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. The filing covers the three and nine months ended December 31, 2014, representing the third quarter and first nine months of fiscal 2015. The filing was dated February 3, 2015. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Revenue | $30.9 million | $29.8 million | $87.3 million | $75.3 million |
| Operating income | $2.1 million | $0.8 million | $4.8 million | $1.8 million |
| Net income | $1.4 million | $0.5 million | $3.3 million | $1.0 million |
| Diluted EPS | $0.61 | $0.19 | $1.41 | $0.43 |
| Operating margin | 6.9% | 2.7% | 5.5% | 2.3% |
| Net margin | 4.7% | 1.5% | 3.8% | 1.4% |
- Ground equipment sales were $12.6 million in the quarter and $35.9 million year to date, up 14% and 48%, respectively. Ground support services increased 23% in the quarter and 22% year to date.
- Overnight air cargo revenue declined 10% in the quarter and 6% year to date, principally because prior-year heavy maintenance checks generated higher billable maintenance revenue.
- Cash and cash equivalents were $8.8 million at December 31, 2014, compared with $3.8 million at March 31, 2014. Investment securities available for sale were $5.6 million.
- Working capital was $26.9 million, an increase of $4.8 million from March 31, 2014. Total assets were $42.5 million and stockholders’ equity was $31.1 million.
- Operating cash flow was $7.1 million for the first nine months, compared with cash used in operations of $0.1 million in the prior-year period. Investing cash flow was negative $2.0 million, including $4.1 million of investment-security purchases and $1.8 million of capital expenditures.
- The company had no long-term debt and no borrowings under its secured revolving credit facility. The facility provided $9.0 million of availability at December 31, 2014, although availability returned to $7.0 million on January 1, 2015. The facility expires August 31, 2016.
- No regular cash dividend was declared in the current periods. In May 2014, the board adopted a policy to discontinue the regularly scheduled annual cash dividend.
Material changes versus the prior comparable period
- Third-quarter revenue increased 4%, operating income increased 169%, and net income increased approximately 219%.
- First-nine-month revenue increased 16%, operating income increased 173%, and net income increased approximately 218%.
- Profitability benefited from stronger deicer sales, improved ground equipment production efficiency and product mix, lower corporate expenses, and a lower effective tax rate.
- Third-quarter operating income included a $0.8 million gain on asset sales, including the sale of a company-owned King Air aircraft and eight leased deicing units. The prior-year quarter included a $0.025 million gain.
- The prior-year quarter included $0.565 million of payments to the former chief executive officer under a separation agreement; those payments did not recur.
- Ground equipment sales backlog declined to $7.2 million at December 31, 2014 from $10.2 million a year earlier and $14.4 million at March 31, 2014.
- Accumulated other comprehensive income increased to $0.340 million from a $0.008 million loss at March 31, 2014, primarily because of unrealized gains on available-for-sale securities.
Guidance, outlook, risks and unusual items
- The filing provides no formal revenue, earnings or margin guidance.
- Management expects negotiations with FedEx on replacement air-cargo agreements to resume. Current contracts may be terminated by FedEx on 30 days’ notice, and replacement terms could differ materially.
- FedEx accounted for approximately 42% of consolidated revenue in the first nine months and is the principal customer of the overnight air cargo segment. Loss of the FedEx contracts would materially adversely affect the company.
- Air cargo operations covered 79 FedEx aircraft at December 31, 2014, including three soft-parked Cessna Caravan aircraft.
- GGS received a new U.S. Air Force deicing-truck contract through July 13, 2016, with four one-year extension options. Contract value and unit deliveries depend on annual requirements and available funding. The company also extended its tow-tractor contract through September 27, 2015.
- GGS is seasonal, with commercial deicer revenue and operating income typically lower in the first and fourth fiscal quarters.
- Management stated that disclosure controls and procedures were not effective at December 31, 2014 because a material weakness in internal control over financial reporting identified in the fiscal 2014 Form 10-K had only been partially remediated. Remediation included accounting personnel education and engagement of a third-party advisory firm to strengthen review of the income-tax provision.
- The company formed Space Age Insurance Company, a captive insurer, in March 2014. Its activities are included in corporate results and received an estimated tax benefit under Section 831(b).
- The company reported no pending or threatened lawsuits and no material subsequent events through the filing date.
Investor verification items
- Verify the status, renewal terms and economics of the replacement FedEx agreements and assess the concentration risk.
- Reconcile third-quarter earnings improvement for the $0.8 million asset-sale gain and the nonrecurring prior-year executive separation payments.
- Monitor GGS backlog, military contract funding, seasonal demand and the sustainability of improved margins.
- Review remediation progress and any subsequent disclosures regarding the material weakness in internal controls.
- Assess the market value, concentration and volatility of the $5.6 million available-for-sale investment portfolio.
- Confirm revolving-credit availability after the January 1, 2015 reduction to a $7.0 million maximum and compliance with the facility’s financial covenants.