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 Form 10-Q covers the three and six months ended September 30, 2014, the second quarter and first six months of fiscal 2015. The financial statements are unaudited.
- Overnight air cargo is conducted through Mountain Air Cargo and CSA Air, principally under contracts with FedEx.
- Global Ground Support manufactures and sells deicers and other specialized equipment.
- Global Aviation Services provides aircraft ground-support equipment and facilities maintenance.
- Shares outstanding at November 1, 2014: 2,355,028.
Financial Results and Key Metrics
| Metric | Three months ended September 30, 2014 | Three months ended September 30, 2013 | Six months ended September 30, 2014 | Six months ended September 30, 2013 |
|---|---|---|---|---|
| Revenue | $34.625 million | $24.190 million | $56.403 million | $45.470 million |
| Operating income | $2.597 million | $0.752 million | $2.695 million | $0.973 million |
| Net income | $1.818 million | $0.456 million | $1.891 million | $0.595 million |
| Basic EPS | $0.77 | $0.19 | $0.80 | $0.24 |
| Diluted EPS | $0.77 | $0.18 | $0.80 | $0.24 |
- Approximate operating margin was 7.5% for the quarter and 4.8% for the six-month period, compared with 3.1% and 2.1%, respectively, in the prior comparable periods.
- Approximate net margin was 5.3% for the quarter and 3.4% for the six-month period, compared with 1.9% and 1.3%, respectively, in the prior comparable periods.
- Quarterly income tax expense was $766,200, with an estimated annual effective tax rate of approximately 30%, compared with 39.8% in the prior-year quarter. Six-month tax expense was $804,200.
- Six-month net cash used in operating activities was $576,450, compared with $5.429 million used in the prior-year period.
- Six-month net cash used in investing activities was $4.191 million, primarily reflecting $3.973 million of investment-security purchases and $1.553 million of capital expenditures.
- Six-month net cash provided by financing activities was $1.218 million, including $1.331 million of revolving-credit borrowings.
- Cash and cash equivalents declined to $209,192 at September 30, 2014 from $3.759 million at March 31, 2014. Investment securities available for sale totaled $4.848 million.
- Working capital was $24.560 million. Current assets were $32.682 million and current liabilities were $8.121 million.
- Long-term debt was $1.331 million at September 30, 2014, versus none at March 31, 2014. The secured revolving facility had $9.0 million available through December 31, 2014, with availability scheduled to return to $7.0 million on January 1, 2015. The facility expires August 31, 2016.
- Total stockholders’ equity was $29.064 million, compared with $27.360 million at March 31, 2014.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 43%, while six-month revenue increased 24%.
- Ground equipment sales revenue increased 127% in the quarter and 77% for the six-month period. The increase reflected military and commercial deicer sales, including approximately $4.8 million of shipments delayed from the prior quarter.
- Ground equipment sales operating income increased to $2.924 million in the quarter from $453,000 and to $2.744 million for the six-month period from $459,000.
- Ground support services revenue increased 13% in the quarter and 22% for the six-month period, but quarterly operating income declined 70% because of infrastructure, leadership, marketing, facility and control investments.
- Overnight air cargo revenue declined 1% in the quarter and 4% for the six-month period. Operating income declined 51% in the quarter and 33% for the six-month period.
- Air cargo results were affected by two fewer operating Cessna 208 aircraft, lower maintenance labor revenue, higher personnel costs and a $100,000 regulatory-documentation penalty related to a 2012 incident. The filing states that the issue was remediated.
- General and administrative expense increased 33% in the quarter and 21% for the six-month period, primarily from higher salaries, profit sharing, payroll services, contract labor and employee benefits.
- The Board discontinued the regularly scheduled annual cash dividend in May 2014. No dividend was declared or paid in the current six-month period; $733,885 was paid in the prior-year period.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- No formal revenue, earnings or other financial guidance is provided in the filing.
- GGS backlog was $15.3 million at September 30, 2014, versus $14.4 million at March 31, 2014 and $11.9 million at September 30, 2013; backlog was $21.8 million at June 30, 2014.
- GGS received a new U.S. Air Force deicer contract in May 2014, initially running through July 13, 2016, with four one-year extension options. The contract’s value and unit volume depend on annual requirements and available government funding. A separate tow-tractor contract was extended through September 27, 2015.
- FedEx represented approximately 42% of six-month consolidated revenue and 35% of quarterly consolidated revenue. FedEx may terminate the air-cargo agreements on 30 days’ notice. Replacement-contract negotiations had resumed but remained at an early stage, and terms could change materially.
- The air-cargo segment had 79 aircraft under agreement with FedEx at September 30, 2014, including three soft-parked Cessna Caravan aircraft.
- GGS is seasonal, with historically lower revenue and operating income in the first and fourth fiscal quarters. Quarterly results may also reflect shipment timing, including the delayed deicer shipments recognized in the current quarter.
- The company reported that disclosure controls and procedures were not effective at September 30, 2014 because remediation of a previously disclosed material weakness in internal control over financial reporting was incomplete. Remediation included accounting personnel education and engagement of a third-party advisory firm to strengthen review of the income-tax provision.
- Investment securities available for sale had a fair value of approximately $4.848 million, with gross unrealized losses of approximately $158,000 at September 30, 2014.
- The company formed Space Age Insurance Company, a captive insurer, in March 2014 and initially capitalized it with $250,000.
- The company reported no pending or threatened lawsuits. Management reported no material subsequent events affecting the financial statements.
- On September 16, 2014, the company agreed to sell a 1990 Beech King Air aircraft for approximately $850,000; closing conditions were satisfied on November 6, 2014.
- The filing discusses adoption assessments for new accounting guidance on revenue recognition and going-concern disclosures; it does not state a material current-period impact.
Most Important Facts for Investors to Verify
- Whether the current surge in GGS revenue and profitability is sustainable or primarily reflects delayed shipments, contract timing and seasonal deicer demand.
- The status and economics of replacement FedEx agreements, given the 30-day termination provision and the concentration of revenue in FedEx.
- Progress in remediating the material weakness and whether disclosure controls have subsequently become effective.
- Cash conversion and liquidity, including the decline in cash, increased receivables, revolving-credit borrowings and borrowing-base availability.
- U.S. Air Force contract funding, delivery requirements and extension options supporting the GGS backlog.
- The impact of discontinuing the annual dividend and the company’s future capital-allocation policy.
- Subsequent-period results, including the recorded outcome of the aircraft sale and any changes in investment-security values.