Air T, Inc. Form 10-Q Summary
Business context and reporting period
Air T, Inc. is a decentralized holding company operating in overnight air cargo, ground equipment sales, ground support services, printing equipment and maintenance, leasing, and commercial jet engines. This report covers the three and six months ended September 30, 2016, the second quarter of fiscal 2017, compared with the corresponding periods of fiscal 2016. The financial statements are unaudited.
During the period, Air T consolidated Delphax Technologies, beginning November 24, 2015, and added the commercial jet engine segment through its July 18, 2016 acquisition of substantially all operating assets of Contrail Aviation Support.
Financial performance and key metrics
| Metric | Three months ended September 30, 2016 | Three months ended September 30, 2015 | Six months ended September 30, 2016 | Six months ended September 30, 2015 |
|---|---|---|---|---|
| Revenue | $38.5 million | $44.7 million | $69.0 million | $67.0 million |
| Operating income (loss) | $1.0 million | $5.5 million | $(6.1) million | $4.5 million |
| Net income (loss) | $1.1 million | $3.8 million | $(6.9) million | $3.1 million |
| Net income (loss) attributable to Air T stockholders | $1.1 million | $3.8 million | $(2.6) million | $3.1 million |
| Basic EPS | $0.52 | $1.60 | $(1.18) | $1.29 |
| Operating margin | Approximately 2.7% | Approximately 12.3% | Approximately (8.8)% | Approximately 6.6% |
- Second-quarter revenue decreased 14%, primarily because the prior-year period included a large ground-equipment deicer order that did not recur.
- Six-month revenue increased 3%, reflecting the inclusion of Delphax and Contrail revenue and higher overnight air cargo and ground support services revenue.
- Six-month results included approximately $5.6 million of Delphax-related inventory, intangible asset, goodwill, long-lived asset, and severance charges, plus a $1.5 million other-than-temporary impairment charge on the Insignia Systems investment.
- Second-quarter non-operating income was $433,000, including a $429,000 gain on sale of marketable securities. Six-month non-operating expense was $855,000 after the investment impairment charge.
Segment results and material changes
| Segment | Six-month 2016 revenue | Six-month 2016 operating income (loss) | Key change |
|---|---|---|---|
| Overnight air cargo | $33.8 million | $1.4 million | Revenue increased 12%; operating income was broadly stable, but second-quarter profit declined because of lower FedEx administrative fees and higher unreimbursed crew costs. |
| Ground equipment sales | $15.3 million | $1.6 million | Revenue decreased 39%; prior-year high-volume commercial deicer orders did not recur. Gross margin declined to 21.8% from 25.8%. |
| Ground support services | $13.8 million | $(351,000) | Revenue increased 21% from new customers, markets, and parts sales; operating loss narrowed 42%. |
| Printing equipment and maintenance | $4.3 million | $(6.9) million | Results include Delphax from November 24, 2015. Delphax reported sharply weaker legacy-product demand and disappointing sales of its elan printer. |
| Commercial jet engines | $1.3 million | $43,000 | New Contrail segment contributed revenue and modest operating income from July 18 through September 30, 2016. |
FedEx represented approximately 49% of six-month consolidated revenue and 45% of the prior-year comparable revenue. The FedEx dry-lease agreements were extended to May 31, 2020, but remain terminable on short notice under specified provisions. Management stated that loss of the FedEx contracts would materially harm the Company.
Cash flow, liquidity, debt, and capital structure
- Cash used in operating activities was $13.8 million in the first six months of fiscal 2017, compared with $4.0 million used in the prior-year period. Working-capital usage included increases in accounts receivable and inventories.
- Cash used in investing activities was $2.2 million, including $4.0 million for the Contrail acquisition and $911,000 of capital expenditures, partly offset by marketable-securities proceeds.
- Cash provided by financing activities was $12.8 million, primarily from net revolving-credit borrowings, partially offset by the $7.9 million common-stock repurchase.
- Cash and cash equivalents were $2.2 million at September 30, 2016. Including $824,000 of restricted cash, management described total cash and cash equivalents as approximately $3.0 million. Working capital was $29.7 million.
- The senior secured revolving credit facility was increased from $20 million to $25 million and its maturity extended to April 1, 2018. Borrowings were approximately $20.8 million at September 30, 2016, bearing interest at one-month LIBOR plus 1.50%.
- Air T was not compliant with the revolving facility’s maximum leverage covenant at September 30, 2016 and expected a violation at December 31, 2016. The lender waived the September violation and agreed, based on projections, to waive the expected December violation.
- Delphax had approximately $1.9 million outstanding under its separate senior credit facility and was not in compliance with its financial covenants. The lender could stop additional borrowing and demand immediate repayment, although it continued allowing access as of the report date.
- Contrail had no borrowings under its $12 million borrowing-base facility and approximately $2.2 million of borrowing availability. Air T’s guarantee is limited to $1.6 million plus related interest and collection costs.
- The Company repurchased 329,738 shares for $7.9 million, reducing outstanding shares to 2,042,789 at November 1, 2016.
Guidance, outlook, risks, contingencies, and unusual items
- No formal earnings or revenue guidance was provided.
- Management expected the reduced FedEx administrative fee, together with higher unreimbursed operating costs, to continue affecting overnight air cargo operating income for the remainder of the fiscal year unless the arrangement is amended.
- Two leasing contracts terminated during the quarter and represented $183,000 of quarterly leasing revenue; management stated this could significantly reduce leasing revenue for the remainder of the fiscal year.
- Delphax anticipated cooperating with lenders regarding a potential formal receivership and operating liquidation of Delphax Canada, potentially beginning in the fourth quarter of calendar 2016 or first quarter of calendar 2017. The Company is restricted from initiating that process while senior-credit-facility debt remains outstanding.
- Delphax’s consolidated six-month revenue was approximately $5.0 million, versus an operating loss of approximately $6.9 million. Its assets declined to $4.5 million while liabilities reached $10.9 million at September 30, 2016.
- Contrail’s acquisition accounting remained provisional. Consideration included $4.0 million of cash, 21% membership interests issued to the seller, and an estimated $2.9 million earnout liability, with potential earnout payments of up to $3.0 million in aggregate.
- Air T entered into a commitment to construct a new headquarters facility for approximately $2.0 million and subsequently arranged a construction loan of up to $1.48 million.
- Subsequent events included acquisitions of Jet Yard and substantially all assets of D&D GSE Support. Terms included additional fixed payments and potential earnout obligations; financial results were not included in the September 30 statements.
- The Company accelerated expiration of its shareholder rights agreement to September 26, 2016.
Most important facts for investors to verify
- Whether Air T can maintain compliance with its revolving-credit covenants after the temporary waivers expire.
- Whether Delphax’s lender will continue funding operations or demand repayment, and the economic impact of a potential Delphax Canada liquidation.
- The durability and profitability of the FedEx contracts after the lower administrative fee and higher unreimbursed costs.
- Whether ground equipment sales recover after the nonrecurring prior-year deicer order and whether backlog continues to decline.
- The recoverability of receivables and inventories, particularly given substantial working-capital cash usage.
- The final purchase accounting, earnout exposure, and performance of Contrail, Jet Yard, and D&D GSE Support.
- The effect of Delphax’s valuation allowance, tax-loss carryforwards, and other tax attributes on future cash taxes and reported earnings.