Air T, Inc. Form 10-Q Summary
Business Context and Reporting Period
Air T, Inc. operates three segments: overnight air cargo, ground equipment sales, and ground support services. This report covers the three and six months ended September 30, 2015, the second quarter and first six months of fiscal 2016. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended Sept. 30, 2015 | Prior Year | Six Months Ended Sept. 30, 2015 | Prior Year |
|---|---|---|---|---|
| Revenue | $44.7 million | $34.6 million | $67.0 million | $56.4 million |
| Operating income | $5.5 million | $2.6 million | $4.5 million | $2.7 million |
| Operating margin | 12.3% | 7.5% | 6.6% | 4.8% |
| Net income | $3.8 million | $1.8 million | $3.1 million | $1.9 million |
| Diluted EPS | $1.58 | $0.77 | $1.28 | $0.80 |
- Second-quarter revenue increased 29%, operating income increased 112%, and net income increased approximately 109% year over year.
- Six-month revenue increased 19%, operating income increased 65%, and pretax income increased 64%.
- Net margins were approximately 8.5% in the quarter and 4.6% for the six-month period.
- Six-month operating cash flow was negative $4.0 million, compared with negative $0.6 million in the prior year. Working-capital investment, particularly accounts receivable and inventory, was the principal use of cash.
- Six-month investing cash flow was negative $2.4 million, including $1.9 million of marketable-security purchases and $0.5 million of capital expenditures.
- Six-month financing cash flow was negative $3.6 million after $17.9 million of credit-line repayments and $14.3 million of borrowings.
- Cash and cash equivalents declined to $4.2 million from $14.2 million at March 31, 2015. Marketable securities totaled $6.3 million, including $4.1 million classified as non-current.
- Working capital was $23.9 million, down $6.6 million from March 31, 2015. Total assets were $46.1 million and stockholders’ equity was $32.3 million.
- Outstanding borrowings were approximately $1.4 million at September 30, 2015. The company has a $20.0 million senior secured revolving facility maturing April 1, 2017, bearing interest initially at one-month LIBOR plus 1.50%.
Material Changes Versus the Prior Comparable Period
- Overnight air cargo revenue increased 45% in the quarter and 28% for the six-month period, primarily because new FedEx dry-lease agreements became effective June 1, 2015. The agreements provide higher aircraft rents, administrative fees, and maintenance rates, while certain crew costs are now borne by Air T.
- Ground equipment sales revenue increased 19% in the quarter and 9% year to date. Higher domestic commercial deicer sales and production efficiencies increased the segment’s second-quarter operating income to $4.6 million from $2.9 million. Segment gross margin increased to 27.1% from 23.9% in the quarter and to 25.8% from 22.0% for the six-month period.
- Ground support services revenue increased 27% in the quarter and 20% year to date, but the segment reported an operating loss of $0.2 million in the quarter and $0.4 million for the six-month period. Higher maintenance and parts costs, fixed-price contracts, start-up margins, and infrastructure investments pressured profitability.
- GGS backlog was $24.4 million at September 30, 2015, compared with $15.3 million a year earlier and $39.9 million at June 30, 2015. The backlog includes the remaining portion of an approximately $32 million deicing-vehicle order from a major U.S. airline.
- Unrealized losses on available-for-sale securities increased accumulated other comprehensive loss to $0.7 million from $0.1 million at March 31, 2015. The securities had a $6.3 million fair value and $1.1 million of gross unrealized losses at September 30, 2015.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management describes the quarter as robust but cautions that results are not necessarily indicative of the full year.
- GGS remains seasonal, with commercial deicer deliveries typically concentrated before winter. The USAF contract runs through July 2016 with extension options, but purchases depend on requirements and available funding.
- FedEx accounted for 45% of six-month consolidated revenue. The new dry-lease agreements initially expire May 31, 2016, may generally be terminated on 90 days’ notice, and aircraft leases may be terminated on 10 days’ notice. The filing states that FedEx would have been permitted to terminate each agreement under specified customer-concentration or other provisions as of the filing date.
- The revolving credit facility is secured by substantially all company and borrower assets and contains financial covenants, including minimum tangible net worth of $22.0 million, minimum fixed-charge coverage of 1.35 to 1.0, minimum asset coverage of 1.75 to 1.0, and maximum leverage of 3.5 to 1.0.
- Management believes pending product-liability, employment, and other legal matters will not materially affect financial position or results, although adverse outcomes remain possible.
- On October 2, 2015, Air T committed $0.5 million to a 90-day subordinated Delphax note and agreed, subject to conditions including shareholder approval, to acquire a $2.5 million five-year subordinated note, $1.05 million of Delphax preferred stock, and a warrant. The transaction could provide Air T with substantial governance rights, including board representation, but involves subordinated-credit and investment risk.
- On October 9, 2015, Air T completed the organization of a wholly owned equipment-leasing subsidiary.
- Management stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the sustainability of higher FedEx-related revenue and margins, including renewal, termination, aircraft-rent, reimbursement, and crew-cost provisions.
- Assess GGS backlog conversion, customer concentration, seasonal delivery patterns, and the absence of minimum purchases under the USAF contract.
- Monitor GAS execution, fixed-price contract exposure, infrastructure spending, and the timing of expected profitability.
- Reconcile operating cash flow with reported earnings and track accounts receivable, inventory, and backlog-related working-capital requirements.
- Review the company’s liquidity and compliance with all revolving-credit financial covenants.
- Evaluate the market value, concentration, and potential impairment risk of the company’s available-for-sale securities.
- Review final approval, funding, subordination, collateral, and governance terms of the Delphax investment and related preferred-stock and warrant transactions.