Air T, Inc. Form 10-Q Summary
Business Context and Reporting Period
Air T, Inc. operates three segments: overnight air cargo, ground equipment sales, and ground support services. The report covers the quarter and nine months ended December 31, 2011, the third quarter of fiscal 2012. The financial statements are unaudited. Air T was a smaller reporting company with 2,446,286 common shares outstanding as of January 31, 2012.
Key Financial Metrics
| Metric | Three Months Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended December 31, 2011 | Nine Months Ended December 31, 2010 |
|---|---|---|---|---|
| Revenue | $25.65 million | $22.31 million | $67.67 million | $57.51 million |
| Operating income | $0.90 million | $0.92 million | $2.07 million | $2.15 million |
| Net income | $0.58 million | $0.60 million | $1.34 million | $1.44 million |
| Basic EPS | $0.24 | $0.25 | $0.55 | $0.59 |
| Operating margin | 3.5% | 4.1% | 3.1% | 3.7% |
| Net margin | 2.3% | 2.7% | 2.0% | 2.5% |
Revenue increased 15% in the quarter and 18% for the nine-month period. Operating income declined 2% in the quarter and 4% year to date, while net income declined 3% and 7%, respectively. The effective tax rate was approximately 36.2% for the quarter and 36.1% for the nine-month period.
- Overnight air cargo revenue increased 13% in the quarter and 18% year to date. Nine-month operating income rose 26% to $2.74 million.
- Ground equipment sales revenue increased 9% in the quarter and 25% year to date, but segment operating income fell 72% in the quarter and 91% year to date.
- Ground support services revenue increased 70% in the quarter but declined 6% year to date. Quarterly operating income increased 440%, while nine-month operating income declined 11%.
Cash Flow, Liquidity, and Capital Structure
- Cash provided by operating activities was $1.50 million for the first nine months of fiscal 2012, compared with cash used of $4.86 million in the prior-year period.
- Capital expenditures were $0.75 million, compared with $0.17 million in the prior-year period. Management reported no current commitments for significant capital expenditures.
- Cash used in financing activities was $0.50 million, including a $0.61 million cash dividend and $0.12 million of proceeds from stock-option exercises.
- Cash and cash equivalents increased to $6.86 million at December 31, 2011, from $6.52 million at March 31, 2011.
- Working capital was $23.19 million, up $0.46 million from March 31, 2011.
- The company had no long-term debt outstanding and no amounts drawn under its secured $7.0 million revolving credit facility. The full $7.0 million was available at December 31, 2011. The facility was extended through August 31, 2013, and the company was in compliance with its financial requirements.
- Total stockholders’ equity was $27.09 million, compared with $26.24 million at March 31, 2011.
Material Changes, Outlook, and Risks
- Air cargo benefited from four ATR-72 aircraft delivered by FedEx for maintenance and operating service. All 84 revenue aircraft were covered by dry-lease service agreements.
- FedEx represented approximately 52% of nine-month revenue. The agreements may be terminated by FedEx on 30 days’ notice; loss of the FedEx relationship would have a material adverse effect.
- Ground equipment sales included $5.23 million of USAF deicer deliveries during the first nine months, compared with none in the prior-year period. A $5.1 million USAF purchase order for flight-line tow tractors was scheduled for delivery between April and September 2012.
- Ground equipment backlog was $14.9 million at December 31, 2011, compared with $17.5 million at December 31, 2010 and $9.6 million at March 31, 2011.
- Management cited competitive pricing, higher production and engineering costs, production inefficiencies, and reduced USAF orders as causes of lower ground equipment margins. Management expected that corrective actions could require several more quarters to improve costs and gross margins.
- Ground support services continued recovering from reduced Delta contract scope. New customers and locations increased quarterly revenue and profit, but management noted that replacement business carried lower margins than the prior Delta work.
- GGS business is seasonal, particularly commercial deicer deliveries. Seasonality could increase if USAF sales cease to be a significant component of revenue.
- The company reported no material pending or threatened litigation and no material subsequent events through the filing date. Management concluded that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Investor Verification Items
- Verify the sustainability and renewal terms of the FedEx agreements and the concentration risk represented by FedEx.
- Track ground equipment gross margins, production efficiency initiatives, USAF contract extensions, and delivery of the $5.1 million purchase order.
- Assess whether GAS can replace the lost Delta volume without further margin deterioration.
- Reconcile operating cash flow with changes in receivables, inventories, accounts payable, and the $0.75 million of capital expenditures.
- Review the revolving credit facility’s borrowing-base requirements, subjective acceleration clause, and fixed-charge coverage covenant.
- Monitor inventory reserves, warranty reserves, aircraft and equipment maintenance costs, and the company’s exposure to seasonal demand.