Business Context and Reporting Period
Air T, Inc. filed an unaudited Form 10-Q for the three months ended June 30, 2012, the first quarter of fiscal 2013. The company operates through three segments: overnight air cargo, ground equipment sales, and ground support services.
- Overnight air cargo is conducted through Mountain Air Cargo and CSA Air and is substantially dependent on FedEx.
- Global Ground Support manufactures and sells deicers and other specialized ground equipment.
- Global Aviation Services provides aircraft ground-support equipment and airport-facility maintenance.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30, 2012 | Prior-Year Period | Change |
|---|---|---|---|
| Revenue | $24.49 million | $16.56 million | Up 48% |
| Operating income | $653,670 | $250,992 | Up 160% |
| Income before taxes | $652,013 | $263,149 | Up $388,864 |
| Net income | $417,013 | $168,149 | Up 148% |
| Basic and diluted EPS | $0.17 | $0.07 | Up $0.10 |
| Operating margin | 2.7% | 1.5% | Improved |
| Net margin | 1.7% | 1.0% | Improved |
- Ground equipment sales revenue increased 158% to $10.74 million and generated $252,350 of operating income, compared with a $310,856 operating loss in the prior-year quarter.
- Ground support services revenue increased 92% to $3.01 million; operating income increased 475% to $222,420.
- Overnight air cargo revenue declined 1% to $10.73 million, while segment operating income declined 19% to $754,841.
- Cash and cash equivalents were $4.73 million at June 30, 2012, compared with $5.81 million at March 31, 2012.
- Working capital was $23.18 million, down approximately $65,000 from March 31, 2012.
- The company had a $7.0 million secured revolving credit facility, with the full amount available and no outstanding borrowings. The facility expires August 31, 2013, and the company was in compliance with its covenants.
- Net cash used in operating activities was $349,088, compared with $980,735 of cash provided in the prior-year period. Net cash used in investing activities was $126,994, and net cash used in financing activities was $611,571, principally reflecting the quarterly dividend.
- Capital expenditures were $130,494, compared with $395,407 in the prior-year period. The company reported no significant capital expenditure commitments.
- The company paid a $0.25 per-share cash dividend in June 2012.
Material Changes Versus the Prior Comparable Period
- Consolidated growth was driven primarily by increased military and commercial ground-equipment sales and expansion of ground-support services.
- Ground equipment revenue included approximately $4.02 million of sales to the U.S. Air Force. The segment’s backlog was $12.0 million at June 30, 2012, compared with $10.1 million a year earlier and $15.3 million at March 31, 2012.
- Air cargo profitability declined because of higher management personnel costs added to support the company’s expanded aircraft fleet.
- General and administrative expense increased 16% to $2.95 million, primarily due to higher professional fees, salaries and benefits, and profit-sharing expense.
- Accounts receivable increased during the quarter and was a significant use of operating cash, while inventory declined from March 31, 2012.
Outlook, Commentary, Risks and Unusual Items
- Management characterized the quarter as a positive reversal of recent profitability trends, but stated that quarterly results are not necessarily indicative of full-year performance.
- FedEx accounted for approximately 44% of consolidated revenue and is the primary customer for the air cargo segment. FedEx may terminate the relevant agreements with 30 days’ notice, and the company was negotiating replacement agreements whose terms could affect future results.
- Current U.S. Air Force contracts were obtained under highly competitive pricing; management stated that their margins are substantially lower than those of the contracts they replaced.
- Ground equipment markets remain highly competitive, creating pressure on margins. The segment is also historically seasonal, particularly for commercial deicer deliveries.
- The U.S. Air Force exercised the third option period under the deicing-truck contract, extending it to July 2013. The flight-line tow-tractor contract had been extended to September 2012; contract value and unit volumes depend on annual requirements and available funding.
- The company’s air cargo agreements generally reimburse major direct cost components without markup, limiting the direct effect of fuel-cost fluctuations. A change in contract terms could shift more cost risk to the company.
- The filing states that the company was not involved in, or aware of, any pending or threatened lawsuits and reported no material subsequent events.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2012, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Terms, renewal status and termination provisions of the replacement FedEx agreements.
- Sustainability and profitability of U.S. Air Force-related equipment deliveries and the $12.0 million backlog.
- Whether ground-equipment and ground-support growth can offset declining air-cargo margins and corporate overhead.
- Operating-cash conversion, particularly the effect of accounts receivable and inventory movements.
- Availability and covenant compliance under the $7.0 million revolving credit facility through its August 31, 2013 expiration.
- Seasonality and potential margin effects if U.S. Air Force sales decline.