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AIRT > SEC Filings for AIRT > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for AIR T INC


7-Aug-2013

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 June 30,
                                                   2013                   2012

         Overnight Air Cargo Segment:
           FedEx                           $ 12,408        58 %   $ 10,734        44 %
         Ground Equipment Sales Segment:
           Military                             776         4 %      4,024        17 %
           Commercial - Domestic              4,225        20 %      5,140        21 %
           Commercial - International           236         1 %      1,579         6 %
                                              5,237        25 %     10,743        44 %

         Ground Support Services Segment      3,635        17 %      3,011        12 %
                                           $ 21,280       100 %   $ 24,488       100 %

MAC and CSA provide small package overnight airfreight delivery services on a contract basis throughout the eastern half of the United States and the Caribbean. MAC and CSA's revenues are derived principally pursuant to "dry-lease" service contracts with FedEx. Under the dry-lease service contracts, FedEx leases its aircraft to MAC and CSA for a nominal amount and pays a monthly administrative fee to MAC and CSA to operate the aircraft. Under these contracts, all direct costs related to the operation of the aircraft (including fuel, outside maintenance, landing fees and pilot costs) are passed through to FedEx without markup. 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. As reported in our Form 10-K for the year ended March 31, 2013, we had been in the process of negotiating replacement agreements with FedEx, but the contract negotiations had been put on hold. We continue to expect replacement agreements to be negotiated and put into effect at some point in the future and the terms of the replacement agreements may differ from the terms of our current agreements, which may affect our results going forward.

As of June 30, 2013, MAC and CSA had an aggregate of 83 aircraft under agreement with FedEx. Separate agreements cover the three types of aircraft operated by MAC and CSA for FedEx -- Cessna Caravan, ATR-42 and ATR-72. Pursuant to such agreements, FedEx determines the schedule of routes to be flown by MAC and CSA. Included within the 83 aircraft are six Cessna Caravan aircraft that are considered soft-parked. These aircraft remain covered under MAC's agreements with FedEx although at a reduced administrative fee compared to aircraft currently in operation. MAC continues to perform maintenance on the aircraft, but they are not crewed and MAC does not currently operate the aircraft on scheduled routes. In June 2013, FedEx transferred two soft-parked Cessna Caravan aircraft from MAC's fleet to another feeder operator to meet scheduling needs. In addition, subsequent to June 30, 2013, two Cessna Caravan aircraft were damaged and retired and FedEx transferred one Cessna Caravan to MAC's fleet, for a net loss of one Cessna Caravan and FedEx also transferred one ATR-72 aircraft to another feeder operator to meet scheduling needs. The administrative revenue related to an ATR aircraft is significantly greater than the administrative revenue related to the operation of a Cessna Caravan. After these changes, MAC and CSA had an aggregate of 81 aircraft under agreement with FedEx, including five Cessna Caravan aircraft that are considered soft parked.

MAC and CSA combined contributed approximately $12,408,000 and $10,734,000 to the Company's revenues for the three-month periods ended June 30, 2013 and 2012, respectively, a current year increase of $1,674,000 (16%).

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 2013, the fourth option period under the contract was exercised, extending the contract to July 2014. 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. The value of the contract, as well as the number of units to be delivered, depends upon annual requirements and available funding of the USAF.


GGS contributed approximately $5,237,000 and $10,743,000 to the Company's revenues for the three-month periods ended June 30, 2013 and 2012, respectively, representing a $5,506,000 (51%) decrease. At June 30, 2013, GGS's order backlog was $12.7 million compared to $12.0 million at June 30, 2012 and $6.5 million at March 31, 2013.

GAS was formed in September 2007 to operate the aircraft ground support equipment and airport facility maintenance services business of the Company. GAS provides 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 $3,635,000 and $3,011,000 to the Company's revenues for the three-month periods ended June 30, 2013 and 2012, respectively, representing a $624,000 (21%) increase.

First Quarter Highlights

The first quarter of fiscal 2014 saw the Company revenues decrease by 13% from the prior year comparable quarter. Operating income decreased 66% in the same first quarter compared to the prior year quarter. These results represent a challenging first quarter that was impacted by low GGS sales and corporate costs relating to a recently settled election contest.

Revenues from the air cargo segment increased 16% compared to the first quarter of the prior fiscal year, while operating income decreased 11%. Revenues were up as a result of an increase in maintenance costs this quarter which were passed through to its customer, at cost. Operating income decreased as a result of FedEx transferring one ATR aircraft to another operator in the fourth quarter of the previous fiscal year. In addition, MAC has experienced increased rent and repair costs at its heavy maintenance facility.

Revenues for GGS decreased by 51% compared to the first quarter of the prior fiscal year. GGS had operating income of approximately $6,000 for the quarter, compared to $305,000 in the prior year's comparable quarter. GGS's revenues were reduced in all categories, but the largest factor was a $3.2 million reduction in sales to the USAF. Sales of deicers and flight-line tow tractors to the USAF were a major contributor to the first quarter revenues in the prior year and orders by the USAF for the first quarter of fiscal 2014 were minimal. Gross margins improved in the segment as a result of continuing efforts to improve production efficiencies as well as a reduction in the sale of low margin flight-line tow tractors to the USAF.

Revenues from our GAS subsidiary increased by $624,000 (21%) compared to the first quarter of the prior fiscal year as a result of the company's growth in new customers and locations over the past year. Operating income for GAS increased by $80,000 (47%) for the quarter related to this growth. GAS continues to seek enhancements in its management processes and has seen improved operating margin this quarter as a result of these efforts and due to the maturation of stations that were started up in the previous year.

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 effects 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. Historically, 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 historically lessened the impact on the Company. With sales to the USAF ceasing to be a significant component of GGS's sales, seasonal patterns of revenues and earnings attributable to its commercial deicer business have resumed, 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.

Results of Operations

First Quarter 2014 Compared to First Quarter 2013

Consolidated revenue decreased $3,208,000 (13%) to $21,280,000 for the three-month period ended June 30, 2013 compared to its equivalent prior period. The decrease in revenues can be principally attributed to a decrease in sales in our ground equipment sales segment. Revenue in the ground equipment sales segment decreased $5,507,000 (51%) as a result of a $2.0 million decrease in deicer sales to the military and a $1.2 million decrease in flight-line tow tractor sales to the military as well as smaller declines in commercial domestic and international sales. Revenues in the ground support services segment were up $624,000 (21%), as a result of the company's addition of new customers and locations. Revenues in our air cargo segment increased $1,674,000 (16%) primarily as a result of an increase in maintenance costs passed through to our customer at cost.

Operating expenses decreased $2,775,000 (12%) to $21,060,000 for the three-month period ended June 30, 2013 compared to its equivalent prior period. The principal component of the decrease was a $5,176,000 (55%) decrease in ground equipment sales segment operating expenses, relating to the 51% decrease in segment revenue. Gross margins improved in the segment as a result of continuing efforts to improve production efficiencies as well as a reduction in the sale of low margin flight-line tow tractors to the USAF. Ground support services segment operating costs increased $453,000 (18%) driven primarily by the current quarter's 21% increase in revenues. Gross margins in this segment improved as stations started in the prior year began to mature. Air cargo operating expenses increased by $1,675,000 (18%), principally as a result of an increase in maintenance costs passed though to our customer at cost. MAC is also operating one less ATR aircraft than in the comparable prior year quarter and has experienced increased rent and repair costs at its main maintenance facility. General and administrative expenses increased $252,000 (9%) to $2,950,000 for the three-month period ended June 30, 2013 compared to its equivalent prior period. The principal components of this increase were a $140,000 increase in professional fees and stockholder expense relating to the recently settled election contest, and increases in travel expenses, rent expense and salaries and related benefits.

Operating income for the quarter ended June 30, 2013 was $221,000, a $433,000 (66%) decrease from the same quarter of the prior year. The ground equipment sales segment had a $298,000 (98%) decrease in its operating income as a result of decreased unit sales in the current quarter compared to the prior quarter. The ground support services segment saw an $80,000 (47%) increase in its operating income resulting from the growth in customers and locations over the past year. The overnight air cargo segment saw an $83,000 (11%) decrease in its operating income resulting from the loss of one aircraft and increased operating costs, quarter over quarter.


Pretax earnings decreased $425,000 for the three-month period ended June 30, 2013 compared to the prior year comparable period, primarily due to the decreases in the ground equipment sales and air cargo segments operating income as well as increased professional fees and costs associated with the recently settled election contest.

During the three-month period ended June 30, 2013, the Company recorded $89,000 in income tax expense, which resulted in an estimated annual tax rate of 39.0%, compared to a 36.0% tax rate in the comparable quarter in 2012. 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 June 30, 2013 the Company's working capital amounted to $22,122,000, a decrease of $545,000 compared to March 31, 2013.

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 June 30, 2013. 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 June 30, 2013, $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 June 30, 2013 was .19%. 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 June 30, 2013, changes in the LIBOR rate during that period would have had a minimal effect on its interest expense for the quarter.

Following is a table of changes in cash flow for the respective periods ended June 30, 2013 and 2012:

                                                   Three Months Ended June 30,
                                                      2013               2012

     Net Cash Used in Operating Activities       $      (542,000 )   $   (349,000 )
     Net Cash Used in Investing Activities               (97,000 )       (127,000 )
     Net Cash Used in Financing Activities              (734,000 )       (612,000 )

     Net Decrease in Cash and Cash Equivalents   $    (1,373,000 )   $ (1,088,000 )

Cash used in operating activities was $193,000 more for the three-month period ended June 30, 2013 compared to the similar prior year period, resulting from a variety of offsetting factors. The most significant factor was inventories which increased substantially during the current period reflecting the significant increase in order backlog since the beginning of the quarter while it had actually declined in the prior comparable period. This change was somewhat offset by related movements in accounts payable related to inventories. An additional offsetting factor was accounts receivable which decreased marginally during the current period while it increased substantially in the prior comparable period, relating to sales levels in each of the respective periods.

Cash used in investing activities for the three-month period ended June 30, 2013 was $30,000 less than the comparable prior year period due primarily to the decrease in capital expenditures.

Cash used in financing activities was $122,000 more in the three-month period ended June 30, 2013, than in the corresponding prior year period due to an increase in the annual cash dividend paid to shareholders.

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 $0.30 per share cash dividend in June 2013.


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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