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. This unaudited report covers the quarter and nine months ended December 31, 2012, representing the third quarter and first nine months of fiscal 2013. The company is a smaller reporting company and is not a shell company.
The overnight air cargo segment, operated through Mountain Air Cargo and CSA Air, serves primarily FedEx. Ground equipment sales are conducted through Global Ground Support, while Global Aviation Services provides equipment and facility maintenance services.
Financial Performance and Key Metrics
| Metric | Three Months Ended Dec. 31, 2012 | Three Months Ended Dec. 31, 2011 | Nine Months Ended Dec. 31, 2012 | Nine Months Ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $26.7 million | $25.7 million | $72.4 million | $67.7 million |
| Operating income | $987 thousand | $901 thousand | $2.0 million | $2.1 million |
| Net income | $633 thousand | $579 thousand | $1.3 million | $1.3 million |
| Diluted EPS | $0.26 | $0.24 | $0.52 | $0.55 |
| Operating margin | 3.7% | 3.5% | 2.8% | 3.1% |
Quarterly net income benefited from higher operating income and was subject to a $357 thousand income tax provision. The estimated annual effective tax rate was 36.1%. For the nine-month period, the estimated annual effective tax rate was 36.0%.
- Quarterly revenue increased $1.1 million, or 4%.
- Nine-month revenue increased $4.7 million, or 7%.
- Quarterly operating expenses increased 4% to $25.7 million; nine-month operating expenses increased 7% to $70.4 million.
- Cash flow from operating activities was $4.6 million for the first nine months, compared with $1.5 million in the prior-year period.
- Capital expenditures were $293 thousand, compared with $750 thousand in the prior-year period.
- Cash used in financing activities was $612 thousand, primarily reflecting the $0.25 per share cash dividend paid in June 2012.
- Cash increased to $9.5 million at December 31, 2012, from $5.8 million at March 31, 2012.
Liquidity, Debt, and Balance Sheet
- Working capital was $24.1 million at December 31, 2012, up $845 thousand from March 31, 2012.
- Total assets were $36.2 million and stockholders’ equity was $27.7 million at December 31, 2012.
- The company had no borrowings outstanding under its $7.0 million secured revolving credit facility, and the full $7.0 million was available at December 31, 2012.
- The credit facility expiration date was extended in August 2012 from August 31, 2013 to August 31, 2014. The company was in compliance with the facility’s fixed-charge coverage requirement.
- Borrowings bear interest at 30-day LIBOR plus 150 basis points; LIBOR was 0.21% at December 31, 2012.
- Management reported no commitments for significant capital expenditures.
Material Changes Versus the Prior Comparable Period
- Overnight air cargo: Quarterly revenue increased 3%, but operating income declined 15% to $708 thousand. Nine-month revenue was essentially flat, while operating income declined 15% to $2.3 million, primarily because of higher labor, travel, insurance, management, flight, and maintenance costs.
- Ground equipment sales: Quarterly revenue was essentially flat, while operating income increased $281 thousand to $441 thousand. The improvement reflected a two-percentage-point gross-margin increase attributed to improved production efficiency. Nine-month revenue increased 6% to $27.8 million, partly due to increased USAF tow-tractor sales, and operating income rose to $582 thousand.
- Ground support services: Quarterly revenue increased 26% and operating income increased 21%, driven by new customers and locations. Nine-month revenue increased 52% to $9.4 million, while operating income increased 19% to $630 thousand. Startup costs and management staffing for new stations pressured nine-month expenses.
- Corporate costs: General and administrative expenses increased 12% for the quarter and 13% for the nine-month period, driven primarily by salary and health insurance costs, rent, travel, and professional fees.
- Backlog: Ground equipment sales backlog declined to $9.2 million at December 31, 2012, from $14.9 million a year earlier and $15.3 million at March 31, 2012.
Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no formal financial guidance.
- FedEx accounted for approximately 49% of nine-month consolidated revenue and all overnight air cargo revenue. Current FedEx agreements may be terminated with 30 days’ notice, and the company was negotiating replacement agreements whose terms could affect future results. Loss of the FedEx contracts would have a material adverse effect.
- GGS’s USAF deicer contract was extended to July 2013, and its flight-line tow-tractor contract was extended to September 2013. Contract value and unit deliveries depend on annual requirements and available USAF funding. Tow-tractor margins are lower than deicing-equipment margins.
- GGS remains exposed to competitive pricing pressure and seasonal demand, particularly for commercial deicing equipment. Reduced USAF sales could increase seasonal volatility.
- Air cargo costs are generally reimbursed by the customer without markup under dry-lease service agreements, limiting direct fuel-cost exposure. A change in contract terms could shift inflation and operating-cost risk to the company.
- Inventory valuation, warranty reserves, doubtful accounts, and income-tax estimates depend on management assumptions and could change as market conditions develop.
- The company reported no pending or threatened litigation and no material subsequent events through the filing date.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Renewal terms, duration, and economics of the replacement FedEx service agreements.
- Conversion of GGS’s $9.2 million backlog into revenue and the effect of lower-margin USAF tow-tractor sales.
- Sustainability of GAS growth as new locations mature and startup costs decline.
- Whether higher air cargo management and maintenance costs continue to pressure segment margins.
- Future dividend declarations, since the company’s annual dividend policy remains subject to profitability and board approval.
- Availability and covenant compliance under the $7.0 million revolving credit facility.
- Potential changes in inventory reserves, warranty costs, customer credit quality, and other management estimates.