Air T, Inc. Form 10-Q 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. This unaudited Form 10-Q covers the three and six months ended September 30, 2011, the second quarter and first six months of fiscal 2012, compared with the corresponding fiscal 2011 periods.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Six Months Ended September 30 |
|---|---|---|
| Revenue | $25.461 million | $42.022 million |
| Operating income | $0.919 million | $1.170 million |
| Operating margin | Approximately 3.6% | Approximately 2.8% |
| Net income | $0.593 million | $0.761 million |
| Net margin | Approximately 2.3% | Approximately 1.8% |
| Diluted EPS | $0.24 | $0.31 |
- Quarterly revenue increased 26% year over year, while operating income increased 13% and net income increased 9%.
- Six-month revenue increased 19%, but operating income declined 5% and net income declined 10% year over year.
- Six-month operating cash flow was negative $1.176 million, compared with negative $5.096 million in the prior-year period.
- Six-month investing cash flow was negative $0.555 million, including $0.606 million of capital expenditures. Financing cash flow was negative $0.494 million, including a $0.612 million dividend payment.
- Cash and cash equivalents were $4.291 million at September 30, 2011, down from $6.515 million at March 31, 2011. Working capital was $22.515 million.
- The company had no amounts outstanding under its $7.0 million secured revolving credit facility; the full $7.0 million was available at quarter-end. The facility was extended to August 31, 2013, and the company was in compliance with its requirements.
- Total assets were $34.666 million and stockholders’ equity was $26.516 million at September 30, 2011. Long-term obligations were zero, and current obligations were $1,775.
Material Changes Versus the Prior Comparable Period
- Overnight air cargo: Quarterly revenue increased 20% to $12.340 million and segment operating income increased 47% to $0.981 million. Six-month revenue increased 20% to $23.167 million and segment operating income increased 37% to $1.913 million. Growth reflected additional ATR-72 aircraft, higher administrative fees and maintenance activity, and pass-through operating costs.
- Ground equipment sales: Quarterly revenue increased 59% to $11.175 million, primarily because $5.234 million of deicers were delivered to the U.S. Air Force. Segment operating income fell 40% to $0.218 million because of competitive pricing, lower margins, production inefficiencies and higher production and engineering costs. For the six months, the segment generated an operating loss of $0.092 million versus income of $0.199 million in the prior-year period.
- Ground support services: Quarterly revenue declined 31% to $1.947 million and operating income declined 32% to $0.157 million. Six-month revenue declined 30% to $3.511 million and operating income declined 63% to $0.195 million, primarily because of reduced work under the Delta Airlines contract and the absence of a prior-year one-time equipment sale.
- General and administrative expense increased 7% for the quarter and 6% for the six months. Investment income declined because cash and investment balances were lower.
- Inventories increased to $12.706 million from $11.538 million at March 31, 2011, while accounts receivable increased to $12.211 million from $11.690 million.
Outlook, Commentary, Risks and Unusual Items
- GGS reported a $20.0 million order backlog at September 30, 2011, compared with $14.6 million a year earlier and $9.6 million at March 31, 2011.
- In September 2011, GGS received a $5.1 million U.S. Air Force purchase order for flight-line tow tractors scheduled for delivery between April and September 2012. The value and timing of additional military orders depend on annual requirements and available funding.
- The company remains highly dependent on FedEx: the air cargo segment provided approximately 55% of consolidated revenue during the six months ended September 30, 2011. FedEx may terminate its agreements on 30 days’ notice, and the company states that loss of the contracts would materially adversely affect results.
- GGS faces competitive pricing pressure, lower margins under its current U.S. Air Force deicer contract, production inefficiencies and seasonal demand. Its U.S. Air Force contracts were scheduled to run through July 2012 and September 2012, respectively, subject to extension options.
- GAS continues to experience reduced revenue and profitability following revisions to its Delta contract. Management expects new business and locations to generate lower margins than the prior Delta work.
- The company states that GGS remains somewhat seasonal, particularly for commercial deicer deliveries, although military and international sales have reduced historical seasonality.
- Management reported no material subsequent events and no pending or threatened material litigation. Disclosure controls and procedures were deemed effective, with no material change in internal control over financial reporting during the quarter.
- The company paid a $0.25-per-share dividend in June 2011. Future dividends remain subject to profitability and other factors determined by the board.
Important Facts for Investors to Verify
- Whether FedEx contract renewals, aircraft additions and pass-through cost arrangements support continued air cargo growth.
- Conversion of GGS’s $20.0 million backlog and $5.1 million Air Force order into revenue and cash, including the margins achieved.
- Whether GGS can restore positive segment profitability despite competitive pressure and production inefficiencies.
- The durability and economics of the revised Delta contract and replacement business at GAS.
- Cash conversion and working-capital requirements, particularly the negative operating cash flow and elevated inventories.
- Availability and covenant compliance under the $7.0 million revolving credit facility, including borrowing-base limitations.
- Future U.S. Air Force funding, contract extensions and the potential return of seasonal volatility in GGS sales.