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, 2012, representing the second quarter and first six months of fiscal 2013. The financial statements are unaudited.
- Overnight air cargo is operated through Mountain Air Cargo and CSA Air and primarily serves FedEx.
- Global Ground Support manufactures deicers and other specialized equipment for commercial, military, and industrial customers.
- Global Aviation Services provides aircraft ground-support equipment and facilities maintenance services.
- Common shares outstanding at October 26, 2012: 2,446,286.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2012 | Three Months Ended September 30, 2011 | Six Months Ended September 30, 2012 | Six Months Ended September 30, 2011 |
|---|
| Revenue | $21.162 million | $25.461 million | $45.650 million | $42.022 million |
| Operating income | $351 thousand | $919 thousand | $1.005 million | $1.170 million |
| Operating margin | 1.7% | 3.6% | 2.2% | 2.8% |
| Net income | $227 thousand | $593 thousand | $644 thousand | $761 thousand |
| Net margin | 1.1% | 2.3% | 1.4% | 1.8% |
| Basic and diluted EPS | $0.09 | $0.24 | $0.26 | $0.31 |
- Second-quarter revenue declined 17%, while six-month revenue increased 9%.
- Six-month operating cash flow was $771 thousand, compared with cash used of $1.176 million in the prior-year period.
- Capital expenditures were $221 thousand for the six months, down from $606 thousand.
- Cash used in financing activities was $612 thousand, primarily reflecting the $0.25-per-share cash dividend paid in June 2012.
- Cash and cash equivalents were $5.756 million at September 30, 2012, compared with $5.814 million at March 31, 2012.
- Working capital was $23.423 million, an increase of $184 thousand from March 31, 2012.
- Total assets were $32.974 million and stockholders’ equity was $27.087 million at September 30, 2012.
- The company had no borrowings under its $7.0 million secured revolving credit facility; the full $7.0 million was available at quarter-end.
- The credit facility was extended through August 31, 2014. The company was in compliance with its fixed-charge coverage requirement.
Material Changes Versus the Prior Comparable Period
| Segment | Six-Month Revenue Change | Six-Month Operating Income | Key Change |
|---|
| Overnight air cargo | Down 2% to $22.785 million | $1.619 million versus $1.913 million | Higher labor, travel, insurance, flight, and maintenance costs. |
| Ground equipment sales | Up 10% to $16.829 million | $141 thousand versus a $92 thousand loss | First-half improvement, but second-quarter sales fell sharply because of lower U.S. Air Force revenue. |
| Ground support services | Up 72% to $6.036 million | $222 thousand versus $195 thousand | Growth from new customers and locations, partly offset by startup and management costs. |
- Second-quarter ground equipment revenue decreased 46% to $6.086 million, including a $4.523 million reduction in U.S. Air Force sales. The segment recorded a $164 thousand operating loss versus $218 thousand of operating income in the prior-year quarter.
- Ground equipment backlog was $15.5 million at September 30, 2012, compared with $20.0 million a year earlier and $15.3 million at March 31, 2012. Approximately $11.2 million represented U.S. Air Force orders expected to be delivered during the remainder of the fiscal year.
- Second-quarter ground support services revenue increased 55% to $3.025 million, but operating income declined to $52 thousand from $157 thousand because of startup costs at new stations and added management staff.
- Second-quarter overnight air cargo operating income declined 12% to $864 thousand, primarily because of increased management, labor, and other costs.
- General and administrative expense increased 12% in the quarter and 14% for the six months, driven primarily by salaries, health insurance, travel, rent, and professional fees.
Outlook, Commentary, Risks, and Unusual Items
- No specific financial guidance was provided.
- Management noted weakening domestic demand for commercial deicing equipment, partly attributed to mild U.S. weather, and continuing margin pressure in competitive domestic, international, and military markets.
- U.S. Air Force contracts were extended: the deicing equipment contract through July 2013 and the flight-line tow tractor contract through September 2013. Contract value and unit deliveries remain dependent on annual requirements and available funding.
- Air cargo operations are highly concentrated in FedEx, which represented approximately 50% of consolidated six-month revenue and 57% of second-quarter revenue. FedEx may terminate the current agreements on 30 days’ notice. Air T was negotiating replacement agreements, and terms could differ materially from existing arrangements.
- All 81 revenue aircraft operated under dry-lease service agreements. Fuel and other major direct costs are generally passed through to FedEx without markup; changes in contract terms could shift cost risk to Air T.
- Ground equipment sales are seasonal, particularly commercial deicers delivered before winter. Reduced U.S. Air Force sales could increase the company’s exposure to seasonal commercial demand.
- Inventories, warranty reserves, doubtful accounts, and income taxes require management estimates that could be affected by aviation industry conditions, demand, customer credit, and product utilization.
- The company reported no pending or threatened litigation and no material subsequent events through the filing date.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Terms and economics of the replacement FedEx agreements, including termination rights, reimbursement provisions, aircraft coverage, and pricing.
- Conversion of the $15.5 million ground equipment backlog into revenue and the timing, funding, and margins of the U.S. Air Force orders.
- Whether ground support services can absorb startup and management costs as new stations mature.
- Recovery of ground equipment demand and margins amid mild-weather effects and competitive pressure.
- Cash generation relative to the annual dividend policy and the company’s continued reliance on internal liquidity.
- Availability and covenant compliance under the $7.0 million revolving credit facility.
