Air T, Inc. Form 10-Q Summary
Business Context and Reporting Period
Air T, Inc. is a decentralized holding company operating in overnight air cargo, ground equipment sales, ground support services, printing equipment and maintenance, and equipment leasing. The filing covers the three months ended June 30, 2016, the first quarter of fiscal 2017, compared with the three months ended June 30, 2015. The statements are unaudited.
Delphax Technologies, acquired and consolidated beginning November 24, 2015, materially affected the current-period results. Air T reported 2,372,527 weighted-average shares outstanding during the quarter and 2,042,789 shares outstanding as of August 2, 2016.
Financial Metrics
| Metric | Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 |
|---|---|---|
| Revenue | $30.493 million | $22.359 million |
| Operating loss | $(7.073) million | $(1.049) million |
| Operating margin | (23.2%) | (4.7%) |
| Net loss | $(7.989) million | $(0.736) million |
| Net loss attributable to Air T stockholders | $(3.676) million | $(0.736) million |
| Loss per diluted share | $(1.55) | $(0.31) |
| Net cash used in operating activities | $(4.758) million | $(4.515) million |
| Net cash used in investing activities | $(0.232) million | $(1.274) million |
| Net cash provided by financing activities | $3.634 million | $(0.019) million |
| Cash and cash equivalents at period end | $3.970 million | $7.581 million |
Revenue increased 36%. Operating expenses increased 60% to $37.567 million, outpacing revenue growth. The consolidated operating loss included approximately $5.610 million of Delphax-related inventory reserves, asset impairments and estimated severance costs. A further $1.502 million non-operating other-than-temporary impairment charge was recorded on the Insignia Systems investment.
At June 30, 2016, total assets were $50.374 million, total liabilities were approximately $23.001 million, and total equity was $27.373 million. Working capital was $20.437 million, down $2.806 million from March 31, 2016. Consolidated short-term debt was $2.178 million and long-term debt was $3.321 million, including approximately $3.3 million outstanding under Air T's revolving credit facility. The filing states that approximately $824,000 of cash was restricted; the MD&A also refers to approximately $4.8 million of cash and cash equivalents, including restricted cash.
Material Changes Versus the Prior Comparable Period
- Overnight air cargo revenue increased 29% to $16.637 million, and segment operating income improved to $0.979 million from a $0.094 million loss. The improvement reflected higher administrative fees and maintenance rates under new FedEx agreements.
- Ground equipment sales revenue increased 5% to $4.254 million, while the segment's operating loss improved substantially to approximately $0.141 million from $0.519 million.
- Ground support services revenue increased 25% to $6.800 million, and its operating loss improved to $0.110 million from $0.335 million.
- Printing equipment and maintenance contributed $2.560 million of reported revenue but approximately $6.935 million of operating loss. No comparable Delphax revenue was included in the prior-year quarter.
- General and administrative expense increased 53% to $5.829 million, including $1.352 million attributable to Delphax and higher ground support and corporate costs.
- Inventories, net of reserves, increased to $15.200 million from $12.274 million, while inventory reserves increased to $2.657 million from $0.222 million, primarily due to Delphax.
- Cash used in operations increased modestly despite the substantially larger net loss, aided by noncash impairment charges and working-capital changes.
Guidance, Outlook, Risks and Unusual Items
- Management provided no formal quantitative earnings or revenue guidance in the filing.
- Delphax's largest customer accelerated plans to remove legacy printing systems, and demand for legacy products declined broadly. Sales of the new elan printer system were below expectations.
- Delphax reported severe liquidity constraints, was out of compliance with financial covenants on its $7.0 million senior secured credit facility, and had approximately $2.1 million outstanding. The lender had the contractual right to stop further borrowings and accelerate the debt, but had not done so as of the filing date.
- Delphax anticipated cooperating with its lenders on a possible receivership and operating liquidation of Delphax Canada, potentially during the third or fourth calendar quarter of 2016. Air T was restricted from initiating that process while the senior lender remained unpaid.
- Delphax's intangible assets and goodwill were fully impaired, and certain long-lived tangible assets were partially impaired. The filing notes that recovery estimates involved significant judgment and Level 3 fair value measurements.
- FedEx represented 55% of consolidated revenue in the quarter. The FedEx dry-lease agreements were extended to May 31, 2020, but either party generally may terminate on 90 days' notice, FedEx may terminate individual aircraft leases on 10 days' notice, and the filing states that FedEx could have terminated the agreements under certain customer-concentration provisions.
- The weighted-average administrative fee rate under the FedEx agreements was reduced by more than 2% effective June 1, 2016. Management expected higher unreimbursed operating costs and a significantly greater adverse impact on air-cargo operating income during the remainder of fiscal 2017.
- On July 1, 2016, Air T repurchased 329,738 shares from the Biglari Group for $7.917 million, or $24.01 per share.
- On July 18, 2016, Air T acquired the assets of Contrail Aviation Support for $4.938 million in cash, subject to adjustment, 21% of Contrail Aviation's equity, and potential earnout payments of up to $3.0 million. The transaction was to be accounted for beginning in fiscal 2017's second quarter.
- Subsequent amendments increased Air T's revolving credit facility from $20.0 million to $25.0 million and extended its maturity from April 1, 2017 to April 1, 2018. The company also guaranteed up to $1.6 million of Contrail Aviation's debt, plus related interest and collection costs.
- GGS backlog was $12.1 million at June 30, 2016, down from $39.9 million a year earlier but up from $10.0 million at March 31, 2016. GGS remains subject to seasonal demand and government funding requirements.
Most Important Facts for Investors to Verify
- Whether Delphax proceeds into receivership or liquidation and the ultimate recoverability of its inventory, receivables, equipment and other assets.
- Whether Delphax regains compliance with its senior credit facility or faces acceleration and loss of borrowing capacity.
- The effect of lower FedEx administrative fees, unreimbursed operating costs, aircraft utilization and any termination or modification of FedEx contracts.
- Air T's ability to fund continuing operating cash outflows, the $7.917 million stock repurchase, Contrail acquisition costs and potential earnout obligations.
- Compliance with Air T's amended revolving-credit covenants, including tangible net worth, fixed-charge coverage, leverage and asset-coverage requirements.
- The financial contribution and integration performance of Contrail Aviation and the impact of its limited company guarantee.
- Whether the $1.502 million Insignia impairment represents the final decline or additional investment losses may be required.
- The filing's unaudited status, provisional accounting for the Delphax acquisition, and the substantial judgment underlying impairment and liquidation-recovery estimates.