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AIRT > SEC Filings for AIRT > Form 10-K on 4-Jun-2013All Recent SEC Filings

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Form 10-K for AIR T INC


4-Jun-2013

Annual Report


Item 7. 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 its 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 its 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 its 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:

         (Dollars in thousands)
                                                      Year Ended March 31,
                                                  2013                    2012

         Overnight Air Cargo Segment:
           FedEx                           $  49,851        48 %   $ 48,344        54 %
         Ground Equipment Sales Segment:
           Military                           15,413        15 %      6,928         8 %
           Commercial - Domestic              17,102        17 %     16,436        18 %
           Commercial - International          7,779         7 %      8,726        10 %
                                              40,294        39 %     32,090        36 %

         Ground Support Services Segment      12,919        13 %      8,948        10 %
                                           $ 103,064       100 %   $ 89,382       100 %

MAC and CSA are short-haul express airfreight carriers and provide overnight air cargo services to one primary customer, FedEx Corporation ("FedEx"). MAC also on occasion provides maintenance services to other airline customers and the U. S. military, though no such services were provided in fiscal 2013 or fiscal 2012. Under the terms of dry-lease service agreements, which currently cover all of the 85 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 amount of the administrative fee is reduced for aircraft considered to be soft-parked, and at March 31, 2013, eight of the 85 revenue aircraft were considered to be soft-parked. 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. 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. During the quarter ended March 31, 2013, FedEx transferred an ATR-72 aircraft from MAC's fleet to a feeder operator in Canada to meet scheduling needs. The administrative revenue related to ATR-72 aircraft is significantly greater than the administrative revenue related to the operation of a Cessna Caravan.

MAC and CSA combined revenues increased by $1,507,000 (3%) in fiscal 2013. See the following comparison of fiscal year 2013 to 2012 for details of the increase.

GGS manufactures and supports aircraft deicers and other specialized 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 offers 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.


In June 1999, GGS was awarded a four-year contract to supply deicing equipment to the USAF. GGS was awarded two three-year extensions of that contract through June 2009. On July 15, 2009, the Company announced that GGS had been awarded a new contract to supply deicing trucks to the 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 was 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. Because these contracts with the USAF do not obligate the USAF to purchase a set or minimum number of units, the value of these contracts, as well as the number of units to be delivered, depends upon the USAF's requirements and available funding.

GGS revenues increased by $8,204,000 (26%) in fiscal 2013. See the following comparison of fiscal year 2013 to 2012 for details of the increase.

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 23 locations throughout the country.

GAS revenues increased by $3,971,000 (44%) in fiscal 2013. See the following comparison of fiscal year 2013 to 2012 for details of the increase.

Fiscal 2013 Summary

Revenues for our overnight air cargo segment totaled $49,851,000 for the year ended March 31, 2013, representing a $1,507,000 (3%) increase over the prior year. The segment saw its operating income decrease by $513,000 or 14% in fiscal 2013. The increase in revenues is principally due to an increase in maintenance operating costs passed through to our air cargo customer at cost. The decrease in operating income is attributed to increased management labor costs and administrative costs in both its flight and maintenance departments in fiscal 2013, as the segment added key personnel in both the flight and management departments during the fiscal year.

Revenues for GGS totaled $40,294,000 for the year ended March 31, 2013, an increase of $8,204,000 (26%) over the prior year, while operating income increased by $1,514,000, from an operating loss of $625,000 in the prior year. The increase in GGS revenues is primarily due to $7.7 million of sales of flight-line tow tractors under the contract with the USAF. The increase in operating income is the result of the 26% increase in sales as well as a slight increase in GGS's gross margin percentage. Gross margin continues to be negatively impacted by a highly competitive environment, including domestic, international and military contracts. In addition, margins on the flight-line tow tractors are very slim. In spite of those factors, the segment's gross margin increased by one half percent in fiscal 2013 compared to the prior fiscal year as the segment has focused on improving production efficiency.

During the year ended March 31, 2013, revenues from our GAS subsidiary totaled $12,919,000, representing a $3,971,000 (44%) increase from the prior year. The segment also saw its operating income increase by $171,000 or 24% in fiscal 2013. These increases are the result of the addition of new customers and locations as this segment continues to build its revenue base.


Fiscal 2013 vs. 2012

Consolidated revenue increased $13,682,000 (15%) to $103,064,000 for the fiscal year ended March 31, 2013 compared to the prior fiscal year. The increase in 2013 revenue resulted from increases in all three operating segments.

Revenues in the overnight air cargo segment increased $1,507,000 (3%) to $49,851,000, principally due to increases in maintenance operating costs passed through to our air cargo customer at cost.

Revenues in the ground equipment sales segment increased by $8,204,000 (26%) to $40,294,000 in fiscal 2013. The increase was due primarily to the sale of $7.7 million of flight-line tow tractors to the USAF in fiscal 2013 compared to $85,000 in fiscal 2012.

Revenues in the ground support services segment increased by $3,971,000 (44%) to $12,919,000, resulting from an increase in new customers as well as an increase in work and locations for existing customers.

Operating expenses on a consolidated basis increased $13,028,000 (15%) to $100,336,000 for fiscal 2013 compared to fiscal 2012. The increase was due to a number of factors. Operating expenses in the overnight air cargo segment were up $1,690,000 (4%) generally correlating to the increase in revenues within that segment. Ground equipment sales operating costs increased $6,940,000 (25%), again fairly closely correlating to the increase in revenues within that segment. Ground equipment sales gross margin continues to be negatively impacted by a highly competitive environment, including domestic, international and military contracts. In addition, the segment's gross margin has been negatively impacted by low margins on the $7.7 million of sales of flight-line tow tractors in the current year. In spite of these pressures, the segment was able to gain production efficiencies resulting in a one half percent increase in gross margin compared to the prior year. Operating expenses in the ground support services segment increased by $3,080,000 (51%) relating to the increased revenues produced in fiscal 2013. The ground services segment saw a reduction in its operating margins as it incurred significant costs in starting up and running new large stations in 2013.

General and administrative expense increased $1,122,000 (10%) to $12,457,000 in fiscal 2013. The Company incurred increased general and administration costs in the ground support services segment of $677,000 relating to staffing costs, rents and other operating costs, and supply costs associated with new stations and increased business in fiscal 2013. In addition, the Company experienced a $250,000 increase in professional fees in 2013 related to the various shareholder matters and a $122,000 increase in profit sharing expense related to the increased profit generated by the Company in fiscal 2013.

Operating income for the year ended March 31, 2013 was $2,728,000, a $654,000 (32%) increase from fiscal 2012. The increase was principally the result of the substantial increases in revenues at the ground equipment sales and ground support services segments as discussed above.

Non-operating income, net for the year ended March 31, 2013 was $2,000, a $21,000 decrease from fiscal 2012. Non-operating income is interest income net of interest expense, and decreased as a result of decreased rates of return in fiscal 2013.

Income tax expense of $1,060,000 in fiscal 2013 represented an effective tax rate of 38.8%, compared to income tax expense of $746,000 in fiscal 2012 which represented an effective tax rate of 35.6%.

Net earnings were $1,670,000 or $0.68 per diluted share for the year ended March 31, 2013, a 24% increase from earnings of $1,350,000 or $0.55 per diluted share in fiscal 2012.

Liquidity and Capital Resources

As of March 31, 2013, the Company held approximately $9.2 million in cash and cash equivalents. Of this amount, $3.3 million was invested in liquid money market accounts. All invested amounts are fully insured by the Federal Deposit Insurance Corporation ("FDIC"), with the exception of approximately $360,000 held in money market accounts and $1,000,000 invested in uninsured demand debt obligations of Duke Energy Corporation.


As of March 31, 2013, the Company's working capital amounted to $22,667,000, an increase of $519,000 compared to March 31, 2012.

The Company has a $7,000,000 secured long-term revolving credit line with an expiration date of 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 March 31, 2013. The Company had no outstanding obligations under its line of credit at March 31, 2013 and 2012. See Note 6 in the consolidated financial statements, included elsewhere in this report, for further discussion.

The Company is exposed to changes in interest rates on its line of credit, however, the line of credit had no outstanding balance at March 31, 2013 and 2012, and the Company had no borrowings on the line of credit during the year ended March 31, 2013.

Following is a table of changes in cash flow for the respective years ended March 31, 2013 and 2012:

                                                            Year Ended March 31,
                                                            2013            2012

  Net Cash Provided by Operating Activities              $ 4,362,000     $  752,000
  Net Cash Used in Investing Activities                     (367,000 )     (905,000 )
  Net Cash Used in Financing Activities                     (612,000 )     (548,000 )

  Net Increase (Decrease) in Cash and Cash Equivalents   $ 3,383,000     $ (701,000 )

Cash provided by operating activities was $3,610,000 more for fiscal 2013 compared to fiscal 2012. The major contributor to this cash flow increase was a substantial decrease in inventories in fiscal 2013, primarily as a result of inventory-reduction initiatives implemented at GGS during fiscal 2013, compared to a substantial increase in fiscal 2012. This increase was partially offset by a cash flow decrease caused by a substantial increase in accounts receivable in fiscal 2013, primarily the result of high GGS sales and deliveries in March 2013, compared to a substantial decrease in fiscal 2012.

Cash used in investing activities was $538,000 less in fiscal 2013, capital expenditures decreased by $627,000 in fiscal 2013 compared to the prior year. The Company expended approximately $380,000 in overhaul costs for its corporate aircraft in fiscal 2012 and also expended $284,000 for vehicles and tooling for new GAS stations in fiscal 2012.

Cash used in financing activities was $64,000 more in fiscal 2013 compared to fiscal 2012 primarily due to the $124,000 in proceeds from the exercise of stock options in fiscal 2012.

There are currently no commitments for significant capital expenditures. The Company's Board of Directors, on August 7, 1997, adopted the policy to pay an annual cash dividend in the first quarter of each fiscal year, in an amount to be determined by the board. On May 17, 2013 the Company declared a $.30 per share cash dividend, to be paid on June 28, 2013 to shareholders of record June 7, 2013.

Off-Balance Sheet Arrangements

The Company defines an off-balance sheet arrangement as any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a Company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging, or research and development arrangements with the Company. The Company is not currently engaged in the use of any of these arrangements.


Impact of Inflation

The Company believes that inflation has not had a material effect on its manufacturing operations, because increased costs to date have been passed on to its customers. Under the terms of its overnight 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 by its customer. Significant increases in inflation rates could, however, have a material impact on future revenue and operating income.

Seasonality

GGS's business has historically been seasonal. The Company has continued its efforts to reduce GGS's seasonal fluctuation in revenues and earnings by increasing military and international sales and broadening its product line to increase revenues and earnings throughout the year. In June 1999, GGS was awarded a four-year contract to supply deicing equipment to the United States Air Force, and subsequently was awarded two three-year extensions on the contract, which expired in June 2009. In July 2009, GGS was awarded a new one-year contract with the United States Air Force with four additional one-year extension options. 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 seasonal impacts in the past when sales under the contract with the United States Air Force were a significant component of the Company's revenues. If sales to the United States Air Force 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 being lower in the first and fourth fiscal quarters. The overnight air cargo and ground support services segments are not susceptible to seasonal trends.

Critical Accounting Policies and Estimates

The Company's significant accounting policies are more fully described in Note 1 of Notes to the Consolidated Financial Statements in Item 8. The preparation of the Company's consolidated 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 parts 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 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.

Recent Accounting Pronouncements

We do not believe there are any recently issued accounting standards that have not yet been adopted that will have a material impact on the Company's financial statements.

Forward Looking Statements

Certain statements in this Report, including those contained in "Overview," are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company's financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words "believes", "pending", "future", "expects," "anticipates," "estimates," "depends" or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:

Economic conditions in the Company's markets;

The risk that contracts with FedEx could be terminated or adversely modified in connection with any renewal;

The risk that the number of aircraft operated for FedEx will be further reduced;

The risk that the United States Air Force will continue to defer significant orders for deicing equipment under its contract with GGS;

The impact of any terrorist activities on United States soil or abroad;

The Company's ability to manage its cost structure for operating expenses, or unanticipated capital requirements, and match them to shifting customer service requirements and production volume levels;

The risk of injury or other damage arising from accidents involving the Company's overnight air cargo operations, equipment sold by GGS or services provided by GAS;

Market acceptance of the Company's new commercial and military equipment and services;

Competition from other providers of similar equipment and services;

Changes in government regulation and technology;

Mild winter weather conditions reducing the demand for deicing equipment.

A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.


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