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FORWARD-LOOKING STATEMENTS
This section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" ("MD&A") is intended to provide a reader of
our financial statements with a narrative from the perspective of management on
our financial condition, results of operations, liquidity, and certain other
factors that may affect our future results. The MD&A provides a narrative
analysis explaining the reasons for material changes in the Company's (i)
financial condition during the period from the most recent fiscal year-end,
March 31, 2022 , to and including June 30, 2022 and (ii) results of operations
during the current fiscal period(s) as compared to the corresponding period(s)
of the preceding fiscal year.
This Quarterly Report on Form 10-Q, including the MD&A, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements reflect our current views with
respect to future events and financial performance. The words "believe,"
"expect," "anticipate," "intend," "estimate," "forecast," "project," "should,"
"will," "continue" and similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Any and all forecasts and projections in this
document are "forward looking statements" and are based on management's current
expectations or beliefs. From time to time, we may also provide oral and written
forward-looking statements in other materials we release to the public, such as
press releases, presentations to securities analysts or investors, or other
communications by us. Any or all of our forward-looking statements in this
report and in any public statements we make could be materially different from
actual results. Accordingly, we wish to caution investors that any
forward-looking statements made by or on behalf of us are subject to
uncertainties and other factors that could cause actual results to differ
materially from such statements.
We also wish to caution investors that other factors might in the future prove
to be important in affecting our results of operations. New factors emerge from
time to time; it is not possible for management to predict all of such factors,
nor can it assess the impact of each such factor on the business or the extent
to which any factor, or a combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 (including the information presented therein under Risk Factors), as well other publicly available information.
Insight
Air T, Inc. (the "Company," "Air T ," "we" or "us") is a holding company with a portfolio of operating businesses and financial assets. Our goal is to prudently and strategically diversifyAir T's earnings power and compound the growth in its free cash flow per share over time.
We currently operate in four industry segments:
• Night air freight, which operates in the air express delivery services sector;
•Ground equipment sales, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers; •Commercial aircraft, engines and parts, which manages and leases aviation assets; supplies surplus and aftermarket commercial jet engine components; provides commercial aircraft disassembly/part-out services; commercial aircraft parts sales; procurement services and overhaul and repair services to airlines and, •Corporate and other, which acts as the capital allocator and resource for other consolidated businesses. Further, Corporate and other also comprises insignificant businesses and business interests that do not pertain to other reportable segments.
Each line of business has distinct management teams and infrastructures that offer different products and services. We assess the performance of our business segments based on operating profit and adjusted EBITDA.
Operating results
Outlook
COVID-19 and its impact on the current financial, economic and financial market environment, as well as future developments in these and other areas, present uncertainty and risk to our financial condition and results. operating. Each of our companies
28 -------------------------------------------------------------------------------- implemented measures to attempt to limit the impact of COVID-19 but we still experienced a substantial number of disruptions, and we experienced and continue to experience a reduction in demand for commercial aircraft, jet engines and parts compared to historical periods. Many of our businesses may continue to generate reduced operating cash flow and may operate at a loss during fiscal 2023. We expect that the impact of COVID-19 will continue to some extent. The fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions and our business in particular, and, as a result, present material uncertainty and risk with respect to us and our results of operations.
First Quarter of Fiscal 2023 vs. First Quarter of Fiscal 2022
Consolidated revenue for the three-month period ended
Following is a table detailing revenue by segment, net of intercompany during the three months endedJune 30, 2022 compared to the same quarter in the prior fiscal year (in thousands): Three Months Ended June 30, Change 2022 2021 Overnight Air Cargo$ 20,564 $ 18,851 $
1,713 9%
Ground Equipment Sales 5,815 8,182
(2,367) (29)%
Commercial aircraft engines and spare parts 22,855 9,594 13,261 138%
Corporate and Other 1,628 341 1,287 377 %
$ 50,862 $ 36,968 $ 13,894 38 %
Revenues from the air cargo segment for the three-month period ended June 30,
2022 increased by $1,713 (9%) compared to the first quarter of the prior fiscal
year. The increase was principally attributable to higher administrative fees
and maintenance labor revenue from FedEx.
The ground equipment sales segment contributed approximately $5.8 million and
$8.2 million to the Company's revenues for the three-month periods ended
June 30, 2022 and 2021 respectively, representing a $2.4 million (29%) decrease
in the current quarter. The decrease was primarily driven by lower sales volume
of military deicing trucks this quarter compared to prior year comparable
quarter. At June 30, 2022 , the ground equipment sales segment's order backlog
was $17.2 million compared to $7.1 million at June 30, 2021 . Finished Goods
inventory increased to $9.1 million as of June 30, 2022 from $7.3 million as of
June 30, 2021 , as we added additional trucks ready for sale to capitalize on
opportunistic sales that may arise as customers continue to recover from the
impacts of the pandemic.
The commercial jet engines and parts segment contributed $22.9 million of
revenues in the quarter ended June 30, 2022 compared to $9.6 million in the
comparable prior year quarter, which is an increase of $13.3 million (138%). The
increase was primarily driven by higher component part sales across all
companies within the segment and engine sales at AirCo1 that did not occur in
the same quarter in the prior fiscal year.
Revenues from the corporate and other segment for the three-month period ended
June 30, 2022 increased by $1.3 million (377%) compared to the first quarter of
the prior fiscal year. The increase was primarily attributable to the
acquisitions mentioned in Note 2 of the Notes to Condensed Consolidated
Financial Statements of this report.
Below is a table detailing operating profit (loss) by segment for the three months ended
Three Months Ended
June 30, Change
2022 2021
Overnight Air Cargo $ 1,077 $ 732 $ 345
Ground Equipment Sales 142 1,423 (1,281)
Commercial Jet Engines and Parts 3,074 (238) 3,312
Corporate and Other (3,459) (1,921) (1,538)
$ 834 $ (4) $ 838
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Consolidated operating profit for the quarter ended
The air cargo segment's operating income for the three-month period endedJune 30, 2022 was$1.1 million compared to operating income of$0.7 million the first quarter of the prior fiscal year due primarily to having higher segment revenues as described above, offset by higher pilot and staff salaries. The ground equipment sales segment's operating income for the quarter endedJune 30, 2022 decreased by$1.3 million from the prior year comparable quarter to$0.1 million . This decrease was primarily attributable to the decreased sales noted in the segment revenue discussion above. The commercial jet engines and parts segment generated operating income of$3.1 million in the current-year quarter compared to an operating loss of$0.2 million in the prior-year quarter. The change was primarily attributable to the increased component sales at the companies within this segment. The corporate and other segment's operating loss increased by$1.5 million to$3.5 million from the prior-year quarter loss of$1.9 million primarily driven by higher benefits cost in the current-year quarter. Following is a table detailing non-operating income (expense) during the three months endedJune 30, 2022 compared to the same quarter in the prior fiscal year (in thousands): Three Months Ended June 30, Change 2022 2021 Interest expense$ (1,822) $ (939) $ (883)
Income from equity method investments 532 83 449
Other (154) 1,182 (1,336)
$ (1,444) $ 326 $ (1,770)
The Company had a net non-operating loss of $1.4 million during the quarter
ended June 30, 2022 , compared to net non-operating income of $0.3 million in the
prior-year quarter. In current year quarter, the Company had increased interest
expense due to the increased issuance of the Company's Trust Preferred
securities as well as an increased debt level at Contrail. In the first quarter
2021, the Company recorded a gain of $0.5 million on the liquidation of Delphax
France , a subsidiary of Delphax Technologies, Inc. Also in the current-year
quarter, the Company recorded $0.1 million of investment loss driven by
decreases in the fair value of our investments compared to prior-year quarter
investment gain of $0.3 million .
During the three-month period ended June 30, 2022 , the Company recorded $0.2
million in income tax expense at an effective tax rate ("ETR") of (31.5)%. The
Company records income taxes using an estimated annual effective tax rate for
interim reporting. The primary factors contributing to the difference between
the federal statutory rate of 21.0% and the Company's effective tax rate for the
three-month period ended June 30, 2022 were the change in valuation allowance
related to the Company's subsidiaries in the corporate and other segment,
Delphax Solutions, Inc. and Delphax Technologies, Inc. (collectively known as
"Delphax"), other capital losses, the estimated benefit for the exclusion of
income for SAIC under Section 831(b), and the exclusion from the tax provision
of the minority owned portion of the pretax income of Contrail Aviation Support,
LLC .
During the three-month period ended June 30, 2021 , the Company recorded $5.0
thousand in income tax benefit at an effective tax rate ("ETR") of (1.6)%. The
Company records income taxes using an estimated annual effective tax rate for
interim reporting. The primary factors contributing to the difference between
the federal statutory rate of 21.0% and the Company's effective tax rate for the
three-month period ended June 30, 2021 were the change in valuation allowance
related to Delphax and other capital losses, the estimated benefit for the
exclusion of income for SAIC under Section 831(b) and the exclusion from the tax
provision of the minority owned portion of the pretax income of Contrail.
Significant Accounting Policies and Estimates
The Company's significant accounting policies are fully described in Note 1 to the condensed consolidated financial statements and in the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year endedMarch 31, 2022 . The preparation of the Company's condensed consolidated financial statements in conformity with accounting principles generally accepted inthe United States requires the use of estimates and assumptions to determine certain assets, liabilities, 30 -------------------------------------------------------------------------------- revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company's estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. There were no significant changes to the Company's critical accounting policies and estimates during the three-months endedJune 30, 2022 .
Seasonality
The ground equipment sales segment business has historically been seasonal, with the revenues and operating income typically being lower in the first and fourth fiscal quarters as commercial deicers are typically delivered prior to the winter season. Other segments have typically not experienced material seasonal trends. Supply Chain and Inflation The Company continues to monitor a wide range of health, safety, and regulatory matters related to the COVID-19 pandemic including its impact on our business operations. In particular, ongoing supply chain disruptions have impacted product availability and costs across all markets including the aviation industry in which our company operates. Additionally,the United States is experiencing an acute workforce shortage and increasing inflation which has created a hyper-competitive wage environment. Thus far, the direct impact of these items on our businesses has not been material. However, ongoing or future disruptions to consumer demand, our supply chain, product pricing inflation, our ability to attract and retain employees, or our ability to procure products and fulfill orders, could negatively impact the Company's operations and financial results in a material manner. We continue to look for proactive ways to mitigate potential impacts of supply chain disruptions at our businesses.
Cash and capital resources
As ofJune 30, 2022 , the Company held approximately$9.5 million in cash and cash equivalents and restricted cash,$2.0 million of which related to restricted cash collateralized held for three opportunity zone investments made by the Company - Air T OZ 1, LLC, Air T OZ 2, LLC, and Air T OZ 3, LLC (the "Opportunity Zone Funds"), each aMinnesota limited liability company and a subsidiary of the Company. The Company also held$1.7 million in restricted investments held as statutory reserve of SAIC. The Company has approximately$0.9 million of marketable securities and an aggregate of$32.9 million in available funds under its lines of credit as ofJune 30, 2022 .
From
As mentioned in Note 2 and Note 12 of Notes to Condensed Consolidated Financial Statements of this report, onDecember 2, 2021 , the Company, through its wholly-owned subsidiaryWolfe Lake HQ, LLC , completed the purchase of the real estate located at 5000 36th Street West, St. Louis Park, Minnesota pursuant to a real estate purchase agreement withWLPC East, LLC , aMinnesota limited liability company (an unrelated third-party) datedOctober 11, 2021 . The real estate purchased consists of a 2-story office building, asphalt-paved driveways and parking areas, and landscaping. The building was constructed in 2004 and contains an estimated 54,742 total square feet of space. The real estate purchased is where theAir T's Minnesota executive office is currently located. With this purchase, the Company assumed 11 leases from existing tenants occupying the building. The purchase price was$13.2 million , which was paid for with approximately$3.3 million in cash and a new secured loan from Bridgewater with an aggregate principal amount of$9.9 million and a fixed interest rate of 3.65% which matures onDecember 2, 2031 . As mentioned in Note 12 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report, onJune 9, 2022 , the Company,Jet Yard and MBT entered into Amendment No. 1 to Third Amended and Restated Credit Agreement ("Amendment") and a related Overline Note ("Overline Note") in the original principal amount of$5.0 million . The Amendment and Note memorialize an increase to the amount that may be drawn by the Company on the MBT revolving credit agreement from$17.0 million to$22.0 million . As ofJune 30, 2022 , the unused commitment of the MBT revolver and the Overline Note was$2.9 million and$5.0 million , respectively. The total amount of borrowings under the facility as revised is now the Company's calculated borrowing base or$22.0 million . The borrowing base calculation methodology remains unchanged. As mentioned in Note 15 of Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Report on Form 10-Q, in 2016, Contrail entered into an Operating Agreement with the Seller providing for the put and call options with regard to the 21% non-controlling interest retained by the Seller. The Seller is the founder of Contrail and its current Chief Executive Officer. The Put/Call Option permits the Seller or the Company to requireContrail Aviation to purchase all of the Seller's equity membership interests inContrail Aviation commencing onJuly 18, 2021 . As of the date of this filing, neither the Seller nor the Company has indicated an intent to exercise the put and call options. If either side were to exercise the option, the Company anticipates that the price would approximate the fair value of the Contrail RNCI, as determined on the transaction date. The Company currently expects that it would fund any required payment from cash provided by operations. As mentioned in Note 15 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report, onMay 5, 2021 , the Company formed an aircraft asset management business called CAM and an aircraft capital joint venture called 31 -------------------------------------------------------------------------------- CJVII. The venture focuses on acquiring commercial aircraft and jet engines for leasing, trading and disassembly. CJVII targets investments in current generation narrow-body aircraft and engines, building onContrail Aviation's origination and asset management expertise. CAM serves two separate and distinct functions: 1) to direct the sourcing, acquisition and management of aircraft assets owned by CJVII, and 2) to directly invest into CJVII alongside other institutional investment partners. CAM has an initial commitment to CJVII of approximately$53.0 million , which is comprised of an$8.0 million initial commitment from the Company and an approximately$45.0 million initial commitment from MRC. As ofJune 30, 2022 , CAM's remaining capital commitments are approximately$1.1 million from the Company and$19.7 million from MRC. CJVII was initially capitalized with up to$408.0 million of equity from the Company and three institutional investor partners, consisting of$108.0 million in initial commitments and$300.0 million in upsize capacity, contingent on underwriting and transaction appeal. As of the date of this filing,$91.6 million of capital has been deployed to CJVII. The timing of the remaining capital commitment is not yet known at this time. The Company believes it is probable that the cash on hand and current financings, net cash provided by operations from its remaining operating segments, together with amounts available under our current revolving lines of credit, as amended, will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.
Cash flow
The following is a table of changes in cash flow from continuing operations for the three months ended
Three months completed
2022 2021 Net Cash Used in Operating Activities (2,531) (8,821) Net Cash Used in Investing Activities (1,060) (1,449) Net Cash Provided by Financing Activities 4,573 5,819
Effect of exchange rates on cash and cash equivalents
173 (49)
Net increase (decrease) in cash and cash equivalents and restricted cash
1,155 (4,500) Net cash used in operating activities was$2.5 million for the three-month period endedJune 30, 2022 compared to net cash used in operating activities of$8.8 million in the prior year three-month period, equating to an overall decrease of$6.3 million period over period. The overall decrease in net cash used in operating activities was primarily driven by a net increase in cash provided by receivables of$8.5 million due to timely payments in the current period as well as lower accrued expenses payments of$3.9 million , mostly attributable to timing of payroll, bonus, and health insurance payments. Those impacts are partially offset by a$4.6 million net increase in cash used for inventories to support increased sales levels as well as a$1.1 million increase in net loss. Net cash used in investing activities for the three-month period endedJune 30, 2022 was$1.1 million compared to net cash used in investing activities of$1.4 million in the prior-year period.
Net cash provided by financing activities for the three-month period ended
Non-GAAP Financial Measures
The Company uses adjusted earnings before taxes, interest, and depreciation and
amortization ("Adjusted EBITDA"), a non-GAAP financial measure as defined by the
SEC , to evaluate the Company's financial performance. This performance measure
is not defined by accounting principles generally accepted in the United States
and should be considered in addition to, and not in lieu of, GAAP financial
measures.
Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation
and amortization, adjusted for specified items. The Company calculates Adjusted
EBITDA by removing the impact of specific items and adding back the amounts of
interest expense and depreciation and amortization to earnings before income
taxes. When calculating Adjusted EBITDA, the Company does not add back
depreciation expense for aircraft engines that are on lease, as the Company
believes this expense matches with the corresponding revenue earned on engine
leases. Depreciation expense for leased engines totaled $0.3 million and $0.1
million for the three months ended June 30, 2022 and 2021, respectively.
32
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Management believes that Adjusted EBITDA is a useful measure of the Company's
performance because it provides investors additional information about the
Company's operations allowing better evaluation of underlying business
performance and better period-to-period comparability. Adjusted EBITDA is not
intended to replace or be an alternative to operating income (loss), the most
directly comparable amounts reported under GAAP.
The tables below provide a reconciliation of operating profit (loss) from continuing operations to Adjusted EBITDA and Adjusted EBITDA by segment for the three months ended
Three months completed
6/30/2022 6/30/2021 Operating income (loss) from continuing operations $ 834 $ (4)
Depreciation allowances (excluding leased engine depreciation)
605 279 (Gain) Loss on disposition of assets (2) 3 Security issuance expenses 15 5 Adjusted EBITDA$ 1,452 $ 283 Three months ended 6/30/2022 6/30/2021
Overnight Air Cargo$ 1,096 $ 747 Ground Equipment Sales 191 1,456 Commercial Jet Engines and Parts 3,251 (74) Corporate and Other (3,086) (1,846) Adjusted EBITDA$ 1,452 $ 283
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