Air T, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2017, compared with fiscal 2016. The request metadata references “2015 Q4,” but the supplied filing is Air T’s fiscal 2017 annual report, filed October 13, 2017.
Business Context
Air T is a decentralized holding company operating six segments: overnight air cargo, ground equipment sales, ground support services, printing equipment and maintenance, commercial jet engines and parts, and leasing. Fiscal 2017 included a full year of consolidated Delphax results and the addition of Contrail Aviation and Jet Yard. AirCo was acquired after year-end and will be included beginning in fiscal 2018.
- Overnight air cargo represented approximately 47% of consolidated revenue and is heavily dependent on FedEx.
- Ground equipment sales represented approximately 21% of revenue.
- Ground support services represented approximately 21% of revenue.
- Printing equipment and maintenance represented approximately 6% of revenue.
- Commercial jet engines and parts represented approximately 5% of revenue.
- Leasing represented less than 1% of revenue.
Financial Performance and Position
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $148.5 million | $148.2 million | Flat |
| Operating income (loss) | $(3.1) million | $6.0 million | Deteriorated $9.1 million |
| Operating margin | (2.1%) | 4.1% | Down approximately 6.2 points |
| Net income (loss) | $(4.9) million | $3.8 million | Declined $8.7 million |
| Net loss attributable to Air T stockholders | $(3.2) million | $4.4 million | Declined $7.6 million |
| Basic loss per share | $(1.51) | $1.86 | Declined $3.37 |
| Cash flow from operating activities | $(7.6) million | $3.2 million | Declined $10.8 million |
| Cash and cash equivalents | $2.8 million | $5.3 million | Down $2.6 million |
| Working capital | $28.6 million | $23.2 million | Up $5.3 million |
| Total assets | $65.3 million | $52.2 million | Up $13.2 million |
| Air T stockholders’ equity | $23.0 million | $34.2 million | Down $11.3 million |
Operating expenses increased 7% to $151.6 million. The principal drivers were the Delphax operating loss, higher corporate and acquisition-related expenses, increased flight crew costs, and investment in the ground support services infrastructure.
Segment Results
- Overnight air cargo: Revenue increased 2% to $69.6 million, but operating income declined 17% to $2.7 million because of higher costs not reimbursed by FedEx and lower maintenance revenue.
- Ground equipment sales: Revenue decreased 39% to $31.4 million and operating income decreased 63% to $2.4 million, primarily because a large prior-year commercial deicer order did not recur. Backlog declined from $10.0 million to $2.8 million.
- Ground support services: Revenue increased 23% to $30.5 million; the operating loss improved 52% to $0.5 million. New customer locations, additional technicians, parts sales, and revised agreements contributed to the improvement.
- Printing equipment and maintenance: Revenue increased to $9.0 million, but the segment generated a $5.9 million operating loss. Delphax recorded approximately $5.6 million of inventory, asset impairment, and severance-related adjustments.
- Commercial jet engines and parts: Contrail Aviation and Jet Yard contributed approximately $7.5 million of revenue and $0.5 million of operating income from their acquisition dates through year-end.
- Leasing: Revenue increased to $0.5 million from negligible prior-year revenue, with approximately $0.4 million of operating income.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $2.8 million, plus $0.9 million of restricted cash, including statutory and reinsurance collateral for the captive insurer.
- The company had a $25.0 million senior secured revolving credit facility, with $17.9 million outstanding at March 31, 2017. Borrowings generally bore interest at one-month LIBOR plus 2.00%.
- Long-term debt was $18.4 million, compared with negligible long-term debt in the prior year. The balance primarily reflected revolver borrowings and a $0.6 million construction loan for the new headquarters.
- The company was out of compliance with certain leverage and tangible net worth covenants at multiple measurement dates. The lender waived the identified defaults and covenant breaches, but subsequent amendments increased interest rates by 0.25% until compliance was demonstrated.
- Cash used in investing activities was $3.7 million, including $4.6 million for acquisitions and $2.3 million of capital expenditures.
- Financing activities provided $8.7 million, principally from revolver borrowings, partly offset by a $7.9 million repurchase of 329,738 shares.
- No regular cash dividend was declared, consistent with the company’s policy adopted in 2014.
Material Changes and Unusual Items
- Delphax’s largest customer accelerated the retirement of legacy printing systems, demand declined broadly, and sales of the new elan printer failed to meet expectations. Delphax’s operations were substantially curtailed.
- Delphax generated an operating loss of approximately $5.9 million in fiscal 2017. Its related goodwill and intangible assets were impaired, inventory reserves increased, and severance liabilities were recorded.
- Air T acquired Contrail Aviation and Jet Yard for aggregate cash consideration of approximately $4.0 million, excluding potential Contrail earn-outs. Contrail’s estimated earn-out liability was $2.9 million at year-end.
- Air T recognized $2.8 million of other-than-temporary investment impairment losses, including approximately $2.6 million related to Insignia Systems. It also recorded approximately $1.2 million of special dividend income from Insignia.
- The company repurchased 329,738 shares for $7.9 million, reducing shares outstanding to approximately 2.0 million at March 31, 2017.
- Management identified material weaknesses in revenue recognition controls, Delphax’s control environment, accounting for Delphax investments and loss attribution, and monitoring of debt covenant compliance. Disclosure controls and internal control over financial reporting were therefore deemed ineffective.
- The company restated prior-period financial information because of an error in the methodology used to attribute Delphax losses to non-controlling interests.
Outlook, Risks and Contingencies
- Management expected the June 1, 2017 amendment to the FedEx agreements to improve overnight air cargo profitability relative to fiscal 2017, although future fee amendments could have the opposite effect.
- GAS expected revised contracts at previously unprofitable locations to improve profitability, while its five-year Delta award was expected to more than double annualized Delta-location revenue relative to the prior run rate.
- GGS backlog was $2.8 million, all expected to be fulfilled in fiscal 2018. Delphax backlog was $3.6 million, although the subsequent foreclosure and bankruptcy of Delphax Canada materially affect the outlook for that business.
- FedEx accounted for approximately 47% of consolidated revenue. The agreements permit termination on 90 days’ notice, and aircraft leases may be reduced on 10 days’ notice. The loss of FedEx would materially affect the company.
- GAS derived approximately 42% of segment revenue from two customers, creating customer concentration risk.
- Delphax was in covenant default under its senior credit agreement. In August 2017, Air T foreclosed on Delphax Canada’s assets after obtaining a bankruptcy order and accepted the assets in satisfaction of approximately $1.5 million owed under the facility.
- Jet Yard had not completed a required demolition pad under its Pinal County lease, creating a potential lease termination risk.
- Air T’s revolving facility is secured by substantially all assets of the company and participating subsidiaries and contains restrictive financial and operating covenants.
- Additional risks include aviation regulation and certification, accidents and product liability, weather-related demand for deicing equipment, cybersecurity, investment-market volatility, interest rates, and the ability to recover Delphax-related investments.
Investor Verification Priorities
- Verify the status of the revolving credit facility, covenant waivers, amended maturity, interest-rate step-up, and subsequent compliance.
- Assess current FedEx aircraft counts, fee amendments, contract renewal or termination exposure, and the impact of pass-through and non-pass-through costs.
- Review the financial and operating consequences of the Delphax Canada foreclosure and bankruptcy, including recoveries on Air T’s debt, inventory, and other assets.
- Evaluate whether GAS’s new customer contracts and Delta expansion have translated into sustained profitability.
- Reconcile the reported investment impairment, Insignia ownership and liquidity, and any continuing market-value exposure.
- Confirm remediation of the material weaknesses and the effect of the prior-period restatement on reported earnings and equity.
- Review the Contrail earn-out, redeemable non-controlling interest, put/call arrangements, and related-party facility lease.