Air T, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2019. Although the request metadata identifies “2018 Q3,” the filing is for Air T’s fiscal third quarter of 2020 and compares with December 31, 2018. The statements are unaudited.
Business context
Air T is a holding company operating in overnight air cargo, ground equipment sales, commercial jet engines and parts, printing equipment and maintenance, and corporate activities. The company completed the sale of Global Aviation Services, LLC on September 30, 2019; its results are presented as discontinued operations.
Financial performance and position
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Revenue | $73.3 million, up 32% | $171.2 million, up 16% |
| Operating income | $3.7 million | $5.2 million |
| Operating margin | Approximately 5.1%, versus 3.4% | Approximately 3.0%, versus 2.5% |
| Income from continuing operations | $0.6 million, versus a $1.9 million loss | $2.5 million, versus $0.7 million |
| Net income attributable to Air T stockholders | $0.4 million loss, versus $2.7 million loss | $7.1 million, versus $1.2 million loss |
| EPS attributable to Air T stockholders | $0.14 loss | $2.57 income |
The nine-month earnings benefit was substantially affected by the $8.1 million after-tax gain on the sale of GAS and a $4.5 million gain related to the settlement and dissolution of Delphax entities. The quarter included a $1.1 million impairment charge on the Insignia Systems investment and $1.2 million of interest expense.
- Segment trends: Third-quarter commercial jet engines and parts revenue increased 84% to $38.5 million, driven primarily by seven asset sales versus two in the prior-year quarter. Ground equipment revenue declined 2% but its backlog increased to $29.1 million from $18.3 million. Overnight air cargo revenue rose 5% and printing revenue declined 22%.
- Nine-month segment trends: Ground equipment revenue increased 15% and operating income increased 86% to $4.2 million. Commercial jet engines and parts revenue increased 23% to $72.7 million. Overnight air cargo operating income declined 32% to $0.9 million, while printing remained unprofitable.
- Cash flow: Operating activities used $9.7 million, compared with $1.2 million provided in the prior-year period, primarily due to inventory purchases at Contrail. Investing activities used $7.4 million, including $35.6 million of capital expenditures and $16.956 million of proceeds from assets on lease. Financing activities provided $26.2 million.
- Liquidity: Cash and restricted cash totaled $21.6 million at December 31, 2019, including $10.0 million pledged as collateral for Opportunity Zone funds. Working capital was $40.8 million. Marketable securities and restricted investments totaled approximately $3.9 million.
- Debt: Total debt was $91.8 million gross, or $91.5 million net of issuance costs, compared with $58.0 million gross at March 31, 2019. Current maturities were $51.5 million, creating significant near-term refinancing requirements.
- Balance sheet: Total assets were $158.4 million and total equity was $23.4 million. Inventory increased to $68.1 million from $27.5 million, primarily due to commercial jet engines and parts.
Material changes versus the prior comparable period
- Revenue and operating income improved substantially, led by commercial jet engine and parts activity and stronger ground equipment margins.
- Air T moved from a prior-year quarterly loss to near break-even attributable earnings, while nine-month attributable earnings turned positive primarily because of the GAS sale and Delphax-related gain.
- Operating cash flow deteriorated materially because of inventory investment, despite higher reported earnings.
- Debt increased by approximately $33.7 million from March 31, 2019, while capital expenditures increased to $35.6 million from $20.0 million.
- The company adopted ASC 842, recognizing approximately $8.5 million of operating lease right-of-use assets and $8.9 million of lease liabilities at December 31, 2019.
- The company repurchased 110,146 common shares for approximately $2.2 million and held them as treasury stock rather than retiring them.
Outlook, risks and unusual items
- Management stated that cash, expected operating cash flow and available revolving facilities should support operations for at least 12 months, but this depends on continued positive cash flow and refinancing or extending revolvers maturing February 28, 2020.
- Management indicated that Minnesota Bank & Trust had expressed an intention to refinance those revolvers, but acknowledged that refinancing was not assured.
- The company’s debt agreements contain financial covenants, including a 1.25 debt-service-coverage-ratio requirement measured at March 31, 2020. Management stated that it may need a waiver or other actions if a covenant is not met.
- Commercial jet engine and parts performance depends on asset sales, leasing activity, inventory investment and financing availability. Variable-rate debt creates interest-rate exposure; the company uses interest-rate swaps on certain borrowings.
- The GAS sale included a potential $4.0 million earn-out based on performance through March 31, 2020. The reported gain remained subject to final settlement, transaction costs and working-capital adjustments.
- The company recorded a cumulative $2.3 million impairment of its Insignia investment during the nine months. Insignia reported materially lower revenue and a net loss for its nine months ended September 30, 2019.
- Outstanding warrants to purchase trust preferred securities had a June 7, 2020 expiration date. A one-for-ten reverse split of the Alpha Income Preferred securities became effective January 14, 2020; Air T common stock was not affected.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Air T and AirCo revolvers were successfully refinanced beyond their February 28, 2020 maturities and on what terms.
- Compliance with the March 31, 2020 debt-service and other financial covenants, including any waivers obtained.
- Conversion of the large commercial jet engine inventory balance into sales and operating cash flow.
- The final settlement and any adjustment to the GAS sale gain and earn-out outcome.
- The sustainability of reported earnings excluding the GAS disposal gain and Delphax bankruptcy-related gain.
- Future impairment risk related to Insignia and other investments, as well as the effect of variable interest rates on debt service.