Air T, Inc. Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2017, compared with the same periods in 2016. The request metadata identifies “2016 Q2,” but the supplied filing is the September 30, 2017 Form 10-Q, filed November 13, 2017. Financial statements are unaudited except for the March 31, 2017 balance sheet derived from audited statements.
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. The company expanded the commercial jet engines and parts segment through Contrail Aviation, Jet Yard, and the May 2017 acquisition of AirCo.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Six Months Ended September 30, 2017 | Six Months Ended September 30, 2016 |
|---|---|---|---|---|
| Revenue | $48.9 million | $38.5 million | $96.6 million | $69.0 million |
| Operating income (loss) | $0.5 million | $1.0 million | $2.7 million | $(6.1) million |
| Net income (loss) | $0.5 million | $1.1 million | $1.7 million | $(6.9) million |
| Net income (loss) attributable to Air T stockholders | $0.4 million | $1.1 million | $1.4 million | $(4.7) million |
| EPS, basic and diluted | $0.21 | $0.53 | $0.68 | $(2.11) |
| Cash flow from operations | Not separately provided | Not separately provided | $7.0 million | $(13.8) million |
Second-quarter revenue increased 27%, but operating income declined 53% because corporate expenses rose substantially, including professional fees related to financial statement restatements and costs associated with acquisitions. Six-month operating results improved sharply because the prior-year period included approximately $5.6 million of Delphax-related inventory, intangible asset, long-lived asset, and severance charges.
Revenue and Segment Developments
- Overnight air cargo: Six-month revenue increased 3% to $34.8 million and operating income increased 21% to $1.7 million. Higher FedEx administrative fees and billable maintenance hours supported results. FedEx accounted for substantially all segment revenue, and the company operated 80 aircraft under FedEx agreements.
- Ground equipment sales: Six-month revenue increased 40% to $21.5 million, primarily from higher commercial deicer sales. Operating income increased 21% to $1.3 million. Backlog was $20.4 million at September 30, 2017, compared with $9.8 million a year earlier.
- Ground support services: Six-month revenue increased 29% to $17.9 million and operating income improved to $0.6 million from a $0.4 million loss, reflecting new business, improved pricing, and additional locations.
- Printing equipment and maintenance: Six-month revenue was $4.4 million, down from $5.0 million, while operating income improved to approximately $0.4 million from a $7.0 million loss because prior-year impairment and restructuring charges did not recur. Delphax Canada entered bankruptcy proceedings and its assets were foreclosed by Air T.
- Commercial jet engines and parts: Six-month revenue increased to approximately $17.9 million from $1.3 million, driven by Contrail growth, AirCo, Jet Yard, new customers, and airframe sales. The segment generated approximately $0.8 million of operating income for the six months but a small operating loss in the second quarter, primarily due to AirCo.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and cash equivalents were $1.4 million at September 30, 2017, compared with $2.8 million at March 31, 2017. Restricted cash was $0.9 million.
- Working capital was $24.2 million, down $4.4 million from March 31, 2017.
- Operating cash flow was $7.0 million for the first six months, versus cash usage of $13.8 million in the prior-year period. The improvement was aided by net income, lower inventories, and working-capital changes.
- Investing cash usage was $11.9 million, including $8.3 million of capital expenditures and $2.9 million for business combinations.
- Total debt included approximately $13.9 million outstanding under the senior secured revolving facility, $1.6 million under the AirCo term loan, $1.5 million under the construction loan, and $4.9 million under Contrail’s separate revolving facility. Balance-sheet short-term and long-term debt totaled approximately $21.9 million, excluding certain consolidated and intercompany presentation effects.
- The $25.0 million revolving facility matured in April 2019 after an amendment extending the maturity. Approximately $11.1 million of borrowing availability remained at September 30, 2017, subject to borrowing-base and covenant requirements.
- Management stated that cash, working capital, and borrowing facilities were expected to provide adequate liquidity for the next twelve months, while also actively pursuing refinancing of the credit facility.
Material Changes, Unusual Items, and Risks
- AirCo was acquired for $2.4 million and generated a provisional, after-tax bargain purchase gain of approximately $0.5 million.
- Contrail’s first earnout payment was $1.0 million, based on approximately $2.1 million of EBITDA, and was paid in October 2017. A further $0.1 million D&D earnout was also paid in October 2017.
- Air T recognized a $0.8 million other-than-temporary impairment loss on investments during the six-month period. The company held approximately 1.82 million Insignia Systems shares, or about 15% of Insignia’s outstanding shares, at September 30, 2017.
- The company was not compliant with certain credit facility covenants at prior measurement dates and was not compliant with capital expenditure and assets-held-for-lease covenants at September 30, 2017. The lender waived the relevant defaults and modified the capital expenditure covenant.
- Disclosure controls and procedures were ineffective because material weaknesses in internal control over financial reporting had not been remediated. Weaknesses involved revenue recognition, Delphax controls and accounting, attribution of Delphax results, lender covenant monitoring, and accounting for the Delphax Canada foreclosure and bankruptcy.
- Prior-period financial statements were restated for accounting and attribution issues involving Delphax. The company incurred additional professional fees in connection with the restatements.
- FedEx contracts may be terminated on short notice under specified conditions, and loss of the FedEx relationship would materially affect the company.
- Delphax Canada’s bankruptcy proceedings remained ongoing at September 30, 2017. The company expected unsecured creditors to receive no payment but acknowledged potential successor-liability claims.
- After quarter-end, Airco 1 obtained a $3.4 million loan to finance part of the purchase of a Boeing 737-800 airframe for disassembly and parts sales. A proposed acquisition of Blue Clay Capital assets from a company owned by a director remained subject to closing conditions and investor consents.
Investor Verification Priorities
- Verify the sustainability of revenue and margin growth from Contrail, AirCo, Jet Yard, GGS, and GAS, including the effect of acquisitions and non-recurring transactions.
- Review the company’s refinancing plan, remaining credit availability, debt maturities, interest rates, collateral, and continuing covenant compliance.
- Assess the material weaknesses, restatements, remediation progress, and potential for further accounting adjustments.
- Evaluate concentration and termination risk associated with FedEx contracts and the financial effect of any contract changes.
- Monitor Delphax Canada’s bankruptcy, foreclosure-related claims, and the carrying value and future operating strategy of Delphax-related assets.
- Review exposure to Insignia and other marketable securities, including future impairment or fair-value volatility.
- Confirm completion and terms of the Airco airframe financing and the proposed Blue Clay Capital transaction.