Air T, Inc.(the "Company," " Air T," "we" or "us" or "our") 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 cargo, 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 others, which acts as a capital and resource distributor for the other consolidated companies. In addition, Corporate and Other also includes non-significant activities that do not relate to other reportable segments.
Wolfe Lake HQ, LLC. On December 2, 2021, the Company, through its wholly-owned subsidiary Wolfe Lake, completed the purchase of the real estate located at 5000 36th Street West, St. Louis Park, Minnesotafor $13.2 millionpursuant to the real estate purchase agreement with WLPC East, LLC, a Minnesotalimited liability company 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. Air T's Minnesotaexecutive office is currently located in the building. With this purchase, the Company assumed 11 leases from existing tenants occupying the building. Wolfe Lake HQ, LLCis included within the Corporate and other segment. See Note 2 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. GdW Beheer B.V.On February 10, 2022, the Company, acquired GdW, a Dutch holding company in the business of providing global aviation data and information for EUR 12.5 million. The acquisition was completed through a wholly-owned subsidiary of the Company, Air T Acquisition 22.1, a Minnesotalimited liability company, through its Dutch subsidiary, Shanwick, and 22 -------------------------------------------------------------------------------- was funded with cash, investment by executive management of the underlying business, and the loans described in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. As part of the transaction, the executive management of the underlying business purchased 30% of Shanwick. Air T Acquisition 22.1 and its consolidated subsidiaries are included within the Corporate and other segment. See Note 2 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
May 5, 2021, the Company helped form an aircraft asset management business called CAM, and a new aircraft capital joint venture called CJVII. The Company and MRC agreed to become common members in CAM. 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. For the Asset Management Function, CAM receives origination fees, management fees, consignment fees (where applicable) and a carried interest. For its Investment Function, 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. Any investment returns are shared pro-rata between the Company and MRC. See Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
The Company also holds interests in Insignia and CCI. The operations of these companies are not consolidated into the operations of the Company. See
Note 10 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
Each line of business has distinct management teams and infrastructures that offer different products and services. We evaluate the performance of our business segments based on operating profit (loss) and adjusted EBITDA.
September 30, 2019, the Company completed the sale of GAS. The results of operations of GAS are reported as discontinued operations in the condensed consolidated statements of operations for the year ended March 31, 2021. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations. 23 --------------------------------------------------------------------------------
Certain statements in this Report, including those contained in "Overview," are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company's financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words "believes", "pending", "future", "expects," "anticipates," "estimates," "depends" or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as: •Economic and industry conditions in the Company's markets; •The risk that contracts with FedEx could be terminated or adversely modified; •The risk that the number of aircraft operated for FedEx will be reduced; •The risk that GGS customers will defer or reduce significant orders for deicing equipment; •The impact of any terrorist activities on
United Statessoil or abroad; •The Company's ability to manage its cost structure for operating expenses, or unanticipated capital requirements, and match them to shifting customer service requirements and production volume levels; •The Company's ability to meet debt service covenants and to refinance existing debt obligations; •The risk of injury or other damage arising from accidents involving the Company's overnight air cargo operations, equipment or parts sold and/or services provided; •Market acceptance of the Company's commercial and military equipment and services; •Competition from other providers of similar equipment and services; •Changes in government regulation and technology; •Changes in the value of marketable securities held as investments; •Mild winter weather conditions reducing the demand for deicing equipment; •Market acceptance and operational success of the Company's relatively new aircraft asset management business and related aircraft capital joint venture; and •The length and severity of the COVID-19 pandemic. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. 24 --------------------------------------------------------------------------------
COVID-19 and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition and results of operations. Each of our businesses 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 beyond fiscal 2022. 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.
Financial year 2022 compared to 2021
Consolidated revenue increased by
$2.0 million(1%) to $177.1 millionfor the fiscal year ended March 31, 2022compared to the prior fiscal year. Following is a table detailing revenue (after elimination of intercompany transactions), in thousands: Year ended March 31, Change 2022 2021 Overnight Air Cargo $ 74,409 $ 66,251 $ 8,15812 % 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 $ 1,9561 % Revenues from the air cargo segment increased by $8.2 million(12%) compared to the prior fiscal year, principally attributable to higher FedEx pass through revenues, higher admin fee as a result of increased contract rates starting in June 2021and higher maintenance labor revenue. In addition, maintenance revenue with customers outside of FedEx also increased compared to the prior year. Pass-through costs under the dry-lease agreements with FedEx totaled $23.0 millionand $19.9 millionfor the years ended March 31, 2022and 2021, respectively. The ground equipment sales segment contributed approximately $42.2 millionand $60.7 millionto the Company's revenues for the fiscal periods ended March 31, 2022and 2021, respectively, representing a $18.4 million(30%) decrease in the current year. The decrease was primarily driven by a lower volume of truck sales to the USAF in the current fiscal year. At March 31, 2022, the ground equipment sales segment's order backlog was $14.0 millioncompared to $10.3 millionat March 31, 2021. The commercial jet engines and parts segment contributed $57.7 millionof revenues in fiscal year ended March 31, 2022compared to $46.8 millionin the prior fiscal year which is an increase of $10.9 million(23%). The increase is primarily attributable to the fact that all the companies within this segment had higher component sales as the aviation industry started to see more activity in the current year as COVID-19 related restrictions continued to loosen.
The following is a table detailing operating income (loss) by segment, net of intercompany during fiscal 2022 and fiscal 2021 (in thousands):
Year ended March 31, Change 2022 2021 Overnight Air Cargo
$ 2,794 $ 2,178 $ 616Ground 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) $ 17,930Consolidated operating income for the fiscal year ended March 31, 2022was $8.8 millioncompared to consolidated operating loss of $9.2 millionin the prior fiscal year.
The operating result of the air cargo segment increased by
The ground equipment sales segment operating income decreased by
$5.7 millionfrom $8.9 millionin the prior year to $3.2 millionin the current year. This decrease was primarily attributable to the decreased sales noted in the segment revenue discussion above. Operating income of the commercial jet engines and parts segment was $3.6 millioncompared to operating loss of $10.9 millionin the prior year. The change was primarily attributable to the increased component sales with more favorable margin as the aviation industry started to see more activity as explained in the segment revenue discussion above. In addition, this segment incurred an inventory write-down of $6.4 millionin the prior year compared to only $0.8 millionin the current year.
The table below presents adjusted EBITDA by segment for the year ended
Twelve Months Ended Change
March 31, 2022March
Overnight Air Cargo $ 2,854 $
Ground Equipment Sales 3,455
Commercial Jet Engines and Parts 5,200 (3,933) 9,133 Corporate and Other (103) (8,777) 8,674 Adjusted EBITDA
$ 11,406 $ (1,330)12,736
Consolidated adjusted EBITDA for the year ended
Adjusted EBITDA for the Air Cargo segment increased by
The ground equipment sales segment Adjusted EBITDA decreased by
$5.7 millionfrom $9.1 millionin the prior year to $3.5 millionin the current year. This decrease was primarily attributable to the decreased operating income noted in the discussion above. Adjusted EBITDA of the commercial jet engines and parts segment was $5.2 million, an increase of $9.1 millionfrom the prior fiscal year. The increase was primarily driven by the change in operating income (loss) as described above, partially offset by a lower EBITDA adjustment in inventory write-down of $5.5 millionin this fiscal year compared to the prior fiscal year. The corporate and other segment Adjusted EBITDA increased by $8.7 millionfrom fiscal 2021 to fiscal 2022. The increase was driven by the $9.1 millionoffset to general and administrative expenses in the current fiscal year as a result of the ERC credit.
The following is a table detailing consolidated non-operating income (expenses), net of intercompany during fiscal year 2022 and fiscal year 2021 (in thousands):
March 31, Change 2022
Interest expense, net
$ (4,948) $ (4,624) $ (324)Gain on forgiveness of Paycheck Protection Program ("PPP") 8,331 - 8,331 Income (loss) from equity method investments 37 (723) 760 Other 1,221 2,741 (1,520) Total $ 4,641 $ (2,606) $ 7,247The Company had net non-operating income of $4.6 millionfor the year ended March 31, 2022, an increase of $7.2 millionfrom $2.6 millionnon-operating expense in the prior year. The increase was primarily attributable to the $8.3 milliongain recognized on the SBA's forgiveness of the Company's PPP loan offset by a decrease of $1.5 millionin other income primarily driven by prior-year's unrealized and realized gain on sale of investments that did not recur in the current-year. During the year ended March 31, 2022, the Company recorded $1.2 millionof income tax expense related to continuing operations, which yielded an effective rate of 8.7%. The primary factors contributing to the difference between the federal statutory rate of 21% and the Company's effective tax rate for the fiscal year ended March 31, 2022were the estimated benefit for the exclusion of income for the Company's captive insurance company subsidiary under §831(b), the exclusion of the minority owned portion of pretax income of Contrail, state income tax expense, the exclusion of PPP loan forgiveness proceeds from taxable income, and changes in the valuation allowance. The change in the valuation allowance is primarily due to unrealized losses on investments and the generation of foreign tax credits through the NOL carryback claim that the Company expects to expire before they are fully utilized, and attribute reduction incurred by Delphax related to dissolution of its French subsidiary. During the fiscal year ended March 31, 2021, the Company recorded $3.4 millionof income tax benefit related to continuing operations at an effective tax rate of 28.8%. The primary factors contributing to the difference between the federal statutory rate of 21% and the Company's effective tax rate for the fiscal year ended March 31, 2021were the estimated benefit for the exclusion of income for the Company's captive insurance company subsidiary under §831(b), the exclusion of the minority owned portion of pretax income of Contrail, state income tax expense, the rate differential for the Net Operating Loss ("NOL") carryback claim and changes in the valuation allowance. The change in the valuation allowance is primarily due to unrealized losses on investments and the generation of foreign tax credits through the NOL carryback claim that the Company expects to expire before they are fully utilized. 25 --------------------------------------------------------------------------------
COVID-19 and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas (such as inflation and supply chain issues) present uncertainty and risk with respect to our financial condition and results of operations. Each of our businesses 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 could operate at a loss from time to time beyond fiscal 2022. 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 businesses in particular, and, as a result, present material uncertainty and risk with respect to us and our results of operations. 26 --------------------------------------------------------------------------------
Cash and capital resources
March 31, 2022, the Company held approximately $8.4 millionin total cash, cash equivalents and restricted cash. Of which, $2.3 millionrelated to cash collateral for three Opportunity Zonefund investments. The Company also held $1.7 millionin restricted investments held as statutory reserve of SAIC. The Company also has approximately $0.9 millionof marketable securities. As of March 31, 2022, the Company's working capital amounted to $97.3 million, an increase of $19.7 millioncompared to March 31, 2021, primarily driven by the $9.1 millionEmployee Retention Credit ("ERC") receivable and an increase of $13.2 millionin accounts receivable. The Company's Credit Agreement with Minnesota Bank & Trust, a Minnesotastate banking corporation ("MBT") (the Air T debt in Note 1 4 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) includes several covenants that are measured once a year at March 31, including but not limited to, a negative covenant requiring a debt service coverage ratio of 1.25. The AirCo 1 Credit Agreement (the AirCo 1 debt in Note 1 4 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) contains an affirmative covenant relating to collateral valuation. The Contrail Credit Agreement (the Contrail debt in Note 14 of
Notes to the consolidated financial statements included in part II, item 8
this report) contains affirmative and negative covenants, including covenants that restrict the ability of Contrail and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates. The Contrail Credit Agreement also contains quarterly financial covenants applicable to Contrail and its subsidiaries, including a minimum debt service coverage ratio of 1.25 to 1.0 and a minimum tangible net worth ("TNW") of
$8 million. The obligations of Contrail under the Contrail Credit Agreement are guaranteed by the Company, up to a maximum of $1.6 million, plus costs of collection. The Company is not liable for any other assets or liabilities of Contrail and there are no cross-default provisions with respect to Contrail's debt in any of the Company's debt agreements with other lenders. As of March 31, 2022, the Company, AirCo 1 and Contrail were in compliance with all financial covenants. In April 2020, the Company obtained loans under the PPP loan, as authorized by the CARES Act, of $8.2 millionto help pay for payroll costs, mortgage interest, rent and utility costs. As of March 31, 2022, the Company's PPP Loan was fully forgiven by the SBA. As such, the Company accounted for its then outstanding principal and accrued interest as a gain on extinguishment in accordance with ASC 470. As mentioned in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, during fiscal 2022, the Company received $8.5 millionin gross proceeds from the sale of TruPs through a S-3 Registration Statement filed by the Company. The TruPs were sold and issued under the S-3 "shelf" Registration Statement base prospectus filed with the Securities and Exchange Commissionon March 10, 2021and declared effective by the SECon March 19, 2021, and under an At the Market Offering Agreement and a First Amendment to the At the Market Offering Agreement filed with the SECon May 14, 2021and November 19, 2021, respectively, and prospectus supplements filed with the SECon May 14, 2021and November 19, 2021, respectively. The Shelf Registration Statement registers a number of securities that may be issued by the Company in a maximum aggregate amount of up to $15 million. The Registration Statement is subject to the offering limits set forth in General Instruction I.B.6 of Form S-3 because the Company's public float is less than $75 million. For so long as the Company's public float is less than $75 million, the aggregate market value of securities sold by the Company under the Shelf Registration Statement pursuant to Instruction I.B.6 to Form S-3 during any 12 consecutive months may not exceed one-third of the Company's public float. For purposes of this limitation, the aggregate market value of our outstanding common stock held by non-affiliates, or public float, was $23.7 million, based on 1.0 million shares of our outstanding common stock held by non-affiliates and a price of $22.75per share, which was the price as of March 31, 2022, a date within 60 days of the date that our common stock was last sold on The Nasdaq Global Market on May 26, 2022, calculated in accordance with General Instruction I.B.6 of Form S-3. After giving effect to the $7.9 millionoffering limit imposed by General Instruction I.B.6 of Form S-3, we have now reached the offering limit under the current Prospectus Supplement. As mentioned in Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, 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 to require Contrail to purchase all of the Seller's equity membership interests in Contrail commencing on July 18, 2021("Contrail RNCI"). As of the date of this filing, neither the Seller nor Air Thas 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 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on May 5, 2021, the Company formed a new aircraft asset management business called CAM and a new aircraft capital joint venture called CJVII. The new venture will focus on acquiring commercial aircraft and jet engines for leasing, trading and disassembly. CJVII will target investments in current generation narrow-body aircraft and engines, building on Contrail's origination and asset management expertise. CAM will serve 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 million, which is comprised of an $8 millioninitial commitment from the Company and an approximately $45 millioninitial commitment from MRC. As of March 31, 2022, CAM's remaining capital commitments are approximately $2.0 millionfrom the Company and $22.0 millionfrom MRC. CJVII will initially be 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, $75.8 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 (including that obtained from the PPP and other current financings), net cash provided by operations from its remaining operating segments, together with its current revolving lines of credit, as amended or replaced, 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. 27 --------------------------------------------------------------------------------
The following is a table of changes in cash flow from continuing operations for the respective years ended
March 31, Change 2022
Net Cash Used in Operating Activities
$ (33,084) $ (1,823) $ (31,261)Net Cash (Used) Provided by Investing Activities (33,388) 2,516 (35,904) Net Cash Provided by Financing Activities 59,254 71 59,183 Effect of foreign currency exchange rates (341) (412) 71 Net (Decrease) Increase in Cash and Cash Equivalents and Restricted Cash $ (7,559) $ 352 $ (7,911)Cash used in operating activities was $33.1 millionin fiscal year 2022 compared to cash used in operating activities of $1.8 millionin fiscal year 2021. During fiscal year 2022, the Company's purchase of engines and components received into inventory exceeded amounts spent in fiscal year 2021 by $17.5 million. Further, less cash was collected this year due to timing and less concentration of cash receipts compared to the prior year as accounts receivable increased by $13.2 million. Cash used in investing activities for fiscal year 2022 was $33.4 millioncompared to cash provided by investing activities for the prior fiscal year of $2.5 million. This difference was primarily driven by cash used for the acquisitions of Wolfe Lake assets of $13.4 million, GdW's acquisition of $12.8 million, and investment in unconsolidated entities of $6.8 million. Cash provided by financing activities for fiscal year 2022 was $59.2 millionmore compared to the prior fiscal year. This was primarily due to the current year's increase in net proceeds from lines of credit of $33.0 million, increase in proceeds received from issuance of Trust Preferred Securities ("TruPs") of $10.0 million, and decrease in payments on line of credit of $21.0 millioncompared to prior year, offset by prior year's proceeds from PPP loan of $8.2 millionthat did not recur in the current year. 28 --------------------------------------------------------------------------------
Off-balance sheet arrangements
The Company defines an off-balance sheet arrangement as any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a Company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging, or research and development arrangements with the Company. The Company is not currently engaged in the use of any of these arrangements.
Supply chain and inflation
The Company continues to monitor a wide range of health, safety, and regulatory matters related to the continuing 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 have been immaterial. 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. The Company believes that inflation has not had a material effect on its manufacturing and commercial jet engine and parts operations, because increased costs to date have been passed on to customers. Under the terms of its overnight air cargo business contracts the major cost components of that segment's operations, consisting principally of fuel, crew and other direct operating costs, and certain maintenance costs are reimbursed by its customer. Significant increases in inflation rates could, however, have a material impact on future revenue and operating income. 29 --------------------------------------------------------------------------------
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 $1.9 millionfor the fiscal year ended March 31, 2022and 2021. 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) from continuing operations, the most directly comparable amounts reported under GAAP. The table below provides a reconciliation of operating income (loss) from continuing operations to Adjusted EBITDA for the fiscal year ended March 31, 2022and 2021 (in thousands): Twelve Months Ended March 31, 2022 March 31, 2021 Operating income (loss) from continuing operations $ 8,755 $ (9,175) Depreciation and amortization (excluding leased engines depreciation) 1,589 1,231 Asset impairment, restructuring or impairment charges 805 6,592 Loss (gain) on sale of property and equipment 5 (10) Security issuance expenses 252 32 Adjusted EBITDA $ 11,406 $ (1,330) Included in the asset impairment, restructuring or impairment charges for the fiscal year ended March 31, 2022was a write-down of $0.8 millionon the commercial jet engines and parts segment's inventory. The write-down was attributable to our evaluation of the carrying value of inventory as of March 31, 2022, where we compared its cost to its net realizable value and considered factors such as physical condition, sales patterns and expected future demand to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.
The table below presents adjusted EBITDA by segment for the year ended
Twelve Months Ended March 31, 2022 March 31, 2021 Overnight Air Cargo $ 2,854 $ 2,248 Ground Equipment Sales 3,455 9,132 Commercial Jet Engines and Parts 5,200 (3,933) Corporate and Other (103) (8,777) Adjusted EBITDA
$ 11,406 $ (1,330)30
The ground equipment sales segment business has historically been seasonal, with the revenues and operating income typically being higher in the second and third fiscal quarters as commercial deicers are typically delivered prior to the winter season. Other segments are typically not susceptible to material seasonal trends. 31 --------------------------------------------------------------------------------
Critical accounting policies and estimates.
The significant accounting policies of the Company are described in note 1 of the
Notes to the consolidated financial statements included in part II, item 8
this report. The preparation of the Company's 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, 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. The Company believes that the following are its most critical accounting policies: Business Combinations. The Company accounts for business combinations in accordance with Financial Accounting Standards Board("FASB") Accounting Standards Codification ("ASC") 805, Business Combinations. Consistent with ASC 805, the Company accounts for each business combination by applying the acquisition method. Under the acquisition method, the Company records the identifiable assets acquired and liabilities assumed at their respective fair values on the acquisition date. Goodwillis recognized for the excess of the purchase consideration over the fair value of identifiable net assets acquired. Included in purchase consideration is the estimated acquisition date fair value of any earn-out obligation incurred. For business combinations where non-controlling interests remain after the acquisition, assets (including goodwill) and liabilities of the acquired business are recorded at the full fair value and the portion of the acquisition date fair value attributable to non-controlling interests is recorded as a separate line item within the equity section or, as applicable to redeemable non-controlling interests, between the liabilities and equity sections of the Company's consolidated balance sheets. There are various estimates and judgments related to the valuation of identifiable assets acquired, liabilities assumed, goodwill and non-controlling interests. These estimates and judgments have the potential to materially impact the Company's consolidated financial statements. Inventories - Inventories are carried at the lower of cost or net realizable value. Within the Company's commercial jet engines and parts segment, there are various estimates and judgments made in relief of inventory as parts are sold from established groups of parts from one engine or airframe purchase. The estimates and judgments made in relief of inventory are based on assumptions that are consistent with a market participant's future expectations for the commercial aircraft, jet engines and parts industry and the economy in general and our expected intent for the inventory. These assumptions and estimates are complex and subjective in nature. Changes in economic and operating conditions, including those occurring as a result of the impact of the COVID-19 pandemic or its effects could impact the assumptions and result in future losses to our inventory. The Company periodically evaluates the carrying value of inventory. In these evaluations, the Company is required to make estimates regarding the net realizable value, which includes the consideration of sales patterns and expected future demand. Any slow moving, obsolete or damaged inventory and inventory with costs exceeding net realizable value are evaluated for write-downs. These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made. Valuation of Assets on Lease or Held for Lease - Engine assets on lease or held for lease are stated at cost, less accumulated depreciation. On a quarterly basis, we monitor the portfolio for events which may indicate that a particular asset may need to be evaluated for potential impairment. These events may include a decision to part-out or sell an asset, knowledge of specific damage to an asset, or supply/demand events which may impact the Company's ability to lease an asset in the future. On an annual basis, even absent any such 'triggering event', we evaluate the assets in our portfolio to determine if their carrying amount may not be recoverable. If an asset is determined to be unrecoverable, the asset is written down to fair value. When evaluating for impairment, we test at the individual asset level (e.g., engine, airframe or aircraft), as each asset generates its own stream of cash flows, including lease rents and maintenance reserves.
The Company must make significant and subjective estimates to determine whether an impairment exists. These estimates are as follows:
•Fair value - we determine fair value by reference to independent appraisals, quoted market prices (e.g., an offer to purchase) and other factors such as current data from airlines, engine manufacturers and MRO providers as well as specific market sales and repair cost data. •Future cash flows - when evaluating the future cash flows that an asset will generate, we make assumptions regarding the lease market for specific engine models, including estimates of market lease rates and future demand. These assumptions are based upon lease rates that we are obtaining in the current market as well as our expectation of future demand for the specific engine/aircraft model.
If the expected undiscounted cash flows and fair value of our long-lived assets decline in the future, we may incur impairment charges.
Accounting for Redeemable Non-Controlling Interest. Policies related to redeemable non-controlling interests involve judgment and complexity, specifically on the classification of the non-controlling interests in the Company's consolidated balance sheet, and the accounting treatment for changes in the fair value or estimated redemption value for non-controlling interests that are redeemed at other than fair value. Further, there is significant judgment in determining whether an equity instrument is currently redeemable or not currently redeemable but probable that the equity instrument will become redeemable. Additionally, there are also significant estimates made in the valuation of the Contrail's redeemable non-controlling interest. The fair value of Contrail's non-controlling interest is determined using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method. Contrail's discounted cash flow analysis requires significant management judgment with respect to forecasts of revenue, operating margins, capital expenditures, and the selection and use of an appropriate discount rate. Contrail's market approach requires management to make significant assumptions related to market multiples of earnings derived from comparable publicly-traded companies with similar operating characteristics as Contrail. There are also significant estimates made to determine the estimated redemption value of Shanwick's redeemable non-controlling interest ("Shanwick RNCI"). The analysis uses significant inputs such as forecasted earnings before interest and taxes ("EBIT"), discount rate and expected volatility, which require significant management judgment and assumptions. 32
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