Air T, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2015. The request references 2014 Q4, but the supplied filing is the fiscal 2015 annual report and includes unaudited fourth-quarter data.
Business Context
Air T operates three segments: overnight air cargo services through Mountain Air Cargo and CSA Air; ground equipment sales through Global Ground Support; and ground support services through Global Aviation Services. Revenue mix was 45% air cargo, 37% ground equipment, and 18% ground support services. FedEx accounted for 45% of consolidated revenue and all air cargo revenue.
Financial Results and Key Metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $112.2 million | $100.8 million | Up 11% |
| Operating income | $3.4 million | $2.6 million | Up 30% |
| Operating margin | 3.0% | 2.6% | Up approximately 0.4 points |
| Net income | $2.5 million | $1.5 million | Up 69% |
| Diluted EPS | $1.04 | $0.60 | Up 73% |
| Operating cash flow | $8.0 million | $(0.6) million | Improved $8.5 million |
| Cash and equivalents | $14.2 million | $3.8 million | Up $10.4 million |
| Long-term debt, including current portion | $5.0 million | None reported | New borrowing |
Net income benefited from a lower effective tax rate of 27.3%, compared with 44.8% in the prior year. The rate included a $364,000 benefit from the captive insurer’s Section 831(b) election. Marketable securities totaled $5.3 million at year-end and had $211,000 of gross unrealized losses.
Working capital was $30.4 million, up $8.3 million. Investing cash use was $2.6 million, including $1.9 million of capital expenditures. No significant future capital expenditure commitments were reported.
Material Changes Versus Prior Period
- Ground equipment sales revenue increased 33% to $41.8 million, and segment operating income increased 79% to $4.3 million. Growth was driven by commercial deicers, USAF tow tractors and deicers, and glycol recovery vehicles.
- Overnight air cargo revenue declined 5% to $49.9 million, and segment operating income fell 46% to $1.2 million. The decline primarily reflected the non-recurrence of major heavy-maintenance checks performed in fiscal 2014.
- Ground support services revenue increased 21% to $20.5 million, but segment operating income declined 75% to $267,000 because fixed-price contracts generated costs substantially above associated revenue and the company increased infrastructure spending.
- GGS backlog fell to $2.8 million from $14.4 million. Management expected the March 31, 2015 backlog to be fulfilled in fiscal 2016; backlog was $6.3 million at May 31, 2015.
- The company discontinued its regularly scheduled annual cash dividend. No shares were repurchased under the 750,000-share authorization during fiscal 2015.
- Quarterly fourth-quarter revenue was $24.9 million, but the company reported a fourth-quarter operating loss of $1.4 million and net loss of $856,000, compared with fourth-quarter fiscal 2014 operating income of $864,000 and net income of $417,000.
Liquidity, Debt, Outlook and Risks
At March 31, 2015, Air T had $5.0 million outstanding under a $7.0 million secured revolving credit line and was in compliance with its covenants. On April 1, 2015, it replaced that line with a $20.0 million senior secured revolving facility maturing April 1, 2017. Initial pricing was one-month LIBOR plus 1.50%, with a 0.15% unused commitment fee. The facility is secured by substantially all assets and includes leverage, fixed-charge coverage, asset coverage, tangible net worth, and other restrictive covenants.
On June 1, 2015, MAC and CSA entered new FedEx dry-lease agreements covering all revenue aircraft. The agreements increase aircraft rent, maintenance labor rates, and administrative fees, but shift certain operational costs to Air T. FedEx can terminate the agreements on 90 days’ notice, terminate individual aircraft leases on 10 days’ notice, and could terminate under specified customer-concentration or staffing provisions as of the filing date. Management expected improved air cargo profitability, supported by higher maintenance rates and cost-reduction actions, but anticipated approximately $500,000 of additional fiscal 2016 costs for a mandated maintenance-manual rewrite.
- FedEx concentration is the principal business risk; loss or reduction of FedEx contracts or aircraft could materially affect results.
- The new FedEx agreements increase exposure to unreimbursed operating-cost inflation and other cost volatility.
- GAS depends materially on LSG SkyChefs and Delta; together they represented approximately 51% of GAS revenue. The LSG SkyChefs contract was renewed through August 2018 but includes a 30-day termination clause.
- GGS sales are seasonal and sensitive to winter weather, aviation industry conditions, government funding, and USAF order volumes. USAF contracts do not require minimum purchases.
- The company is subject to FAA, DOT, TSA, environmental, insurance, product-liability, cybersecurity, and operational risks. Management stated that pending or threatened product-liability matters were not expected to be material.
- Marketable-security values may create earnings volatility, and certain holdings may be difficult to liquidate promptly at full value.
Most Important Facts to Verify
- Terms, renewal status, aircraft counts, termination rights, and cost reimbursement under the June 2015 FedEx agreements.
- Compliance with the $20.0 million secured facility’s financial covenants and the amount drawn after March 31, 2015.
- Whether GAS fixed-price contract losses and infrastructure spending have been corrected.
- GGS backlog conversion, commercial deicer demand, USAF funding, and seasonality.
- Sustainability of fiscal 2015 earnings given the tax benefit, asset-sale gains, and unusually strong working-capital release.
- Continuation of the dividend suspension and any future share repurchases.