Air T(AIRT) - 2020 Q4 - Annual Report

PART I Business Overview Air T, Inc. is a holding company operating in five industry segments: overnight air cargo, ground equipment sales, commercial jet engines and parts, printing equipment and maintenance, and corporate and other, aiming to diversify earnings and grow free cash flow per share - Air T, Inc. operates in five industry segments: Overnight air cargo, Ground equipment sales, Commercial jet engines and parts, Printing equipment and maintenance, and Corporate and other[14] - The company completed the sale of its wholly-owned subsidiary, Global Aviation Services, LLC (GAS), which previously constituted the ground support services segment, on September 30, 2019[15] - MAC and CSA, operating in the Overnight Air Cargo segment, have a 35-year relationship with FedEx, with FedEx accounting for approximately 30% and 29% of consolidated revenue for fiscal years 2020 and 2019, respectively[19][22] - Ground Equipment Sales (GGS) manufactures and sells aircraft deicers and other specialized equipment, with deicing equipment sales accounting for approximately 89% of GGS's revenues in fiscal year 2020, up from 77% in the prior fiscal year[30] - The Commercial Jet Engines and Parts segment (Contrail, Jet Yard, AirCo, Worthington) focuses on trading, leasing, and supplying surplus commercial jet engines and parts, with Contrail contributing approximately 31% and 38% of total consolidated revenue for fiscal years 2020 and 2019, respectively[36] - The Printing Equipment and Maintenance segment (Delphax) designs, manufactures, and sells digital print production equipment, with Delphax Canada and Delphax UK dissolved in June 2019[40][42][44] GGS Order Backlog (in millions) | As of March 31, | Backlog (USD) | | :-------------- | :------------ | | 2020 | $51.5 | | 2019 | $26.1 | Risk Factors The company faces significant risks, including the material adverse effects of the COVID-19 pandemic, substantial dependency on FedEx, market fluctuations, IT disruptions, and the cyclical nature of the aviation industry - The COVID-19 pandemic has resulted in significant negative impacts, including a reduction in demand for commercial aircraft, jet engines, and parts, presenting material uncertainty and risk to the company's business[58][59][61] - The Air Cargo Segment is highly dependent on FedEx, which accounted for 30% of consolidated operating revenues and 96% of the segment's operating revenues in fiscal year 2020, making loss of this relationship a material adverse effect[62] - Sales of deicing equipment can be adversely affected by mild winter weather conditions, reducing demand for new units as airports extend the useful lives of existing equipment[69] - The company's investment portfolio, with $3.2 million in marketable securities as of March 31, 2020, is subject to value fluctuations that could result in losses and affect operating results[71] - The company faces risks from information technology disruptions, including cybersecurity attacks, which could lead to operational delays, data breaches, financial losses, and reputational damage[73] - The company's substantial indebtedness and capital-intensive nature of its aircraft and engine business require maintaining sufficient liquidity, which could be adversely impacted by revenue declines, increased expenses, or reduced credit availability[111][112] Unresolved Staff Comments The company has no unresolved staff comments to report - Not applicable[142] Properties The company owns approximately 4.626 acres in Denver, North Carolina, and leases various facilities for its subsidiaries across multiple locations, including Michigan, North Carolina, Kansas, Wisconsin, Arizona, Minnesota, Oklahoma, and Australia - The Company owns approximately 4.626 acres in Denver, North Carolina, which houses the operations of Air T and MAC[142] - CSA's operations are headquartered at leased office and hangar space at the Ford Airport in Iron Mountain, Michigan[143] - GGS leases an 112,500 square foot production facility in Olathe, Kansas, with the lease expiring in August 2024[145] - Jet Yard leases approximately 48.5 acres of land at the Pinal Air Park in Marana, Arizona, with the lease expiring in May 2046[147] - AirCo and Worthington consolidated back office operations and inventory to a 41,280 square-foot facility in Eagan, Minnesota, with the lease expiring in December 2027[149][150] Legal Proceedings The company and its subsidiaries are involved in ordinary course legal proceedings, which management believes will not materially adversely affect financial condition, liquidity, or results of operations - The Company and its subsidiaries are subject to legal proceedings and claims that arise in the ordinary course of their business[151] - Management believes that current proceedings will not have a material adverse effect on the Company's financial condition, liquidity, or results of operations[151] Mine Safety Disclosures The company has no mine safety disclosures to report - Not applicable[151] PART II Market for Common Equity, Stockholder Matters & Equity Purchases Air T, Inc.'s common stock trades on NASDAQ under 'AIRT', with 163 holders of record as of March 31, 2020, no cash dividends since 2014, and $2.8 million in share repurchases during fiscal year 2020 - The Company's common stock is publicly traded on the NASDAQ Global Market under the symbol "AIRT"[152] - As of March 31, 2020, the number of holders of record of the Company's Common Stock was 163[152] - The Company has not paid any cash dividends since 2014[152] - The Company repurchased 150,658 shares of common stock for an aggregate cost of $2.8 million during the fiscal year ended March 31, 2020, under an authorized program[153][348] Common Stock Repurchases (Q4 Fiscal 2020) | Dates of Shares Purchased | Total Number of Shares Purchased | Average Price per Share (USD) | Total Number of Shares Purchased as Part of Public Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :------------------------ | :------------------------------- | :---------------------- | :----------------------------------------------------------------------------- | :----------------------------------------------------------------------------- | | Jan 1 - Jan 31, 2020 | — | — | 142,564 | 969,688 | | Feb 1 - Feb 29, 2020 | — | — | 142,564 | 969,688 | | March 1 - March 31, 2020 | 30,746 | $14.94 | 173,310 | 938,942 | Selected Financial Data The company has chosen not to provide selected financial data in this section - Not applicable[155] Management's Discussion and Analysis This section analyzes Air T, Inc.'s financial condition and results of operations for fiscal years 2020 and 2019, covering segment performance, COVID-19 impact, critical accounting policies, liquidity, and capital resources, with a focus on diversifying earnings and growing free cash flow per share Overview Air T, Inc. is a holding company with a portfolio of operating businesses and financial assets, aiming to strategically diversify earnings and compound free cash flow per share across five segments, with the ground support services segment sold in September 2019 - Air T, Inc. is a holding company with a portfolio of operating businesses and financial assets, aiming to prudently and strategically diversify earnings power and compound the growth in its free cash flow per share over time[156] - The company operates in five industry segments: Overnight air cargo, Ground equipment sales, Commercial jet engines and parts, Printing equipment and maintenance, and Corporate and other[156] - The ground support services segment was discontinued with the sale of Global Aviation Services, LLC (GAS) on September 30, 2019[157] Forward Looking Statements The report contains forward-looking statements involving risks and uncertainties, including economic conditions, FedEx contract risks, aircraft reduction, deferred USAF orders, terrorist activities, cost management, accident risks, market acceptance, competition, regulatory changes, investment value fluctuations, weather, debt service, and the COVID-19 pandemic - Forward-looking statements involve risks and uncertainties, and actual results may differ materially[158] - Economic conditions in the Company's markets - Risk of FedEx contract termination or adverse modification - Risk of further reduction in aircraft operated for FedEx - Impact of COVID-19 pandemic length and severity Results of Operations Consolidated revenue increased by 10% to $236.8 million in fiscal year 2020, driven by ground equipment sales and commercial jet engines, while consolidated operating income decreased by 22% to $7.3 million due to higher operational costs and increased corporate expenses, with non-operating expenses rising from increased interest and investment losses, partially offset by a bankruptcy settlement gain Consolidated Revenue by Segment (in thousands) | Segment | FY2020 Revenue (USD) | FY2019 Revenue (USD) | Change (USD) | Change (%) | | :------------------------------- | :------------- | :------------- | :----------- | :--------- | | Overnight Air Cargo | $75,275 | $72,978 | $2,297 | 3% | | Ground Equipment Sales | $59,156 | $47,152 | $12,004 | 25% | | Printing Equipment and Maintenance | $306 | $655 | $(349) | (53)% | | Commercial Jet Engines and Parts | $101,284 | $93,968 | $7,316 | 8% | | Corporate and Other | $764 | $749 | $15 | 2% | | Total | $236,785 | $215,502 | $21,283 | 10% | - Ground equipment sales revenue increased by $12.0 million (25%) due to increased sales of commercial and military deicers, driven by market requirements and more business[163] - Commercial jet engines and parts revenue increased by $7.3 million (8%), primarily due to Contrail trading two more aircraft in the current year[164] Consolidated Operating Income by Segment (in thousands) | Segment | FY2020 Operating Income (USD) | FY2019 Operating Income (USD) | Change (USD) | Change (%) | | :------------------------------- | :---------------------- | :---------------------- | :----------- | :--------- | | Overnight Air Cargo | $749 | $1,918 | $(1,169) | (61)% | | Ground Equipment Sales | $7,302 | $3,420 | $3,882 | 114% | | Commercial Jet Engines and Parts | $8,322 | $12,298 | $(3,976) | (32)% | | Printing Equipment and Maintenance | $(1,596) | $(1,403) | $(193) | (14)% | | Corporate and Other | $(7,486) | $(6,902) | $(584) | (8)% | | Total | $7,291 | $9,331 | $(2,040) | (22)% | - Operating income for the air cargo segment decreased by $1.2 million (61%) due to fewer aircraft (69 in FY2020 vs. 79 in FY2019) from the loss of the Caribbean service area[166] - Ground equipment sales operating income increased by $3.9 million (114%) due to additional sales and higher margin orders in the current year[167][168] - Commercial jet engines and parts operating income declined by $4.0 million (32%) due to higher operational costs, mainly material costs and legal fees for aircraft and jet engine deals[168] Consolidated Non-Operating Expenses (in thousands) | Item | FY2020 (USD) | FY2019 (USD) | Change (USD) | Change (%) | | :---------------------------------------- | :----------- | :----------- | :----------- | :--------- | | Other-than-temporary impairment loss on investments | $(2,305) | $(2,000) | $(305) | (15)% | | Interest expense, net | $(4,692) | $(3,427) | $(1,265) | (37)% | | Gain on settlement of bankruptcy | $4,527 | — | $4,527 | 100% | | Bargain purchase acquisition gain | $49 | $1,984 | $(1,935) | (98)% | | Income (loss) from equity method investments | $(910) | $341 | $(1,251) | n/m | | Other | $(1,336) | $(261) | $(1,075) | (412)% | | Total | $(4,667) | $(3,363) | $(1,304) | (39)% | - Net non-operating expenses increased by $1.3 million, primarily due to a $1.3 million increase in interest expense and $1.3 million in investment losses, partially offset by a $4.5 million gain on bankruptcy settlement related to Delphax Canada and UK[169] - The company recorded an income tax benefit of $0.5 million in FY2020 (effective rate of -20.7%) compared to an expense of $1.8 million in FY2019 (effective rate of 29.5%)[170][171] Market Outlook The global COVID-19 outbreak creates significant uncertainty and risk for the company's financial condition, results of operations, cash flows, and liquidity, with a sharp decline in demand for commercial aircraft, jet engines, and parts, leading to expected reduced operating cash flow and potential losses in fiscal 2021 - The COVID-19 pandemic has led to a sharp decline in travel demand, directly impacting the commercial aircraft, jet engines, and parts industry[173] - The company has experienced and continues to experience a reduction in demand for commercial aircraft, jet engines, and parts[173] - The company expects reduced operating cash flow and potential losses in fiscal 2021 due to COVID-19, with the full impact remaining highly uncertain[160][161][174] Liquidity and Capital Resources As of March 31, 2020, the company held $15.6 million in cash and equivalents and $1.7 million in marketable securities, with working capital increasing by $12.2 million to $30.7 million, while Contrail forecasted probable non-compliance with financial covenants for Q2 FY2021 due to COVID-19, leading to the company obtaining $8.2 million in PPP loans Cash and Equivalents (in millions) | Item | March 31, 2020 (USD) | March 31, 2019 (USD) | | :---------------------------------- | :------------------- | :------------------- | | Cash and cash equivalents | $5.952 | $12.417 | | Restricted cash | $9.619 | $0.123 | | Restricted investments | $1.085 | $0.831 | | Marketable securities | $1.677 | $1.760 | - Working capital increased by $12.2 million to $30.7 million as of March 31, 2020, primarily due to a $33.2 million increase in inventory, offset by a $17.9 million increase in short-term borrowings[177] - As of March 31, 2020, both the Company and Contrail were in compliance with all financial covenants[175] - Contrail forecasted probable non-compliance with its financial covenants for the quarter ended September 30, 2020, due to the impact of COVID-19 on its business[182] - Subsequent to March 31, 2020, the company obtained approximately $8.2 million in loans under the Paycheck Protection Program (PPP) to cover payroll and other costs[185] - Revenues for Overnight Air Cargo, Ground Equipment Sales, and Commercial Jet Engines and Parts segments were down 14%, 26%, and 67% respectively, for April and May 2020 due to COVID-19 - The company expects a negative impact on consolidated cash flow from operations in Q1 fiscal 2021 Cash Flows In fiscal year 2020, cash used in operating activities increased significantly to $26.2 million from $22.4 million provided in fiscal year 2019, primarily due to additional inventory purchases, while cash used in investing activities decreased by $11.3 million to $11.6 million due to higher proceeds from asset sales, and cash provided by financing activities increased by $9.7 million from increased net proceeds from term loans, lines of credit, and warrant exercises Changes in Cash Flow (in thousands) | Cash Flow Category | FY2020 (USD) | FY2019 (USD) | Change (USD) | | :-------------------------------------- | :----------- | :----------- | :----------- | | Net Cash Provided by (Used in) Operating Activities | $(26,231) | $22,356 | $(48,587) | | Net Cash Used in Investing Activities | $(11,568) | $(22,853) | $11,285 | | Net Cash Provided by Financing Activities | $19,240 | $9,546 | $9,694 | | Effect of foreign currency exchange rates | $260 | $96 | $164 | | Net Increase in Cash and Cash Equivalents and Restricted Cash | $(18,299)| $9,145 | $(27,444)| - Cash used in operating activities in fiscal year 2020 increased due to additional purchases of inventory[188] - Cash used in investing activities decreased in fiscal year 2020 primarily because the Company received $26.5 million more of proceeds from sale of assets on lease or held for lease[189] - Cash provided by financing activities increased due to increased net proceeds from term loans and lines of credit, in addition to proceeds received from the exercise of warrants[190] Off-Balance Sheet Arrangements The company is not currently engaged in any off-balance sheet arrangements, which are defined as transactions involving unconsolidated entities where the company has guarantees, retained interests in transferred assets, obligations under derivative instruments classified as equity, or material variable interests providing financing or risk support - The Company is not currently engaged in the use of any off-balance sheet arrangements[192] Impact of Inflation The company believes inflation has not materially affected its manufacturing and commercial jet engine and parts operations, as increased costs have been passed on to customers, and major cost components of its overnight air cargo business are reimbursed by customers, though significant future increases in inflation rates could materially impact revenue and operating income - Inflation has not had a material effect on manufacturing and commercial jet engine and parts operations, as increased costs have been passed on to customers[193] - Major cost components of the overnight air cargo business (fuel, crew, direct operating costs, certain maintenance) are reimbursed by customers[193] - Significant increases in inflation rates could have a material impact on future revenue and operating income[193] Seasonality The ground equipment sales segment experiences seasonality, with lower revenues and operating income in the first and fourth fiscal quarters as commercial deicers are typically delivered before the winter season, while other segments are not materially affected by seasonal trends - The ground equipment sales segment business has historically been seasonal, with revenues and operating income typically lower in the first and fourth fiscal quarters[195] - Commercial deicers are typically delivered prior to the winter season[195] - Other segments are not susceptible to material seasonal trends[195] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant estimates and judgments in business combinations, variable interest entities, inventories, and redeemable non-controlling interest, with actual results potentially differing materially due to COVID-19 uncertainties - Business Combinations: Accounts for acquisitions using the acquisition method, recording identifiable assets and liabilities at fair value, and recognizing goodwill for any excess purchase consideration, involving estimates and judgments in valuation - Variable Interest Entities (VIEs): Analyzes variable interests to determine if consolidation is required as the primary beneficiary, based on power to direct activities and right to receive benefits/absorb losses - Inventories: Carried at the lower of cost or net realizable value, with estimates and judgments made in relief of inventory for the commercial jet engines and parts segment, consistent with market expectations - Accounting for Redeemable Non-Controlling Interest: Involves judgment in classification (temporary equity) and significant estimates in valuation (fair value vs. carrying value), with adjustments recognized through retained earnings - The COVID-19 pandemic makes estimates and assumptions inherently less certain, potentially impacting future losses to inventory and investments[200][232][233] Market Risk Disclosures The company has no quantitative and qualitative disclosures about market risk to report in this section - Not Applicable[203] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements of Air T, Inc. and its subsidiaries for fiscal years 2020 and 2019, including the statements of income, comprehensive income, balance sheets, cash flows, and equity, along with the independent auditor's report and extensive notes detailing accounting policies, operations, and subsequent events Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on Air T, Inc.'s consolidated financial statements for fiscal years 2020 and 2019, affirming fair presentation of financial position, results of operations, and cash flows in conformity with GAAP - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements of Air T, Inc. and subsidiaries for the fiscal years ended March 31, 2020 and 2019[209] - The financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America[209] Consolidated Statements of Income The consolidated statements of income show a 10% increase in total operating revenues to $236.8 million in fiscal year 2020, with operating income from continuing operations decreasing by 22% to $7.3 million, while net income attributable to Air T, Inc. stockholders significantly increased to $7.7 million from $1.3 million in fiscal year 2019, largely due to a gain on sale of discontinued operations Consolidated Statements of Income Highlights (in thousands, except per share data) | Item | FY2020 (USD) | FY2019 (USD) | | :-------------------------------------------- | :----------- | :----------- | | Total Operating Revenues | $236,785 | $215,502 | | Total Operating Expenses | $229,494 | $206,171 | | Operating Income from continuing operations | $7,291 | $9,331 | | Net income from continuing operations | $3,168 | $4,207 | | Loss from discontinued operations, net of tax | $(114) | $(1,006) | | Gain on sale of discontinued operations, net of tax | $8,179 | — | | Net income | $11,233 | $3,201 | | Net Income Attributable to Air T, Inc. Stockholders | $7,656 | $1,340 | | Basic Income per share | $2.74 | $0.44 | | Diluted Income per share | $2.73 | $0.44 | Consolidated Statements of Comprehensive Income The consolidated statements of comprehensive income show total comprehensive income of $10.9 million for fiscal year 2020, a significant increase from $3.2 million in fiscal year 2019, including net income, foreign currency translation gains, and unrealized losses on interest rate swaps Consolidated Statements of Comprehensive Income (in thousands) | Item | FY2020 (USD) | FY2019 (USD) | | :-------------------------------------------- | :----------- | :----------- | | Net Income | $11,233 | $3,201 | | Foreign currency translation gain | $212 | $225 | | Unrealized loss on interest rate swaps, net of tax | $(529) | $(236) | | Total Other Comprehensive Loss | $(317) | $(11) | | Total Comprehensive Income | $10,916 | $3,190 | | Comprehensive Income Attributable to Air T, Inc. Stockholders | $7,324 | $1,290 | Consolidated Balance Sheets The consolidated balance sheets show total assets increased to $151.4 million as of March 31, 2020, from $115.1 million in 2019, primarily driven by a significant increase in inventories and current portion of long-term debt, while total liabilities also increased to $120.3 million from $86.3 million, and total equity attributable to Air T, Inc. stockholders slightly decreased to $24.0 million from $24.4 million Consolidated Balance Sheets Highlights (in thousands) | Item | March 31, 2020 (USD) | March 31, 2019 (USD) | | :-------------------------------------------- | :------------------- | :------------------- | | Cash and cash equivalents | $5,952 | $12,417 | | Restricted cash | $9,619 | $123 | | Inventories, net | $60,623 | $27,455 | | Total Current Assets | $98,486 | $71,348 | | Assets on lease or held for lease, net | $27,945 | $25,164 | | Total Assets | $151,427 | $115,143 | | Current portion of long-term debt | $42,684 | $24,735 | | Total Current Liabilities | $67,746 | $52,794 | | Long-term debt | $43,136 | $32,918 | | Total Liabilities | $120,336 | $86,309 | | Redeemable non-controlling interest | $6,080 | $5,476 | | Total Air T, Inc. Stockholders' Equity | $24,006 | $24,359 | | Total Equity | $25,011 | $23,358 | - Inventories, net, increased significantly to $60.6 million in FY2020 from $27.5 million in FY2019[220] - Current portion of long-term debt increased to $42.7 million in FY2020 from $24.7 million in FY2019[220] Consolidated Statements of Cash Flows The consolidated statements of cash flows show a shift from cash provided by operating activities of $20.9 million in fiscal year 2019 to cash used of $25.1 million in fiscal year 2020, primarily due to increased inventory purchases, while investing activities shifted from cash used of $23.0 million in 2019 to cash provided of $8.6 million in 2020, largely due to higher proceeds from asset sales, and financing activities provided $19.2 million in 2020, up from $9.5 million in 2019, driven by increased debt proceeds and warrant exercises Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Category | FY2020 (USD) | FY2019 (USD) | | :------------------------------------------------ | :----------- | :----------- | | Net cash (used in) provided by operating activities | $(25,074) | $20,936 | | Net cash provided by (used in) investing activities | $8,605 | $(23,004) | | Net cash provided by financing activities | $19,240 | $9,546 | | Net Increase in Cash and Cash Equivalents and Restricted Cash | $3,031 | $7,574 | | Cash and Cash Equivalents and Restricted Cash at End of Period | $15,571 | $12,540 | - Cash used in operating activities increased in fiscal year 2020 due to additional purchases of inventory[188] - Proceeds from sale of assets on lease and held for lease significantly increased to $30.7 million in FY2020 from $4.2 million in FY2019[223] - Proceeds from lines of credit increased to $174.6 million in FY2020 from $107.5 million in FY2019[223] Consolidated Statements of Equity The consolidated statements of equity reflect a slight decrease in total Air T, Inc. Stockholders' Equity to $24.0 million as of March 31, 2020, from $24.4 million in 2019, with key changes including $7.7 million in net income attributable to stockholders, a 3-for-2 stock split, $2.8 million in share repurchases, and the issuance of Trust Preferred Securities and Warrants, while redeemable non-controlling interest increased to $6.1 million Consolidated Statements of Equity Highlights (in thousands) | Item | March 31, 2020 (USD) | March 31, 2019 (USD) | | :-------------------------------------------- | :------------------- | :------------------- | | Common Stock (Amount) | $756 | $506 | | Treasury Stock (Amount) | $(2,617) | — | | Additional Paid-In Capital | $2,636 | $2,867 | | Retained Earnings | $23,768 | $21,191 | | Accumulated Other Comprehensive Loss | $(537) | $(205) | | Total Air T, Inc. Stockholders' Equity | $24,006 | $24,359 | | Non-controlling Interests | $1,005 | $(1,001) | | Total Equity | $25,011 | $23,358 | - Net income attributable to Air T, Inc. stockholders was $7.7 million in FY2020[227] - A 3-for-2 stock split occurred on June 10, 2019[227] - Repurchase of common stock amounted to $(2.8) million in FY2020[227][348] - Issuance of Debt - Trust Preferred Securities and Warrants resulted in a reduction of retained earnings by $4.0 million and $0.84 million, respectively[227] Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's financial statements, covering significant accounting policies, discontinued operations, major customer dependency, business acquisitions, variable interest entities, fair value measurements, inventories, assets on lease, property and equipment, investments, equity method investments, accrued expenses, lease arrangements, financing arrangements, related party matters, share repurchases, stock options, revenue recognition, employee benefits, income taxes, quarterly financial data, geographical and segment information, earnings per share, commitments and contingencies, and subsequent events SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the company's accounting policies, including principles of consolidation, use of estimates (with a specific mention of COVID-19 impact), segment reporting, variable interest entities, business combinations, cash and cash equivalents, inventories, equity method investments, goodwill, intangible assets, property and equipment, accounting for debt preferred securities and warrant liability, income taxes, redeemable non-controlling interest, and revenue recognition, also detailing recently adopted and issued accounting pronouncements - The Company operates in five reportable operating segments: overnight air cargo, ground equipment sales, commercial jet engine and parts, printing equipment and maintenance, and corporate and other[228][234] - The preparation of financial statements involves significant estimates and assumptions, which are inherently less certain due to the COVID-19 pandemic[231][232][233] - Goodwill of approximately $4.2 million as of March 31, 2020, is entirely related to the acquisition of Contrail Aviation, with a quantitative impairment analysis concluding no impairment was warranted due to COVID-19[248][251] - The company adopted ASU 2016-02, Leases (Topic 842), on April 1, 2019, recognizing right-of-use assets of approximately $10.7 million and lease liabilities of approximately $11.2 million, with an immaterial cumulative effect on retained earnings[273] - The fair value of the redeemable non-controlling interest was $6.1 million as of March 31, 2020, an increase of $0.6 million from March 31, 2019[264] - Contrail management forecasted probable non-compliance with its financial covenants for the quarter ended September 30, 2020, and is seeking waivers or alternative financing, including the Main Street Lending Program[269][270] - Subsequent to March 31, 2020, the Company obtained $8.2 million in PPP loans to help pay for payroll and other costs[272] DISCONTINUED OPERATIONS On September 30, 2019, the company completed the sale of Global Aviation Services, LLC (GAS) for a purchase price of $21.0 million, recognizing a pre-tax gain of approximately $10.5 million (net of tax gain of $8.2 million), with GAS's results reported as discontinued operations, showing net sales of $16.6 million and a net loss of $0.1 million in fiscal year 2020 prior to disposition - The Company completed the sale of 100% of the equity ownership in Global Aviation Services, LLC (GAS) on September 30, 2019, for a purchase price of $21.0 million[282] - A pre-tax gain on the sale of GAS of approximately $10.5 million was recognized, with a net of tax gain of $8.2 million, during the fiscal year ended March 31, 2020[282] Summarized Results of Operations of GAS (in thousands) | Item | FY2020 (USD) | FY2019 (USD) | | :-------------------------------------------- | :----------- | :----------- | | Net sales | $16,637 | $34,332 | | Operating Expense | $(17,319) | $(35,597) | | Loss from discontinued operations before income taxes | $(682) | $(1,265) | | Income tax benefit | $(568) | $(259) | | Loss from discontinued operations, net of tax | $(114) | $(1,006) | MAJOR CUSTOMER FedEx Corporation is a major customer, accounting for approximately 30% and 29% of the company's consolidated revenues in fiscal years 2020 and 2019, respectively, and represented 16% and 20% of consolidated accounts receivable at March 31, 2020 and 2019, respectively - Approximately 30% and 29% of the Company's consolidated revenues were derived from services performed for FedEx Corporation in fiscal 2020 and 2019, respectively[287] - Approximately 16% and 20% of the Company's consolidated accounts receivable at March 31, 2020 and 2019, respectively, were due from FedEx Corporation[287] BUSINESS COMBINATIONS On May 4, 2018, Air T, Inc. acquired substantially all assets and assumed certain liabilities of Worthington Aviation Parts, Inc. for $3.3 million cash, resulting in a bargain purchase gain of approximately $2.0 million (net of tax), as Worthington was in financial distress and the acquisition was non-marketed - On May 4, 2018, the Company completed the acquisition of substantially all assets and assumed certain liabilities of Worthington Aviation Parts, Inc.[289] - Total consideration for the acquisition was $3.326 million, including $50,000 earnest money and $3.3 million cash payment[290][291] - The transaction resulted in a bargain purchase gain of approximately $1.983 million (pre-tax) and $2.0 million (net of tax), as Worthington was in financial distress and the acquisition was non-marketed[293] VARIABLE INTEREST ENTITIES The company consolidates Delphax as a variable interest entity (VIE) since November 24, 2015, due to its significant equity and debt investments, with Delphax Canada and Delphax UK dissolved in June 2019, resulting in a $4.5 million gain on dissolution, and Delphax recording net income of $6.1 million in fiscal year 2020, primarily from this gain - The Company concluded it became the primary beneficiary of Delphax on November 24, 2015, and consolidates Delphax in its financial statements[296] - Delphax Canada and Delphax UK were dissolved in June 2019, leading to a $4.5 million gain on dissolution of entities[298] - Delphax recorded net income of $6.1 million in FY2020, primarily from the dissolution gain, compared to a net loss of $0.5 million in FY2019[300] FAIR VALUE OF FINANCIAL INSTRUMENTS The company measures financial assets and liabilities at fair value, categorizing them into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than active market prices), and Level 3 (unobservable significant inputs), with marketable securities as Level 1, interest rate swaps as Level 2, and acquisition contingent consideration obligations and redeemable non-controlling interest as Level 3 - Level 1: Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities - Level 2: Quoted prices in markets that are not active or observable inputs, directly or indirectly, for substantially the full term of the asset or liability - Level 3: Prices or valuation techniques requiring significant unobservable inputs Fair Value Measurements (in thousands) | Item | March 31, 2020 (USD) | March 31, 2019 (USD) | | :-------------------------------------------- | :------------------- | :------------------- | | Marketable securities (Level 1) | $3,240 | $3,213 | | Interest rate swaps (Level 2) | $914 | $227 | | Acquisition contingent consideration obligations (Level 3) | — | $489 | | Redeemable non-controlling interest (Level 3) | $6,080 | $5,476 | INVENTORIES Total inventories, net of reserves, significantly increased to $60.6 million as of March 31, 2020, from $27.5 million in 2019, with the commercial jet engines and parts segment accounting for the largest portion of this increase, rising from $21.0 million to $51.1 million Inventories (in thousands) | Category | FY2020 (USD) | FY2019 (USD) | | :-------------------------------------- | :----------- | :----------- | | Ground equipment manufacturing: | | | | Raw materials | $4,192 | $2,498 | | Work in process | $2,731 | $1,659 | | Finished goods | $1,725 | $972 | | Printing equipment and maintenance: | | | | Raw materials | $464 | $401 | | Finished goods | $910 | $1,048 | | Commercial jet engines and parts | $51,084 | $21,032 | | Total inventories | $61,106 | $27,610 | | Reserves | $(483) | $(155) | | Total, net of reserves | $60,623 | $27,455 | ASSETS ON LEASE The company leases equipment to third parties, primarily through Contrail, under operating lease agreements with terms typically between 2 and 3 years, with future fixed rental payments under non-cancelable leases totaling $1.322 million as of March 31, 2020, mostly due in fiscal year 2021 - The Company leases equipment to third parties, primarily through Contrail, which leases engines to aviation customers with lease terms between 2 and 3 years under operating lease agreements[307] Future Fixed Rental Payments from Non-Cancelable Leases (in thousands) | Fiscal Year | Amount (USD) | | :---------- | :----------- | | 2021 | $1,172 | | 2022 | $83 | | 2023 | $61 | | 2024 | $6 | | 2025 | — | | Thereafter | — | | Total | $1,322 | PROPERTY AND EQUIPMENT Property and equipment, net of accumulated depreciation, increased to $5.3 million as of March 31, 2020, from $4.3 million in 2019, primarily driven by additions to furniture, fixtures, and improvements, and buildings Property and Equipment (in thousands) | Item | FY2020 (USD) | FY2019 (USD) | | :------------------------------------ | :----------- | :----------- | | Furniture, fixtures and improvements | $7,633 | $6,100 | | Building | $1,958 | $1,634 | | Total | $9,591 | $7,734 | | Less accumulated depreciation | $(4,319) | $(3,470) | | Property and equipment, net | $5,272 | $4,264 | INVESTMENTS IN SECURITIES During fiscal year 2020, the company recorded gross unrealized gains of $8,360 and gross unrealized losses of $0.5 million on its investments in securities, which are included in the Consolidated Statements of Income - During the year ended March 31, 2020, the Company had gross unrealized gains aggregating to $8,360 and gross unrealized losses aggregating to $0.5 million, which are included in the Consolidated Statements of Income[310] EQUITY METHOD INVESTMENTS The company accounts for its investments in Insignia Systems, Inc. and Cadillac Casting, Inc. (CCI) using the equity method, with the net investment basis in Insignia approximately $1.3 million as of March 31, 2020, after recording a $1.5 million loss and $2.3 million in impairment charges, while the $2.8 million investment in CCI resulted in $0.6 million income for the period under ownership - The Company's investment in Insignia is accounted for under the equity method of accounting[311] - For the year ended March 31, 2020, the Company recorded a loss of approximately $1.5 million as its share of Insignia's net loss and total impairment charges of $2.3 million on the investment[312] - The Company's net investment basis in Insignia is approximately $1.3 million as of March 31, 2020[312] - On November 8, 2019, the Company invested $2.8 million to purchase a 19.9% ownership stake in Cadillac Casting, Inc. (CCI), accounted for using the equity method[313] - For the year ended March 31, 2020, Air T recorded income of $0.6 million as its share of CCI's net income[314] Summarized Financial Information for Equity Method Investees (in thousands) | Item | 12 Months Ended Dec 31, 2019 (USD) | 12 Months Ended Dec 31, 2018 (USD) | | :------------------ | :--------------------------------- | :--------------------------------- | | Revenue | $108,751 | $135,345 | | Gross Profit | $7,570 | $22,734 | | Operating income (loss) | $(2,653) | $3,340 | | Net income (loss) | $(3,645) | $2,486 | | Net income attributable to Air T, Inc. stockholders | $(887) | $391 | ACCURUED EXPENSES Total accrued expenses decreased to $13.0 million as of March 31, 2020, from $14.2 million in 2019, primarily due to a decrease in salaries, wages, and related items, partially offset by an increase in profit sharing and bonus accruals Accrued Expenses (in thousands) | Item | FY2020 (USD) | FY2019 (USD) | | :------------------------------ | :----------- | :----------- | | Salaries, wages and related items | $3,616 | $6,049 | | Profit sharing and bonus | $3,349 | $2,077 | | Other deposits | $1,722 | $1,526 | | Other | $4,337 | $4,523 | | Total | $13,024 | $14,175 | LEASE ARRANGEMENTS The company has operating leases for real estate, machinery, and office equipment, with terms ranging from 2 to 30 years, recognizing right-of-use assets of $8.1 million and lease liabilities of $8.6 million as of March 31, 2020, upon adopting ASU 2016-02, with total lease cost for the twelve months ended March 31, 2020, being $2.9 million - The Company has operating leases for real estate, machinery, and office equipment, with terms ranging from 2 to 30 years[317] Components of Lease Cost (in thousands) | Item | 12 Months Ended March 31, 2020 (USD) | | :-------------------- | :----------------------------------- | | Operating lease cost | $2,093 | | Short-term lease cost | $439 | | Variable lease cost | $342 | | Sublease income | — | | Total lease cost | $2,874 | Lease Liabilities and ROU Assets (in thousands) | Item | March 31, 2020 (USD) | | :------------------------ | :------------------- | | Operating lease ROU assets | $8,116 | | Operating lease liabilities | $8,647 | | Weighted-average remaining lease term | 14 years, 4 months | | Weighted-average discount rate | 4.50% | Maturities of Lease Liabilities (in thousands) | Fiscal Year | Operating Leases (USD) | | :---------- | :--------------------- | | 2021 | $1,624 | | 2022 | $1,512 | | 2023 | $1,331 | | 2024 | $960 | | 2025 | $694 | | Thereafter | $6,388 | | Total undiscounted lease payments | $12,509 | | Less: Interest | $(3,299) | | Less: Discount | $(563) | | Total lease liabilities | $8,647 | FINANCING ARRANGEMENTS As of March 31, 2020, total debt, net of unamortized debt issuance costs, was $85.8 million, up from $57.7 million in 2019, including various revolving credit facilities and term loans, with the company issuing $12.9 million in Trust Preferred Securities (TruPs) and having 4.8 million Warrants outstanding, and using interest rate swaps to hedge against rising variable interest rates, while net interest expense increased to $4.7 million in fiscal year 2020 Debt Summary (in thousands) | Debt Category | March 31, 2020 (USD) | March 31, 2019 (USD) | | :------------ | :------------------- | :------------------- | | Air T Debt | $35,592 | $27,135 | | AirCo Debt | $8,335 | $6,770 | | Contrail Debt | $42,247 | $24,117 | | Total Debt| $86,174 | $58,022 | | Less: Unamortized Debt Issuance Costs | $(354) | $(369) | | Total Debt, net | $85,820 | $57,653 | - The weighted average interest rate on short-term borrowings outstanding was 3.7% as of March 31, 2020, down from 5.3% in 2019[330] Contractual Financing Obligations (in thousands) | Fiscal year ended | Amount (USD) | | :---------------- | :----------- | | 2021 | $42,684 | | 2022 | $13,901 | | 2023 | $4,991 | | 2024 | $3,267 | | 2025 | $3,126 | | Thereafter | $18,205 | | Total | $86,174 | | Less: Unamortized Debt Issuance Costs | $(354) | | Total | $85,820 | Net Interest Expense (in thousands) | Item | FY2020 (USD) | FY2019 (USD) | | :------------------------------------ | :----------- | :----------- | | Contractual interest | $4,458 | $3,291 | | Amortization of deferred financing costs | $237 | $194 | | Interest income | $(3) | $(58) | | Total | $4,692 | $3,427 | - The Company issued 1.6 million Trust Preferred Capital Securities (TruPs) with an aggregate stated value of $4.0 million and 8.4 million Warrants to purchase TruPs in June 2019[336] - As of March 31, 2020, approximately 3.6 million Warrants have been exercised, resulting in $12.9 million outstanding on Debt - Trust Preferred Securities[339] - The Company uses interest rate swaps to hedge against rising variable interest rates on Term Notes A and D, designated as cash flow hedging instruments[341][342] RELATED PARTY MATTERS Related party transactions include Contrail Aviation Support, LLC leasing facilities from Cohen Kuhn Properties, LLC, owned by the CEO and CFO, Gary S. Kohler serving as Chief Investment Officer for BCCM, a subsidiary, and Nick Swenson, CEO, being the majority shareholder of Cadillac Casting, Inc. (CCI), making him the primary beneficiary under the VIE model - Contrail Aviation Support, LLC leases its corporate and operating facilities from Cohen Kuhn Properties, LLC, a limited liability company whose membership interests are owned by Mr. Joseph Kuhn, Chief Executive Officer and Mrs. Miriam Cohen-Kuhn, Chief Financial Officer equally[344] - Gary S. Kohler, a director, entered into an employment agreement with BCCM, a wholly-owned subsidiary, to serve as its Chief Investment Officer[345] - Nick Swenson, CEO, is the majority shareholder (69%) of Cadillac Casting, Inc. (CCI), and is considered the primary beneficiary of CCI under the VIE model[346] SHARE REPURCHASE The company repurchased 150,658 shares of common stock at an aggregate cost of $2.8 million during the fiscal year ended March 31, 2020, under a Board-authorized program, with 9,766 shares retired and 140,892 shares recorded as treasury shares - The Company repurchased 150,658 shares of common stock at an aggregate cost of $2.8 million during the year ended March 31, 2020[348] - 9,766 shares were retired, and 140,892 shares were recorded as treasury shares as of March 31, 2020[348] EMPLOYEE AND NON-EMPLOYEE STOCK OPTIONS The company maintains stock option plans for employees and directors, valuing options using the Black-Scholes model, with no options granted under Air T, Inc.'s plan in fiscal years 2020 or 2019, and no stock-based compensation expense recognized, while 11,250 shares were outstanding and exercisable under the Delphax option plans as of March 31, 2020, with a weighted average exercise price of $6.61 - No options were granted under Air T, Inc.'s stock option plan during the fiscal years ended March 31, 2020 and 2019, and no stock-based compensation expense was recognized[351] Stock Option Activity (in thousands, except per share data) | Item | Shares | Weighted Average Exercise Price Per Share (USD) | Weighted Average Remaining Life (Years) | Aggregate Intrinsic Value (USD) | | :------------------------------------ | :----- | :---------------------------------------------- | :-------------------------------------- | :------------------------------ | | Outstanding at March 31, 2019 | 11,250 | $6.61 | 4.07 | $152,075 | | Outstanding at March 31, 2020 | 11,250 | $6.61 | 3.07 | $66,388 | | Exercisable at March 31, 2020 | 11,250 | $6.61 | 3.07 | $66,388 | REVENUE RECOGNITION The company recognizes revenue from product sales (parts, equipment, engines) at a point-in-time upon shipment or transfer of control, and from support services (maintenance, repair, aircraft routes) over time as benefits are provided, with total disaggregated revenues for fiscal year 2020 being $236.8 million, including $168.7 million from product sales and $55.8 million from support services, and $23.7 million from air cargo dry-lease pass-through costs - Product sales revenue is recognized at a point-in-time upon shipment or when control is transferred to the customer[354] - Support services revenue is recognized over time as the customer simultaneously receives the benefits provided by the Company's performance[354] Disaggregated Revenues by Type (in thousands) | Type of Revenue | FY2020 (USD) | FY2019 (USD) | | :-------------- | :----------- | :----------- | | Product Sales | $168,704 | $148,107 | | Air Cargo | $23,690 | $23,043 | | Ground equipment sales | $58,082 | $45,897 | | Commercial jet engines and parts | $86,625 | $78,174 | | Printing equipment and maintenance | $261 | $592 | | Corporate and other | — | — | | Support Services | $55,771 | $55,795 | | Air Cargo | $51,469 | $49,781 | | Ground equipment sales | $485 | $648 | | Commercial jet engines and parts | $3,675 | $5,239 | | Printing equipment and maintenance | $42 | $47 | | Corporate and other | $104 | $89 | | Leasing Revenue | $11,138 | $10,391 | | Ground equipment sales | $189 | $76 | | Commercial jet engines and parts | $10,797 | $10,189 | | Corporate and other | $152 | $126 | | Other | $1,214 | $1,065 | | Total | $236,785 | $215,502 | - Pass-through costs under overnight air cargo dry-lease agreements with FedEx totaled $23.7 million and $23.6 million for fiscal years 2020 and 2019, respectively[267] EMPLOYEE BENEFITS The company offers a 401(k) defined contribution plan for domestic employees and an 1165(E) plan for Puerto Rico-based employees, with contributions of approximately $0.6 million in both fiscal years 2020 and 2019, and paid a discretionary profit sharing bonus with expenses of $3.5 million in fiscal year 2020 and $2.4 million in fiscal year 2019 - The Company's contribution to its 401(k) and 1165(E) defined contribution plans was approximately $0.6 million for both fiscal years ended March 31, 2020 and 2019[361] - Profit sharing expense was approximately $3.5 million in fiscal 2020 and $2.4 million in fiscal 2019[362] INCOME TAXES The company recorded an income tax benefit of $0.5 million in fiscal year 2020, compared to an expense of $1.8 million in 2019, resulting in effective tax rates of -20.7% and 29.5%, respectively, influenced by the micro-captive insurance benefit, non-taxable cancellation of debt income, changes in valuation allowance, and the write-off of Delphax tax attributes, with a full valuation allowance of $6.4 million established against Delphax's net deferred tax assets in 2020 Income Tax Expense (Benefit) (in thousands) | Item | FY2020 (USD) | FY2019 (USD) | | :------------ | :----------- | :----------- | | Current: | | | | Federal | $43 | $2,484 | | State | $(8) | $418 | | Foreign | — | $23 | | Total current | $35 | $2,925 | | Deferred: | | | | Federal | $(481) | $(1,101) | | State | $(98) | $(63) | | Total deferred| $(579) | $(1,164) | | Total | $(544) | $1,761 | Reconciliation of Income Tax Expense to U.S. Federal Statutory Rate (in thousands) | Item | FY2020 (USD) | FY2020 (%) | FY2019 (USD) | FY2019 (%) | | :-------------------------------------------- | :----------- | :--------- | :----------- | :--------- | | Expected Federal income tax expense U.S. statutory rate | $551 | 21.0% | $1,253 | 21.0% | | State income taxes, net of federal benefit | $(519) | -19.8% | $201 | 3.4% | | Nontaxable cancellation of debt income | $(1,331) | -50.7% | — | 0.0% | | Micro-captive insurance benefit | $(172) | -6.6% | $(197) | -3.3% | | Change in valuation allowance | $(7,789) | -296.8% | $1,405 | 23.5% | | Income attributable to minority interest - Contrail | $(325) | -12.4% | $(434) | -7.3% | | Write-off Delphax tax attributes | $9,353 | 356.4% | — | 0.0% | | Acquired NOL carrybacks; CARES Act | $(363) | -13.8% | — | 0.0% | | Other differences, net | $51 | 1.9% | $(467) | -7.8% | | Income tax (benefit) expense | $(544) | -20.7% | $1,761 | 29.5% | - A full valuation allowance of $6.4 million was established against Delphax's net deferred tax assets at March 31, 2020, primarily due to cumulative tax losses[373] - The CARES Act, enacted in March 2020, made significant changes to federal tax laws, with no material income tax consequences on the reporting period of these financial statements[375] QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Unaudited quarterly financial information for fiscal years 2020 and 2019 shows fluctuations in operating revenues, income from continu