Business Context and Reporting Period
Air T, Inc. is a diversified holding company operating in overnight air cargo, ground equipment sales, commercial jet engines and parts, printing equipment and maintenance, and corporate investments. The filing is a Form 10-K for the fiscal year ended March 31, 2020, not 2018 Q4. The financial statements compare fiscal 2020 with fiscal 2019 and were audited by Deloitte & Touche LLP.
On September 30, 2019, Air T sold Global Aviation Services, LLC (“GAS”). GAS is presented as discontinued operations, including an $8.2 million net-of-tax gain on sale in fiscal 2020.
Financial Performance and Key Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Revenue | $236.8 million | $215.5 million | Up 10% |
| Operating income | $7.3 million | $9.3 million | Down 22% |
| Operating margin | 3.1% | 4.3% | Down 1.2 percentage points |
| Income from continuing operations | $3.2 million | $4.2 million | Down 25% |
| Net income attributable to Air T stockholders | $7.7 million | $1.3 million | Up $6.3 million |
| Net income attributable margin | 3.2% | 0.6% | Improved, primarily from discontinued-operations gain |
| Basic earnings per share | $2.74 | $0.44 | Increased |
| Cash flow from operating activities | $(25.1) million | $20.9 million | Declined $46.0 million |
| Cash flow from continuing operations | $(26.2) million | $22.4 million | Declined $48.6 million |
| Total debt, before issuance costs | $86.2 million | $58.0 million | Increased $28.2 million |
Revenue growth was led by ground equipment sales, which increased 25% to $59.2 million, and commercial jet engines and parts, which increased 8% to $101.3 million. Overnight air cargo revenue increased 3% to $75.3 million. Printing equipment revenue declined 53% to approximately $0.3 million.
Operating income declined despite higher revenue. Ground equipment operating income increased to $7.3 million from $3.4 million, while overnight air cargo operating income fell to $0.7 million from $1.9 million and commercial jet engines and parts operating income fell to $8.3 million from $12.3 million. Corporate and other operating losses increased to $7.5 million from $6.9 million.
Net income benefited from the $8.2 million after-tax GAS sale gain and a $4.5 million bankruptcy-settlement gain related to Delphax entities. Offsetting items included $2.3 million of investment impairment, $4.7 million of net interest expense, and a $0.9 million loss from equity-method investments.
Liquidity, Debt and Balance Sheet
- Cash, cash equivalents and restricted cash totaled $15.6 million at March 31, 2020, including $9.6 million of restricted cash primarily collateralizing three Opportunity Zone fund investments.
- Working capital was $30.7 million, up $12.2 million year over year, but inventory increased by $33.2 million to $60.6 million.
- Total debt was $86.2 million, including $42.7 million classified as current and $43.1 million classified as long term, net debt issuance costs of $85.8 million.
- Debt increased principally through borrowings supporting aircraft and engine assets and other operations. Net interest expense increased 37% to $4.7 million.
- Air T and Contrail were in compliance with financial covenants at March 31, 2020. However, Contrail forecast probable noncompliance with its debt service coverage covenant for the quarter ending September 30, 2020 and with a required revolving-loan paydown in fiscal 2021.
- Subsequent to year-end, the Company obtained approximately $8.2 million of Paycheck Protection Program loans. On June 26, 2020, MBT converted approximately $9.5 million of revolving borrowings into a term loan maturing June 25, 2025.
Capital expenditures were $37.1 million, including $34.9 million in the commercial jet engines and parts segment. The company repurchased 150,658 common shares for approximately $2.8 million and has not paid cash dividends since 2014.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue increased $21.3 million, but operating income decreased $2.0 million because of weaker air cargo and commercial jet engine margins and higher corporate costs.
- Air cargo aircraft operated for FedEx declined to 69 from 79, following the transfer of approximately 11 aircraft from Caribbean operations to another carrier. Management reported an approximately $1.7 million revenue reduction and $0.1 million net-income reduction from this realignment.
- Ground equipment backlog increased to $51.5 million from $26.1 million, with management expecting the backlog to be filled in fiscal 2021.
- Inventory increased substantially, primarily in the commercial jet engines and parts segment, contributing to negative operating cash flow.
- GAS was sold, producing a $20.5 million cash receipt at closing and an $8.2 million after-tax gain, while GAS generated a $0.1 million loss from discontinued operations through disposition.
- Air T invested $2.8 million for a 19.9% equity-method interest in Cadillac Casting, Inc. and recognized a $1.5 million share of Insignia Systems’ loss plus a $2.3 million impairment of the Insignia investment.
- The Company adopted the lease standard, recognizing approximately $10.7 million of right-of-use assets and $11.2 million of lease liabilities.
Outlook, Commentary, Risks and Unusual Items
Management stated that all businesses remained open but that COVID-19 materially reduced demand for commercial aircraft, jet engines and parts. April and May 2020 revenues were down 14% for overnight air cargo, 26% for ground equipment sales and 67% for commercial jet engines and parts. Management expected substantially reduced operating cash flow and that some businesses could operate at a loss beginning in the first quarter of fiscal 2021. No quantitative full-year guidance was provided.
- FedEx accounted for approximately 30% of consolidated revenue and 96% of overnight air cargo revenue in fiscal 2020. The contracts may be terminated on relatively short notice, and FedEx could reduce the number of aircraft operated.
- COVID-19 may reduce aviation demand, inventory values, engine lease rates, asset values, revenue and liquidity for an extended period.
- Contrail’s potential covenant breach could permit Old National Bank to accelerate its debt and exercise remedies against collateral. Air T’s guarantee is limited to $1.6 million plus collection costs, and no cross-default provisions were reported with other Air T debt.
- Commercial jet engine and parts results are exposed to aircraft retirements, oversupply, lease defaults, repossession costs, maintenance obligations and declining asset values.
- Ground equipment sales are seasonal and depend partly on winter weather and U.S. Air Force orders. The U.S. Air Force contract was scheduled to expire July 13, 2020, subject to extension.
- The Company faces floating-rate debt exposure, LIBOR transition risk, refinancing risk and compliance requirements under multiple secured credit facilities.
- The filing identifies cybersecurity, labor-cost inflation, regulatory compliance, litigation, customer concentration, concentrated ownership and the ability to insure risks as additional material risks.
Investor Verification Priorities
- Verify the filing period: this Form 10-K covers the year ended March 31, 2020, rather than 2018 Q4.
- Reconcile reported net income and EPS with continuing operations, discontinued operations and the GAS sale gain.
- Assess the sustainability and valuation of the $60.6 million inventory balance, particularly commercial aircraft, engine and parts inventory after COVID-19.
- Review Contrail’s covenant compliance, waiver or refinancing status, required revolver paydown and potential acceleration exposure.
- Confirm the status and possible forgiveness of the $8.2 million PPP loan and the terms of the June 2020 MBT refinancing.
- Monitor FedEx contract renewals, aircraft counts and the effect of any further route or aircraft reductions.
- Evaluate whether the $51.5 million ground equipment backlog converted to revenue and cash flow as expected.
- Review future impairment risk for Insignia, goodwill, aircraft and engine assets, and other investments.