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 unaudited filing covers the three months ended June 30, 2014, the first quarter of fiscal 2015, compared with the three months ended June 30, 2013. The company is a smaller reporting company and is not a shell company.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $21.779 million | $21.280 million | +$0.498 million, 2% |
| Operating income | $98,824 | $220,458 | -$121,634, 55% |
| Operating margin | 0.5% | 1.0% | Down approximately 0.6 percentage points |
| Income before taxes | $110,797 | $227,511 | Down 51% |
| Net income | $72,797 | $138,511 | Down 47% |
| Net margin | 0.3% | 0.7% | Down approximately 0.3 percentage points |
| Basic diluted EPS | $0.03 | $0.06 | Down $0.03 |
| Operating cash flow | $(1.665) million | $(0.542) million | Higher cash use of $1.123 million |
| Capital expenditures | $275,016 | $97,415 | +$177,601 |
Revenue consisted of overnight air cargo of $11.681 million, ground equipment sales of $5.312 million, and ground support services of $4.786 million. Segment operating income was $545,287, $(180,198), and $221,414, respectively; corporate expenses were $487,679.
At June 30, 2014, cash and cash equivalents were $3.533 million, marketable securities were $1.037 million, and working capital was approximately $23.288 million. Total assets were $38.052 million and stockholders’ equity was $27.340 million. The company had $863,050 outstanding under a $7.0 million secured revolving credit facility, with $7.0 million reported as available under the facility. The facility expires August 31, 2015 and bears interest at 30-day LIBOR plus 150 basis points.
Material Changes Versus the Prior Comparable Period
- Revenue increased 2%, driven primarily by a $1.150 million, or 32%, increase in ground support services revenue. Ground equipment sales increased 1%, while air cargo revenue declined 6%.
- Operating income declined 55% because all three operating segments reported lower operating income. Ground equipment sales moved from a small profit to a $180,198 operating loss.
- Air cargo results were affected by lower pass-through maintenance costs, operation of one fewer ATR aircraft, an ATR transfer to another operator, and retirement of one soft-parked Caravan.
- Ground equipment sales results reflected production inefficiencies from an unexpected shipment delay, $42,000 of severance expense, $70,000 of additional depreciation, $76,000 of bad debt expense, and higher sales-force compensation. The segment also recorded a $187,794 gain on the sale of leased equipment.
- Ground support services revenue grew with new customers and locations, but operating income decreased 11% as the company expanded corporate and management infrastructure.
- Cash used in operations increased substantially, principally because inventories increased by approximately $2.604 million and accounts payable remained relatively flat. Investing cash flow was positive due to securities and equipment sales; financing cash flow was positive because of new borrowings.
- The board adopted a policy in May 2014 to discontinue the regularly scheduled annual cash dividend. No dividend was declared in the current quarter, compared with $0.30 per share, or $733,885, in the prior-year quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No quantified consolidated earnings or revenue guidance was provided. Management stated that quarterly results are not necessarily indicative of full-year results.
- FedEx accounted for approximately 53% of consolidated revenue. Air cargo contracts may be terminated by FedEx on 30 days’ notice, and replacement-contract negotiations had only recently resumed and remained in the early stages. Changes to or loss of these contracts could materially affect results.
- At June 30, 2014, MAC and CSA had 79 aircraft under agreement with FedEx, including three soft-parked aircraft. FedEx retired one soft-parked Caravan during the quarter.
- GGS received a new U.S. Air Force deicing-truck contract covering an initial period through July 13, 2016, with four one-year extension options. Contract value and unit volumes depend on annual requirements and available funding. GGS reported backlog of $21.8 million at June 30, 2014.
- GGS remains subject to seasonal fluctuations, with typically lower revenue and operating income in the first and fourth fiscal quarters.
- The company formed Space Age Insurance Company, a captive insurer, in March 2014 and initially capitalized it with $250,000. Its activities are included in corporate results.
- Marketable securities generated an $8,410 realized gain but had an $82,543 pre-tax unrealized loss, reflected in other comprehensive income at $51,543 net of tax. Securities with a fair value of approximately $809,000 were in an unrealized loss position.
- On July 21, 2014, the company received $275,000 from the sale of two aircraft and related inventory with a net book value of $188,000, resulting in an estimated gain of $87,000.
- The company disclosed a material weakness in internal control over financial reporting. Disclosure controls and procedures were therefore deemed ineffective at June 30, 2014, although management stated that the financial statements fairly present the company’s condition and results. Remediation, including personnel education and third-party review of the income-tax provision, was only partially complete.
- The company reported no pending or threatened lawsuits and no significant capital-expenditure commitments. The filing does not provide a clear quantified estimate of total future contractual obligations.
- Adoption of FASB ASU 2014-09, Revenue from Contracts with Customers, is required beginning April 1, 2017. The company was assessing the adoption method and potential impact.
Investor Verification Priorities
- Verify the status, renewal terms, and economics of the FedEx replacement agreements and the effect of the reduced aircraft fleet.
- Assess whether the $21.8 million GGS backlog converts to revenue and profit, including the impact of U.S. government funding and contract options.
- Monitor inventory growth, operating cash flow, borrowing-base availability, and the company’s reliance on the revolving credit facility.
- Evaluate whether the discontinuation of the annual dividend changes capital allocation and shareholder returns.
- Track remediation of the material weakness and any subsequent effect on financial reporting reliability.
- Review the sustainability of ground support services growth and whether additional infrastructure costs will pressure margins.