Air T Inc (AIRT) 2010 Q4 法說會逐字稿

Welcome to the Air T Incorporated conference call for its 2011 fiscal year. Walter Clark, the Company's Chairman and Chief Executive Officer, will be leading the call today. And he will be joined by the Company's Chief Financial Officer, John Parry. There will be a question and answer session following the Company's presentation and at that time we will provide instructions for those who wish to participate in that portion of the call.

During the course of this call, you may hear statements that express a belief, expectation, or intention as well as those that are not historically fact. These statements are forward-looking statements under the Private Litigation Securities Reform Act and involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor Statement included in the Company's press release and are described in more detail, along with other risks and uncertainties in the Company's filings with the SEC including its Form 10-K for the fiscal year ended March 31, 2011.

The Company urges you to review these filings. The Company does not undertake to update any forward-looking statement made on this conference call to reflect any change in Management's expectations or any change in assumptions or circumstances on which such statements are based. I will now turn the call over to Mr. Clark.

Thank you. Before we review the results for the 2011 fiscal year, I'd like to draw your attention to our press release announcing our results of operations. Press release is available on our website at www.airT.net. In addition, earlier this morning we filed our annual report on Form 10-K which includes our audited financial statements. You can access our Form 10-K on the SEC's website, at www.SEC.gov.

Today, we reported consolidated revenues of approximately $83.4 million, and net earnings of approximately $2.1 million or $0.87 per diluted share. This compares to consolidated revenues of approximately $81.1 million, net earnings of approximately $3.8 million, and earnings per diluted share of $1.54 in fiscal 2010. After 3 consecutive years of record revenues and net profits, we experienced a decline in both in fiscal 2010, reflecting a very difficult economic and industry condition. In our most recent fiscal year, we reversed that trend with respect to revenues, but our net profit continued to decline.

Our Air Cargo segment was a strong performer as revenues for the segment totaled $42.3 million for fiscal 2011, representing a 9% increase over the prior year. And operating income increased by 26%. During the second quarter of fiscal 2011, FedEx delivered 4 additional ATR-72 passenger aircraft to our Mountain Air Cargo subsidiary for heavy maintenance work to prepare those aircraft for Air Cargo operation. During the third quarter, 1 of the aircraft was completed and FedEx placed that aircraft with Mountain Air Cargo and has been operated by MAC ever since November. It's uncertain whether FedEx will ultimately place the other 3 ATRs with MAC once maintenance work is completed.

We received administrative fee revenue and maintenance labor revenue on the aircraft and the heavy maintenance work to be performed by MAC on the 3 aircraft was essentially completed as of the end of fiscal 2011. Fiscal 2011 revenues for our Ground Support Equipment Sales segment which operates through our Global Ground Support subsidiary, or GGS, were down less than 1% from the prior year while operating income decreased by $2.4 million or 61%. While GGS revenues were fairly flat overall, there was a significant shift in the composition of revenues. Revenues from the US military decreased to 4% of GGS revenues in fiscal 2011 compared to 51% in the prior year. While GGS was able to renew the deicer contract with the Air Force in July of 2010, it did not deliver any orders under this new contract during fiscal 2011. In the past, the Air Force work allowed us to be more flexibility in our deliveries and production which contributed to greater efficiencies and lower overall cost structure.

Fiscal 2011 revenues for our Ground Support Services segment which operates through our Global Aviation Services subsidiary or GAS was $8.2 million, a 10% decrease from the prior year. In July 2010 after a highly competitive bidding process, GAS was notified of changes to its contract with Delta Air Lines which has resulted in a significant reduction in the scope of work performed for Delta, principally beginning in September 2010. The services being reduced, which include services being eliminated at GAS's largest Delta location accounted for almost 50% of GAS's historical revenues and a greater proportion of its operating income. The impact of the reductions is reflected in the operating results for the second half of fiscal 2011.

GAS continues to seek out new customers and location to build its revenue base back but expects to see lower margins than it produced prior to the Delta contract revisions. We recently announced a dividend of $0.25 a share. Given the uncertain economic environment going forward, we are looking to continue to maintain cash balances at conservative levels. Being conservative with our cash not only hedges against economic uncertainty but also gives us the flexibility to pursue attractive growth opportunities. At this point, I would like to ask John Parry to review our operating results in more detail for you and after that we'll take your questions. John?

Thank you, Walter, and good morning. Compared to prior years, when our operating results were primarily driven by revenues, for fiscal 2011 revenues were slightly higher than the prior year, but profits were reduced due to lower margins.

First I would like to discuss our revenues. Consolidated revenues increased by 3% to $83.4 million for fiscal 2011, compared to the prior fiscal year. The increase in 2011 revenue resulted from a number of offsetting factors. First, revenues in the Overnight Air Cargo segment increased by 9% to $42.3 million. Largely as a result of the increases in administrative fee revenue and maintenance labor revenue relating to the 4 ATR-72 aircraft that were delivered by FedEx during the second quarter, as well as increases in flight maintenance operating costs passed through to our customer at cost. Heavy maintenance on 1 of the ATR-72 aircraft was completed and it was placed into revenue service during the third quarter, and heavy maintenance work on the remaining 3 aircraft has been substantially completed at March 31, 2011.

Revenues in the Ground Equipment Sales segment decreased by less than 1% to $32.8 million. While this overall decrease in the segment was minimal, there was a significant swing in the product and customer mix, principally resulting from the lack of deicer sales to the United States Air Force during fiscal 2011, offset by increased deicer sales in both the commercial domestic and commercial international markets. Revenues from domestic commercial customers increased to 63% of GGS revenues in fiscal 2011 compared to 31% in the prior year. In November 2010, GGS was awarded a contract to provide $10.5 million of deicing trucks and training simulators to the city of Charlotte, North Carolina, for use at the Charlotte Douglas International Airport. GGS had delivered $9.3 million of these units by the end of fiscal 2011 with the remainder delivered in the first quarter of fiscal 2012. Revenues from international customers increased to 33% of GGS revenues in fiscal 2011, compared to 18% in the prior year.

Revenues in the Ground Support Services segment decreased by 10% to $8.2 million, resulting from the reduction in scope of work performed for Delta within this segment during the last half of fiscal 2011. Operating expenses on a consolidated basis for fiscal 2011 increased by 6% to approximately $80 million. The increase was due to a number of factors. Operating expenses in the Overnight Air Cargo segment were up 9% corresponding to the increase in revenues within that segment. Ground equipment sales operating costs increased by 8%. GGS's gross margin percentage was dramatically affected by changes in customer base as the commercial business, both domestically and internationally, has increased significantly in a highly competitive environment. In addition, the Air Force work, which decreased dramatically, had allowed us to be much more flexible in prior years in our deliveries and production which contributed to greater efficiencies and a lower overall cost structures.

Operating expenses in the Ground Support Services segment decreased by 8%, largely as a result of the reduction in work performed for Delta. General and administrative expenses decreased by 1% in fiscal 2011. The Company incurred reduced compensation expense related to stock options and profit sharing expense decreased directly related to the decreased profit generated by the Company in fiscal 2011. These decreases were offset by an increase in employee benefit costs, a $108,000 increase in the provision for bad debts, and lesser increases in salary and other overhead costs. Increase in provision for bad debts was due to fully reserving for a non-trade receivable that was deemed uncollectible in the fourth quarter of fiscal 2011.

Income tax expense in fiscal 2011 represented an effective tax rate of 40.1% which included a true-up of income taxes on prior year filings, the benefit of foreign tax credits, as well as the benefit of the US production deduction. Income tax expense in fiscal 2010 represented an effective tax rate of 32.4%, which included the true-up of federal income taxes on prior year filings, the benefit of prior and current year foreign tax credits, as well as the US production deduction. On the balance sheet, we ended fiscal 2011 with $6.6 million in cash and cash equivalents and working capital of $22.7 million. With that I'd like to turn the call back to Walter.

Thanks, John. Looking ahead to fiscal 2012, we continue to enjoy a good relationship with our Air Cargo customer. In addition, we look forward to the opportunity to serve the United States Air Force and our other existing Ground Equipment Sales and Ground Support Services customers and to forging new customer relationships in the year ahead. At the end of fiscal 2011, our backlog of orders was $9.6 million, compared to a backlog of $1.3 million at the end of the prior fiscal year. I'd now like to open the call to your questions and I believe our conference host will provide you with the instructions for participating in this portion of the call. We'll try to keep the call to 30 minutes today.

The question and answer session will be conducted electronically. (Operator Instructions). Jonathan Lichter, [Campinio] Capital.

Just wanted to make sure I had the numbers right. Was it $0.28 that you earned in the fourth quarter?

> Yes.

Okay. And what was the reason, again, that the tax rate was higher in the quarter?

We had some true-ups of prior year credits. The prior year was very low because we had picked up some prior year foreign tax credits and we had some true-ups this year that raised the rate a bit.

What would it have been, the earnings, if the tax rate was the same as it had been in the rest of the year?

We would expect historically the tax rate to be in the 36% to 37% range, so you're talking probably $0.04 to $0.05.

Okay. Okay. And when do you expect the accounts receivable to come back down to normal? Or is this the new normal?

This is fairly high. We had a pretty good sized contract in process at year-end so the receivables were higher than normal. We have a bit of a new normal, though, as well because the international accounts are a little bit slower. We've got some work that takes a little bit longer on the collections side, letters of credit and such. So it's a combination of a fair amount of work at year-end and plus a new -- little bit of a new normal with the international work, a little bit longer.

So would you expect it to come back down to $8 million, $9 million? Is that a fair number?

Hard to say. I think it's going to depend on the level of business and the level of production we're doing. We should certainly see a reduction. I don't really want to speculate on the amount.

Was that the reason that the dividend was a little lower than previous years? Is that you hadn't collected yet on the receivables?

Jonathan, this is Walter Clark. This is really our conservative approach to cash management. Our earnings were down. We kind of took note of the fact that we had the lowered earning amount and we appreciate and like to have cash on hand to utilize instead of borrowing from the bank.

Okay. And the inventory, is that also -- will that be trending lower as well going forward?

That -- we would expect that, yes. That's up in accordance with the backlog being up and the work going on, so yes, we would expect that, to see a decline there.

Okay. Also, do you expect any order from the Air Force this year? Is that -- since they didn't go --

John. That's driven really by -- it's hard. It's driven by budget vagaries and requirements for the Air Force so it's fairly opaque to us what they intend to do in the coming year.

Okay. Thank you.

Part of that backlog that we have this current year is still part of an Air Force order that we will deliver in this current fiscal year, but as far as what they're going to order in the next budget cycle, is just unknown to us.

Okay. Thanks a lot.

(Operator Instructions). Noah Mayer, HWCM Investment Management.

Congratulations on the great execution in the quarter. I just have a question about capital allocation in particular. You had mentioned that you not only wanted to run a conservative balance sheet but also were looking at growth opportunities. I'm hoping that you can clarify the opportunities that you would see as interesting, given your current valuation. Your market cap was pretty much equal to your net current assets and you're at about 5 times trailing EBIT, which you have kind of a cyclically depressed EBIT. So seems a little bit unlikely that you would be able to find an acquisition target that would be as attractive as your own common stock. Can you clarify what you think you might be able to find in the marketplace?

Noah, we have expansion opportunities we're looking at in our Ground Services segment that requires significant amount of capital. We also do some organic growth that we're looking at new product lines. It takes significant amount of capital to fund engineering and development costs. Those are 2 areas that we would have use of some of that cash. So -- this is Walter Clark, by the way.

Right, right. No, it makes sense that those are opportunities. It just is a little bit difficult for me to understand how those opportunities would be able to return very low risk double-digit returns, which is what buying back your own stock would seem to imply, given the valuation.

Right. Well, that's a decision that the Board would make and right now the Board is standing with what we've done so far, as far as basically keeping a fairly conservative amount, keep the cash on the balance sheet. So -- I appreciate your input, Noah. And I'll be glad to take it to the Board as a comment we got on the call.

Well, great. Thank you very much. It's an outstanding business and we think that there's a lot of opportunity to make some minor tweaks in capital allocation to increase the value quite substantially. Thanks so much and have a great day.

Thank you, Noah.

And there are no further questions. I will turn the call back over to Mr. Clark for any additional or closing remarks.

We would like to thank all of you for joining us today and we appreciate your interest in our Company and everybody have a good day. Thank you very much.

And that will conclude today's call. We thank you for your participation.