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

                                FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Quarterly Report Under Section 13 or 15 (d)

of the Securities Exchange Act of 1934

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X      No  ___

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)  Yes      No   X    

 

 

 Yes      No   X    

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

This filing contains 29 pages.

PART I. FINANCIAL INFORMATION

                          

Item 1. Financial Statements

 

 

 

 

 

The Condensed Consolidated Balance Sheet as of September 30, 2005 and the Condensed Consolidated Statements of Operations, Stockholders’ Equity and Comprehensive Income, for the periods ended September 30, 2005 and 2004 have been prepared by Air T, Inc. (the Company) without audit. 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, 2005, and for the 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, 2005. 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 the Company’s stock option plans were considered potential common shares and were included in the weighted average common shares unless they were anti-dilutive. As of September 30, 2005 and 2004, respectively, 16,000 and 1,000 outstanding stock options were anti-dilutive.

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

4.    Inventories

Inventories consist of the following:

5.    Recent Accounting Pronouncements

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would not have been material.

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 as actual warranty cost becomes known.

Product warranty reserve activity during the three and six-months ended September 30, 2005 and 2004 are as follows:

7.    Derivative Financial Instruments

The Company is exposed to market risk, such as changes in interest rates. To manage the volatility relating to interest rate risk, the Company may enter into interest rate hedging arrangements from time to time.

On October 30, 2003, the Company terminated an interest rate swap with a notional amount of $2,400,000, entered into in May 2001, for $97,500. The fair-market-value termination fee was ratably amortized into interest expense through the, then current, bank credit line termination date of August 31, 2005.

The Company does not hold or issue derivative financial instruments for trading or speculative purposes. As of September 30, 2005 the Company had no derivative financial instruments outstanding. 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, 2005, annual interest expense would have increased by approximately $22,000.

In August 2005, the Company amended the terms of its $7,000,000 secured long-term revolving credit line and extended its expiration date to August 31, 2007. 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, 2005, 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, inven tories and equipment, with certain exclusions. At September 30, 2005, $4,777,000 was available under the terms of the credit facility. The credit facility is secured by substantially all of the Company’s assets.

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

Segment data is summarized as follows:

10.    Commitments and Contingencies

 

 

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, Federal Express 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 94 aircraft at September 30, 2005) are owned by and dry-leased from the Customer, and the Short Brothers SD3-30 aircraft (two aircraft at September 30, 2005) 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 are renewable annually and may be terminated by the Customer at any time upon 15 to 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. The Company is not contractually precluded from providing such services to other firms, and has done so in the past. Loss of its contracts with the Customer would have a material adverse effect on the Company.

MAC and CSA’s revenues contributed approximately $21,919,000 and $18,604,000 to the Company’s revenues for the six-month periods ended September 30, 2005 and 2004, respectively, a current year increase of approximately 17.8%. The increase in revenues was primarily related to increased direct operating costs associated with of flight and maintenance services, and increased administrative fees. The increases were due to continued placement of ATR aircraft into revenue service, and acquisition of aircraft parts which was primarily associated with the transition to ATR aircraft.

Global, which provides the remainder of the Company’s revenue, manufactures, services and supports aviation ground support and specialized military and industrial equipment on a worldwide basis. Global’s revenue contributed approximately $13,433,000 and $12,849,000 to the Company’s revenues for the six-month periods ended September 30, 2005 and 2004, respectively. The 4.5% increase in revenues was primarily related to the mix of customer orders during the respective periods.

 

     On August 4, 2005, Global commenced litigation against its subcontractor that designed, fabricated and warrantied the booms at the Philadelphia airport, seeking to recover costs incurred in connection with repairing the 11 booms and any damages arising from the collapse of the boom in February 2005. The Company cannot provide assurance that it will be able to recover its repair expenses, or otherwise be successful, in this action.

The Company’s current forecast for fiscal 2006 assumes that, due to higher fuel cost and the continuation of operating losses in the commercial passenger airlines over the past several years, the commercial aviation industry will grow at a rate that is substantially less than the rest of the economy.

Increased military and Homeland Security budgets, pending funding approvals, may help offset the expected lower than normal order levels from Global’s commercial airline customers. Company management currently anticipates that its air cargo customer will continue its aircraft fleet modernization program throughout fiscal 2006, however, future terrorist attacks, competition or inflation may cause delays or termination of certain projects. Given uncertainties associated with the above factors, the Company continues to operate in a highly unpredictable environment.

Based on the current general economic and industry outlook and cost cutting measures implemented over the past two fiscal years, the Company believes its existing cash and cash equivalents, cash flow from operations, and funds available from the recently renewed

credit facility will be adequate to meet its current and anticipated working capital requirements throughout fiscal 2006. If these sources are inadequate or become unavailable, then the Company may pursue additional funds through the financing of unencumbered assets, although there is no assurance these additional funds will be sufficient.

Actual results for fiscal 2006 will depend upon a number of factors beyond the Company’s control, including, in part, the actual total costs incurred to effect the repair of booms at the Philadelphia airport once final testing is completed and any related expenses, including cost of litigation to pursue the recovery, of these expenses from third parties, including Global’s subcontractor. Actual results will also depend on future significant increases in rate of inflation, including fuel prices, the timing, speed and magnitude of the economic recovery, military funding of pending future equipment orders, future levels of commercial aviation capital spending, increased competition, future terrorists acts and winter weather patterns.

The discussion and analysis of the Company’s financial condition and results of operations are based on its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates these estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, reserves for excess or obsolete inventory, warranty reserves, retirement benefit obligation accruals, deferred taxes, asset lives used in computing depreciation and amortization, and accounting for income taxes, continge ncies and litigation. Application of these estimates and assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operation-Critical Accounting Policies and Estimates” included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2005 for further information regarding our critical accounting policies and estimates.

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 $275,000 and $267,000, respectively, as of September 30, 2005 and March 31, 2005, 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 business segment discontinued in 2003. 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 $453,000 and $441,000, respectively, as of September 30, 2005 and March 31, 2005, 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.

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.

Deferred Taxes. Deferred tax assets and liabilities, net of valuation allowance in the amount of $85,000, as of September 30, 2005 and March 31, 2005 reflect the likelihood of the recoverability of these assets. Company judgment of the recoverability 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 5.5% discount rate. Long-term deferred retirement benefit obligations amounted to $1,493,000 and $1,485,000, respectively, as of September 30, 2005 and March 31, 2005. 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.

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.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would not have been material.

Operating expenses increased $4,771,000 (16.1%) to $34,441,000 for the six-month period ended September 30, 2005 and $2,216,000 (14.3%) to $17,671,000 for the three-month period ended September 30, 2005 compared to their equivalent 2004 periods. The change in operating expenses for the six-month period consisted of the following: cost of flight operations increased $1,016,000 (12.8%) primarily as a result of increased costs associated with fuel, pilot staffing and travel and landing fees, due to higher oil prices and customer flight schedule changes, which were passed on to the customer without markup; maintenance expense increased $2,116,000 (28.8%) primarily as a result of increases in the volume of aircraft parts purchased for ATR aircraft and cost of outside maintenance, maintenance personnel, cost of travel a nd contract services, related to customer fleet modernization; ground equipment operating expenses increased $1,169,000 (11.7%), as a result of $599,000 in current period repair costs for the deicing booms located at the Philadelphia airport, as discussed in Overview above, and increased cost of parts and supplies related to the mix of customer orders; depreciation and amortization increased $22,000 (7.3%) as a result of purchases of capital assets; and general and administrative expense increased $449,000 (10.9%) primarily as a result of increased cost of staffing, wages and benefits and staff expense, which, in part, includes $189,000 in efforts to restore the Philadelphia deicing equipment to service, as described above.

The change in operating expenses for the three-month periods, respectively, ended September 30, 2005 consisted of the following: cost of flight operations increased $404,000 (9.6%), primarily as a result of increased direct operating cost associated with route schedule changes which increased the cost of pilot staffing and travel, airport fees and increased fuel expense; maintenance expense increased $405,000 (10.7%) primarily as a result of increased cost of parts and outside maintenance, partially offset by lower travel expense and maintenance salaries; ground equipment increased $1,102,000 (20.7%), as a result of product repair cost, discussed above, cost of parts and labor associated with increased Global sales; and general and administrative expense increased $278,000 (13.9%) primarily as a result of increase d salaries and related benefits, and staff expense, offset by decreased profit sharing provision and professional fees.

 

In August 2005, the Company amended the terms of its $7,000,000 secured long-term revolving credit line and extended its expiration date to August 31, 2007. 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, 2005, 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, inven tories and equipment, with certain exclusions. At September 30, 2005, $4,777,000 was available under the terms of the credit facility. The credit facility is secured by substantially all of the Company’s assets.

The Company assumes various financial obligations and commitments in the normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under existing contractual arrangements such as debt and lease agreements. A table representing the scheduled maturities of the Company’s contractual obligations as of March 31, 2005 was included under the heading “Contractual Obligations” on page 14 of the Company’s 2005 Annual report on Form 10-K filed with the SEC on June 17, 2005. There were no significant changes from the table referenced above during the quarter ended September 30, 2005.

The Company has not currently, nor in the past, engaged in the use of structured finance arrangements, known as off-balance sheet financing transactions, with unconsolidated entities or other persons.

     Cash used in investing activities for the six-months ended September 30, 2005 was approximately $36,000 more than the comparable period in 2004 due to proceeds from the sale of fixed assets in the 2004 period.

 

The Company is exposed to market risk, such as changes in interest rates. To manage the volatility relating to interest rate risk, the Company may enter into interest rate hedging arrangements from time to time.

On October 30, 2003, the Company terminated an interest rate swap with a notional amount of $2,400,000, entered into in May 2001, for $97,500, the fair-market-value termination fee was ratably amortized into interest expense through the, then current, bank credit line termination date of August 31, 2005.

The Company does not hold or issue derivative financial instruments for trading or speculative purposes. As of September 30, 2005 the Company had no derivative financial instruments outstanding. 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, 2005, annual interest expense would have increased by approximately $22,000.

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, 2005, $64,000 has been reflected as a current liability and $75,000 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 informa tion 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 2005 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 c ontrol 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 syste m, misstatements due to error or fraud may occur and not be detected.

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

 

No.     Description

SIGNATURES

By:     /s/ Walter Clark                

Date: November 8, 2005

By:     /s/ John J. Gioffre            

Date: November 8, 2005

 

Exhibit Number    Document

 

31.1 Certification of Walter Clark

31.2 Certification of John Gioffre

32.1 Section 1350 certification