Air T(AIRT) - 2022 Q4 - Annual Report

Part I Business Air T, Inc. is a holding company operating through four segments, focusing on diversifying earnings and growing free cash flow through strategic acquisitions and joint ventures in fiscal 2022 - The company operates across four distinct industry segments: Overnight air cargo, Ground equipment sales, Commercial jet engines and parts, and a Corporate segment for capital allocation[13] - On December 2, 2021, the company acquired a 54,742 sq. ft. office building in St. Louis Park, Minnesota for $13.2 million through its subsidiary Wolfe Lake HQ, LLC[14] - On February 10, 2022, the company acquired GdW Beheer B.V., a Dutch aviation data company, for EUR 12.5 million[15] - In May 2021, Air T helped form Contrail Asset Management, LLC (CAM) and Contrail JV II LLC (CJVII), an aircraft asset management business and capital joint venture, with an initial commitment of $8.0 million from the Company[16] Overnight Air Cargo This segment, operated by subsidiaries MAC and CSA, primarily serves FedEx under 'dry-lease' contracts for a fleet of 72 aircraft, with agreements renewed in 2021 and terminable by FedEx with 90 days' notice - The Overnight Air Cargo segment's revenue is principally derived from 'dry-lease' service contracts with FedEx, where FedEx provides the aircraft and the company provides the crew and operational control[23] - Contracts with FedEx accounted for approximately 41% of the Company's consolidated revenue for the fiscal year ended March 31, 2022, where the loss of FedEx as a customer would have a material adverse effect[26] FedEx-Owned Cargo Aircraft Operated as of March 31, 2022 | Type of Aircraft | Number of Aircraft | | :--- | :--- | | Cessna Caravan 208B | 54 | | ATR-42 | 9 | | ATR-72 | 9 | | Total | 72 | Ground Equipment Sales Operated by GGS, this segment manufactures and sells aircraft deicers and other specialized ground support equipment, with deicing equipment constituting 88% of fiscal 2022 revenue and a new contract awarded by the USAF in October 2021 - The segment's primary products include aircraft deicers, scissor-type lifts, and military decontamination units, with sales of deicing equipment accounting for 88% of the segment's revenues in fiscal 2022[33] - In October 2021, GGS was awarded a new contract to supply deicing trucks to the USAF, which could expire on October 21, 2027, if all option years are executed[39] - The segment's order backlog was $14.0 million at March 31, 2022, an increase from $10.3 million at March 31, 2021[45] Commercial Jet Engines and Parts This segment, comprising several subsidiaries, provides commercial aircraft trading, leasing, parts solutions, storage, disassembly, and MRO services, focusing on engines for prevalent narrow-body aircraft - Contrail Aviation Support focuses on trading, leasing, and parts for CFM56 and V2500A5 engines, which power Boeing 737 and Airbus A320 aircraft[41] - Jet Yard and Jet Yard Solutions offer commercial aircraft storage and disassembly services at Pinal Air Park in Marana, Arizona[42] - AirCo and Worthington supply spare parts, repair programs, and maintenance services for regional and business aircraft fleets, operating FAA and EASA certified repair stations[43][44] Governmental Regulation The company and its subsidiaries are subject to extensive regulation by various governmental agencies, primarily the DOT, TSA, and FAA, covering air service, aviation security, and safety standards - The company's operations are regulated by the DOT for air service, the TSA for aviation security, and the FAA for safety, including equipment, personnel, and maintenance[47][48][49] Risk Factors The company faces a range of risks, including general business risks, segment-specific operational dependencies, and structural and financial vulnerabilities related to its holding company structure and debt General Business Risks The company is exposed to general business risks including adverse effects from global public health issues, market fluctuations, rising inflation, competition for skilled employees, and cybersecurity threats - The business has been and may continue to be adversely affected by global public health issues, such as the COVID-19 pandemic, which impacts employees, suppliers, customers, and the global economy[54][55] - Rising inflation presents a risk of increased labor and operating costs, which could materially impact financial results[59] - The company sustained a ransomware cybersecurity attack in May 2022 that caused a network disruption, but steps were taken to address the incident, and it is not believed to have a material adverse effect on the business[64] Risks Related to Our Segment Operations The company's segments face specific operational risks, including the Air Cargo segment's high dependence on FedEx, the Ground Equipment Sales segment's vulnerability to weather, and the Commercial Jet Engines and Parts segment's exposure to fluctuating engine values and extensive regulation - The Air Cargo business is significantly dependent on FedEx, which accounted for 41% of consolidated operating revenues in fiscal 2022, and the contract can be terminated by FedEx upon 90 days' written notice[73] - Sales of deicing equipment in the ground equipment segment can be negatively affected by mild winter weather, which reduces demand for new units[80] - The value of leased engines and aircraft can be adversely affected if lessees fail to meet their maintenance and recordkeeping obligations[85] - The commercial jet engine and parts segment is subject to numerous regulations, including export/import rules, OFAC restrictions, anti-corruption laws, and civil aviation regulations from bodies like the FAA and EASA[91][92][93][94] Risks Related to Our Structure and Financing/Liquidity Risks Structural and financial risks include the company's holding company structure, concentrated stockholder control, the impact of rising interest rates on variable-rate debt, and the potential inability to meet obligations if cash flows are insufficient - As of March 31, 2022, the three largest stockholders beneficially owned or could direct the voting of approximately 64% of the outstanding common stock, giving them control over stockholder matters[113] - A portion of the company's outstanding debt bears interest at floating rates, making it vulnerable to increased costs from rising interest rates[114] - The company's ability to meet its obligations is dependent on future cash flows, and there is a risk that these flows or access to financing may be insufficient, potentially leading to defaults or forced asset sales[120][121] - The transition away from LIBOR to alternative rates could adversely impact the cost and availability of financing[126] Unresolved Staff Comments Not applicable, as the company reports no unresolved comments from the SEC staff - Not applicable[142] Properties The company owns properties in Denver, North Carolina, and St. Louis Park, Minnesota, and leases numerous facilities including production, hangar, office, and land for its various operations - The Company owns its operational headquarters in Denver, North Carolina, and an office building in St. Louis Park, Minnesota[142] - Key leased properties include a 112,500 sq. ft. production facility for GGS in Olathe, Kansas, and 48.5 acres of land for Jet Yard in Marana, Arizona[143][145] Legal Proceedings The company and its subsidiaries are involved in legal proceedings and claims that arise in the ordinary course of business, which management believes will not materially and adversely affect its financial condition - The Company is subject to legal proceedings in the ordinary course of business but does not expect them to have a material adverse effect on its financial condition[148] Mine Safety Disclosures Not applicable, as the company has no mine safety disclosures to report - Not applicable[149] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NASDAQ Global Market under 'AIRT', with a share repurchase program in place, and no cash dividends paid since 2014 - The Company's common stock is traded on the NASDAQ Global Market under the symbol 'AIRT'[149] - A share repurchase program authorized the buyback of up to 1,125,000 shares, and during fiscal year 2022, the Company purchased 15,435 shares under this program[149] Common Stock Purchases in Q4 FY2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 1 - Jan 31, 2022 | 5,660 | $25.47 | | Feb 1 - Feb 28, 2022 | 9,775 | $24.65 | | Mar 1 - Mar 31, 2022 | — | $— | Management's Discussion and Analysis of Financial Condition and Results of Operations For fiscal year 2022, consolidated revenue increased 1% to $177.1 million, with operating income swinging to a profit of $8.8 million, driven by the Commercial Jet Engines and Parts segment and supported by sufficient liquidity Results of Operations In fiscal 2022, consolidated revenue rose 1% to $177.1 million, with growth in Air Cargo and Commercial Jet Engines and Parts offsetting a decline in Ground Equipment Sales, leading to a significant improvement in consolidated operating income Revenue by Segment (in thousands) | Segment | FY 2022 | FY 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Overnight Air Cargo | $74,409 | $66,251 | $8,158 | 12% | | Ground Equipment Sales | $42,239 | $60,679 | $(18,440) | (30)% | | Commercial Jet Engines and Parts | $57,689 | $46,793 | $10,896 | 23% | | Corporate and Other | $2,740 | $1,398 | $1,342 | 96% | | Total | $177,077 | $175,121 | $1,956 | 1% | Operating Income (Loss) by Segment (in thousands) | Segment | FY 2022 | FY 2021 | Change ($) | | :--- | :--- | :--- | :--- | | Overnight Air Cargo | $2,794 | $2,178 | $616 | | Ground Equipment Sales | $3,220 | $8,948 | $(5,728) | | Commercial Jet Engines and Parts | $3,619 | $(10,882) | $14,501 | | Corporate and Other | $(878) | $(9,419) | $8,541 | | Total | $8,755 | $(9,175) | $17,930 | - Net non-operating income was $4.6 million, an increase of $7.2 million from the prior year, primarily due to an $8.3 million gain on the forgiveness of the company's PPP loan[177] Liquidity and Capital Resources As of March 31, 2022, the company maintained strong liquidity with $8.4 million in cash and $97.3 million in working capital, benefiting from PPP loan forgiveness and TruPs issuance, and expects sufficient funds for future obligations - As of March 31, 2022, the Company held $8.4 million in cash and cash equivalents and had working capital of $97.3 million[183] - The company's $8.2 million Paycheck Protection Program (PPP) loan was fully forgiven by the SBA as of March 31, 2022[185] - The company has a remaining capital commitment of approximately $2.0 million to the CJVII aircraft capital joint venture[190] - Management believes that cash on hand, cash from operations, and available credit lines will be sufficient to meet obligations for at least the next 12 months[191] Cash Flows For fiscal year 2022, net cash used in operating activities significantly increased to $33.1 million due to higher inventory and receivables, while investing activities used $33.4 million for acquisitions, and financing activities provided $59.3 million from credit lines and securities issuance Cash Flow Summary (in thousands) | Activity | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(33,084) | $(1,823) | | Net Cash (Used) Provided by Investing Activities | $(33,388) | $2,516 | | Net Cash Provided by Financing Activities | $59,254 | $71 | Non-GAAP Financial Measures The company uses Adjusted EBITDA as a non-GAAP measure, which for fiscal year 2022 was $11.4 million, a $12.7 million increase from the prior year, primarily driven by the Commercial Jet Engines and Parts and Corporate segments Reconciliation of Operating Income (Loss) to Adjusted EBITDA (in thousands) | | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Operating income (loss) from continuing operations | $8,755 | $(9,175) | | Depreciation and amortization (excluding leased engines) | $1,589 | $1,231 | | Asset impairment, restructuring or impairment charges | $805 | $6,592 | | Other adjustments | $257 | $22 | | Adjusted EBITDA | $11,406 | $(1,330) | Critical Accounting Policies and Estimates The company's most critical accounting policies involve significant estimates and judgments, including business combinations, inventory valuation, impairment testing for leased assets, and the complex accounting and valuation of redeemable non-controlling interests - Key critical accounting policies include Business Combinations, Inventories, Valuation of Assets on Lease, and Accounting for Redeemable Non-Controlling Interest[210] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to fluctuating interest rates on its variable-rate debt, which it mitigates using variable-to-fixed interest-rate swap agreements - The Company is primarily subject to risk from fluctuating interest rates on its variable-rate borrowings[218] - To manage interest rate risk, the Company uses variable-to-fixed interest-rate swap agreements[218] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2022 and 2021, with an unqualified opinion from Deloitte & Touche LLP, highlighting the valuation of redeemable non-controlling interest as a critical audit matter Consolidated Income Statement Highlights (in thousands) | Metric | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Total Operating Revenues | $177,077 | $175,121 | | Operating Income (Loss) | $8,755 | $(9,175) | | Net Income (Loss) | $12,227 | $(8,390) | | Net Income (Loss) Attributable to Air T, Inc. | $10,928 | $(7,277) | | Diluted EPS | $3.78 | $(2.53) | Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2022 | March 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $128,243 | $105,774 | | Total Assets | $207,599 | $140,750 | | Total Liabilities | $171,121 | $119,438 | | Total Equity | $25,717 | $14,714 | - The independent auditor, Deloitte & Touche LLP, identified the valuation of the redeemable non-controlling interest in Contrail Aviation Support, LLC as a critical audit matter due to the significant management judgment required[229][232] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None, as the company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[434] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of March 31, 2022, with no material changes identified - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2022[435] - Management concluded that the Company's internal control over financial reporting was effective as of March 31, 2022, based on the criteria in the COSO 2013 framework[438] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of stockholders - Information for this item is incorporated by reference from the Company's definitive proxy statement[440] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of stockholders - Information for this item is incorporated by reference from the Company's definitive proxy statement[444] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership of major shareholders, directors, and management is incorporated by reference from the company's 2022 proxy statement, detailing outstanding options and available securities under equity compensation plans Equity Compensation Plan Information as of March 31, 2022 | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 337,250 | $6.61 | 94,000 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 337,250 | $6.61 | 94,000 | Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of stockholders - Information for this item is incorporated by reference from the Company's definitive proxy statement[448] Principal Accountant Fees and Services Information about the fees billed by the principal accountant, Deloitte & Touche LLP, and the Audit Committee's pre-approval policies will be presented in the company's 2022 proxy statement and is incorporated herein by reference - Information for this item is incorporated by reference from the Company's definitive proxy statement[448] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, including corporate governance documents, material contracts, and certifications - This section lists all financial statements and exhibits filed with the annual report, including the Report of Independent Registered Public Accounting Firm and various material contracts[450] Form 10-K Summary The company has elected not to include an optional summary of the Form 10-K, directing investors to the Table of Contents for reference - The company has chosen not to include an optional Form 10-K summary[470]