Air T, Inc. Form 10-Q Summary
Business Context and Reporting Period
Air T, Inc. reported results for the quarter and nine months ended December 31, 2015, its fiscal 2016 third quarter. The company operates overnight air cargo, ground equipment sales, ground support services, printing equipment and maintenance, and leasing businesses. The filing is unaudited and should be read with the fiscal 2015 Form 10-K.
Air T began consolidating Delphax Technologies and its subsidiaries on November 24, 2015, after acquiring a senior subordinated note, Series B preferred stock and a warrant. Air T determined that it controlled Delphax as the primary beneficiary of a variable interest entity, despite holding approximately 38% of Delphax's common-equivalent interest.
Financial Performance and Key Metrics
| Metric | Three Months Ended December 31 | Nine Months Ended December 31 |
|---|---|---|
| Revenue | $46.6 million, up 51% | $113.6 million, up 30% |
| Operating income | $3.9 million, up 82% | $8.3 million, up 73% |
| Income before taxes | $3.9 million, up 84% | $8.4 million, up 73% |
| Net income attributable to Air T stockholders | $3.0 million, up 105% | $6.0 million, up 81% |
| Diluted earnings per share | $1.24 versus $0.61 | $2.52 versus $1.41 |
| Operating margin | 8.3% versus 6.9% | 7.3% versus 5.5% |
| Net margin attributable to Air T stockholders | 6.4% versus 4.7% | 5.3% versus 3.8% |
Third-quarter revenue growth was led by overnight air cargo revenue of $18.7 million, up 44%, and ground equipment sales of $20.3 million, up 61%. Ground support services revenue increased 24% to $6.6 million. Delphax contributed $1.0 million of revenue after consolidation, while the new leasing segment contributed approximately $6,000.
Third-quarter operating income benefited from higher ground equipment sales and improved ground equipment gross margin of 26.2%, compared with 22.8% in the prior-year quarter. Air cargo operating income increased 135% to $1.4 million. Ground equipment operating income increased 127% to $3.9 million. Ground support services operating income declined to approximately $26,000. Delphax generated an operating loss of $883,000 during the consolidation period.
Cash provided by operating activities was $3.0 million for the first nine months, compared with $7.1 million in the prior-year period. Investing activities used $4.0 million, including $3.3 million for purchases of marketable securities and $1.1 million of capital expenditures. Financing activities used $7.8 million, primarily reflecting repayment of the company's revolving credit line and $3.0 million of payments on Delphax's senior credit facility. Cash declined from $14.2 million at March 31, 2015 to $5.3 million at December 31, 2015.
At December 31, 2015, current assets were $38.1 million and current liabilities were $12.2 million, producing working capital of $26.1 million. Marketable securities totaled $8.7 million, including $4.7 million classified as non-current. Air T had no borrowings outstanding under its $20.0 million revolving credit facility. Delphax had approximately $181,000 outstanding under its senior revolving facility and $38,000 under an equipment loan.
Material Changes Versus the Prior Comparable Period
- The new FedEx dry-lease agreements, effective June 1, 2015, increased air cargo administrative and maintenance revenues but also shifted certain aircraft rental and crew costs to Air T.
- Ground equipment sales increased substantially due principally to a major domestic airline deicer order. Production efficiencies and product mix improved the segment's gross margin.
- Ground support services revenue grew, but profitability declined because of higher maintenance and parts costs, startup margins and infrastructure investments.
- Delphax was newly consolidated and added $1.0 million of revenue, $1.9 million of operating expenses and an $883,000 operating loss during the reported period. Its losses increased the effective tax rate because Delphax's losses could not offset Air T's earnings.
- The prior-year periods included substantially larger gains on sales of property and equipment: $781,000 in the third quarter and $1.1 million in the first nine months, compared with $56,000 and $51,000, respectively, in the current periods.
- Total equity increased to $37.1 million from $29.8 million at March 31, 2015, including $1.2 million of non-controlling interests related to Delphax. Retained earnings increased to $30.4 million from $24.4 million.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or revenue guidance was provided.
- Management expects Delphax may continue to incur operating losses until the commercial rollout of its elan 500 digital color print system is successful.
- Delphax's acquisition accounting remained provisional at December 31, 2015 and was expected to be finalized in the fourth quarter of fiscal 2016. The company established a full valuation allowance against Delphax's net deferred tax assets, approximately $12.0 million at December 31, 2015.
- FedEx advised Air T in January 2016 that one ATR aircraft would be transferred to another feeder operator at the end of February 2016. The related administrative revenue is significantly higher than that from a Cessna Caravan. The FedEx agreements initially expire May 31, 2016, may generally be terminated on 90 days' notice, and permit aircraft-specific termination on 10 days' notice.
- GGS backlog was $10.8 million at December 31, 2015, compared with $7.2 million a year earlier and $24.4 million at September 30, 2015. The U.S. Air Force contract does not guarantee minimum purchases and depends on requirements and available funding.
- The $20.0 million revolving credit facility matures April 1, 2017, is secured by substantially all relevant assets and contains financial covenants, including minimum tangible net worth of $22.0 million, minimum fixed-charge coverage of 1.35 to 1.0, minimum asset coverage of 1.75 to 1.0 and maximum leverage of 3.5 to 1.0.
- Key risks include dependence on FedEx, aircraft and contract changes, seasonal ground equipment demand, Delphax operating losses and execution risk, foreign currency exposure, inventory and warranty estimates, and the possibility that investments in Delphax or other businesses do not produce expected returns.
- The company disclosed pending or threatened product-liability, employment and other legal matters, but management believes adverse outcomes would not materially affect operations or financial position.
Most Important Facts for Investors to Verify
- Whether the new FedEx agreements remain in place and how the ATR transfer and future aircraft changes affect air cargo revenue and margins.
- Whether GGS can convert its backlog into revenue and sustain the 26.2% gross margin achieved in the current period.
- Delphax's liquidity, operating losses, elan 500 rollout, covenant compliance and the final purchase-accounting adjustments.
- The composition, valuation and liquidity of Air T's $8.7 million marketable securities portfolio, including unrealized losses.
- Operating cash conversion, inventory growth and the decline in cash despite higher reported earnings.
- Compliance with the revolving credit facility's covenants and the facility's April 2017 maturity.
- The impact of foreign exchange, customer concentration, seasonality and the non-guaranteed U.S. Air Force contract.