SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26582
WORLD AIR HOLDINGS, INC.
| DELAWARE (State or other jurisdiction of incorporation or organization) |
20-2121036 (I.R.S. Employer Identification Number) |
The HLH Building, 101 World Drive, Peachtree City, GA 30269
(Address of principal executive offices)
(770) 632-8002
(Registrant’s telephone number, including area code)
World Airways, Inc.
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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
The number of shares of the registrant’s Common Stock outstanding on May 2, 2005 was approximately 23,515,000.
WORLD AIR HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
TABLE OF CONTENTS
2
ITEM 1. FINANCIAL STATEMENTS
WORLD AIR HOLDINGS, INC.
ASSETS
(in thousands)
(unaudited)
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 76,182 | $ | 49,956 | ||||
Restricted cash |
4,160 | 4,926 | ||||||
Accounts receivable, less allowance for doubtful accounts
of $209 at March 31, 2005 and December 31, 2004 |
46,607 | 52,382 | ||||||
Prepaid expenses and other current assets |
6,977 | 8,335 | ||||||
Deferred tax assets |
5,836 | 6,685 | ||||||
Total current assets |
139,762 | 122,284 | ||||||
EQUIPMENT AND PROPERTY |
||||||||
Flight and other equipment |
85,430 | 84,514 | ||||||
Less: accumulated depreciation and amortization |
52,737 | 51,321 | ||||||
Net equipment and property |
32,693 | 33,193 | ||||||
LONG-TERM DEPOSITS |
18,079 | 18,237 | ||||||
OTHER ASSETS AND DEFERRED CHARGES, NET |
4,905 | 5,603 | ||||||
TOTAL ASSETS |
$ | 194,629 | $ | 179,317 | ||||
(Continued)
3
WORLD AIR HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND STOCKHOLDERS’ EQUITY
(in thousands except share amounts)
(unaudited)
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
CURRENT LIABILITIES |
||||||||
Current maturities of long-term debt |
$ | 6,000 | $ | 6,000 | ||||
Accounts payable |
36,758 | 35,482 | ||||||
Current portion of accrued rent |
8,414 | 5,489 | ||||||
Current portion of deferred rent |
548 | 3,242 | ||||||
Unearned revenue |
8,730 | 6,293 | ||||||
Accrued maintenance |
4,238 | 4,179 | ||||||
Accrued salaries, wages and profit sharing |
20,631 | 20,463 | ||||||
Accrued taxes |
9,058 | 8,482 | ||||||
Other accrued liabilities |
2,516 | 1,861 | ||||||
Total current liabilities |
96,893 | 91,491 | ||||||
Long-term debt, net of current maturities |
24,000 | 43,879 | ||||||
Deferred gain from sale-leaseback transactions, net of
accumulated amortization of $4,552 at March 31, 2005
and $4,269 at December 31, 2004 |
1,362 | 1,645 | ||||||
Accrued post-retirement benefits |
4,206 | 4,081 | ||||||
Accrued and deferred rent, net of current portion |
3,095 | 5,615 | ||||||
Deferred income taxes |
2,221 | 2,208 | ||||||
TOTAL LIABILITIES |
131,777 | 148,919 | ||||||
STOCKHOLDERS’ EQUITY |
||||||||
Preferred stock, $.001 par value (5,000,000 shares authorized;
no shares issued or outstanding) |
— | — | ||||||
Common stock, $.001 par value (100,000,000 shares authorized;
24,591,695 shares issued and 23,510,452 shares outstanding at
March 31, 2005; 17,430,023 shares issued and 16,348,780 shares
outstanding at December 31, 2004) |
25 | 18 | ||||||
Additional paid-in capital |
65,261 | 42,712 | ||||||
Retained earnings |
10,423 | 525 | ||||||
Treasury stock, at cost (1,081,243 shares at March 31, 2005 and
December 31, 2004) |
(12,857 | ) | (12,857 | ) | ||||
Total stockholders’ equity |
62,852 | 30,398 | ||||||
COMMITMENTS AND CONTINGENCIES |
— | — | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 194,629 | $ | 179,317 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
WORLD AIR HOLDINGS, INC.
| 2005 | 2004 | |||||||
REVENUES |
||||||||
Flight operations |
$ | 159,020 | $ | 129,019 | ||||
Other |
529 | 565 | ||||||
Total revenues |
159,549 | 129,584 | ||||||
OPERATING EXPENSES |
||||||||
Flight |
45,169 | 40,802 | ||||||
Maintenance |
24,955 | 17,856 | ||||||
Aircraft costs |
20,929 | 19,671 | ||||||
Fuel |
30,471 | 18,202 | ||||||
Flight operations subcontracted to other carriers |
508 | 1,518 | ||||||
Commissions |
8,859 | 6,300 | ||||||
Depreciation and amortization |
1,455 | 1,287 | ||||||
Sales, general and administrative |
10,025 | 10,309 | ||||||
Total operating expenses |
142,371 | 115,945 | ||||||
OPERATING INCOME |
17,178 | 13,639 | ||||||
OTHER INCOME (EXPENSE) |
||||||||
Interest expense |
(985 | ) | (1,542 | ) | ||||
Interest income |
269 | 122 | ||||||
Other, net |
(203 | ) | (633 | ) | ||||
Total other income (expense) |
(919 | ) | (2,053 | ) | ||||
EARNINGS BEFORE INCOME TAX EXPENSE |
16,259 | 11,586 | ||||||
INCOME TAX EXPENSE |
6,361 | 3,711 | ||||||
NET EARNINGS |
$ | 9,898 | $ | 7,875 | ||||
BASIC EARNINGS PER SHARE |
||||||||
Net earnings |
$ | 0.52 | $ | 0.69 | ||||
Weighted average shares outstanding |
19,024 | 11,448 | ||||||
FULLY DILUTED EARNINGS PER SHARE |
||||||||
Net earnings |
$ | 0.38 | $ | 0.34 | ||||
Weighted average shares outstanding |
26,786 | 24,434 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
5
WORLD AIR HOLDINGS, INC.
| Additional | Total | |||||||||||||||||||
| Common | Paid-in | Retained | Treasury Stock, | Stockholders’ | ||||||||||||||||
| Stock | Capital | Earnings | at Cost | Equity | ||||||||||||||||
Balances at December 31, 2004 |
$ | 18 | $ | 42,712 | $ | 525 | $ | (12,857 | ) | $ | 30,398 | |||||||||
Amortization of warrants |
— | 46 | — | — | 46 | |||||||||||||||
Exercise of 425,025 stock options |
— | 516 | — | — | 516 | |||||||||||||||
Exercise of warrants for 1,076,345
shares |
1 | 2,499 | — | — | 2,500 | |||||||||||||||
Issuance of 5,660,302 shares for
debt conversions |
6 | 18,578 | — | — | 18,584 | |||||||||||||||
Tax benefit of stock option exercises |
— | 910 | — | — | 910 | |||||||||||||||
Net earnings and comprehensive
earnings |
— | — | 9,898 | — | 9,898 | |||||||||||||||
Balances at March 31, 2005 |
$ | 25 | $ | 65,261 | $ | 10,423 | $ | (12,857 | ) | $ | 62,852 | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
6
WORLD AIR HOLDINGS, INC.
| 2005 | 2004 | |||||||
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD |
$ | 49,956 | $ | 30,535 | ||||
CASH FLOWS
FROM OPERATING ACTIVITIES |
||||||||
Net earnings |
9,898 | 7,875 | ||||||
Adjustments to reconcile net earnings to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
1,455 | 1,287 | ||||||
Deferred gain recognition |
(283 | ) | (283 | ) | ||||
Loss on disposals of equipment and property |
32 | 311 | ||||||
Tax benefit of stock option exercises |
910 | — | ||||||
Amortization of warrants and debt issuance costs |
455 | 496 | ||||||
Deferred income taxes |
709 | — | ||||||
Provision for doubtful accounts |
— | 841 | ||||||
Other |
(43 | ) | (35 | ) | ||||
Changes in current operating assets and liabilities: |
||||||||
Accounts receivable |
5,775 | (6,895 | ) | |||||
Restricted cash |
766 | 18,602 | ||||||
Deposits, prepaid expenses and other assets |
1,516 | 1,758 | ||||||
Accounts payable, accrued expenses and other liabilities |
570 | 5,519 | ||||||
Unearned revenue |
2,437 | 826 | ||||||
Net cash provided by operating activities |
24,197 | 30,302 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchases of equipment and property |
(987 | ) | (459 | ) | ||||
Proceeds from disposals of equipment and property |
— | 2 | ||||||
Net cash used in investing activities |
(987 | ) | (457 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Repayment of debt |
— | (18,000 | ) | |||||
Proceeds from exercise of stock options |
516 | 32 | ||||||
Proceeds from exercise of warrants |
2,500 | — | ||||||
Payment of debt issuance costs |
— | (499 | ) | |||||
Net cash provided by (used in) financing activities |
3,016 | (18,467 | ) | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
26,226 | 11,378 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 76,182 | $ | 41,913 | ||||
SUPPLEMENTAL
INFORMATION: |
||||||||
Interest paid |
$ | 401 | $ | 799 | ||||
Income taxes paid |
$ | 4,590 | $ | 534 | ||||
Non-cash
Financing Activities: |
||||||||
The conversion of the Company’s convertible senior subordinated debentures |
$ | 18,113 | $ | — | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
7
WORLD AIR HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| 1. | Basis of Presentation | |||
| The unaudited Condensed Consolidated Financial Statements include the accounts of World Air Holdings, Inc. (“World Air Holdings” or the “Company”) and its wholly-owned subsidiaries, World Airways, Inc. (“World Airways”) and World Risk Solutions, Ltd. (“World Risk Solutions”). World Airways Parts Company LLC is a wholly-owned subsidiary of World Airways. All significant inter-company accounts and transactions have been eliminated. | ||||
| Management believes that all adjustments necessary for a fair statement of results have been included in the unaudited Condensed Consolidated Financial Statements for the interim periods presented. The 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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the year ending December 31, 2005. | ||||
| The Condensed Consolidated Balance Sheet for December 31, 2004 is derived from the Consolidated Financial Statements included in the Company’s 2004 Form 10-K. These interim period Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Consolidated Financial Statements contained in World Air Holdings’ Annual Report on Form 10-K for the year ended December 31, 2004. | ||||
| Certain items in prior year financial statements included herein have been reclassified to conform to the 2005 financial statement presentation | ||||
| 2. | Long-Term Operating Deposits | |||
| Long-term operating deposits of $18.1 million at March 31, 2005 consisted of aircraft and engine (flight equipment) deposits of $17.7 million and building and miscellaneous deposits of $0.4 million. At December 31, 2004, long-term operating deposits of $18.2 million consisted of aircraft and engine deposits of $17.8 million and building and miscellaneous deposits of $0.4 million. | ||||
| 3. | Earnings per Share | |||
| Basic earnings per share are computed by dividing net earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share include the effects of common equivalent shares outstanding during the period. The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share data): | ||||
| Three Months Ended March 31, 2005 | ||||||||||||
| Earnings | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
Basic EPS |
||||||||||||
Earnings available to common stockholders |
$ | 9,898 | 19,024 | $ | 0.52 | |||||||
Effect of Dilutive Securities |
||||||||||||
Warrants |
— | 2,190 | ||||||||||
Options |
— | 1,519 | ||||||||||
8% convertible debentures |
163 | 4,053 | ||||||||||
Profit sharing |
(13 | ) | — | |||||||||
Amortization of debt issuance costs |
35 | — | ||||||||||
Aircraft lease restructuring fees |
(28 | ) | — | |||||||||
Diluted EPS |
||||||||||||
Earnings available to common stockholders
plus assumed conversions |
$ | 10,055 | 26,786 | $ | 0.38 | |||||||
8
| Three Months Ended March 31, 2004 | ||||||||||||
| Earnings | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
Basic EPS |
||||||||||||
Earnings available to common stockholders |
$ | 7,875 | 11,448 | $ | 0.69 | |||||||
Effect of Dilutive Securities |
||||||||||||
Warrants |
— | 1,946 | ||||||||||
Options |
— | 2,435 | ||||||||||
8% convertible debentures |
394 | 8,605 | ||||||||||
Profit sharing |
(8 | ) | — | |||||||||
Amortization of debt issuance costs |
42 | — | ||||||||||
Aircraft lease restructuring fees |
(45 | ) | — | |||||||||
Diluted EPS |
||||||||||||
Earnings available to common stockholders
plus assumed conversions |
$ | 8,258 | 24,434 | $ | 0.34 | |||||||
| 4. | Accounting for Stock-Based Compensation | |||
| At March 31, 2005, the Company had three stock-based compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net earnings for the quarter ended March 31, 2005, as all options granted during those periods had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (in thousands, except per share data): | ||||
| Quarter Ended March 31 , | ||||||||
| 2005 | 2004 | |||||||
Net earnings, as reported |
$ | 9,898 | $ | 7,875 | ||||
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects |
(185 | ) | (103 | ) | ||||
Pro forma net earnings |
$ | 9,713 | $ | 7,772 | ||||
Earnings per share |
||||||||
Basic —as reported |
$ | 0.52 | $ | 0.69 | ||||
Basic — pro forma |
$ | 0.51 | $ | 0.68 | ||||
Diluted —as reported |
$ | 0.38 | $ | 0.34 | ||||
Diluted — pro forma |
$ | 0.37 | $ | 0.33 | ||||
| The per share weighted-average fair value of stock options granted during the first quarter of 2004 was $4.06 (no stock options were granted during the first quarter of 2005) on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: |
| Quarter Ended March 31, | ||||||||
| 2005 | 2004 | |||||||
Expected dividend yield |
0 | % | 0 | % | ||||
Risk-free interest rate |
3.5 | % | 3.0 | % | ||||
Expected life (in years) |
4.4 | 4.9 | ||||||
Risk-free volatility |
78 | % | 91 | % | ||||
9
| 5. | Virginia Lease Obligation | |||
| The Company is obligated under an operating lease for office space at its former headquarters in Herndon, Virginia, through April 2006. In the first quarter of 2005, due to market conditions, the Company fully accrued for the remaining payments under this operating lease. The Company had a liability balance of $1.1 million at December 31, 2004. During the first quarter of 2005, the Company reviewed market conditions and determined that an additional net $0.6 million should be added to the liability. This resulted in a $1.7 million balance at March 31, 2005, which is the present value of the total remaining cash obligation under this lease. The liability is included in other accrued liabilities on the accompanying Condensed Consolidated Balance Sheets at March 31, 2005. | ||||
| 6. | Union Negotiations | |||
| World Airways’ cockpit crewmembers, who constitute approximately 27% of its employees and are represented by the International Brotherhood of Teamsters (the “Teamsters”), are subject to a collective bargaining agreement that became amendable June 30, 2003. The Company continued negotiations with the Teamsters during the first quarter of 2005, under the auspices of the National Mediation Board. | ||||
| World Airways’ aircraft dispatchers, who are represented by the Transport Workers Union (“TWU”), are subject to a collective bargaining agreement that became amendable December 31, 2003. Fewer than 15 World Airways’ employees are subject to this collective bargaining agreement. The Company continued negotiations with the TWU during the first quarter of 2005. | ||||
| 7. | Post-Retirement Health Care Benefits Plan | |||
| World Airways’ cockpit crewmembers and eligible dependents are covered by a post-retirement health care benefits plan. A summary of the net periodic post-retirement benefit costs for the three months ended March 31 is as follows (in thousands): | ||||
| Quarter Ended March 31, | ||||||||
| 2005 | 2004 | |||||||
Service cost |
$ | 107 | $ | 93 | ||||
Interest cost |
69 | 71 | ||||||
Net amortized loss |
4 | 4 | ||||||
Net periodic post-retirement benefit cost |
$ | 180 | ||||||