Air T, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, compared with the three months ended June 30, 2017. The filing metadata references “2017 Q1,” but the filing itself reports fiscal 2019 first-quarter results for the period ended June 30, 2018. Air T operates overnight air cargo, ground equipment sales, ground support services, printing equipment and maintenance, commercial jet engines and parts, and corporate activities.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $60.9 million | $47.7 million | +$13.2 million, or 28% |
| Operating income | $2.6 million | $2.2 million | +$0.4 million, or 18% |
| Operating margin | 4.3% | 4.6% | Down approximately 0.3 percentage points |
| Net income | $3.3 million | $1.2 million | +$2.1 million |
| Net income attributable to Air T stockholders | $2.8 million | $1.0 million | +$1.9 million |
| Diluted earnings per share | $1.38 | $0.47 | +$0.91 |
| Operating cash flow | $14.7 million | $(2.1) million | +$16.9 million |
Net income attributable to Air T stockholders represented approximately 4.6% of revenue, compared with approximately 2.0% in the prior-year quarter. The improvement in net income was materially affected by a $2.0 million after-tax bargain purchase gain from the Worthington acquisition, in addition to stronger commercial jet engine and parts results.
- Revenue mix: Commercial jet engines and parts revenue increased to $27.3 million from $12.7 million, including $17.35 million from sales of four whole engines. Overnight air cargo revenue increased 5% to $17.6 million. Ground equipment sales increased 7% to $6.4 million.
- Weak segments: Printing equipment and maintenance revenue fell 90% to $0.3 million and generated a $0.3 million operating loss. Ground support services generated an $0.1 million operating loss versus $0.4 million of operating income in the prior-year quarter.
- Cash and liquidity: Cash, cash equivalents and restricted cash totaled $5.8 million at June 30, 2018. Working capital was $25.2 million, down $5.3 million from March 31, 2018. Management stated that operating cash flow, cash and other liquidity sources were expected to meet foreseeable cash requirements.
- Debt: Total debt was $41.2 million, or $40.9 million net of issuance costs, versus $48.5 million and $48.1 million net, respectively, at March 31, 2018. Debt included $9.5 million of short-term debt and $31.3 million of long-term debt. The company also had a $3.4 million Worthington term loan maturing November 30, 2019.
- Balance sheet: Total assets were $97.1 million and total liabilities were $67.6 million. Air T stockholders’ equity was $28.0 million, while redeemable non-controlling interest was $2.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by commercial jet engine and parts activity, including the acquisition of Worthington and four whole-engine sales. The segment’s operating income increased to $3.3 million from $0.8 million.
- Air T acquired substantially all of Worthington Aviation and Parts’ assets on May 4, 2018 for total consideration of $3.3 million, net of acquired cash. The preliminary purchase accounting produced a $2.0 million after-tax bargain purchase gain. Worthington contributed approximately $2.6 million of revenue and $0.2 million of operating income during the quarter.
- Operating expenses increased 28%, broadly matching revenue growth. Depreciation, amortization and impairment increased to $1.5 million from $0.4 million, principally reflecting commercial jet engine and parts assets.
- Operating cash flow improved substantially, principally because inventory sales generated approximately $11.3 million of cash and accounts payable increased by approximately $3.9 million.
- Investing cash use increased to $6.7 million, including $3.3 million for Worthington, $2.0 million invested in a quota-share reinsurance program, and $0.5 million of capital expenditures and other investments.
- Financing cash use was $7.3 million, reflecting $38.2 million of line-of-credit repayments, partially offset by $28.9 million of line-of-credit proceeds and $3.4 million of term-loan proceeds.
- Air T adopted ASC 606 revenue recognition and several other accounting updates effective April 1, 2018. Management reported that the transition impact of ASC 606 was immaterial.
Guidance, Outlook, Risks and Unusual Items
The filing provides no quantitative earnings or revenue guidance. Management’s stated objective is to expand and diversify cash earnings power and grow after-tax cash flow per share. Ground equipment sales are seasonal, with typically lower revenue and operating income in the first and fourth fiscal quarters because deicers are generally delivered before winter.
- Acquisition and valuation risk: Worthington’s purchase price allocation remained provisional at June 30, 2018; assets, liabilities, intangible assets and the bargain purchase gain could be adjusted during the measurement period.
- Concentration and volatility: The quarter’s commercial jet engine results benefited from four whole-engine sales totaling $17.35 million, which were not present in the prior comparable period and may not recur.
- Debt and refinancing: The company has material borrowings, floating-rate debt, covenant requirements and significant maturities beginning in 2019. Worthington debt matures in November 2019, while other revolvers mature in 2019.
- Inventory and receivables: The company holds substantial aviation inventory and relies on estimates for obsolescence, marketability and collectability. Inventory declined to $27.6 million from $34.2 million at March 31, 2018, contributing materially to operating cash flow.
- Delphax exposure: Delphax remained consolidated as a variable interest entity and reported a $0.1 million net loss for the quarter. Delphax Canada’s bankruptcy proceedings were ongoing, and the company remained the primary obligor for its liabilities pending legal release.
- Investments: Air T owned approximately 29% of Insignia, with a reported investment basis of approximately $4.8 million and market value of approximately $5.7 million at June 30, 2018. Marketable securities were subject to earnings volatility following adoption of fair-value accounting for equity securities.
- Contingent consideration: Remaining contingent consideration related to Contrail Aviation was $2.0 million, including $1.5 million current and $0.5 million non-current, according to the filing.
Most Important Facts for Investors to Verify
- Whether commercial jet engine and parts revenue and margins can be sustained without recurring whole-engine sales.
- The final purchase price allocation and any subsequent adjustment to the $2.0 million Worthington bargain purchase gain.
- Debt maturities, borrowing-base availability, covenant compliance and refinancing plans for 2019 maturities.
- The quality and repeatability of the $14.7 million quarterly operating cash flow, particularly the inventory liquidation and increase in accounts payable.
- Recovery prospects for printing equipment and maintenance and ground support services, both of which deteriorated materially.
- The status and potential financial impact of Delphax Canada’s bankruptcy proceedings and related obligations.
- Market value volatility and accounting impacts associated with the Insignia investment and other securities.