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Saturday, October 08, 2005

Global Aircraft Solutions (GACF) 10-K

I want to look at GACF (website) to get a better sense of CVU and EDAC, which are also in the airplane repair business (maintenance, repair, overhaul: "MRO"). On a side note, I'm no longer banned from the pink sheets website so I'm going to start linking to them again. Yes, I did get around the ban by using an offsite shell account (could have used TOR also, thanks Terran).

GACF is a holding company. 97% of their operations are through wholely owned subsidiaries Hamilton Aerospace Companies ("HAT"), Delaware (82% of revenue) organized 1997 and acquired 2002, and "Word Jet" sic [it's right there in the intro of their 10-K, later on they spell it correctly] ("WJ"). WJ is 15% of revenue, organized Jan 1, 2004, Nevada, located Tuscon. The other revenue is a contract with Mesa Airlines starting in Q3 2003. Mesa wanted to work directly with Global and not a sub, although the work is done by HAT. All work is on commercial passenger and cargo planes.

GACF paid $2 million for WJ: cash, debt, and stock at 50 cents (now $1.42).

HAT is licensed by FAA and European JAA. Handles narrow-body transport aircraft, including interiors, converting passenger planes to freighters.

Little guys like GACF are important because:
  1. Only FAA certified repair facilities can modify, service, repair planes. This would hurt GACF in the event of consolidation since the larger airlines would have their own repair shops.
  2. Repair stations are required for mandatory inspection and maintenance. Still no help in the event of consolidation.
  3. Due to economics, most operators rely on repair stations, often entirely. Again, consolidation would change this.
  4. Repair stations are often used to tear down, part out, and sell the parts of inventory planes. This might not be harmed as much by consolidation.
  5. Due to their closeness to operators, repair stations are often first to learn about good deals on parts. Not after consolidation.
  6. Even when airlines park their airplanes during downturns, the planes still need to be inspected and stored. Yeah, ok.
  7. Good working relationships with everyone in the business. Not after consolidation.
I think that extreme consolidation down to just a few players would knock these guys out of business. But a more realistic scenario of limited consolidation would only hurt them partially... maybe. But a big trend is horizontal markets and GACF could actually benefit from any increased outsourcing.

Fuel price increases hurt the business because less fuel efficient older aircraft are most of their business.

HAT has increased market share. They handle most of the turnaround maintenance for airlines operating out of Tuscon (yeah, there's a major hub). They have specialized experience for FedEx (engine hush-kit). HAT holds FAA Air Agency Certificate #HOCR426X authorizing it to do specific operations on: B-727-100-200, B-737-100/200/300/400/500, 757, DC-8, DC-9, and some P&W engines and a GE engine. HAT also holds JAA certificate 5903.
routine minor and major maintenance
corrosion control and prevention
structural inspectionsavionic upgrades
interior reconfig
strip and paint
comprehensive systems and structural mods
flight test support
component overhaul
HAT handles heavy maintenance "C-check" and complete overhauls "D-check".

Maintenence and Service Agreements ("MSA") are generally fixed-price labor-only, with a cap on hours for unforeseen repairs. Parts are either provided or purchased by HAT and sold to operator.

Some long term customers have umbrella agreements: Jetran International (737, DC-9, MD-80, JT 8D engines), Pegasus (office in Istanbul, 14 airplanes corporate and fleet, 737/400, 737/800), Falcon Air (Sweden, they do their own A and B checks on 737-300/400/500/600/700/800, unspecified work on 757, line A checks on ATR42-200/300/320, operate at Malmo-Sturup airport in Sweden for Britania Airways, Sterline European Airlines, Fly Me).

Customers: Shaheen Airlines (Pakistani domestic only airline, 737-200 and A-320 only), Teebah Airlines (Jordanian aircraft leasing company but really owned by Sheikh Hussain al-Khawam who heads one of Iraq's biggest tribes and was apparently involved in the Oil-for-Food/Fraud, looking to buy a widebody, also HAT is helping build Iraqi Airlines among other things), Jetran International, an aircraft trading and leasing company, Falcon Air Express, a 121 United States passenger operator, Aero Micronesia, a 121 freight operator, Aero California, a Mexican airline, Pegasus Aviation, a large aircraft leasing company and long-time Hamilton Aviation customer, as well as a number of smaller customers.

2 largest customers are 80% of revenues in 2002, 43% in 2003, and 36% in 2004.

Shaheen Airlines 26% of revenue (Pakistan)
Teebah Airlines 16% of revenue (Iraq)
Jetran 13%
Falcon 13%

HAT is 37% of WJ's revenue.

HAT just entered the 757 market. HAT's target market is 25% of the worldwide commercial aircraft maintenance market. They started out with Tier 2 operators of older aircraft and have been successful in expanding to Tier 1.

Damn!!!!! Blogger wiped out a bunch of my work. Now I'm totally demotivated since this is starting to look ugly. It talked a bit about WJ's business (which ended up not being terribly important), also Evergreen International Aviation is a massive competitor not far from HAT, privately held. They handle just about ever kind of plane and have the largest facility in the world. Very scary. Also there's Tramco which is owned by Goodrich. Goodrich mentions PEMCO (which I looked at years ago) as a competitor. Goodrich MRO seemed to be increasing perhaps 15-20% during 2003 and 2004.

Some competitors are doing badly and could possibly drop prices to get cash flow or market share.

Since 9/11, 5 repair stations have either stopped or filed Chapter 11. This is good for GACF.

Rotables are serialized parts of airplanes tracked by the FAA. Consumables are things like oil, grease, tape. Expendables are things like bolts and rivets which are not serialized.

The Boeing 2003 market outlook report projects passenger growth of 5.1% per year over the long term, cargo up 6.4% per year. Global MRO market is $40 billion with airlines doing half of it.

150 employees at HAT, capacity can be 500 in 2 shifts. 20 at WJ. Pima Community College has been training mechanics since 1991, new training center next to HAT. HAT works closely with Pima to apprentice new students.
while aggressively replacing those key employees who, after given a reasonable opportunity to do so, fail to successfully meet their job requirements. While this may seem harsh, the critical public safety issues associated with commercial aircraft maintenance require that HAT quickly identify and address any shortcomings in the oversight of its activities.
The lease of the airport facility was originally on a year-to-year basis because HAT/GACF didn't have the capitalization required by the airport for a muli-year lease. After a private placement (506/D) HAT now meets the requirement for a multi-year lease.

Don't forget the risk of doing 82% of business in one location.

The HAT facility is at the Tuscon International Airport, with 360 days average sunshine, very low humidity. 22 acres on the northwest ramp, within the airport itself (which provides security). Lease is $25,650/month. 2 hangars.

The WJ facility is 73K sq ft in Tuscon, directly across the street from HAT.

Company took on extra business in Q4 2004 which would decrease profitability in the short term, but enhance the long term (probably crappy margins in outsourcing).

Legal Proceedings:

June 2004, GACF initiated lawsuit against Corwin Foster and wife and Seajay Holdings (Michigan, limited liability), US district court. Requested return of 1.5 million shares of stock. Part of stock exchange agreement. Old Mission Assessment agreed to provide financing for HAT. Foster was officer. HAT received only $400K of the agreed upon $3 million. GACF returned the money and is seeking damages of $1 million, the return of the shares, and punitive damages of $10 million.

Sept 17, 2004, James Scott filed discrimination complaint with AZ State Atty Gen, claiming he wasn't re-hired because of his race. GACF claims he was eligible, he was employed by Job-Aire Services (temp service for aviation), released, and designated not eligible for re-hire. Performance issues at HAT during a previous placement by Job-Aire. Dude, if you were good, they'd be scrambling to hire you regardless of race.

Sept 7, 2004, Murphy Emelike filed a discrimination complaint due to race. He failed to report to work and Job-Aire filled his position with someone else who did report to work. Dude!

Let's skip ahead now to the financials.
The discussion of the results of operations is very long and detailed. Ugh.

Lots of fixed costs (rent, insurance, debt payments, certain salaries), fluctuating business revenues. yeah yeah...

Revenue doubled in 2004. Hours worked increased quarter by quarter.
Q1: 40K hours
Q2: 46K hours
Q3: 56K hours
Q4: 100K hours

GACF scored a multi-million dollar consignment inventory which will help WJ revenue.

HAT does well when customers want "nose-to-tail" work. HAT accepted work in excess of labor capacity to establish relationships with new customers, who will probably need nose-to-tail work.

Starting in Q1 04, HAT focused on selective work booked with a smaller and highly skilled and stable workforce (presumably without James Scott and Murphy Emelike). Labor costs decreased by $195K in Q1 (5% of revenue).

GACF got fined by the IRS for delinquent payroll tax. Based on the discussion, it sounds like this was an intentional trade-off.

In Q2, 90% of HAT revenue came from the top 5 customers. 41% of WJ revenue was from top 5. The discussion of Q2 includes examples of focus on profitability over just plain revenue. yeah, it makes sense. There's some factoring of receivables.

etc. etc. So they've started dealing tactically with revenue and profits, which is good. The details of how they ran the business are good. But this business should be priced cheaply, with everything taken into consideration: perhaps 12 times roughly average earnings.

HAT full year:
Gross margin: 16%
Net margin: 8.7%
Global's direct business was unprofitable so those numbers should be a bit lower, not much.

WJ is more profitable.

Overall 2004:
$31 million revenue
$24 million COGS
$2.5 million net profit

Overall 2003:
$15 million revenue
$12 million COGS
($1.3) million loss

It seems like the profits of 2004 are at least somewhat sustainable. During 2003, HAT results were improving and this continued into 2004. But conservatively, I'd assume perhaps $2 million in profits on average going forward, for pricing the company.

May 2004, private placement of 9.6 million shares priced at 34 cents a share (ugh!), with all sorts of warrants. Net result is 24 million shares in exchange for $18 million.

Sept 2004, private placement of 2.1 million shares total for $1.1 million (ugh again!).

Salaries are very reasonable.
Directors and officers own 17.7% of the company.
Barron Partners owns 31.3%.
No related party stuff (except on the balance sheet!!!)
Unqualified audit opinion by a single auditor.

Balance Sheet
current assets are split between AR and inventory, everything else is in the noise.
PP&E is only about 12% of assets
liabilities are mostly AP, with some billings in excess..., accrued liabilities, and due to factor
They had negative equity in 2003, but the placements really cleaned up the balance sheet. You can tell they were sort of in trouble in 2003, which explains the IRS issue and the placements.

They earned 10 cents diluted, but based on my notes, I'd assume earnings of about 8 cents (instead of using my 12 multiple above), making the company worth about $1.2 dollars based on earnings (current stock price is $1.43).

Cash flow is downright ugly. Operations burned $1 million.
$1 million non-cash gain from renegotiating a contract
$3.6 million increase in AR (offset $2.3 million by increase in AP)
$1.6 million increase in inventory
etc. etc.

$1.3 million capex.
Yeah, they really needed the placements!

I still need to cover the notes, but this company isn't all that interesting to me right now.

UPDATE: Looking at Q2 results only reinforces my opinions. I swear I didn't cheat when I picked 8 cents.

UPDATE: I wonder if the hush kits for FedEx jets is because they fly overnight and land very early in the morning?

Thanks for recommending those books, Mr. Bruce.

I really admire the way you organise your thoughts on a given company.

As you rightly said that theory helps you only to the extent that you can make use of it practically.

To add I would say that it is like "To make a decision you have to consider all the variables that can affect the validity of that decision."

Similarly to become a succesful investor it is necessary that you supply your grey area with all those things that can make a difference and then make the best use of them. Currently I am nourishing my brain with Ben Graham

I hope you agree with me!!!
"I hope you agree with me!!!"

Here's my opinion:
At 21 years old, your best asset is your capacity to learn and work. Your most important task is learning, and that covers theoretical knowledge, learning about organizations and how they work, and understanding people.

At 41 years old, your best asset is your knowledge and your drive toward goals. Your most important task is accumulating wealth, managing family relationships, and running a complex life.

At 61 years old, your best asset is your accumulated experience, wealth, and family. Your most important task is having fun.

Right now, you are in the first category and I'm in the second.
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