Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
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’s earnings power and compound the growth in its free cash flow per share over time.
We currently operate in four industry segments:
• Overnight air cargo, which operates in the air express delivery services industry;
• Ground equipment sales, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers;
• Commercial aircraft, engines and parts, which manages and leases aviation assets; supplies surplus and aftermarket commercial jet engine components; provides commercial aircraft disassembly/part-out services; commercial aircraft parts sales; procurement services and overhaul and repair services to airlines and;
• Corporate and other, which acts as the capital allocator and resource for other consolidated businesses. Further, Corporate and other is also comprised of insignificant businesses that do not pertain to other reportable segments.
Acquisitions
On January 31, 2023, the Company acquired WASI, a Kansas corporation that services the aircraft industry across the United States and internationally through the operation of a repair station which is located in Springfield, Missouri at the Branson National Airport. The acquisition was funded with cash and the loans described in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. WASI is included within the Overnight air cargo segment. See Note 2 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
Unconsolidated Investments
The Company has an ownership interest in Contrail Asset Management, LLC (“CAM”). The operations of CAM are not consolidated into the operations of the Company. See Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
The Company also has ownership 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 business segment has separate management teams and infrastructures that offer different products and services. We evaluate the performance of our business segments based on operating income (loss) and Adjusted EBITDA.
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Forward Looking Statements
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 States soil 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
• Despite our current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.
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.
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Results of Operations
Fiscal 2023 vs. 2022
Consolidated revenue increased by $70.2 million (40%) to $247.3 million for the fiscal year ended March 31, 2023 compared to the prior fiscal year. Following is a table detailing revenue (after elimination of intercompany transactions), in thousands:
Year ended March 31, Change
2023 2022
Overnight Air Cargo $ 90,543 $ 74,409 $ 16,134 22 %
Ground Equipment Sales 48,485 42,239 6,246 15 %
Commercial Jet Engines and Parts 101,737 57,689 44,048 76 %
Corporate and Other 6,558 2,740 3,818 139 %
Total $ 247,323 $ 177,077 $ 70,246 40 %
Revenues from the air cargo segment increased by $16.1 million (22%) compared to the prior fiscal year, principally attributable to higher labor revenues, higher admin fees and higher FedEx pass through revenues due to increased fleet (72 aircraft in the prior year compared to 85 in the current year). Pass-through costs under the dry-lease agreements with FedEx totaled $29.2 million and $23.0 million for the years ended March 31, 2023 and 2022, respectively.
The ground equipment sales segment contributed approximately $48.5 million and $42.2 million to the Company’s revenues for the fiscal years ended March 31, 2023 and 2022, respectively, representing a $6.2 million (15%) increase in the current year. The increase was primarily driven by a higher volume of truck sales to the USAF and commercial customers in the current fiscal year. At March 31, 2023, the ground equipment sales segment’s order backlog was $13.6 million compared to $14.0 million at March 31, 2022.
The commercial jet engines and parts segment contributed $101.7 million of revenues in fiscal year ended March 31, 2023 compared to $57.7 million in the prior fiscal year which is an increase of $44.0 million (76%). 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.
Revenues from the corporate and other segment increased by $3.8 million (139%) compared to the prior fiscal year, principally attributable to having a full year of Shanwick's revenues in fiscal 2023 compared to having only 2 months of revenues in fiscal 2022.
Following is a table detailing operating (loss) income by segment, net of intercompany during Fiscal 2023 and Fiscal 2022 (in thousands):
Year ended March 31, Change
2023 2022
Overnight Air Cargo $ 4,047 $ 2,794 $ 1,253
Ground Equipment Sales 3,141 3,220 (79)
Commercial Jet Engines and Parts (957) 3,619 (4,576)
Corporate and Other $ (10,638) (878) (9,760)
Total $ (4,407) $ 8,755 $ (13,162)
Consolidated operating loss for the fiscal year ended March 31, 2023 was $4.4 million compared to consolidated operating income of $8.8 million in the prior fiscal year.
Operating income for the air cargo segment increased by $1.3 million in the current fiscal year, due primarily to having higher segment revenues as described above, offset by higher pilot salaries and aircraft lease costs.
The current fiscal year's ground equipment sales segment operating income was relatively flat compared to the prior fiscal year.
Operating loss of the commercial jet engines and parts segment was $1.0 million compared to operating income of $3.6 million in the prior year. The change was primarily attributable to the increase in inventory write-down of $6.6 million in the current fiscal year compared to the prior fiscal year, offset by the increase in sales explained above.
Operating loss of the corporate and other segment increased by $9.8 million in the current fiscal year, primarily driven by the $9.1 million offset to general and administrative expenses in the prior fiscal year as a result of the Employee Retention Credit ("ERC") that did not recur in the current fiscal year.
The table below provides Adjusted EBITDA by segment for the fiscal year ended March 31, 2023 and 2022 (in thousands):
Twelve Months Ended Change
March 31, 2023 March 31, 2022
Overnight Air Cargo $ 4,505 $ 2,854 $ 1,651
Ground Equipment Sales 3,314 3,455 (141)
Commercial Jet Engines and Parts 7,105 5,200 1,905
Corporate and Other (8,895) (103) (8,792)
Adjusted EBITDA $ 6,029 $ 11,406 $ (5,377)
Consolidated Adjusted EBITDA for the fiscal year ended March 31, 2023 was $6.0 million, a decrease of $5.4 million compared to the prior fiscal year.
Adjusted EBITDA for the air cargo segment increased by $1.7 million in the current fiscal year, due primarily to having higher segment operating income as described above.
The current fiscal year's ground equipment sales segment Adjusted EBITDA was relatively flat compared to the prior fiscal year's.
Adjusted EBITDA of the commercial jet engines and parts segment was $7.1 million, an increase of $1.9 million from the prior fiscal year. The increase was primarily driven by higher component sales explained above.
The corporate and other segment Adjusted EBITDA loss increased by $8.8 million from fiscal 2022 to fiscal 2023. The increase was driven by the $9.1 million offset to general and administrative expenses in the prior fiscal year as a result of the ERC credit that did not recur in the current fiscal year.
Following is a table detailing consolidated non-operating income (expense), net of intercompany during fiscal 2023 and fiscal 2022 (in thousands):
Year Ended March 31, Change
2023 2022
Interest expense, net $ (7,935) $ (4,948) $ (2,987)
Gain on forgiveness of Paycheck Protection Program ("PPP") — 8,331 (8,331)
Income from equity method investments 1,460 37 1,423
Other (471) 1,221 (1,692)
Total $ (6,946) $ 4,641 $ (11,587)
The Company had net non-operating loss of $6.9 million for the fiscal year ended March 31, 2023 compared to a non-operating income of $4.6 million in the prior fiscal year. The change was primarily attributable to the $8.3 million gain on the SBA's forgiveness of the Company's PPP loan recognized in the prior fiscal year, in addition to the $3.0 million increase in contractual interest expense driven by an increase in Contrail's revolver usage in the current fiscal year.
During the year ended March 31, 2023, the Company recorded $0.4 million of income tax expense, which yielded an effective rate of -3.8%. 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, 2023 were 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, and changes in the valuation allowance. The net change in the valuation allowance was $3.1 million for the year ended March 31, 2023. In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. The change in the Company’s valuation allowance is primarily due to the realizability of the domestic deferred tax assets, the unrealized losses on investments, the foreign tax credits generated by the operations in the Company’s Puerto Rico branch that is expected to expire before being fully utilized, and the change in full valuation allowances associated with the Delphax entities.
During the fiscal year ended March 31, 2022, the Company recorded $1.2 million of income tax expense at an effective tax 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, 2022 were 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.
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Market Outlook
Future economic developments such as inflation and increased interest rates as well as further business issues such as 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 and economic and business issues but we still experienced disruptions, and we experienced 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 flows and could operate at a loss from time to time beyond fiscal 2023. We expect that issues caused by the pandemic and other economic and business issue will continue to some extent. The fluidity of this situation precludes any prediction as to the ultimate adverse impact these issues 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.
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Liquidity and Capital Resources
As of March 31, 2023, the Company held approximately $7.1 million in total cash, cash equivalents and restricted cash, of which, $0.8 million related to cash collateral for three Opportunity Zone fund investments. The Company also held $2.2 million in restricted investments held as statutory reserve of SAIC.
As of March 31, 2023, the Company’s working capital amounted to $52.3 million, a decrease of $45.1 million compared to March 31, 2022, primarily driven by an increase of $32.3 million in the current portion of long-term debt and a decrease of $8.2 million in the ERC receivable as refunds were received during fiscal 2023.
The Company’s Credit Agreement with Minnesota Bank & Trust, a Minnesota state banking corporation (“MBT”) (the Air T debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) includes several covenants that are measured twice a year at September 30 and 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 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) contains an affirmative covenant relating to collateral valuation.
The Air T Acquisition 22.1's term loans with ING (the Air T Acquisition 22.1 debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) include several covenants that are measured once a year at December 31, including but not limited to, a negative covenant requiring a debt service coverage ratio of 1.10 and a senior net leverage ratio of 2.10 at December 31, 2022 and 1.50 at subsequent years.
The Contrail Credit Agreement (the Contrail debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of 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 $12 million. As of March 31, 2023, the Company, AirCo 1, Air T Acquisition 22.1 and Contrail were in compliance with all financial covenants.
As of December 31, 2022, Contrail management forecasted that Contrail would be in violation of the debt service coverage ratio covenant contained in the ONB financing agreements during the twelve-month period subsequent to the filing date of the Form 10-Q for the quarterly period ended December 31, 2022, primarily because the first principal payment of its Term Note G (“Term Note G – ONB”) was to become due in November 2023. Non-compliance with a debt covenant that is not subsequently cured allows Old National Bank (“ONB”) the right to accelerate the maturity of the Contrail Credit Agreement and declare the entire amount of Contrail’s outstanding debt at the time of non-compliance immediately due and payable and exercise its remedies with respect to the collateral that secures the debt. In the event of acceleration of maturity of the Contrail Credit Agreement, the Company would not have sufficient cash on hand or available liquidity to repay the outstanding debt.
In response to this condition, Contrail entered into an amendment to the Credit Agreement with ONB whereby, among other things, in exchange for a $20 million principal prepayment of Term Note G, Contrail obtained a waiver of the debt service coverage ratio covenant. $6.7 million of the $20.0 million prepayment was paid on March 30, 2023 and the remaining $13.3 million payment is currently expected to be paid in September 2023. These payments will eliminate the need for Contrail to make any future scheduled principal payments on Term Note G until the final maturity of (on) November 24, 2025. At this time, Contrail management believes it is highly probable that it will have sufficient liquidity to make the $13.3 million prepayment in September 2023.
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 mentioned in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on June 9, 2022, the Company, Jet Yard and MBT entered into Amendment No. 1 to Third Amended and Restated Credit Agreement (“Amendment”) and a related Overline Note (“Overline Note”) in the original principal amount of $5.0 million. The Amendment and Note memorialize an increase to the amount that may be drawn by the Company on the MBT revolving credit agreement from $17.0 million to $22.0 million. As of March 31, 2023, the Overline Note was paid in full and terminated and the unused commitment on the MBT revolver was $8.3 million. The borrowing base calculation methodology remains unchanged.
As mentioned in Note 10 and Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on September 30, 2022, the Company executed a promissory note payable to CCI for $2.0 million that bears interest at 10.00% per annum and matured on December 30, 2022. As of December 31, 2022, this note has been repaid.
As mentioned in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on November 8, 2022, Contrail entered into the Second Amendment to Master Loan Agreement (the “Amendment”) with ONB. The Amendment amends the Master Loan Agreement dated as of June 24, 2019, as amended. The principal revisions made in the Amendment are: (i) the tangible net worth covenant was revised to require that Contrail maintain a tangible net worth of at least $12.0 million at all times prior to March 31, 2024 and $15.0 million at all times on or following March 31, 2024; and, (ii) that all proceeds from certain asset sales during the period beginning on October 1, 2022 and ending on March 31, 2023 be applied as prepayments on Term Loan G. Contrail executed a Collateral Assignment of two Aircraft engines in connection with the Amendment.
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As mentioned in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on March 22, 2023, Contrail entered into the First Amendment to Second Amendment to Master Loan Agreement and Third Amendment to Master Loan Agreement ("the Amendment") with ONB. The Amendment amends the Master Loan Agreement dated June 24, 2019 with principal revisions to: (i) Section 3 of the Second Amendment was revised so that exclusion of certain gains and losses from the definition of “net income” applies through September 30, 2023, not March 31, 2023; (ii) Section 5 of the Second Amendment relating to prepayment of Term Loan G was amended to eliminate the requirement that all asset sales during the period beginning with October 1, 2022 and ending on March 31, 2023 be applied as prepayments on Term Loan G; instead, the Amendment provision now reflects the agreement that voluntary payments totaling $20.0 million would be made by the borrower on Term Loan G no later than September 30, 2023; and, (iii) a revolving note resting period covenant was added to the Amendment whereby the outstanding principal balance on the revolving note would be paid to zero (0) for at least thirty (30) consecutive days during each annual period ending on the anniversary date of the revolving note, provided the borrower has not achieved a debt service coverage ratio of 1.10:1.
As mentioned in Note 2 and Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on January 31, 2022 the Company funded the WASI acquisition through (i) a promissory note to Worldwide Aviation, LLC, (ii) cash, and (iii) an additional secured loan from MBT. The promissory note to Worldwide Aviation, LLC ("Seller's Note") in the amount of $1.5 million bears a fixed interest rate of 6.00% and is payable via periodic payments up to the January 1, 2026 maturity date. In connection with the acquisition, the Company and Jet Yard, LLC entered Amendment No. 2 to the Third Amended and Restated Credit Agreement (“Amendment No. 2”) with MBT. Amendment No. 2 amends the Third Amended and Restated Credit Agreement dated as of August 31, 2021 as amended by that certain Amendment No. 1 to the Third Amended and Restated Credit Agreement dated June 9, 2022. Amendment No. 2 provides for a new term loan (“Term Loan F”) in the amount of $1.0 million to help finance a portion of the consideration paid by the Company. Pursuant to the amendment, the Company executed Term Note F in favor of MBT in the original principal amount of $1.0 million. The note bears interest at a rate equal to the greater of six percent (6.00%) or the prime rate plus one percent (1.00%). The note obligates the Company to make monthly payments of principal plus accrued interest commencing March 1, 2023. The note may be prepaid, in whole or part, at any time without penalty and final payment of all amounts due under the note is due January 31, 2028.
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 T has indicated an intent to exercise the put and call options. If either side were to exercise the option, the Company anticipates that the price would approximate the fair value of the Contrail RNCI, as determined on the transaction date. The Company currently expects that it would fund any required payment from cash provided by operations.
As mentioned in Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, the Company has ownership interest in Contrail Asset Management, LLC (“CAM”). The operations of CAM are not consolidated into the operations of the Company. For its Investment Function (as defined in Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report), CAM’s initial commitment to CJVII was approximately $51.0 million. The Company and MRC have commitments to CAM in the respective amounts of $7.0 million and $44.0 million. As of March 31, 2023, the Company has fulfilled its capital commitments to CAM.
The revolving lines of credit at Air T with MBT and Contrail with ONB have a due date or expire within the next twelve months. As of the date of this report, the Company and MBT entered into amendments to the MBT revolving credit agreement and related promissory note to extend the maturity date of the credit facility to August 31, 2024 and include the following changes:
1. A $2.0 million seasonal increase in the maximum amount available under the facility. The maximum amount of the facility will now increase to $19.0 million between May 1 and November 30 of each year and will decrease to $17.0 million between December 1 and April 30 of each year;
2. The reference rate for the interest rate payable on the revolving facility will change from Prime to SOFR, plus a spread. The exact spread over SOFR will change every September 30 and March 31 based on the Company calculated funded debt leverage ratio (defined as total debt divided by EBITDA). Depending on the result of the calculation, the interest rate spread applicable to the facility will range between 2.25% and 3.25%;
3. The unused commitment fee on the revolving credit facility will increase from 0.11% to 0.15%; and,
4. The covenant restricting the Company’s use of funds for “Other Investments” was revised to limit the Company to $5.0 million of “Other Investments” per year.
We are currently seeking to refinance the Contrail revolver prior to its maturity date; however, there is no assurance that we will be able to execute this refinancing or, if we are able to refinance this obligation, that the terms of such refinancing would be as favorable as the terms of our existing credit facility.
As a result, management believes it is probable that the cash on hand and current financings, net cash provided by operations from its remaining operating segments, together with amounts available under our current revolving lines of credit, as amended, will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.
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Cash Flows
Following is a table of changes in cash flow from continuing operations for the respective years ended March 31, 2023 and 2022 (in thousands):
Year Ended March 31, Change
2023 2022
Net Cash Provided by (Used in) Operating Activities $ 16,909 $ (33,084) $ 49,993
Net Cash Used in Investing Activities (6,168) (33,388) 27,220
Net Cash (Used in) Provided by Financing Activities (12,380) 59,254 (71,634)
Effect of foreign currency exchange rates 361 (341) 702
Net Decrease in Cash and Cash Equivalents and Restricted Cash $ (1,278) $ (7,559) $ 6,281
Cash provided by operating activities was $16.9 million in fiscal year 2023 compared to cash used in operating activities of $33.1 million in fiscal year 2022. The fluctuation was primarily driven by the $17.3 million change in the ERC receivable: in the prior fiscal year, the Company applied for the ERC in the amount of $9.1 million, of which, in the current fiscal year, the Company received $8.2 million. In addition, the fluctuation was further increased by the $27.8 million change in inventories, primarily due to Contrail and GGS generating more sales of their inventories compared to the prior fiscal year.
Cash used in investing activities for fiscal year 2023 was $6.2 million compared to cash used in investing activities for the prior fiscal year of $33.4 million. The current fiscal year's cash usage was primarily driven by cash used for the acquisition of WASI of $2.5 million and investment in unconsolidated entities of $3.1 million. The prior fiscal year's cash usage was primarily driven by cash used for the acquisitions of Wolfe Lake assets of $13.4 million, Shanwick's acquisition of $12.8 million, and investment in unconsolidated entities of $6.8 million.
Cash used in financing activities for fiscal year 2023 was $12.4 million compared to cash provided by financing activities for the prior fiscal year of $59.3 million. This was primarily due to decreased net proceeds from lines of credit of $8.4 million, less proceeds from term loans of $23.6 million in addition to increased payments on term loans of $24.0 million. Lastly, the change was also due to the fact that there was no proceeds received from issuance of TruPs in the current fiscal year compared to $11.3 million in the prior fiscal year.
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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.
Systems and Network Security
Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect or prevent all attempts to compromise our systems, including hacking, viruses, malicious software, break-ins, phishing attacks, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of client information or other interruption to our business operations. As techniques used to obtain unauthorized access to sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we may be unable to anticipate, or implement adequate measures to protect against these attacks. If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target us or other participants, or the communication infrastructure on which we depend. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees, and engage third-party experts and consultants. Cybersecurity breaches would not only harm our reputation and business, but also could materially decrease our revenue and net income.
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 addition, ongoing supply chain disruptions have impacted product availability and costs across all markets including the aviation industry in which our Company operates. Additionally, the United States is experiencing an acute workforce shortage and increasing inflation and interests rates which has created a hyper-competitive wage environment and increased debt costs. Thus far, the direct impact of these items on our businesses has not been material. However, ongoing or future disruptions to consumer demand, our supply chain, product pricing inflation, continued increases in interest rates, 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 these issues 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.
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Non-GAAP Financial Measures
The Company uses adjusted earnings before taxes, interest, and depreciation and amortization ("Adjusted EBITDA"), a non-GAAP financial measure as defined by the SEC, to evaluate the Company's financial performance. This performance measure is not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.
Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates Adjusted EBITDA by removing the impact of specific items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes. When calculating Adjusted EBITDA, the Company does not add back depreciation expense for aircraft engines that are on lease, as the Company believes this expense matches with the corresponding revenue earned on engine leases. Depreciation expense for leased engines totaled $1.6 million and $0.3 million for the fiscal year ended March 31, 2023 and 2022.
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, 2023 and 2022 (in thousands):
Twelve Months Ended
March 31, 2023 March 31, 2022
Operating (loss) income from continuing operations $ (4,407) $ 8,755
Depreciation and amortization (excluding leased engines depreciation) 2,525 1,589
Asset impairment, restructuring or impairment charges 1 7,840 805
Loss on sale of property and equipment 8 5
Securities expenses 63 252
Adjusted EBITDA $ 6,029 $ 11,406
The table below provides Adjusted EBITDA by segment for the fiscal year ended March 31, 2023 and 2022 (in thousands):
Twelve Months Ended
March 31, 2023 March 31, 2022
Overnight Air Cargo $ 4,505 $ 2,854
Ground Equipment Sales 3,314 3,455
Commercial Jet Engines and Parts 7,105 5,200
Corporate and Other (8,895) (103)
Adjusted EBITDA $ 6,029 $ 11,406
1 Included in the asset impairment, restructuring or impairment charges for the fiscal year ended March 31, 2023 was a write-down of $7.3 million on the commercial jet engines and parts segment's inventory, of which, $5.4 million was due to a management decision to monetize three engines by sale to a third party, in which the net carrying values exceeded the estimated proceeds. The remainder of the write-down was attributable to our evaluation of the carrying value of inventory as of March 31, 2023, 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.
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Seasonality
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.
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Critical Accounting Policies and Estimates.
The Company’s significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires 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. Goodwill is 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 in determining whether any impairment exists. Those 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 forecasted undiscounted cash flows and fair value of our long-lived assets decrease 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 Contrail's RNCI. 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.
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