Air T, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended December 31, 2018, representing fiscal 2019 periods. The filing is dated February 14, 2019. The request metadata identifies “2017 Q3,” but the filing text clearly reports December 31, 2018 results.
Business Context
Air T operates 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 company describes its strategy as expanding and diversifying after-tax cash flow per share. The statements are unaudited, and management cautions that interim results are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Three Months Ended December 31 | Nine Months Ended December 31 |
|---|---|---|
| Revenue | $63.6 million, up 43% | $173.8 million, up 23% |
| Operating income | $1.5 million, versus $0.6 million | $2.4 million, versus $3.2 million |
| Operating margin | 2.3%, versus 1.2% | 1.4%, versus 2.3% |
| Net income attributable to Air T stockholders | Loss of $2.7 million, versus loss of $0.7 million | Loss of $1.2 million, versus income of $0.7 million |
| EPS | $(1.34), versus $(0.33) | $(0.59), versus $0.35 |
| Net cash from operating activities | Not separately reported | $1.3 million, versus $8.3 million |
The quarterly loss was driven substantially by $2.0 million of other-than-temporary impairment on a reinsurance investment, higher interest expense, and other investment losses. Nine-month income taxes were $168,000, producing a reported effective tax rate of negative 57.2%, influenced by valuation allowances, the Worthington bargain purchase gain, captive-insurance treatment, and minority-owned income.
Liquidity, Balance Sheet and Debt
- Cash, cash equivalents and restricted cash were $3.6 million at December 31, 2018, down from $5.1 million at March 31, 2018. Unrestricted cash and cash equivalents were $2.7 million.
- Marketable securities were $2.5 million on the balance sheet; management separately stated that total marketable securities were approximately $8.2 million, so the filing text does not provide a fully clear reconciliation of these amounts.
- Working capital was $15.0 million, down $15.5 million from March 31, 2018. Current assets were $71.6 million and current liabilities were $56.6 million.
- Total debt was $67.2 million, or $66.8 million net of issuance costs, compared with $48.5 million gross debt at March 31, 2018. Current debt was $33.4 million and long-term debt was $33.4 million.
- Debt maturities due by December 31, 2019 totaled $33.4 million. Revolving lines and certain term debt mature or expire within the following twelve months, and management was seeking refinancing or extensions.
- Debt service coverage and other covenants under the MB&T credit agreement are tested at March 31, 2019. Management stated that compliance was not assured and that it may seek a waiver or take other actions if a covenant is not met.
Cash Flow and Capital Allocation
- Operating cash flow declined to $1.3 million from $8.3 million, primarily reflecting increased inventory and accounts receivable in the commercial jet engines and parts business.
- Investing cash use increased to $22.7 million from $18.6 million. Major uses included $19.1 million for assets on lease, $3.4 million for acquisitions, $2.0 million for the reinsurance investment, and $2.0 million for marketable securities.
- Financing cash inflow was $19.9 million, including new term loans, net revolving borrowings, and a $1.9 million loan against life insurance cash value. The company repurchased 20,958 shares for $693,136 during the nine months.
Material Changes Versus Prior Comparable Period
- Commercial jet engines and parts: Revenue increased 434% in the quarter and 171% year to date. Growth reflected the sale of two engines totaling $8.9 million in the quarter, six engines totaling $26.25 million year to date, and the May 2018 Worthington acquisition. Segment operating income increased to $2.4 million in the quarter and $6.2 million year to date.
- Worthington acquisition: The May 2018 acquisition contributed approximately $10.5 million of nine-month revenue and generated a $2.0 million bargain purchase gain. The purchase price allocation remained provisional at December 31, 2018.
- Overnight air cargo: Revenue was broadly flat, but quarterly operating income fell 93% because of higher crew and other operating costs and fewer billable FedEx maintenance hours.
- Ground support services: Revenue declined 3% year to date and the segment moved from $0.5 million of operating income to a $1.2 million operating loss, reflecting weaker shop-level results, higher overhead, and closed airport locations.
- Printing equipment and maintenance: Revenue declined 88% in the quarter and 90% year to date. Management stated that the segment was upgrading printer products and expected new printer sales to begin in fiscal 2020.
- Corporate and other: The operating loss widened to $5.1 million year to date from $2.3 million, primarily due to increased headcount and professional fees. The prior year included a $1.2 million benefit related to foreclosed Delphax inventory.
Outlook, Risks and Unusual Items
- No formal consolidated revenue or earnings guidance is provided in the filing.
- Management expects cash, operating cash flow, and other liquidity sources to be sufficient for foreseeable needs, but this expectation depends on refinancing or extending near-term debt obligations and maintaining covenant compliance.
- The company recorded a $2.0 million impairment after a $2.0 million reinsurance investment was deemed worthless due to severe global natural catastrophes affecting the underlying contracts.
- The Worthington acquisition generated a nonrecurring bargain purchase gain of approximately $2.0 million after tax; the related purchase accounting was still preliminary.
- Interest-rate risk is managed through swaps on certain variable-rate debt. The swaps were designated as effective cash-flow hedges beginning August 1, 2018.
- Delphax remains a consolidated variable-interest entity with net liabilities of approximately $6.5 million. Delphax Canada bankruptcy proceedings remained ongoing, although Delphax creditors generally have no recourse to Air T assets.
- Contrail’s seller holds a put option that could require the company to purchase the seller’s membership interests beginning July 18, 2021. The remaining contingent consideration liability was $480,000 at December 31, 2018.
- Air T had filed a registration statement for a proposed dividend of Alpha Income Trust Preferred Securities and related warrants, but the registration statement had not been declared effective and the securities had not been issued.
- The company adopted several accounting standards during the period, including ASC 606 and guidance affecting equity securities and restricted cash. Management expected the upcoming lease standard to have no material effect on operations or cash flow, but the implementation review was ongoing.
Investor Verification Checklist
- Verify the request period against the filing: this document reports the quarter and nine months ended December 31, 2018, not 2017.
- Assess the company’s ability to refinance or extend the $33.4 million of debt due within twelve months and satisfy the March 31, 2019 debt covenant.
- Reconcile the balance-sheet marketable securities balance of $2.5 million with management’s separate reference to approximately $8.2 million of marketable securities.
- Separate recurring operating performance from engine sales, acquisition-related bargain purchase gains, investment impairments, and other unusual items.
- Evaluate cash conversion, inventory growth, and the sustainability of the commercial jet engine and parts segment’s unusually strong sales.
- Review the provisional Worthington purchase accounting, Delphax bankruptcy exposure, Contrail put option, and other commitments and contingencies.
- Monitor the expected fiscal 2020 launch of upgraded printer products and the financial impact of closed ground-support locations.