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 December 31,                  Nine Months Ended December 31,
                           2012                     2011                    2012                    2011

Overnight Air
Cargo Segment:
  FedEx            $   12,417         46 %   $ 12,062        47 %   $   35,202        49 %   $ 35,229        52 %
Ground Equipment
Sales Segment:
  Military              3,943         15 %        102         0 %        8,783        12 %      5,525         8 %
  Commercial -
Domestic                3,859         14 %      8,096        32 %       12,570        17 %     14,826        22 %
  Commercial -
International           3,143         12 %      2,742        11 %        6,421         9 %      5,934         9 %
                       10,945         41 %     10,940        43 %       27,774        38 %     26,285        39 %

Ground Support
Services Segment        3,341         13 %      2,648        10 %        9,377        13 %      6,159         9 %
                   $   26,703        100 %   $ 25,650       100 %   $   72,353       100 %   $ 67,673       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 $35,202,000 and $35,229,000 to the Company's revenues for the nine-month periods ended December 31, 2012 and 2011, respectively, a current year decrease of $27,000.

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 $27,774,000 and $26,285,000 to the Company's revenues for the nine-month periods ended December 31, 2012 and 2011, respectively, representing a $1,489,000 (6%) increase. At December 31, 2012, GGS's order backlog was $9.2 million compared to $14.9 million at December 31, 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 $9,377,000 and $6,159,000 to the Company's revenues for the nine-month periods ended December 31, 2012 and 2011, respectively, representing a $3,218,000 (52%) increase. GAS has been successful in the past year in adding new customers and locations to build its revenue base.

Third Quarter Highlights

Revenues from the air cargo segment increased 3% compared to the third quarter of the prior fiscal year, while operating income decreased 15%, continuing the trend that we experienced in the first two quarters 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 compared to the prior year comparable quarter.

Revenues for GGS were flat when compared to the third quarter of the prior fiscal year. GGS generated operating income of approximately $441,000 for the quarter, an increase of $281,000 compared to the prior year comparable quarter. The principal factor for the increase in operating profits was a two percentage point increase in gross margin compared to the prior year comparable quarter. While GGS continues to see increased pressure on margins in highly competitive domestic, international and military equipment markets, the increase in gross margin is consistent with the increase in the second quarter of this fiscal year and is attributable to improving production efficiencies.

During the quarter ended December 31, 2012, revenues from our GAS subsidiary increased by $694,000 (26%) as a result of the company's growth in new customers and locations. GAS operating income also increased by $72,000 (21%), representing a solid quarter for this segment.

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

Third Quarter Fiscal 2013 Compared to Third Quarter Fiscal 2012

Consolidated revenue increased $1,053,000 (4%) to $26,703,000 for the three-month period ended December 31, 2012 compared to its equivalent prior period. The increase in revenues can be principally attributed to the $694,000 (26%) increase in the ground support services segment revenues as a result of the segment's recent growth in new customers and locations. Revenues in the ground equipment sales segment were flat quarter over quarter and the air cargo segment showed a nominal 3% increase in revenues over the prior year comparable quarter as a result of a comparable increase in costs passed through to the segment's customer without markup.

Operating expenses increased $968,000 (4%) for the three-month period ended December 31, 2012 compared to its equivalent prior period. The increase in total operating expenses corresponded to the increase in revenues for the quarter. The principal component of the increase was a $437,000 (24%) increase in ground support services segment operating costs, driven primarily by the current quarter's increase in revenues. Ground equipment sales segment operating expenses decreased $182,000 (2%) due to increases in production efficiencies resulting in a two percentage point increase in gross margin, quarter over quarter. Air cargo segment operating costs increased 3% for the quarter, consistent with the increase in revenues. General and administrative expenses increased $351,000 (12%) for the three-month period ended December 31, 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, rents and professional fees.

Operating income for the quarter ended December 31, 2012 was $987,000, an $85,000 (9%) increase from the same quarter of the prior year. The ground equipment sales segment reported a $281,000 (175%) increase in its operating income for the quarter ended December 31, 2012, principally relating to the increase in gross margin percentage discussed in the prior paragraph. The ground support services segment saw a $72,000 (21%) increase in its operating income in the current quarter, directly related to the increased growth in revenues for the quarter. The overnight air cargo segment saw a $123,000 (15%) decrease in its operating income due to an increase in key management personnel in both its flight and maintenance departments, consistent with the prior quarter results.

Non-operating income, net decreased $2,000 for the three-month period ended December 31, 2012.

Pretax earnings increased $83,000 for the three-month period ended December 31, 2012 compared to the prior comparable period, relating to the increased operating income of the ground equipment sales and ground support services segments, as detailed above.

During the three-month period ended December 31, 2012, the Company recorded $357,000 in income tax expense, which resulted in an estimated annual tax rate of 36.1%, comparable to the rate of 36.2% 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 offset by permanent tax differences.

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

Consolidated revenue increased $4,681,000 (7%) to $72,353,000 for the nine-month period ended December 31, 2012 compared to its equivalent prior-year 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 $1,489,000 (6%), principally as a result of increased sales of flight-line tow tractors under the contract with the USAF. Revenues in the ground support services segment were up $3,219,000 (52%), resulting from the addition of new customers and locations over the past year, particularly several new large locations for one customer. Revenues for the air cargo segment were flat compared to the prior-year equivalent period.

Operating expenses increased $4,760,000 (7%) to $70,362,000 for the nine-month period ended December 31, 2012 compared to its equivalent prior-year period. Ground equipment sales segment operating costs increased $924,000 (4%) driven primarily by the current period's increase in revenues. Ground support services segment operating expenses increased $2,544,000 (61%) 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 opened in the first two quarters. General and administrative expenses increased $1,082,000 (13%) for the nine-month period ended December 31, 2012 compared to its equivalent prior-year 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 nine-month period ended December 31, 2012 was $1,991,000, a $79,000 (4%) decrease from the same period of the prior year. The overnight air cargo segment saw a $418,000 (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 $514,000 increase in its operating income in the nine-month period ended December 31, 2012 due in part to increased revenues but largely due to increased gross margins as a result of increasing production efficiency. The ground support services segment saw a $100,000 (19%) increase in its operating income for the period, principally relating to the increase in revenues.

Non-operating income, net decreased $23,000 for the nine-month period ended December 31, 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 $102,000 for the nine-month period ended December 31, 2012 compared to the prior comparable period, primarily due to the decrease in the overnight air cargo segment operating income.

During the nine-month period ended December 31, 2012, the Company recorded $718,000 in income tax expense, which resulted in an estimated annual tax rate of 36.0%, 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 offset by permanent tax differences.

Liquidity and Capital Resources

As of December 31, 2012 the Company's working capital amounted to $24,085,000, an increase of $845,000 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 December 31, 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 December 31, 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 December 31, 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 December 31, 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 December 31, 2012 and 2011:

                                                 Nine Months Ended December 31,
                                                     2012                 2011

   Net Cash Provided by Operating Activities   $      4,620,000       $  1,502,000
   Net Cash Used in Investing Activities               (284,000 )         (661,000 )
   Net Cash Used in Financing Activities               (612,000 )         (496,000 )

   Net Increase in Cash and Cash Equivalents   $      3,724,000       $    345,000

During 2011, the Company used cash in operating activities primarily to support growth in receivables offset by a decrease in accounts payable. For 2012, decreases in inventories and other current assets and a decrease in accrued expenses contributed to an increased level of cash flow from operating activities.

Cash used in investing activities for the nine-month period ended December 31, 2012 was $377,000 less than the comparable prior year period primarily due to the decrease in capital expenditures.

Cash used in financing activities was $116,000 more for the nine-month period ended December 31, 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.