Air T, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2011; filed August 10, 2011. The filing identifies Air T as a smaller reporting company. Results are unaudited and should be read with the fiscal year ended March 31, 2011 Form 10-K. The MD&A refers inconsistently to “first quarter 2012” and “first quarter fiscal 2011”; the filing text does not clearly resolve the fiscal-year labeling.
Business Context
- Overnight air cargo: Mountain Air Cargo and CSA Air provide short-haul express airfreight services, primarily to FedEx, under dry-lease service agreements covering 81 revenue aircraft.
- Ground equipment sales: Global Ground Support manufactures deicers, aircraft service equipment and other specialized equipment for commercial, military and industrial customers.
- Ground support services: Global Aviation Services provides aircraft ground-support-equipment and airport-facility maintenance services.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Change |
|---|
| Revenue | $16.56 million | $15.02 million | Up 10% |
| Operating income | $251 thousand | $410 thousand | Down 39% |
| Operating margin | 1.5% | 2.7% | Down approximately 1.2 percentage points |
| Income before taxes | $263 thousand | $468 thousand | Down 44% |
| Net income | $168 thousand | $299 thousand | Down 44% |
| Basic and diluted EPS | $0.07 | $0.12 | Down $0.05 |
| Cash flow from operations | $981 thousand | $(1.00) million | Improved by $1.98 million |
Revenue by Segment
| Segment | 2011 Revenue | 2010 Revenue | Change | 2011 Operating Income (Loss) |
|---|
| Overnight air cargo | $10.83 million | $8.92 million | Up 21% | $932 thousand |
| Ground equipment sales | $4.17 million | $3.93 million | Up 6% | $(311) thousand |
| Ground support services | $1.56 million | $2.18 million | Down 28% | $39 thousand |
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $6.66 million at June 30, 2011, compared with $6.52 million at March 31, 2011.
- Working capital was approximately $22.03 million, down $695 thousand from March 31, 2011.
- Operating cash flow was $981 thousand, despite a $1.62 million inventory investment and a $2.34 million reduction in accounts payable. The principal positive working-capital item was a $5.01 million reduction in accounts receivable.
- Investing cash outflow was $344 thousand, including $395 thousand of capital expenditures.
- Financing cash outflow was $490 thousand, primarily reflecting the $612 thousand annual cash dividend; the company also received $124 thousand from stock-option exercises.
- The company had a secured $7.0 million revolving credit facility expiring August 31, 2012. The full $7.0 million was available at June 30, 2011, with no borrowings outstanding. The company was in compliance with its fixed-charge coverage requirement.
- Total liabilities were $5.52 million, consisting principally of current liabilities. Stockholders’ equity was $25.92 million.
Material Changes Versus Prior Comparable Period
- Revenue increased $1.54 million, primarily from higher air-cargo activity and maintenance and administrative-fee revenue related to four ATR-72 aircraft delivered by FedEx for heavy maintenance.
- Air-cargo operating income increased 28% to $932 thousand.
- Ground equipment sales reported a $311 thousand operating loss versus a $163 thousand loss in the prior period. Management cited competitive pricing pressure, lower margins, production inefficiencies and delayed deliveries. GGS shipped no deicers to the U.S. Air Force during the quarter.
- Ground support services revenue declined $613 thousand and operating income declined 87%, primarily because the scope of the Delta Airlines contract was reduced, including elimination of services at the largest Delta location.
- General and administrative expenses increased 6% to $2.54 million, driven principally by rents, insurance, professional fees, and office equipment and supplies.
- Investment income declined by $45 thousand because of lower cash and investment balances.
- Inventories increased to $13.14 million from $11.54 million at March 31, 2011, while accounts receivable declined to $6.68 million from $11.69 million.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or revenue guidance is provided.
- GGS backlog was $10.1 million at June 30, 2011, up from $9.6 million at March 31, 2011 and $8.8 million at June 30, 2010.
- The U.S. Air Force exercised the second option period under GGS’s deicing-equipment contract, extending it to July 2012. A separate tow-tractor contract had produced no deliveries as of June 30, 2011, and its value depends on annual requirements and available military funding.
- Management stated that GGS faces continued competitive pressure and that lower U.S. Air Force orders are reducing production flexibility and increasing costs. GGS’s business is also seasonally affected by commercial deicer deliveries before winter.
- FedEx accounted for approximately 65% of consolidated revenue. FedEx may terminate the applicable service agreements with 30 days’ notice; loss of the FedEx contracts would materially adversely affect the company.
- Management expects GAS to have a smaller revenue base and lower margins following the Delta contract revisions.
- Management stated that there were no significant capital-expenditure commitments, no material subsequent events, and no pending or threatened material lawsuits known to the company.
- The company paid a $0.25-per-share dividend in June 2011, compared with $0.33 per share in the prior comparable period.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2011, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the fiscal-year terminology, because the MD&A contains inconsistent references to fiscal 2011 and fiscal 2012 for the June 30, 2011 quarter.
- Assess FedEx concentration, contract termination provisions and the sustainability of increased ATR-72-related revenue.
- Monitor GGS margins, production efficiency, backlog conversion, U.S. Air Force orders and commercial equipment demand.
- Evaluate the ongoing revenue and profitability impact of the reduced Delta contract on GAS.
- Review inventory growth, warranty and obsolete-inventory reserves, and the degree to which operating cash flow depends on working-capital reductions.
- Confirm continued compliance with the revolving credit facility’s borrowing-base and fixed-charge coverage requirements before relying on the $7.0 million availability.
- Consider dividend sustainability in light of lower earnings and the company’s policy to pay an annual dividend based on profitability and other factors.
