Air T, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2017, Air T’s first quarter of fiscal 2018. The provided metadata identifies “2016 Q1,” but the filing itself reports June 30, 2017 and compares it with June 30, 2016. Air T is a diversified holding company operating in overnight air cargo, ground equipment sales, ground support services, printing equipment and maintenance, commercial jet engines and parts, leasing, and related investments.
Key Financial Metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 |
|---|---|---|
| Revenue | $47.7 million | $30.5 million |
| Operating income (loss) | $2.2 million | $(7.1) million |
| Operating margin | 4.6% | (23.2)% |
| Net income (loss) | $1.2 million | $(8.0) million |
| Net income (loss) attributable to Air T shareholders | $968,000 | $(5.8) million |
| Diluted earnings (loss) per share | $0.47 | $(2.42) |
| Net cash used in operating activities | $(2.1) million | $(4.8) million |
| Net cash used in investing activities | $(3.4) million | $(232,000) |
| Net cash provided by financing activities | $4.7 million | $3.6 million |
Revenue increased 56%, primarily from the commercial jet engines and parts segment, which contributed $12.7 million of revenue and $811,000 of operating income following acquisitions completed after the prior-year quarter. Ground support services revenue increased 34% to $9.1 million, and ground equipment sales increased 40% to $5.9 million. Overnight air cargo revenue was broadly flat at $16.7 million, while printing equipment and maintenance revenue increased 22% to $3.1 million.
Operating expenses increased 21% to $45.5 million, largely reflecting acquired businesses, but prior-year Delphax inventory write-downs, asset impairments, and severance charges did not recur. The company recorded $374,000 of income tax expense at a 23.3% effective rate, compared with a $372,000 tax benefit and a 4.4% effective rate in the prior-year quarter.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $1.9 million at June 30, 2017, compared with $2.8 million at March 31, 2017. Restricted cash was $890,000.
- Working capital was approximately $32.0 million, up $3.4 million from March 31, 2017.
- Total assets were $69.7 million; total liabilities were $44.9 million; total equity was $23.2 million.
- Short-term debt was $2.2 million and long-term debt was $20.9 million. Principal borrowings included approximately $19.8 million under the senior secured revolving credit facility and $1.1 million under the construction loan.
- The $25.0 million revolving credit facility had approximately $5.2 million of availability at June 30, 2017. The facility bore interest at one-month LIBOR plus 225 basis points at quarter-end and was later extended to April 1, 2019.
- Contrail had $57,000 outstanding under a separate $15.0 million revolving facility, with approximately $14.9 million available. Air T guaranteed Contrail obligations up to $1.6 million plus specified interest and collection costs.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue rose $17.2 million, or 56%, to $47.7 million.
- Operating results improved by $9.3 million, from a $7.1 million loss to $2.2 million of income.
- Delphax’s operating results improved from a $6.9 million loss to $924,000 of income, principally because the substantial prior-year impairment, inventory reserve, and severance charges did not recur.
- The commercial jet engines and parts segment was new to the comparable period and generated $12.7 million of revenue, driven by the Contrail, Jet Yard, and AirCo businesses.
- Ground support services became profitable, with operating income of $357,000 compared with a $110,000 loss in the prior-year quarter.
- Air cargo operating income declined 17% to $817,000 because of higher flight crew and other costs not passed through to customers.
- Cash usage remained negative despite the return to profitability. Operating cash flow improved year over year, but investing cash flow included $2.9 million for the AirCo acquisition and financing provided $4.7 million.
Outlook, Risks, Contingencies and Unusual Items
- Delphax distress: Delphax Canada remained out of compliance with financial covenants. Air T delivered a payment demand in July 2017, obtained a bankruptcy order on August 8, 2017, and foreclosed on Delphax Canada’s personal property and rights on August 10, 2017 in satisfaction of approximately $1.5 million owed under the senior credit agreement.
- Credit covenant risk: Air T had previously breached leverage and tangible net worth covenants. The lender granted waivers, waived testing of certain covenants, and later extended the revolving facility. The company also failed to deliver certain financial statements and compliance certificates on time; related defaults were waived.
- Customer concentration: FedEx accounted for approximately $16.7 million, or 35%, of quarterly revenue. FedEx agreements may generally be terminated on short notice, and the filing states that loss of the contracts would materially adversely affect the company.
- Investment impairment: Air T recorded a $771,000 other-than-temporary impairment on its Insignia Systems investment. It held approximately 1.66 million Insignia shares, or about 14% of that company, at quarter-end. The investment’s carrying value was $1.7 million.
- Acquisitions and earn-outs: AirCo was acquired for $2.4 million and generated a provisional after-tax bargain purchase gain of approximately $502,000. Contrail’s estimated earn-out liability was $2.9 million, including a $1.0 million payment due in October 2017. A separate $100,000 D&D earn-out was also payable in October 2017.
- Internal controls: Management concluded that disclosure controls were ineffective because material weaknesses remained unremediated. Weaknesses involved revenue recognition, Delphax financial reporting and accounting, attribution of Delphax results to non-controlling interests, and monitoring of debt covenant compliance.
- Accounting changes: The company adopted the deferred-tax balance-sheet classification amendment and the stock-based compensation amendment. It was evaluating the potential effects of new revenue recognition, lease, credit-loss, financial-instrument, and cash-flow standards.
- Operational outlook: GGS reported backlog of $16.4 million at June 30, 2017, compared with $2.8 million at March 31, 2017. Management stated that a June 1, 2017 FedEx agreement amendment was expected to positively affect future air cargo profitability.
Most Important Facts for Investors to Verify
- Whether Delphax Canada’s foreclosure and bankruptcy proceedings resulted in additional losses, recoveries, or obligations for Air T.
- Current availability, covenant compliance, interest rates, waivers, and maturity terms under the revolving and other credit facilities.
- Whether the company can sustain positive operating cash flow while funding inventory, acquisitions, debt amortization, and earn-out payments.
- The durability of the commercial jet engines and parts segment’s results and the final accounting for AirCo’s provisional acquisition values.
- The valuation and future impairment risk of the Insignia investment and other marketable securities.
- Progress in remediating the identified material weaknesses and whether future filings require restatement or additional lender waivers.
- Dependence on FedEx, including renewal, termination, aircraft utilization, reimbursement terms, and the effect of operating costs not passed through to the customer.
- Seasonality and order timing in the ground equipment business, including the status and funding of U.S. government contracts.