Air T, Inc. Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2018, compared with fiscal 2017. The supplied filing is a fiscal 2018 Form 10-K, not a 2016 Q4 filing as indicated in the request metadata.
Business Context
Air T is a decentralized holding company operating across overnight air cargo, ground equipment sales, ground support services, printing equipment and maintenance, commercial jet engines and parts, leasing, and corporate/investment activities. Major fiscal 2018 developments included the acquisition of AirCo aviation parts assets, acquisition of Blue Clay Capital Management, continued expansion of Contrail Aviation and related engine-assets operations, and foreclosure of Delphax Canada assets following bankruptcy proceedings.
Financial Performance and Key Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $194.5 million | $148.5 million | Up 31% |
| Operating income (loss) | $4.25 million | $(3.10) million | Improvement of $7.35 million |
| Operating margin | 2.2% | (2.1)% | Improved |
| Net income (loss) | $2.46 million | $(4.94) million | Returned to profitability |
| Net income (loss) attributable to Air T stockholders | $2.28 million | $(3.21) million | Returned to profitability |
| Diluted EPS | $1.11 | $(1.51) | Improved |
| Net cash used in operating activities | $(0.28) million | $(7.55) million | Improved by $7.28 million |
| Net cash used in investing activities | $(26.42) million | $(3.70) million | Higher investment spending |
| Net cash provided by financing activities | $28.74 million | $8.69 million | Higher borrowings |
Fiscal 2018 revenue growth was led by ground equipment sales, commercial jet engines and parts, ground support services, and a modest increase in overnight air cargo. GGS revenue increased 59% to approximately $50.0 million, while its operating income increased 44% to $3.84 million. Commercial jet engines and parts revenue increased substantially with the addition of AirCo and a full year of Contrail results; segment operating income was approximately $2.00 million. Overnight air cargo revenue increased 5% to $72.8 million and operating income increased to $4.13 million.
Printing equipment and maintenance revenue declined 35% to approximately $6.1 million, but the segment’s operating loss narrowed substantially to approximately $0.75 million from $5.94 million, primarily because the prior-year Delphax impairment and restructuring effects did not recur. Ground support services remained slightly loss-making, with a fiscal 2018 operating loss of approximately $0.18 million.
At March 31, 2018, total assets were $97.1 million, total liabilities were $70.9 million, and Air T stockholders’ equity was $25.1 million. Cash and cash equivalents were $4.8 million; working capital was $30.5 million. Net inventory increased to $34.2 million from $19.8 million, largely reflecting commercial jet engine and parts inventory. The filing reports approximately $48.1 million of debt, net of unamortized issuance costs.
Material Changes Versus the Prior Period
- Revenue increased 31%, and Air T returned to positive operating income and net income.
- The June 1, 2017 FedEx agreement amendment increased administrative fee revenue and contributed to improved overnight air cargo profitability.
- GGS benefited from higher deicing and catering truck sales; backlog rose to $13.3 million from $2.8 million.
- AirCo was acquired for $2.4 million and produced fiscal 2018 revenue; the transaction generated a $0.78 million pretax bargain purchase gain, or approximately $0.50 million after tax.
- Contrail expanded its financing and engine-related asset base. Capital expenditures increased to $20.2 million, primarily for engine assets intended for lease.
- The Company refinanced its prior BB&T facility with a $26.9 million MBT package consisting of a revolving facility and term loans, and added a $1.68 million real estate loan.
- Delphax Canada entered bankruptcy and Air T foreclosed on its assets in August 2017. Bankruptcy proceedings remained ongoing at March 31, 2018, and Delphax Canada remained the primary obligor on its liabilities.
- The Company adopted the equity method for its approximately 28% Insignia Systems investment after additional purchases increased ownership above 20%.
Liquidity, Debt, Outlook, and Risks
Cash flow from operations remained slightly negative despite the return to profitability. Financing activities supplied $28.7 million of cash, while investing activities used $26.4 million. The company’s principal credit agreements contain financial covenants, including a minimum 1.25-to-1.00 debt service coverage ratio and a 1.50-to-1.00 asset coverage ratio. Management reported compliance with applicable covenants at March 31, 2018.
At March 31, 2018, Contrail had $14.8 million outstanding under a $20.0 million revolving facility and $9.9 million outstanding under an additional loan. AirCo 1 had approximately $2.36 million outstanding on an airframe loan and $4.95 million outstanding on a $5.0 million revolving facility. Contractual financing obligations totaled approximately $48.1 million, with $9.3 million due in fiscal 2019 and $16.9 million due in fiscal 2020.
No formal quantitative earnings guidance was provided. Management’s outlook depends on continued growth in aviation parts and engine activities, execution of GGS backlog, improved ground support services performance, and preservation of the FedEx relationship. Subsequent to year-end, Air T acquired Worthington Aviation Parts for approximately $3.3 million and obtained related financing of up to $4.9 million.
- FedEx represented approximately 38% of consolidated revenue and all overnight air cargo revenue. FedEx may terminate the agreements on 90 days’ notice and individual aircraft leases on 10 days’ notice.
- GAS derived approximately 47% of revenue from two major customers, creating customer concentration risk.
- FedEx administrative fees can change annually, producing significant volatility in air cargo profitability.
- GGS is exposed to winter weather, government funding, aviation industry conditions, and seasonal demand.
- Delphax remains subject to bankruptcy, liquidation, recovery, and potential successor-liability risks.
- Jet Yard’s Pinal County lease may be affected because required facility improvements had not been completed and rezoning prevented construction at the time of filing.
- The Company held approximately $2.6 million of marketable securities at fair value and recognized approximately $1.56 million of other-than-temporary investment impairment losses in fiscal 2018.
- Debt is secured by substantial company and subsidiary assets and is subject to financial and operational covenants.
- Management stated that previously identified material weaknesses in internal controls were remediated, but the fiscal 2018 assessment excluded AirCo and BCCM because of their proximity to year-end acquisitions.
Important Facts for Investors to Verify
- Whether FedEx renews, maintains, or reduces aircraft and route allocations under the dry-lease agreements.
- The sustainability of fiscal 2018 profitability excluding bargain purchase gains, investment items, and other unusual items.
- Contrail’s ability to generate sufficient cash flow to service its expanding debt and meet its financial covenants.
- Realization of the $13.3 million GGS backlog and the effect of seasonality and weather on delivery timing.
- Cash conversion, given that operating cash flow remained negative while inventory and capital expenditures increased materially.
- The final outcome of Delphax Canada’s bankruptcy and any potential claims against Air T.
- The impact of the Worthington acquisition and related debt on fiscal 2019 leverage and liquidity.
- The effect of customer concentration at FedEx and GAS, and the status of the Company’s internal-control processes for newly acquired businesses.