Air T, Inc. — Form 10-Q Summary
Business context and reporting period
Air T, Inc. is a diversified holding company with businesses in overnight air cargo, ground equipment sales, ground support services, printing equipment and maintenance, leasing, and commercial jet engines. This unaudited Form 10-Q covers the three and nine months ended December 31, 2016, the third quarter and first nine months of fiscal 2017. Air T reported 2,042,789 common shares outstanding as of January 31, 2017.
Financial performance and key metrics
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Revenue | $35.8 million | $46.6 million | $104.8 million | $113.6 million |
| Operating income (loss) | $1.6 million | $3.9 million | $(4.4) million | $8.3 million |
| Net income (loss) | $1.7 million | $2.4 million | $(5.2) million | $5.5 million |
| Net income (loss) attributable to Air T stockholders | $0.9 million | $3.0 million | $(1.8) million | $6.0 million |
| Basic EPS | $0.42 | $1.25 | $(0.81) | $2.54 |
| Operating margin | 4.6% | 8.3% | (4.2)% | 7.3% |
Quarterly revenue declined 23% year over year and nine-month revenue declined 8%. Quarterly attributable earnings declined to $0.9 million from $3.0 million, while the nine-month period moved from attributable profit of $6.0 million to a loss of $1.8 million. The nine-month results include a $1.5 million other-than-temporary impairment charge on the Insignia investment and approximately $5.6 million of Delphax-related inventory, asset impairment, and severance charges recorded in the June 2016 quarter.
Revenue by major segment for the nine months included overnight air cargo of $50.9 million, ground equipment sales of $20.5 million, ground support services of $21.4 million, printing equipment and maintenance of $6.9 million, commercial jet engines of $4.3 million, and leasing of $0.5 million. Operating income was generated by overnight air cargo of $2.1 million, ground equipment sales of $0.7 million, commercial jet engines of $0.5 million, and leasing of $0.4 million, while printing equipment and maintenance produced a $5.9 million operating loss.
Cash flow, balance sheet, debt, and liquidity
- Cash and cash equivalents were $1.6 million at December 31, 2016, down from $5.3 million at March 31, 2016. Including marketable securities, management described approximately $2.4 million of cash and cash equivalents and noted that $821,000 was restricted; the filing uses differing presentations for liquidity resources.
- Working capital was $29.1 million, up $5.8 million from March 31, 2016. Current assets were $46.0 million, including $20.9 million of inventory, while current liabilities were $16.9 million.
- Operating cash flow was negative $10.7 million for the nine months, compared with positive $3.0 million in the prior-year period. The principal working-capital use was an $8.6 million increase in inventories.
- Investing cash flow was negative $2.8 million, including $4.6 million for acquisitions and $1.5 million of capital expenditures. Financing cash flow was positive $9.7 million, primarily from net borrowings and partly offset by the $7.9 million repurchase of 329,738 common shares.
- Total reported debt was approximately $19.5 million, consisting of $1.2 million of short-term debt and $18.4 million of long-term debt. The company had $18.3 million outstanding under its $25.0 million senior secured revolving facility and $77,000 under a construction loan.
- The revolving facility matures April 1, 2018 and bears interest at one-month LIBOR plus 1.50% as of December 31, 2016. The company was not in compliance with its maximum leverage covenant at the September 30 and December 31 measurement dates, but the lender waived compliance. Management also disclosed a waiver related to the minimum tangible net worth covenant for the December 31 period.
- Delphax had approximately $1.2 million outstanding under its separate credit facility and was not in compliance with its financial covenants. The facility was subject to acceleration rights and default interest.
Material changes versus the prior comparable period
- Ground equipment sales declined 55% for the nine months and 87% for the quarter because a large prior-year commercial deicer order did not recur. The segment’s nine-month gross margin declined to 20.8% from 26.2%.
- Overnight air cargo revenue increased 4% for the nine months but quarterly operating income declined 35%. A June 2016 amendment to FedEx dry-lease agreements reduced the weighted average administrative fee by more than 2%, while crew and other non-reimbursed costs increased.
- Ground support services revenue increased 19% for the nine months, and the quarterly operating loss narrowed, reflecting new customers, locations, and services. The company stated that new agreements with a principal customer were expected to improve profitability at certain previously unprofitable locations.
- Commercial jet engines became a new operating segment after the July 2016 Contrail acquisition and October 2016 Jet Yard acquisition. The segment generated $4.3 million of nine-month revenue and $0.5 million of operating income.
- Delphax revenue increased because the current period included a full quarter, but its business deteriorated materially. Its largest customer accelerated the removal of legacy printing systems, demand declined broadly, the new elan printer did not meet expectations, and production was significantly curtailed.
- The company repurchased approximately 14% of its March 31, 2016 shares outstanding, reducing shares from 2.37 million to 2.04 million.
Outlook, risks, contingencies, and unusual items
- Management stated that Delphax or one of its creditors may initiate a formal receivership, potentially involving an operating liquidation of Delphax Canada, possibly during the first half of fiscal 2018. The company subsequently acquired Delphax’s senior credit facility on January 6, 2017 for approximately $1.26 million, reduced the facility limit to $2.5 million, and increased interest to a default rate of 2.5% per month. Air T also increased the Delphax subordinated note default rate to 18% and agreed to forbear from exercising certain remedies through May 31, 2017, subject to conditions.
- Delphax’s assets may be used only to satisfy Delphax obligations, and Delphax creditors generally do not have recourse to Air T’s other assets. Nevertheless, Air T has assumed lender obligations and faces potential additional funding requirements.
- FedEx represented approximately 49% of nine-month revenue and 48% of quarterly revenue in the overnight air cargo segment. The dry-lease agreements may be terminated on relatively short notice, and the filing states that loss of FedEx contracts would materially adversely affect the company.
- Contrail’s acquisition included a potential earn-out of up to $3.0 million, a 21% non-controlling interest, and put/call rights that could require a future purchase of the seller’s interest. Air T also provided a limited guaranty of Contrail debt of up to $1.6 million plus interest and collection costs.
- Jet Yard’s Arizona lease requires phased construction, including a hangar capable of housing a Boeing B777-300 by the first quarter of 2021. Failure to meet construction milestones could permit lease termination.
- Insignia paid Air T approximately $1.2 million in a special dividend in January 2017. The company expected a substantially offsetting decline in the investment’s fair value and had not finalized the fourth-quarter accounting impact.
- The company is constructing a new headquarters in Denver, North Carolina, with an expected aggregate cost of approximately $2.0 million. It also remains subject to related-party leases, acquisition earn-outs, legal claims in the ordinary course, and covenant restrictions.
- The filing provides no formal revenue or earnings guidance. Management cautioned that quarterly and nine-month results are not necessarily indicative of full-year performance and highlighted seasonality in ground equipment sales.
Important facts for investors to verify
- Whether Delphax enters receivership or liquidation and the resulting impact on Air T’s cash, debt, guarantees, and future funding obligations.
- Whether the lender continues to waive Air T’s leverage and tangible-net-worth covenant breaches and whether refinancing is available before the April 2018 revolving-facility maturity.
- The sustainability of FedEx contract economics after the administrative-fee reduction and the risk of contract termination.
- Whether ground equipment orders and margins recover after the prior-year deicer order comparison.
- The final fourth-quarter accounting treatment for the Insignia special dividend and related investment valuation changes.
- The performance and contingent consideration obligations of Contrail, Jet Yard, and D&D, including the Contrail earn-out and put/call arrangement.
- The company’s ability to convert elevated inventory and receivables into cash while operating cash flow remains negative.