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, 2022and (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 ended
March 31, 2022(including the information presented therein under Risk Factors), as well other publicly available information.
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 diversify Air T'searnings 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.
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 ended
June 30, 2022compared 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$
Ground Equipment Sales 5,815 8,182
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 $ 13,89438 % Revenues from the air cargo segment for the three-month period ended June 30, 2022increased 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 millionand $8.2 millionto the Company's revenues for the three-month periods ended June 30, 2022and 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 millioncompared to $7.1 millionat June 30, 2021. Finished Goods inventory increased to $9.1 millionas of June 30, 2022from $7.3 millionas 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 millionof revenues in the quarter ended June 30, 2022compared to $9.6 millionin 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, 2022increased 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 $ 345Ground 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) $ 83829
Consolidated operating profit for the quarter ended
The air cargo segment's operating income for the three-month period ended
June 30, 2022was $1.1 millioncompared to operating income of $0.7 millionthe 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 ended June 30, 2022decreased by $1.3 millionfrom 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 millionin the current-year quarter compared to an operating loss of $0.2 millionin 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 millionto $3.5 millionfrom the prior-year quarter loss of $1.9 millionprimarily driven by higher benefits cost in the current-year quarter. Following is a table detailing non-operating income (expense) during the three months ended June 30, 2022compared 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 millionduring the quarter ended June 30, 2022, compared to net non-operating income of $0.3 millionin 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 millionon the liquidation of Delphax France, a subsidiary of Delphax Technologies, Inc. Also in the current-year quarter, the Company recorded $0.1 millionof 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 millionin 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, 2022were 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 thousandin 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, 2021were 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 ended
March 31, 2022. The preparation of the Company's condensed consolidated financial statements in conformity with accounting principles generally accepted in the United Statesrequires 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 ended June 30, 2022.
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 Statesis 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
June 30, 2022, the Company held approximately $9.5 millionin cash and cash equivalents and restricted cash, $2.0 millionof 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 a Minnesotalimited liability company and a subsidiary of the Company. The Company also held $1.7 millionin restricted investments held as statutory reserve of SAIC. The Company has approximately $0.9 millionof marketable securities and an aggregate of $32.9 millionin available funds under its lines of credit as of June 30, 2022.
As mentioned in Note 2 and Note 12 of Notes to Condensed Consolidated Financial Statements of this report, on
December 2, 2021, the Company, through its wholly-owned subsidiary Wolfe 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 with WLPC East, LLC, a Minnesotalimited liability company (an unrelated third-party) dated October 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 the Air T's Minnesotaexecutive 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 millionin cash and a new secured loan from Bridgewater with an aggregate principal amount of $9.9 millionand a fixed interest rate of 3.65% which matures on December 2, 2031. As mentioned in Note 12 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report, on June 9, 2022, the Company, Jet Yardand 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 millionto $22.0 million. As of June 30, 2022, the unused commitment of the MBT revolver and the Overline Note was $2.9 millionand $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 require Contrail Aviationto purchase all of the Seller's equity membership interests in Contrail Aviationcommencing on July 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, on May 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 on Contrail Aviation'sorigination 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 millioninitial commitment from the Company and an approximately $45.0 millioninitial commitment from MRC. As of June 30, 2022, CAM's remaining capital commitments are approximately $1.1 millionfrom the Company and $19.7 millionfrom MRC. CJVII was initially capitalized with up to $408.0 millionof equity from the Company and three institutional investor partners, consisting of $108.0 millionin initial commitments and $300.0 millionin upsize capacity, contingent on underwriting and transaction appeal. As of the date of this filing, $91.6 millionof 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.
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
Net increase (decrease) in cash and cash equivalents and restricted cash
1,155 (4,500) Net cash used in operating activities was
$2.5 millionfor the three-month period ended June 30, 2022compared to net cash used in operating activities of $8.8 millionin the prior year three-month period, equating to an overall decrease of $6.3 millionperiod 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 milliondue 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 millionnet increase in cash used for inventories to support increased sales levels as well as a $1.1 millionincrease in net loss. Net cash used in investing activities for the three-month period ended June 30, 2022was $1.1 millioncompared to net cash used in investing activities of $1.4 millionin 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 Statesand 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 millionand $0.1 millionfor the three months ended June 30, 2022and 2021, respectively. 32 -------------------------------------------------------------------------------- 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 $ 747Ground 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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