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company's estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. The Company believes that the following are its most significant accounting policies:

Allowance for Doubtful Accounts. An allowance for doubtful accounts receivable is established based on management's estimates of the collectability of accounts receivable. The required allowance is determined using information such as customer credit history, industry information, credit reports, customer financial condition and the collectability of outstanding accounts receivables. The estimates can be affected by changes in the financial strength of the aviation industry, customer credit issues or general economic conditions.

Inventories. The Company's inventories are valued at the lower of cost or market. Provisions for excess and obsolete inventories are based on assessment of the marketability of slow-moving and obsolete inventories. Historical parts usage, current period sales, estimated future demand and anticipated transactions between willing buyers and sellers provide the basis for estimates. Estimates are subject to volatility and can be affected by reduced equipment utilization, existing supplies of used inventory available for sale, the retirement of aircraft or ground equipment and changes in the financial strength of the aviation industry.

Warranty Reserves. The Company warranties its ground equipment products for up to a three-year period from date of sale. Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted quarterly as actual warranty cost becomes known.


Income Taxes. Income taxes have been provided using the liability method. Deferred income taxes reflect the net affects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes using enacted rates expected to be in effect during the year in which the basis differences reverse.
Revenue Recognition. Cargo revenue is recognized upon completion of contract terms. Maintenance and ground support services revenue is recognized when the service has been performed. Revenue from product sales is recognized when contract terms are completed and ownership has passed to the customer.

Seasonality

The deicer industry that GGS operates in has historically been seasonal. The Company has been able to reduce GGS's seasonal fluctuation in revenues and earnings by broadening its product line to include military and international sales to increase revenues and earnings throughout the year. Although sales remain somewhat seasonal, particularly with regard to commercial deicers which typically are delivered prior to the winter season, this diversification has lessened the impact on the Company. If sales to the USAF cease to be a significant component of GGS's sales, seasonal patterns of revenues and earnings attributable to its commercial deicer business may resume, with revenues and operating income for the segment typically being lower in the first and fourth fiscal quarters. The overnight air cargo and ground support services segments are not susceptible to seasonal trends.

Results of Operations

Second Quarter Fiscal 2013 Compared to Second Quarter Fiscal 2012

Consolidated revenue decreased $4,299,000 (17%) to $21,162,000 for the three-month period ended September 30, 2012 compared to its equivalent prior period. The decrease in revenues can be principally attributed to decreases in business in our ground equipment sales segment. Revenues in the ground equipment sales segment decreased $5,089,000 (46%), the principal component being a $4,523,000 decrease in revenues from the USAF in the current quarter compared to the prior year comparable quarter. Offsetting that large decrease in revenues was a $1,079,000 (55%) increase in the ground support services segment revenues as a result of the company's growth in new customers and locations.

Operating expenses decreased $3,731,000 (15%) for the three-month period ended September 30, 2012 compared to its equivalent prior period. The principal component of the decrease was a $4,821,000 (48%) decrease in ground equipment sales segment operating costs, driven primarily by the current quarter's decrease in revenues. Ground support services segment operating expenses increased $994,000 (76%) principally relating to the increase in revenues for the segment but also as a result of increased startup costs and management staffing related to several large new stations in this quarter. General and administrative expenses increased $322,000 (12%) for the three-month period ended September 30, 2012 compared to its equivalent prior period. The increase was incurred over a variety of categories with the principal components of this increase being salary costs including health insurance, travel expense, rents and professional fees, partially offset by a decrease in profit sharing expense.

Operating income for the quarter ended September 30, 2012 was $351,000, a $568,000 (62%) decrease from the same quarter of the prior year. The ground equipment sales segment incurred an operating loss of $164,000 in the quarter ended September 30, 2012 compared to operating income of $218,000 in the prior year comparable quarter, a $382,000 reduction. The reduction is the direct result of reduced revenues in the current quarter, principally from reduced sales to the USAF. The ground support services segment saw a $105,000 decrease in its operating income in the current quarter. Although revenues were up, the startup costs associated with opening new large stations resulted in reduced operating income this quarter. The overnight air cargo segment saw an $117,000 (12%) decrease in its operating income due to increased labor and other costs.

Non-operating income, net decreased $6,000 for the three-month period ended September 30, 2012. The principal difference was a decrease in investment income.

Pretax earnings decreased $574,000 for the three-month period ended September 30, 2012 compared to the prior comparable period, relating to the decreased operating income of all three segments as detailed above.

During the three-month period ended September 30, 2012, the Company recorded $126,000 in income tax expense, which resulted in an estimated annual tax rate of 35.7%, comparable to the rate of 36.1% for the comparable prior quarter. The estimated annual effective tax rates for both periods differ from the U. S. federal statutory rate of 34% primarily due to the effect of state income taxes.


First Six Months of Fiscal 2013 Compared to First Six Months of Fiscal 2012

Consolidated revenue increased $3,628,000 (9%) to $45,650,000 for the six-month period ended September 30, 2012 compared to its equivalent prior period. The increase in revenues can be attributed to increases in business in our ground equipment sales and ground support services segments. Revenues in the ground equipment sales segment increased $1,484,000 (10%). Revenues in the ground support services segment were up $2,525,000 (72%), resulting from the addition of new customers and locations over the past year, particularly several new large locations for one customer.

Operating expenses increased $3,793,000 (9%) for the six-month period ended September 30, 2012 compared to its equivalent prior period. Ground equipment sales segment operating costs increased $1,105,000 (8%) driven primarily by the current period's increase in revenues. Ground support services segment operating expenses increased $2,108,000 (87%) following the increase in revenues for the segment but also as a result of increased startup costs and management staffing related to several large new stations in this quarter. General and administrative expenses increased $731,000 (14%) for the six-month period ended September 30, 2012 compared to its equivalent prior period. The increase was incurred over a variety of categories with the principal components of this increase being salary costs including health insurance, travel, rents and professional fees offset by a decrease in office equipment and supplies.

Operating income for the six-month period ended September 30, 2012 was $1,005,000, a $165,000 (14%) decrease from the same period of the prior year. The overnight air cargo segment saw a $295,000 (15%) decrease in its operating income due to increased labor, travel, insurance and other flight and maintenance costs. The ground equipment sales segment experienced a $233,000 increase in its operating income in the six-month period ended September 30, 2012. The increase is the result of increased revenues in the current period. The ground support services segment saw a $27,000 (14%) increase in its operating income for the period.

Non-operating income, net decreased $20,000 for the six-month period ended September 30, 2012. The principal difference was a decrease in investment income, due to decreased returns on cash and investment balances in the current period.

Pretax earnings decreased $185,000 for the six-month period ended September 30, 2012 compared to the prior comparable period, primarily due to the decrease in the overnight air cargo segment operating income.

During the six-month period ended September 30, 2012, the Company recorded $361,000 in income tax expense, which resulted in an estimated annual tax rate of 35.9%, comparable to the rate of 36.1% for the comparable prior period. The estimated annual effective tax rates for both periods differ from the U. S. federal statutory rate of 34% primarily due to the effect of state income taxes.

Liquidity and Capital Resources

As of September 30, 2012 the Company's working capital amounted to $23,423,000, an increase of $184,000 compared to March 31, 2012.

The Company has a $7,000,000 secured long-term revolving credit line. In August 2012, the expiration date of the credit line was extended from August 31, 2013 to August 31, 2014. The revolving credit line contains customary events of default, a subjective acceleration clause and a fixed charge coverage requirement, with which the Company was in compliance at September 30, 2012. There is no requirement for the Company to maintain a lock-box arrangement under this agreement. The amount of credit available to the Company under the agreement at any given time is determined by an availability calculation, based on the eligible borrowing base, as defined in the credit agreement, which includes the Company's outstanding receivables, inventories and equipment, with certain exclusions. At September 30, 2012, $7,000,000 was available for borrowing under the credit line and no amounts were outstanding.

Amounts advanced under the credit facility bear interest at the 30-day "LIBOR" rate plus 150 basis points. The LIBOR rate at September 30, 2012 was .21%. The Company is exposed to changes in interest rates on its line of credit with respect to any borrowings outstanding under the line of credit. However, because the Company's outstanding balance under the line of credit was negligible during the quarter ended September 30, 2012, changes in the LIBOR rate during that period would have had a minimal affect on its interest expense for the quarter.


Following is a table of changes in cash flow for the respective periods ended September 30, 2012 and 2011:

                                       Six Months Ended September 30,
                                        2012                  2011

            Net Cash Provided by
            (Used in) Operating
            Activities             $      771,000       $      (1,176,000 )
            Net Cash Used in
            Investing Activities         (217,000 )              (555,000 )
            Net Cash Used in
            Financing Activities         (612,000 )              (494,000 )

            Net Decrease in Cash
            and Cash Equivalents   $      (58,000 )     $      (2,225,000 )

During 2011, the Company used cash in operating activities primarily to support growth in receivables and inventories resulting from increases in sales and backlog for the 2011 period. For 2012, decreases in receivables, inventories and other current assets were offset by the reduction in accounts payable and accrued expenses.

Cash used in investing activities for the six-month period ended September 30, 2012 was $338,000 less than the comparable prior year period due to the decrease in capital expenditures.

Cash used in financing activities was $118,000 more for the six-month period ended September 30, 2012, than in the corresponding prior year period due to proceeds from the exercise of stock options in the prior period totaling $124,000.

There are currently no commitments for significant capital expenditures. The Company's Board of Directors on August 7, 1998 adopted the policy to pay an annual cash dividend, based on profitability and other factors, in the first quarter of each fiscal year, in an amount to be determined by the Board. The Company paid a $0.25 per share cash dividend in June 2012.

Impact of Inflation

The Company believes that inflation has not had a material effect on its operations, because increased costs to date have been passed on to its customers. Under the terms of its air cargo business contracts the major cost components of its operations, consisting principally of fuel, crew and other direct operating costs, and certain maintenance costs are reimbursed, without markup by its customer. Significant increases in inflation rates or a change in air cargo contracts, shifting the risk of these cost increases to the Company, could have a material impact on future revenue and operating income.

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