Air T, Inc. - 10-Q quarterly report FY

Item 1. Financial Statements

 

AIR T, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (UNAUDITED)

The accompanying Condensed Consolidated Financial Statements have been prepared by Air T, Inc. (the Company) in accordance with generally accepted accounting principles for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and to Article 10 of regulation S-X. The Company has continued to follow the accounting policies set forth in the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows as of September 30, 2006, and for prior periods presented, have been made.

It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2006. The results of operations for the period ended September 30 are not necessarily indicative of the operating results for the full year.

Basic earnings per share has been calculated by dividing net earnings by the weighted average number of common shares outstanding during each period. For purposes of calculating diluted earnings per share, shares issuable under employee stock options were considered potential common shares and were included in the weighted average common shares unless they were anti-dilutive. As of September 30, 2006 and 2005, 1,000 outstanding stock options were anti-dilutive.

The computation of basic and diluted earnings per common share is as follows:

Inventories consist of the following:

 

 

As a result of adopting Statement 123(R) on April 1, 2006, the Company’s income before income taxes and net income for the three and six months ended September 30, 2006, were, respectively, $58,358 and $35,015 and $89,108 and $53,465 lower than if it had continued to account for share-based compensation under APB Opinion No. 25. Compensation expense as a result of stock options affected basic and diluted earnings per share by $.01 and $.02, respectively, for the three and six months ended September 30, 2006.

Prior to the adoption of Statement 123(R), the Company did not present tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

 

A total of 209,000 options were granted under the Company’s stock option plan during the three-month period ended September 30, 2006.

A summary of option activity under the Plan as of September 30, 2006, and changes during the six months then ended is presented below:

 

The Company’s ground equipment subsidiary warranties its products for up to a two-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.

Product warranty reserve activity during the three and six-months ended September 30, 2006 and 2005 are as follows:

In August 2006, the Company was advised by its lender that the expiration date of its $7,000,000 secured long-term revolving credit line had been extended to August 31, 2008. The revolving credit line contains customary events of default, a subjective acceleration clause and restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. There is no requirement for the Company to maintain a lock-box arrangement under this agreement. As of September 30, 2006, the Company was in compliance with all of the restrictive covenants. 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, 2006, $4,427,000 was available under the terms of the credit facility. The credit facility is secured by substantially all of the Company’s assets.

The Company is exposed to changes in interest rates on certain portions of its line of credit, which bears interest based on the 30-day LIBOR rate plus 137 basis points. If the LIBOR interest rate had been increased by one percentage point, based on the balance of the line of credit at September 30, 2006, annual interest expense would have increased by approximately $19,000.

The Company evaluates the performance of its operating segments based on operating income.

Segment data is summarized as follows:

 

 

 

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

MAC and CSA provide short-haul express air freight services primarily to one customer, FedEx Corporation (the Customer). Under the terms of its Customer’s dry-lease service agreements which currently cover approximately 99% of the revenue aircraft operated, the Company charges an administrative fee and passes through to its customer certain other 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.

Separate agreements cover the four types of aircraft operated by MAC and CSA for their customer—Cessna Caravan, ATR-42/72, Fokker F-27, and Short Brothers SD3-30. Cessna Caravan, ATR-42/72 and Fokker F-27 aircraft (a total of 92 aircraft at September 30, 2006) are owned by and dry-leased from the Customer, and the Short Brothers SD3-30 aircraft (two aircraft at September 30, 2006) are owned by the Company.

The SD3-30’s are operated periodically under wet-lease arrangements with the Customer. Pursuant to such agreements, the Customer 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.

Agreements with the customer which are renewable on two to five year terms, may be terminated by the Customer at any time upon 30 days’ notice. The Company believes that the short term and other provisions of its agreements with the Customer are standard within the air freight contract delivery service industry. Loss of its contracts with the Customer would have a material adverse effect on the Company.

MAC and CSA’s revenues contributed approximately $17,222,000 and $21,919,000 to the Company’s revenues for the six-month periods ended September 30, 2006 and 2005, respectively, a current year decrease of approximately 21%. The decrease in revenues was primarily related to a decrease in maintenance services and acquisition of aircraft parts, which were attributed to wind-down and completion of the customer’s fleet modernization, associated with conversion of ATR aircraft from passenger to cargo configuration during fiscal 2006.

 

Due to an increase in the number of commercial deicing unit orders received, and in part filled during the three-month period ended September 30, 2006, the Company currently forecasts the domestic commercial aviation market will grow at a rate closer to the rest of the economy than was previously expected. Although international sales, which have been lower in the current year-to-date period compared to the similar period last year, are more difficult to predict, the Company currently anticipates is that fiscal 2007 international sales will not match the level of fiscal 2006’s international revenues. Company management anticipates that the decreased level of maintenance revenues experienced year-to-date, associated with the recent completion of its customers’ current fleet modernization, will continue to reduce air cargo revenues and operating margins throughout the remainder of fiscal 2007 as compared to fiscal 2006. Cost cutting measures implemented during fiscal 2007 are expected to partially offset the effect of reduced maintenance revenues during the remainder of the current fiscal year.

Based on the current general worldwide political, economic and industry outlook and cost cutting measures implemented during the fiscal 2007, the Company believes its existing cash and cash equivalents, cash flow from operations, and funds available from current and renewed credit facilities will adequately meet its current and anticipated working capital requirements throughout fiscal 2007. If these sources are inadequate or become unavailable, then the Company may pursue additional funds through the financing of unencumbered assets or sale of equity securities, although there is no assurance these additional funds will be sufficient to replace the sources that are inadequate or become unavailable.

Actual results for fiscal 2007 will depend upon a number of factors beyond the Company’s control, including, in part, the magnitude of future international orders, potential additional transition of the aircraft fleet operated for the Company’s air cargo customer, the timing, speed and magnitude of the economic recovery of the aviation industry based in-part on the price of oil, military funding of pending future equipment orders, future levels of commercial aviation capital spending, future terrorists acts and weather patterns.

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the U.S. 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 most significant estimates made by management include allowance for doubtful accounts receivable, reserves for excess and obsolete inventories, warranty reserves, deferred tax asset valuation, retirement benefit obligations, valuation of revenue recognized under the percentage-of-completion method, valuation of long-lived assets and valuation of stock based compensation.

Following is a discussion of critical accounting policies and related management estimates and assumptions.

Allowance for Doubtful Accounts. An allowance for doubtful accounts receivable in the amount of $490,000 and $482,000, respectively, as of September 30, 2006 and March 31, 2006, was 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 associated with a discontinued business segment. 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. Reserves for excess and obsolete inventories in the amount of $681,000 and $451,000, respectively, as of September 30, 2006 and March 31, 2006, are based on assessment of the marketability of slow-moving and obsolete inventories. 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 two-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.

Product warranty reserve activity during three and six-months ended September 30, 2006 and 2005 are as follows:

Deferred Taxes. Net deferred tax assets are shown net of valuation allowance in the amount of $85,000 and $82,000, as of September 30, 2006 and March 31, 2006, respectively, to reflect the likelihood of the recoverability of certain of these assets. Company judgment of the recoverability of certain of these assets is based primarily on estimates of current and expected future earnings and tax planning.

Retirement Benefits Obligation. The Company currently determines the value of retirement benefits assets and liabilities on an actuarial basis using a 5.75% discount rate. Long-term deferred retirement benefit obligations amounted to $666,000 and $661,000, respectively, as of September 30, 2006 and March 31, 2006. Values are affected by current independent indices, which estimate the expected return on insurance policies and the discount rates used. Changes in the discount rate used will affect the amount of pension liability as well as pension gain or loss recognized in other comprehensive income.

Revenue Recognition. Cargo revenue is recognized upon completion of contract terms and maintenance revenue is recognized when the service has been performed. Revenue from product sales is recognized when contract terms are completed and title has passed to customers. Revenues from long-term fixed price manufacturing projects are recognized on the percentage-of-completion method. The Company was not engaged in any long-term fixed-price contracts in the six months ended September 30, 2006 and 2005.

Valuation of Long-Lived Assets. The Company assesses long-lived assets used in operations for impairment when events and circumstances indicate the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. In the event it is determined that the carrying values of long-lived assets are in excess of the fair value of those assets, the Company then will write-down the value of the assets to fair value.

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109." This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006 and is not expected to have a material affect.

As a result of adopting Statement 123(R) on April 1, 2006, the Company’s income before income taxes and net income for the three and six months ended September 30, 2006, were, respectively, $58,358 and $35,015 and $89,108 and $53,465 lower than if it had continued to account for share-based compensation under APB Opinion No. 25. Compensation expense as a result of stock options affected basic and diluted earnings per share by $.01 and $.02, respectively, for the three and six months ended September 30, 2006.

 

Prior to the adoption of Statement 123(R), the Company did not present tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

 

A total of 209,000 options were granted under the Company’s stock option plan during the three-month period ended September 30, 2006.

Operating expenses decreased $5,293,000 (15.4%) to $29,148,000 for the six-month period ended September 30, 2006 and decreased $3,502,000 (19.8%) to $14,169,000 for the three-month period ended September 30, 2006 compared to there equivalent 2005 periods. The net decrease in operating expenses for the six-month period consisted of the following: cost of flight operations decreased $468,000 (5.2%) primarily as a result of decreased costs associated with flight department and pilot staffing and pilot travel due to completion of customer flight schedule changes; maintenance expense decreased $3,248,000 (34.3%) primarily as a result of decreases in the volume of aircraft parts purchased for ATR aircraft and cost of MAC and outside direct maintenance, maintenance personnel, cost of travel and contract services, related to customer fleet modernization; ground equipment operating expenses decreased $1,418,000 (12.7%), as a result of $788,000 in costs related to the Philadelphia boom repairs booked by Global in the six-month period ended September 30, 2005 and decreased manufacturing, engineering and sales costs associated with the revenue mix discussed above; depreciation and amortization increased $3,000 (1.0%) as a result of depreciation on purchases of capital assets; and general and administrative expense decreased $162,000 (3.6%)primarily as a result of decreased staff salaries and related expense and utilities costs, partially offset by an increase in employee’s profit sharing provision.

The change in operating expenses for the three-month periods, respectively, ended September 30, 2006 and 2005 consisted of the following: cost of flight operations decreased $297,000 (6.4%) primarily as a result of decreased costs associated with flight department and pilot staffing and pilot travel due to completion of customer flight schedule changes; maintenance expense decreased $1,073,000 (25.6%) primarily as a result of decreases in the volume of aircraft parts purchased for ATR aircraft and cost of MAC and outside direct maintenance, maintenance personnel, cost of travel and contract services, related to customer fleet modernization; ground equipment operating expenses decreased $1,953,000 (30.4%), as a result of lower manufacturing, engineering and sales costs discussed above and $415,000 in costs related to the Philadelphia boom repairs booked by Global in the quarter ended September 30, 2005; depreciation and amortization decreased $19,000 (11.3%) as a result of retirement of capital assets; and general and administrative expense decreased $161,000 (7.0%)primarily as a result of decreased staff salaries and benefits expense and professional fees, partially offset by an increase in employee’s profit sharing provision.

The current six-month period’s increased operating income ($745,000) (81.8%) resulted primarily from the recognition in the 2005 six-month period of approximately $788,000 in operating expense related to Global’s efforts to return the Philadelphia de-icing units to service and from higher first quarter fiscal 2007 equipment unit revenues and order mix in the ground equipment sector, partly offset by decreased maintenance revenues associated with the air cargo segment.

The current three-month period’s increased operating income ($87,000) (18.8%) resulted primarily from the recognition in the 2005 three-month period of approximately $415,000 in operating expense related to Global’s efforts to return the Philadelphia de-icing units to service and from higher operating margins due to order mix in the ground equipment sector, partially offset by decreased maintenance revenues associated with the air cargo segment.

Pretax earnings increased respectively, $824,000 and $118,000 for the six and three-month periods ended September 30, 2006 compared to 2005, principally due to $788,000 and $415,000, respectively, in costs related to the Philadelphia boom repairs booked by Global during the six and three months periods ended September 30, 2005, and the above stated ground equipment segment’s increased operating income, offset by decreased maintenance margins related to the air cargo segment.

 

In August 2006, the Company was advised by its lender that the expiration date of its $7,000,000 secured long-term revolving credit line had been extended to August 31, 2008. The revolving credit line contains customary events of default, a subjective acceleration clause and restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. There is no requirement for the Company to maintain a lock-box arrangement under this agreement. As of September 30, 2006, the Company was in compliance with all of the restrictive covenants. 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, 2006, $4,427,000 was available under the terms of the credit facility. The credit facility is secured by substantially all of the Company’s assets.

The Company is exposed to changes in interest rates on certain portions of its line of credit, which bears interest based on the 30-day LIBOR rate plus 137 basis points. If the LIBOR interest rate had been increased by one percentage point, based on the balance of the line of credit at September 30, 2006, annual interest expense would have increased by approximately $19,000.

 

 

 

Contractual death benefits for the Company’s former Chairman and Chief Executive Officer who passed away on April 18, 1997 are payable by the Company in the amount of $75,000 per year for 10 years from the date of his death. As of September 30, 2006, $64,000 has been reflected as a current liability and $17,000 has been reflected as a long-term liability associated with this death benefit.

As of the end of the period covered by this report, management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in this report. Based upon, and as of the date of that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that management will be timely alerted to material information required to be included in the Company’s periodic reports filed with the Commission.

There were no changes in the Company’s internal control over financial reporting during or subsequent to the second quarter of fiscal 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

It should be noted that while the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, believe that the Company’s disclosure controls and procedures provide a reasonable level of assurance, they do not expect that the disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within

the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

(a) The Company held its 2006 annual meeting of stockholders on September 28, 2006.

(b) Each of the individuals listed in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on August 14, 2006 as nominees for election as directors was elected at the annual meeting. These nominees are listed below.

(c) At the annual meeting, the stockholders voted on the election of all nine members of the Board of Directors and ratification of the appointment of Dixon Hughes PLLC to serve as the Company’s independent auditors for the fiscal year ending March 31, 2007. The following tables summarize the results of the voting on these matters.

(d) Not applicable

(a) Exhibits

Date: November 3, 2006

Date: November 3, 2006

 

 

31.1 Certification of Walter Clark

31.2 Certification of John Gioffre

32.1 Section 1350 certification

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