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 filing covers the quarter and six months ended September 30, 2013, the second quarter of fiscal 2014. The financial statements are unaudited. Air T is a smaller reporting company with 2,446,286 common shares outstanding as of November 1, 2013.
- Overnight air cargo: Mountain Air Cargo and CSA Air provide contract services principally to FedEx.
- Ground equipment sales: Global Ground Support manufactures deicers and other specialized equipment for commercial, military, and industrial customers.
- Ground support services: Global Aviation Services provides aircraft equipment and airport facility maintenance services.
Financial Metrics
| Metric | Three Months Ended Sept. 30, 2013 | Three Months Ended Sept. 30, 2012 | Six Months Ended Sept. 30, 2013 | Six Months Ended Sept. 30, 2012 |
|---|---|---|---|---|
| Revenue | $24.190 million | $21.162 million | $45.470 million | $45.650 million |
| Operating income | $752,492 | $350,934 | $972,950 | $1.005 million |
| Operating margin | 3.1% | 1.7% | 2.1% | 2.2% |
| Net income | $456,110 | $227,432 | $594,621 | $644,445 |
| Net margin | 1.9% | 1.1% | 1.3% | 1.4% |
| Diluted EPS | $0.18 | $0.09 | $0.24 | $0.26 |
- Second-quarter revenue increased 14%, while operating income increased 114% and net income doubled year over year.
- Six-month revenue was essentially flat, declining 0.4%; operating income declined 3% and net income declined 8%.
- Six-month segment revenue was $24.529 million for air cargo, $13.144 million for ground equipment sales, and $7.797 million for ground support services.
- Six-month segment operating income was $1.237 million for air cargo, $458,913 for ground equipment sales, and $557,615 for ground support services, partly offset by $1.281 million of corporate expenses.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash used in operating activities was $5.429 million in the first six months of fiscal 2014, compared with $771,000 of cash provided in the prior-year period.
- The operating cash outflow was principally driven by a $5.771 million increase in inventories, a $1.466 million increase in accounts receivable, and a $898,000 increase in prepaid and other assets, partially offset by higher accounts payable.
- Cash and cash equivalents declined from $9.197 million at March 31, 2013 to $3.673 million at September 30, 2013.
- Investing cash outflow was $144,275, primarily for capital expenditures. Management reported no significant capital expenditure commitments.
- Financing cash flow was $49,337, reflecting $783,222 of revolving-credit borrowings and $733,885 of dividends paid.
- Working capital was $22.739 million, approximately $72,000 higher than at March 31, 2013.
- Total assets were $38.576 million and stockholders’ equity was $27.997 million at September 30, 2013.
- The company had $783,222 outstanding under a secured $7.0 million revolving credit facility, with $7.0 million reported as available under the facility’s borrowing-base terms. The facility expires August 31, 2015 and bears interest at 30-day LIBOR plus 150 basis points.
- The company was in compliance with the facility’s fixed-charge coverage requirement at September 30, 2013.
- Net inventories increased to $13.126 million from $8.182 million at March 31, 2013, primarily from higher ground-equipment raw materials and work in process.
Material Changes Versus the Prior Comparable Period
- Ground equipment sales: Second-quarter revenue increased 30% to $7.907 million, and segment operating income improved to $452,702 from a $163,765 loss. The improvement reflected stronger domestic commercial deicer and scissor-truck sales, better production efficiency, product mix, and fewer lower-margin USAF tow-tractor sales.
- Ground support services: Second-quarter revenue increased 38% to $4.162 million, while operating income increased to $307,448 from $52,028. Growth reflected additional locations, new and existing customer services, improved management processes, and maturation of newer stations.
- Overnight air cargo: Second-quarter revenue increased only 1% to $12.121 million, while operating income declined 35% to $564,969. The decline reflected two fewer ATR aircraft, higher maintenance labor, and higher rent and repair costs.
- For the first six months, ground equipment revenue declined 22%, primarily because of lower military and international sales, while domestic commercial sales increased. Air cargo revenue increased 8%, principally from maintenance costs passed through to FedEx at cost. Ground support services revenue increased 29%.
- The estimated annual effective tax rate increased to 39.8% for the quarter and 39.6% for the six-month period, compared with 35.7% and 35.9%, respectively, primarily because of state tax apportionment.
- Corporate expenses increased because of higher salaries, professional fees, and shareholder expenses related to a recently settled election contest.
- The company paid a $0.30-per-share cash dividend in June 2013, compared with $0.25 per share in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no formal revenue, earnings, or margin guidance.
- FedEx accounted for 54% of six-month revenue and 50% of second-quarter revenue. FedEx may terminate the air-cargo agreements on 30 days’ notice, and the loss of the contracts would have a material adverse effect.
- Negotiations for replacement FedEx agreements had been put on hold. Management expected replacement agreements to be negotiated in the future, but stated that terms may differ and affect future results.
- MAC and CSA had 81 aircraft under agreement with FedEx at September 30, 2013, including four soft-parked aircraft. Subsequent to quarter-end, one additional aircraft was transferred to another operator, leaving 80 aircraft under agreement, including three soft-parked aircraft.
- GGS order backlog was $11.9 million at September 30, 2013, compared with $15.5 million a year earlier and $6.5 million at March 31, 2013.
- GGS remains seasonal, with commercial deicer sales generally concentrated before winter. Management expects lower revenue and operating income in the first and fourth fiscal quarters.
- Working-capital needs increased materially because of inventory accumulation and receivables growth, resulting in negative operating cash flow and increased revolving-credit borrowings.
- The company’s contracts, inventory reserves, warranty reserves, tax provisions, and receivable allowances depend on estimates that may change with customer conditions, aviation demand, equipment utilization, and economic conditions.
- The company reported no pending or threatened lawsuits of which it was aware and no material subsequent events through the filing date.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2013, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Progress and final terms of replacement agreements with FedEx, including termination rights, aircraft counts, pricing, and pass-through cost provisions.
- Whether the $11.9 million GGS backlog converts to revenue and cash flow, particularly in light of military-contract funding and seasonal commercial demand.
- The sustainability of the sharp second-quarter improvement in GGS and GAS margins.
- Inventory conversion, accounts-receivable collections, and the company’s ability to reverse the $5.429 million operating cash outflow.
- Availability and covenant compliance under the secured revolving credit facility as borrowing-base values change.
- The impact of higher state tax apportionment on future effective tax rates and earnings.
- Future dividend decisions, since the company’s dividend policy is discretionary and based on profitability and other factors.