AIRT

Air T, Inc. (AIRT) 10-K Summary: Fiscal Year Ended March 31, 2011

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended March 31, 2011. Air T, Inc. operates three segments: Overnight Air Cargo (subsidiaries Mountain Air Cargo and CSA Air), Ground Equipment Sales (Global Ground Support), and Ground Support Services (Global Aviation Services). The Company is a smaller reporting company incorporated in Delaware. Its primary customer is FedEx Corporation, which accounted for 51% of consolidated revenues in 2011.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 3% ($2.29 million) driven by a 9% increase in the Overnight Air Cargo segment. This growth was offset by declines in the other two segments.
• Profitability Decline: Net income decreased 43% ($1.62 million) and Operating Income decreased 37% ($1.99 million). The decline was primarily due to reduced gross margins in the Ground Equipment Sales segment and reduced profitability in Ground Support Services.
• Segment Performance:
  • Overnight Air Cargo: Revenues up 9% to $42.34 million; Operating Income up 26% to $3.11 million. Growth attributed to additional aircraft maintenance and administrative fees from FedEx.
  • Ground Equipment Sales: Revenues flat (down <1%) at $32.81 million; Operating Income down 61% to $1.56 million. Margins compressed due to a shift from high-margin military sales (USAF) to competitive commercial sales.
  • Ground Support Services: Revenues down 10% to $8.22 million; Operating Income down 44% to $0.68 million. Caused by a significant reduction in scope of work with Delta Airlines.
• Cash Flow: Operating cash flow turned negative ($4.52 million outflow) compared to a $5.51 million inflow in 2010. This was driven by a $6.04 million increase in accounts receivable and a $4.70 million increase in inventories.

Outlook, Risks, and Management Commentary

• Customer Concentration Risk: The Company remains heavily dependent on FedEx (51% of revenue). Contracts are renewable on 2-5 year terms but can be terminated by FedEx with 30 days' notice. Loss of this customer would have a material adverse effect.
• Contract Changes:
  • USAF: Military sales dropped from 21% of revenue in 2010 to 1% in 2011 due to a gap in contract deliveries. A new contract exists with extension options, but future orders are uncertain.
  • Delta Airlines: A contract reduction in late 2010 significantly impacted the Ground Support Services segment. Management expects lower margins in this segment going forward.
• Liquidity: The Company holds $6.6 million in cash and short-term investments. It maintains a $7.0 million revolving credit facility with no outstanding balance as of March 31, 2011.
• Dividends: The Board declared a cash dividend of $0.25 per share on May 18, 2011, payable June 24, 2011.
• Backlog: Total backlog was $9.6 million as of March 31, 2011, a significant increase from $1.3 million in the prior year, largely due to orders from the City of Charlotte and the USAF.

Investor Verification Checklist

• FedEx Contract Status: Verify the stability of the relationship with FedEx and any potential changes to aircraft counts or route schedules.
• USAF Contract Renewals: Monitor the exercise of extension options on the USAF deicer contract to assess future revenue stability in the Ground Equipment segment.
• Accounts Receivable Collection: Review the aging of the $11.7 million accounts receivable balance, noting significant concentrations with FedEx (24%), City of Charlotte (23%), and a customer in China (18%).
• Inventory Levels: Assess the $11.5 million inventory balance against the $9.6 million backlog to ensure no obsolescence risks exist.
• Delta Replacement Revenue: Evaluate the Ground Support Services segment's ability to replace lost Delta revenue with new customers at acceptable margins.