Air T, Inc. Form 10-Q Summary
Business Context and Reporting Period
Air T, Inc. operates three segments: overnight air cargo, ground equipment sales, and ground support services. The report covers the three and nine months ended December 31, 2013, representing the third quarter and first nine months of fiscal 2014. The financial statements are unaudited.
- Overnight air cargo is operated through Mountain Air Cargo and CSA Air, principally under dry-lease service contracts with FedEx.
- Ground equipment sales manufactures deicers and other specialized equipment for commercial, military, and industrial customers.
- Ground support services provides aircraft equipment and airport facilities maintenance.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31, 2013 | Three Months Ended Dec. 31, 2012 | Nine Months Ended Dec. 31, 2013 | Nine Months Ended Dec. 31, 2012 |
|---|---|---|---|---|
| Revenue | $29.835 million | $26.703 million | $75.305 million | $72.353 million |
| Operating income | $0.796 million | $0.987 million | $1.769 million | $1.991 million |
| Operating margin | 2.7% | 3.7% | 2.3% | 2.8% |
| Net income | $0.455 million | $0.633 million | $1.050 million | $1.277 million |
| Net margin | 1.5% | 2.4% | 1.4% | 1.8% |
| Diluted EPS | $0.19 | $0.26 | $0.43 | $0.52 |
- Quarterly revenue increased 12%; nine-month revenue increased 4%.
- Quarterly operating income declined 19%; nine-month operating income declined 11%.
- Quarterly net income declined 28%; nine-month net income declined 18%.
- Cash and cash equivalents were $6.873 million at December 31, 2013, compared with $9.197 million at March 31, 2013.
- Working capital was $21.247 million, down $1.420 million from March 31, 2013.
- Inventories increased to $11.775 million from $8.182 million, primarily reflecting higher order backlog.
- Total assets were $36.520 million and stockholders’ equity was $27.182 million at December 31, 2013.
- Current liabilities were $9.269 million; the filing reports no outstanding borrowings under the company’s $7.000 million secured revolving credit facility. The full $7.000 million was available at quarter-end.
- Net cash used in operating activities was $0.087 million for the first nine months, compared with $4.620 million of cash provided in the prior-year period.
- Capital expenditures were $0.268 million, and net cash used in investing activities was $0.228 million.
- Net cash used in financing activities was $2.009 million, including $0.734 million of dividends, $1.078 million for common-stock repurchases, and $0.223 million for repurchase of stock options.
Material Changes Versus the Prior Comparable Period
- Overnight air cargo revenue increased 17% in the quarter and 11% year to date, largely because higher maintenance costs were passed through to FedEx at cost. Segment operating income decreased 30% in the quarter and 25% year to date because two ATR aircraft were transferred to other operators and maintenance, rent, and repair costs increased.
- Ground equipment sales revenue was essentially flat in the quarter and decreased 13% year to date. Military sales declined, while domestic commercial sales increased. Segment operating income increased 174% in the quarter and 186% year to date because of improved production efficiency, product mix, and reduced sales of low-margin USAF tow tractors.
- Ground support services revenue increased 29% in both the quarter and year-to-date period due to new customers and locations. Quarterly operating income decreased 38% because of higher management, workers’ compensation, travel, and bad-debt costs; year-to-date operating income increased 29%.
- Corporate operating expenses increased substantially, including a $565,680 severance payment to former Chief Executive Officer Walter Clark and other salary, health insurance, travel, advertising, professional-fee, and bad-debt costs.
- The company recorded a $301,000 charge in the quarter to correct prior capitalization of software development costs that should have been expensed. Management stated that the prior annual periods were not materially misstated.
- Accounts receivable decreased from March 31, 2013, while inventory increased significantly, contributing to the deterioration in operating cash flow.
- The company declared and paid a $0.30-per-share cash dividend during the first quarter, compared with $0.25 per share in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no quantitative earnings or revenue guidance.
- FedEx represented approximately 52% of year-to-date consolidated revenue. FedEx contracts may be terminated on 30 days’ notice, and replacement-contract negotiations were on hold but expected to resume. Loss or unfavorable revision of these contracts could materially affect results.
- At December 31, 2013, the air cargo segment had 80 aircraft under agreement with FedEx, including three soft-parked aircraft. One soft-parked aircraft was transferred to another feeder operator during the quarter.
- GGS backlog was $10.2 million at December 31, 2013, compared with $9.2 million a year earlier and $6.5 million at March 31, 2013.
- USAF contracts for deicing trucks and flight-line tow tractors were extended through July 2014 and September 2014, respectively. Contract deliveries depend on annual requirements and available government funding.
- GGS remains subject to seasonal demand, particularly for commercial deicing equipment.
- The company settled an open federal tax audit for fiscal 2011 and agreed to pay an additional $62,485. The reported estimated annual effective tax rate increased to 42.8% for the quarter and 41.0% year to date, compared with 36.1% and 36.0%, respectively.
- Management reported no material subsequent events through the filing date and concluded that disclosure controls were effective.
- Management reclassified $301,000 of quarterly and $831,000 of year-to-date expenses from general and administrative expense to ground support services expense; the reclassification did not affect segment operating income.
Important Facts for Investors to Verify
- Terms, renewal prospects, and termination provisions of the replacement FedEx agreements.
- Whether elevated inventory converts into sales and cash flow, particularly given the increased GGS backlog.
- Sustainability of improved GGS margins after the decline in low-margin USAF tow-tractor sales.
- Whether higher air cargo maintenance and facility costs persist and how aircraft transfers affect profitability.
- Future cash requirements related to the former CEO’s incentive compensation, severance arrangements, dividends, and share repurchases.
- Exposure to USAF contract funding, deicing seasonality, customer concentration, and potential changes in reimbursed air cargo costs.
- The impact of the software-cost correction and the higher effective tax rate on future reported earnings.