LIMCO-PIEDMONT INC 10-Q 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
for the quarterly period ended June 30, 2008
for the transition period from to
Commission file number: 001-33604
(Exact Name of Registrant as Specified in Its Charter)
5304 S. Lawton Ave.
Tulsa, Oklahoma, 74107
(Address of Principal Executive Offices)
(Registrants Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of July 31, 2008 the Registrant had 13,205,000 shares outstanding.
LIMCO-PIEDMONT INC. AND SUBSIDIARIES
The following discussion of our financial condition and results of operations reflects our current views with respect to future events and financial results and should be read in conjunction with the financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this Quarterly Report on Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and are subject to the safe harbor created by those sections. Words such as anticipate, expect, intend, plan, believe, seek, outlook and estimate as well as similar words and phrases signify forward-looking statements. Our forward-looking statements are not guarantees of future results and conditions and important factors, risks and uncertainties may cause our actual results to differ materially from those expressed in our forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the section entitled Risk Factors set forth in Item 1A and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission (SEC), and those detailed from time to time in our other filings with the SEC. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
LIMCO-PIEDMONT INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
See notes to unaudited condensed consolidated financial statements.
LIMCO-PIEDMONT INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
See notes to unaudited condensed consolidated financial statements.
LIMCO-PIEDMONT INC. AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(in thousands, except per share data)
See notes to unaudited condensed consolidated financial statements.
LIMCO-PIEDMONT INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to unaudited condensed consolidated financial statements.
LIMCO-PIEDMONT INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 General
a. Limco-Piedmont Inc. (the Company), a Delaware corporation, is a majority-owned subsidiary, 62%, of TAT Technologies Ltd. (the Parent). The Company is principally engaged in:
The repair and overhaul of heat transfer components, auxiliary power units (APUs), propellers, landing gear and pneumatic ducting.
Inventory management and parts services for commercial, regional and charter airlines and business aircraft owners.
The Companys primary operations are located in Tulsa, Oklahoma and Kernersville, North Carolina. The principal markets of the Company are Europe, the United States and Latin America. The Company sells its products mainly to the aircraft industry.
b. Unaudited Interim Results:
The accompanying condensed consolidated financial statements of Limco-Piedmont Inc. and subsidiaries (the Company) presented herein have been prepared by the Company and are unaudited. They do not include all the notes in our annual financial statements and, therefore, should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report 10K filed with the Securities and Exchange Commission dated March 21, 2008, In the opinion of the Companys management, the accompanying unaudited condensed financial statements reflect all adjustments (consisting of normal and recurring adjustments) considered necessary to present fairly the Companys financial position, results of operations and cash flows for all periods presented. The results of operations for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results to be expected for the year ending December 31, 2008 or any other interim period or for any other future year.
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Note 2 Short-Term Investments
Short-term investments are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investment in Debt and Equity Securities. Management determines the classification of its investments in marketable debt and equity securities at the time of purchase and reevaluates such determinations as of each balance sheet date. As of June 30, 2008, all marketable securities covered by SFAS No. 115, were designated as available-for-sale. Securities available-for-sale are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a separate component of shareholders equity classified as other comprehensive income. Realized gains and losses and declines in market value judged to be other than temporary, of which there were none for the period ended June 30, 2008, are included in other income. The unrealized loss of $220,000 relates to short-term investments held less than one year. Interest and dividends are also included in other income. Our short-term investments consist of auction rate tax-exempt securities and corporate and government bonds with maturities with one to four years. The Companys investments in corporate and government bonds, have maturities past one year, however, the company classifies these investments as available-for-sale and therefore has classified them as short-term securities. Should management determine that these securities were to be held longer than one year then they would be classified as long-term securities.
Auction rate securities are variable rate debt securities. While the underlying security has a long-term nominal maturity, the interest rate is reset through auctions that are typically held every 7, 28, or 35 days. The securities trade at par and are callable at par on any interest payment date at the option of the issuer. Interest is paid at the end of each auction period. We classify these securities as short-term because we intend to liquidate them as the need for working capital arises in the ordinary course of business and we are able to liquidate them or roll them over to the next reset period. During the first three months of the year the Company determined to liquidate its holdings of variable rate debt securities and in January and February 2008 it sold approximately 90% of its auction rate tax-exempt securities portfolio at par and reinvested the proceeds in high-grade corporate debt, governmental debt instruments and money market funds. The remaining balance of $3 million will be sold as the market allows.
In September 2007, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157. Among other requirements, SFAS 157 defines fair value and establishes a framework for measuring fair value and also expands disclosure about the use of fair value to measure assets and liabilities. SFAS 157 is effective beginning the first fiscal year that begins after November 15, 2007. The Company adopted SFAS 157 during the first quarter of 2008. Although the adoption of SFAS 157 did not materially impact our financial condition, results of operations, or cash flows, we are now required to provide additional disclosures as part of our financial statements.
SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of June 30, 2008, the Company held certain assets that are required to be measured at fair value on a recurring basis, including money market funds and available-for-sale securities. The Companys available-for-sale securities include auction-rate securities which consist of municipal bonds with an auction reset feature whose underlying assets are state municipal bonds which are substantially backed by the federal government. As a result of failed auctions, these securities are currently illiquid through the normal auction process. As a result, quoted market prices and other observable market data are not available or diminished. Accordingly, these investments were valued using pricing models based on the net present value of estimated future cash flows as of June 30, 2008. These securities were also compared, when possible, to other observable market data with similar characteristics to the securities held by the Company.
The Companys financial assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 at June 30, 2008, were as follows (in thousands):
Note 3 Inventories
Inventories are composed of the following:
Inventories are shown net of allowances for obsolescence of $123,354, and $299,059 at June 30, 2008, and December 31, 2007, respectively.
Note 4 Related Parties
a. Transactions with related parties:
Historically, the Company has purchased a majority of its cores for heat exchangers from its Parent. In January 2007, the Company entered into a manufacturing agreement in which it is required to purchase all cores required for its heat exchangers from its Parent through January 31, 2017. Heat exchangers not manufactured by the Parent may be purchased from other vendors, including Hamilton Sundstrand.
Parent company payables as of June 30, 2008 and December 31, 2007 were $1,952,000 and $1,762,000 respectively. Purchases from the Parent include cores and related products and insurance costs Parent company payables are unsecured and provide for no interest payments and are generally paid within 60 days.
Note 5- Net Income Per Share
The consolidated statements of income present basic and diluted net income per share. Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earning per share considers the potential effect of dilution on basic earning per share assuming potentially dilutive securities that meet certain criteria, such as stock options, were outstanding since issuance. The treasury stock method is used to determine the dilutive effect of potentially dilutive securities. There are 348,000 options outstanding that were anti-dilutive at June 30, 2008 and there are no warrants outstanding as of June 30, 2008.
The following table reconciles basic shares outstanding to diluted shares outstanding:
Note 7 Employee Share Based Compensation
The Company entered into a share based compensation agreement with its CEO during August 2005. The compensation agreement is made up of 45,000 Phantom Stock options and other stock options to be issued upon the completion of an IPO by the Company.
The Phantom Stock options had an exercise price of $6.37. At the date of exercise, the CEO received a cash payment for the difference between the exercise price and the average price of the Parents stock price for the 60 days preceding the exercise date. At June 30, 2007, the Company recorded compensation expense of $320,511 related to the Phantom stock. The Company recorded a liability related to the Phantom Stock Options of $265,987 as of June 30, 2007. All of the Phantom Stock Options were exercised by December 31, 2007.
Effective as of July 19, 2007, the date of our initial public offering, the Company established an incentive compensation plan, or the 2007 plan, under which it may issue options to purchase up to 600,000 shares of its common stock. The options vest in three equal annual installments, except for 66,000 options that vest in four equal semi-annual installments. Options generally expire five to ten years from date of grant.
Compensation expense attributable to outstanding stock options was $(70,786) and $131,214, for the three and six months ended June 30, 2008, respectively. Compensation expense was negative for the three months ended June 30, 2008, as actual forfeitures exceeded the Companys expectations. As of June 30, 2008, the total unrecognized compensation cost related to non-vested stock awards was $1.4 million and the weighted average period over which the cost is expected to be recognized is approximately 2.8 years.
A summary of our stock option plan as of June 30, 2008, is presented below:
The weighted average grant date fair value of the stock options granted during the six months ended June 30, 2008 was $2.16. There were 15,000 stock options granted during the three months ended June 30, 2008. These options had a weighted average grant date fair value of $2.16.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
Note 8 Segment Reporting
The Company evaluates segment performance based on revenue and operating income. The operating income reported in our segments excludes corporate and other unallocated amounts. Although such amounts are excluded from the business segment results, they are included in
reported consolidated earnings. Corporate and unallocated amounts include executive level expenses and expenses related to our accounting and finance, human resources and information technology departments.
The following financial information is the information that management uses for analyzing the results. The figures are presented in consolidated method as presented to management.
The following financial information is a summary of the operating income of each operational segment:
Note 9 Recently Issued Accounting Standards
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 establishes a fair value option permitting entities to elect the option to measure eligible financial instruments and certain other items at fair value on specified election dates. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The fair value option may be applied on an instrument-by-instrument basis, with a few exceptions, is irrevocable and is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective for
annual periods beginning after November 15, 2007 and for certain provisions for annual periods beginning after November 15, 2008, and should not be applied retrospectively to fiscal years beginning prior to the effective date. On the adoption date, an entity may elect the fair value option for eligible items existing at that date and the adjustment for the initial remeasurement of those items to fair value should be reported as a cumulative effect adjustment to the opening balance of retained earnings. We are currently assessing whether to apply the provisions of SFAS No. 159 to eligible financial instruments in place on the adoption date and the related impact on our financial statements. This statement became applicable to the Company as of the year beginning January 1, 2008, and the Company did not elect to apply SFAS 159 to its financial assets and liabilities. Therefore the adoption of SFAS 159 has had no impact on the Companys financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)). SFAS 141(R) expands the definition of transactions and events that qualify as business combinations; requires that the acquired assets and liabilities, including contingencies, be recorded at the fair value determined on the acquisition date and changes thereafter reflected in revenue, not goodwill; changes the recognition timing for restructuring costs; and requires acquisition costs to be expensed as incurred. Adoption of SFAS 141(R) is required for annual periods beginning after December 15, 2008. Early adoption and retroactive application of SFAS 141(R) to fiscal years preceding the effective date are not permitted. The adoption of SFAS 160 is not expected to have a material impact on our Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements (SFAS 160). SFAS 160 re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and requires the classification of minority interests as a component of equity. Under SFAS 160, a change in control will be measured at fair value, with any gain or loss recognized in earnings. The effective date for SFAS 160 is for annual periods beginning on or after December 15, 2008. Early adoption and retroactive application of SFAS 160 to fiscal years preceding the effective date are not permitted. The adoption of SFAS 160 is not expected to have a material impact on our Consolidated Financial Statements.
In March 2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivative Instruments and Hedging Activities, as an amendment to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of SFAS 161 is not expected to have a material impact on our Consolidated Financial Statements.
Note 10 Impairment of Long Lived Assets
The Company reviews long-lived assets, including intangible assets and goodwill, for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest the remaining value may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As of June 30, 2008 the Company has experienced a significant drop in market capitalization. The Company has evaluated this change and feels at the current time that the entire MRO market is down due
to economic pressures related to fuel costs in the market place and that this is not a significant drop of real value to the Company since MRO sales continue to be up for the Company. Management reviews its goodwill and intangibles each year for impairment.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Prior to our initial public offering on July 18, 2007, we operated as a wholly-owned subsidiary of TAT Technologies. We were incorporated in Delaware on February 28, 2007 as a successor to Limco-Airepair, Inc., which was incorporated as an Oklahoma corporation in 1995 upon the merger of three aerospace companies that had been acquired by TAT Technologies from 1992 through 1995. Prior to the consolidation of Limco-Airepair, Inc. into our company, the Company transferred all of its assets and liabilities associated with its Oklahoma operations to our wholly-owned subsidiary, Limco-Airepair Inc., a newly formed Delaware corporation.
Prior to our acquisition of Piedmont in July 2005, our business was focused on providing MRO services for heat transfer components. With the acquisition of Piedmont, we expanded the scope of our MRO services to also include APUs, propellers and landing gear and added our parts services business.
Our consolidated financial statements have been prepared on the historical cost basis and present our financial position, results of operations and cash flows as derived from TAT Technologies historical financial statements. TAT Technologies has historically provided us with certain services including general and administrative services for employee benefit programs, insurance, legal, treasury and tax compliance. Currently, TAT Technologies provides certain insurance coverages that are then reimbursed by the Company. The financial information included in our financial statements does not necessarily reflect what our financial position and results of operations would have been had we operated as a stand-alone entity during the periods covered, and may not be indicative of our future operations or financial position.
We provide maintenance, repair and overhaul, or MRO, services and parts supply services to the aerospace industry. Our four FAA certified repair stations provide aircraft component MRO services for airlines, air cargo carriers, maintenance service centers and the military. We specialize in MRO services for components of aircraft, such as heat transfer components, auxiliary power units, or APUs, propellers, landing gear and pneumatic ducting. In conjunction with our MRO services we are also an original equipment manufacturer, or OEM, of heat transfer equipment for airplane manufacturers and other selected related products. Our parts services division offers inventory management and parts services for commercial, regional and charter airlines and business aircraft owners.
We provide services for the components segment of the MRO services market. Our MRO services segment includes the repair and overhaul of heat transfer components, APUs, propellers, landing gear and pneumatic ducting, among other components. Generally, manufacturer specifications, government regulations and military maintenance regimens require that aircraft components undergo MRO servicing at regular intervals or as necessary. Aircraft components typically require MRO services, including repairs and installation of replacement units, after three to five years of service or sooner if required. Aircraft manufacturers typically provide warranties on new aircraft and their components and subsystems, which may range from one to five years depending on the bargaining power of the purchaser.
Warranty claims are generally the responsibility of the OEM during the warranty period. Our business opportunity usually begins upon the conclusion of the warranty period for these components and subsystems.
We are licensed by Hamilton Sundstrand, a leading provider of aerospace products, to provide MRO services for all of their air-to-air heat transfer products and by Honeywell Aerospace, or Honeywell, a leading manufacturer of aerospace products and an aerospace services provider, to provide MRO services for three of their APU models. Our repair stations are certified by the FAA and the European Aviation Safety Agency, or EASA. In conjunction with our MRO services, we also manufacture heat transfer equipment used in commercial, regional, business and military aircraft, complete environmental control systems and cooling systems for electronics.
Our parts services division provides a number of services for commercial, regional and charter airlines and business aircraft owners, including inventory management and parts services. We presently assist several of these customers with their parts procurement needs by using our knowledge of the aircraft component industry to quickly acquire necessary aircraft components in a cost-effective manner. We have a knowledgeable and experienced staff of 10 customer service representatives and offer our customers 24 hour service and same day shipping. We currently supply parts to approximately 500 commercial, regional and charter airlines and business aircraft owners.
Our management believes that our revenues and sources of revenues are among the key performance indicators for our business. Our revenues from our two principal lines of business for the three and six months ended June 30, 2008 and 2007 were as follows:
The following table reflects the geographic breakdown of our revenues for each of the three month and six month periods ended June 30, 2008 and 2007:
Our cost of revenues for MRO services consists of component and material costs, direct labor costs, shipping expenses, overhead related to manufacturing and depreciation of manufacturing equipment. Our cost of revenues for parts services consists primarily of the cost of the parts and shipping expenses. Our gross margin is affected by the proportion of our revenues generated from MRO services (including the sale of OEM products) and parts services. Our revenues from MRO services generally have higher gross margins than our parts services.
Selling and marketing expenses consist primarily of commission payments, compensation and related expenses of our sales teams, attendance at trade shows and advertising expenses and related costs for facilities and equipment.
General and administrative expenses consist of compensation and related expenses for executive, finance, legal and administrative personnel, professional fees and other general corporate expenses and related costs for facilities and equipment.
Subsequent to the second quarter, the company was awarded or provided purchase orders for a total of $7 million in additional business that will add to our backlog for 2009 and beyond. We were awarded a follow on contract to overhaul F-16 heat exchangers for the US Airforce. We also have new orders for V22 Osprey Oil Coolers that are used by the US Marines and the Navy and for heat exchangers used on the Patriot missile launcher.
At our Piedmont facilities we have made our first deliveries on the Air Wisconsin contract and continue to get business for our parts logistics segment. Weve been qualified to overhaul the Honeywell 331 APUs which will allow for future growth in this area. These locations were also awarded the OneAero Top Shop Award 2008 for the Best APU Shop.
At Limco-Airepair, we have recently been invited to bid on significant new business from domestic and international operators. These opportunities are driven by North American operators continued search for savings and the strength of global currencies versus the dollar. We expect these trends to continue and drive additional growth in 2008 and beyond.
We intend to capitalize on these opportunities and will aggressively market our services, manage our operations efficiently and will seek synergistic acquisitions.
Critical Accounting Policies
The preparation of the financial statements in accordance with generally accepted accounting principles in the United States, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, costs and expenses and related disclosures. Though we evaluate our estimates and assumptions on an ongoing basis, our actual results may differ from these estimates. For a more detailed discussion of our critical accounting policies we refer you to our 10K for the year ended December 31, 2007 and filed with the Securities and Exchange Commission.
Results of Operations
The following table sets forth our statements of operations as a percentage of revenues for the periods indicated:
In addition to revenues and the sources of our revenues, our management team views our gross profit margin and the level of inventory compared to revenues as the key performance indicators in assessing our companys financial condition and results of operations. Our management team believes that the upward trend in our MRO revenues is reflective of an industry-wide increase in demand for MRO services, and we currently expect that this trend will continue for the foreseeable future. While our management team believes that demand for parts services will also continue to grow, this segment is subject to a high degree of volatility because of the potential impact of large one time parts purchases.
Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007
Revenues. Total revenues decreased by $365,000, to $17.7 million for the three months ended June 30, 2008 from $18.0 million for the three months ended June 30, 2007. The decrease in revenues was primarily attributable to slower than anticipated parts sales offset by growth in MRO revenues.
MRO Revenues. Revenues from MRO services increased by $619,000, to $13.2 million for the three months ended June 30, 2008 from $12.6 million for the three months ended June 30, 2007. The organic growth in MRO services revenues for the three months ended June 30, 2008 is a result of increased sales to historical customers and, to a lesser degree, sales to new customers.
Parts Services. Parts services revenues decreased by $984,000, to $4.5 million for the three months ended June 30, 2008 from $5.4 million for the three months ended June 30, 2007. This decrease in sales is attributable to the sporadic sales environment for parts.
Cost of revenues. Cost of revenues increased by $2.4 million, to $14.7 million for the three months ended June 30, 2008 from $12.3 million for the three months ended June 30, 2007. Contributing to the increase in cost of revenues for MRO services was an increase in raw material costs and labor costs. Cost of revenues for parts services decreased by $202,000, to $3.6 million for the three months ended June 30, 2008 from $3.8 million for the three months ended June 30, 2007, principally as a result of our decreased parts revenues.
Selling and marketing expenses. Selling and marketing expenses decreased by $2,000 to $660,000 for the three months ended June 30, 2008 from $662,000 for the three months ended June 30, 2007. The decrease in selling and marketing expenses is primarily attributable to commissions fluctuations offset by heightened sales and marketing efforts.
General and administrative expenses. General and administrative expenses decreased by $688,000 to $1.5 million for the three months ended June 30, 2008 from $2.1 million for the three months ended June 30, 2007. The decrease in general and administrative expenses is primarily attributable to a phantom stock expense for the companys CEO, that was recorded during the three months ended June 30, 2007. Non-cash
compensation expense was $(71,000) and included in general and administrative expenses during the second quarter of 2008 compared to none in the second quarter of 2007.
Operating income. Our operating income decreased by $2.1 million, to $719,000 for the three months ended June 30, 2008 from $2.8 million for the three months ended June 30, 2007. The decrease is attributable primarily to lower sales revenues from parts.
Interest income. Interest income increased by $7,000 to $224,000 for the three months ended June 30, 2008 from $217,000 for the three months ended June 30, 2007, principally as a result of an increase in the amount of funds held in interest bearing accounts and short term investments following our initial public offering. We expect that our interest income for the remainder of 2008 will increase as a result of the investment of a significant portion of the proceeds of our initial public offering in short term investments.
Interest and financing expense. Interest expense was zero for the three months ended June 30, 2008 compared to $384,000 for the three months ended June 30, 2007. The decrease in interest expense reflects our repayment of our outstanding indebtedness with a portion of the proceeds of our initial public offering during 2007.
Income taxes. Income taxes decreased by $751,000, to $338,000 for the three months ended June 30, 2008 from $1.1 million for the three months ended June 30, 2007. The decrease in income tax expense is primarily attributable to our short-term tax free investments and our determination that our overall effective tax rate is lower because of these investments and the results discussed above.
Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007
Revenues. Total revenues decreased by $3.5 million, to $34.8 million for the six months ended June 30, 2008 from $38.3 million for the six months ended June 30, 2007. The decrease in revenues was primarily attributable to slower than anticipated parts sales offset by growth in MRO revenues. During the first quarter of 2007 there was a one-time parts sale to Viva Aerobus for $2.7 million.
Revenues from MRO services increased by $1.2 million, to $26.2 million for the six months ended June 30, 2008 from $25.0 million for the six months ended June 30, 2007. The organic growth in MRO services revenues for the six months ended June 30, 2008, is a result of increased sales to historical customers and, to a lesser degree, sales to new customers.
Parts services revenues decreased by $4.6 million, to $8.6 million for the six months ended June 30, 2008 from $13.2 million for the six months ended June 30, 2007. The decrease in parts sales is primarily attributable to a one-time purchase of $2.7 million during the first three months of 2007 by Viva Aerobus, a Mexican airline and decreased purchases by existing customers.
Cost of revenues. Cost of revenues for MRO and Parts Services decreased by $19,000, to $27.7 million for the six months ended June 30, 2008 from $27.7 million for the six months ended June 30, 2007. Contributing to the decrease in cost of revenues for MRO services was a decrease in the sales of parts offset by increase in the costs of parts used for this activity, higher wages paid to our plant workers in an effort to reduce turnover and to attract new employees, and the mix of MRO services during the quarter. Cost of revenues for parts services decreased by $3.9 million, to $6.9 million for the six months ended June 30, 2008 from $10.8 million for the six months ended June 30, 2007, principally as a result of our decreased parts revenues and the one time sale to Viva Mexico during the first six months of 2007.
Selling and marketing expenses. Selling and marketing expenses increased by $124,000 to $1.4 million for the six months ended June 30, 2008 from $1.3 million for the six months ended June 30, 2007. The increase in selling and marketing expenses is primarily attributable to heightened sales and marketing efforts, offset by lower commissions incurred.
General and administrative expenses. General and administrative expenses decreased by $484,000, to $3.4 million for the six months ended June 30, 2008 from $3.8 million for the six months ended June 30, 2007. The decrease in general and administrative expenses is primarily attributable to a phantom Stock expense for the Companys CEO, that was recorded during the six months ended June 30, 2007. Non-cash stock based compensation expense of $131,000 included in general and administrative expenses compared to none in the first six months of 2007.
Operating income. Our operating income decreased by $3.0 million, to $2.1 million for the six months ended June 30, 2008 from $5.2 million for the six months ended June 30, 2007. The decrease is attributable primarily to lower sales revenues from parts due to a one-time sale during the first quarter of 2007.
Interest income. Interest income increased by $125,000 to $396,000 for the six months ended June 30, 2008 from $271,000 for the six months ended June 30, 2007, principally as a result of an increase in the amount of funds held in interest bearing accounts and short term investments following our initial public offering. We expect that our interest income for the remainder of 2008 will increase as a result of the investment of a significant portion of the proceeds of our initial public offering in short term investments.
Interest and financing expense. Interest expense was zero for the six months ended June 30, 2008 compared to $541,000 for the six months ended June 30, 2007. The decrease in interest expense reflects our repayment of our outstanding indebtedness with a portion of the proceeds of our initial public offering during 2007.
Income taxes. Income taxes decreased by $1.0 million to $915,000 for the six months ended June 30, 2008 from $1,942,000 for the six months ended June 30, 2007. The decrease in income tax expense is primarily attributable to the discussion above, our short-term tax free investments and our determination that our overall effective tax rate is lower because of these investments.
Liquidity and Capital Resources
As of June 30, 2008, we had cash and cash equivalents of $8.8 million, and short-term investments of $21.6 million, consisting primarily of government and corporate bonds and auction rate tax exempt securities. Our total working capital was approximately $53.8 million. Our liquidity position resulted from the July 23, 2007, sale of 4,205,000 shares of common stock in our initial public offering from which we received net proceeds of approximately $42 million.
The following table summarizes our cash flows for the periods presented:
Net cash used in operating activities was $3.1 million for the six months ended June 30, 2008. This amount was primarily attributable to a $4.1 million increase in inventories required to support the increase in MRO revenues and the ramp up for a new parts contract, a $846,000 decrease in accounts payable, offset in part by $1.6 million in net income, a $190,000 increase in amounts payable to TAT Technologies for the purchase of heat transfer components and $680,000 of depreciation and amortization expense.
Net cash provided by investing activities was $7.2 million for the six months ended June 30, 2008. We sold approximately $6.6 million in corporate and municipal bonds and auction rate securities that were reinvested in money markets. We invested $1.1 for the purchase of property and equipment, including test facilities for our APUs.
Net cash provided by financing activities was $744,000 for the six months ended June 30, 2008.
The following table summarizes our minimum contractual obligations and commercial commitments as of June 30, 2008 and the effect we expect them to have on our liquidity and cash flow in future periods:
As of June 30, 2008, our principal commitments consisted of obligations outstanding under operating leases and our deferred tax liability. All of our long-term debt was repaid during 2007 with a portion of the proceeds of our initial public offering. We currently do not have significant capital spending or purchase commitments. In the last three years, we have experienced substantial increases in our expenditures as a result of the growth in our operations and personnel. We intend to increase our expenditures in the future consistent with our anticipated growth. We anticipate that our cash resources will be used primarily to fund our operating activities, as well as for capital expenditures and acquisitions.
We expect that we will have additional capital expenditures during 2008 of approximately $100,000, primarily for expanded capabilities and capacity for our MRO services. We expect that our cash flow from operations will be sufficient to fund these capital expenditures.
Over the next 12 months, we expect cash flows from our operating activities, along with our existing cash and cash equivalents and marketable securities, to be sufficient to fund our operations. We intend to assess the need for a long-term line of credit, but do not believe that the current lack of an external source of long-term liquidity will have a material adverse effect on our business or results of operations.
Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our selling and marketing activities, costs associated with expansion into new markets, and the timing of the introduction of new products and services.
We believe that the growth of our business over the last two years has masked a historical seasonal trend in the MRO services sector. Historically, we have seen many airlines decrease their maintenance requirements in the peak air travel summer months and increase their maintenance requirements in the winter months when air travel is not as great.
Off-balance sheet arrangements
As of June 30, 2008, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SECs Regulation S-K.
Recent Accounting Pronouncements
For a discussion of applicable new accounting pronouncements see Note 9 to our Unaudited Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risks
Our exposure to foreign exchange risk primarily relates to our sales to offshore clients. We do not believe that we currently have any significant direct foreign exchange risk since such sales are denominated in dollars.
We repaid our outstanding debt of $8 million as of June 30, 2007 that was due to our bank and parent company with a portion of the proceeds of our initial public offering. We invested the remaining net proceeds of the offering in corporate and government bonds and auction rate securities that are tax exempt. Our results of operations and cash flows will be subject to fluctuations due to changes in the interest rates applicable to our investments. We do not presently intend to use interest rate derivative instruments to manage our exposure to interest rate changes.
Item 4. Controls and Procedures
Our management, including our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by our company in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information was made known to them by others within the company, as appropriate to allow timely decisions regarding required disclosure.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Controls over Financial Reporting
There were no changes to our internal controls over financial reporting that occurred during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments to the legal proceedings disclosed under Part I, Item 3, Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2007.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed under Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We sold 4,205,000 of our shares of common stock in our initial public offering on July 19, 2007. The aggregate offering price of the shares sold was $46.3 million. The total expenses of the offering were approximately $4.8 million. None of such expenses were paid directly or indirectly to directors, officers, or persons owning 10% or more of any class of equity securities of our company or to our affiliates. The net public offering proceeds to us, after deducting the total expenses were approximately $41.5 million. Such proceeds have been used to repay approximately $4.0 million in debt owed to TAT Technologies and $4.0 million in debt owed to Bank Leumi USA, and $2.2 million was used for the purchase of capital equipment and inventory. The remaining proceeds have been invested in cash, cash equivalents and short- term investments. As of June 30, 2008, we had $8.8 million in cash and cash equivalents and $21.6 million in short-term investments.
For more information on the use of proceeds from our initial public offering, see Liquidity and Capital Resources and notes to our financial statements included in this report on Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
(i) A proposal to elect the above mentioned directors for a one year term ending upon the annual meeting of shareholders to be held in 2009 and until their successors are duly elected and qualified was approved with the following vote:
(ii) A proposal to appoint Virchow, Krause & Company, LLP as the Companys independent registered accounting firm for the fiscal year ending December 31, 2008 was approved with 12,665,943 votes for; 1,921 against and 500 withheld.
Item 6. Exhibits
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 14, 2008