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. This filing covers the three months ended June 30, 2015, the first quarter of fiscal 2016, compared with the quarter ended June 30, 2014. The financial statements are unaudited.
The company had 2,372,527 common shares outstanding as of August 1, 2015. FedEx remained the principal customer of the overnight air cargo segment.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $22.359 million | $21.779 million | Up $0.580 million, 3% |
| Operating income (loss) | $(1.049) million | $0.099 million | Down $1.148 million |
| Operating margin | (4.7%) | 0.5% | Down approximately 5.2 points |
| Net income (loss) | $(0.736) million | $0.073 million | Down $0.809 million |
| Basic and diluted EPS | $(0.31) | $0.03 | Declined $0.34 |
| Net margin | (3.3%) | 0.3% | Down approximately 3.6 points |
| Net cash used in operating activities | $(4.515) million | $(1.665) million | Use increased $2.850 million |
Revenue by segment was $12.889 million for overnight air cargo, $4.039 million for ground equipment sales, and $5.430 million for ground support services. Segment operating income (loss) was $0.236 million, $(0.424) million, and $(0.222) million, respectively. Corporate expenses were $(0.639) million.
At June 30, 2015, cash and cash equivalents were $8.361 million, current assets were $33.848 million, and working capital was approximately $24.907 million. Total assets were $43.116 million, current liabilities were $8.941 million, long-term debt was $4.981 million, and stockholders’ equity was $28.778 million.
Cash used in investing activities was $1.271 million, including $1.070 million of marketable-securities purchases and $0.219 million of capital expenditures. Financing activities used $0.019 million. Cash declined by $5.804 million during the quarter.
Marketable and available-for-sale securities had a combined fair value of approximately $5.910 million and an aggregate cost basis of $6.560 million at quarter-end. The company recorded a $0.281 million net unrealized loss in other comprehensive income.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3%, led by a 10% increase in overnight air cargo revenue and a 13% increase in ground support services revenue. Ground equipment sales declined 24%.
- Operating results deteriorated from income of $0.099 million to a loss of $1.049 million, with all three operating segments reporting weaker results.
- Air cargo operating income declined 57% to $0.236 million. The decline reflected maintenance-manual rewrite costs, higher health-benefit and pilot costs, reduced contract labor revenue, and $1.174 million of additional aircraft rental expense under new FedEx agreements.
- Ground equipment sales reported a $0.424 million operating loss versus a $0.180 million loss in the prior-year quarter. The prior period included a $0.188 million gain on the sale of leased equipment that did not recur.
- Ground support services swung from operating income of approximately $0.221 million to an operating loss of $0.222 million as the company increased staffing, infrastructure, training, facility, maintenance, and parts spending to support anticipated growth.
- Inventory increased to $11.500 million from $7.790 million at March 31, 2015, primarily to support a substantial ground-equipment backlog. The increase was a major use of operating cash.
- On April 1, 2015, the company replaced its $7.0 million credit line with a $20.0 million senior secured revolving credit facility maturing April 1, 2017. Outstanding borrowings were approximately $4.981 million at June 30, 2015.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal financial guidance is provided in the filing.
- Management expects maintenance-manual rewrite costs to continue adversely affecting air cargo results for the remainder of fiscal 2016. Management also expects the new FedEx agreement structure to increase revenue but reduce air cargo operating income as a percentage of revenue because certain aircraft-rental and crew costs are no longer reimbursed.
- New FedEx dry-lease agreements became effective June 1, 2015, initially expire May 31, 2016, and generally may be terminated on 90 days’ notice. FedEx may terminate the lease of an individual aircraft on 10 days’ notice. The filing states that FedEx would have been permitted to terminate each agreement under specified customer-concentration or staffing provisions as of the report date.
- MAC and CSA had 80 aircraft under agreement with FedEx at June 30, 2015, including two soft-parked aircraft. The concentration of air cargo revenue with FedEx is a significant customer and contract risk.
- Ground equipment backlog was $39.9 million at June 30, 2015, compared with $2.8 million at March 31, 2015 and $21.8 million at June 30, 2014. The current backlog included an approximately $32 million order from a major U.S. airline, with deliveries expected in the third quarter of fiscal 2016. Execution, delivery timing, customer requirements, and funding remain relevant risks.
- Ground equipment sales are seasonal, with weaker revenue and operating income typically in the first and fourth fiscal quarters. The USAF contract does not require a minimum number of purchases, and the filing notes that recent USAF orders had not offset commercial seasonality.
- The revolving credit facility is secured by substantially all company and borrower assets, excluding real property, and includes financial covenants such as minimum tangible net worth of $22.0 million, minimum fixed-charge coverage of 1.35 to 1.0, minimum asset coverage of 1.75 to 1.0, and maximum leverage of 3.5 to 1.0.
- The company was involved in product-liability matters involving pending or threatened lawsuits. Management believed an adverse outcome would not materially affect operations or financial position.
- The company reported a $0.333 million income-tax benefit in the quarter, compared with $0.038 million of tax expense in the prior-year quarter. The filing attributes the tax rate differences to state taxes, the domestic production activities deduction, and the captive insurance subsidiary.
- Management stated that disclosure controls were effective as of June 30, 2015 and that no material change in internal control over financial reporting occurred during the quarter.
Most Important Facts for Investors to Verify
- Whether the $39.9 million ground-equipment backlog converts to revenue and cash flow on the expected schedule, particularly the approximately $32 million airline order.
- The profitability and cash-flow impact of the revised FedEx dry-lease agreements, including aircraft rental, crew costs, maintenance fees, and termination provisions.
- Whether operating losses and increased inventory investment pressure compliance with the revolving credit facility’s financial covenants.
- The sustainability of the company’s liquidity after the $5.804 million quarterly cash reduction and $4.515 million operating cash outflow.
- The extent and recoverability of the approximately $0.650 million aggregate unrealized investment loss and the company’s exposure to publicly traded securities.
- Whether ground support services’ growth investments produce the anticipated customer and location expansion without continuing operating losses.
- The outcome and potential cost of pending or threatened product-liability matters, despite management’s assessment that they are not material.