AIR T INC 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. FORWARD-LOOKING STATEMENTS This section entitled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The MD&A provides a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition during the period from the most recent fiscal year-end, March 31, 2024, to and including September 30, 2024 and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year. This Quarterly Report on Form 10-Q, including the MD&A, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current views with respect to future events and financial performance. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should,” "will," "continue" and similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Any and all forecasts and projections in this document are “forward looking statements” and are based on management’s current expectations or beliefs. From time to time, we may also provide oral and written forward-looking statements in other materials we release to the public, such as press releases, presentations to securities analysts or investors, or other communications by us. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of us are subject to uncertainties and other factors that could cause actual results to differ materially from such statements, because of, among other things, potential risks and uncertainties, such as: • An inability to finance our operations through bank or other financing or through the sale of issuance of debt or equity securities; • 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 commercial jet engines and parts segment or its 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. We also wish to caution investors that other factors might in the future prove to be important in affecting our results of operations. New factors emerge from time to time; it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 25 We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended March 31, 2024 (including the information presented therein under Risk Factors), as well other publicly available information. Overview Air T, Inc. (the “Company,” “Air T,” “we” or “us”) is a holding company with a portfolio of operating businesses and financial assets. Our goal is to prudently and strategically diversify Air T’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 also comprises insignificant businesses and business interests. 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 and Adjusted EBITDA. Results of Operations Second Quarter Fiscal 2025 Compared to Second Quarter Fiscal 2024 Consolidated revenue for the three-month period ended September 30, 2024 increased by $2.3 million (2.9%) compared to the same quarter in the prior fiscal year. Following is a table detailing revenue by segment, net of intercompany during the three months ended September 30, 2024 compared to the same quarter in the prior fiscal year (in thousands): Three Months Ended September 30, Change 2024 2023 Overnight Air Cargo $ 31,187 $ 28,197 $ 2,990 10.6 % Ground Equipment Sales 14,454 12,246 2,208 18.0 % Commercial Jet Engines and Parts 32,926 36,478 (3,552) (9.7) % Corporate and Other 2,675 2,045 630 30.8 % $ 81,242 $ 78,966 $ 2,276 2.9 % Revenues from the overnight air cargo segment for the three-month period ended September 30, 2024 increased by $3.0 million (10.6%) compared to the second quarter of the prior fiscal year. The increase was principally attributable to higher administrative fees due to increased fleet of 105 aircraft in the current year quarter compared to 85 aircraft in the prior year quarter and additional routes granted by FedEx. The ground equipment sales segment contributed approximately $14.5 million and $12.2 million to the Company’s revenues for the three-month period ended September 30, 2024 and 2023 respectively, representing a $2.2 million (18.0%) increase in the current quarter. The increase was primarily driven by the higher number of deicing trucks sold in the current year quarter compared to prior year's comparable quarter. At September 30, 2024, the ground equipment sales segment’s order backlog was $9.1 million compared to $7.0 million at September 30, 2023. The commercial jet engines and parts segment contributed $32.9 million of revenues in the quarter ended September 30, 2024 compared to $36.5 million in the comparable prior year quarter, which is a decrease of $3.6 million (9.7%). The decrease was 26 primarily driven by four whole engine sales at Contrail in the prior year’s quarter compared to none in the current year’s quarter. This was partially offset by the increase in component part sales in the current year’s quarter compared to prior year’s quarter. We believe Contrail's increased component part sales is driven by airlines’ focusing on maintaining existing fleets of 737NG and A320CEO aircraft, because new orders from the OEMs have been cancelled or delayed. The company is in a position to satisfy customer demand through available inventory and expertise in serviceable aftermarket material. Revenues from the corporate and other segment for the three-month period ended September 30, 2024 increased by $0.6 million (30.8%) compared to the second quarter of the prior fiscal year. The increase was primarily attributable to increased software subscriptions at Shanwick. Following is a table detailing operating income (loss) by segment during the three months ended September 30, 2024 compared to the same quarter in the prior fiscal year (in thousands): Three Months Ended September 30, Change 2024 2023 Overnight Air Cargo $ 1,807 $ 2,039 $ (232) Ground Equipment Sales 418 (12) 430 Commercial Jet Engines and Parts 3,648 1,152 2,496 Corporate and Other (1,974) (2,418) 444 $ 3,899 $ 761 $ 3,138 Consolidated operating income for the quarter ended September 30, 2024 was $3.9 million, compared to operating income of $0.8 million in the comparable quarter of the prior year. The overnight air cargo segment's operating income for the three-month period ended September 30, 2024 was $1.8 million compared to operating income of $2.0 million in the same quarter in the prior fiscal year. This decrease was primarily attributable to higher salaries expense. The ground equipment sales segment's operating income for the quarter ended September 30, 2024 was $0.4 million compared to the prior year comparable quarter's operating loss of $12.0 thousand. This increase was primarily attributable to the higher sales noted in the segment revenue discussion above. The commercial jet engines and parts segment generated operating income of $3.6 million in the current year quarter compared to an operating income of $1.2 million in the prior year quarter. Even though the segment revenue was lower compared to the prior year quarter, the increase in operating income in the current quarter was primarily attributable to higher profit margins on Contrail's component sales compared to the prior year comparable quarter. The corporate and other segment's operating loss for the three-month period ended September 30, 2024 was $2.0 million compared to the prior year comparable quarter's operating loss of $2.4 million. The decrease in operating loss was attributable to increased sales noted in the segment revenue discussion above. Following is a table detailing non-operating income (expense) during the three months ended September 30, 2024 compared to the same quarter in the prior fiscal year (in thousands): Three Months Ended September 30, Change 2024 2023 Interest expense $ (2,162) $ (1,853) $ (309) Income from equity method investments 2,346 748 1,598 Other (784) (777) (7) $ (600) $ (1,882) $ 1,282 The Company had net non-operating loss of $0.6 million during the quarter ended September 30, 2024, compared to net non-operating loss of $1.9 million in the prior year quarter. The decrease in non-operating loss was primarily driven by a $1.6 million increase in net income allocated to the Company from equity method investments as mentioned in Note 8 of Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Report on Form 10-Q. This is partially offset by a $0.3 million increase in interest expense. 27 During the three-month period ended September 30, 2024, the Company recorded $0.3 million in income tax expense at an ETR of 10.2%. The Company has computed the provision for income taxes based on the estimated annual effective tax rate excluding loss jurisdictions with no tax benefit and the application of discrete items, if any, for interim reporting. The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three-month period ended September 30, 2024 were the valuation allowance related to the Company's U.S. consolidated group, DTI, LGSS, DSI, and BCCM Kenya, and the foreign rate differentials for Air T's operations located in the Netherlands and Puerto Rico. During the three-month period ended September 30, 2023, the Company recorded income tax expense of $0.5 million at an ETR of (43.4)%. The Company records income taxes using an estimated tax rate for interim reporting. The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three-month period ended September 30, 2023 were the change in valuation allowance related to the Company's U.S. consolidated group, DSI, DTI, and LGSS, and the foreign rate differentials for Air T's operations located in the Netherlands and Puerto Rico. First Six Months of Fiscal 2025 Compared to First Six Months of Fiscal 2024 Following is a table detailing revenue by segment, net of intercompany during the six months ended September 30, 2024 compared to the same period in the prior fiscal year (in thousands): Six Months Ended September 30, Change 2024 2023 Overnight Air Cargo $ 61,570 $ 55,925 $ 5,645 10.1 % Ground Equipment Sales 21,809 24,033 (2,224) (9.3) % Commercial Jet Engines and Parts 59,176 66,324 (7,148) (10.8) % Corporate and Other 5,099 4,115 984 23.9 % $ 147,654 $ 150,397 $ (2,743) (1.8) % Revenues from the overnight air cargo segment for the six months ended September 30, 2024 increased by $5.6 million (10.1%) compared to the six months ended September 30, 2023. The increase was principally attributable to higher administrative fees due increased fleet of 105 aircraft in the current year compared to 85 aircraft in the prior year and additional routes granted by FedEx. The ground equipment sales segment's revenue for the six-month period ended September 30, 2024 was $21.8 million compared to $24.0 million in the same period in the prior fiscal year. The decrease was primarily driven by the lower number of deicing trucks sold during the first three months of the current year compared to the prior year. We believe that the decline in sales for this segment is directly attributable to a decreased demand for deicing trucks across the entire industry, driven by the recent milder winters. The commercial jet engines and parts segment contributed $59.2 million of revenues in the six months ended September 30, 2024 compared to $66.3 million in the comparable prior year six months period. The decrease was primarily driven by a total of five whole engine sales at Contrail and Worthington combined in the prior year compared to none in the current year. This is partially offset by Contrail's higher component part sales in the current year compared to prior year. We believe Contrail's increased component part sales is driven by airlines focusing on their existing fleets of 14,000 aircraft due to the cancellation or delay of new orders from the OEMs, allowing the company to leverage its expertise and serviceable engine portfolio to meet immediate demands. Revenues from the corporate and other segment in the six months ended September 30, 2024 increased by $1.0 million (23.9%) compared to the six months ended September 30, 2023. The increase was primarily attributable to increased software subscriptions at Shanwick. Following is a table detailing operating income (loss) by segment during the six months ended September 30, 2024 compared to the same six months in the prior fiscal year (in thousands): Six Months Ended September 30, Change 2024 2023 Overnight Air Cargo $ 3,645 $ 3,974 $ (329) Ground Equipment Sales (358) (97) (261) Commercial Jet Engines and Parts 4,743 2,629 2,114 Corporate and Other (4,709) (5,084) 375 $ 3,321 $ 1,422 $ 1,899 28 Consolidated operating income for the six months ended September 30, 2024 was $3.3 million compared to an operating income of $1.4 million for the comparable six months of the prior year. The overnight air cargo segment's operating income for the six months ended September 30, 2024 was $3.6 million compared to operating income of $4.0 million in the prior year comparable period. This decrease was primarily attributable to higher salaries expense. The ground equipment sales segment's operating loss for the six months ended September 30, 2024 was $0.4 million compared to operating loss of $0.1 million in the prior year comparable period. The increased loss was primarily attributable to lower sales during the first three months noted above. The commercial jet engines and parts segment generated operating income of $4.7 million in the current year six-month period compared to operating income of $2.6 million in the prior year six-month period. The increase was primarily attributable to Contrail's higher profit margin on component part sales in the current year compared to the prior year. The corporate and other segment's operating loss for the six-month period ended September 30, 2024 was $4.7 million compared to an operating loss of $5.1 million in the prior year comparable period. The decrease in operating loss was primarily driven by the revenue increase noted above. Following is a table detailing non-operating income (expense) during the six months ended September 30, 2024 compared to the same six months in the prior fiscal year (in thousands): Six Months Ended September 30, Change 2024 2023 Interest expense $ (4,108) $ (3,662) $ (446) Income from equity method investments 4,269 1,439 2,830 Other (80) (136) 56 $ 81 $ (2,359) $ 2,440 The Company had a net non-operating income of $0.1 million for the six months ended September 30, 2024 compared to a net non-operating loss of $2.4 million in the prior year six-month period. The decrease in non-operating loss was primarily driven by a $2.8 million increase in net income allocated to the Company from equity method investments as mentioned in Note 8 of Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Report on Form 10-Q. This is partially offset by a $0.4 million increase in interest expense. During the six-month period ended September 30, 2024, the Company recorded income tax expense of $0.4 million at an ETR of 11.96%. The Company has computed the provision for income taxes based on the estimated annual effective tax rate excluding loss jurisdictions with no tax benefit and the application of discrete items, if any, for interim reporting. The primary factors contributing to the difference between the federal statutory rate of 21% and the Company's effective tax rate for the six-month period ended September 30, 2024 were the valuation allowance related to the Company's U.S. consolidated group, DTI, LGSS, DSI and BCCM Kenya, and the foreign rate differentials for Air T's operations located in the Netherlands and Puerto Rico. During the six-month period ended September 30, 2023, the Company recorded income tax expense of $0.7 million at an ETR of (74.5)%. The Company records income taxes using an estimated annual effective tax rate for interim reporting. The primary factors contributing to the difference between the federal statutory rate of 21% and the Company's effective tax rate for the six-month period ended September 30, 2023 were the valuation allowance related to the Company's U.S. consolidated group, DSI, DTI, LGSS, and the foreign rate differentials for Air T's operations located in the Netherlands and Puerto Rico. Critical Accounting Policies and Estimates The Company’s significant accounting policies are fully described in Note 1 to the condensed consolidated financial statements and in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2024. The preparation of the Company’s condensed 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. There were no significant changes to the Company’s critical accounting policies and estimates during the three-months ended September 30, 2024. Seasonality 29 The ground equipment sales segment business has historically been seasonal, with the revenues and operating income typically being lower in the first and fourth fiscal quarters as commercial deicers are typically delivered prior to the winter season. Other segments have typically not experienced material seasonal trends. 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 in the future, 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. Inflation Future economic developments such as inflation and increased interest rates as well as further business issues present uncertainty and risk with respect to our financial condition and results of operations. We expect that issues caused by economic and business issues will continue beyond the current fiscal year. 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, presents material uncertainty and risk with respect to us and our results of operations. The Company believes the estimates and assumptions underlying the Company’s consolidated financial statements are reasonable and supportable based on the information available as of September 30, 2024. Liquidity and Capital Resources As of September 30, 2024, the Company held approximately $9.2 million in cash and cash equivalents and restricted cash. The Company also held $1.0 million in restricted investments held as statutory reserve of SAIC. The Company has an aggregate of approximately $25.3 million in available funds under its lines of credit as of September 30, 2024. As of September 30, 2024, the Company’s working capital amounted to $57.5 million, an increase of $1.5 million compared to March 31, 2024. As mentioned in Note 1 2 of Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Report on Form 10-Q, on May 30, 2024, Contrail, a majority-owned subsidiary of the Company, entered in the Redemption Agreement with Seller. Pursuant to the Redemption Agreement, Contrail agreed to purchase and redeem from the Seller, 16% of its 21% interest in Contrail, effective as of April 1, 2024. The purchase price for the redeemed interest is $4.6 million, plus an earnout amount. The cash purchase price is payable through the OCAS Loan, payable beginning on May 1, 2024 and monthly thereafter for a 12-month period of interest payments only with the outstanding balance amortized and paid over the following three years. Interest accrues on the principal amount at an annual rate equal to the 10-year Treasury bond yield plus 375 basis points, compounded monthly. The rate adjusts on each anniversary date of the note. The payment obligation under the note may be deferred if Contrail’s forecast indicates that any payment following the first 12-month period would cause a loan default or a loan default exists. Initially, the payment obligation would revert back to interest only, unless a default exists, in which case no payment would be required. If Contrail is unable to make a payment for 12 months, then interest shall cease to accrue. The note is expressly subordinated to the payment in full of all indebtedness of Contrail on or prior to the date of the note or thereafter created. See additional details on the OCAS Loan in Note 12 of Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Report. As mentioned in Note 1 2 of Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Report on Form 10-Q, on August 29, 2024, the Company and twelve of the Company’s subsidiaries entered into a New Credit Agreement with Alerus Financial, National Association. The New Credit Agreement provides the Revolver - Alerus in an initial maximum principal amount of up to $14.0 million. Availability under the Revolver - Alerus is subject to a borrowing base and provides for a sub-facility for the issuance of letters of credit in an aggregate amount not to exceed $3.0 million, with the outstanding amount of any such letters of credit reducing availability for borrowings under the revolving credit facility. Revolver - Alerus matures on February 28, 2026 and balance outstanding will bear interest at a rate per annum equal to the greater of 5.00% or one-month SOFR plus 2.00%. In addition to the Revolver - Alerus, the New Credit Agreement provides for two secured term loans – Term Note A - Alerus and Term Note B - Alerus. Term Note A - Alerus is a loan in the principal amount of $10.7 million that matures on August 15, 2029 that bears interest at a rate per annum equal to the greater of 5.00% or one-month SOFR plus 2.00%. Term Note A - Alerus requires monthly payments of principal commencing September 15, 2024 with such payments set at a seven year level principal amortization and a payment of $3.2 million due at maturity. A prepayment premium based on the amount prepaid is due in certain circumstances. 30 Term Note B - Alerus is a loan in the principal amount of $2.3 million that matures on August 15, 2029 and bears interest at a rate per annum equal to the greater of 5.00% or one-month SOFR plus 2.00%. Term Note B - Alerus requires monthly payments of principal commencing September 15, 2024 with such payments set at a 25 year level principal amortization and a payment of $1.8 million due at maturity. A prepayment premium based on the amount prepaid is due in certain circumstances. The Borrowers are co-borrowers under the New Credit Agreement and each of the notes. The obligations of the Borrowers under the New Credit Agreement and the notes are secured by a first priority security interest in substantially all of the Borrowers' current assets, including accounts receivable and inventory. The Company is not a borrower under the New Credit Agreement but has guaranteed the obligations of the Borrowers owed to the Lender. In addition, Air T, Inc. has pledged a brokerage account of marketable securities held at a securities intermediary to secure the obligations. Furthermore, the obligations are further secured by a deed of trust on approximately 4.626 acres of real estate that includes a 13,000 square foot office building in Denver, North Carolina. In connection with the closing of the New Credit Agreement, the Company and its subsidiaries used proceeds from the new financing to satisfy and discharge all obligations, and terminated all commitments, under the Company’s existing secured credit facility with Minnesota Bank & Trust. The Company incurred no termination penalties in connection with such termination. As mentioned in Note 1 2 of Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Report on Form 10-Q, on September 12, 2024, Contrail entered into the Fifth Amendment to the Master Loan Agreement dated June 24, 2019 and Supplement #11 to the Master Loan Agreement, and Term Note J with ONB. Term Note J is a term loan in the principal amount of $10.0 million. The loan bears a variable monthly interest rate at the 1-month SOFR Rate plus 3.86% and requires equal monthly payments of principal and interest until the loan maturity date of September 12, 2028. The loan requires compliance with covenants that require minimum Tangible Net Worth of $15.0 million and a Quarterly Cash Flow Coverage of not less than 1.25 to 1.0. In order to induce ONB to enter into these agreements, Contrail and OCAS, Inc. entered into a subordination agreement dated September 12, 2024 to address certain loan matters and to establish the priority of repayment of Contrail’s debt to ONB over the OCAS Loan in the original principal amount of $4.6 million. The Company believes that it has sufficient cash on hand and available liquidity, 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. Cash Flows Following is a table of changes in cash flow for the six months ended September 30, 2024 and 2023 (in thousands): Six Months Ended September 30, 2024 2023 Net cash provided by operating activities $ 3,044 $ 15,897 Net cash (used in) provided by investing activities (14,195) 156 Net cash provided by (used in) financing activities 12,494 (17,229) Effect of foreign currency exchange rates on cash and cash equivalents (2) 9 Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash $ 1,341 $ (1,167) Net cash provided by operating activities was $3.0 million for the six-month period ended September 30, 2024 compared to net cash provided in operating activities of $15.9 million in the prior year six-month period. The decrease in operating cash flows was primarily driven by changes in inventory and accounts receivable, which had a net impact of $7.9 million and $8.8 million, respectively. Inventory decreased by $8.8 million in the current year period, compared to a larger decrease of $16.7 million in the prior year period, reflecting higher engine sales in the commercial jet engines and parts segment in the prior year period. Accounts receivable increased by $8.2 million in the current year due to the timing of component sales, whereas in the prior year, accounts receivable decreased by $0.6 million. These changes were partially offset by a $3.0 million net change in net income after adjustments in the current year period compared to the prior year period. Net cash used in investing activities for the six-month period ended September 30, 2024 was $14.2 million compared to net cash provided by investing activities of $0.2 million in the prior year period. The cash used in investing activities was primarily driven by capital expenditures related to assets on lease in the current year at Contrail. Net cash provided by financing activities for the six-month period ended September 30, 2024 was $12.5 million compared to net cash used in financing activities of $17.2 million in the prior year period. The cash provided by financing activities in the current year six- period was primarily driven by $13.5 million more proceeds and $16.4 million less payments on the Company's term loans and revolving lines of credit compared to the prior year six-month period. 31 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. There was no depreciation expense for leased engines during the three or six months ended September 30, 2024 and 2023. 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. We may periodically review and update our non-GAAP financial measures based on our determination of their relevance to our business which could result in the addition or elimination of select non-GAAP financial measures in the future. Adjusted EBITDA is not intended to replace or be an alternative to operating income (loss), the most directly comparable amounts reported under GAAP. The tables below provide a reconciliation of operating income to Adjusted EBITDA for the three and six months ended September 30, 2024 and 2023 (in thousands): Three months ended Six months ended 9/30/2024 9/30/2023 9/30/2024 9/30/2023 Operating income $ 3,899 $ 761 $ 3,321 $ 1,422 Depreciation and amortization (excluding leased engines depreciation) 949 700 1,709 1,389 Asset impairment, restructuring or impairment charges 124 3 503 5 Gain on sale of property and equipment (8) (2) (8) (8) TruPs issuance expenses 28 47 129 93 Share-based compensation 2 79 18 157 Severance expenses 39 2 218 2 Adjusted EBITDA $ 5,033 $ 1,590 $ 5,890 $ 3,060 The table below provides Adjusted EBITDA by segment for the three and six months ended September 30, 2024 and 2023 (in thousands): Three months ended Six months ended 9/30/2024 9/30/2023 9/30/2024 9/30/2023 Overnight Air Cargo $ 1,950 $ 2,127 $ 3,897 $ 4,142 Ground Equipment Sales 513 23 1 (28) Commercial Jet Engines and Parts 4,141 1,339 5,806 3,009 Corporate and Other (1,571) (1,899) (3,814) (4,063) Adjusted EBITDA $ 5,033 $ 1,590 $ 5,890 $ 3,060 32 Issuer and guarantor subsidiary summarized information Air T Funding is a statutory business trust formed under Delaware law in September 2018. Air T Funding exists for the exclusive purposes of (i) issuing and selling its Alpha Income Trust Preferred Securities (also referred to as the 8.0% Cumulative Securities, Capital Securities or “Trust Preferred Securities”), par value $25.00 per share, (ii) using the proceeds from the sale of the Trust Preferred Securities to acquire Junior Subordinated Debentures issued by the Company, and (iii) engaging in only those other activities necessary, advisable or incidental thereto (such as registering the transfer of the Trust Preferred Securities). Accordingly, the Junior Subordinated Debentures are the sole assets of Air T Funding, and payments by the Company under the Junior Subordinated Debentures and a related expense agreement are the sole revenues of Air T Funding. Air T Funding’s business and affairs are conducted by a Property Trustee, a Delaware Trustee and two individual Administrative Trustees who are officers of Air T. Distributions on the Trust Preferred Securities are payable to record holders at the annual rate of 8% of the stated $25.00 liquidation amount, payable quarterly in arrears on the 15th day of February, May, August, and November in each year. The Trust Preferred Securities issued by the Trust are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by Air T. Air T guarantees the payment of distributions by Air T Funding and payments on liquidation of or redemption of the Trust Preferred Securities (subordinate to the right to payment of senior and subordinated debt of Air T, as defined in Note 1 2 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report). If Air T Funding has insufficient funds to pay distributions on the Trust Preferred Securities (i.e., if Air T has failed to make required payments under the Junior Subordinated Debentures), a holder of the Trust Preferred Securities would have the right to institute a legal proceeding directly against Air T to enforce payment of such distributions. All of the Common Securities of Air T Funding are owned by Air T. The Common Securities rank pari passu, and payments will be made thereon pro rata, with the Trust Preferred Securities, except that upon the occurrence and during the continuance of an event of default under the Trust Agreement, as amended resulting from an event of default under the indenture, the rights of the Company as holder of the common securities to payment in respect of distributions and payments upon liquidation, redemption or otherwise would be subordinated to the rights of the holders of the Trust Preferred Securities. The Trust Preferred Securities are subject to mandatory redemption at any time on or after June 7, 2024. Upon the repayment or redemption at any time, in whole or in part, of any Junior Subordinated Debentures, the proceeds from such repayment or redemption would be applied to redeem a like amount of the Trust Preferred Securities, at the liquidation amount plus any accumulated and unpaid distributions. If less than all of the Junior Subordinated Debentures are to be repaid or redeemed on a redemption date, then the proceeds from such repayment or redemption would be allocated to the redemption of the Trust Preferred Securities pro rata. The Company also has an optional right to redeem the Junior Subordinated Debentures (i) on or after June 7, 2024, in whole at any time or in part from time to time at a redemption price equal to the accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to the date fixed for redemption, plus 100% of the principal amount thereof, or (ii) at any time, in whole (but not in part), upon the occurrence of a Tax Event, an Investment Company Event or a Capital Treatment Event (each as defined in the indenture) at a redemption price equal to the accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to the date fixed for redemption, plus 100% of the principal amount thereof. In the event a Tax Event, an Investment Company Event or Capital Treatment Event has occurred and is continuing and the Company does not elect to redeem the Junior Subordinated Debentures and thereby cause a mandatory redemption of the Trust Preferred Securities or to liquidate Air T Funding and cause the Junior Subordinated Debentures to be distributed to holders of the Trust Securities in liquidation of Air T Funding, such Trust Preferred Securities will remain outstanding and additional sums may be payable on the Junior Subordinated Debentures. So long as no Debenture event of default has occurred and is continuing, at any time on or after June 7, 2024, the Company has the right under the indenture to defer the payment of interest on the Junior Subordinated Debentures at any time or from time to time for a period not exceeding 20 consecutive quarters with respect to each such period (each, an “Extension Period”), provided that no Extension Period may extend beyond the stated maturity of the Junior Subordinated Debentures on June 7, 2049. As a consequence of any such election, quarterly distributions on the Trust Preferred Securities will be deferred by Air T Funding during any such Extension Period. Distributions to which holders of Trust Preferred Securities are entitled will accumulate additional amounts thereon at the rate per annum of 8% thereof, compounded quarterly from the relevant Distribution Date, to the extent permitted under applicable law. During any such Extension Period, the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company’s capital stock (which includes common and preferred stock) or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu with or junior in interest to the Junior Subordinated Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks pari passu with or junior in interest to the Junior Subordinated Debentures (other than (a) dividends or distributions in common stock of the Company, (b) any declaration of a dividend in connection with the implementation of a stockholders’ rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the guarantee and (d) purchases of common stock for issuance under any of the Company’s benefit plans for its directors, officers or employees). Prior to the termination of any such Extension Period, the Company may further extend such Extension Period, provided that such extension does not cause such Extension Period to exceed 20 consecutive quarters or extend beyond the stated maturity. Upon the termination of any such Extension Period and the payment of all amounts then due, and subject to the foregoing limitations, the Company may elect to begin a new Extension Period. Subject to the foregoing, there is no limitation on the number of times that the Company may elect to begin an Extension Period. The Company has no current intention of exercising its right to defer payments of interest by extending the interest payment period on the Junior Subordinated Debentures. Air T Funding has a term of 30 years, but may terminate earlier as provided in the Trust Agreement, as amended. The Trust Agreement was most recently amended on March 3, 2021 and on January 28, 2022 and currently allows for the issuance of up to $100.0 million of Trust Preferred Securities. As of September 30, 2024, there are $43.3 million in Trust Preferred Securities outstanding ($9.0 million held by the wholly-owned subsidiaries of the Company). The Trust is a “finance subsidiary” of Air T within the meaning of Rule 3‑10 of Regulation S‑X under the Securities Act of 1933, as amended, and as a result the Air T Funding does not file periodic reports with the SEC under the Securities Exchange Act of 1934, as amended. 33 Item 3. Quantitative and Qualitative Disclosures About Market Risk For quantitative and qualitative disclosures about market risk, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended March 31, 2024. Our exposures to market risk have not changed materially since March 31, 2024. 34