Air T, Inc. Form 10-Q Summary
Reporting period: The filing covers the three and six months ended September 30, 2018, Air T’s fiscal 2019 second quarter and first half, compared with the corresponding 2017 periods. The request metadata identifies “2017 Q2,” but the filing itself is for 2018 Q2. Air T operates six segments: overnight air cargo, ground equipment sales, ground support services, commercial jet engines and parts, printing equipment and maintenance, and corporate.
Key Financial Metrics
| Metric | Three months ended Sept. 30, 2018 | Three months ended Sept. 30, 2017 | Six months ended Sept. 30, 2018 | Six months ended Sept. 30, 2017 |
|---|---|---|---|---|
| Revenue | $49.3 million | $48.9 million | $110.2 million | $96.6 million |
| Operating income (loss) | $(1.6) million | $0.5 million | $1.0 million | $2.7 million |
| Operating margin | (3.3%) | 1.0% | 0.9% | 2.8% |
| Net income (loss) | $(1.4) million | $0.5 million | $1.9 million | $1.7 million |
| Net income (loss) attributable to Air T stockholders | $(1.3) million | $0.4 million | $1.5 million | $1.4 million |
| EPS, basic and diluted | $(0.65) | $0.21 | $0.74 | $0.68 |
| Cash flow from operations | Not separately provided | Not separately provided | $14.9 million | $7.0 million |
- Revenue mix: First-half commercial jet engines and parts revenue increased 113% to $38.0 million, while printing equipment and maintenance revenue declined 90% to $0.4 million. Ground equipment sales declined 10% and ground support services declined 2%.
- Profitability: Second-quarter operating results deteriorated primarily because of lower air cargo and ground equipment profitability, a $0.7 million ground support services loss, and higher corporate costs. First-half operating income declined 63%.
- Non-operating items: First-half results included a $2.0 million bargain purchase gain from the Worthington acquisition and $1.4 million of interest expense, compared with $0.5 million of interest expense in the prior-year period.
- Balance sheet: At September 30, 2018, cash and cash equivalents were $5.6 million, restricted cash was $0.02 million, marketable securities were $2.3 million, and working capital was $20.8 million. Total assets were $117.7 million versus $97.1 million at March 31, 2018.
- Debt: Total debt was $59.8 million, net of issuance costs $59.4 million, compared with $48.5 million gross debt at March 31, 2018. Debt due within twelve months was $15.2 million.
- Cash flows and investment: Operating cash flow was $14.9 million, investing cash flow was $(27.6) million, and financing cash flow was $13.3 million. Capital expenditures were $20.0 million, including approximately $19.1 million for aircraft on lease. Ending cash, cash equivalents and restricted cash totaled $5.6 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 1%, but the Company moved from $0.5 million of operating income to a $1.6 million operating loss and from $0.4 million of attributable net income to a $1.3 million loss.
- First-half revenue increased 14%, but operating income fell from $2.7 million to $1.0 million. The increase in revenue was concentrated in commercial jet engines and parts and did not translate proportionally into operating profit.
- Worthington Aviation and Parts was acquired in May 2018 for approximately $3.3 million of net cash consideration. The acquisition generated a preliminary $2.0 million bargain purchase gain and contributed $7.1 million of revenue and $0.6 million of operating income during the first six months.
- Contrail sold four engines for approximately $17.35 million during the quarter ended June 30, 2018, contributing to the commercial jet engines and parts segment’s first-half growth.
- Capital expenditures increased substantially from $8.3 million to $20.0 million, primarily because of aircraft acquisitions, while debt increased by approximately $11.3 million.
- Delphax Canada’s bankruptcy resulted in no printing segment revenue in the first half and substantially lower related expenses. Delphax’s bankruptcy proceedings remained ongoing, and Air T continued to consolidate Delphax.
- The Company adopted ASC 606, ASU 2016-01, ASU 2016-15, ASU 2016-18 and other accounting updates during the period. Management reported no material transition impact from ASC 606.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that operating cash flow, cash and other liquidity sources are expected to be sufficient for foreseeable cash requirements, but liquidity declined as significant capital expenditures and acquisitions were funded with additional debt.
- Ground equipment sales are seasonal, with typically lower revenue and operating income in the first and fourth fiscal quarters. The segment’s backlog was $30.6 million at September 30, 2018, compared with $20.4 million a year earlier.
- The Company is exposed to variable interest rates and uses interest-rate swaps. A new $18.0 million variable-rate loan was obtained to fund two Airbus A319 aircraft; the loan matures in September 2021.
- Contingent consideration related to the Contrail acquisition totaled approximately $2.0 million at September 30, 2018, including $1.5 million current and $0.5 million non-current.
- After quarter-end, Hurricane Michael caused significant claims affecting the Company’s $2.0 million investment in Oxbridge RE NS. Management expected to record an impairment of approximately $1.1 million in the quarter ending December 31, 2018, barring additional events.
- On October 2, 2018, the Company repurchased 15,000 additional shares for approximately $0.5 million. On November 12, 2018, it increased its Minnesota Bank & Trust revolving credit facility from $10.0 million to $13.0 million.
- Delphax Canada’s bankruptcy proceedings were ongoing, and the Company stated that Delphax Canada remained the primary obligor of its liabilities. The Company’s creditors generally have no recourse to Delphax’s assets, and Delphax’s creditors have no recourse to Air T’s assets.
Important Facts for Investors to Verify
- Whether the commercial jet engines and parts segment’s unusually strong first-half sales, including the four-engine sale and Worthington acquisition, are repeatable.
- The sustainability of operating cash flow after accounting for working-capital movements, inventory sales, acquisition-related effects and substantial aircraft capital expenditures.
- Debt maturities, revolver availability, variable-rate exposure and compliance with financing covenants.
- The final purchase-price allocation for Worthington and whether the preliminary bargain purchase gain changes.
- The expected impairment and ultimate recovery associated with the Oxbridge RE NS investment following Hurricane Michael.
- The effect of continuing losses in ground support services and printing equipment and maintenance, as well as higher corporate expenses.
- The outcome and timing of Delphax Canada’s bankruptcy proceedings and any potential effects on consolidated liabilities or future expenses.
- The filing’s unaudited status and the caution that interim results are not necessarily indicative of full-year performance.