AIR T INC annual report, FY2018

Air T, Inc. Form 10-K Summary

Reporting period: Fiscal year ended March 31, 2019, compared with fiscal 2018. The request metadata identifies “2017 Q4,” but the supplied filing is the Company’s fiscal 2019 Form 10-K, filed June 28, 2019.

Business Context

Air T is a holding company operating six segments: overnight air cargo; ground equipment sales; ground support services; commercial aircraft, engines and parts; printing equipment and maintenance; and corporate and other. The Company’s strategy is to diversify earnings and grow free cash flow per share through operating businesses, acquisitions and financial investments.

• Overnight air cargo operates 79 FedEx-leased aircraft as of March 31, 2019.
• Ground equipment sales manufactures deicers and other specialized aviation equipment; backlog increased to $26.1 million.
• Ground support services maintained equipment and airport facilities for more than 145 customers at approximately 85 North American airports.
• Commercial aircraft, engines and parts includes Contrail, Jet Yard, AirCo and Worthington.
• Delphax’s Canadian subsidiary remained in bankruptcy, and the printing segment was largely inactive.

Financial Performance and Metrics

Metric	FY2019	FY2018	Change
Revenue	$249.8 million	$194.5 million	Up 28%
Operating income	$8.1 million	$4.2 million	Up 90%
Income before taxes	$4.7 million	$2.7 million	Up $2.1 million
Net income	$3.2 million	$2.5 million	Up 30%
Net income attributable to Air T stockholders	$1.34 million	$2.28 million	Down 41%
Basic and diluted EPS	$0.66	$1.11	Down 41%
Operating margin	3.2%	2.2%	Improved
Cash flow from operations	$20.9 million	$(0.3) million	Improved $21.2 million

Revenue growth was concentrated in commercial aircraft, engines and parts, which increased 218% to $94.0 million. Contrail sold nine engines for approximately $41.0 million, and Worthington contributed approximately $15.2 million after its May 2018 acquisition. Overnight air cargo revenue was essentially flat, while ground equipment sales and ground support services declined. Printing revenue fell 89% to approximately $0.7 million.

Operating income benefited from the commercial aircraft, engines and parts segment, which increased to $12.0 million from $0.6 million. However, overnight air cargo operating income declined 54% to $1.9 million, ground support services increased its operating loss to $1.3 million, printing losses increased to $1.4 million, and corporate losses increased to $6.6 million.

Net income attributable to Air T stockholders declined despite higher consolidated net income, primarily because of a substantially higher allocation of earnings to non-controlling interests, including Contrail. Non-operating expenses increased to $3.4 million, including $3.4 million of net interest expense, a $2.0 million investment impairment and $0.4 million of other investment losses. A $2.0 million bargain-purchase gain on Worthington partially offset these items.

Cash Flow, Liquidity and Debt

• Cash and cash equivalents were $12.5 million at March 31, 2019, versus $4.8 million a year earlier. Cash, cash equivalents and restricted cash totaled $12.6 million.
• Working capital was $18.6 million, down $11.9 million, principally because short-term borrowings increased by $15.5 million.
• Cash used in investing activities was $23.0 million, including $19.1 million of capital expenditures for leased assets and $3.4 million for business acquisitions, partially offset by $4.2 million of proceeds from asset sales.
• Total debt was $58.0 million, or $57.7 million net of unamortized issuance costs, compared with $48.5 million gross debt in fiscal 2018.
• Debt due in fiscal 2020 totaled $24.7 million, including the current portion of debt. The Air T revolving facility was $17.0 million, with $12.4 million drawn at year-end and $4.6 million unused.
• The Company was in compliance with its financial covenants at March 31, 2019. Management stated that operating cash flow, cash and other liquidity sources were expected to meet foreseeable requirements.
• Floating-rate debt is partially hedged by interest-rate swaps. Debt and liquidity remain sensitive to interest rates, refinancing conditions and covenant compliance.

Material Changes and Unusual Items

• Worthington Aviation Parts was acquired in May 2018 for approximately $3.35 million of total consideration and generated a $2.0 million bargain-purchase gain.
• Ambry Hill Technologies was acquired in July 2018 for $50,000.
• Contrail’s engine and aircraft activity drove a significant increase in revenue, capital expenditures and depreciation.
• A $2.0 million impairment was recorded on a quota-share reinsurance investment affected by severe global catastrophes.
• Delphax revenue declined to approximately $0.7 million from $6.1 million, and the Canadian subsidiary’s bankruptcy proceedings remained ongoing.
• The Company adopted ASC 606, ASU 2016-01 and other accounting standards in fiscal 2019. Management reported no material transition impact from ASC 606.
• The Company repurchased 22,652 shares for approximately $744,000 and had 2,022,637 shares outstanding at March 31, 2019.
• The Board had discontinued regular cash dividends.

Outlook, Commentary and Principal Risks

No formal revenue or earnings guidance was provided. Management stated that cash flows, cash and other liquidity sources were expected to be sufficient for foreseeable requirements.

• FedEx concentration: FedEx represented approximately 29% of consolidated revenue and 99% of overnight air cargo revenue. Contracts may be terminated on 90 days’ notice, and individual aircraft leases may be terminated on 10 days’ notice.
• Subsequent FedEx realignment: On April 19, 2019, FedEx announced a Caribbean strategic realignment expected to transfer approximately 11 MAC aircraft to another carrier. MAC estimated a potential impact of up to $2.0 million of revenue and $540,000 of net income, although the amounts remained uncertain.
• Customer concentration: Two customers generated approximately 43% of ground support services revenue.
• Debt and liquidity: Significant debt maturities, floating interest rates, restrictive covenants and refinancing requirements could pressure liquidity.
• Aircraft and engine exposure: Engine values, lease rates, maintenance obligations, repossession costs and customer credit quality can fluctuate materially.
• Operational and regulatory risk: Aviation operations and repair stations are subject to FAA, TSA, DOT, EASA and other regulatory requirements, and certificates may be suspended or revoked for cause.
• Delphax: Ongoing bankruptcy proceedings, liquidation of foreign entities and accumulated tax attributes may result in additional losses or unrecoverable investments.
• Seasonality and weather: Ground equipment sales are seasonal, and mild winters can reduce demand for deicing equipment.
• Investments and acquisitions: Marketable securities, goodwill, acquired businesses and investments may require impairment charges or produce volatile results.
• Other risks: Cybersecurity incidents, labor inflation, skilled-worker shortages, legal claims, foreign exchange movements and regulatory changes could adversely affect results.

Investor Verification Checklist

• Verify the filing period: fiscal 2019, not 2017 Q4.
• Assess the sustainability of Contrail’s unusually strong engine sales and the extent to which fiscal 2019 earnings depended on non-recurring transactions.
• Review FedEx contract terms, the Caribbean realignment and the potential loss of aircraft, revenue and earnings.
• Evaluate the $58.0 million debt balance, fiscal 2020 maturities, borrowing-base availability, covenants and refinancing needs.
• Reconcile consolidated net income with the $1.34 million attributable to Air T stockholders and the $5.48 million redeemable non-controlling interest.
• Review Delphax bankruptcy developments, potential successor-liability claims and the recoverability of related assets and tax attributes.
• Assess the $26.1 million ground-equipment backlog for conversion into revenue and cash flow.
• Review acquisition accounting, the Worthington bargain-purchase gain and the sensitivity of goodwill, inventory and aircraft-engine valuations.
• Consider the $2.0 million reinsurance investment impairment and remaining exposure to investment losses.
• Review subsequent financing actions, including the June 2019 preferred-securities and warrant issuance and the $4.0 million, 8% junior subordinated debenture.