AIR T INC annual report, FY2016

Air T, Inc. Fiscal 2016 Form 10-K Summary

Reporting period: The filing is an annual report for the fiscal year ended March 31, 2016, filed June 29, 2016. The request references 2015 Q4, but the filing covers fiscal 2016 and includes unaudited fourth-quarter information.

Business Context

Air T is a decentralized holding company operating five segments: overnight air cargo, ground equipment sales, ground support services, printing equipment and maintenance, and equipment leasing. The company’s principal businesses include FedEx feeder-airline operations, aircraft deicing and specialized equipment manufacturing, aviation maintenance services, and the newly consolidated Delphax Technologies printing business.

• Overnight air cargo represented 46% of fiscal 2016 revenue.
• Ground equipment sales represented 34%.
• Ground support services represented 17%.
• Printing equipment and maintenance represented 3%; leasing contributed less than 1%.

Financial Performance and Key Metrics

Metric	FY2016	FY2015	Change
Revenue	$148.2 million	$112.2 million	+32%
Operating income	$6.0 million	$3.4 million	+77%
Operating margin	4.1%	3.0%	Improved
Income before taxes	$6.2 million	$3.4 million	+80%
Net income attributable to Air T stockholders	$4.9 million	$2.5 million	+99%
Diluted EPS	$2.06	$1.04	+98%
Net cash from operations	$3.2 million	$6.8 million	-$3.6 million

The consolidated net income was $3.8 million, including a $1.2 million net loss attributable to non-controlling interests. The effective tax rate increased to 38.9% from 27.3%, primarily because Delphax’s losses did not generate a tax benefit in Air T’s consolidated tax return.

• Overnight air cargo revenue increased 37% to $68.2 million, and segment operating income increased to $3.3 million from negligible income. Higher administrative fees and maintenance rates under the new FedEx agreements were partly offset by higher aircraft rental costs.
• Ground equipment sales revenue increased 23% to $51.2 million, while segment operating income increased 74% to $6.4 million. Commercial deicer and catering-truck sales were the primary drivers.
• Ground support services revenue increased 21% to $24.8 million, but the segment operating loss widened to $1.0 million because certain fixed-price contracts generated costs materially above related revenue.
• Delphax contributed $4.0 million of revenue and a $2.0 million operating loss from November 24, 2015 through March 31, 2016.

Cash Flow, Liquidity, Debt and Balance Sheet

• Cash and cash equivalents were $5.3 million at March 31, 2016, compared with $13.4 million a year earlier. Total cash, including restricted cash, was approximately $6.2 million.
• Working capital was $23.2 million, down $7.2 million from March 31, 2015.
• Operating cash flow declined to $3.2 million, principally because of changes in inventory and other working-capital accounts.
• Investing cash flow was negative $5.3 million, including purchases of marketable securities and capital expenditures.
• Financing cash flow was negative $6.0 million, primarily reflecting repayment of Air T’s credit-line borrowings and net repayment of Delphax debt.
• Air T had no borrowings outstanding under its $20.0 million senior secured revolving credit facility at year-end. The facility matures April 1, 2017 and is subject to financial and operating covenants.
• Consolidated current and long-term debt totaled approximately $1.9 million at year-end, substantially representing Delphax borrowings. Air T’s revolving facility was undrawn.
• Total assets increased to $52.2 million from $43.5 million, and Air T stockholders’ equity increased to $34.8 million from $29.8 million.
• Marketable securities had a fair value of approximately $9.7 million, including $4.7 million of Insignia Systems stock. Gross unrealized gains were $422,000 and gross unrealized losses were $557,000.

Material Changes Versus the Prior Period

• Air T entered into new FedEx dry-lease agreements effective June 1, 2015. The agreements increased aircraft rental rates, maintenance labor rates and administrative fees, while shifting certain operating-cost risks to Air T’s cargo subsidiaries.
• Air T formed Air T Global Leasing in October 2015.
• Air T invested in Delphax in November 2015 through preferred stock, a warrant and a $2.5 million senior subordinated note. Although the equity interest was a minority interest, Air T determined that it controlled Delphax and began consolidating it.
• GGS backlog increased to $10.0 million from $2.8 million. All reported GGS backlog was expected to be filled in fiscal 2017.
• The company continued its policy of paying no regularly scheduled annual cash dividend and made no share repurchases during fiscal 2016.
• Fiscal fourth-quarter revenue was $34.6 million, but the company reported a $2.3 million operating loss and a $1.1 million net loss, compared with a $1.4 million operating loss and $856,000 net loss in the prior-year fourth quarter. The filing does not provide a single clear explanation for all fourth-quarter volatility, although GGS seasonality and Delphax-related charges and losses were relevant.

Guidance, Outlook, Risks and Unusual Items

• No formal consolidated earnings or revenue guidance is provided.
• On June 1, 2016, after year-end, the FedEx agreements were extended to May 31, 2020, but the weighted-average administrative fee per aircraft was reduced by more than 2%. Management expects the reduction to have a substantially greater adverse effect on cargo-segment operating income because unreimbursed operating costs are expected to increase materially.
• FedEx accounted for 46% of consolidated revenue and 24% of accounts receivable. FedEx may terminate the agreements on 90 days’ notice and may terminate an individual aircraft lease on 10 days’ notice. The loss or reduction of FedEx business would be material.
• In April 2016, Delphax’s largest customer, representing approximately 50% of legacy revenue, notified Delphax that it planned to reduce order volume by approximately 90% and phase out legacy printers within 18 months. Delphax engaged a turnaround consultant, and management expected a significant impact on the quarter ending June 30, 2016.
• Delphax was out of compliance with financial covenants on its $7.0 million senior secured revolving facility. The lender had the contractual right to stop further borrowings and accelerate approximately $1.8 million outstanding, although it had not done so as of the filing date. Air T did not guarantee this facility.
• Air T recorded a $100,000 goodwill impairment and a $50,000 tradename impairment related to Delphax during the fourth quarter.
• GGS remains exposed to seasonal demand and winter weather conditions. The USAF deicer contract did not produce deicer-unit sales during fiscal 2016, and government purchases depend on requirements and available funding.
• GAS depended on two customers for approximately 48% of segment revenue; LSG SkyChefs alone represented approximately 33%.
• In June 2016, Air T acquired land and committed approximately $1.9 million to construct a new headquarters facility expected to be completed in fiscal 2018.
• The filing identifies risks related to aviation regulation, FAA certifications, fuel and operating costs, customer concentration, cybersecurity, marketable-security volatility, product liability, leases, economic conditions and the ability to recover Air T’s Delphax investments.

Most Important Facts for Investors to Verify

• Whether the amended FedEx fee structure and higher unreimbursed operating costs materially reduce overnight air cargo profitability.
• FedEx contract renewal, termination rights, aircraft counts and route volumes, given the 46% revenue concentration.
• Delphax’s liquidity, covenant compliance, customer attrition, turnaround plan and potential impairment of Air T’s debt, preferred-stock and warrant investments.
• Whether the $10.0 million GGS backlog converts to revenue and cash flow as expected, particularly in light of seasonal and government-order risks.
• GAS contract profitability and remediation of fixed-price contracts that produced losses.
• Operating cash conversion, inventory growth and liquidity after the year-end cash decline.
• Future effects of the $1.9 million headquarters commitment and related-party lease transition.
• The filing’s audited financial statements received an unqualified opinion, but the auditor did not provide an attestation opinion on internal control over financial reporting because Air T qualifies for the applicable smaller-reporting-company exemption.