Thursday, 22 April 2010

Stormy Financial Skies in '09, Better Forecast 2010

AeroMechanical Services Ltd.
Basic Shares: 103.1 million
Fully Diluted: 117.6 million


Two issues that have fixated AeroMechanical (AMA) investors for many years are what is going on in China after AMA announced a deal to equip over 500 aircraft there several years ago and getting AMA’s technology installed on the factory floor.
Please click on the image to enlarge

Small but revealing statements were made in the Management Discussion and Analysis discussion that accompanied AMA’s annual report.

In reference to China, it was stated that an employee is still spending “95%” of his time in that vast and booming country to move business along.

And there was this statement about enticing an aircraft manufacturer to install blue boxes while aircraft are under construction:

“Efforts are being made to have OEMs install afirs in the factory and we hope to see movement in this regard in 2010.”

Bare bone statements that signify management is not shrinking from the two business fronts despite past frustrations.
And speaking of frustrations, much was said of 2009 - the financial equivalent of a poke in the eye for the airline industry - including AeroMechanical (AMA).

Thankfully a sharp stick wasn’t the weapon of choice, a still painful but less damaging fat finger was.
So while sales failed to meet the hoped-for mark, AMA's top line revenue still grew to $5.1 million from $3.1 million in 2008.

One thing that’s clear is the company learned how to be leaner and meaner while enjoying the benefits of forging alliances with critical business partners and enjoying the eyeball-catching financial power of a recurring revenue model.

As AMA Chairman & CEO, Bill Tempany, put it in his letter to shareholders:

“It (2009) was one of those years for the record books but in the face of many obstacles, we were able to make some headway.”
Headway, indeed.

During the year, partnership agreements were struck with:

1. L-3 Communications (NYSE:LLL) – the largest provider of aircraft black boxes in the world which teamed up with AMA in order to automatically transmit back to earth in real time all the operational data going into a black box recorder when an aircraft malfunction occurs.

2. GuestLogix Inc. (TSE: GXI) – a fast-growing Canadian company that provides passenger credit card transaction technology for airlines, ships and railroads. GXI wanted to use AMA’s technology so it could verfiy a credit card’s validity in real time before an on board transaction took place, whether that be from an aircraft, cruise ship or railway car.

3. And Sierra Nevada Corporation – a private, U.S.-based that provides high-tech electronic equipment to the U.S. military and other militaries around the world.

Given that the high profile search for the missing black box aboard the Air France aircraft that disappeared into the Atlantic Ocean last summer is still going on, the deal with L-3 has taken on the greatest prominence.

That deal has been, as Mr. Tempany wrote, “a real feather in our cap” while meeting new potential customers along with L-3 executives or other customers AeroMechanical approaches on its own who have an interest in all the other capabilities of AMA’s technology.

None of these deals were expected to produce instant results when they were signed throughout 2009.

But AMA is ideally positioned to take advantage of all three of them in the improved markets of this year. Some facts to note while thumbing through the 2009 annual report:

As we noted above, revenues grew 60%. That’s the beauty of recurring revenues and increased sales from additional technological services. In real terms, “afirs Up Time” revenue rang in at $4.28 million versus just over $2 million the previous year.

On the recurring revenue model, the gross margin between costs of sales and recurring money coming in the office door was 52.6% in 2009, compared to 16% in 2008. The margin is growing every year due to two factors - revenues keep rising due to increasing installations against a relatively fixed cost and revenues also increase from adding additional capabilities to the on board AMA technology – such as fuel savings monitoring capabilities.

Importantly, expenses were cut by $2 million to approximately $7.4 million from $9.5 million in 2008.

The net loss also improved dramatically falling to $4.5 million in 2009 from $8.5 million in 2008.
A cash cushion is always a positive and so it is with AMA from two financings in 2009 that left it with $7 million in cash at year end.

To read the full report, please click here.