Air T, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2017, representing the third quarter and first nine months of fiscal 2018. The filing is unaudited except for the March 31, 2017 balance sheet derived from audited financial statements.
Business Context
Air T is a decentralized holding company operating in overnight air cargo, ground equipment sales, ground support services, printing equipment and maintenance, commercial jet engines and parts, leasing, and corporate/investment activities. Recent expansion included AirCo, additional commercial aviation assets, and the December 2017 acquisition of Blue Clay Capital Management.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Revenue | $44.5 million | $35.8 million | $141.1 million | $104.8 million |
| Operating income (loss) | $0.6 million | $1.6 million | $3.2 million | $(4.4) million |
| Operating margin | 1.2% | 4.6% | 2.3% | (4.2)% |
| Net income (loss) | $(0.7) million | $1.7 million | $1.0 million | $(5.2) million |
| Net income (loss) attributable to Air T stockholders | $(0.7) million | $1.2 million | $0.7 million | $(3.4) million |
| EPS, basic and diluted | $(0.33) | $0.60 | $0.35 | $(1.60) |
Cash flow and liquidity: Operating cash flow was $8.3 million for the first nine months, compared with $(10.7) million in the prior-year period. Investing cash flow was $(18.6) million, including $15.2 million of capital expenditures, principally related to commercial aviation assets. Financing cash flow was $15.5 million. Cash and cash equivalents increased to $8.0 million from $2.8 million at March 31, 2017; restricted cash was $0.9 million. Working capital was $30.1 million.
Debt: The December 2017 refinancing established $26.9 million of MBT financing, including a $10.0 million revolver and term loans of $10.0 million, $5.0 million, and $1.9 million. Reported company debt was $2.5 million current and $32.3 million long-term on the consolidated balance sheet. Contrail had $9.4 million outstanding and $5.6 million available under its separate facility; AirCo 1 had approximately $3.3 million outstanding under its aircraft loan. The Company was in compliance with applicable MBT and Contrail covenants at December 31, 2017.
Material Changes Versus Prior Comparable Period
- Revenue increased 24% in the quarter and 35% year to date, driven primarily by ground equipment sales, commercial jet engines and parts, ground support services, and higher air-cargo administrative fees.
- Quarterly operating income declined 66% despite higher revenue, as printing and commercial aviation results weakened and general and administrative expenses rose 46%.
- Ground equipment sales revenue increased 139% in the quarter and 66% year to date, while nine-month operating income increased to $2.4 million from $0.7 million.
- Commercial jet engines and parts revenue increased 407% year to date, reflecting Contrail growth, AirCo, and aircraft and engine-related sales; quarterly operating results declined to a $0.3 million loss.
- Printing equipment and maintenance revenue declined 66% in the quarter and 23% year to date, reflecting lost customers and the continuing decline of Delphax operations.
- The prior-year period included approximately $5.6 million of Delphax-related inventory, intangible, tangible-asset, and severance adjustments that did not recur in 2017.
Unusual Items, Outlook, and Risks
- The quarter included a $0.8 million other-than-temporary impairment on Oxbridge Re securities and a $0.2 million unrealized loss on an interest-rate swap. Year-to-date other-than-temporary investment impairment was $1.6 million.
- The Tax Cuts and Jobs Act produced a $0.1 million deferred-tax revaluation expense, partially offset by recognition of a $0.3 million refundable minimum-tax-credit receivable related to Delphax.
- Contrail paid a $1.0 million earnout in October 2017; $1.9 million of estimated earnout liability remained at December 31, 2017. A put/call arrangement may require future purchase of the 21% non-controlling interest after the fifth anniversary of the acquisition.
- Delphax Canada remained in bankruptcy proceedings after Air T foreclosed on its assets in August 2017. Air T expects unsecured creditors to receive no payment but acknowledges potential direct or successor-liability claims.
- No specific quantitative earnings or revenue guidance was provided. Management stated that cash, working capital, and borrowing facilities were expected to provide adequate liquidity for the next twelve months.
- FedEx accounted for approximately 37% of nine-month revenue and 41% of quarterly revenue in the overnight air-cargo segment. The contracts may be terminated on relatively short notice, and loss of the FedEx relationship would materially affect the Company.
- Management identified material weaknesses in revenue-recognition controls, Delphax controls, investment and variable-interest-entity analysis, Delphax loss attribution, debt-covenant monitoring, and accounting for the Delphax foreclosure and bankruptcy. Disclosure controls were therefore ineffective as of December 31, 2017.
Investor Verification Items
- Verify the sustainability and margins of the large ground equipment and commercial aviation revenue increases, including backlog and customer concentration.
- Assess Delphax bankruptcy exposure, potential successor-liability claims, remaining assets and liabilities, and the effect of the foreclosure on future operations.
- Reconcile total consolidated debt, subsidiary borrowings, maturities, interest rates, collateral, guarantees, and compliance with financial covenants.
- Review remediation of the disclosed material weaknesses and any restatements or control-related developments in subsequent filings.
- Evaluate the valuation and volatility of marketable securities, including the Company’s growing ownership of Insignia Systems and related impairment risk.
- Monitor the Contrail earnout and put/call obligations, AirCo aircraft-part investment, and the January 2018 additional $9.9 million Contrail borrowing disclosed as a subsequent event.