Air T, Inc. 2014 Form 10-K Summary
Business context and reporting period
Air T, Inc. operates three segments: overnight air cargo through Mountain Air Cargo and CSA Air; ground equipment sales through Global Ground Support; and ground support services through Global Aviation Services. The filing covers the fiscal year ended March 31, 2014, with comparison to fiscal 2013. The company also formed Space Age Insurance Company, a captive insurer, in March 2014.
Revenue mix was 52% overnight air cargo, 31% ground equipment sales and 17% ground support services. FedEx accounted for approximately 52% of consolidated revenue and all overnight air cargo revenue. The company had 576 full-time and full-time-equivalent employees and operated 80 aircraft under FedEx agreements, including four soft-parked aircraft.
Key financial metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Operating revenue | $100.8 million | $103.1 million | Down 2% |
| Operating income | $2.6 million | $2.7 million | Down 4% |
| Operating margin | 2.6% | 2.6% | Approximately flat |
| Net income | $1.47 million | $1.67 million | Down 12% |
| Net margin | 1.5% | 1.6% | Lower |
| Diluted EPS | $0.60 | $0.68 | Down 12% |
| Cash flow from operations | $(0.6) million | $4.4 million | Declined $4.9 million |
| Capital expenditures | $1.3 million | $0.4 million | Increased $0.9 million |
| Cash and cash equivalents | $3.8 million | $9.2 million | Down $5.4 million |
| Working capital | $22.1 million | $22.7 million | Down $0.5 million |
| Total assets | $37.2 million | $36.1 million | Up $1.2 million |
| Long-term debt, including current portion | None | None | No change |
The company had a $7.0 million secured revolving credit facility, expiring August 31, 2015. No amount was outstanding at March 31, 2014, and the company was in compliance with its covenants. Approximately $2.5 million of cash and investments was not FDIC insured.
Material changes versus the prior comparable period
- Overnight air cargo revenue increased 5% to $52.3 million, primarily because higher reimbursable maintenance and operating costs were passed through to FedEx at cost. Segment operating income decreased 31% to $2.2 million because of higher maintenance labor, rent and repair costs and two fewer ATR aircraft operated for FedEx.
- Ground equipment sales revenue decreased 22% to $31.5 million. U.S. Air Force deicer and tow-tractor sales fell substantially, partly offset by a $5.3 million increase in commercial deicer sales. Segment operating income increased 170% to $2.4 million as gross margin improved approximately eight percentage points due to better production efficiency and a more favorable product mix.
- Ground support services revenue increased 31% to $16.9 million and operating income increased 25% to $1.1 million, driven by new customers, locations and increased work for existing customers. Segment margins declined slightly because of higher management and infrastructure costs.
- General and administrative expense increased 14% to $12.8 million, including approximately $566,000 of severance related to former Chief Executive Officer Walter Clark and higher staffing, rent, professional fee and other costs.
- The effective tax rate increased to 44.8% from 38.8%, primarily because of a prior-year state tax true-up. Fiscal 2014 also included $62,000 of additional federal tax paid to settle an IRS examination.
- Inventory increased to $12.2 million from $8.2 million, reflecting the higher equipment backlog, contributing to negative operating cash flow. Backlog increased to $14.4 million from $6.5 million, with management expecting it to be filled in fiscal 2015.
- Cash used in financing increased because of the $1.1 million repurchase of Mr. Clark’s shares, the $394,000 repurchase of stock options and a higher cash dividend. In May 2014, the board discontinued the regularly scheduled annual dividend and authorized repurchases of up to 750,000 shares.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expects the ground equipment business to remain seasonal, particularly because commercial deicer deliveries are concentrated before the winter season.
- FedEx agreements were renewable annually and terminable by FedEx on 30 days’ notice; current contracts extended through October 31, 2014. Replacement contract negotiations had resumed but were in early stages, and terms could differ materially from current agreements.
- FedEx’s aircraft allocation and route decisions directly affect revenue and maintenance activity. The company is not guaranteed a specific number of aircraft or routes.
- The LSG SkyChefs contract represented approximately 36% of GAS revenue in fiscal 2014 and was subject to renewal in July 2014. Delta represented approximately 16% of GAS revenue.
- New U.S. Air Force contracts were obtained after year-end: a two-year deicer contract through July 2016 with extension options, subject to government requirements and funding. These contracts do not require the USAF to purchase a minimum number of units.
- The company formed SAIC with an initial capitalization of $250,000 to insure previously uninsured company risks and participate in reinsurance arrangements. Management identified a material weakness in internal control over financial reporting related to accounting for deferred taxes associated with premiums paid to SAIC. Management’s remediation plan included additional employee training and third-party tax review.
- The independent auditor issued an unqualified opinion on the financial statements, but the company was not required to obtain, and the auditor did not provide, an attestation opinion on internal control over financial reporting.
- Other risks include FAA certification or regulatory action, aviation accidents and product liability, competition, weather-related deicer demand, aviation industry conditions, customer concentration and potential inadequacy of insurance coverage. Management stated that pending product liability and employment matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Renewal terms and economics of the FedEx contracts after October 31, 2014, including aircraft count, routes, fees and termination provisions.
- Whether the increased equipment backlog converts to revenue and cash without excess inventory or margin deterioration.
- Actual orders and funding under the new and existing USAF contracts.
- Renewal and customer concentration exposure within the GAS segment, particularly the LSG SkyChefs contract.
- Remediation of the material weakness involving SAIC-related deferred tax accounting and whether future filings report effective internal controls.
- Liquidity trends following the decline in cash, negative operating cash flow and discontinuation of the regular dividend.
- Effects of the authorized 750,000-share repurchase program on shares outstanding, cash balances and capital allocation.