Air T, Inc. Form 10-Q Summary
Business Context and Reporting Period
Air T, Inc. is a holding company operating six segments: overnight air cargo, ground equipment sales, ground support services, commercial jet engines and parts, printing equipment and maintenance, and corporate and other. The filing covers the three months ended June 30, 2019, the first quarter of fiscal 2020, compared with the three months ended June 30, 2018. The provided request metadata identifies 2018 Q1, but the filing itself clearly reports the June 30, 2019 quarter.
Financial Performance and Position
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $55.7 million | $60.9 million | Down 8% |
| Operating income | $1.2 million | $2.6 million | Down 53% |
| Operating margin | 2.2% | 4.3% | Down 2.1 percentage points |
| Income before taxes | $3.8 million | $3.7 million | Up 4% |
| Net income | $4.2 million | $3.3 million | Up 27% |
| Net income attributable to Air T stockholders | $1.8 million | $2.8 million | Down 37% |
| Basic and diluted EPS | $0.79 | $0.92 | Down 14% |
| Operating cash flow | $5.4 million | $14.7 million | Down 63% |
Revenue changes by consolidated segment included ground equipment sales up 92% to $12.2 million and overnight air cargo up 4% to $18.3 million. Commercial jet engines and parts declined 40% to $16.3 million, ground support services declined 6% to $8.5 million, and printing equipment and maintenance declined 78% to $64,000.
Operating income was pressured by lower commercial jet engine and parts sales, higher pilot incentives and bonus costs in overnight air cargo, and corporate expenses. Ground equipment sales benefited from higher military and commercial deicer volume, while ground support services improved to an operating profit. The ground equipment sales backlog was $31.8 million at June 30, 2019, compared with $17.5 million at June 30, 2018.
At June 30, 2019, cash and cash equivalents plus restricted cash were $16.3 million, marketable securities were approximately $5.8 million, and working capital was $28.5 million. Total debt was $64.4 million gross, or $64.1 million net of debt issuance costs, compared with $58.0 million gross at March 31, 2019. Current debt maturities totaled $27.8 million due by June 30, 2020. Total operating lease liabilities were $10.6 million.
Total assets were $133.7 million and total liabilities were $106.0 million at June 30, 2019. Inventory increased to $36.5 million from $30.0 million at March 31, 2019, primarily due to commercial jet engines and parts. The company adopted ASC 842 and recorded approximately $10.7 million of right-of-use assets and $11.2 million of lease liabilities.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue decreased $5.2 million, primarily because the prior-year period included record sales of four engines at Contrail that did not recur.
- Operating income declined $1.4 million, with the operating margin falling to 2.2% from 4.3%.
- Net income attributable to Air T stockholders declined despite higher consolidated net income, principally because of increased income attributable to non-controlling interests.
- Operating cash flow decreased $9.3 million, reflecting higher inventory and changes in accrued liabilities.
- The company recorded a $4.5 million gain from the dissolution and discharge of Delphax Canada and Delphax UK, partially offset by an $814,558 impairment of its Insignia Systems investment.
- The prior-year quarter included a $2.0 million bargain purchase gain from the Worthington acquisition; the current-year bargain purchase gain was only $34,244.
- On June 10, 2019, the company completed a three-for-two stock split, issued $4.0 million of trust preferred securities, and distributed warrants. As of June 30, 2019, 840,924 warrants had been exercised, generating approximately $2.0 million of proceeds, and 7,559,076 warrants remained outstanding.
Cash Flow, Outlook, Risks, and Unusual Items
Cash flow from operations was $5.4 million. Investing cash outflows were $3.8 million, including approximately $3.3 million for assets on lease and an engine purchase. Financing activities provided $2.0 million, principally from net borrowings and warrant exercises, partially offset by term-loan repayments.
Management stated that cash, operating cash flow, and other liquidity sources are expected to meet foreseeable requirements. However, revolving credit facilities and certain term debt mature or expire within the following twelve months. The company was seeking refinancing or extensions and stated that there was no assurance such transactions would be completed on favorable terms.
The MBT credit agreement includes financial covenants, including a minimum 1.25 debt service coverage ratio measured at March 31, 2020. Management was working toward compliance but acknowledged that there was no assurance the covenant would be met and that a waiver or other corrective action might be required.
No formal revenue or earnings guidance is provided. Management highlighted pilot labor shortages, seasonal demand in ground equipment sales, exposure to variable interest rates, commercial aviation market conditions, inventory levels, and the performance of Insignia Systems as relevant risks. Interest-rate swaps hedge portions of variable-rate debt; their fair value was a liability of approximately $456,000 at June 30, 2019.
The filing states that there were no material changes to the risk factors reported in the fiscal 2019 Form 10-K, no material subsequent events, and effective disclosure controls as of June 30, 2019.
Investor Verification Checklist
- Verify the maturity, availability, covenants, and refinancing status of the $27.8 million of debt due within twelve months.
- Assess whether the $31.8 million ground equipment backlog converts to revenue and cash flow, particularly given the segment’s seasonal pattern.
- Monitor commercial jet engine and parts sales, inventory growth, and the recurrence of large engine transactions.
- Review the impact of non-recurring items, including the $4.5 million Delphax dissolution gain and the $814,558 Insignia impairment, on sustainable earnings.
- Confirm the economic effects, exercise activity, dilution potential, and June 2020 expiration of the remaining trust preferred security warrants.
- Evaluate the company’s ability to meet the March 31, 2020 debt service coverage covenant and maintain adequate liquidity.